Strange Bundle

1. Building the Intentional University: Minerva and the Future of Higher Education, edited by Stephen M. Kosslyn and Ben Nelson.  The new university Minerva explains its educational philosophy, imagining redesigning higher ed from scratch.  I would do something very similar to what they did, and this book explains the curricular philosophy and practice in great detail.

2. Olivier Roy, In Search of the Lost Orient: An Interview.  There should be a book like this for every substantive thinker, namely a very long, book-length interview with frank rather than perfunctory answers.  The dialog covers Afghanistan, Yemen, 1968 Paris and radicalism, China, “political Islam,” and women (ahem), among other topics.  Recommended.

3. Aaron Carroll, The Bad Food Bible: How and Why to Eat Sinfully.  Yes, that is the Aaron Carroll, the one who writes about health care policy.  What does the evidence actually say about which foods are good and bad for you?  I’ll just say my diet is healthier than I had thought, and beware added sugar.

I have only browsed Abbas Amanat’s Iran: A Modern History, but it appears to be a very readable and highly useful 908 pp. overview of Persian/Iranian history, though less theoretical and conceptual than what an economist might be looking for.

Harvey Sachs, Toscanini: A Musician of Conscience, is a very high quality book, I would have read more of it except I can’t stand listening to Toscanini.

Eric A. Posner has the forthcoming Last Resort: The Financial Crisis and the Future of Bailouts.  He argues that much of what was done was not fully legal.

Dani Rodrik’s Straight Talk on Trade: Ideas for a Sane World Economy is a very good introduction to Rodrik’s basic ideas on trade.

1.  Is the BBC tailoring some content to do away with the plot?

2. Mark Koyama reviews Peter Leeson.

3. Paul Krugman responds on corporate tax incidence.  I see this as a classic case of “as usual the truth lies somewhere in between.”  In response to Paul, foreign capital goes after American rents all the time (ask Toyota), exchange rate overshooting models have little validity in the data (“news” moves exchange rates), and I don’t see why the long-run is a bad guide to tax policy.  That said, I do think more of the burden of capital taxation falls on capital than labor, but plenty falls on labor nonetheless.  See the most recent comments from Summers, stronger arguments overall.

4. “The Seattle Sperm Bank categorizes its donors into three popular categories: “top athletes,” “physicians, dentists and medical residents,” and “musicians.””  Link here.

5. Excellent Scott Sumner post on an excellent John Cochrane post.

6. The Saudis and the Kurds.

1. Robin Hanson on Posner and Weyl, property and monopoly.

2. The Kevin Williamson piece everyone is reading.

3. Scott Sumner argues people do not hate inflation.  And Arnold Kling on the banking dispute.

4. 1994 Edward Luttwak on the return of fascism.

5. Should liberalism embrace allegory?

6. Feynman and Arline.

7. John Cochrane on corporate tax incidence.

From John Cochrane:

That paragraph contains a classic economic fallacy, that of composition; the confusion of relative prices and the level of prices and wages overall. If labor markets get “tight,” companies finding it hard to find workers, then yes, one expects wages to rise. But one expects wages to rise relative to prices. You only tempt workers to move to your company by offering them wages that allow them to buy more. Similarly, if there is strong demand for a company’s products, its prices will rise. But those prices rise relative to other prices and to wages. Offering a company higher prices when its wages, costs, and competitor’s prices are all rising does nothing to get it to produce more.

So, in fact, standard economics makes no prediction at all about the relationship between inflation — the level of prices and wages overall; or (better) the value of money — and the tightness or slackness of product and labor markets! The fabled Phillips curve started as a purely empirical observation, with no theory.

To get there, you need some mechanism to fool people — for workers to see their wage rise, but not realize that other wages and prices are also rising; for companies to see their prices rise, but not realize that wages, costs, and competitors’ prices are also rising. You need some mechanism to convert a rise in all prices and wages to a false perception that everyone’s relative prices and wages are rising. There are lots of these mechanisms, and that’s what economic theory of the Phillips curve is all about. The point today: it is not nearly as obvious as newspaper accounts point out. And if central bankers are a bit befuddled by the utter disappearance of the Phillips curve — no discernible relationship, or actually now a relationship of the wrong sign, between inflation and unemployment, well, have a little mercy. Inflation is hard.

There is more at the link.

1. p.11 lists where various countries are on the Laffer Curve (pdf).

2. Is “loss aversion” even true?

3. The guy who quit showering.

4. “I am selling my reservation that I personally made last year for the delivery of a new Tesla Model 3.”

5. Henry Farrell interviews Steve Teles.

6. Tracking deregulation in the Trump era.

7. This study shows police body cameras don’t matter so much (NYT).  And the myth of Fed independence (NYT).

In part his blog post is a response to my recently published email, but it is also a more general presentation of the equity banking idea.  Here are his closing bits:

The equity of 100% equity financed banks would be incredibly safe. 1/10 the volatility of current banks. It would be an attractive asset. The private sector really does not have to hold any more risk or provide any more money to an equity financed banking system. We just slice the pizza differently. If issuing equity is hard, banks can just retain profits for a decade or so.

Or, better, our regulators could leave the banks alone and allow on on-ramp. Start a new “bank” with 50% or more equity? Sure, you’re exempt from all regulation.

And, in case you forgot, we live in the era of minuscule interest rates — negative in parts of the world; and sky high equity valuations. All the macroeconomic prognosticators are still bemoaning a “savings glut.” A scarcity of investment capital, needing some sort of fine pizza slicing to make sure just the right person gets the mushroom and the right person gets the pepperoni does not seem the key to growth right now.

He chose the excellent title “Tyler: Equity financed banking is possible!”  Do read the whole thing, it is a very good and useful post.

I would add a few points in response.  First, I think equity banking would have to be very tightly regulated to remain as such, more than the status quo.  There always would be incentives to take on more off-balance sheet risk for higher returns.  Second, a much bigger commercial credit sector would have its own maturity mismatch problems.  It might be better than the status quo, but it too likely would end up with a lot of bad regulation, or maybe it would become a no-less-dangerous form of shadow banking.  In general, I don’t think our current form of government can precommit to “no regulation.”  Third, money market funds work pretty hard to maintain fixed nominal value for their depositors.  Admittedly this is a theoretical puzzle, but that we don’t understand the prevalence of debt at various levels (and that prevalence is all the stronger outside the U.S.) does not lead me to think we can alter it as we might wish.  That the theory of capital structure is so weak I do not take to mean that capital structure is so remarkably flexible.  Finally, I don’t think the savings glut is all that relevant for SMEs, and traditional banks still seem to be more efficient at matching borrowing and lending at the local level.  Again, this is a phenomenon we do not understand very well (Fama 1985), but I am not so confident we can undo it.  I also don’t think the savings glut will last much longer, given Asian demographics.

That all said, I would gladly experiment more with equity banking and indeed have written as such in the past.  I am less sure it will do away with our current regulatory dilemmas.  I don’t think it is easy to get around having a part of the economy which is both systemically risky, and also debt-intertangled, as the evolution of shadow banking over the last fifteen years seems to indicate.

That is the title of my latest Bloomberg column, here is one excerpt:

Now enter the Fed, which I think of as a tool of Congress and the president. It gives Congress a means of promoting economic growth and stability (one hopes), as well as a path for deflecting the blame if tough decisions must be made. Congress insists that the Fed is “independent,” precisely for this reason. But if voters hated what the Fed was doing, Congress could rather rapidly hold hearings and exert a good deal of influence. Over time there is a delicate balancing act, where the Fed is reluctant to show it is kowtowing to Congress, so it very subtlety monitors its popularity so it doesn’t have to explicitly do so.

If we imposed a monetary rule on the Fed, even a theoretically optimal rule, it would stop the Fed from playing this political game. Many monetary rules call for higher rates of price inflation if the economy starts to enter a downturn. That’s often the right economic prescription, but voters hate high inflation. The Fed would probably lose its political capital if it had to follow through on the rule, and monetary policy would end up politicized for a long time.

Central bank quasi-independence is a quite a fragile institution, and it is maintained only by allowing central banks to juggle lots of balls at once. If you make a rule too tough, even a good rule, sometimes what you get is a rule that snaps and breaks.

Do read the whole thing.

That is the new Peter Leeson book, and it is just out.  Here is the Amazon summary:

This rollicking tour through a museum of the world’s weirdest practices is guaranteed to make you say, “WTF?!” Did you know that “preowned” wives were sold at auction in nineteenth-century England? That today, in Liberia, accused criminals sometimes drink poison to determine their fate? How about the fact that, for 250 years, Italy criminally prosecuted cockroaches and crickets? Do you wonder why? Then this tour is just for you!

Here are the book’s rather spectacular blurbs.  Here is a short Peter piece on medieval ordeals.  Here is a Reddit thread on whether medieval ordeals actually were an effective test of guilt.  And he has this piece on superstition and Friday the 13th in Newsweek.  I would like to see a media outlet excerpt his piece on the rationality of gypsy culture.

I would say that Peter has written a very effective book within the Beckerian tradition, namely trying to explain economic phenomena in terms of a neoclassical rational actor model.  Nonetheless I am much less of a Beckerian than Peter is, at least for the socially-oriented issues he is considering.  Here is a simple typology of approaches:

1. Beckerians and the rational actor model.  I slot Peter in here, along with many Chicago School economists, Marvin Harris, and much of public choice economics.  An explanation shows how a social outcome stems from the interaction of means-end maximizing individuals, translated into some aggregate result.

2. Behavioral economics.  By now this is old news, but these researchers find what I consider to be relatively small deviations from the rational actor model.  This is usually done by measurement, rather than through more complete models.

3. Cultural economics, anthropologists, and many sociologists.  Peer effects are paramount, and Frenchmen see the world differently than do Americans, not to mention Bantus or Pygmies.  This is due to a social contagion of perception that does not boil down to rationality in the sense that economists understand it (you can build a model in which social mimicry at young ages is rational, but that model won’t generate much insight into the particular phenomena we are trying to explain, nor does that model pick up the mimicry mechanism very well).  Historical study plus thick description plus economic rationality at various margins (but margins only) plus some statistics is the way to go.  Mostly we’re trying to understand how and why other groups of people see the world in fundamentally different terms.

The economists who can best grasp other points of view thus are the masters of explaining macro-phenomena (by which I mean something quite distinct from traditional macroeconomics).

I am much closer to #3 than are most economists.  Furthermore, I view economists as patting themselves excessively on the back for #2, when #3 is far more important.  Peter has written a very good book mostly in the tradition of #1, though due to his Austrian background with periodic forays into #3.  I once wrote to Peter: “Gypsy culture rational?  How about Episcopalian investment bankers in Connecticut being rational?”  Probably neither are.

A Slovenian artist breastfed her dogs and fertilized one of her eggs with a dog cell as part of an award-winning three-month art project. She also produced a video documenting the creative process behind the bizarre venture.