It’s Not the End of the World

President Trump. A year ago I never would have predicted I’d be writing those words. I’m not happy to write them now. Trump is xenophobic, misogynistic, and racist. He supports economic policies that economists, a profession notorious for disagreeing about everything,  unanimously reject. His manner is crude, his speech unsophisticated, his words antagonistic and petty. Donald Trump is, as far as I can tell, a terrible human being. He could very well be an even worse president.

But we’re going to be ok.

The US government was specifically designed to prevent any single individual from having too much power. It was designed under the assumption that men are not angels. It was designed for Donald Trump.

There’s not going to be a wall. The 35% tariff on China is an empty threat. NAFTA is not going anywhere (the TPP might not be so lucky, but remember that Clinton was also against it). I would even be surprised if Obamacare is substantially changed. As bad as many of his ideas are, President Trump doesn’t write the laws. It is of course important to point out that Republicans also have control of both the Senate and the House, but these are largely the same people that have had control for the last 2 years. I expect a shift towards Republican ideas – lower taxes, fewer regulations – and those policies on their own might be worrying enough for many of you. But I do not expect any catastrophic changes. Let’s wait and see what happens before we go crazy. If there’s no use crying over spilled milk, there’s certainly no use crying over milk that has yet to be spilled.

Markets appear to feel the same way. After some concerns last night about the stock market going crazy, the results today seem much closer to business as usual. And I think this lack of chaos in stock markets is indicative of a broader theme: politics isn’t everything – not even close.

According to the state of my Facebook and Twitter feeds, Trump getting elected is the worst event that’s ever happened in the world (only slightly edging out Brexit). Take a deep breath. Regardless of the identity of the individual sitting in the oval office, the world moves on. Scientists will continue to make breakthroughs that improve technology, eliminate diseases, and help us deal with a changing environment. Entrepreneurs will continue to  look for new ways to please consumers as they create new products and new businesses. Writers will keep on writing, teachers keep on teaching. Amazing new things are created every day and one man won’t change that. Progress in this country has never come from politicians.

Your family is still there. Your friends are still there. Your career, your hobbies, your dreams – they’re all still there. For most people, the important aspects of their personal lives have little to do with the president. Is Trump’s election a step backward? I think so. Is it concerning that half of the country thinks it’s ok to elect a president like Trump? Of course. I’m not going to deny that there are deep rooted problems that remain in our society. But a Clinton victory wouldn’t have changed any of that. We need to work hard to solve these problems and that starts by understanding why so many voted for somebody whose policies are bad and morals even worse. I don’t think it’s primarily racism, and I’ll have more on this later. But for now go do something that makes you happy and be thankful that we live in a country that is strong enough to withstand a bad leader. It’s not the end of the world.

P.S. I’ve been wrong about Trump from the beginning, so I could easily be wrong here too. But Scott Adams (author of the Dilbert cartoon) has been right from the beginning and he agrees that Trump is not going to be so bad.

P.P.S. Here’s another good article that echoes similar themes

How I’m Voting California Ballot Propositions

voting_united_statesCalifornia has 17 new propositions up for vote on the ballot next week (the link has longer descriptions as well as arguments for each one). I had to do some research to figure out how I’m going to vote on each one anyway, so I figured I’d write down some thoughts here as well. In general my instinct is to reject unless given a good argument to accept, so we’ll see if any of them can convince me. I spent approximately 5 minutes deciding on each, so this analysis probably isn’t the deepest. Let me know in the comments if I’ve missed any good arguments on either side.

Proposition 51: Public School Facility Bonds

What it Does: Allows $9 billion in new borrowing to be used to improve education in California

How I’m Voting: No

Reasoning: California may be doing better in terms of budget these days, but debt levels are still not so good. Even Gov. Jerry Brown says no. Maybe if the money was going to a good cause it would be worth taking on more debt. But it’s going to education:

education_spending
Source

The $3 billion allocated to “modernization of school facilities” is particularly concerning. The school system has problems. More money is not the answer.

Proposition 52: Continued Hospital Fee Revenue Dedicated to Medi-Cal Unless Voters Approve Changes

What it Does: I’m not entirely sure. Apparently there is a fee paid by hospitals that goes to MediCal (California’s version of Medicaid). This proposition would continue that fee and would only allow it to change if voters agreed. A no would allow legislators to change it and potentially divert funds away from MediCal to the general fund

How I’m Voting: Yes

Reasoning: It looks to me that either way the money is going to be spent. If I understand correctly, a yes vote makes sure it is spent on healthcare for the poor rather than whatever politicians think is important. That seems better to me.

Proposition 53: Voter Approval Requirement for Revenue Bonds above $2 Billion

What it Does: Requires any infrastructure project that requires more than $2 billion in funding through bonds to be approved by voters first

How I’m Voting: Yes

Reasoning: Supporters refer to it as the “No Blank Checks Initiative.” Sounds good to me.

Proposition 54: Public Display of Legislative Bills Prior to Vote

What it Does: Requires laws to be posted online for 72 hours prior to a vote by the legislature

How I’m Voting: Yes

Reasoning: The opposition says “Prop 54 will throw a monkey wrench into the ability of our elected officials to get things done.” I thought they were trying to convince me to vote no. But seriously, increasing transparency in legislation is a welcome change.

Proposition 55: Extension of the Proposition 30 Income Tax Increase

What it Does: Extends a tax increase on incomes over $250,000 passed in 2012 for 12 more years

How I’m Voting: No

Reasoning: How about a tax decrease?

Proposition 56: Tobacco Tax Increase

What it Does: Increases taxes on cigarettes by $2.00 per pack

How I’m Voting: No

Reasoning: Current taxes are 87 cents per pack so we’re looking at a 230% increase. Here’s what the first study that comes up when you google “Do cigarette taxes work?” says about cigarette taxes: “Estimates indicate that, for adults, the association between cigarette taxes and either smoking participation or smoking intensity is negative, small and not usually statistically significant.” I’m already opposed to higher taxes in principle. Taxes that hit the poor the hardest and are allocated to specific government programs which are sure to be highly inefficient are even less appealing. I’m all for reducing smoking. The government isn’t the one that should be leading the charge. (Also perhaps most importantly I need my roommate to be able to pay his rent.)

Proposition 57: Parole for Non-Violent Criminals and Juvenile Court Trial Requirements

What it Does: Increases parole opportunities for non-violent criminals and allows judges to decide whether to try juveniles as adults

How I’m Voting: Yes

Reasoning: Seems like a no brainer. We put way too many people in jail. The opposing argument makes some scary claims that this is going to put rapists back onto the streets. I don’t buy it.

Proposition 58: Non-English Languages Allowed in Public Education

What it Does: Repeals a previous proposition that required English to be used in all classrooms and non-English speakers to take an intensive English training class

How I’m Voting: Yes

Reasoning: Would it be better if all students knew English? Maybe. But the reality is they don’t. If I’m a science teacher and I can teach my Spanish speaking students in their native language better than in English I should be allowed to do so. Get politicians out of the classroom and let teachers make the decisions.

Proposition 59: Overturn of Citizens United Act Advisory Question

What it Does: Nothing as far as I can see. It will “Call on California’s elected officials to work on overturning Citizens United v. Federal Election Commission and other similar judicial precedents…Proposition 59 would not legally require officials to act as the measure advises them to”

How I’m Voting: No

Reasoning: What? This should not be on the ballot. It’s a poll not a law.

Proposition 60: Condoms in Pornographic Films

What it Does: Ahem, just read for yourself (Don’t worry, link is safe for work, just a description of the proposition)

How I’m Voting: No

Reasoning: No comment, except maybe they should have waited 9 more propositions before proposing this one (sorry)

Proposition 61: Drug Price Standards

What it Does: Regulates drug prices to ensure state agencies pay no more than the Department of Veteran Affairs

How I’m Voting: No

Reasoning: I think we should move closer to a free market in healthcare. This proposition moves us further away. Is this analysis too simple? Maybe, but unless there’s a crystal clear argument in support, I’m not voting for price controls in any situation.

Proposition 62: Repeal of the Death Penalty

What it Does: Self-explanatory

How I’m Voting: Yes

Reasoning: I don’t feel comfortable deciding whether another human being deserves to live or not. That’s already enough for a yes, but then I read the support argument and found out there’s been 13 executions since 1978, but they cost $5 BILLION?! and that “a death row sentence costs 18 times more than life in prison.” I can’t imagine why, but it makes my decision that much easier. Also, remember that even for the most heinous crimes, it’s not their fault.

Proposition 63: Background Checks for Ammunition Purchases and Large-Capacity Ammunition Magazine Ban

What it Does: Self-explanatory

How I’m Voting: No

Reasoning: I’m not necessarily opposed to the idea of increasing the difficulty of getting a gun, but this just seems like putting another layer of red tape on top of the red tape that’s already there

Proposition 64: Marijuana Legalization

What it Does: Legalizes marijuana for recreational use for adults over 21

How I’m Voting: Yes

Reasoning: The drug war costs a ton and puts a bunch of people in jail for doing something that doesn’t harm anyone. Marijuana is safer than alcohol. Anyone that wants it can already get it with ease (if anything, legalization might make it more difficult for minors to get it although probably effect would be small). Easy vote for me.

Proposition 65: Dedication of Revenue from Disposable Bag Sales to Wildlife Conservation Fund

What it Does: Diverts all funds from the sale of bags to the Wildlife Conservation Fund. Currently stores are allowed to keep them I believe.

How I’m Voting: No

Reasoning: I wish I could just eliminate the fee altogether, but I definitely don’t want to turn it into a tax.

Proposition 66: Death Penalty Procedures

What it Does: Reforms death penalty legal procedures, shortening time legal challenges can take to 5 years

How I’m Voting: No

Reasoning: Let’s just repeal. If this gets more yes votes than 62 it supersedes it. I much prefer 62.

Proposition 67: Plastic Bag Ban Veto Referendum

What it Does: Bans plastic bags

How I’m Voting: No

Reasoning: I like plastic bags

 

Competition and Market Power Why a "Well-Regulated" Market is an Impossible Ideal

Standard accounts of basic economics usually begin by outlining the features of “perfect competition.” For example, Mankiw’s popular Principles of Economics defines a perfectly competitive market as one that satisfies the following properties

  1. The goods offered for sale are all exactly the same
  2. the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price.

    The implication of these two properties is that all firms in a perfectly competitive market are “price takers.” If any firm tried to set a price higher than the current market price, their sales would immediately drop to nothing as consumers shift to other firms offering the exact same good for a cheaper price. As long as firms can enter and exit a market freely, perfect competition also implies zero profits. Any market experiencing positive profits would quickly see entry as firms try to take advantage of the new opportunity. The entry of new firms increases the supply of the good, which reduces the price and therefore pushes profits down.

After defining the perfectly competitive market, the standard account begins to extol its virtues. In particular, a formal result called the First Welfare Theorem shows that in a perfectly competitive equilibrium, the allocation of goods is Pareto efficient (which just means that no other allocation could make somebody better off without making somebody else worse off). So markets are great. Without any planner or government oversight of any kind, they arrive at an efficient outcome on their own.

But soon after developing the idea, we begin to poke holes in perfect competition. How many markets can really be said to have a completely homogeneous good? How many markets have completely free entry and no room for firms to set their own price? It’s pretty hard to answer anything other than zero. Other issues also arise when we begin to think about the way markets work in reality. The presence of externalities (costs to society that are not entirely paid by the individuals making a decision – pollution is the classic example), causes the first welfare theorem to break down. And so we open the door for government intervention. If the perfectly competitive market is so good, and reality differs from this ideal, doesn’t it make sense for governments to correct these market failures, to break up monopolies, to deal with externalities?

Maybe, but it’s not that simple. The perfect competition model, despite being a cool mathematical tool that is sometimes useful in deriving economic results, is also an unrealistic benchmark. As Hayek points out in his essay, “The Meaning of Competition,” the concept of “perfect competition” necessarily requires that “not only will each producer by his experience learn the same facts as every other but also he will thus come to know what his fellows know and in consequence the elasticity of the demand for his own product.” When held to this standard, nobody can deny that markets constantly fail.

The power of the free market, however, has little to do with its ability to achieve the conditions of perfect competition. In fact, that model leaves out many of the factors that would be considered essential to a competitive market. Harold Demsetz points out this problem in an analysis of antitrust legislation.

[The perfect competition model] is not very useful in a debate about the efficacy of antitrust precedent. It ignores technological competition by taking technology as given. It neglects competition by size of firm by assuming that the atomistically sized firm is the efficiently sized firm. It offers no productive role for reputational competition because it assumes full knowledge of prices and goods, and it ignores competition to change demands by taking tastes as given and fully known. Its informational and homogeneity assumptions leave no room for firms to compete by being different from other firms. Within its narrow confines, the model examines the consequences of only one type of competition, price competition between known, identical goods produced with full awareness of all technologies. This is an important conceptual form of competition, and when focusing on it alone we may speak sensibly about maximizing the intensity of competition. Yet, this narrowness makes the model a poor source of standards for antitrust policy.
Demsetz (1992) – How Many Cheers For Antitrust’s 100 Years?

Although the types of competition outlined by Demsetz are a sign of market power by firms, they are not necessarily a sign that the market has failed or that governments can improve the situation. Let me tell a simple story to illustrate this point. Assume a firm develops a new technology that they are able to prevent other firms from immediately replicating (either because of a patent, secrecy, a high fixed cost of entry, etc.). This firm is now a monopoly producer of that product and can therefore set a price much higher than its cost and make a large profit. The government sees this development and orders the firm to release its plans so that others can replicate the technology and produce their own version. Prices fall as new firms enter and profits go to zero. Consumers are better off since prices are lower and they have a larger choice of products. (A similar story could also be told if the government simply mandated a lower price by monopoly firms).

But the story isn’t over. If I’m another entrepreneur (or even an existing firm) watching this sequence of events, I’m a bit worried. That new idea I was thinking about is going to cost a lot. If I had the possibility to make a large profit, maybe I would be willing to take the risk and go for it anyway. If, on the other hand, I knew for sure that even when I achieve success the government immediately reduces my profits to zero, am I still going to undertake that project? Not a chance. The potential for future profits is an incredibly important incentive for innovation.

Here’s another example from the real world that illustrates the opposite case. In the late 1990s, Microsoft tried to bundle Internet Explorer with their Windows operating system (essentially giving away Explorer for free). This move made it difficult for independent internet browsers to compete (Netscape was the market leader at the time). An antitrust lawsuit was brought against Microsoft and they were initially ordered to break up (which never actually occurred in the end as far as I know, but that doesn’t matter for the story). In the EU, they were required to provide a browser choice page when installing Windows.

In each of the two examples above, there is a clear tradeoff. In the first, consumers are better off in the short run (lower prices), but potentially worse off in the long run (less innovation). The second case is exactly the opposite. Consumers are worse off in the short run (they don’t get a browser for free) but potentially better off in the long run (more browser competition). Can we say for sure whether regulation helps or hurts in either case? Can we even say whether the regulation would push the market to be more competitive or less? I don’t see how (but which browser you are using right now despite the relatively lenient restrictions on Microsoft might give some indication).

I’m not saying regulation is never a good idea in theory. But in practice, it turns out to be really hard. Even in the cases above where it is obvious that a firm is trying to take advantage of monopoly power, it remains unclear whether a move closer to “perfect competition” will result in an increase in actual competition. You can of course pick apart the stories above and come up with some regulatory scheme that balances present and future costs and benefits. But doing so in general would require governments to have even more information than the already ridiculous knowledge assumptions implicit in the perfect competition model. It’s easy to point out imperfections in markets. It’s much harder to figure out what to do about them.

Notice that I haven’t necessarily made an argument against regulation. The takeaway from this post should not be that markets always work or that regulation always fails (I’ll leave that for future posts!). My point is simply that pointing out a flaw in the free market does not automatically imply an opportunity for a regulatory solution. The question is much more complicated than that.

But having said that let me leave you with one final thought. Markets are incredibly dynamic. Whenever the market “fails,” all it takes is one clever entrepreneur to come up with a better method and correct the failure. When government fails? Well, maybe we can come back to that in ten years when they get around to discussing it.

Links 8-21-16

“In the land of the free, where home ownership is a national dream, borrowing to buy a house is a government business for which taxpayers are on the hook.”

“If you think that there has never been a better time to be alive — that humanity has never been safer, healthier, more prosperous or less unequal — then you’re in the minority. But that is what the evidence incontrovertibly shows.”

Noah Smith criticizes heterodox macro

And then addresses some of the responses

The Solution to High Rents: Build More Houses. Who would have thought?

Which Party is For Small Government Again?

Democrats want to expand the role of government. Republicans want to shrink it. At least, that’s what their rhetoric says. The story becomes a bit harder to believe when looking at government spending statistics. Consider two presidents as an example. President A increased spending by $357 billion over the first seven years of his presidency. Over the same period, President B increased spending by around half as much, $160 billion. Who is President A? The legendary champion of small government, Ronald Reagan. President B? None other than the evil Kenyan dictator, Barack Obama himself.

Let’s look at a graph of total spending per capita over time (data from the BEA). I don’t see any clear party breaks. The one big slowdown in spending in the 1990s coincides with Clinton (a Democrat).

gov_expenditure

Breaking the data down by president makes the point even clearer. The table below shows how much spending per capita increased over each presidents tenure.

president_spending

Note that Obama’s numbers are skewed by stimulus spending. Measuring from 2009 Q2 drops the increase to $153.

Overall, Republicans have held office for 36 years since 1953 and increased government spending per capita by $5310 during that time ($148 per year on average). Democrats were in power for 27 years and increased spending per capita by $3167 ($117 per capita). Not a single president in either party has actually reduced the size of government by this measure. A natural question is whether control of the senate or house is more important than the president. I didn’t calculate the numbers, but I doubt it would help the Republicans, who had control of the senate during the expansion in spending under both Reagan and Bush.

Bill McBride at Calculated Risk keeps a tally of public and private sector jobs added by president. By those numbers, Obama is the only president since Carter to decrease the total number of public sector jobs. Again, there is no clear relationship between party affiliation and number of jobs added.

On taxes, the picture looks strikingly different. Performing the same exercise shows that Republicans reduced taxes by $23 per capita per year, while Democrats increased taxes by $278 per capita per year. So maybe you could argue that the Republicans have kept half of their small government promise. But both parties clearly like to spend. At least the Democrats seem to care about paying for it.

Links 8-7-2016

Scott Sumner is Feeling the Johnson,

Vox says Republicans should be too,

But Bob Murphy’s Not Convinced.

Maybe Denmark isn’t so Great After All

“when it comes to government support of grants from the National Science Foundation (NSF) for economic research, our sense is that many economists avoid critical questions, skimp on analysis, and move straight to advocacy.”

2016: The Best Year Yet

In the last few weeks I’ve seen multiple people on Facebook claiming 2016 is the worst year in history. After I checked to make sure I wasn’t in an alternate timeline where events like the Black Death, the French Revolution, and World War II (among many others) never happened, I concluded they were probably exaggerating. Still, it seems like many people have started to believe the idea that overall welfare in the world is on a downward trend. Luckily, they couldn’t be more wrong.

Let’s take a look at some of the main complaints about the world in 2016. Our World in Data is a great source to visualize these long run trends and is where I got most of the graphs below. Check it out if you’re interested in topics I didn’t cover here.

Violent Crime

If you listen to the media, you might be a little bit scared to go outside. Mass shootings, terrorist attacks, and police brutality seem to be perpetual components of the nightly news. I of course do not want to trivialize any of these problems. Any level of unnecessary violence above zero is something we should try to eliminate. But violence has always been a part of this world. Has it been getting worse? No.

Homicide rates in the US, for example, are around their 50 year low and other countries show similar trends

You might think that restricting the focus to gun homicides would show a different trend. As Mark Perry explains, gun violence has actually fallen even as the number of guns has steadily increased.

gun_violence

We still have a long way to go, but it looks like we’re on the right track.

(off topic: notice how high US violence is relative to other countries even in the early 1900s. Might there be an explanation that has nothing to do with our gun laws?)

Poverty

In the US, you have probably heard that income inequality is up, middle class incomes have stagnated, and the poverty rate hasn’t fallen in over thirty years. All of these statistics are true on the surface, But as Don Boudreaux likes to point out, being poor today is not the same as it was in the past. In another post, he notes that most Americans today live much better than the absolute richest American a century ago. He asks how much money would be required in order for you to prefer living in 1916 than in 2016 with your current income. I don’t think I’d be willing for any sum of money. While I’m sure being rich in 1916 has its benefits, I’ll take my computer and airplanes any day.

On middle class incomes, this graph is commonly cited

I’ll deal with this apparent gap between labor compensation and productivity soon in a later post, but for now just take my word for it that it’s not exactly what it seems.

Another important point is that anybody born in the US (or any other first world country), has already won life’s most important lottery. Eliminating poverty in developing countries is a much more pressing issue. Here is what has happened to global poverty over the last 200 years. Since 1970, around the time when many would tell you the neoliberal agenda sent the world into a spiral of misery, the number of people living in extreme poverty has fallen from around 2.2 million to 700 thousand.

Healthcare

Democrats will tell you that too many people are uninsured. Republicans that Obamacare is destroying the country. Meanwhile life expectancy has been rising steadily for decades in every region of the world

life_expectancy

 

While child mortality has fallen

child_mortality

These are of course not the only factors that matter. The rise in healthcare spending (both public and private) in the US and other countries is concerning and we will need to figure out ways to deal with this issue, but once again, the trend seems to be going the right way.

You might say that I’ve cherry picked statistics to fit my story. That’s true. There’s a lot of bad things happening in the world right now. But we hear about those all the time. I think it’s important to also appreciate the stuff that is working and I do believe that the vast majority of people are far better off now than they have been at any point in the past.

Feel the Johnson

gary_johnson

 

 

 

 

 

 

Gary Johnson, the Libertarian candidate for president, held a fundraiser at Drew Carey’s house the other day. Apparently the dress code was “Libertarian comfortable, i.e. whatever you’re comfy in.”

I started imagining what the dress codes at the other candidates fundraisers must look like:

“Democrat comfortable, i.e. whatever you’re comfy in, but bring several changes of clothes just in case it offends anyone” (credit my brother for this one).

“Republican comfortable, i.e. whatever you’re comfy in as long as you’re not Mexican or Muslim.”

“Green party comfortable, i.e. whatever you’re comfy in that is made from environmentally sustainable materials by people being paid a living wage.”

Johnson and his running mate Bill Weld will be on CNN this Wednesday for a town hall discussion (they were also on last month). I recommend checking these guys out if you’re not happy with either of the major party candidates.

Welcome

Welcome to the Pretense of Knowledge! I started this blog primarily for my own benefit – to organize my thoughts and polish my writing – but I hope you will find something interesting to read here as well. The main focus of most posts will be on economics, but I also plan to write on politics, philosophy, and occasionally throw in a couple posts on sports and entertainment.

Since my site shares its title with F.A. Hayek’s Nobel Prize speech, you may have already guessed that I approach most topics from a Hayekian libertarian perspective. If you don’t know what that means, here or here might be a good place to start (and if you’re feeling more adventurous try this). Essentially, it means that I won’t be voting for either Clinton or Trump in November. It means that I think markets work well most of the time and that when they don’t the government still tends to make things worse. And it means that I think the American military is about five times larger than necessary, that we should be knocking down walls rather than building new ones, and that politicians shouldn’t have anything to do with what you do in your bedroom or what you put into your body.

But besides paying my respects to Hayek, the title “the pretense of knowledge” has a deeper meaning for this blog. In his speech, Hayek criticized the arrogance of economists who believed that their knowledge was so great that they could make numerical predictions with accuracy comparable to the physical sciences. Instead, he urged the social scientist to recognize the “insuperable limits to his knowledge.” In my writing I will attempt to adhere to that philosophy. I have no doubt that a large proportion of the ideas I present turn out to be totally wrong and I fully expect in two years (or two months) I will look back on my early posts in disgust. So if you disagree with something I say, tell me why in the comments and try to keep an open mind. Hopefully, we will be able to learn from each other.

Over the next couple days I will have posts coming out about Hayek’s economics, about why 2016 is the best year yet, and about free will vs determinism. I also plan to do a series of posts criticizing modern macroeconomics and will likely have some smaller posts as well.

Thanks for reading!

Chris