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Noah Smith had a great post yesterday about becoming a Bayesian Superhero. Because I am an inveterate nitpicker and a routine abandoner of my commitment to Spreadsheets Anonymous, I want to dig into the math behind his example. In this case, it actually matters quite a bit, because the math in this case mutes the power of the example somewhat:
But nevertheless, every moment contains some probability of death for a non-superman. So every moment that passes, evidence piles up in support of the proposition that you are a Bayesian superman. The pile will probably never amount to very much, but it will always grow, until you die.
But this gets into a philosophical thing that I’ve never quite understood about statistical inference, Bayesian or otherwise, which is the question of how to choose the set of hypotheses, when the set of possible hypotheses seems infinite.
In an ancient home of civilization, with a long and storied history and culture, it was the end of an era, the end of a great war. The superpowers whose influence had maintained stability withdrew, and sure enough, in the name of nationalism and self-determination, the local people, unused to and unprepared for true self-government, divided along tribal lines led by “big men” and began to brutally slaughter each other. The crimes committed were truly horrible, including ethnic cleansing, mass civilian slaughter, and even mass rape camps. Even after decades, peace and stability have been elusive, as has true democracy. And while glimmers of economic success have lately emerged, the region’s name is still synonymous in the Western public consciousness with backwardness, tribal strife, and the specter of perpetual conflict and Western intervention.
I’m talking about the Balkans. What were you thinking of?
I recently had a long Twitter debate with Bryan Caplan plus some monarchist dude (seriously – see Noah Smith for more) about whether anti-colonialism was evil because after the colonial powers left a lot of very bad things happened in Africa.* Without looking at the broader picture of just how demented a perspective this is, what I want to hone in on is the simple fact that, at least by Caplan’s libertarian, there just is no way to justify the kind of rule that characterized colonialism in principle even without delving into colonialism in practice (which was pretty terrible from start to finish). It also doesn’t engage with the counterfactual of the likely consequences of attempting to maintain colonialism – for the benefit of the natives, surely! – after the colonized had clearly and strongly expressed their preference for self-government. Caplan’s view seems to be that, after a century of some of the most brutal rule known to history, well, now there was penicillin, and self-government might bring conflict, so let’s muddle through the status quo. It just wasn’t possible. And more to the point, why would public choice theory, which Caplan and other libertarians so dearly love for making a maximalist case for every potential tyranny in American federal regulatory agencies, provide any support the benevolence of colonial government? And if colonial government was good for the colonized, wouldn’t that suggest that perhaps Western governance is also good for Westerners, even with all its regulations and taxes and welfare? If you’re a libertarian, and you sound indistinguishable from neoreactionary monarchists, you might want to reconsider!
Let’s put it this way – on the question of immigration, even though Caplan may be sympathetic to the same fact set as neoreactionaries, he still supports freedom of movement whereas monarchists are diametrically opposed. It seems natural that the same dynamic should prevail on the question of ending colonialism, and I don’t know why it doesn’t.
I am well aware of all the failures of analogy between the Balkans c. 1990 and Africa c. 1960, but the ways they are analogous points out just how patronizing and blinkered the pro-colonial viewpoint is. I’ve never heard anyone argue that the instability and conflict that followed the collapse of the USSR therefore mitigates in favor of perpetuation of the Cold War and Soviet dominance of Eastern Europe (though whether that would have prevented or softened the implosion of Yugoslavia is also debatable), but yet the case is made that if only Europe had retained control of Africa things would have been better, for reasons. There isn’t any evidence for this in the historical record, and certainly nobody has a plan for how the same countries that committed vast crimes and sins in Africa, devastated its ecosystem and bled it of resources, would then somehow re-establish the kind of civil society and norms of politics and governance that could have led, at any point, to a peaceful transition to self-rule. What happened after 1960 was almost certainly carved in stone in Berlin in 1885.
*I tried to figure out Storify but it was more complicated than I thought and I am busy.
Noah Smith has some thoughts on the chosen people that I thought I would respond to today, as we approach the Sabbath, because TGIS, mensches.
Asking the latest iteration of the Jewish question, namely, “why do American Jews seem to eat a disproportionately large and delicious share of the national reuben?” Noah Smith narrows the question to:
“Do Jews, identified consistently, succeed enduringly well, relative to other religious minorities, relative to other Americans or Europeans, and after taking into account selective immigration and a preference for urbanization?”
He claims this question isn’t interesting; to that I say, nu? Who said it had to be interesting? And also – I do think it’s interesting, because it’s the actual question, and because the actual answer to that question might have some value (as opposed to an answer like “Jews are basically equivalent to Southeast Asian immigrants, except they feel slightly guilty when they eat pork”).
More to the point, I think the crux of this question has to do with the fact that, compared to other groups in world history, Jews are weird. Really weird, frankly.
Firstly, the fact that Jews exist at all, today, is pretty remarkable, and not for magen David-waving reasons like “lots of people whose name started with the letter ‘H’ tried to kill us and seriously eff those guys” though, seriously, eff those guys. Especially you, Hadrian*. Eff you and the Wall you rode in on. Or something.
It’s remarkable that the Jews are still here because, looking at the moment that the Jews were finally displaced fully from their ancestral homeland, one thousand eight hundred eighty one yeqrs ago, there were lots of groups and peoples and religions and polities and states around, and pretty much none of them are around none. Sure, there are those who can more credibly claim some through-line or direct-ish descent from those groups, but pretty few who can straight-up claim to be part of an unbroken substantial continuity of those groups. Have you met any Goths lately? Huns? Been subjected to Roman rule? Parthian? The Jews were expelled from Judea when Christians were still being fed to the lions, when the foundations of European feudalism were still 150 years away, when world maps in the Eastern Hemisphere did not include the Western Hemisphere. There is something uniquely enduring about the Jews, worth acknowledging without acknowledging exactly why, per se.
But taking a narrower perspective, the Jews took a unique path to American immigration. Basically, they came to America in two distinct bunches. First, in the 1850s, came the German Jews. These were the pre-assimilated Jews, relatively wealthy and cosmopolitan, who had basically made it before they even got here. Then, in the 1880s, the Eastern European Jews started arriving alongside all the Germans and Irish and Italians and Poles who were coming in droves. These Jews were the shtetl Jews, the real Fiddler on the Roof Jews, still looking over their shoulders for Cossacks and dybbuks. The now-American Jews who were already here (who, remember, were very assimilated, likely Reform, already wealthy) looked at these new Jews, who were provincial and poor and accustomed to rural life, and said “oy vey, we gotta help these nudniks.” It was half solidarity, half Pgymalion. So they poured money into creating institutions to help these Jews get not merely fed, clothed, and housed, but assimilated and educated and employed. They created Federations and HIAS and Bnai Brith.
So you take a people who have spent nearly two millennia carefully balancing intense in-group solidarity and enthusiastic assimilation and adaptation, with a culture that not only promotes literacy, constructive skepticism, and intellectual engagement in a way that was totally counterproductive economically for centuries and yet has somehow endured in something weirdly close to at least a subset of its ancient form despite dispersion, assimilation, and persecution; and you bring them en masse to the most tolerant, liberal, and urbanized place on the planet; and you welcome them with an extremely dense network of well-funded and highly-motivated institutions devoted to ensuring their success in their adopted homeland, a homeland that would be uniquely welcoming of said success…
Anyway, Jewish success in the United States is no mystery. Neither, by the way, is the fact of Jewish success – consider that it is a notable decline for a group that comprises 2% of the population to comprise merely 12% of the United States Senate. Jews are a weird case, and not directly comparable even to other “model minority” stories of selection bias.
Now, the question of whether it will endure is another question – this, though, is a question of what constitutes endurance. If, in 50 years, Jews are still wealthy, powerful, and well-represented in major cultural and economic institutions well beyond their numbers, but less so than today, does that represent endurance?
*May his bones be crushed.
Noah Smith mused about a subject I’m interested in – the fundamental conceptual issues at the nature of saving – in a way I like to muse about it – thought experiments – so how could I not deconstruct his post in excruciating detail?
Specifically, I’d like to focus on the economy of his deer hunter (one of many, in his example, but just one for this purpose): a man who lives, alone, in the woods, hunting deer. I’m going to break this down as much as I can while abstracting away the non-deer parts of his economy (shelter, clothing, tools, etc). Because the deer hunter is an economy – and while he might be an economy of only one human, who we’ll call Vronsky -, we can productively and fruitfully view him as a vertically-integrated economy, and break him down into four sectors:
1) A firm that hunts deer. The firm locates as many deer as possible and kills them, then sells them to the next sector. It has most fixed costs (labor to hunt deer) and therefore pays relatively fixed wages, the rest collected as profit.
2) A firm that processes dead deer into venison. This firm always purchases all the deer killed by the first firm, and always sells all of its venison to the next two sectors. It has more variable wages (because it has variable labor as its primary input) and takes the rest as profit.
3) A firm that stores processed deer. This firm always buys all the surplus venison produced by the processing firm, salts it, and stores it until there is a market for it. We will discuss its economy in more detail below.
4) The consumer. It always buys a certain amount of venison (let’s call it C) no matter what.
Now, in actuality, all these firms are the same person – Vronsky, who owns all the firms, provides all the labor, and collects all the wages and profits (which he then proceeds to, largely, eat). But we can break the internal economy of his life away from Williamson-ian integration and imagine a market that works something like this:
There are flush years and lean years – periods, that is, in which D (the amount of deer caught by the hunting firm) is either greater than or less than C. Let’s see what happens in a flush year.
The first firm kills some amount of deer, D, that is bigger than C (we’ll call it C + S). It sells C + S deer to the second firm, pays its wages, and collects profit (let’s imagine the firm breaks even in years when D = C).
The second firm processes all the deer into venison, and sells C venison to the consumer and S to the third firm. This firm always breaks even because its labor varies in direct proportion to its production which varies in direct proportion to the available venison.
Now, the third firm. What should be clear is that the third firm is the closest this economy has to a financial sector – it buys venison when it’s plentiful and sells it when it’s, er, dear. This means it, essentially, stabilizes the internal price of venison (and also raw deer). It also is a very different firm from the other two, since labor is a minimal input – it is a capital-intensive firm that specializes in storage and market mastery (we’re assuming it inherits all the capital, physical and intellectual). Assuming our flush year is t=1, the firm has costs – purchasing the venison, salting it, and storing it – but no revenue. Which means it has to borrow. From whom? The consumer’s wages should always = C, so it must borrow from the profitable sector of the economy – the first firm, who has profited from a plenty of deer to kill. Essentially, the amount of raw deer necessary to produce an amount of venison = C costs exactly the wages of a year’s worth of deer hunting, and the wages of processing the deer into venison are equal to the mark-up of venison over deer, meaning all the profits flow to the first firm – the hunting firm. So it loans the money to the third firm, the storage firm.
This works in reverse in lean years. In a lean year (let’s say t=2 is exactly as lean as t=1 is flush, so C-S) the hunting firm is in the red, since it pays wages beyond it’s revenue. However, it can call in a loan from the storage firm, which has almost no costs incurred but suddenly tons of revenue from selling its surplus! So it can pay back the loan to the first firm. So there are now no net savings, nominally or physically. Balance. Om.
But let’s say there isn’t long-term balance. That creates two potential scenarios – one of long-term scarcity, whose end is obvious and really quite sad for poor Vronsky. But long-term plenty is more…interesting.
If there is long-term plenty, a couple things could happen. If we are speaking strictly ceteris paribus, then we would see larger and larger imbalances between the accumulated bonds of the hunting firm and the accumulated debt of the storage firm, ending in…financial crisis! Salted venison doesn’t last forever, so it would be essentially squatting on toxic assets it would be loathe to revalue without the projected revenue to pay off it’s accumulated debt. It would go belly-up, and basically need its loans forgiven – by which we mean, of course, that Vronsky has to write off a lot of old, stinky venison into the river.
But assuming non-ceteris paribusity, what we would actually see is that, as salted venison becomes plenty, prices decline to the point where no amount of hunting can support the wages of the hunting firm. To skip the boring stuff, what happens is that Vronsky consumes more leisure as he eats down his stock of salted venison and takes up whittling or something.
Now, over the truly long term, endless plenty absent productivity increases is impossible for Malthusian reasons unless you want to assume a Children of Men kind of deal. But even there, we wouldn’t see infinite saving because Vronsky would, sitting on a giant pile of meat, only hunt to the extent he wanted to, not needed to.
The key, in the end, is this – that saving is just as much about production than consumption, and it’s really about the future-orientation of production. In a world where Vronsky is alone, and has no reason to invest in future growth, he won’t endlessly stockpile venison because of diminishing returns and will therefore shift to other forms of spending his time. But in a world where Vronsky was future-oriented, at least minimally, he might spend his savings to create extra time he could use to develop more efficient hunting tools, thus saving even more time in the future. Or he could develop a game that would amuse him. Or he could pack a sack full of salt venison and go on a quest to find a friend, or at least a basset hound.
The real point, in the end, is that nominal savings (which always equal nominal debt) are very disconnected from whether current production is creating value for the future. In the 00’s we simply invested too much of our productive capacity in building overly-large houses in low-cost but low-value locations, which created a lot of nominal debt and therefore nominal savings but didn’t enable the United States to be more productive in the future. On the other hand, higher taxes that built high-speed rail wouldn’t show up as saving, but from the perspective of society, we would be deferring fleetingly pleasurable consumption of movies and candy and craft beer and what have you towards building valuable infrastructure that would make us richer in the future. That’s not nominal savings, and in the short-term GDP looks the same, but that’s true saving in the modern world.
A couple weeks ago Noah Smith wrote a very sharp piece for the Atlantic about the limits of macroeconomic models that nevertheless, IMHO, fails to reach the most important conclusion of all.
Let’s say I devise a macroeconomic model that can accurately predict the economy. Whoohoo! Now, what to do about it? There are two broad categories of action I could proceed to take, both which end in the same confounding paradox – either publish the model, or proceed to make a massive killing in the markets.
Either way, someone is going to make a massive killing, either immediately or once the value of the model becomes clear. So much so that model-adherent traders and investors will quickly grow to the point where they are a substantial share of the market itself. So the model will make a prediction and traders and investors will act in such a magnitude as to alter the economy’s path. But the model will then consume all the new data and spit out a new prediction, which will then spur traders into a new path-altering round of trading, and is the paradox clear yet? Essentially, the very existence of this model would send markets into a Gödelian-loop of accelerating paroxysms of wild trading. Imagine this model connected to HFT algorithms and you get the idea – volatility without end, markets seizing.
The moral of the story is that all finite formal systems are limited by their inability to account for themselves (ie, can never be complete, consistent, and decidable) and that more broadly human behavior is in part determined by human knowledge about human behavior and thus as the latter changes so does the former and thus can never be complete or settled.
Mind, n. A mysterious form of matter secreted by the brain. Its chief activity consists in the endeavor to ascertain its own nature, the futility of the attempt being due to the fact that it has nothing but itself to know itself with.
Miles Kimball and Yichuan Wang find that high government debt doesn’t cause low GDP growth, and Kimball says he finds that surprising, as does Matt Yglesias. But as I suggested in a post last month, I’m not really surprised by this at all.
Governments tax or borrow. The former is withdrawing money from the economy in exchange for nothing (or perhaps a promise not to sanction the taxed) while the latter withdraws money from the economy in exchange for a piece of paper. That’s debt! Evil, evil, debt! Oh, no!
Wait, let’s start over.
The goverment decides it wants to do something it isn’t already doing, and therefore needs to command a higher share of total social production going forward than it has been. Developed-world governments don’t directly commandeer social resources, they claim through the proxy of money, by spending it. Assuming an economy at full capacity (whatever that means), if the government commandeers resources by spending money without removing any money from the economy then you’d have inflation, unless the central bank raises interest rates substantially, which would likely have undesireable negative effects. So the government attempts to roughly balance the resources claims it makes using money by withdrawing an equivalent amount of money from society. Sometimes it does this through taxes, which has some desireable properties (no future obligations on the state, can be used Pigovianly) and some undesirable ones (unintended consequences, involuntary, discourages desireable activity). Borrowing also has some desireable properties (voluntary, compensates those who part with their money) and some undesireable properties (obligates the state).
Therefore, there are two key intertwined questions to be asked about this new government activity, which remember is centrally about taking some resources deployed previously to some private purpose and redirecting them to some other, presumably public purpose – is the new activity more valuable than the activity(s) it is supplanting, and how is it being financed? They are intertwined because the latter question informs the former.
Let’s say we all agree that this new government project – let’s say it’s a SUPERTRAIN, for fun – is widely considered to be of higher value than the marginal private activity it supplants regardless of how it is funded. The government could raise taxes to fund it, but unless it is taxing something undesireable (like carbon or booze or Kardashians) this would have the drawback of incurring some "deadweight loss," not to mention other unintended consequences. It could also borrow the money, which would have two consequences. Firstly, it would supplant something different – rather than raising the cost of work or carbon emissions, it would be more likely to supplant a capital investment of some kind somewhere in the economy. Secondly, it would obligate the government.
And to what would it obligate the government? Key to understanding this is that governments, unlike Lannisters, never pay their debts. They cleverly disguise this fact by paying their debts in full and on time. Huh? From the perspective of a borrower, you get your interest payments, and then your principal in full. But from the perspective of a government, you don’t pay the principal back out of tax revenue, you pay it by rolling over the debt and issuing new debt in the amount of the principal. This works because of NGDP growth (both the RGDP growth and inflationary components). In fact, we’re still likely rolling over all the debt we incurred from WWII, which back then was 110% of NGDP but today is less than 2% of NGDP.
So really what the government does when it issues a bond is issue itself a negative perpetuity. And the key to understanding the value of a perpetuity is knowing the interest rate, since the PV = C/r. Therefore, the obligation on the government is much more dependent on the interest rate path than on the nominal coupon value.
But that interest rate path isn’t just some made-up thing – it’s fundamentally related to NGDP growth. Don’t believe me? Here’s the fed funds rate divided by the NGDP growth rate:
So when recessions happen, the ratio spikes (and whether it spikes up or down is very interesting), but otherwise it’s very steady; if you exclude just the 12 of 223 periods where the absolute value of the ratio is greater than 3, you get an average of 0.8 and a standard deviation of 0.6.
So what does that mean? As interest rates grow, so does the obligation on the government – but it also implies that the government’s ability to meet that obligation is growing in tandem. Which suggests that, while governments cannot borrow limitlessly, the pain point at which government indebtedness begins to inflict structural economic harm is vastly higher than previous assumptions.
Japan, for example, is often cited as an example of government debt creating a huge drag/time bomb/giant vengeful lizard that is harming Japan’s economy. But since 1990, Japan’s debt/GDP ratio increased from 67% to 211% and GDP-per-capita…grew! Significantly! Not awesomely, not enough to catch-up with the US (in fact, it fell behind), but grow it did. Certainly more than you might think it would if the 90% monster were real and starting smashing major cities or something.
Many people have begun to worry whether the seemingly-inevitable Japanese debt crisis is nearing as yield have crept up. But yields have crept up because NGDP-growth-expectations have crept up. As long as they increase in tandem, contra Noah Smith, Japan should always be able to pay its debts.
And I’d be willing to put money/my reputation on this point. While Noah Smith is 100% right that bets != beliefs, I am nonetheless willing to agree in principle to any reasonably-valued bet that neither Japan nor the United States will default over any arbitrary time period. Any takers?
Ashok Rao busts me for being lazy this morning, and he has me dead to rights. I blithely waved away a further discussion of what would actually happen if there was a large secular increase in aggregate saving on the part of the poor. I was lazy about this, and in my defense, I was using “economic disequlibirum” as a stand-in for saying “a) I’m at the office, b) I didn’t think it was entirely relevant to the final conclusion of my post, and c) I was feeling lazy.”
So now that, at the very least, condition a) has been relieved, let’s take a look at Ashok’s point. He notes – quite correctly – that 1) even if you make unrealistically egalitarian assumptions about the initial wealth distribution that increased saving by the poor doesn’t affect the ratio very much, and the more broad point that 2) the wealth gap between rich and poor will continue to increase so long as the rich save at a higher rate than the poor regardless of the initial distribution. Both of these are correct, but they do end up being somewhat tangential to the real question re: the effect on the economy on a substantial secular increase in the social desire to save.
This is, in fact, a much disputed question in economics, and what effects it might have (and whether that effect depends on whether current conditions are recessionary and whether we’re at the ZLB) are not the subject of much consensus. As a general point, though, Americans used to save much more, so if we decided to save more now, in all actuality it may not have much economic impact at all.
But just because things used to be one way doesn’t mean that, under current conditions, they could just be that way again – a lot has changed since the 1970s and perhaps it might not be so simple to revert back to saving that much. Tangentially, I’m really not a huge fan of the distinction between “saving” and “consuming” anyway, so maybe I’m not the perfect person to be breaking this down, but what the heck, let’s give it a shot:
What happens to the economy when the poor start saving more depends on what “savings” is in this context. Let’s start with some real data – the lowest quintile of Americans take home 3.4% of national income, and therefore a 1% increase in the savings rate of “the poor” (defining that as coterminous with the bottom quintile of earners, which is totally not actually correct) would result in an increase in the total national savings rate of .034%. So we’re talking pretty small taters, frankly, which is really the key issue.
But beyond that, we can still discuss the theoretical side, which truly does depend on what “savings” means. If it means “putting the money into deposit accounts at banks” then the aggregate effect of those savings depends on whether it increases loaned funds from that bank in an amount that equals or exceeds the forgone consumption. The reason the “paradox of thrift” doesn’t always hold is that the saved money “has to go somewhere” which means it could (though not will) become someone else’s consumption (of perhaps a more durable good) that will offset the loss in more short-term oriented consumptions. So the “disequilibirum” that results could be a net loss in output and/or it could be a sectoral shift in output, and how disequilibirum-izing you think that is depends on how PSST-y you think the economy is or more broadly how inflexible it his, how high transaction and discovery costs are, how rooted labor markets are, that kind of thing.
Anyway, the point is, while this is theoretically all interesting, my two conclusions from Ashok’s post are a) the net short-term economic impact of even a substantial shift in the savings preferences of the poor will be small and b) I still think the conclusion of my prior post was right because it wasn’t dependent on whether or not a) is true.
Hmmm, I wonder what would happen if everyone started saving as much income as they reasonably could? Where would the high yield investments be with so much capital sloshing around? How would the markets react when aggregate demand plummets even further?
Snark aside, the key here is that, while it would benefit any individual poor person to save more (assuming, of course, that’s possible given their income and cost-of-living, which is not an assumption I’m eager to make), if every poor person somehow stumbled onto Smith’s article and tried to save more it might generate economic disequlibria that wouldn’t benefit anyone. This is semi-related to the point I’ve made before that aggregate saving is a very different animal than individual saving.
IMHO, the best thing we can do for poor people is to a) give them money and other stuff (mostly healthcare), but perhaps more importantly b) make American richer so that we can more easily afford to give poor people money and healthcare. Public policy-wise, this mostly means investing in things that increase forward-looking productivity – high-speed rail, super-fast public internet access, etc. If America is richer tomorrow than it is today, than transfer programs can either a) grow without affecting the real net incomes of those paying for them or b) can remain at current levels of generosity while simultaneously allowing effective taxes to decline or making more public investment possible. That makes the political economy of the welfare state more sustainable and leads to a virtuous cycle. I don’t think it’s a coincidence that most wealthy nations have generous social safety nets.
Note that this is distinct from the right-wing trope that economic growth automatically benefits the poor because every time GDP grows golden coins rain from the flying limousines of the rich onto the heads of the grateful poor. The key is still in active support networks for the poor and the way that economic growth tends to strengthen them
So I already commented on Ashok Rao’s blog re: the content of Ryan Enos’ op-ed in The Washington Postre: racial polarization and partisan preferences, but after more careful examination following Noah Smith’s call for Richard Florida to refute it, I realized that a substantial part of the op-ed is not only wrong-headed but dishonest as well. He writes:
In that same year, I examined the voting of Latinos in Los Angeles and found that those who lived near predominantly African American neighborhoods were far less likely to vote for Obama than Latinos who lived farther away — suggesting that contact with their African American neighbors may have prompted them to vote against an African American candidate.
The link is to a paper authored by Enos, which, if you read, is about the 2008 Democratic presidential primary. Putting aside (very real) questions about the paper’s internal validity, by citing it in the article without mentioning that it is about the primary and not general election vote in the context of an op-ed warning of partisan polarization, Enos can only be said to be deliberately misleading readers into believing that Latinos who live nearer to African-American neighborhoods were more likely to vote for McCain or Romney as opposed to Hillary Clinton. In fact, the same precints his paper cites as the best examples of polarization in the Democratic primary are precints that went 9-to-1 for Obama in 2012.
At the very least this calls for a substantial correction to the article.