Wednesday, January 28, 2009

When The Savior Fails to Show

"Obama's election was the one event this year that gave me hope for the future!"

- Anonymous correspondent, quoted by James Delingpole in The Spectator.

Anne Applebaum of The Washington Post has an interesting point of departure:

The rejoicing was not entirely unanimous, of course, not least because the frothy media coverage itself provoked some backlash. One British friend told me that while he'd enjoyed watching the inauguration, "this salvationist acclaim for a political redeemer worries me, since it shows the depth of the almost universal despair." Similar rumblings were heard elsewhere.

Indeed. So powerful is the commercial and military might of the United States still (despite prophecies of looming decline) that people not just in the U.S. but in other countries look to him as someone who can magically conjure up solutions to solve their main problems in life – diplomatic, financial, environmental, and even personal.

Leave aside that there are some places – India, most prominently – where our new President is greeted as much with skepticism as with hope. Why would the President of the United States be in a position to be the savior he is expected to be? Government by its very nature cannot solve most problems effectively. A few – market failures properly defined – it can, but does not necessarily, solve better than individuals pursuing their self-interest. But typically, government attempts to address problems beyond its sphere of minimal competence – to end the Great Depression (which was only Great in the U.S., where government efforts to address it through new and innovative methods were the greatest), to fix family breakdown, to prevent the poorly understood mechanics of the incredibly complex global climate system from going in one bad direction or another, to get beyond the human politics that has been in operation, and understood, for millennia, to fix people's health problems, and on and on – actually make these problems worse. The first questions to always ask when the messiah comes bearing the seal of the Office of the President of the United States ought to be, “Will these things you propose actually solve these problems, and what is the historical evidence for this claim?”

Even if the President of the United States had such a divine capacity to predict the future and push all of the necessary societal buttons to force people to act against their interests so that allows he can fulfill his promises, the Constitution (wisely) limits his power to do these things. He must negotiate the opposing interests he faces in Congress, some even in his own party, and he must do things that the Supreme Court will allow. He has no ability to move mountains. It is perhaps a sign of end-stage corruption of government by democracy alone that we believe the government can do anything, and if it fails to do so it must be the fault of some Enemy - some Emmanuel Goldstein marshaled up for the occasion. If people not just in Santa Monica and Akron but in Britain, France, Mexico and Indonesia are waiting for President Obama to make it all right, we are headed for a very angry time.

Sunday, January 25, 2009

Should American High Technology Be Less Successful?

Because soon it may be. The LA TImes talks of how Google, having bet big through campaign donations to Barack Obama, is now set to reap its rewards. (Special interests carving up the citizenry - the "change we seek.")

In 2006 I wrote the following about Google's decision to open up a lobbying office in DC:

But that they see the benefits of lobbying as justifying the costs is disturbing, another sign that information technology is every day becoming more like cars, oil, and every other industry where the returns to pressuring the government are large. And that can have no good effects on the progress of the information revolution.

Well, the entanglement of the state with the car industry (and of course the financial industry) has become far more profound than even I imagined when I wrote this. Not good news for those - say, car customers, shareholders and employees of companies, people in the future with no say in the matter but now stuck with much higher tax bills and higher costs for goods and services because of the permanently increased reach of the state - without so much heft in DC. Thinking of how such industries as passenger rail and automobiles have performed as innovators during their era of extensive entanglement with Washington, it is a little disturbing to read the following from the Times account:

Google says the main reason it has improved its standing in Washington is that Obama's tech priorities mirror its own. He has endorsed network neutrality. His technology agenda also calls for expanding broadband Internet access to rural areas and appointing the first government-wide chief technology officer ([Google CEO Eric] Schmidt has been mentioned for the position but reiterated this week he was not interested).

"This administration is more focused on science and technology," Schmidt said in an interview. "That's positive for all of technology, and particularly Google."

Does anyone feel that the American technology sector, during the era that Washington, the Microsoft antitrust case aside, has more or less left it alone has performed poorly? Has it failed to innovate, failed to make people's lives better? Is more government focus on high technology likely to make high technology more or less effective for the American people relative to how effective it was before? This is the question to ask right now, because if we wait until the government gets really "focused on science and technology" it will be too late.

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Monday, January 19, 2009

What Was the Matter With the Old Declaration?

The Declaration of Independence, it seems, is in need of repair. Quoth the President-elect, according to USA Today:

What is required is a new declaration of independence, not just in our nation, but in our own lives -- from ideology and small thinking, prejudice and bigotry -- an appeal not to our easy instincts but to our better angels.

"Our easy instincts,” which some might suppose could be translated as“our own ownership of our lives, goals, and destiny,” is not good enough for the collectivist horde. It has long been a disturbing collectivist tic - the belief that progress is inevitable, and the need for it so obvious to anyone who thinks the right thoughts – that only "special interests" (the collectivists’ interests conspicuously not among them) and "ideology" (i.e., mindless political disagreement obstructing the construction of paradise) stand in the way.

But in fact, these “ideological” differences are profound and unavoidable, and if we try to paper them over, it means we cede the protection of self-government to the soul's slavery of being led by usurpers – perhaps charismatic, perhaps sufficiently rhetorically gifted to succeed in politics on nothing more than the promise of “change,” but usurpers just the same.

Ideology is there for a reason. It is there because free men, thinking freely, have come to different conclusions about the nature of a just society. Purporting to end it eliminates that freedom. Ideology is there because, if we wish to remain free we are not and can never beone,” and pretending otherwise quickly turns the opposition into the enemy. The only thing that holds us together is our belief that we are a nation of individuals. Politics is there to channel disagreements about “ideology” into less destructive channels. There is no eliminating it without ultimately feeling a need to eliminate the opposition.

Here is The Washington Post story on what the President-elect believes is necessary:

President-elect Barack Obama announced the formation of a new group known as "Organizing for America" that aims to continue the grassroots advocacy that the former Illinois Senator began in his presidential campaign.

"As President, I will need the help of all Americans to meet the challenges that lie ahead," Obama said in a video message e-mailed to supporters (and reporters) this morning. "That's why I'm asking people like you who fought for change during the campaign to continue fighting for change in your communities."

The new group will be the flagship of "Obama 2.0" as many people have taken to calling the transformation of the political organization created during the 2008 campaign.

There is something more than a little disturbing about mass mobilization of people to create permanent groups of government supplicants (for that is what they will be), with Uncle Sam the welfare-state dealer luring them into dependency before unleashing them, so transformed. on the obstacles to the progress – otherwise known as free men – so dear to the progress-ives.

People need and deserve a higher purpose, no matter what the sociobiologists say. But only if it is their own higher purpose freely chosen, which requires that this purpose not be imposed on others. The conquest of this eternal desire by the individual for existential clarity, which he might, left to his own devices, nobly fulfill through the occasionally stumbling living out of his own life, by a collective movement for "change" or "progress" defined by ambitious politicians who seek to put the state in charge of our destiny, nevernot end well. At best it gives us the decaying culture of modern welfare-state Europe, at worst Lenin. It leaves a people dependent on the state, perhaps (if they are lucky) materially sated but lacking the fundamental challenges of life - the need to triumph, and to fail to triumph, over the obstacles it throws in the way of one's goals. It leaves a society bereft of ambition and achievement, leaving only undisciplined anger at the failure of the state to solve problems, along with the failure to recognize its creation of many of them to begin with. It is not what the signers of the Declaration had in mind.


Thursday, January 08, 2009

Where Does the Tuition Money Go?

George Leef of the John William Pope Center for Higher Education Policy discusses Charles Murray’s recent book, which I reviewed here. Mr. Leef ends with a sentence that raises an interesting question - where does all the bloated expenditure on higher education end up?

For decades, America’s higher education establishment has been riding high. It succeeded in persuading most of the populace that more education—that is, formal education—was an unalloyed benefit for both the individual and the nation. That may have been true decades ago, but it no longer is. Instead of trying to preserve the notion that college is good for almost everyone, the education establishment should face the reality that many young Americans would be better off if they didn’t go to college right after high school.

Economists refer to the return going to an asset’s owner because of the asset’s permanent scarcity as a rent. The term derives from rent to land, which was seen to be the most meaningfully finite resource in the days of Smith and Ricardo, but can apply to any asset whose lack of good substitutes, including from competition from new entry, generates high returns for its owner. This can accrue to the owner of an unusually good voice, an unusually attractive face, the ability to write unusually elegant economic models, the ability to obtain special government privileges (whence the term “rent-seeking”), and so on.

Higher education ought to generate substantial rents. State universities are heavily subsidized, so that the cost to the student is considerably less than the expenditure on resources made by the school. This should generate ample opportunity for faculty/administration chiseling. Private and, to a lesser extent, state universities are able to price-discriminate by calibrating financial aid. After demanding, and getting, a slew of financial information from potential students, schools calculate their willingness to pay, and give them financial aid for the rest, which is just a convoluted way of charging each student a different price. By doing this, the school extracts most of the gains from trade between school and student. Competition through entry is possible, and does exist through University of Phoenix-type arrangements, but heavily subsidized first movers are difficult to compete against.

But if universities generate such tremendous rents, where do they go? Administrators are arguably very well-paid relative to the opportunity cost of their time. (If an English professor becomes a university president, what is his next-best alternative?) Some professors, especially science and engineering stars at research universities, and professors in business colleges (who tend to have better private-sector alternatives) are paid pretty well, but many, especially in the humanities are not (as they would be the first to tell you).

I think that much of the rent is taken not as money, but as leisure and vanity indulgence. The faculty member who retires (often at a relatively young age), having brought the same crumpled lecture notes into class for 20 years, is legendary. Few middle managers in the private sector could get away with such a lack of dedication to continuing education. Many faculty take a huge chunk of the year off – summer and Christmas season in particular. Compared to private-sector managers, they have a large amount of time available even during the workweek, often not having to be on campus unless they are teaching. Faculty and administrators alike are tremendously creative in creating fads (“critical thinking,” “civic engagement,” “assessment,” etc.) to justify conferences, which are often held in nice hotels in pleasant cities and for which the university often picks up the tab. The tenure system itself contributes to this leisure rent, by making it almost impossible to dismiss faculty for anything other than gross misconduct outside the classroom. It is an artifact of earlier times, but is retained by the sort of uncompetitive system Messrs. Leef and Murray describe. (I say this as someone with tenure myself.) Faculty are not under threat for being fired for what they say, which is the nominal justification for tenure. If anything, tenure serves to strengthen the ideological cartel of the existing faculty, another form of noncompetitive rent – the ability to propagandize students with little competition.

Administrators too have ways to vent the rents, most famously through the indulgence of the edifice complex, the construction of probably unnecessary buildings with the current administration’s names suitably immortalized in stone. Other methods undoubtedly exist. These methods, in combination with the grossly inefficient way in which faculty structure their work schedules, raise the cost of education, in ways a supermarket could not get away with.

College work ain’t digging ditches. It is rather nice work if you can get it, which is why the competition for faculty positions, particularly in the humanities, is so high despite the low pay. (If sociology professors are underpaid, why do hundreds of people often apply for a single opening at a decent university?) The rents from the tremendous inefficiency of the higher-education market are often not taken as cash, but that does not make them small.

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Monday, January 05, 2009

The National-Security State Metastisizes

Michael Yon, who has reported from Iraq and Afghanistan with great distinction in recent years, tells of the fate that befell a Thai friend of his when she ran afoul of the national-security state:

While the U.S. Immigration officer named Knapp rifled through all her belongings, Aew sat quietly. She was afraid of this man, who eventually pushed a keyboard to Aew and coerced her into giving up the password to her e-mail address. Officer Knapp read through Aew's e-mails that were addressed to me, and mine to her. Aew would tell me later that she sat quietly, but “Inside I was crying.” She had been so excited to finally visit America. America, the only country ever to coerce her at the border. This is against everything I know about winning and losing the subtle wars. This is against everything I love about the United States. We are not supposed to behave like this. Aew would tell me later that she thought she would be arrested if she did not give the password.

Humans are driven by fear; it is a basic survival instinct. Politicians are driven by the need to accumulate and retain power; it is what they do. And these two basic facts of life often collide to unfortunate effect, especially in a society that claims to cherish individual autonomy.

The threats – infinitely clever terrorists, illegal drugs seizing hold of every child – always seem so powerful, and the burdens so distant. The national-security state always seems nonthreatening when the victim is Some Other Person – that Muslim over here, every one of whose people just bring it on themselves, that union activist or gun nut over there who just won’t keep quiet, that person way over there who shouldn’t be moving that much money around anyway. What does the innocent person have to fear, anyway? What’s a little technical violation of civil liberties when our security is at stake?

Until, that is, our liberty is gone. Would the founding generation have put up with this nonsense?


The Great China Blackout

Power consumption is a decent indicator of economic activity. Here is what it has done in China in recent years:

2005: 24.24% increase
2006: 33.13% increase
2007: 14.93% increase

And Nov. 2007- Nov., 2008? According to Barron's, electricity consumption in that period fell 9.6%.

Whatever the official data say, the China bubble is popping, hard. Just as some of us have long thought, even if the timing, and the global impact, are different from what we expected.

I thought then, and I still think, that the combination of Chinese repression, 20 years of established growth generating hundreds of millions of middle-class people with first-hand memories of the bad times, and Chinese nationalistic pride will allow the government to ride this out. But we are about to find out.

Hat tip: Ambrose Evans-Pritchard, for alerting me to the China power-consumption data.

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Saturday, January 03, 2009


I seem to be getting a lot of traffic from a website with which I was unfamiliar, StumbleUpon. If you like what you read, you may wish to take a look at my first book, where there is much more of the same.

If you know who recommended me please leave a comment, as I would appreciate knowing about it.

American Housing and the Great Crash

The global financial crisis happened because the US, by failing to oversee lending markets, recklessly let a housing bubble develop. When it popped the whole world, having bought into the bubble through securitized mortgages, fell too. Right?

Think again. Oh, it's true that the US housing market developed a bubble. As I have noted here , that is because of the politicization of housing loans by the federal government, which made lenders' job difficult. But it is also true, as I've argued here, that the crash is more likely a function of the global boom that unfolded, depending on one's preferred starting point, in 1982, 1991 or 1998. This boom was profound, changing hundreds of millions of lives, but ended the way such booms always do, with a backlog of mistaken ventures in need of cleaning out. At worst, the U.S. housing bubble was nothing more than the needle that popped the bubble that particular day.

Can this be? Below is a chart that links two numbers. On the vertical axis is the percentage fall in stock markets around the world in 2008. On the horizontal is the country's rating for clean governance by Transparency International, an anti-corruption group.


Note the close relationship between lack of transparency (i.e., more corruption) and the size of the fall. Indeed, the correlation between the two quantities for the 28 countries I arbitrarily chose (because market data were easily available) is 0.69, which in social science is very large.

So what does it mean? In any society economic actors make mistakes relative to what they know after the fact. In societies with a lot of corruption (which masks information, because each government bribe is by construction hidden from the investing public) or with miserable accounting or other problems with financial information the number of such mistakes over any interval is larger. Thus, this crash is a major cleaning out of a large pile of accumulated mistakes, not an outburst of irrationality or the residue of some strangely unprecedented spasm of greed. The correlation would undoubtedly be even more impressive if it used the quality of financial reporting and information instead of overall government transparency, but is very informative as it is.

For more evidence that this is a rational resolution of a rational bubble (driven by the emergence of many countries with great potential but unknown strengths and low information conductivity into the global system), note that China suffered one of the biggest market declines despite the fact that foreigners are not allowed to trade in its stock markets to any significant extent. How can that be if the crash is simply contamination from U.S. housing? Pakistan too has suffered a dramatic fall, despite the lack of importance, I suspect, of U.S. housing securities on the Karachi exchange. The U.S. and the U.K., in contrast, despite being the epicenter of the housing bubble, had (relatively) modest declines.

What is going on is, as I have said before, an information problem, not a liquidity problem. Only by discovering the information many want but few have - information about which ventures undertaken during the great bubble are sustainable, and which were errors; about where, in other words, the remaining unexploded economic bombs lie - can order be restored.

But why let the data get in the way of a good political fable?

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