Recent articles

1. I often discuss the “clown show” aspect of Trump’s style. It turns out that these sort of antics are now pretty widespread on the right. Here’s The Economist:

Imagine the dinner party from hell and it would look a lot like the one politicians from Forum for Democracy (fvd), a Dutch far-right party, held in November. It began with a row over the backing music, with guests torn between classical music or Ava Max’s “Kings & Queens”, a trashy dance hit. Over lobster and wine, allegations of anti-Semitism among the party’s youth ranks were dismissed by its leader, Thierry Baudet. Guests were asked how many people they would let die for the sake of freedom (“three million” was Mr Baudet’s offer). Later, the fvd’s leader suggested that covid-19 was the work of George Soros. In the days that followed, as accounts of the dinner surfaced, politicians from the party lined up to quit. It was a spectacular collapse after a remarkable rise. Founded only in 2016, fvd was feted as the future of the far right in the eu, briefly topping opinion polls in 2019. Its piano-playing, Hegel-quoting leader was breathlessly profiled in the press. Now it goes into a general election in March hoping for a few seats at best.

A clown ceiling exists in eu politics, which has kept Eurosceptic parties such as fvd from gaining too much power. Such parties tend to grow quickly before collapsing, often due to their own risible ineptitude. 

The Financial Times had a similar article.

America seems to be one of the few developed countries where a major party can become a complete clown show and still hold on to almost 40% of the electorate.

2. Reason magazine points out that the Biden administration has abandoned cost/benefit analysis when deciding on new regulations:

President Joe Biden has moved swiftly to rev up the regulatory state by weakening oversight and effectively ending a reality-based assessment of the costs and benefits of federal regulation.

Even Obama used the cost/benefit criterion to decide on new regulations, so this is a major step back toward the Dark Ages for the Democrats. Although I’m disappointed, I can’t say I am surprised. The entire economics profession has been going steadily downhill since at least 2008, and this sort of intellectual regression eventually has policy consequences.

3. This article discusses a December 2020 debate within the White House about nutty election conspiracy theories. It’s a sort of real life Dr. Strangelove. Very funny.

4. Lots of conservatives are leaving Fox News because it’s too left wing, and going over to ultra-right wing Newsmax. But now even Newsmax has been taken over the the left. Check out this hilarious video. Where will the Trumpistas go next?

5. China’s January 22 decision to lockdown Wuhan was a major turning point in the pandemic, but a less well remembered event occurred just two days later when China announced asymptomatic transmission.

Zeynep Tufekci has an excellent essay discussing how this should have profoundly changed our understanding of the pandemic, and yet many of us were reluctant to accept the implications. (I’d include myself in that list of people to blame.)

Before the lockdown, there was great reason to suspect their official statements. Afterward, however, they had finally unleashed their actual scientists to warn us, because as explained above, now their incentives were aligned with preventing the pandemic, and warn us they did. 

Further, the Criterion of Embarrassment, something historians use all the time, greatly increased my confidence in this paper—and everything the Chinese CDC would publish in the next month or so. This is the idea that something that embarrasses or puts the speaker in a difficult position is more likely to be true. From this paper, we learned that most of the cases had never been to the seafood market and that human-to-human transmission had been occurring since December. This was clearly supremely embarrassing for Chinese authorities and also very dangerous. This confirmed the cover-up, and now both China and the world were risking a pandemic. So everything in this paper and all their warnings now had a great deal of paper.

From this paper, we learned that the mean incubation period was about five days (still true). We learned that the elderly were at much greater risk (still true). 

But we learned something else very important: The paper explained that some cases either had very mild or atypical presentations. They did not reliably come with the high-fever of SARS, which, very, very luckily for the world, coincided with the infectious period of SARS. 

In addition, Chinese officials were already telling us that the disease was spreading from patients without symptoms. 

Read the entire essay; it’s excellent. Here’s her conclusion:

Now, this was round two. The Chinese officials were telling us the truth, because it was now in their interest to do so. Their scientists were doing their best to warn us, because as scientists that is what  they want to do, and they had finally been allowed to share this with us. Everything we needed to know to act was right there in front of us, but it required not just knowledge, but a theory of knowledge to turn it into actionable, timely information.

So here we are.

Jim Jones was a piker

When I was young, a big news story was the mass suicide/murder at Jim Jones’s religious cult in Guyana, where 918 people died, mostly Americans. One congressman investigating the cult also died.

If Alex Tabarrok is right, then the US might be about to engage in a mass suicide that would put Jim Jones to shame. We are refusing to approve the new AstraZeneca vaccine that’s already been approved in the UK and the EU, even though doing so could save many tens of thousands of lives.

And our press isn’t even discussing the issue; there are much more pressing issues to be addressed such as speculation in GameStop shares.

As Bob Dole used to say, “Where’s the outrage?”

A Coasian argument for a parliamentary system

Asher Meir is a policy economist at the Kohelet Policy Forum, a policy think tank in Jerusalem. He sent me a very interesting defense of parliamentary systems, which utilizes Coasian reasoning. The rest of the post is written by Meir. (Please keep comments polite, as this is a guest post) :

A while back Scott made reference to the advantages of a parliamentary system. As someone with experience with policy work in both systems (in 1980s a junior staffer in Washington, in recent years a policy economist at a think tank in Israel) I would like to point out the many advantages, in terms of governance and in terms of democracy (basically the opposite of democratic deficit) in a parliamentary system.

As an organizing principle, I would describe the advantage as follows: The “externality” approach to public goods and bads is basically dual to a “missing markets” approach. (Coase was very busy with this.) People can’t buy and sell pollution, national security etc. The political system creates markets in public policy, where constituencies trade policy preferences.

The bottom line is that a parliamentary system has many more margins where preferences can be traded. It is a much richer market. There are more parties, and with a coalition virtually every decision is a compromise = a deal = a utility-promoting exchange.

To continue with a Coasian orientation, we can view political parties as firms. Just as in the market much of the organization of production is done in a control mode within firms, while other aspects are in agreements between firms, likewise in a parliamentary system some of the work of aggregation of preferences is within parties, who are good at advancing the outstanding distinct interests of certain constituencies, and other aspects are embodied in the markets: choosing a party to vote for or join, and in deals made between parties. The market has some optimal distribution of number and sizes of firms; optimizing the market for aggregating preferences also has some optimal number and size. The chance that it is two firms with about half the market for each would seem to be small.

Here is one example: In Israel 16 seats in a parliament of 120 belong to ultra-Orthodox parties. Virtually everything these parties want is unpopular among all 104 other Knesset members. However, the price of these compromises is low for other Knesset members and these parties don’t make many demands beyond their narrow interests. They don’t have a huge amount of political capital but they spend it all on a few policies that are very important to them.

Another, complementary issue: Ministers in a parliamentary system are politicians. I observe that the degree of regulatory capture is much less. The person running the Education Ministry is not an education professional, the person running the Health Ministry is not a health professional. They are not experts but as we know experts are almost always captured. Second of all, every minister wants to be Prime Minister someday and has a very powerful incentive to make a successful reform that will make him/her memorable to voters. At the very least a successful reform will guarantee a high place in the list and an additional term, it will give a good chance to move up to a more powerful ministry, and in some cases can help catapult someone to Prime Minister. Of course the ministries themselves are divvied up by agreement = exchange so each party has to decide which policies or which politicians are most important to them. Within the parties deals are also taking place.

Every minister wants a lot of money and power for his ministry, but there is a government. There is only so much money and only so much power so these are also assigned by negotiation. Each minister has a powerful incentive to make the best possible case for his ministry. It’s like a court where good decisions are stimulated by division of labor between the defense and the prosecution who make carefully argued cases to the judge. (In this case the government and ultimately the public.) Of course power has a lot to do with it, but 1. even someone with a lot of power wants to “spend” it judiciously 2. power itself is accumulated by people who represent a constituency and are empowered to make deals to the common benefit of varying constituencies. Of course parties also compete for politicians. A politician can have an individual constituency and can choose the firm which will help him/her advance his/her individual political career alongside the interests of the private constituency.

In the US I see it more as a “market maker” model rather than an exchange model. The President decides all these margins him/herself. The problems with this are myriad. There is a cognitive issue – even if the President is politically accountable to the same spectrum of constituencies as a parliament, s/he has limited bandwidth. There is no wisdom of crowds. Second of all, the President is not accountable to everyone, there’s just a limit to who can have his/her ear. Finally, if you are a market maker you have market power. If there is a deal with surplus which will only get made if you broker it, you will be able to appropriate some of that surplus. This is a big drag on the market.

We like to think of markets in terms of knowledge + incentives. A business has the most knowledge about costs and benefits in their area of specialty, and they have the incentives to create value because they appropriate it in profits. In a parliamentary system, politicians are better able to position and brand themselves such that there is some “line of business” where they know the customer and they know the costs, and to empower these politicians to make constructive exchanges with other politicians.

Your vote is almost never wasted (probabilistically) in a parliamentary system. I have the right to vote in New Jersey but I never bother. No vote or bloc of thousands of votes ever moved New Jersey in a presidential election in my lifetime. But in a parliamentary system, there are always a few seats hanging on just a few votes. In Israel parties can trade their excess votes so the final few thousand votes can affect almost anyone. Virtually every party is biting its nails even when there only a few thousand votes left to count.

As a small-c conservative, I am not personally a big believer in radical change, and since the Constitution has been around for over 230 years I would not be in a rush to change it. Probably my favorite quote from an economist is from the pioneer in innovation economics Fritz Machlup: “If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge, to recommend abolishing it.” (BTW I recently read that Edith Penrose was co-author of this statement.)

On the other hand, this venerable regime does recently seem to be showing worrying signs of wear. Above all I am a believer in voter/consumer sovereignty so if my thoughts make the electorate better informed, they are a contribution to a better America. (And insofar as Great Britain had a parliamentary system at the time when the Colonies insolently set up their own commonwealth, perhaps a parliament for the US is the truly conservative option?)

Burma is a banana republic

The military in Burma is using baseless allegations of election fraud to overturn the results of a democratic election that did not go their way:

Myanmar military television said Monday that the military was taking control of the country for one year, while reports said many of the country’s senior politicians including Aung San Suu Kyi had been detained.

An presenter on military-owned Myawaddy TV made the announcement and cited a section of the military-drafted constitution that allows the military to take control in times of national emergency. He said the reason for takeover was in part due to the government’s failure to act on the military’s claims of voter fraud in last November’s election and its failure to postpone the election because of the coronavirus crisis.

I wonder where they got the idea?

Chesterton’s Fence and stock prices

John Cochrane has a new post with the following headline:

Gamestop. 1999 déjà vu all over again?

In context, Cochrane seems to be referring to the tech stock “bubble” of 1999, a year when the NASDAQ rose from about 2200 to just over 4000. If you bought a NASDAQ index fund during 1999 at say 3250 and held it until today, it would be valued at over 13,000, even after this week’s drop (and not even including dividend reinvestment.)

So what does 1999 all over again mean? Does it mean that GameStop shares purchased for $325 will be worth $1300 in 22 years, plus dividends? A buy signal? I don’t think that’s what Cochrane means; it seems like he’s rather skeptical of the future prospects of this controversial stock. (Although he wisely refrains from specific investment advice, something I also plan to do.)

I mention this example to remind readers that while 1999 is often viewed as a classic stock price bubble, there’s actually very little evidence that tech stocks were greatly overvalued back in 1999, at least in aggregate.

Bitcoin was about $2 when I first became aware of the topic. All my Bitcoin posts have basically had the same message—it’s probably not a bubble because there is no such thing as bubbles. As Bitcoin became more successful, I also pointed out that in an efficient market, 99% of Bitcoin-type investments should eventually collapse to almost nothing.

That might sound odd, but consider the alternative. Suppose that even 10% of investments such as early Bitcoin, early Amazon, early Tesla, etc., turned out to be wildly successful, rising 1000-fold. The other 90% fell to zero. A diversified portfolio full of that sort of speculative stock would yield a return that is far above the market average, roughly a 100-fold gain.

Investors know that a few of these high risk/high reward stocks will become highly successful. As a result, they all trade at high prices (relative to earnings). Eventually, most of these companies end up doing poorly, which operates via “confirmation bias” to convince most people that they were right about bubbles, even though they were wrong. They remember that they always knew would fail and forget that they refrained from buying Amazon for $7 back in 2001. How could a money-losing seller of books on the internet ever become a huge success?

In the early 2010s, I had no idea what was going on with Bitcoin, and still don’t really understand the investment. But I think I at least understand that I don’t understand it. You say nothing “fundamental” has changed with GameStop in the past week? OK, maybe, but are you sure? Does becoming 10 times more famous and developing a strong emotional connection to many millennials have zero value to a retailer? I don’t even play computer games, so I have absolutely no opinion on this stock. But how confident are you in your opinion?

This is why it’s so hard to test the EMH. The collapse of what looks like speculative bubbles seems like evidence against the EMH, but in fact the theory predicts that the vast majority of speculative “bubbles” will collapse, in order that the expected rate of return on portfolios that include Bitcoin, Amazon and Tesla is consistent with the risk-adjusted rate of return on other portfolios. The statement “speculative stock X is very likely to be lower in a couple years” is not at all equivalent to “speculative stock X is a bad investment.”

This aspect of market behavior is really hard for people to see, and as a result the vast majority of people never see it. Selling people on the EMH is like trying to convince someone that there’s no such thing as objective truth, or free will, or personal identity. If their brains are not wired in such a way as to grasp the idea, there’s no way to make them see it. Vase/profile.

People aren’t even thinking about the EMH question in the right way—they think it can be answered by squinting very hard at some so-called “bubbles” and figuring out whether the market was irrational. The actual question is, “What anti-EMH models are useful to me?”

Don’t bother arguing with me in the comment section; I’m a pragmatist. Do one of these three things:

  1. Short a stock that you think is overvalued.
  2. Go long on a stock you think is undervalued.
  3. Agree with me that markets are efficient.

PS. In 2013, I quoted Tyler Cowen saying the following:

With apologies to Scott Sumner, I say Bitcoin is a bubble.  Outside of war and rebellion, do “normal” new currencies behave this way?

Read my whole 2013 post, and tell me how my claims on everything from Bitcoin to stock prices look today.

PPS. Here’s how to tell if you understood the argument I made in this post. Is the Bitcoin story of the past decade:

A. A single data point against bubble theories?

B. A thousand data points against bubble theories?

The answer is B. It’s an absolutely crushing blow to asset price bubble theories. Devastating. It allows for 999 other asset price collapses in a world totally free of bubbles. NOW how are you going to prove that bubbles exist?