Thursday, October 28, 2010

Quotes of the day

The illusions that spur entrepreneurial ventures and consumer daydreams point to the nonmaterial side of markets. Markets not only expand health and comfort, providing a sustaining material existence. They also spur ambition and imagination, the quest for achievement and the pursuit of meaning. They give us an opportunity to exercise our creativity, to enjoy the satisfactions of absorbing, productive work, and to fashion and express our identities.--Virginia Postrel

But while there is a lot of interest in the psychology and neuroscience of markets, there is much less in the psychology and neuroscience of government. Slavisa Tasic, of the University of Kiev, wrote a paper recently for the Istituto Bruno Leoni in Italy about this omission. He argues that market participants are not the only ones who make mistakes, yet he notes drily that "in the mainstream economic literature there is a near complete absence of concern that regulatory design might suffer from lack of competence." Public servants are human, too. Mr. Tasic identifies five mistakes that government regulators often make: action bias, motivated reasoning, the focusing illusion, the affect heuristic and illusions of competence. In the last case, psychologists have shown that we systematically overestimate how much we understand about the causes and mechanisms of things we half understand. The Swedish health economist Hans Rosling once gave students a list of five pairs of countries and asked which nation in each pair had the higher infant-mortality rate. The students got 1.8 right out of 5. Mr. Rosling noted that if he gave the test to chimpanzees they would get 2.5 right. So his students' problem was not ignorance, but that they knew with confidence things that were false. ... If lawmakers are to understand how laws get applied in the real world, they need to know and understand the habits of mind of their officials.--Matt Ridley

The essential Progressive belief that [Ezra] Klein expresses in undiluted form is that crafting public policy through legislation is a topic for which, in simplified terms, the benefits of expertise outweigh the benefits of popular contention. Stated more cautiously, this would be the belief that the institutional rules of the game should be more heavily tilted toward expert opinion on many important topics than they are in the U.S. today. This would be a lot more compelling if the elites didn’t have such a terrible track record of producing social interventions that work. An aeronautical engineer can predict reliably that “If you design a wing like this, then this plane will be airworthy, but if you design it like that, then it will never get in the air.” If you were to build a bunch of airplanes according to each set of specifications, you would discover that he or she is almost always right. This is actual expertise. I’ve tried to point out many times that the vast majority of program interventions fail when subjected to replicated, randomized testing. Our so-called experts in public policy talk a good game, but in the end are no experts at all. They build castles of words, and call it knowledge.--Jim Manzi

Elites are often missing crucial knowledge, and unaware of it. In some ways, that effect is more pronounced than it used to be, with more and more of the elites drawn from a narrow class of extremely well-educated people from a handful of metropolitan areas, few of whom have ever, say, been responsible for a profit and loss statement, or tried to bring a gas station into compliance with local and federal EPA regulations. In a world where your primary output is words, it is easy to imagine a smoothly operating process based on really smart rule-making. And there's a certain impatience with the grimy, self interested folks who complain about the regulations imposed for the good of society--a certain forgetting that in aggregate, those whiners are society. In essence, elites are always missing one vital piece of information: what it is like to be someone who is not in the elite. ... The problem is not that the elites are venal self-interested autocrats out to screw the little guy and give their group more power; the problem is that, like every other group, they tend to understand the costs of programs that restrict their autonomy very well, and to be somewhat less sensitive to the freedom of others. As Anatole France drily put it: "The law in its majestic equality refuses the rich as well as the poor the right to sleep under bridges and to beg for bread."--Megan McArdle

If there were terrorist attacks in this country or elsewhere in the world, all the analysts would be on TV and say, “See? Bin Laden wasn’t that important to the organization.” So it would depend on what would happen, but you’ve posed an interesting idea that if that happened, you could use it as a pivot point to say “Okay, we’ve essentially dismantled and defeated al-Qaeda. They’re not in Afghanistan.” And you could have some sort of significant troop withdrawal. At the same time, the war on the ground is ugly and violent, and we’re losing a lot of troops. You can’t divorce yourself, when you look at this, from the sacrifice and payment some individuals and families are making in this war. The responsibility and price is unevenly distributed. I asked this question of people in Obama’s circle working on this, “What do we owe the people who are over there?” And one of them said, “Everything. They’re our surrogates.” I then asked “What are we giving them? Are we giving them everything?” Of course, the answer is, “No.” Part of what we’re not giving them is the clarity of mission and leadership and focus and commitment. The Obama campaign of 2008, the clarion call, “Yes we can!” We haven’t heard it about these wars.--Bob Woodward

It turns out that early voting mitigates the impact of get-out-the-vote mechanisms, and it also diminishes the impact of "Election Day". Voting used to be a public act of civic engagement, with all sorts of activity focused around election day, from exhortatory news stories to social pressure from the sight of neighbors trudging to the poll. One way to think about it is that voting signals something about you to others in the community, but with the advent of early voting, that signal is no longer so powerful: someone who doesn't turn up on election day might not have voted, or they might simply have gotten it out of the way weeks before.--Megan McArdle

... we should not waste money on the presumption that SEC enforcement actually sniffs out frauds before they blow up. In 2005, Harry Markopolous wrote a 21-page memo to SEC regulators about Bernie Madoff entitled: "The World's Largest Hedge Fund is a Fraud." Nothing happened. The regional SEC office was aware since 1997 that Allen Stanford was likely conducting a Ponzi scheme, but no SEC action took place until 12 years later when his Ponzi scheme was revealed via a lack of funds, costing $8 billion. Too little too late. They might as well admit they are there to attach fines and jail time on the obviously guilty. It is so easy to fool the SEC, they only highlight their obliviousness by suggesting their activity is anything other than post hoc.--Eric Falkenstein

Bernanke is playing something closer to electronic golf. After each practice swing in Wii, the likely distance the ball will travel is shown on the computer screen. The practice swings are the recent policy statements by Fed officials. The reactions of markets (everything from stocks to TIPS spreads) show us the likely effects. Yes, there is a circularity problem here–but at least it gives us a ballpark estimate. And the Fed’s still not swinging hard enough.  Target the forecast! Set monetary policy at a level expected to produce desired growth in AD. We’re still far from that level. I hope Bernanke doesn’t choke under the pressure. I hope he remembers what he told the Japanese a few years back.--Scott Sumner

Here’s what really bothers me about [Joseph] Stiglitz’s article. It’s not that he favors a different monetary policy than I do; it’s that he seems to oppose the Fed having any monetary policy at all. (Hence the connection with those “abolish the Fed” elements within the Tea Party.) I defy anyone to read the article and find any monetary policy being advocated. Indeed I don’t see any evidence that Stiglitz even knows what monetary policy is.--Scott Sumner

Since when is every trade surplus or deficit an "external imbalance" in need of correction? It makes sense for a country that has good investment prospects to import a lot of goods, run trade deficits, and borrow money. Years later, the country puts the resulting products on boats to pay the lenders back. The U.S. borrowed abroad to finance our railroads in the 19th century and ran surpluses when Europe was rebuilding after World War II. Were these "imbalances"? Or consider a country (say, China) with a lot of middle-aged workers who need to save for retirement. It makes perfect sense for them to put stuff on boats and send it to a second country (say, the United States) whose people want to consume the goods. The people in the first country invest their earnings, say, by buying the bonds issued by the second country. And as they retire, they cash in the bonds and buy goods flowing the other way.--John Cochrane

IN FRANCE workers angry about pension reforms have blockaded fuel refineries, causing 4,000 petrol stations to run dry. The Netherlands’ recently elected minority government depends for survival on support from a Muslim-baiting populist. Economies across Europe are struggling to cope with sluggish growth, lacerating budget cuts and the after-effects of borrowing binges. But there is an exception to the gloomy European rule. No big developed country has come out of the global recession looking stronger than Germany has. The economy minister, Rainer BrĂ¼derle, boasts of an “XL upswing”. Exports are booming and unemployment is expected to fall to levels last seen in the early 1990s. The government is a stable, though sometimes fractious, coalition of three mainstream parties. The shrillest protest is aimed at a huge new railway project in Stuttgart. Amid the truculence and turmoil around it, Germany appears an oasis of tranquillity.--The Economist

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