Socialism vs. Democratic Socialism

“Democratic socialism” is the new thing: a name for what the progressive side of the Democratic party has wanted to do for quite some time.

It isn’t socialism. For that, we need to go to Venezuela. Both Democrats and Republicans (and especially young people should know better than to say it is). Here’s Greg Ip:

… The very word “socialism” has been debased into a millennial hashtag on the left and a schoolyard taunt on the right …

Some polls find young American adults prefer socialism to capitalism …

Would these people actually know socialism if they saw it? Taxing the rich, Medicare-for-all, and a Green New Deal that replaces fossil fuels with renewables are certainly liberal, probably radical, possibly unwise.

But socialist? Hardly.

They redistribute the outcomes of the market; they don’t replace the market with the state as the means of allocating production. That’s the hallmark of true socialism, and Venezuela’s catastrophic experience is a useful lesson in why it is has fallen out of favor around the world.

Here’s what real socialism did in Venezuela, according to Ricardo Hausmann:

… Expropriated six million hectares of land, the steel sector, cement sector, supermarkets, telecoms, banks, dairy factories, coffee processing factories, hotels, and essentially ran all of them into the ground …

Back to Greg Ip:

Venezuela’s socialism, which was heavily influenced by Cuban communism, isn’t just a disaster; it’s unique. Despite the region’s long history of left-wing populism, no Latin American country has since followed Venezuela’s path.

The point of all this is that we may as well drop socialism from the “Democratic socialism”. But that just leaves. But that points up the essential problem: maybe “Democratic” wasn’t selling that well to voters, so they’re trying to dress it up differently.

Read the whole thing, entitled "Venezuela’s Collapse Exposes the Fake Socialism Debated in U.S." in teh February 6, 2019 issue of The Wall Street Journal.

Why Is Macro So Hard? Bias Against Emergence and Bias Against Understanding

Macro is hard because journalists (and many of the rest of us) overweight conscious action by individuals — decisions.

If we overweight something, we must underweight something else — and that’s emergence: the idea that some things happen through the interaction of all of us rather than through conscious planning.

Cold Spring Shops pointed me towards a couple of pieces and Stumbling and Mumbling that cover this well, in the context of Brexit and the rise of Boris Johnson. Not all of this is relevant here; I’ve emphasized the parts I like best.

I fear that we have here is another example of a bias against emergence. Political journalists especially focus upon conscious political actions to the neglect of emergent processes.  Brexit is a political choice whereas other, perhaps bigger, influences on real wages are the complex unintended products of millions of dispersed decisions. So Humphrys pays the former more attention.

…

Nor is it confined to journos. Leftists sometimes blame rising CEO pay on bosses’ greed, as if the rest of us would turn down pay rises, and under-estimate the extent to which it is the result of partly-emergent processes such as globalization (pdf), deunionization, agency failure or managerialist ideology.

In this respect, the BBC has what John Birt and Steve Richards called a “bias against understanding.” In downgrading the importance of emergence, it stops viewers and listeners from understanding social phenomena.

But this all leads to a disturbing conclusion:

If this bias merely led to ignorance, it wouldn’t be so bad. But it might have a more systematic effect. If we underweight emergence, we overweight the role of conscious individual agency. This causes us to exaggerate what politicians and business leaders can achieve if only they display strong leadership. And that, in turn, helps to sustain inequalities of income and power.

It gets better in the second piece:

The thing about complex emergent processes is that they are hard to understand – there’s a complexity brake – and even harder to forecast. This might explain why economists have generally failed to predict recessions in a timely manner.

This is why I say the BBC is guilty of an ideological bias. In not even considering the question of emergence, and instead pretending that markets are like people, it is assuming that complex social phenomena – not just markets but perhaps political behaviour too - are understandable and predictable.

This is no mere innocent error. If markets are like toddlers or teenagers, it’s possible to understand and predict their behaviour and so Very Serious People can claim to possess expertise and hence a legitimate right to power and influence in politics and business. If, however, they are instead complex processes they might not be predictable – except in the sense that we might know the probability distribution of possible outcomes – then those VSPs are in fact mere empty suits.

As Alasdair MacIntyre wrote:

Do we now possess that set of law-like generalizations governing social behaviour of the possession of which Diderot and Condorcet dreamed? Are our bureaucratic rulers thereby justified or not? It has been insufficiently remarked that how we ought to answer the question of the moral and political legitimacy of the characteristically dominant institutions of modernity turn on how we decide an issue in the philosophy of the social sciences. (After Virtue, p 87)

In unthinkingly denying the very possibility of complexity, the BBC is therefore helping to shore up the power and prestige of the ruling class. That’s a profoundly politically biased position.

I love that. And turning it on its head, it’s critical for the ruling class to assert that things can’t be emergent/complex.

My gosh … Trump may have had a huge insight when he remarked that healthcare policy was hard!

Cross-posted from my personal blog; this topic isn’t a great fit for undergraduates just getting exposed to these ideas.

Took Some Time Off

For Spring 2019, a computer lab came completely free for use in ECON 3020 after spring break. Because of this, we did more extensive work on time series and growth theory, and spent less time on policy and current events in this blog.

So, I’ve got a backlog of things to post here.

A 5th Test

I’m getting weirdness with my blogging software. This is a test to see if it carries over to the Blogger platform too.

(Strongly Political Post for Today. Use for Tinfoil Hat As Needed.): The Financial Crisis and Bailouts

The Wall Street Journal has an op-ed page that is generally regarded as conservative, Republican-oriented, and pro-business (it would be more correct to say that it is pro-markets). Within that, their column leaning most in that direction is James Freeman’s Best of the Web.

So, fair warning, this post isn’t about a neutral topic.

Having said that, I found that the March 21 piece entitled “Bank Bailouts and the Washington Post” (a copy is saved to the G drive too) had a lot of solid macroeconomics in there. It touches on some ideas we talked about earlier in the semester regarding recessions, financial crises, and housing markets … and it does so in a way that’s consistent with mainstream macroeconomic thought.

Primarily it’s about Bernie Sanders, and the paper’s Fact Checker column evaluating this statement that Sanders has used on the campaign trail:

Not one major Wall Street executive went to jail for destroying our economy in 2008 as a result of their greed, recklessness and illegal behavior. No. They didn’t go to jail. They got a trillion-dollar bailout.

Fact Checker was concerned about two points: the trillion dollar figure, and the no one went to jail claim. They ultimately gave the overall quote “2 Pinocchios”.

First, let’s tee-up the no one went to jail claim. Freeman points out that:

Neither the Post nor Mr. Sanders seems much interested in exploring the most obvious possibility—that many actions were financially ruinous but not criminal.

This is not a politically popular point but it’s true.

Such an inquiry would lead to unpleasant findings about the myriad ways in which Washington encouraged bankers and everyone else to invest in U.S. residential real estate—from creating the mortgage monsters Fannie Mae and Freddie Mac to promoting lax underwriting with “affordable housing goals” to negative real interest rates set by the Federal Reserve in the early 2000s to bank capital standards in concert with government-anointed credit ratings agencies which encouraged the purchase of mortgage-backed securities.

It’s a sad point, but if the government encourages you to do stupid stuff, and you do and get ruined, it’s not actually criminal.

Don’t believe me? Why does the government subsidize flood insurance for people who build homes in floodplains, and then offer low interest loans for people to rebuild in the same spots??

On the second point, Fact Checker splits hairs about the size of the bailout. Let me ask you: if you’re busted, and need a loan, but wouldn’t get one out in the real world under normal circumstances, but then you do and are able to pay it off … is it a bailout?

I’ve phrased the question that way because it’s similar to the sort of situations college students get themselves into when they have to ask their parents for extra money.

Here’s the thing: you probably shouldn’t wait until after the loan is repaid to judge whether or not it’s a bailout. This is because it’s a lot easier to say it’s not a bailout if the borrower recovered because the whole possibility that they might have is being ignored:

… The Post’s “Fact Checker” makes the tendentious argument that Federal Reserve loans to banks during the crisis shouldn’t count as bailouts.

…

Not only was Wall Street bailed out, but also the whole U.S. economy — at a profit of more than $200 billion for U.S. taxpayers.

I am of the opinion that there was a bailout, and it was the right thing to do. Part of that was a liquidity crisis, and part of it was a solvency crisis. And one of the big lessons of the poor monetary response to the Great Depression was that liquidity crises can and should be addressed strongly because they can be defused. Unfortunately, it’s a problem that you can’t tell whether a particular financial crisis is, say 80% liquidity crisis and 20% solvency crisis (and therefore both easy and important to address strongly), or 20-80 liquidity (and more problematic).

In short, if one of the roles of your central bank is to be the lender of last resort, then you should let it lend in the last resort, and quit second guessing.

Freeman writes the way I speak in class sometimes:

It’s a conventional opinion but not a fact that the U.S. economy would have been worse off without bank bailouts.

Good macroeconomists get that figuring these things out is really hard after the fact.

Per Capita Healthcare Costs

I think a lot of people simply don’t understand where all the money goes in healthcare. New research† fleshes out the lifetime costs (in 2000 dollar real terms, but not in present value).

The estimates are $361K for women, and $269K for men. About 40% of that difference can be attributed to women’s greater longevity, while the other 60% is presumably pregnancy related.

We tend to blame a lot of those costs on prescription drugs. Not so: about 15% of lifetime healthcare expenses are for drugs.

Where’s the rest of the money go?

Roughly 45% goes to staying in facilities: hospitals, nursing homes, rehabilitation centers, and long-term care institutions.

About 30% goes to acute care in hospitals (that does not include the costs of staying there, and being provided with routine/chronic care).

Roughly 25% goes to service professionals, like doctors and nurses.

***************************************************

There’s a really good takeaway here. Think about how much it costs to stay in a hotel or vacation rental.

Here’s my personal experience. I stay in a nice hotel with a big discount when I go to Salt Lake City (I stay at the University Guest House at the parents’ rate). The cost of a decent hotel room (in which we have slept three) is about $120/night. My mortgage is about $60/day. From that, I conclude that a hotel, for most people, is roughly twice as expensive as a home. That’s just a ballpark figure, but my guess is that it’s fair to say that, for most people, staying away from home costs twice as much or thereabouts.

Here’s the thing: nursing homes, rehab centers, hospitals, and institutions are basically hotels with extra expensive services. This is where most of America’s healthcare dollars are going.

On the other hand, if you’ve ever cared for someone at home … you’ve probably at least contemplated that those care facilities are a pretty good deal.

P.S. Just for BB: the lifetime costs of dental care are about $31K.

† The source article is “The Lifetime Distribution of Health Care Costs,” by Alamayehu and Warner, in Health Services Research.

Infrastructure: Why Does America Pay So Much for Stuff That’s So Lousy?

Politicians love to talk about infrastructure spending. Trump wants a trillion dollars for it! Now that’s macroeconomic!!

Yet, most people don’t know exactly what it is. Here’s the big 6 components: the electricity grid, pipelines, railroads, airports, port facilities, and bridges. Roads and particularly highways kinda’ sorta’ belong on that list too, but most of them are done locally, and if you think about it … mostly go between places connected to the grid, pipelines, railroads, airports, and ports.

Our international students can confirm that a lot of America’s infrastructure is … hmmm … not what they expected from a country they viewed as big and rich. Why is that?

In short, what we build stinks because it costs more than it should.

Here’s one opinion why:

Americans have to understand that they are behind … They have to let go of the mythology of the American entrepreneur who does not listen to the experts. They can solve the problem of high construction costs if they want, but they need to first recognize that it exists, and that internal politics and business culture are part of the problem rather than the solution.

Oops. Didn’t we just elect an exemplar of “the mythology of the American entrepreneur who does not listen to the experts”?

I drew that from the conclusions of a long post at the blog Pedestrian Observations. There, 9 problems with building infrastructure in the U.S. were outlined (with an emphasis on examples from subway projects, and light rail like the Trax system in Salt Lake City).

• Almost all countries bore tunnels for subways (more expensive), but they dig out a big hole to make the station (cheaper). In the U.S., we bore out the station too, so as not to disturb the surface as much.
• Mezzanines: you know those shopping malls around public transport that … no one goes to for the shopping (think about it, you buy stuff there because you need to, not because the prices are good). Most countries don’t have those. Where exactly did our governments get the idea that they need to build malls, but only in subways, airports, and train and bus stations? A few shops are fine … but private malls on the surface have been going extinct for a couple of decades.
• Low bid contracts: in the U.S. we mostly require governments to go with the lowest bidder, but we don’t check how much extra it costs when we that bid needs to be upgraded. In many cases, the strategy is to offer the lowest bid, and jack up the prices when things need to be spruced up. (You may be sitting in one of those projects right now).
• Incomplete contracts and lawyers: in the U.S., those upgrades get negotiated on a case by case basis, instead of having stipulated prices in advance which bureaucrats could choose from.
• Poor management: transportation agencies are put in charge of managing their own construction projects, rather than having a government “department of construction” that might develop expertise.†
• Turf battles: this is a disadvantage of America’s decentralized and Federalized system of government.
• Irrelevant additions: everyone likes their public transportation to look nice, but the U.S. is known for overdoing it, especially on refurbishments of older facilities.
• Politicians are not hurt by high costs: who exactly is hurt by California shutting down construction of its high speed rail line? Note that California spent zero of its own money on that project so far … it was all federal money, coming from Cedar City amongst other places.
• Global Incuriousity: I love this one so much, I’m quoting below.

Functional illiteracy is a great concept. About 20 years ago I started incorporating innumeracy — the inability to process or make decisions about large numbers — into my explanations mix. And now I get to add incuriousity: the unwillingness to be curious about how other people do things because they might be doing it better.

That is America in a nutshell: we are conditioned to be incurious.

Incuriosity is not merely ignorance. Ignorance is a universal trait, people just differ in what they are ignorant about. But Americans are unique in not caring to learn from other countries even when those countries do things better. American liberals spent the second Bush administration talking about how health care worked better in most other developed countries, but displayed no interest in how they could implement universal health care so that the US could have what everyone else had, even when some of these countries, namely France and Israel, had only enacted reforms recently and had a population of mostly privately-insured workers. In contrast, they reinvented the wheel domestically, coming up with the basic details of Obamacare relying on the work on domestic thinktanks alone.

…

Americans venerate founders and innovators, an approach that works in industries where the US is in the global frontier, like tech or retail, but not in ones where it lags, like cars and the entire public sector. To avoid learning from others, Americans end up believing in myths about what is and isn’t possible: they insist they are so much richer than Europe that they have nothing to learn from across the Pond, and hang all their hopes on any flim-flam artist who comes from within American business culture …

Oops. Does that sound like you know who? For that matter, does it sound like flim-flam artists from other cultures, like Obama, who was elected to the presidency with an essentially empty resume? Or Bush II whose claim to fame was being partial owner of a baseball team?

Americans … have to let go of the mythology of the American entrepreneur who does not listen to the experts.

The latter is, of course, a huge problem with understanding macroeconomics. How often are you personally forwarded some meme or video relating to macroeconomics broadly? The thing is … I bet you’re never forwarded memes or videos like that about biochemistry, cinematography, or diachronic linguistics? Think about that for a minute.

Ready for some examples or transportation policymakers not listening?

… Tells me of an official at either Caltrain or the California High-Speed Rail Authority, I forget which, who did not know Germany had commuter trains. Another Caltrain official, confronted with the fact that in Japan trains turn faster than Caltrain thought possible, responded “Asians don’t value life the way we do” – never mind that Japan’s passenger rail safety per passenger-km is about 1.5 orders of magnitude better than the US’s. In stonewalling about its safety regulations, since positively reformed, an FRA official insisted American trucks are heavier than European ones, where in fact the opposite is the case. Boston’s sandbagged North-South Rail Link process included a best practices section but insisted on only including North American examples, since European ones would make America look bad. [BTW: I had no idea we even had an agency known as the FRA, short for Federal Railroad Administration].

Canada is not much better than the US. Americans’ world is flat, with its corners in Boston, Seattle, San Diego, and Miami. Canadians’ world includes the United States and Canada, making it flat with the northern ends of the quadrilateral stretched a few hundred kilometers to the north. A study of a long-overdue extension of Vancouver’s Millennium Line to UBC has four case studies for best practices, all from within North America. This is despite the fact that in the developed world the system most similar to Vancouver’s SkyTrain in technology and age is the Copenhagen Metro …

† The article notes a story I love. In Madrid, they evaluated the costs of their proposed big subway project by comparing it against subway projects around the world. Their list of subways included a surface light rail project in Boston because the Spaniards all assumed that any project so expensive must have involved a lot of digging. It didn’t.