Economists Have Done a Great Job Making the Case Against Tariffs

Famously, economists have very different opinions from the lay public about economic policy. They are largely pro-free trade. Until fairly recently there was broad agreement among economists that the minimum wage causes unemployment. (Which probably means it’s a bad idea, but not necessarily.) They are broadly pro-free-market.

So what’s going on with the public? We have this whole tribe, this entire profession, who spends their time thinking deeply about these topics, collecting data, building formal models, and doing other kinds of research. And they come to agreement on at least a few topics. So why is this consensus so widely at variance with what the general public believes?

I sometimes hear professional economists comment on this belief gap. They say things like, “Economists have done a terrible job of making the case for free trade.” (Or whatever the topic.) I’ll insist otherwise. Economists have done a fantastic job of making the case for free trade. A single microeconomics course cured me of a lot of sloppy thinking on economic topics. It’s not like they just jot down a bunch of equations and throw in some stodgy commentary for text-filler, just to fill up a 400+ page textbook. The formulas are just there to keep your thinking disciplined. The text is there to explain the logic of free trade in plain English. I’ve seen many very elegant examples of this argument (this one about a car-crop in Iowa is probably my favorite). Some of the econ textbooks I've read are downright quotable, converting a logical, mathematical argument into beautiful prose. If someone writes a short, beautiful, easily digestible proof, it’s not their fault that the lesson fails to register on the narrow bandwidth of the public’s short attention span.

Russ Roberts has done some important work trying to communicate economics to the public. His podcast Econtalk is excellent. It covers a wide range of topics in a conversational style, but (almost) always manages to give the economist’s perspective. He’s written some books that try to viscerally communicate the lessons of economics, using fiction (The Invisible Heart, The Choice, The Price of Everything). It’s important work, and this is probably an effective way to reach people. But I want to push back against the notion that formal logic is too stodgy, or that we need to be “touchy-feely” to reach everyone.

Dry, textbook economics cured me of my leftism. I’ve seen the critiques of basic economics (mostly I’m speaking of micro/price theory), by left-wing economists and by non-economists. I think these critiques are mostly lame and totally unconvincing. Even when they land a solid critique (“Humans aren’t always and everywhere rational actors…”) these critiques fail to revive the interventionists policies supported by those critics (“…therefore, what, the government should be able to intervene in all our life decisions?”). What I’m trying to say is: textbook economics is very convincing. I’ve been there. I’ve had this play out inside my own brain. I know what it feels like to be convinced by pure logic, to discard a political orientation that was once a part of my identity because it’s not tenable. When I hear a different kind of argument, the kind that goes “Let’s discard our sense of reason because of this touchy-feely consideration over here…” I always think it’s a little bit creepy. Like someone is trying to override my sense of proportion or scale by fixating me on something emotionally compelling. Emotionally compelling examples might be necessary to "bring the lesson home" so to speak, but the underlying logic has to be there, too. Otherwise the next guy who comes along with a different compelling example will sway me back, and so on in a pointless random walk.

____________________
There's something to be said for convincing people with bad-but-convincing arguments, but it feels totally sleazy. It always leaves me with the dueling reactions: "I didn't want it this way" and "Meh, I'll take it." Also, it tends to back-fire. The person who is convinced by a bad argument might not stay convinced for long. Also, people observing the discussion will come away with the impression that your side is disingenuous, and as Exhibit A they can point to this shining example you've just given them. 

Does Scott Alexander Read My Blog?

I had written these two posts a few weeks ago. Then Scott Alexander wrote a post last week with a nearly identical theme. Scott's post is longer than mine and covers a lot more ground, but is built on the same theme. It's kind of eerie. It's not like this was something from the news cycle that we both decided to comment on.

I'm sure it's a coincidence, actually, because I have this feeling all the time. I get it with other bloggers I follow (Bryan Caplan, Scott Sumner, David Henderson). Maybe it's an over-active pattern-matching routine in my head. Or maybe I'm actually taking a cue from them. I'm sure Scott Alexander hears from the same kinds of people I do on the "personal responsibility/laziness" question. So actually, maybe it's no coincidence he has something to say in response to these people.

Drug Poisonings and Chronic Health Conditions

In an earlier post, I wrote that about 20-25% of drug poisoning deaths involved some kind of chronic health condition. See what I wrote. I think this calls into question whether these were truly drug overdoses. If a death certificate for a supposed opioid poisoning has “sleep apnea” and “obesity” listed on it, that calls into question whether, in a “but for” sense, the death was caused by the drugs. It's more accurate to say that the death was a combination of a drug overdose (drug interaction, in most cases) and a pre-existing health condition.

I’ve done some more thorough analysis, and it looks like I was on the right track with the 20-25% figure. I can’t give any details just now, but I’m glad I stumbled on this path. Will share details and acknowledgements when I can.

I also know quite a lot more about how the death certificate is filled out, how the causes of death get coded in the ICD-10 codes, how an “underlying cause” is selected from the various causes listed on the certificate, how the different parts of the certificate work, etc. When I wrote that post (linked above) a couple of years ago, I had no idea about any of this. I guess I just assumed it was a bunch of contributing causes listed in no particular order. The story is a little more complicated than that. I may have to do a “death certificate explainer” post when the paper I’m working on comes out. I don’t think the stuff I know now invalidates anything I wrote before, but the details are interesting.

Shoulder Flexibility

I’ve been taking private gymnastics lessons, one or two a months since last November. I’d always wanted to do those cool gymnastics tricks (front handsprings, back handsprings, back flips, aerial cartwheels, etc.) After eight lessons, I have a solid front handspring, and I’m close to a back flip and an aerial. My back handspring is not at all ready for prime time, but I can do them on a trampoline. I’m fairly pleased with my progress. In my most recent lesson (last week), we figured out I could do a roundoff after about five minutes of instruction. That was satisfying.

I said this before in a previous post : It’s really important to get a coach with stuff like this. You can sometimes make impressive gains on your own, but there’s no substitute for having an expert telling you what you’re doing wrong. Try this for anything you want to get better at. Are you struggling with a computer language or some other skill at work? Find someone who knows better than you and ask them. Even offer to pay a tutor. Come up with a set of questions or skills you want to learn, then set up a meeting with a co-worker or paid tutor who is willing to teach you. You might find you’re not even asking the right questions.

One thing I never would have thought about is my shoulder flexibility. I had very stiff shoulders, which my gymnastics coach spotted right away. I’ve been stretching them daily since November, and they’re a lot more flexible now. I have very good leg flexibility (almost down to the splits), but never stretched my shoulders. This deficiency was masked from my view, because in my mind “I’m pretty flexible.” I never would have thought to work on this. My front handspring (which I could already do to a reasonable standard before I started stretching) has gotten much better. The push off the ground isn’t at the proper angle unless you can reach your arms far enough above/behind your head.

The moral of the story: get a coach.

Personal Debt of CEOs as Pre-commitment

I’m interested in the topic of very high executive pay, which I’ve written about several times on this blog. The short version of my take: the expected payoff for getting the very best person, as compared to the second or third-best person, can be worth millions or even billions of dollars. So it’s worth shelling out for top talent. Also, once you snag this person, it’s worth coming up with some kind of incentive scheme to actually motivate them. A relatively low base-salary with generous bonuses for performance is probably better than a flat multi-million dollar base salary.

Another problem might be the following: Once you snag the best person, how do you ensure they stay snagged? If someone paid me a $5 million salary, I’d be very tempted to work for one year and then retire. A tiny fraction of the pay that a high-powered corporate executive makes over the course of their career would make a substantial nest egg for any mere mortal. Warren Buffet’s austerity aside, many CEOs have reputations for lavish spending and luxurious homes.

I’m curious if lavish spending can be a sort of commitment strategy for highly-paid executives. In The Smartest Guys in the Room, a book about the Enron crisis, there is a brief discussion of Ken Lay’s personal finances at the end of his tenure. Enron was basically trying to oust him, but he wouldn’t go quietly. It seems he’d racked up $20 million or so in personal debt, some no doubt from his own consumption, some from supporting various benefits and charities. He made sure to negotiate a nice severance for himself, because he had backed himself into a tough spot. (This is from memory, from a book I read in 2011. If any of the details don’t match the actual story, I’m sorry. In that case, please take this example as a hypothetical.)

In that particular case, the pre-commitment strategy backfired. Lay’s debt made it harder for Enron to get rid of him when they wanted to. But in normal times and for normal companies, it’s probably a good thing for a firm if their CEO is sweating a little about their personal finances. It means they’ll stick around. It solves the “What’s keeping this guy from working for a single year then leaving?” problem.

There are other solutions to this problem. “Debt as a pre-commitment” is surely a small piece of the answer. There’s always the good old contract. Just have a clause saying the new CEO will stay on for at least 5 years or something. This isn’t perfect. You might get two great years and then three lack-luster years as the CEO loses interest in the company and starts salivating over his early retirement. Contract or no contract, it’s impossible to make someone show up to work and perform to the peak of their ability if they just don’t wanna. Reputation has to be part of the answer, too. People have personal reputations for things like ambition, honesty, and so on. The board will consider these traits when they appoint their next CEO, looking for some assurance that the person will stick around. Maybe for the kind of person who is likely to climb to the top of a corporation, the “work one year, then retire early” option isn’t even appealing. Maybe the vetting/promotion process selects for people with a lot of raw ambition.

There is a broad literature on this topic of incentivizing executive performance. In the actuarial exam syllabus, there is a discussion of whether or not investors should let companies hedge their risks, and why or why not. The investors can hedge their own risks by investing broadly, so they don’t want the individual companies to blow a lot of money on expensive insurance policies or hedging strategies. But one reason to allow hedging has to do with incentivizing the executives. You want the executive to make a substantial investment in the company, the thinking goes, so they have skin in the game. But it hurts to lose skin, so CEOs will hesitate to invest more than they absolutely have to. Allow the CEO to hedge and protect their investment, and they’ll be prone to invest more of their own private wealth in the company. With more skin in the game, they’re on the hook for bad decisions, they’re more likely to take a long term view, and so on. This is another way to solve the problem described above. It will be hard for a CEO to leave and sell off their investment in their employer without losing a substantial chunk of their investment. A CEO’s surprise retirement is likely to make a company’s stock take a dive. Similar with a major shareholder selling off large quantities of stock. This is a good way for a CEO to tie himself to the mast.

Interestingly, Jeff Skilling, who succeeded Lay at Enron, seems to have tried some version of “work a single year then leave” strategy. Except he didn't quite make it a full year: 

On February 12, 2001, Skilling was named CEO of Enron, receiving $132 million during a single year….Skilling unexpectedly resigned on August 14 of that year, citing personal reasons, and he soon sold large amounts of his shares in the corporation.

Oops! Apparently it’s important to worry about this problem. The Smartest Guys In the Room fills in the details of his short tenure and unexpected resignation.

What If There Were Mutants?

Suppose Magneto exists. Or Superman, or Jean Grey, or Green Lantern. There’s a population of people with unusual gifts that allow them to be extremely productive. What happens? As Tyler Cowen might say, solve for the equilibrium. (Ignoring for a moment the offensive potential of these gifts. A Magneto or Superman could bring a nation to its knees or destabilize an existing global order. Pretend for a moment that these gifts make certain individuals more productive without allowing them to be offensive. That's not what this post is about.)

These people would be vastly more productive at certain kinds of jobs. Moving very large objects with surgical precision, without having to move in heavy equipment (cranes and the like) could make big construction projects a snap. Sure, we still need architects and engineers to direct the work. But “put all of these giant girders in their places” and “move a thousand tons of earth, okay now another, now another” becomes easy.

These people are likely to be highly paid. If your construction firm can build a tall building in a few days, while the other developers are still taking months or years for similar projects, you can get a lot more done and earn a lot more money. So your firm should be willing to bid a very high price for the unique talents that allow you to accomplish quick production. The Green Lanterns and Magnetos will be at least millionaires if not billionaires.

What happens to the rest of us? Do hundreds of thousands (millions?) of displaced construction workers languish in permanent unemployment? Is there a super-rich society of mutants who do everything in the economy? (And do they thus own everything?)  And the rest of us can only eat by sifting though their garbage for scraps? Of course not. Comparative advantage is still in play. If Magneto is doing the work of thousands of people, he’ll likely want to come home to an already-cooked meal, or an already-cleaned home. Maybe he could do these tasks himself better than any mere mortal simply by using his powers, but it is better still for him to spend more hours at work and use his massive pay-check to hire some servants. Having some very rich, productive people nearby creates employment opportunities.

Or let me put it another way. For whom is all this production happening? Suppose a small group of mutants are responsible for half the world’s production. What exactly are they doing? Are they simply building gigantic homes for other mutants? Are some mutants mass-producing consumer goods for other mutants, who repay them with thousands of tons of bulk materials? No, this production is bound to benefit everyone, even if highly productive individuals get compensated for their contribution. Transportation, food, consumer goods, and housing get cheaper in general.  

Or let me put this yet another way. In 1800, 83% of the US labor force was in agriculture. 

Today it’s around 2%. So compared to 1800, each agricultural worker is doing the work of about 40 people. Mutants indeed! Do they own everything? Did this 2% take over the economy? Is it even remotely sensible to say that today’s agricultural workers are doing 4/5^th of America’s production? Again, of course not.  The people who would have been farmers in an older economy found other useful things to do. Like become telephone operators, photographic film developers, and video-store workers. Oops, and then those jobs basically disappeared. Are former telephone operators and video-store workers languishing in permanent unemployment? Again, no. Most people have a very bad intuition about what happens when production get automated, when a few people can now do what used to take many people. And it leads to some very silly commentary.

A tangential point. Suppose there are a lot of good CEOs of various construction firms. If you tried to throw an average person in that role, they would flounder and fail and ruin the business. But there’s a wide enough pool of talented CEOs to pick from. Now, suppose there is one who is uniquely skilled at management for a particular firm. He knows that particular market really well, he can forecast demand just slightly better than any of his competitors, he’s slightly better at keeping his workers motivated and his managers on track. Maybe there are 10 or 100 people who could do the job reasonably well, but the very best guy for the job will build one more medium-sized building each year with the same amount of resources. This person’s unique contribution to the world’s production is one building per year. But for this individual, we’d be short one building per year of his/her working life.  That’s quite a lot for one person to accomplish. It’s like having a mutant superpower. Of course, he’s not literally moving the building materials with his mind, shaping raw steel and cement into a structure. He’s doing it by making hundreds or thousands of workers just a little bit more productive, efficient, and focused. It’s no less impressive for that.

There are people who like to turn the topic of CEO pay into outrage-porn. I think they are deeply mistaken and there is nothing to be outraged about. These executives really are very productive, pretty much in line with their enormous paychecks. There are some “respectable”, “academic” attacks on CEO pay. Some academics have attempted to “prove” that CEO’s aren't particularly talented or good at their jobs. I admit I do not know this literature, so maybe it’s more convincing than I’m giving it credit for. (On the other hand. Perhaps something is happening in the world that’s hard to measure? Perhaps the difference between the very best candidate and the second- or third-best is something ineffable? It seems to me that the people shelling out for top talent have skin in the game and make decisions based on things that are hard to measure or define. Particularly at the very top, decision-makers have to be a little speculative. Contrast this with academics, with no skin in the game and who are only good at discussing things that are externally visible and measurable.) This post by Steven Landsburg says it well. It’s really important to have the very best person in the top spot. Some critics draw exactly the wrong lesson from CEO screw-ups. “See, these guys don’t know what they’re doing!” But a big screw-up is a big deal. If the best person has just a 1 or 2% lower chance of making a big screw-up, that can be worth millions of dollars. Watching someone pour over spreadsheets and grill his staff for information for 12 hours a day might not be quite as sexy as watching a telepath move hundreds of tons of material with his mind. But the outcome is no less impressive. 

Light Blogging

I’ve been blogging less recently, but I hope to return to it as a full-time hobby at some point.

I’ve been spending a lot of time trying to make myself better at my job. Reading books about R programming, taking courses on Datacamp, and reading about various machine-learning topics. I’m really trying to up my game here. I’d like to have a thorough understanding of exactly how all of these algorithms work. Like, if I wanted to build a simple gbm neural net on a small dataset, I want to show what these look like as (for example) a series of formulas in an Excel workbook. Any monkey can use these methods. Just plug the arguments into a function that somebody else wrote for you. It’s not even that hard to explain what they are doing, in basic English in summary form anyway. I’m trying to make myself stand out by understanding how they work in excruciating detail. 

I’m also working on a paper on opioids, which should get published in Cato. I’ll share more details when I can but I’m trying to 1) maintain some level of anonymity and 2) avoid scooping the paper in any way. I've learned some very interesting things about this topic in the past few months. Maybe I'll discuss some of them here after the paper comes out. 

Thanks for your patience. I’ll get back in full swing in the coming months. There is much to discuss!