Risk Aversion I

We model investment behavior based on risk and return.  Return is the expected mean or average return and risk is the variance of possible returns.  Most models assume that people like higher returns (duh!) and lower risk.  We use the term risk aversion to describe the latter.

Kevin D. Williamson, writing in the current version of The National Review, describes how Americans tend to be less risk averse than other countries.  He nails it right from the start:

In the United States, the road to economic success is open because the road to economic failure is open.

That’s the basic American proposition: We have an unregimented business culture, easy credit, a forgiving bankruptcy regime, and a “hold my beer” model of entrepreneurship.

He recognizes that success and failure are both risks.  It is true that individuals often have different reactions to downside risk and upside risks.  We see them buy insurance and lottery tickets.

Of course you should read everything that Kevin writes.  Have you signed up for his Tuesday newsletter?

We would like to discuss professors, because they come up in Kevin’s article, and two exceptions to Kevin’s thesis.  Professors will take awhile so we will use a second post to complete that discussion.

We agree with Kevin that America helps make Americans less risk averse than other developed countries.  We see two exceptions: sports and public safety.  In almost every other country sports use a relegation and promotion system.  America has sports monopolies.  Even if you are as poor a leader as Bob Quinn, the Red Sox still stayed in the American League and he probably made money on the deal.  In England, France, or Spain a team like that would have fallen to the third tier and have little value.

Before COVID-19 we traveled a fair amount.  Comparing the Ciffs of Moher, the Castles of Scotland and other international destination to American destination like our National Parks it is clear to us that America is more risk averse in terms of public safety.  Perhaps you milage will vary but we see America has more restraints and more warning signs than any other developed country.

Perhaps, the American litigation system explains our attitude towards public safety while the nature of American capitalism, as Kevin explains, accounts for the dynamic of American capitalism.



Jonah’s Recovery And Terminology

Of course we like our terminology.  It is part of controlling the conversation.  And almost everyone, including us, puts a little pejorative into their terminology to twist the knife or sway the fence sitters.

We have decided to sign up as a paying subscriber for Jonah Goldberg’s new organization, The Dispatch.

Sidebar: Well that was confusing.  We were deciding if we wanted to use “subscriber” or “member” after paying.  At the bottom of the newsletter they used the former but on the signup page we linked they used the latter.  End Sidebar.

Why?  Because Jonah had an interesting newsletter with DDD.  DDD would be Despising Da Donald.  We know The Donald is big news but it is good to see that Jonah is ready to discuss other stuff.

Jonah is discussing another new organization started by Oren Cass.  We get the newsletter as an email so we don’t have a link.  Here is how Jonah starts:

Oren Cass, a very bright fellow and decent guy, has launched a new organization, American Compass. Joining him are some other very bright people—some of whom I know, others I know by reputation. I do not worry that any of them—particularly Michael Needham or David Azerrad —are ersatz socialists or champions of dirigisme (which, I’ll have you know, I spelled correctly on the first try).

Oren’s project is trying to change the economic direction of the Republican party.  Jonah is exactly right except for the last seven words when he says:

I keep hearing people say or imply that libertarians and free market “fundamentalists” have been running the show in Washington. I honestly have no idea what they’re talking about—and neither do any libertarians I know.

We entirely agree we Jonah that the free market folks have not had control of the Republican party.  Read the whole thing.  You must read it if you need a review of the evidence.  Where we disagree with Jonah and Oren is on the term libertarian.  Our own bias is that libertarian just want to smoke weed.  We know that is unkind and over the top but we still think there is a big difference between what we call capitalistic orphans that want policies to emphasize economic growth and libertarians.  So we went to Wikipedia and the Libertarian Party(United States):

The Libertarian Party (LP) is a political party in the United States that promotes civil libertiesnon-interventionismlaissez-faire capitalism, and limiting the size and scope of government.

We think priorities are crucial.  They support capitalism but it is the last on the list.  They don’t mention economic growth.  We think that Oren and Jonah are trying to appeal to folks like us that view the libertarians as a little suspect.  Oren is saying you want to be with us, the sensible people, rather than with the weird folks.  Perhaps we are weird too but we are not with Oren or Josh Hawley, or Marco Rubio, or any of the folks that are trying to create an industrial policy.  We, the capitalistic orphans want free markets to boost almost everyone and a safety net for the few.  We are willing to discuss what part of the safety net should be private and what part public.  And then what part should be local, state, or federal.

Welcome back to the serious stuff Jonah.  We have missed you.  Still you should have seen the misleading term, libertarian, in Oren’s stuff.  We will wait for you to adopt capitalistic orphans.

End Of A Specious Argument?

James Freeman on the WSJ’s Best Of The Web tries logic on the folks that want to try to reduce income inequality.  Do read the whole thing.  We think it is unlikely to work but it might help the voters make a better decision in the general election.  He starts with an assertion:

Leftist politicians have been saying for years that a dramatic rise in wealth and income inequality is the central economic problem of our time.

We are not sure that those leftists care about the changes in income inequality.  Our guess, and it is only a guess, is that they think there there are more folks that think they would benefit from eating the rich than there are folks that worry about being eaten.  James hopes that an academic paper by Gerald Auten and David Splinter

Sidebar: Yes splinter is a bridge bid but we are not making this up.  If we did, however, then Splinter would be one of the authors but Gerald would need a new name and Splinter a first.  How does Diamond Splinter and Bergen Raises sound for the two authors?  End Sidebar

will eliminate the premise to the argument.  We don’t think that logic will stop folks from selling envy.  Here is part of what James says about the new paper:

After a draft of the paper was released last year, Paul Solman of the PBS NewsHour of all places wrote:

You thought income inequality was rising dramatically, right? Well, so did I. In fact, maybe you thought so in part because I and journalists like me have been reporting it as fact, for decades. But maybe we’re wrong — all of us.Mr. Solman reported that the Auten-Splinter draft paper enjoys widespread respect in the economics profession—even if not everyone is willing to admit it.  [Emphasis added]

We don’t like the of all places dig in bold.  Our information is the the PBS NewsHour is only slightly left of center unlike the rest of PBS.  But the second bold item is really damming to about the group-think of journalists.  James tells us that the paper is well received even by those on the left.

We don’t see that Auten-Splinter have any impact on us and we doubt it will have leftist politicians James hopes to convince.  It won’t have any impact on us because we care about growth much more than inequality.  To be precise, at the current levels of inequality in the US we don’t care about it at all.  We do want the growth fairy to come and visit.  We think that the government has been far too worried about inequality and related issues and not worried enough about growth.  An example of this is The Donald, whose administration has sometimes helped growth but his trade wars have not.  No administration has emphasized growth enough.  Growth should be a higher priority than it currently is.

The left doesn’t agree.  They want to increase the emphasis on distribution.  We don’t think they will be deterred by logic from James.  They think envy sells and we are concerned that they might be right.  Will a specious argument be enough?


Good Ideas, Bad Ideas, And Bad Claims

The left cannot claim to have all the bad economic ideas.  They have the worst as we see in Venezuela but they do not have exclusive rights to such ideas.  There are lots of ideas out there and some of them are good but to get them noticed folks often make extreme claims.  Thus, good ideas get dismissed because they are not quite as good as the claims suggest.

Our example of a bad idea comes from Cesar Conda at NRO.  He says:

President Trump should propose exactly what President Barack Obama did in 2011: a temporary reduction in the Social Security portion of the payroll tax from 6.2 percent to 4.2 percent.

Cesar Conda is:

a former Bush-Cheney White House domestic-policy adviser and senior aide to three Republican U.S. senators, is founding principal of Navigators Global.

He is writing at NRO.  It is not unreasonable to take him seriously.  We shouldn’t.  Part of his argument is economic growth and we are fans of the growth fairy.  Economic growth is critically important and we believe that governments can influence the growth fairy.  But the way to get the growth fairy on your side is through long-term policies.  Countries with policies that support economic freedom like enforcing the rule of law, having low corruption, low regulation, low taxes, and free trade are highly likely to be visited by the growth fairy.  Going in the opposite direction then the more likely the growth fairy won’t visit.

The best you can hope for with Cesar’s idea is to move growth around.  It was one of many bad ideas from the 44th president.  It is worse now given the deficit and the near insolvency of Social Security.

Sean Maskai Flynn at Market Watch has two really good ideas for improving health care and reducing or limiting the costs.  They are good ideas because they are long-term and make healthcare more of a marketplace than it currently is.  First, we need transparent health care prices:

The first policy—price tags—is a necessary prerequisite for competition and efficiency. Under our current system, it’s nearly impossible for people with health insurance to find out in advance what anything covered by their insurance will end up costing. Patients have no way to comparison shop for procedures covered by insurance, and providers are under little pressure to lower costs.

Absolutely.  And second we need health savings accounts (HSA) that revert to the owner or can be extended into future years.  We don’t agree with Sean that the employer needs to “gift” them and he is surely wrong that it is a gift.   Any such payment is surely part of compensation rather than a gift.  We are not sure of how such a payment would be treated by the IRS.  The tax treatment of HSA need to be part of the solution.  We think the important points are high HSA limits and the opportunity to move amounts among years.

The second policy—deductible security—pairs an insurance policy that has an annual deductible with a health savings account (HSA) that the policy’s sponsor funds each year with an amount equal to the annual deductible.

The details are important but the problem is that the headline says these two changes would reduce health care costs by 75 percent.  Nope.  The text says they will provide $2.4 trillion [yup, trillion] per year in savings.  Since health care spending in 2017 was $3.5 trillion this gets another Nope.  Still, transparent prices and HSA with high limits and methods to move amount into other years or revert to the owners are great ideas.  Temporary tax changes are not.  Realistic claims are another good idea.


Choosing Freedom

Kevin Williamson writing at NRO has a great article on the fruits of economic freedom.  You should read it all twice.  He starts with some of the economic and technological wonders of the modern world and then the other side:

Perhaps you’ve had the experience of clicking a link to a video or a news story and taking a second to realize that what you’re seeing is real life — life as we knew it in 2018: horrifying hunger in Yemen and South Sudan; police-state repression in Venezuela and North Korea; migrants in Libya captured like animals and sold as slaves; monarchies that still take themselves seriously.

The world has made great strides in reducing poverty through economic freedom in the past few decades but when we look at the Heritage map of economic freedom there is much to be done.  Only six countries are classified as free and all are small in population so less than 60 million souls out of seven plus billion are free.  When we look at the list of countries with the largest populations, only one (US) of the top ten makes it on the Heritage list of mostly free.

How come?  Here is where we are not entirely in agreement with Kevin.  He notes that lots of rich folks from other countries come to the US and other places because the risk of staying at home is considerable.  He also pokes W’s statement about everybody wishing to be free.  Then he generalizes:

How proud is Pakistan, really? I guess they showed those Hindus a thing or two, maybe, but nobody gets up in the morning thinking: “I wish my country were more like Pakistan!” Not Pakistanis, surely. [Emphasis added]

We disagree.  We think the Pakistanis (not everyone but as a group) are satisfied with their country.  We admit that the limited political freedom there makes alternative hypotheses possible but we are convinced they are satisfied.

Sidebar: the negative net migrants for China, India, etc compared to the positive net for the US support Kevin’s point that some are voting with they feet but these are small percentages.  And why does mostly unfree Russia (#107 on the Heritage list) have positive net migrants?  End Sidebar.

It is not that Pakistanis wouldn’t like to be free and have the fruits of freedom but their priorities are elsewhere and Pakistan meets those other priorities.  We think W was in part right when he said that everyone yearns to be free but sometimes their first priority is to take away another’s freedom.  So we agree with Kevin’s critique of America (and everywhere else):

And it’s not like we don’t know what made us rich and blessed us with relative domestic tranquility. But we happy Americans are not immune from the darker desires. We have not been liberated from hatred, envy, or resentment, and we are just dumb enough to act on those impulses, politically, every now and then.

It is easy for envy and the rest to become a greater priority than freedom because freedom means everybody is free.  MWG and Kevin come to the same conclusion: It is always a time for choosing and we should choose freedom.  We should choose economic and political freedom.  That’s a good resolution for 2019.

The Growth Fairy Visits

Economic growth created our current state of economic grace.  Deirdre McCloskey calls it The Great Enrichment.  Jonah Goldberg calls it The Miracle.   Both of them would agree, we think, that it wasn’t planned.  After thousands of years of human life being short and brutish, in the past few centuries there has been a dramatic change in the quality of human life.  The [economic] growth fairy visited, because of the miracle of compound interest (separate from Jonah’s Miracle), and left us with riches and resources that the richest folks from a century (and especially two) could not imagine.

As an example, Jules Verne published Around the World in 80 Days in 1873 (set the year before).  The hero takes over, Wikipedia helpfully converts it into 2017 pound sterling, two billion pounds or about three billion dollars to make the trip.  We will take the Lady de-Gloves to Changsha, China in a little over a day for about a thousand dollars (and another thousand for the round trip) in a few weeks.  It is a nice comparison of how life has change in a century and-a-half.  Ordinary people now can do far more than the rich could do ten or 15 decades ago.

Economic growth is crucial to our future well being.  If the economy grows at one percent the compound growth over your child or grandchild’s 80 year life span is about 120% but at three percent it is about 960%.  It is a big difference.  It is important because the growth fairy has revisited the US economy after being away for a few years.  The WSJ tells us:

The Commerce Department reported that the economy grew at a robust 3.5% in the third quarter, a mild slowdown from 4.2% in the second. Consumer spending led the way with a 4% increase rooted in a tight job market and wage gains that have bolstered economic confidence. The economy has now grown by 3% over the last 12 months.  The U.S. economy hasn’t grown at 3% in a calendar year since 2005…

We, along with the WSJ, John Taylor:

When policy moves closer to those three attributes, as in the 1980s and 1990s for the advanced countries and more recently for emerging market countries, the economy does well, growing in a stable manner. When policy deviates from those three, as U.S. monetary policy did going into the tragic global financial crisis, the economy does poorly.

and many others believe in the growth fairy.  We do not believe that we can eliminate economic cycles.  Rather, we believe that good policy leads to, on average, better results and bad policy leads to bad results.  There are numerous examples of bad policy with Venezuela being close to the worst possible policies.  We think the WSJ is pretty close on its summary of good and bad policy in the US:

Can economic growth from tax reform and deregulation stand up to the headwinds from higher interest rates, tariffs and perhaps a Democratic Congress?

The WSJ position on interest rates isn’t clear.  It seems like they are saying increasing interest rates are a problem but are they suggesting action to reduce them?  We are with John on a rules based monetary policy rather than worrying about and trying to manipulate interest rates.  So do you believe in fairies?  This is one you really don’t want to die.


A Tale Of Four Countries

To adapt Dickens to our current situation: It is the best of times, it is the worst of times.  That is what Liam Halligan is telling us at UnHerd in [Theresa] Should Set Her Sights On Crony Capitalists.  Liam says the Brexit is not the most important topic for the Tories. It is rebooting capitalism and part of that is fighting crony capitalism.  We tend to agree.

We are only mildly supportive because we don’t like the term crony capitalism (CC) and Liam is really vague about how to fight it.  CC is when the government alters the market to favor certain parties.  A classic example is taxis.  We see the cronyism but not the capitalism.  The best way to fight CC is by reducing regulation.  Liam is vague about what he wants yo do to fight CC and his only real suggestion seems to be more regulation for big entities:

Big companies across the Western world have become far too powerful. Our political, business and media elites are much too intertwined. Such cosy relationships have resulted in an enfeebled competition policy, which is further increasing the might of a small number of corporations, to the detriment of consumers, smaller firms and broader society. [Emphasis added]

We are not sure where Liam is going but if he really wants to fight the cronyism in CC then we are with him.  On the other hand, more regulation will make these entities even more intertwined.

It is the best of times.  Liam reminds us that capitalism has enriched everyone everywhere it has been applied:

Or that, since the late-80s fall of the Berlin Wall, the spread of capitalism has enriched billions – with the share of the global population in extreme poverty plunging from two-fifths in 1990 to under one tenth today.

It is the worst of times as socialism has been tried repeatedly and devastated wide areas of the globe:

No matter that the Soviet Union collapsed under the weight of its economic contradictions. [here is remembering the start of the terror]

Of course, Venezuela is a current example that socialism always fails.  The talented and beautifully named Mary Anastasia O’Grady tells us a story of Why Central America Stays Poor in the WSJ.  We are unsure if we disagree with Liam because he is so often vague about evidence and recommendations.  We disagree in part with Mary but we are sure about it because she writes so clearly:

Nature can be cruel in underdeveloped countries. Yet it wasn’t fire, flood, mudslide or volcano that served this economic gut punch. This is a man-made travesty, courtesy of Guatemala’s Constitutional Court. It is a saga worth recounting because it goes to the heart of the country’s intransigent poverty.

Mary lays the problem at the feet of Guatemala’s Constitutional Court for their interpretation of a treaty:

[T]he United Nations International Labor Organization’s Convention No. 169 states that indigenous peoples living in the area of development projects need to be consulted. Guatemala is a signatory to the convention.

We think some of the blame should go to Guatemala for approving the treaty.  Conservatives recognize the folly of vague treaties, laws, and regulations that sound good because they can come back to bite you just like they did for Guatemala.  Even Progressives can become textualists when it benefits them.

To get back to Dickens is the worst of times because of public and media attitudes.  Liam reports that:

A recent YouGov poll suggested around 60% of voters think the railways and Royal Mail should be renationalised. Over half want the water and energy companies back in public sector ownership. A ComRes survey earlier this year showed that young British adults now think capitalism is more dangerous than communism.

Liam seems to think we should accept such foolishness rather that try to educate folks.  It is true that socialism doesn’t work but folks need reminding.  The attitude towards communism is astounding and another reason for education.

It doesn’t help that the Labor party is headed by Jeremy Corbin.  Liam describes Jeremy’s proposals:

And that’s [what we would call bad reporting] allowing [Jeremy] to present, with some success, his programme of aggressive renationalisation, sweeping trade union powers and highly punitive taxation as “the new common sense of our time”.

The next part of Dickens applies even more: It is an age of wisdom, it is an age of foolishness.  The USSR, Venezuela, and Guatemala offer lessons for the UK.  The first two remind us that socialism, government control of the economy, doesn’t work.  Liam reminds us we need reminders.  Guatemala reminds that treaties, laws, and regulations are written and need interpretation and application.  Much of CC lies in the interpretation and application of such documents.  Some is in the creation of such documents.  If we mean to fight CC we should be at least judicious in the creation of such documents and recognized the need to revise them as necessary.

We’d like to say that it would be a far, far better thing than they had ever done before if the Tories really fought CC but the Tories saved Western Civilization from fascism under Churchill and saved the UK from another form of socialism under Thatcher.  But it is still a really good idea and fighting CC will be a worthy challenge.

Minimum Wage Folies

Terri Sewell and Jim Kessler take to the WSJ to recommend A Better Minimum Wage.  Their idea is to have regional minimum wage that is automatically adjusted for inflation.  Terri and Jim assert:

These wage floors would rise with inflation so that congressional inaction can never again leave working families in the lurch. [and later]

The current minimum wage is too low and too hard to raise.

Starting with the second sentence the answer is no and no.  There is no evidence the current minimum wage is too low.  It is relatively easy to raise as it requires only a simple majority in each house of Congress and a presidential signature.  The problem with raising the minimum wage is that it is a bad idea.

Sidebar: Do Terri and Jim really think their proposal will help some group like working families or the working poor?  We are curious if they are guilty of bad thinking or cynical thinking.  We see the potential advantages to a pro-government group for a higher minimum wage that include a greater demand for government and an ability to blame capitalism for poor outcomes.  End Sidebar.

We are not sure why Terri and Jim tie it to working families.  A higher minimum wage punishes workers whether they are in a family or not.  The key to working is to start working.  Folks develop capital by working and therefore rarely stay at the minimum wage for long.  Raising the minimum wage is an effective method to stop workers from developing skills.  Zero is always the real minimum wage.  If you don’t work you get zero.

We also see no reason to punish folks more because they are already punished by high cost of living.  Pay relates to productivity.  Perhaps fast-food workers in Manhattan are more productive than Spokane or Selma but we would leave that up to the market.

Kevin Williamson’s wonderful recent article at NRO (more on it later) that covers a variety of items including risk aversion reminds us that the flippant answer that zero is the best minimum wage might not be correct and is likely a political loser.  It might not be correct because of risk aversion.  Many folks are reluctant to move, leave a job, or negotiate pay when a risk neutral individual would.  A minimum wage greater than zero provides some value for some folks.  The current one seems perfectly effective for that.

Economic Insight

We don’t know Kevin Williamson’s full resume but he often refers to his English major math.  Yet he has an impressive ability to express economic concepts clearly.  Recently, Kevin was at his best on NRO (and, of course, you should read it all):

A trade deficit is nothing like a budget deficit. Each year’s federal budget deficit adds to the total debt owed by the federal government. Trade deficits don’t do that, which is one reason why “trade deficit” is not a very useful term. A trade deficit is just a bookkeeping entry, not a debt that has to be paid. Countries don’t trade — people do. Americans are no more harmed by the trade deficit with Germany than you are by your trade deficit with Kroger [that is a retailer in case you are not in the 34 states they operate in].

To be clear, you are not harmed because you can get better or cheaper stuff from Kroger (and Wal-Mart, Amazon, etc) than you can produce yourself.  Kevin gives great details about actual tariffs and goes on to identify the real problems that are produced in a trade war:

[The Donald] now proposes to spend $12 billion to bail out U.S. farmers hurt by his batty trade war. That figure will grow if the trade war continues.

The Donald is way wrong in his trade war because it harms everyone.  Elsewhere he has done much to improve economic freedom but he is absolutely wrong here.

Markets Work; Alternatives Don’t

When we allow markets to work we get the Great Enrichment or as Jonah Goldberg calls it, The Miracle.  When we don’t we get the Soviet Union, Zimbabwe, and Venezuela.  The problem is that when we interfere with markets we screw things up and then we need to interfere again and then things get even worse.

We hate to accuse The Donald of having principles but, generally, it has been close to a principle of his to move in the direction of capitalism, for example, Donaldcare and tax reform.  Unfortunately, he has a tariff blind spot that led to this as discussed by Jack Crowe at NRO:

Under the plan, which could be announced as soon as Tuesday, farmers whose livelihoods have been harmed by the retaliatory tariffs resulting from President Trump’s trade war with China, NAFTA and the E.U. will be provided access to three distinct forms of aid: direct assistance, a food-purchase program and a trade-promotion program.

It is the nature screwing up by intervening in the market that one screw up leads to another.  Humans, experts or not, are not an effective replacement for the market. Tho Bishop at the Mises Institute puts it perfectly:

After all, Trump’s tariffs are not only a new tax for Americans, but a policy of directly picking winners and losers in the economy. The interests of steel workers, for example, are being placed above the interest of consumers and farmers. This leads to the government using tax dollars to prop up farmers. Of course this spending means that tax-paying consumers are hit yet again, with their tax dollars being used for this new welfare program.

You should real all of Tho’s article to remind yourself of the joys of capitalism.  If that is not enough to convince you then you need to read Jonah’s appendix in Suicide Of The West.  Capitalism works and alternatives fail.