The "logic" of silicon valley

Robert Reich points to teachers moonlighting as Uber drivers in Silicon Valley as an example of the perverse logic of this area. There is a perverse logic here--companies like Facebook and Google serve vast number of customers with relatively few employees, making a few rich but leaving most out--but that's not what's happening with teachers. There is no logic to that. There is a combination of overwhelming economic forces and terrible laws.

The current round of high-tech companies has been so successful that they've outgrown both the local housing market and the infrastructure that supports it. Facebook, Google, Apple, Salesforce, et al continue to be successful, continue to grow, and continue to hire. Their employees continue to look for places to live. There's only so much room. There are only so many roads, schools, parks, and teachers.

Because of Prop 13 and its descendants, there's only so much money to pay for public services and employees. Property taxes are capped. Other local taxes are nearly impossible to raise. Neither the state nor the federal government are likely to come to the aid of the country's richest areas.

what brooks doesn't understand about mandatory minimums and mass incarceration

David Brooks claims that mandatory minimums have nothing to do with mass incarceration, but he misses the fact that mandatory minimums and prosecutor behavior go together. Over 95% of criminal cases are "resolved" without trial. Prosecutors use the threat of harsh mandatory minimums to coerce guilty pleas from defendants. Underfunded public defenders know that they won't have the resources to give their clients an adequate defense, so they encourage their clients to plead to lesser charges.

A couple weeks ago, a case exactly like this made national news. A teenager in North Carolina was charged as an adult felon for taking a nude selfie and sending it to his girlfriend. This caused a bit of outcry, which faded when he pled guilty to misdemeanor charges. What everyone seemed to miss is that the prosecutor never cared whether he could get a conviction on the felony charges, and probably didn't want to go to trial. The prosecutor wanted to raise the stakes for the defendant, so that the defendant would waive his fifth amendment rights and plead guilty.

It worked, and we were all happy with that.

Modern philosophy makes no sense

Kevin Drum talks about the failings of modern philosophy, including its fascination with the trolley problem. He describes a common philosophical undertaking, taking an apparently reasonable position then attempting to apply it universally and consistently, then being shocked at the results and either using that shock to discredit the initial position or claiming that the shocking final result is a valid result. The trolley problem is popular precisely because it is so easy to generate apparently reasonable initial positions, then extrapolate from them.

Peter Singer's The Life You Can Save, whether its book, web site, or organizational form is an extended exercise in this process. He takes scenarios based on a drowning child, and extrapolates to teach us how we should respond to global poverty. And it's a deeply dishonest effort.

The trolley problem (and Singer's drowning child variation) are exercises not in moral philosophy, but in moral psychology. They investigate the boundaries of our moral sense, not in the realm of logic but in the realm of emotion. And it turns out that our emotional moral senses are complicated, even chaotic. Like public opinion surveys, the results you get from exercises like this depend a great deal on precise wording, the exact types of actions (or inactions) taken (or not). What they show is that our moral sense is weird, strange, and inconsistent, and that we don't really understand it.

What Singer does with this stew of inconsistent results is to pick a particular result that supports his conclusion, then extrapolate from it, ignoring and sometimes dismissing contradictory scenarios, as well as common patterns from the same sets of morality exercises.

For example, Singer tells the story of someone driving a luxury car that represents not just a current source of great personal joy, but his retirement savings, then asks whether the owner should direct a train away from a child to save the child's life, even at the expense of his own joy and future well-being. Unsurprisingly, most people think he should, and from that Singer concludes that we should all forgo all but the bare essentials to prevent avoidable deaths from poverty.

Yet if you change the story a bit, and ask questions like "Should someone mortgage their house to pay for life-saving treatment of a child who lives down the street?" you would get different answers.

In Singer's book, all his scenarios support his conclusions. Moreover, after noting that trolley problem thought experiments suggest that people view action and inaction differently (perhaps recognizing that in a finite life, we cannot do all things), he dismisses that general observation, consistent across a wide range of moral psychology scenarios, as irrelevant.

Unsurprisingly, while noting that poverty has decreased dramatically over the past five decades, both in real and relative terms, the book spends almost no time investigating that phenomenon, insisting instead that large increases in aid are the best answer going forward.

The biggest disappointment for me is that I agree with Prof. Singer that we should and could be doing far more, and yet I found the arguments in his book depressingly weak.

Federal fund rate, median income, and core inflation.

Here, I've added a graph of core inflation to the previous graph. While the correlation between median income growth and the federal funds rates is not perfect, it's far stronger than the correlation between the federal funds rate and inflation. In 1994-95, for example, the FFR doubled, even though inflation (already at a near 10-year low), dropped slightly.

Federal Funds Rate vs Median Household Income

Sustained drops in median income seem to be the rule rather than the exception. Once median income starts to fall, the drop seems to gather momentum and be hard to arrest, at least with monetary policy. What starts the drops? Is it policy or a natural cycle?


Here we have a graph of the federal funds rate against median income. While the graphs are not completely synchronized, their shapes are largely similar. While median income rises, the Federal Funds Rate increases. When median income falls, the Federal Funds rate also falls. The exception to this pattern is 1995-1998, when the Fed allowed median income to rise without responded with interest rate increases. Perhaps not coincidentally, that was the longest period of sustained income growth covered by this data series.

inequality increases, recession vs non-recession

Following up on that last post, depending on how you calculate it, the convergence between median family income and per capita GDP since 1984 occurs either completely or predominantly during the median income drops that surround recognized recessions.

Arithmetically, the difference between median family and per capita income dropped by $14,500 between 1984 and 2012. $14,500 of that change was associated with recessions.

Geometrically, per capita GDP increased 61% from '84 to '12. Median income increased by 8.1%. Between median income recessions, per capita income outpaced median income 43% to 30%, significant but not startling. During median income recessions, per capita income increased 12%. Median income dropped 17%.

By the way, I realize that per capita GDP and median household income measure slightly different things. Average household size, for example, decreased by about 7% over this time period, which would explain some of the difference in non-recession growth. There are, no doubt, other corrections to the baseline trends that explain some differences in growth rates without corresponding increases in inequality.

It seems unlikely, however, that those trends are related to economic cycles. It's hard to believe that average family sizes dropped 8% from 2007 to 2012, or that benefits increased about 15% from 1999-2004 to compensate for the drop in median income. And to the extent that those trends explain the baseline, non-recession convergence of the curves, it only further emphasizes the role of recessions in increasing inequality.

It hasn't always been this way. Prior to 1980, per capita GDP and median household income tracked one another very closely.

more fun with graphs

Median incomes decline before a recession, and continue to decline after the recession is over. What about per capita incomes?



Average incomes drop less steeply, for a shorter time.

It appears, in fact, that the median income drops surrounding recessions account for much of the rise in income inequality over the past thirty years. During full recovery periods (where median income is rising), the curves in the graph track fairly well. During recessions (broadly defined), the curves diverge.

median income drops presage recessions

For the last three recessions, median income started dropping prior to the official recession and continued to drop long after the recession officially ended. In the 1990 recession, median incomes dropped for four years. In the 2001 recession, they dropped for five. Around 2009, they dropped for six.

The fascinating thing, to me anyway, is that median incomes dropped prior to the recessions, that from the perspective of the median family, the recession started years before being recognized by official statistics. Subject to the normal caveats about correlation, causality, and small sample sizes, you might even say that median family income drops are reliable indicators of future recessions.
It's also interesting that while many are wondering why it's taken so long for incomes to recover, the time till income recovery doesn't look all that different from the previous recessions. The biggest difference isn't the length of time till income recovery started, but the amount of income lost. In addition, the severity of the initial income drop was associated with a shorter time gap between the income peak and the recession itself. By the time we hit a recession in 2001, incomes had already been falling for two years.

The role of experts

Prof. Krugman has been writing a lot lately about the "puzzling" fact that those who were wrong about what the economy needed and how it would respond have neither been held to account for their inaccuracies, or felt any need to acknowledge their errors. I don't understand his confusion. Experts and pundits are never faulted or punished for being wrong, only for being disloyal. This is as true of economic policy as it was about war. It is true in every political environment, whether in public or within private organizations.

Rick Santelli's job at CNBC wasn't to be right. It was to provide arguments and rationalizations for CNBC's viewers. It was to give depth to the views those viewers already held, to give them more sophisticated arguments to advance the views they would have advanced, anyway. He did that job well, probably because he held very similar views himself. His performance wasn't cynical. He used his intelligence as most of us do, most of the time, to make arguments in support of our convictions. His convictions aligned with his audience. He was a reliable ally.

Pundits and experts don't lose their jobs or their standing for being wrong. They never have and never will. They lose their jobs for failing to provide support for their political allies. Writers at the National Review will never lose their jobs for expressing a conservative view, no matter how wrong they are proven over time. They will never hold their jobs by expressing a liberal view, no matter how right that view turns out to be. They need to be clever enough to make their readers more committed to the program, they need to be witty enough to be memorable. Accuracy is completely irrelevant.

Perhaps Krugman reacts more strongly to this phenomenon within economics because the lack of responsiveness to the real world is taking place within his own field, because he feels that the failure of economists to lose status for behaving like other experts puts the field into disrepute, weakening the claim of economics to be a science. I fear there is nothing to be done, however. Economics is and always will be the study of wealth and its creation. Its recommendations will always affect the fortunes of the powerful, and the powerful will always find those with the ability to make arguments on their behalf.

First, they came for the terrorists...

It turns out we've been building massive surveillance engines and stuffing them with phone data, social media conversations, search terms, and who knows what else. And it turns out that we're so afraid of terrorists that we think this is a good idea, even though the 9/11 attack killed less than a quarter of the number of homicides in any year from 2000 to 2010. And maybe it's even stopped an attack or two, in which case it's saved some lives.

If saving lives is the criterion for whether we should do this, however, I wonder why we'd stop there. Why wouldn't we use the same approach domestically? If we found people whose profiles suggested future murders, why wouldn't we go through their lives and contacts and find ways to get them off the streets? Wouldn't that be the responsible, prudent thing to do?

Growth, trade balance, and tax policy

Kevin Drum wonders how we can reduce trade deficits to increase growth, especially in a world where everyone else is trying to do the same thing. The simple answer is that we can't and almost certainly shouldn't try.

The US has been running a trade deficit for almost forty years now, leading to our enduring status as The World's Largest Debtor nation. That status only tells half the story. That debt doesn't reflect money we have to repay, in the normal sense of the word. It reflects the fact that foreign entities own more American assets than we own overseas assets. Some of those assets are bonds that require repayment, but others are factories or real estate with overseas owners. And while it's true that foreigners own more assets in the US than we own overseas, our foreign assets are also enormous. They're so large, in fact, that while we're a debtor nation, we earn more from our foreign assets than foreign owners earn from our domestic ones, a situation that has persisted for many years.

Why is this the case? It turns out that investments in the US are safer than similar investments abroad. As a result, investors are willing to accept lower returns. As long as other countries are rich enough to invest here and our assets are viewed as safe, the dollar will be stronger than our trade balance would suggest, and our trade balance will suffer as a result.

It's a form of Resource Curse, where investment safety inflates the value of our currency and makes other economic sectors less competitive, but the conditions that make investments safe are, in fact, good things. We don't want to get rid of them.

As Dean Baker concludes in the article Kevin referenced, we need to stimulate the economy through government spending. We can't borrow indefinitely to support that, so we should raise taxes. That's not what we'll actually do, of course. We'll keep lowering taxes on the rich, hoping that they'll stop hoarding money and invest it instead. They won't do so, because they'll see how poor everyone else is and conclude that there's not much profit to be made.

From today's Chronicle, three stories. The first covers the Occupy effort to disrupt port activities. The second talks about the disconnect between the Occupy movement and blacks. The third is a column by Chip Johnson, talking about how Occupy is doing it all wrong, because they're being disruptive.

The three articles share a common theme: Occupy protests are too disruptive. Disruptive activity hurts people and detracts from the message. If the protesters would behave themselves and not get in the way of people living their lives, they'd be more effective.

Buried in the second article, however, is the following passage:

"Why don't people come out here and Occupy about the violence in our neighborhood?" said Adams, a 44-year-old project manager at a substance-abuse clinic. Every Saturday, she and other members of her church stand on street corners and hold signs asking people to "Stop the Violence."

A search for Charlene Adams on sfgate showed up nothing prior to the article about Occupy. A search for "Stop the Violence" also came up empty.

The article about how blacks feel disconnected from the Occupy movement is right on many points. Black communities have been in crisis for a long time, and no one has reacted. No one started an Occupy movement on their behalf. No one took over downtown Oakland in protest of inner city violence. Protests against injustice that take place only when injustice personally affects the protesters do show moral weakness.

But all three articles miss a fundamental point. The Occupy protests have been successful at getting their point across precisely because they have been disruptive, because they didn't take place on sidewalks, on weekends, out of the view and out of the way of the powerful. The Occupy movement should champion the neighborhoods of Oakland, but if they do so in the neighborhoods of Oakland--rather than downtown--if they do so on the weekends when it doesn't interfere with business, the Chronicle will ignore it, just as they've ignored Ms. Adams' weekend protests against violence.

the narrowest result

Some Senators have introduced a resolution to reverse Citizens United. They draw their amendment as narrowly as possible, because everything else is hunky-dory. The Citizens United decision is the root cause of all our problems.

it's not about objectivity

David Atkins complains about the behavior of Politico, reporting on the Cain and Perry camps as if it weren't part of the story, and says

The myth of objectivity in journalism can't die a fast enough death.

But it's never been about objectivity. It's been about the appearance of objectivity. It's always been OK (and unavoidable) to have political views, as long as you can claim that you don't.

handing out free money

Atrios periodically suggests handing out free money. As he's pointed out, free money gets handed out all the time. Since January 2008, about $2T has been handed out. It could have done a lot of good if it had been given to those who needed it.

Thank you, James Madison

Our son has difficulty reading. Two years ago, my wife found out about NIMAC, a national center for distributing textbooks in electronic form to print-challenged students (the blind, dyslexics, etc.). NIMAC was created as a result of IDEA 2004, to facilitate student access to texts. Two years later, we're still trying to get access, even though our son's eligibility for the materials has never been questioned.

The story is a common one to anyone who has ever tried to navigate an unfamiliar bureaucracy: many paths followed to dead-ends, months spent getting a particular authorization only to find that it was the wrong one, months wasted getting authorizations from uncooperative or semi-cooperative third-parties that turned out to be irrelevant, etc.

The particulars of the story aren't that important, but as the process dragged on, it became clear that the process was designed more to deny access than to facilitate it. The rules are arcane, the documentation hurdles substantial. Even when a student gets access to materials, downloads require the active participation of a public official (at least that's how it appears to us now; we think we're close, but we haven't yet been successful).

"Why," we asked ourselves, "would you create a program to help students, then make it so difficult to use that it would deny services for years?" Why even bother?

It turns out we can thank James Madison and the other authors of our Constitution. The Constitution doesn't merely tell the government to promote invention and creation. It prescribes how to do so:

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.

IDEA required publishers to provide their texts in electronic form, free of charge, but such a requirement creates constitutional problems. In the words of a friend of ours, 'If the government mandates “free” anything, the courts won’t uphold it without a showing of significant need and also a significant administrative check on unauthorized access.' In order to comply with the Constitution, the government has to make access difficult.

It's only two years. And counting. Thanks, Mr. Madison.

Update: I misunderstood the point my friend was making and then misinterpreted what I read. The Congress isn't required to give exclusivity, but apparently courts have interpreted such a grant as the creation of property, after which an act which reduces it is a "taking." The government might be able to limit the original exclusivity, but it's easier to make access to federal funds contingent on providing access, then making barriers to access so high that almost no one can qualify, and those that do, don't do so quickly.

monetary vs fiscal policy

Paul Krugman and Brad Delong are talking about how to get the economy running again, but they're economists so they immediately start talking about models, expectations, interest rates, etc. I'm not an economist (even after reading several textbooks), so that doesn't do much for me. Models necessarily abstract the real world, and while they can teach us a great deal by doing so, they leave a lot out. And sometimes, what they leave out is as important as what they tell us.

When Krugman and Delong say we're in a liquidity trap, they talk about models, graphs, equilibrium points, and other mathematical concepts. They rarely talk about what a liquidity trap means in terms of individual actors. If low interest rates can't stimulate the economy, it means that 1) the low interest rates don't affect consumption, and 2) low interest rates don't affect investment. In the first case, that probably means that the low interest rates we see in bond markets aren't, in fact, getting passed through to consumers. In the second case, it may mean that businesses aren't seeing low interest rates, or it may mean that even with low-interest loans, businesses aren't seeing opportunities for profitable investments.

So, what do consumer interest rates look like? Mortgage rates are low, but the housing market is so soft that investing in a house looks like a risky proposition, even with a low interest rate. People may refinance and reduce their expenses, but low rates don't appear to be creating new home owners and driving new construction. Credit card rates, on the other hand, aren't anywhere near zero. We aren't even close to a lower bound there. Low interest rates at the Fed and T-Bill level may not be doing anything to stimulate consumer demand.

I'm too lazy and unskilled to figure out the interest loans a typical business might face, but there's ample evidence that even with low interest rates, businesses don't see many investment opportunities. Businesses sitting on record piles of cash don't need loans. They have money to spend. They must not see anything worth spending it on.

The advantage of fiscal over monetary policy in times like this is that fiscal policy acts directly, without having to go through intermediaries that have to be profitable. Unlike a business, the government can spend money without worrying about whether the investment will be profitable. When demand is slack, it can even do so without worrying about driving out private activity. Unlike a bank, the government can give money to consumers without worrying about whether they can pay it back, and it can do a much better job of making sure that the funds it injects go to those who will spend it.

revolutions, movements, and anarchists

"How can you have protests without specific agendas?" ask many in the punditocracy, even those who sympathize with the protesters, but they miss the point. It is too soon to prescribe solutions. It is too soon to make demands.

Electoral politics and legislative policy are the endgame of social and democratic engagement, not the opening or the mid-game. They are how you secure gains achieved by an inspired population, not how you inspire a population. Before you can make demands, you must have the power to demand. Before you can prescribe legislation, you must have a constituency. Before you can pull a lever and move the world, you must have a place to stand.

In asking for an agenda, most pundits and leaders are not looking to empower the protesters, but to undermine and defeat them. They seek demands and policies not to address or enact the policies, but to marginalize and fracture the protests. They seek specific policies because specific policies can be attacked, because by attacking the proposed solutions, they can deny the grievances.

Elites always demand "constructive" criticism and protest, but that is merely a mechanism to deflect the criticism and silence the protest. You do not and should not need to know how to right an injustice or fix a policy to object to the injustice or point out that the policy has failed, any more than you should need to know how to cure a disease to go to a doctor and describe your symptoms.

Silly, Matt

Why would a politician vote to reduce his job prospects?

Atrios noted something:

A big problem with economists is that they do a bit of sleight of hand with policy analysis. First they'll come up with some policy change which, IN THEORY GIVEN APPROPRIATE REDISTRIBUTION OF BENEFITS, can be Pareto Improving, that is make everyone as well or better off without making things worse for anyone. That is, because the policy change increases the size of the pie - makes per capita gdp higher - there's more to go around. But the next step, the actual redistribution, of course does not happen so GDP enhancing policies might give Bill Gates an extra billion bucks while leaving the rest of us with $500 million less.

It's worse than that actually. On the one hand, an economist will argue that a policy (say free trade) is beneficial because it increases overall wealth. When people point out that the benefits aren't uniform and that some people will be hurt, they will say that such problems are best addressed through other mechanisms, such as transfer payments. That's nice in theory, but if the proposed policy (in this case transfer payments) is a dead letter, it's irrelevant.

What takes the argument from inane to pernicious is the fact that the same argument used to promote the policy in question is used to oppose addressing the problems it causes. Free trade is good because it's pareto improving. Transfer payments are not (at least not as long as your utility function is constant with income). Economists or politicians or policy wonks who believe in pareto improvement will end up opposing the remedies they originally put forward. To them, the remedies are useful arguments, but they aren't good ideas and shouldn't really be carried out.

It only takes a few players like that to secure majorities for the policy change and against addressing its flaws.