Sunday, December 1, 2013

Shakeup at the Minneapolis Fed

The Federal Reserve Bank of Minneapolis may be the smallest of the 12 Reserve Banks, but in recent years it has earned the reputation of having one of the best research departments. That may be changing.

Friday, October 18, 2013

Reflections on What to Expect When No One's Expecting

Published in 1968, Paul Ehrlich's The Population Bomb reignited Malthusian fears about the imminent collapse of civilization due to overpopulation. Selling over two million copies, it shaped perceptions for the past half century. Despite the fact that its alarmist predictions have been falsified by history, in the popular mind the threat of overpopulation still looms.

Jonathan Last has a very different message in What to Expect When No One's Expecting: America's Coming Demographic Disaster. He dismisses The Population Bomb as "one of the most spectacularly foolish books ever written." His concern is how nations will cope with shrinking populations. Throughout the developed world and even in some of the developing world, fertility rates have fallen below replacement. Women are averaging less than two babies in Europe, the Far East, and even parts of South American. Only in Africa and in some parts of the middle east are fertility rates still high, and even many of these have fallen.

Last faces several barriers to his message. First, many people do not understand what the fertility rate measures. The media focuses on crude birth rate or population growth, not fertility rates, and even when they discuss fertility rates, they often do not use that term. The fertility rate is an estimate of the average number of children a cohort of women will bear during their reproductive years. Because some children die before they reach adulthood, the replacement level of the fertility rate is usually given as 2.1, though it will be higher in poor countries with high child mortality. If a country maintains its fertility rate at the replacement level, it will eventually, with a long lag, stabilize population and have zero population growth. That lag is the second barrier to his message.

The relationship between fertility rates and population growth is not straightforward. Many people do not understand how population can continue to grow if the fertility rate is below replacement. To answer that question requires a bit of mathematical reasoning and math is hard for most people. Ignoring immigration and emigration, population increases when the number of births exceed the number of deaths. The people dying are mostly old people. The fertility rate tells us nothing about what old people are doing; it tells us what young women are doing. In a population that has had a high fertility rate, the number of old people will be much smaller than the number of young people. If the young people start having few babies with a fertility rate below replacement, the number of births may easily exceed the number of deaths because the old generation is small relative to the population.

However, if the fertility rate stays below replacement long enough, the age structure of the population changes and the old generation becomes large relative to the young generation. When that happens, deaths may exceed births even if the young people start having lots of babies. A change in fertility rates does not have its full effects on population growth or decline immediately, but only after a long lag. There are several countries that have had low fertility rates for so long that their populations are now declining. Japan, Germany, and Russia are examples. In the not too distant future much of Europe will join their ranks.

Third, some people who understand that population expansion is not inevitable and that many parts of the world will in coming years will face a population decline maintain that the decline will be a good thing because there are too many people today. This position focuses on the level of population and is concerned with what level of population is ideal. It ignores that the rate of change in population, regardless of what the level is, has effects that may be good or bad. Last is not concerned with the issues surrounding the level of population. He is concerned only with the issues surrounding the change. He notes that a declining population creates some serious problems for a society and that we have limited experience in anticipating or dealing with those problems.

Chief among those problems is providing support for the elderly. All societies must deal with this problem in some way. In traditional societies children take care of their parents, so in these societies to be childless is a curse. In industrial societies a combination of financial markets and government transfer programs have relieved children from the task of caring for their parents but do not relieve the young from the task of supporting the old. Resources must be transferred from the young to the old, either voluntarily via financial markets or by coercion through government transfers. What we do not know is how societies will cope as the ratio of young to old decreases to levels as low as two to one. The change will affect savings and investment, innovation, and the military power a nation can project.

Last is not an expert in demography. He is a writer who is summarizing the work of others and presenting it in an easy-to-digest form for a popular audience. Demography is a story of numbers, and to enliven the book Last mixes in observations of American culture and stories. For example, Margaret Sanger was an eugenist whose goal was to stop the poor from breeding. She teamed up with a woman who had control of the fortune made by the founder of International Harvester to fund research to develop the birth control pill. The research was successful but had consequences quite different from what Sanger envisioned. The pill seems to have depressed births among the prosperous and educated more than it has depressed births among the poor and uneducated. (The extent to which the pill contributed to other changes such as increased premarital sex and cohabitation, increased age at first marriage, and a higher divorce rate remains uncertain.)

Fertility rates have fallen to levels that no one expected back when Ehrlich was renewing Malthusian fears. In Singapore, for example, the average number of babies being born is only a little more than one per young woman. The government has tried a variety of policies to raise that level, but without success. Last points out throughout his book that in the contemporary world there are no economic benefits to having children but there are substantial costs. It is therefore not surprising that so many people opt for few or no children. Last sees no reason for low fertility rates to rise, though most estimates of what the population will be in 50 or 100 years from now assume that they bounce back to replacement levels. Eventually fertility rates will rise, but only time will reveal when and why.

Thursday, October 10, 2013

Cut the meat, save the fat

Thomas Sowell describes the perverse incentives of government bureaucrats facing budget cuts much better than I can:

Back in my teaching days, many years ago, one of the things I liked to ask the class to consider was this: Imagine a government agency with only two tasks: (1) building statues of Benedict Arnold and (2) providing life-saving medications to children. If this agency's budget were cut, what would it do?
The answer, of course, is that it would cut back on the medications for children. Why? Because that would be what was most likely to get the budget cuts restored. If they cut back on building statues of Benedict Arnold, people might ask why they were building statues of Benedict Arnold in the first place.

Monday, August 19, 2013

Tombstone: The Great Chinese Famine

When I attended the University of Wisconsin-Madison from 1968 to 1970, I frequently encountered radical leftists who regarded Mao Zedong (or Mao Tse-tung as he was known in those days) as a hero, a great leader with a great intellect. They did not know and would not have believed that a decade earlier Mao's Great Leap Forward had caused the starvation of millions of Chinese peasants. The exact number will never be known, but estimates range from 17 million to more than 50 million.

Tombstone: The Great Chinese Famine, 1958-1962 by Yang Jisheng is a comprehensive examination of this disaster. The author was in high school when he received word that his father was dying of starvation back in his village. He rushed home but found that his father was too far gone to be helped. It would be years before the author came to understand that his father was one of millions of people who died in an unnecessary man-made disaster. His doubts about the infallibility of the Communist leadership began to form during the Cultural Revolution when many high-ranking officials were accused of corruption. Those doubts matured into skepticism when Yang became a reporter and learned how news was manipulated to indoctrinate the masses. Eventually he decided he needed to uncover the truth. His quest for truth led to this book.

The English version of Tombstone is about half as long as the original Chinese version, published in Hong Kong in 2008 and not available in Mainland China, and it also rearranges the material. Most of the detailed, province-by-province accounts of the famine have been eliminated. Remaining are accounts from a few provinces that were especially hard hit and the chapters that analyze the reasons for this disaster. The book would not have been possible if there were not high-level party officials who also believed that the truth needed to be recorded and preserved.

Unlike Chinese famines in the past, this famine was not caused by flooding, drought, or any other natural calamity. It was caused by policies that Mao Zedong set and kept in place. Mao did not intend to starve millions of people. His goal was to stay in power as the new emperor of China and to use his power to establish the utopia that is the goal of faithful Marxists. His utopian beliefs would not have had disastrous consequences if the triumph of the Chinese Communists in 1949 had not ushered in a totalitarian government.

China has a long tradition of authoritarian government and the communists adopted that authoritarianism despite their promises that they would be democratic. Society was organized as a pyramid, with each level a dictator to those below and a slave to those above. The addition of the secular religion of Marxism allowed the Chinese Communists to take the authoritarian system of the emperors to an extreme. Marxism, despite its rhetoric of egalitarianism, is an elitist belief system that confers absolute power on a privileged few. The faithful believe themselves justified in depriving everyone else of freedom and forcing them to blindly follow orders from above because these measures enable the arrival of heaven on earth.

Yang notes that the communist party relied on "'two barrels:' the gun barrel and the pen barrel; seizing and ruling its domaine relied on both." (p 492) The party controlled thought because it controlled all sources of information and also because it punished any deviation from approved thought with severe consequences. When the Communist Party gained control of China, it executed over 700,000 people (p 476) and executions continued after its power was consolidated as a means of control. Although this system of control, reaching down to shape the thoughts of peasants, was impressive, it had two related shortcomings.

Each level of the hierarchy needed to appease the level above it. Failure to meet goals could bring charges of sabotage or right-wing deviation, so there was an incentive to exaggerate what was possible and what had been accomplished. Because telling the truth about production was dangerous, the entire system ended up being based on lies and deceit. Those at the top did not have a clear idea of what was happening at the bottom.

The lack of honesty contributed to a second problem, the lack of corrective mechanisms. One of the advantages of free markets is that they provide powerful correction to those who make products that people do not want. A democracy also has corrective forces, though they are weaker. The citizens can and often do vote incompetent and corrupt officials from office. However, "[i]n trying to control the ears and eyes of ordinary people, the supreme ruler ends up blocking his own ears and eyes" (p 496) and "[i]n a monarchal political system, the supreme ruler hears only voices that conform to his own will." (p 497)

In the Great Leap Forward Mao intended to squeeze peasants to support industrialization. The government based extraction on reported harvests, but because the reports were exaggerated to curry favor with those above, the level of extraction was so high that deaths from starvation began in 1958. The author argues that there was a chance to correct the mistake at the Lushan Conference in July and August of 1959. It was missed when Mao used the conference to attack those who voiced concern over the way that the Great Leap Forward was proceeding, effectively prohibiting true reporting of the conditions in the countryside. As a result, millions more starved from 1959 to 1962.

Mao was blinded not only by bad information but also by ideology. In socialist and Marxist thought private property establishes and perpetuates inequality. Unacknowledged is the role property rights have in overcoming the problem of common ownership of scarce resources. Private property is a mechanism that makes people recognize costs of their actions. Mao enthusiastically supported the suppression of household food preparation in favor of communal kitchens because he thought there would be economies of scale and that large-scale food production would release people to do other things. He never anticipated that people given free food would overconsume, causing many kitchens to run out of food and to shut down in the winter, leaving people hungry. When households prepare their own food they consider that a consequence of eating now may mean less later. With a communal food supply, what one person consumes now has minimal effect on what that person will have later.

Similarly, when cultivating their own land, peasants have a strong incentive to make smart decisions because mistakes often have dire consequences. When decisions about what and how to produce were made high in the hierarchy, the consequences of mistakes were not borne by decision makers but by the peasants. The problem of common ownership is that people are not accountable for the consequences of their actions and as a result there is no barrier to actions that are socially destructive. Mao's Marxist ideology never let him understand why trying to abolish private property in favor of communal ownership led to repeated failures. Fortunately, reality overcame ideology for some in the leadership so that reform was possible after Mao's death.

Yang estimates that at least 36 million people starved to death from 1958 to 1962. In addition, he estimates that the shortfall in births was about 40 million; lack of food reduced births because a large number of women stopped ovulating. However, when the policies of the Great Leap Forward were relaxed after 1962 and food availability rose, births soared and made up for that shortfall.

Eventually knowledge of the scale of this disaster did reach the top. Several high officials were "charged in 1961 with directing each province to compile data on food supply and demographics. The data indicated a population loss of tens of millions. This information was reported to only two people: Premier Zhou Enlai and Mao Zedong. After reading the report, the premier contacted Zhou Boping and told him to destroy it immediately and make sure that no one else saw it." (p 406)

The author named the book Tombstone for four reasons. He wanted it to be a memorial for his father who died in the famine, for the 36 million others who died, and for himself. He also wanted it to mark the grave of the system that brought about this great tragedy.

Tombstone
is an important documentation of one of the great calamities of 20th century socialism. It gives details and names names. However, there are so many names in the book that the reader can not make sense of them all. The book describes an event so horrific and large that it is beyond human comprehension. Books that put the event into story form, focusing on how it affected a small group of people, will have a larger audience and a greater impact. There is truth to the quote, often attributed to Stalin, that "the death of one man is a tragedy, the death of millions is a statistic."

Here is the review of the book in the Wall Street Journal and here is one from the New York Review of Books.

Friday, August 2, 2013

Your help is hurting


From an interview in Forbes, "Your Help Is Hurting: How Church Foreign Aid Programs Make Things Worse:"
There’s an author Bob Lupton, who really nails it when he says that when he gave something the first time, there was gratitude; and when he gave something a second time to that same community, there was anticipation; the third time, there was expectation; the fourth time, there was entitlement; and the fifth time, there was dependency. That is what we’ve all experienced when we’ve wanted to do good. Something changes the more we just give hand-out after hand-out. Something that is designed to be a help actually causes harm.
Read the whole thing.

Sunday, July 21, 2013

Why Nations Fail: A Review

In Why Nations Fail: The Origins of Power, Prosperity, and Poverty Daron Acemoglu and James Robinson argue that elites promote stasis because change can undermine their positions in society. Elites uses their positions to channel wealth and income to themselves and protect those positions by erecting political and economic structures that keep others from prospering. Acemoglu and Robinson call these structures extractive institutions. In contrast, sustained economic growth must allow the creative destruction that flows from technological change. Only those political and economic institutions that allow participation by outsiders generate the innovations that create sustained economic growth. Acemoglu and Robinson call these structures inclusive institutions. Both extractive and inclusive institutions tend to create forces that perpetuate themselves, which is why it is so hard for poor countries, those with the most extractive institutions, to break away from the status quo and begin the process of growth. The bulk of the book consists of examples that develop and illustrate this theme.

An attraction of this thesis is that it is an extension of the most basic idea in economics, that people respond to incentives. When people have the opportunity to structure incentives to favor themselves, they usually will do so, which is why countries impoverished by elites are so resistant to economic growth. When one tyrant is overthrown, the usurper is usually just another tyrant who wants to use the system to enrich himself and his cronies. The thesis of this book is quite similar to that developed by Hernando De Soto in The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, yet De Soto is not included in the bibliography of sources.

The authors dismiss culture as a factor that explains differences in income level. They point out that the North and South Koreans had similar cultures, yet have had completely different growth paths. Yet within countries different cultural groups can have very different levels of success, and sometimes the successful groups are subject to discrimination. Perhaps the authors should have argued that cultural differences are secondary in explaining what happens to different nation states. Culture is a nebulous concept that is impossible to measure with any precision and thus does not fit readily into economic discussions. But the same can be said for the notion of institutions at the basis of Acemoglu and Robinson's argument.

One of the changes that opened up the economic system of the U.S. was the reforming of laws of incorporation that took place before the Civil War. Originally the granting of corporate charters was tightly controlled by the political process, creating the temptation to create economic rents. The reform of the process took politics out of the process, allowing anyone meeting a set of requirements to get a corporate charter. This change removed a major hurdle in organizing large businesses, and Acemoglu and Robinson completely ignore this development even though it fits into their narrative. (A book with a similar emphasis on the importance of institutions, Political Institutions and Financial Development, edited by Stephen Haber, Douglass C. North, and Barry R. Weingast, has a paper that notes that between 1842 and 1852 eleven states rewrote their constitutions to take the power of chartering corporations out of politics.)

Instead they highlight the anti-trust attack on the so-called robber barons of the late 19th century as a victory for inclusive institutions. They seem unaware that the pejorative term "robber baron" was popularized not in the 19th century but only in the 1930s or that the "monopolists" owned much of their success to exploiting the economies of scale that new technologies brought. The people who most objected to the so-called robber barons were not those who bought from them but those who could not compete with them, the rivals who were the victims of the creative destruction that the Carnegies and Rockefellers of the era unleashed.

Chapter 11 concludes with a section called, "Positive Feedback and Virtuous Cycles." Chapter 12 concludes with a section called "Negative Feedback and Vicious Cycles." Economists do not give the concept of feedback nearly enough emphasis, so perhaps the authors were unaware of what the definitions of positive and negative feedback are. Positive feedback tends to amplifying results while negative feedback dampens or stabilizes things. Hence, both vicious cycles and virtuous cycles result from positive feedback. The authors could have argued that negative feedback creates a stagnation or poverty trap, but a trap is not the same thing as a vicious cycle.

Acemoglu and Robinson give Venice as an example of a state that developed an inclusionary institution, the commenda, which set it on the road to growth and prosperity in ninth and tenth centuries. The commenda was a risk sharing agreement for trade missions that gave ambitious and talented outsiders a chance to prosper. Eventually, early in the 14th century, the elites chose stagnation by closing avenues of upward mobility. Although stagnation and decay are possible paths for today's developed nations, no attention is given to this topic. The omission may be because Acemoglu and Robinson are focused on why so many nations have failed to develop economically, and decay is best left for a different book (though they include one such book, Mancur Olson's The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, in the bibliography). Or perhaps they do not consider decline an important threat; their emphasis on the virtuous cycle of inclusive institutions supports this possibility.

One of the concepts that Acemoglu and Robinson stress is "contingent events," episodes that can break a pattern and send a nation down a path to different institutions. They repeatedly refer to the Glorious Revolution of 1688 as the event that changed the trajectory for England, leading to a process that generated ever more inclusive institutions. In the post-World-War-II era the world underwent massive decolonization, which provided a host of contingent events sending countries on new paths. In almost all of these cases the new regimes made their institutions more exclusive rather than more inclusive, further impoverishing their countries. Acemoglu and Robinson blame the exclusionary institutions that the colonizers left behind for today's poverty in Africa, Asia, and the Americas. What they do not explain is why independence led to more exclusionary institutions rather than more inclusionary institutions.

On page 389 they write, "It is impossible to understand many of the poorest regions of the world at the end of the twentieth century without understanding the new absolutism of the twentieth century: communism." The irony of communism and socialism is that although their rhetoric about equality suggests that they will usher in inclusive institutions, the nature of socialism requires that it be highly exclusionary. Acemoglu and Robinson spend few pages developing this idea despite their declaration of its importance.

In the final chapter Acemoglu and Robinson look at foreign aid and come to the same conclusion that William Easterly found, that it can often be counterproductive, reinforcing the power of the elites to maintain the status quo. However, they conclude that foreign aid is here to stay not because it is effective but because "many Western nations feel guilt and unease about the economic and humanitarian disasters around the world, foreign aid makes them believe that something is being done to combat the problems." (p 454) They also make the case that though China has been growing rapidly for the past few decades, that growth will soon slow down dramatically. They argue that some growth is possible under extractive institutions, and point to the USSR as an example. By massively investing in technology that had been developed by others, the USSR grew rapidly until the 1970s. At that point it had exploited what was possible with that strategy. For growth to continue, they would have had to allow creative destruction, but authoritarian and totalitarian regimes abhor creative destruction. Acemoglu and Robinson see the same process playing out in China. There is no rule of law, property rights are insecure, and the political trumps the economic. What is possible given their institutions is limited.

Acemoglu and Robinson end the book with a story from Peru where Fujimori and his crew tried to ensure their dominance. They paid off various officials and judges, but the really big payments were to the press. They recognized the key to control was control of the press--nothing else really mattered much. If Acemoglu and Robinson had not dismissed culture as unimportant, perhaps they might have played with the importance of the media in shaping culture, which in turn can limit what elites can do in the political sphere.

Update: Here is William Easterly's review of the book in the Wall Street Journal.

Monday, June 17, 2013

Pathological altruism

From James Taranto on Best of the Web Today for June 14, 2013, looking at the concept of pathological altruism as developed by Barbara Oakley:
Oakley concludes by noting that "during the twentieth century, tens of millions [of] individuals were killed under despotic regimes that rose to power through appeals to altruism." An understanding that altruism can produce great evil as well as good is crucial to the defense of human freedom and dignity.
When something bad happens, people often assume that someone with evil motives--especially greed--is the cause. The notion of pathological altruism is an alternative explanation. Bad results can come from what appear to be good motives--altruism. And people with suspect motives, such as greed or lust for power, often are very good at finding ways to exploit the altruism of others to further their own goals.

Friday, May 31, 2013

The great Chinese Famine

Bret Stevens at the Wall Street Journal writes about Tombstone: The Great Chinese Famine, 1958-1962 :
Mr. Yang's father would die within three days. Yet it would take years before Mr. Yang learned that what happened to his father was not an isolated incident. He was one of the 36 million Chinese who succumbed to famine between 1958 and 1962.
It would take years more for him to realize that the source of all the suffering was not nature: There were no major droughts or floods in China in the famine years. Rather, the cause was man, and one man in particular: Mao Zedong, the Great Helmsman, whose visage still stares down on Beijing's Tiananmen Square from atop the gates of the Forbidden City.

Why would a book that documents the "single greatest atrocity of the 20th century" be allowed in China, a country with a repressive government?
It also needs a certain number of people who understand the full truth about the Maoist system so that the party will never repeat its mistakes, even as it keeps the cult of Mao alive in order to preserve its political legitimacy. That's especially true today as China is being swept by a wave of Maoist nostalgia among people who, Mr. Yang says, "abstract Mao as this symbol of social justice," and then use that abstraction to criticize the current regime.



Saturday, May 18, 2013

Price discrimination in education

The average tuition discount rate for college freshmen is now 45%. So even though the sticker prices are very high for many schools, the actual amount that students are paying is only slightly more than half of that.

Colleges price discriminate, which means that they charge different prices to different students. They do that because they are like hotels and airlines--they have very high fixed costs by very low variable costs. They may not do it all that well, but the cost structure pretty much guarantees that they have to try.

I recall that many years ago I tried to explain to the director of financial aid at the college I taught at for many years the idea that what he saw as financial aid was actually a pricing strategy that economists called price discrimination. He was outraged at the very idea that he was doing something called "price discrimination." I realized then that the college would always be struggling to get students when they had no clue as to what they were doing in granting aid. (The school I taught at, I am told, has a tuition discount rate substantially higher than 45%. I am out of the loop so I do not know if the people currently in charge of admissions and financial aid have figured out that they are pricing like hotels and airlines.)

Sunday, May 12, 2013

Coolidge

"Isn't it a strange thing," [Coolidge] asked Barton, "that in every period of social unrest men have the notion that they can pass a law and suspect the operations of economic law?"
From Coolidge, by Amity Shlaes, p 191

I picked up Shlaes' book because the local library had a copy and I had read and enjoyed The Forgotten Man: A New History of the Great Depression. If I had received this book to review for Choice, I would have written something like this:

Calvin Coolidge became president on the unexpected death of Warren Harding in 1923 and won re-election in 1924. He declined to run in 1928 despite pressure from his party. As president he cut taxes, spending, and government debt, leaving government smaller than when he took office. The low ranking professional historians give him reflects their bias for activist presidents. In this view the prosperity during his administration was accidental, not a result of his efforts to curtail government. Shlaes disagrees, arguing that by reducing the role of government, Coolidge encouraged private-sector expansion. She describes how his determination to cut spending overcame opposition from those wanting to spend more on veteran's bonuses, farm subsidies, defense, aid to flood victims, and an ambitious dam building program proposed by Commerce Secretary Herbert Hoover. Coolidge emerges as a determined man respected and popular not because he followed public opinion but because he did what he thought was the right thing to do. That determination and principle combined with luck and a group of dedicated supporters carried him from state legislature to governor of Massachusetts to the vice presidency. Highly recommended, all audiences.

That just makes the 190-word limit for Choice reviews.

Tuesday, April 9, 2013

The New Deal and recovery

Did FDR prolong the Great Depression? This video says yes.

Some of his policies (primarily getting off the gold standard, which neutralized the Federal Reserve for several years) were key to stopping the decline. But I agree with Ohianian that many others slowed recovery.

Thursday, March 28, 2013

Quotes

From This Time Is Different: Eight Centuries of Financial Folly, Carmen M. Reinhart and Kenneth S. Rogoff, Princeton, 2009, 
If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. xxv

Although private debt certainly plays a key role in many crises, government debt is far more often the underlying problem across the wide range of financial crises we examine. xxxiii

Severe financial crises rarely occur in isolation. Rather than being the trigger of recession, they are more often an amplification mechanism: a reversal of fortunes in output growth leads to a string of defaults on bank loans, forcing a pullback on other bank lending, which leads to further output falls and repayment problems, and so on. 145

[I]nflation has long been the weapon of choice in sovereign defaults of domestic debt and, where possible, on international debt. 175

Monday, March 18, 2013

Froma Harrop on incentives

Froma Harrop, a columnist who often writes about economics, opines:
"The most insidious effect of the Social Security and Medicare regimes is that they actually shift economic incentives away from having children," Jonathan V. Last, a writer for the conservative Weekly Standard, says in his book, "What to Expect When No One's Expecting: America's Coming Demographic Disaster ."
Here's a counter-argument: These programs reassure parents bearing the considerable expense of raising children that they won't be destitute if they can't save enough for their old age.
Ms Harrop has a strange notion of how incentives work: If you have children, you get state-funded retirement payments. If you do not have children, you get state-funded retirement payments. Therefore state-funded retirement payments encourage you to have children.

Economists have studied savings and fertility for many years and, as far as I know, none have seriously proposed what Harrop is suggesting. On the contrary, they expect social security programs to reduce the incentive to have children because they are alternative ways of providing income when people get old and are no longer productive.

There are three ways to prepare for old age. The only one available in primitive societies is to have children who will support you when you get old. In these societies being childless is a curse. In some of them, only male children support their parents, and in these societies there is a strong preference for male offspring.

When societies get financial markets and the rule of law, a new way, savings, becomes important. However, many people have self control problems when it comes to budgeting, so various sorts of pension funds, which force patience, develop. When this alternative way to prepare for old age becomes an option, having children becomes less important and we can expect fertility rates to fall.

A final way to provide for the old is for the government to tax the young and give the money to the old. This is what social security programs of welfare states do, though they may disguise what is going on by pretending it is a retirement plan similar to those offered outside of government. Because social security programs offer a third way to provide for old age, we can expect their existence will cause people to rely less on the other two ways, having children and private savings.

All three ways transfer income from the young to the old. With children the transfer is within the family. With private saving it is a voluntary exchange; assets that the old acquire are sold to the young. With government tax and transfer, it is a coerced transaction.

The emergence of articles like this from Harrop may indicate that the decline of fertility is finally attracting notice beyond a narrow slice of academic specialists. Demography is destiny, but math is hard.

See also Jonathan Last's reaction.

Thursday, March 14, 2013

Why interstellar space travel will never happen


Introduction

Most people recognize that time travel presents logical problems--if you can travel back in time, you would change the present from which you came and your existence would be erased, so there would in fact be no one to travel back in time to change it. The purpose of this note is to argue that, although it does not face the logical problems of time travel, another popular theme in science fiction, interstellar travel in which humanity colonizes distant planets, faces such serious obstacles that this travel is unlikely to ever happen.

1. Physics

The first barrier to the spread of humanity beyond the solar system is physical--the distance to the stars is vast beyond the comprehension of most people. Light travels at about 180,000 miles per second. The nearest star to our sun is four light years away. If we could get a space craft to travel at 1000 miles per second, which is vastly faster than anything we can achieve with our current technology and could get us to the moon in four minutes, reaching the nearest star would take over 700 years.

The response to this objection is usually an appeal to technology and progress. A thousand years ago people could not image any way that people would be able to travel anywhere in the world in less than a day. Many of the technologies that we take for granted today were unimaginable to people living a couple centuries ago. What is to prevent an equally big jump in technology in the next two hundred years? What our great-great-great grandchildren will take for granted may be things that we cannot imagine today. Projecting the growth of knowledge and technology that we have seen in the past several hundred years into the future suggests that at some time even an achievement as daunting as interstellar space travel may not only be possible, but routine.

In the late eighteenth and early nineteenth centuries steam power was applied to manufacturing and transportation, beginning an era of rapid economic and technological change known as the Industrial Revolution. It is easy to understand why many people would assume that rapid technological change is the norm after two centuries of it. However, a longer view of history suggest caution. There have been periods in the past of economic growth and prosperity followed by stagnation and decline. The fall of the Greco-Roman civilization is the most obvious example. Much of the knowledge that was accumulated during the centuries that this civilization developed was lost in fires that destroyed manuscript collections, in economic collapse, and in depopulation of its territory during centuries of warlord rule. There is no guarantee that in the future much of the accumulated knowledge of the past two centuries might also be lost.

The present explosion of technological knowledge may be due to a confluence of events that can not be repeated. The discovery by Europeans that there were two continents not on their maps and the resulting unification of the world into a single trading network was a one time event that spurred innovation. The development of limited government with free markets was a break with the normal run of history that features powerful governments that promote stasis. Free markets are inherently dynamic.

We do not know what the limits of knowledge and technology are, so there is no way for us to prove or disprove the possibility of interstellar space travel. However, it should be recognized that belief in limitless possibilities for technology is not based on science. It is a matter of faith.

2. Biology

Suppose that humanity eventually does overcome the physical barrier of vast distance and finds a way to travel to the stars. It would then encounter a second barrier, the biological barrier. Humans evolved on earth and are dependent in a great many ways, some of which we do not understand, on the ecosystems and conditions on earth. If we could reach another solar system, we would find either planets that currently support some form of life or planets that need to be transformed to support earth life.

Planets that are most similar to the earth in size and orbit may be those most likely to already have life. If a planet currently supports life, that life most likely would be incompatible with our life needs because it evolved separately and may have a different molecular basis. Again, we evolved on earth along with other organisms and are dependent on those other organisms. We would have to alter the environment of a living world--disrupting the existing life--to make it compatible with our needs and that might take many centuries. There is no guarantee that the earth life that we bring with us could either co-exist or triumph over the established life. Any return voyage back to earth would run the risk of bringing alien life back to earth with potentially devastating consequences.

Trying to terraform a planet without life is completely beyond the technologies we have today. It took many millions of years for earth to develop the atmosphere and climate on which we depend. Believing that this process could be accelerated (on a planet that was inhospitable to the development of life) so it would take years or centuries is based on faith in technology; perhaps mastering the manipulation of DNA can lead to super organisms with capabilities far greater than anything evolution has produced. Even with such breakthroughs, mastering terraforming would require the trial and error needed to develop any engineering concept. Each planet that needs terraforming would have its own special conditions so that monitoring the process would require on-site decision making with little or no guidance from earth, which leads to a problem discussed in the next section. Finally, the cautions noted about technological progress in the previous section apply here.

The above discussion assumes that life is likely to develop whenever there is an abundance of liquid water. The biological barrier would be far lower if life has only developed on earth and planets in other systems that are similar to earth in orbit and size are barren.

3. Economics

A final barrier is the economic barrier and there are two parts to this. First, it is unlikely that colonizing the galaxy will make sense in terms of costs and benefits. There will be no prospect of intergalactic trade from colonizing distant planets for hundred or thousands of years after the colonization. This problem is why we are not currently colonizing the moon or Mars. The last man on the moon left in 1972. That effort to send men to the moon was a publicity stunt in which the U.S. wanted to show its technological superiority over the Soviet Union. It is unclear when or if we will return because these missions have economic benefits far less than their costs. As robotics improve, making the case for sending people gets harder. Traveling to a planet in another solar system will be vastly more difficult and expensive. What will be the rationale for investing in the effort? Further, if the effort requires hundreds of years to accomplish, it may be politically impossible. History suggests that governments or other human organizations are unlikely to last long enough to accomplish the task.

The second problem is one that Adam Smith would have recognized. The reason that we contemplate colonizing the galaxy is because we have seen living standards and technological progress explode in the past three hundred years. Both of those explosions are tied to specialization and division of labor. We are connected to millions and perhaps billions of other people around the world in the goods we use in everyday life. If we were cut off from the larger market, our standard of living would quickly deteriorate. A thought experiment along these lines was posed recently by the question of whether a single marine unit could defeat the Roman Empire if it could be transported back in time. Certainly it would have an overwhelming advantage in any initial encounter. However, once it used its supplies of fuel and ammunition, it would be unable to replenish them and the advantage of modern technology would be neutralized. The marine unit would quickly realize that modern technology depends on a vast network of support, a network that they would no longer have.

Stone-age hunter-gatherers spread around world, missing only a few islands. Their technology was simple enough to be contained in small groups and to be handed down from generation to generation. When they met new conditions--novel plants and animals--they needed to adapt and that adaptation undoubtedly was done at the cost of may lives. In contrast, European expansion after Columbus was aided by technology complex enough to require links back to the home countries. If Europeans had not had the re-supply lines back to Europe but instead had tried to settle with only what they brought in their ships, it is unlikely that any would have succeeded. Their groups were not large enough to complete the supply chain needed to reproduce their tools.

Colonization of a another solar system would be highly technological and thus would require either a supply chain back to earth or an enormously big ship to bring enough people and supplies to sustain the effort. A physical supply line linking earth to a colony in another solar system seems impossible because of time. Resupply in the case of European colonization could take a year or two in the 16th and 17th centuries, but that is within the lifetime of individuals and governments. Those resupply lines do not tell us about how a resupply line that is longer than the lifetime of many generations and governments could be managed. The bigger the ship, the more costly and difficult the interstellar mission. At present we can not set up a colony on the moon, a task that is trivial compared to setting up a colony in another solar system.

A premise of the book Guns, Germs, and Steel: The Fates of Human Societies by Jared Diamond is that economic development in Europe and Asia was faster than development in other parts of the world because it had the largest population in communication with one another. Diamond notes that history has seen cases in which small isolated groups, such as those who settled Tasmania, lost technology and drifted backwards. If the initial colonist to another solar system were a small group, they would have a limited ability to make the discoveries and invent the technology that would be necessary to adjust the conditions on the new planet. Those adjustments would be necessary because of the biological problems mentioned above.

Again, a belief in technology can solve these problems. If as a byproduct of technologies developed for other purposes, humans stumble on a way to travel interstellar distances cheaply and quickly, not only are the barriers of physics removed, but also the economic barriers. (Travel to the moon was possible only because of technologies previously developed for war. If the technologies of rockets had not already existed, it is doubtful anyone would have developed them solely to get to the moon.) Although the biological barriers would still exist, mining on barren and lifeless planets could give a reason for exploration, trade, and limited settlement.

Conclusion

The Drake equation, which is popular among those searching for extraterrestrial life, is supposed to give an estimate of how many alien civilizations exist in the universe or galaxy. The problem with this equation is that we have a sample size of one solar system that we know a fair amount about, and with a sample size of one we cannot use statistics to estimate the parameters of the equation. That has not stopped people from using the equation, but since the parameters that they use are purely guesses, the results of the equation are also purely guesses. Similarly, those who believe that interstellar colonization is inevitable are using assumptions that are purely guesses. It is not logically impossible that at some time in the very far future humans may overcome the serious obstacles discussed above and travel to distant stars. However, people should also recognize that it is possible that the colonization of space can never happen because it is beyond the capabilities of humans.

Monday, March 11, 2013

Incentives and tricks

"But what Sunstein and Thaler say is that it's just easier to trick people than it is to change their incentives.... [M]y toolkit used to contain only incentives, but now tricks are in there, too."
Steven D Levitt, from an interview in Simon W, Bowmaker, The Art and Practice of Economics Research: Lessons from Leading Minds (Edward Elgar, 2012 ISBN: 978 1849808460) p. 237
Behavioral economics and the psychologists who inspired it may have introduced ways of tricking people into intellectual discourse but it is doubtful that they are discovering anything that has not been practiced by hucksters for generations. Their analysis of weaknesses in the ways people choose can be used in two ways.

First, it can help people manipulate others--to trick or nudge them. This can benefit those who are tricked if, as Levitt, Thaler, and Sunstein assume, the tricker is a benevolent paternalist preventing mistakes by an error-prone citizen or underling. Those who assume that even people in government are usually self-interested fear that the benefitting party will not be the one tricked, but rather the one who tricks. They worry that power combined with this knowledge creates temptation for abuse.

The second way to use the analysis of behavioral economics is not through manipulation but rather as a defense against manipulation.  If one understands the errors to which human decision-making is prone and how those errors can be exploited by others, one can attempt to correct for those errors and is less likely to be exploited.

Thaler and Sunstein do not use the word "trick." Instead they talk about "nudges," ways of framing choices so that people are more likely to make what Thaler and Sunstein consider good choices. Levitt has re-framed their message by using the word "trick," and their approach seems less desirable when it is seen as tricking people rather an as nudging them. Can the government of free and equal people be based on deception?

(Behavioral economics can be used to attack the notion of market efficiency. If people cannot be trusted to make rational choices, why should we want a system to responds to people's wants as markets tend to do? However, behavioral economics can just as easily be used to attack the underpinnings of democracy. If people can be easily tricked, why should we expect their political choices to result in good government? With or without behavioral economics, it is hard to make a convincing case that political processes have a greater tendency to self-correct than market processes.)


Friday, March 8, 2013

Entrepreneurs or thieves?

David Henderson has a good article on the so-called robber barons, a derogative term that became popular only in the 1930s. He notes that those who complained about Rockefeller and Carnegie were not their consumers but their competitors.

The technological breakthroughs of the second half of the 19th century created economies of scale in petroleum, railroads, and steel production. Someone was going to take advantage of these economies, and it turned out that Rockerfeller and Carnegie were the people at the right place with the right skills. But if they had not been there, someone else would have done something similar. Bill Gates in the 20th century is similar case, though it was network economies that he exploited rather than economies of scale. It was inevitable that the business world would standardize on some operating system, and if Microsoft had not offered one, someone else would have developed or offered one. (IBM totally bungled the introduction of their PC--they did not realize it at the time, but they destroyed themselves when they did not control both chips and operating system.) Microsoft has kept its dominance by being smart enough to copy Apple--many others would quickly have lost dominance by being less astute than Microsoft has been.


Saturday, January 12, 2013

Leaving Greenland

What happened to the Vikings who settled in Greenland? Did they starve or leave? New evidence suggests that they did adapt to hunting seafood so that they did not starve. Rather, they could not preserve the way of life that they preferred so they left:
"But, without trade, they couldn't survive in the long run."
And
In the final phase, it was young people of child-bearing age in particular who saw no future for themselves on the island. The excavators found hardly any skeletons of young women on a cemetery from the late period.
"The situation was presumably similar to the way it is today, when young Greeks and Spaniards are leaving their countries to seek greener pastures in areas that are more promising economically," Lynnerup says. "It's always the young and the strong who go, leaving the old behind."

The piece is from SpiegelOnline.