Streetwise Professor

In 1968, journalist Peter Arnett claimed that a U.S. major had told him that a particular village in Vietnam, Ben Tre, had to be extirpated: “It became necessary to destroy the town to save it” (from the Vietcong), sayeth the major (according to Arnett). This has entered American discourse as “we had to destroy the village to save it.”

That phrase came to mind when contemplating the havoc wreaked by the CCP Virus. Europe is shutting down, country by country. Parts of the US have shut down. Others are on the verge of shutting down. The economic carnage is immense. Governments talk of spending trillions of dollars in various forms of relief: the loss of output/income will probably be measured in trillions.

Contra Hayek, it is the curious task of an economist to ask whether it’s worth it. That is, economics is predicated on the concept of scarcity, which in turn implies that every choice involves a trade-off. You want more of a good–or in the present instance, less of a bad–you have to give up something.

What price are you willing to pay? How much is saving 1000 lives worth? 10,000?

Orders of magnitude. Let’s say that shutting down the US economy through radical social distancing, quarantines, etc., saves 1000 lives, and costs $1 trillion. That works out to $1 billion per life. Moreover, the lives saved are most likely aged, infirm, sick individuals with short life expectancies and poor life quality.

Is that a price you are willing to pay? There is no right answer: the answer is subjective. Your answer may differ from mine. But when making decisions, it is a question we have to answer.

Increase the death toll by 10, and you are still at $100 million/life. This is far beyond any value of life estimate used in other regulatory and policy decisions.

If the cost of an economic shutdown is $1 trillion, you would have to save on the order of 100,000 lives to approximate the value of a statistical life (around $10 million) the US government uses for other policy making purposes.

I know that most people recoil at such calculations. The idea of valuing lives in dollars violates most people’s moral intuitions.

So let’s focus on lives. A major recession–or depression, which is not inconceivable–costs lives. Suicide rates go up. Substance abuse goes up, which costs lives in the near term (overdoses, fatal vehicle accidents) and the long term (substance abuse shortens lives). Stress-related fatalities (heart attack, stroke) go up. Murder rates go up. Consumption of health care declines, leading to premature deaths.

And then we can start talking about quality of life.

Pretty soon it adds up. We are not just evaluating the trade-off of lives for money. We are evaluating the trade-off of lives for lives.

That is, always remember Bastiat: think of the unseen. There is an unseen public health cost associated with major economic dislocation. That unseen cost has to be weighed against the cost that is right in front of our faces at present, i.e., the death toll from CPCV-19/20.

It is of course difficult to estimate, or even approximate, the various costs. Our radical ignorance about the virus makes it difficult to assess what the death toll would be under various policies. Similarly, we are operating in completely unexplored territory in trying to estimate the economic cost, let alone the health cost, of more or less draconian restrictions on our lives and movement.

But we have to at least confront the trade-off. Acknowledge it. Grapple with it. My strong sense is that the monomaniacal focus on controlling spread of the virus, the costs be damned, is operating according to the logic of destroying society in order to save it. That logic was absurd in 1968. It is absurd in 2020.

So forget all of that stuff about what workaround Putin was going to employ to remain de facto president for life: he has found a workaround to make himself de jure president for life.

It’s comical in a way. Start a process to amend the constitution of the Russian Federation. Get a respected Soviet-era fossil in the Duma, astronaut Valentina Tereshkova, to introduce an Orwellian Memory Hole amendment. Specifically, that anyone is eligible for two consecutive future presidential terms, thereby consigning Putin’s previous/current consecutive terms to the Memory Hole.

Then get Vova to address the Duma, and say (in effect): oh shucks, guys, I’ll accept if you insist. But only if the Constitutional Court agrees! Which is sort of like the organ grinder saying he’ll accept tips only if the monkey dances.

And, of course, yesterday the monkey danced.

The entire process has been completely banal, and lacking of the frisson that would accompany weighty constitutional changes in other countries.

This all transpired with a (predictable?) lack of response from the Russian populace. Likely because they know responding is worthless. If you know the game is rigged, what’s the point of protesting?

This raises only the question of why Putin went through such machinations in January. My conjecture is that those were mainly trial balloons. He clearly signaled that he was looking for a way to remain in power indefinitely. These signals were met with a collective shrug, except from a completely irrelevant opposition. Seeing this, Putin figured (IMO) that there was no political need for subterfuge: take the direct route and retain presidential power. Which also had the benefit of eliminating ambiguity about the distribution of power going forward.

So Russia shrugs, and Putin moves on: unlike an adage that Putin favors, he did not even hear any dogs barking. A further illustration of the maxim that nations get the leaders they deserve.

Insofar as the US is concerned, this is probably the best outcome. A succession struggle in a hostile nuclear power is not a happy prospect. And it’s not a bad thing when a self-proclaimed rival is in the hands of an aging man (in a country where men do not age well) whose mental powers will diminish and who will become more risk averse/conservative with age.

A banal Russia in the hands of a president who retains his powers as a result of an utterly banal process is not a good thing for Russians. But it is not a bad thing for the rest of the world.

One of the refrains we’ve heard repeatedly during the Panicdemic (which is arguably worse than the pandemic) is: “We Need More Tests! We Need More Tests!”

There is a Chicken Little vibe to these calls for testing. A sense that people are running around like the sky is falling, and not thinking through the right testing strategy.

What are tests for? One is for diagnostic purposes in specific cases. To be frank, the value of such tests is minimal. There is no unique therapy for acute Wuhan Virus sufferers. The protocol is to treat the symptoms of acute respiratory distress the same way as one would treat such distress from other causes. So knowing that someone’s acute distress is caused by agent X as opposed to agent Y is of limited therapeutic value.

Insofar as identifying someone expressing symptoms would help identify others so exposed, a much more efficient strategy is to presume that the symptomatic individual is suffering from WV, track his/her contacts, and monitor and quarantine said individuals accordingly. Yes, there will be Type I (false positive) errors, but the cost of such errors is likely to be relatively small if an individual is suffering from an acute condition, regardless of the exact pathogen that caused it. That pathogen is obviously capable of causing severe problems, so why not isolate those exposed to it, even if you don’t know exactly what it is?

Another purpose of testing is to collect information about the prevalence, virulence, contagiousness, and fatality of the disease. Such information can be used to optimize the policy response.

Testing those who are symptomatic and/or have been exposed is exactly the wrong way to go about that. Such a testing strategy is rife with sample selection bias.

For weeks (mainly on Twitter) I advocated construction of a random panel data set. Select people at random. Test them, and test them at regular intervals–including those who tested negative. This would provide an unbiased sample that would permit more reasoned assessments and judgments about the nature of the pathogen. We could see how many people had contracted the virus, how many people they infected, the mortality rate (and how the mortality rate varied with age, health status, etc.), and the trajectory of the virus.

If that had been done, say, in January when shit started to get real in China, perhaps we could have been able to condition policy on better information. (Not to mention if the CCP had done that in, say, December, when it knew it had a problem on its hands–but decided to suppress information rather than suppress the pathogen.)

Why didn’t our Technocrats figure this out? Yeah. We should put more of our lives in their hands.

But that opportunity to get unbiased data has passed. Now we are forced to respond based on the most sketchy and biased data. Chicken Little proposals about testing will generate . . . more biased data. Which is arguably worse than useless.

What a helluva few weeks it’s been, eh boys and girls? By way of post mortem (hopefully?) rather than prediction, here’s my take.

Under “normal” circumstances, two factors drive asset valuations: expectations of cash flows, and the rate at which investors discount those cash flows. COVID-19–Wuhan Virus, to call it by its proper name–has has profound influence on both.

WV has caused a major aggregate supply shock, and an aggregate demand shock, and these amplify one another. The aggregate supply shock stems from shutdown of productive capacity due to social distancing. And people who aren’t working aren’t earning and aren’t spending, hence the aggregate demand shock.

These developments obviously reduce the income streams from assets (e.g., corporate profits). That’s a negative for stocks.

As an aside, these factors defy traditional policy prescriptions. Monetary and fiscal policy are focused on addressing aggregate demand deficiencies, i.e., trying to move demand-deficient economies (where demand deficiencies arise from price rigidity and nominal shocks) back to the production possibilities frontier. Supply shocks shrink the PPF. Pushing the PPF back to its normal state in current circumstances is a function of public health policy, and even that is likely to be problematic given the huge uncertainties (that I discuss below) and the dubious competence of government authorities (which I discussed last week).

The pandemic nature of WV also makes it the systematic shock par excellence. It hits everyone and every asset class, and cannot be diversified away. A big increase in systematic risk results in a big increase in risk premia, meaning that the already depressed expected cash flows on risky assets get discounted at a higher rate, leading to lower valuations.

A lot higher rate, evidently. Why? Most likely because of the extreme uncertainty about the virus. Data on how infectious it is, how many people have been infected, the fatality rate, how it will be affected by warmer weather, etc., are extremely unreliable. In other words, we know almost nothing about the salient considerations.

This is in part due to lack of testing, and to inherent defects in the testing: those who get tested are disproportionately likely to be symptomatic, exposed, or hypochondriacal, leading to extreme sample selection biases. The tests are apparently unreliable, with high rates of false positives and false negatives. The RNA tests cannot detect past infections. It is in part due to the novelty of the virus. Is it like influenza, and will hence burn out when temperatures warm? Or not?

Another major source of uncertainty is due to the fact that the initial outbreak in China was covered up by the evil CCP regime. (Which now, in an Orwellian twistedness that only totalitarian regimes can muster, is boasting that it will save the world. And which is blaming the United States for its own abject failures. Which is why I insist on calling it the Wuhan Virus–so go ahead, call me a racist. IDGAF.) Thus, data from Ground Zero is lacking, or wildly unreliable. (Ground One–Iran–is equally duplicitous, and equally malign.)

This huge uncertainty regarding a major systematic factor leads to even greater discount rates–and hence to lower stock prices.

And then there is the truly disturbing factor. These textbook causal channels (lower expected cash flows, higher discount rates) have in turn caused changes in asset prices that force portfolio adjustments that move us into the realm of positive feedback mechanisms (which usually have negative effects!) and non-linearities. This represents a shift from “normal” times to decidedly abnormal ones.

When some investors engage in leveraged trading strategies, big price moves can force them to unwind/liquidate these strategies because they can no longer fund their large losses. These unwinds move asset prices yet more (as those who placed a lower valuation on these assets must absorb them from the levered, high-value owners who are forced to sell them). Which can force further unwinds, in perhaps completely unrelated assets.

Not knowing the extent or nature of these trading strategies, or the degree of leverage, it is virtually impossible to understand how these effects may cascade through the markets.

The most evident indicators of these stresses are in the funding markets. And we are seeing such stresses. The FRA-OIS spread (known in a previous incarnation–e.g., 2008–as the LIBOR-OIS spread) has blown out. Dollar swap rates are blowing out. The most vanilla of spreads–the basis net of carry between Treasury futures and the cheapest-to-deliver Treasury–have blown out. Further, the Fed has pumped in huge amounts liquidity into the system, and these alarming spread movements have not reversed. (One shudders to think they would have been worse absent such intervention.)

One thing to keep an eye on is derivatives clearing. As I warned repeatedly during the drive to mandate clearing, the true test of this mechanism is during periods of market disruption when large price moves trigger large margin calls.

Heretofore the clearing system seems to have operated without disruption. I note, however, that the strains in the funding markets likely reflect in part the need for liquidity to make margin calls. Big margin calls that must be met in near real-time contribute to stresses in the funding markets. Clearinghouses themselves may survive, but at the cost of imposing huge costs elsewhere in the financial system. (In my earlier writing on the systemic impacts of clearing mandates, I referred to this as the Levee Effect.)

The totally unnecessary side-show in the oil markets, where Putin and Mohammed bin Salman are waging an insane grudge match, is only contributing to these margin call-related strains. (Noticing a theme here? Authoritarian governments obsessed with control and “stability” have a preternatural disposition to creating chaos.)

Perhaps the only saving grace now, as opposed to 2008, is that the shock did not arise originally from the credit and liquidity supply sector, i.e., banks and shadow banks. But the credit/liquidity supply sector is clearly under strain, and if parts of it break under that strain yet another round of extremely disruptive knock-on effects will occur. Fortunately, this is one area where central banks can palliate, if not eliminate, the strains. (I say can, because being run by humans, there is no guarantee they will.)

Viruses operate according to their own imperatives, and the imperatives of one virus can differ dramatically from those of others. Pandemic shocks are inherently systematic risks, and the nature of the current risk is only dimly understood because we do not understand the imperatives of this particular virus. Indeed, it might be fair to put it in the category of Knightian Uncertainty, rather than risk. The shock is big enough to trigger non-linear feedbacks, which are themselves virtually impossible to predict.

In other words. We’ve been on a helluva ride. We’re in for a helluva right. Strap it tight, folks.

Apropos my earlier post on Erdoğan’s strategic brilliance, after Turkey’s army inflicted some serious damage on Assad’s armed forces, the Russians evidently made it clear that he would not be allowed to have his way in Idlib. So Erdoğan scuttled to Moscow, and emerged with a ceasefire agreement (not that he wanted one) which basically brought his campaign to a screeching halt.

The optics tell all. The fact that Erdo had to go to Moscow for one thing. But it was worse than that. Putin really rubbed the would-be sultan’s nose in it.

The same week a delegation from Zimbabwe–yes, Zimbabwe–visited Putin in the Kremlin. The entire delegation was seated. There was no statuary in sight.

When the Turkish delegation visited, all except Erdoğan were forced to stand. In front of a statue of Catherine the Great, no less, which had been moved into the room specifically for the Turkish delegation.

Catherine, of course, waged war against the Ottomans during her entire reign, and seized vast territories from them. Catherine epitomizes Russian domination of Turkey. As Russians well know–as do Turks.

After leaving the Turks to shuffle cravenly before Catherine’s bronze gaze for a few moments, Putin beckoned them to approach with a dismissive wave of his fingers, like he was calling his dogs. He was trying to humiliate. He succeeded.

Erdoğan has been flailing desperately for US and European support to counter Russia. Trump acknowledged that Turkey and Syria were fighting, but said he didn’t care.

In so many words: You’re on your own, Erdo! You made your bed with Putin, hope you stocked up on the KY.

The refugee gambit has only infuriated the Europeans. Not as if they would be willing to risk confronting Russia anyways.

Yes. Quite the genius Erdo is. Quite the genius.

In a reply to the Paul Romer post, ex-colleague and friend Scott points out the richness of Romer calling for a “new humility” among economists. But not all economists, mind you, just those who value freedom and express skepticism about regulation:

Among these pretend economists, the ones who prized supposed freedom (especially freedom from regulation) over all other concerns proved most useful—not to society at large but to companies that wanted the leeway to generate a profit even if they did pervasive harm in the process. 

This brings to mind Hanna Arendt’s observation: “One of the greatest advantages of the totalitarian elites of the twenties and thirties was to turn any statement of fact into a question of motive.” This is exactly what Romer does. He ascribes venal motives to those who dare disagree with his eminence. He has precious few facts in his article, but casts many aspersions on motives of those with whom he disagrees.

Romer again refers to economists plural, but provides a single illustration–Alan Greenspan. To make him the Representative Agent for an entire swath of the economics profession is utterly ridiculous. He was the head of an economics consulting firm for decades before ascending to the Fed. He never held an academic appointment. He did not publish in peer-reviewed journals. He is an eminently bad person to serve as the epitome of regulation-skeptical economists.

Further, Romer has things exactly upside down. It was–and is–the pro-regulatory/pro-state/pro-government contingent of the economics profession (which has always represented a majority) that could have used, and could use, a dose of humility. Always dismissive of the knowledge problem, they believed that they could design regulatory and legislative schemes that would achieve superior outcomes, only to find out that unintended consequences are a bitch, and regulatory capture undermines the most well-intended schemes.

Indeed, in financial regulation in particular, major financial institutions play B’rer Rabbit, begging not to be thrown in the regulation briar patch, only to profit quite well from it.

In fact, it has long been government/regulation-skeptical economists who have counseled against hubris. In a book tellingly titled “The Fatal Conceit,” Hayek famously wrote: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

The main issue I’ve always had with this quote is that it clearly expresses what Hayek thought economics should do, but did not accurately express the views of the profession at large. Those who view economies and markets as complex systems, as emergent orders, are very dubious of their ability–or the ability of anyone–to impose their designs. But they are, and always have been, a minority.

Another example of a great economist who was humble about attempts to control such complex systems via government was Adam Smith, who famously said:

The man of system, on the contrary, is apt to be very wise in his own conceit [there’s that word again]; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it.

He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

In sum, Paul Romer is projecting. As Smith recognized centuries ago, and Hayek echoed many years later, it is the statists who need humility, and those who advocate a reliance on freedom often do so out of a humble conviction of the difficulty in even understanding the operation of complex systems, let alone controlling or regulating them.

Turkey’s president Recep Tayyip Erdoğan imagines himself to be a modern Ottoman sultan. Presumably he has in mind, say, Suleiman I (“The Magnificent”), but if he keeps it up he is more likely to be a reincarnation of Osman II.

The first object of Erdo’s imperial ambitions is nearby Syria, all but destroyed after 9 years of civil war–not that it was a paradise before 2011. Erdoğan supported the Muslim Brotherhood/Sunni jihadi anti-Assad forces early on, and worked hard to overthrow Assad. He failed: the Russian intervention in particular turned the tide in favor of Assad.

Erdoğan’s air force shot down a Russian SU-25 in November, 2015. This led to a tense standoff with Putin, and given the correlation of forces, Erdoğan was forced to back down. This led to a rapprochement with Russia, resulting in gas deals and most importantly an agreement to purchase S-400 air defense systems.

This mightily irritated the United States. Tensions between the ostensible Nato allies were already high in the aftermath of the July, 2016 coup, which Erdoğan blamed in large part on the US because of its giving asylum to erstwhile ally and subsequent arch enemy, Fethullah Gülen: Erdoğan believes that the coup was a FETO (Fethullah Terrorist Organization) plot.

Relations between Turkey and the US had been fraught since Erdoğan’s decision (when he was prime minister) to deny the use of Turkey to stage the 4th Infantry Division for the offensive against Iraq. Things have gotten progressively worse, as Erdoğan’s Ottoman pretensions have become progressively more grandiose. Moreover, the war on ISIS, which required the US to rely on the Kurds–the only force in the region that can fight its way out of a piss-soaked paper bag–further aggravated the relationship, because Erdoğan considers all Kurds terrorists too.

In sum, Erdoğan has been burning his bridges with the US for years. Decades even.

But now he needs us. The war in Syria has turned sharply against Turkey’s jihadist (Al Qaeda, actually) allies. Regime forces have made steady gains against the last rebel stronghold, Idlib. To try to stave off complete defeat, Erdoğan sent Turkish army units into the neighboring country.

Assad has responded predictably. He has bombed and shelled Turkish army outposts, killing dozens: last week, an airstrike killed 33 Turkish soldiers.

Assad’s calculus is quite simple and quite rational. He knows Russia has his back. Push comes to shove, if Erdoğan launches a full-scale offensive against Syrian Arab Army forces and their supporting militia units, Putin will almost certain order Russian forces (air forces in particular) to strike hard at Turkish units. So Assad has no compunctions about bombing Turkish forces. Indeed, he has an incentive to do so because this may bring the Russians in even more forcefully on his side.

Caught in a trap of his own making, Erdoğan is now spinning desperately–and pathetically–to find a way out. Amusingly, yesterday he asked Putin to “step aside” in Syria. Quite a plan there, Erdo! I’m sure Vova will graciously respond to your request!

Erdoğan is now appealing to the US for help–after years of chest thumping denunciations of the country. Most amazingly, he asked the US for Patriot air defense systems–presumably to shoot down Russian airplanes. (This further convinces me that the real purpose for the S-400s is to use against his own air force in the event of another coup.)

The Pentagon is adamantly opposed to this–good! But elements of the (Deep) State Department insanely and inanely want to accede to this request. FFS:

A senior State Department official is at odds with the Pentagon over sending additional military equipment to help Turkey fight against Russian-backed Syrian government forces, four people familiar with the matter tell POLITICO.

James Jeffrey, the U.S. special representative for Syria engagement, has been pressing the Defense Department to send Patriot missile defense batteries to Turkey to help it repel the Syrian government’s assault in Syria’s Idlib province, the people said. But Pentagon officials are worried about the global ramifications of a move they see as reckless.

Just to be clear: Jeffrey wants to run the risk of an armed confrontation with Russia to protect “rebels”–who happen to be, to a man, Sunni jihadis who are basically just rebranded Al Qaeda.

I have still to hear a remotely persuasive argument as to why the US should give a tinker’s damn about Assad winning in Syria, especially since the alternative is Al Qaeda in all but name. To risk a confrontation with Russia over this is beyond insane.

Erdoğan is also playing the refugee card in an attempt to force the pusillanimous Europeans to intervene on his behalf. What they would do–or are even capable of doing–is a mystery. But Erdoğan is desperate, and flailing about in the hope something or someone will save him.

All he is succeeding in doing is making the Europeans even more sick of him than they already are. Oh, and risking a naval conflict with Greece. As if he didn’t have enough fights on his hands.

Oh, and as if he didn’t have enough problems, Erdoğan has intervened militarily in the only country in the Middle East that could make Syria look at least somewhat functional–Libya. Moreover, he has intervened in opposition to the faction that Russia supports, thereby aggravating Putin either more, and making it less likely that Putin will “stand aside” in Syria.

There’s an acronym in the military–PPPPPP. Prior planning prevents piss-poor performance. Turkey’s new sultan is obviously unfamiliar with this. He plunged into Syria with little thought, and apparently no prior planning regarding Russian and Syrian countermoves, and his ability to counter those countermoves. And predictably, piss-poor performance has been the results.

It will be interesting to see how the US responds. Presuming that Trump overrules the lunatics in the State Department, I am guessing that the administration will give Erdoğan lip service, but leave him twisting in the wind.

Which raises the question of the political reaction within Turkey. A humiliated Erdoğan should be politically vulnerable, but he has succeeded in de-fanging the military and so the historical response to political failure in Turkey–a coup–is probably out of the question. The opposition in Turkey is divided, and its national leadership is hardly inspiring. The country is divided between the Rumelian fringe and the Anatolian heartland. Erdoğan still has strong support among the religious portions of the populace, especially in Anatolia. Meaning that I expect that he will be weakened, but will survive.

Indeed, I anticipate a crackdown on the opposition. The threat to dispossess the opposition CHP of its stake in İşbank  is perhaps a harbinger of such a move.

Watching Erdoğan’s pathetic, incompetent performance also highlights the pathetic, incompetent performance of the United States’ foreign policy elite, which viewed him as a harbinger of an enlightened political Islam that would prove a model for improved governance throughout the region.

They sure can pick ’em, can’t they?

Eminent economist Paul Romer has assumed the role of professional scold. A few years ago he excoriated other eminent economists (notably Robert Lucas) for “mathiness.” Now he is chastising the profession for enabling deregulation that has wreaked havoc across the land.

I have to say his essay is unpersuasive, not to say incoherent. One way of framing the issue is to contrast the view of Keynes:

Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

with that of Stigler (speaking of the passage of the Corn Laws):

economists exert a minor and scarcely detectable influence on the societies in which they live . . . if Cobden had spoken only Yiddish, and with a stammer, and Peel had been a narrow, stupid man, England would have moved toward free trade in grain as its agricultural classes declined and its manufacturing and commercial classes grew.

Romer is clearly in league with Keynes, rather than Stigler.

But he fails to make the case. This is true for many reasons. For one, he argues by anecdote, and hence his style is journalistic rather than rigorously scholarly. A few cherry-picked anecdotes–and Romer uses only three–are clearly insufficient to support Romer’s broader claim that the deregulation favored by many economists (not all) was on the whole baleful. There are entire areas of deregulation (e.g., transportation, telecommunications, restrictions on advertising) that he says nothing about, but which were the subject of massive scholarship in the 1970s and 1980s which demonstrated the inefficiency of the existing regulatory structure: the experience in these industries post-deregulation strongly supported the scholarship that criticized existing regulations.

One interesting example is pharmaceutical regulation, something that exercises Romer quite greatly. Sam Peltzman showed in the 1970s that efficacy regulation under the 1962 Drug Act amendments did not result in a reduction in the amount of inefficacious drugs introduced, but did reduce the rate of introduction of new, valuable therapies. All pain, no gain.

Romer has nothing to say about this.

With respect to pharma regulation, Romer blames the opioid crisis on “pliant pretend economist[s]” who “assume[d] the role of the philosopher-king—someone willing to protect the firm’s reckless behavior from government interference and to do so with a veneer of objectivity and scientific expertise.”

He doesn’t quote any economist, pretend, real or otherwise, playing the role of philosopher-king/academic scribbler whose frenzy regulators or legislators distilled into opioids. Instead, he says:

By the 1990s, such arguments were out of bounds, because the language and elaborate concepts of economists left no opening for more practically minded people to express their values plainly. And when the Drug Enforcement Administration finally tried to limit the distribution of these painkillers, pharmaceutical companies launched a massive lobbying effort in favor of a bill in Congress that would strip the DEA of the power to freeze suspicious narcotics shipments by drug companies. It is a safe bet that these lobbyists made their arguments to Congress in the language of growth, incentives, and the danger of innovation-killing regulations. The push succeeded, and the DEA lost one of its most powerful tools for saving lives.

Of course, during earlier eras, regulators allowed many industries to profit massively from products known to be harmful; Big Tobacco is the most obvious example. But until the 1980s, the overarching trend was toward restrictions that reined in these abuses. Progress was painfully slow, but it was progress nonetheless, and life expectancy increased. The difference today is that the United States is going backward, and in many cases, economists—even those acting in good faith—have provided the intellectual cover for this retreat.

So apparently, by highjacking the language economists prevented rational debate, thereby rendering legislators and regulators defenseless against predatory corporations.

Or something.

That is, not only does Romer fail to show that deregulation was on the whole detrimental, he also fails to show that economists had anything much to do with making it happen. He asserts the Keynesian line, but does not come close to proving it.

Indeed, the reverse is true. Romer’s argument actually supports Stigler’s claim, which can be “distilled” thus: money talks. Or to use Keynes’ term: vested interests talk. What economists said or didn’t say or how they said it or what language they said it in (English, Yiddish, Aramaic) was nothing, compared to the lobbying might of the pharma industry. So not only does Romer fail to identify any actual economist who advocated the policy that infuriates him, he fails to show that what any economist said meant squat for the outcome.

Indeed, this is precisely why a certain species of economists (Stigler, and well, yours truly) was/is so skeptical about regulation: it tends to favor the interests of the regulated. It always has, and it always will. Economic efficiency is a secondary consideration, and what economists have to say on the matter has little (if any) bearing on the outcome. If anything, Romer’s piece is a case for Public Choice economics. But that has implications that Romer would no doubt find inimical.

Romer’s other big anecdote is from the financial industry, namely the infamous Goldman Abacus transaction in which Goldman served as the middleman between John Paulson (who wanted to short US real estate) and a hapless German bank.

The stand in for all economists in this anecdote is one sorta economist: Alan Greenspan. Apparently, Greenspan was the Representative Agent for the economics profession. This is beyond simplistic. Insultingly so.

Another bogeyman in Romer’s telling is Michael Jensen:

Michael Jensen, an economist who helped reshape the U.S. financial sector in the late twentieth century. Jensen rightly worried about several problems that bedeviled the market, including how to keep corporate executives from promoting their own interests at the expense of shareholders. His proposed solutions—hostile takeovers, debt, and executive bonuses that tracked the share price of a firm, among other changes—were widely adopted.

Corporate shareholders saw their earnings skyrocket, but the main effect of the changes was to empower the financial sector, which Greenspan, for his part, worked doggedly to unfetter. As Lemann writes, Jensen’s ideas also helped chip away at the power of the traditional Corporate Man—the sort of executive whose pursuit of profit was tempered somewhat by a commitment to noneconomic norms, among them a belief in the need to foster trust and build long-term relationships across company lines. Taking his place was Transaction Man, who focused on little more than driving up share prices by any means necessary.

There is so much wild generalization here that I am at a loss of where to begin. For one thing, Jensen’s heyday was the 1980s LBO and hostile takeover boom, which had been largely stymied by regulation by the early-1990s, long before the Financial Crisis. (So much for the power of Jensen’s advocacy! Jensen’s hero, Michael Milken, was in jail, FFS.)

I am at a real loss to trace the connection between Jensen’s advocacy of measures to control managerial agency costs and, say, the real estate securitization boom of the mid-2000s. Romer certainly doesn’t lay out the road map. Here merely cites Jensen’s views and asserts some connection with those of Greenspan, and proclaims QED! The South Park Underwear Gnomes’ argumentation was tighter.

And again, what economists said was almost certainly irrelevant here. There were powerful forces–political as well as economic forces–behind the real estate boom and crash. Homeownership became a totem for politicians of both parties in the 1990s and 2000s. Wall Street was on board, because it realized this could be an engine for profit. Main Street financial institutions were on board for the same reason.

So what if Alan Greenspan was cool with this? If he hadn’t been, he wouldn’t have been around long. Economic and political interests found a convenient mouthpiece: the mouthpiece didn’t create the economic and political forces. At the end of the day, economists would not have mattered, and the financial sector would have gotten the mouthpiece it wanted.

This part made me roll my eyes:

the traditional Corporate Man—the sort of executive whose pursuit of profit was tempered somewhat by a commitment to noneconomic norms, among them a belief in the need to foster trust and build long-term relationships across company lines. Taking his place was Transaction Man, who focused on little more than driving up share prices by any means necessary.

Evidence for this “commitment to noneconomic norms, among them a belief in the need to foster trust and build long-term relationships across company lines” among 1960s-1970s corporate executives? None whatsoever. This is an ex cathedra pronouncement that bears no relationship to the reality of self-serving corporate management during this era–management that a 1970s Romer probably would have inveighed against as venal and self-serving (as many criticisms of managerial capitalism did).

No, the issue here is not Corporate Man vs. Transaction Man. It is Straw Man (Romer’s, specifically) vs. Reality.

Romer gives economists both too much credit, and too little. By painting all economists who criticized regulation (based on empirical evidence and theory) as stooges, he gives them too little credit. By blaming them for massive public policy failures, he gives them too much. If only we had such influence.

Does economics matter? Yes. Do economists matter? Not really. And the reason for these answers is the same. Economic considerations–distributive considerations in particular, as they operate through the political and regulatory system–drive political and regulatory outcomes. Economists can comment on this, analyze it, and even advocate particular outcomes. But their participation has as much effect on the outcome as a sportscaster’s does on who wins the Super Bowl.

Even as jaded and cynical as I am, I am agog at the hysterical reaction to the re-assignment of the Vindman twins. Note: re-assignment. They were not consigned to Gitmo or Devil’s Island or even Leavenworth. Hell, it’s unlikely that they will even draw a crap duty assignment. Thule, Greenland, say. They were active duty military personnel switched from one REMF duty assignment to another. Cry me a river. Then jump in it.

It goes with the territory.

But to hear the likes of Ben Wittes and other assorted ticks deeply embedded in the Deep State, this routine part of military life was the American equivalent of the Dreyfus Affair. One can just hear them: “J’accuse! J’accuse!”

At the very least, Tweedle-Alex and Tweedle-Yevgeny were opposed to the policies of the President of the United States. The President, as chief executive and commander and chief, has every right to expect those who are charged with carrying out his policies agree with them, or at the very least, put aside their personal differences and dutifully execute those policies to the best of their ability. If so doing offends their sense of honor, they should resign, or request re-assignment.

But there is evidence that Tweedle-A and Tweedle-Y did more than disagree intellectually with their commander-in-chief’s policies: they actively sought to undermine them. Indeed, there is a colorable case that they were at the very least insubordinate, and perhaps criminal, in going outside the chain-of-command to oppose the lawful authority of the CinC/chief executive.

In which case, their fate is far, far too kind.

The freak out over their “firing” is very revealing, no? Constitutionally, the case is crystal clear. The President has the clear Constitutional authority to assign these guys anywhere. He has the clear right to staff his administration with people who will implement his policies, and will not oppose him.

But the DC mafia clearly believes that positions in the National Security Council or other executive departments are sinecures beyond the reach of the chief executive. This lot considers the unelected bureaucracy to be the fourth branch of government, and indeed, not a mere co-equal to the executive, legislative, and judicial branches, but a superior branch.

There is no greater threat to the Constitutional order–and to liberty–than an overawing and unaccountable bureaucracy. Far more draconian measures are necessary than the mere reassignment of mid-level apparatchiks like the Tweedles.

Today’s news brings another example of the grandiosity of our unelected and unaccountable betters. The four prosecutorial thugs (who include veterans of Mueller’s posse who despite their clear animus and prejudice couldn’t find bupkus on Trump) who recommended the vindictive and punitive sentencing of Roger Stone to 9 years in prison (for doing no worse than James Comey, Andrew McCabe, James Clapper, and other assorted CNN and MSNBC flacks did) resigned in a huff after Main Justice objected to their recommendation–which occurred after Trump tweeted (how else?) his anger at their action.

Good riddance. If there is a god, it will start a trend. Only several hundred-thousand to go.

I can’t remember the last time I watched the State of the Union Address. It is usually just political onanism. But the prospect of a SOTU on the eve of an impeachment vote in the Senate was sufficiently unique that I tuned in last night, partly to observe how Trump handled it, but mainly to see how the Democrats did. There were no surprises.

Trump knew he was going to be acquitted, and had every reason to be magnanimous, gracious, and forward looking. And he was. Yes, he told some stretchers, but (a) he was usually within two standard deviations of the truth (a good performance by SOTU standards), and (b) had a good story to tell. So he told it, with what for him involved little bombast. By Trump standards in particular, he was reserved and contained.

Trump can indeed be small and petty (though he was not last night). Given that, it is quite the challenge to appear smaller and more petty. But the Democrats managed, appearing Lilliputian even in comparison to Trump at his pettiest.

Trump did the by now normal (post-Reagan) shout-outs to ordinary Americans whose stories personalized his political themes. And who could take issue with any of his ordinary American stories?

Well, the Democrats could, quite clearly. A centenarian Tuskegee airman–a sour, taciturn response. A young black girl given a scholarship–a sour, taciturn response. A recovered addict now gainfully employed and reunited with his family–a sour, taciturn response.

Normal people could not help but find these stories uplifting. So I guess that shows the Democrats in the House and Senate are not normal people, but are instead twisted partisan freaks whose hatred of Trump transcends normal human sentiments. They hate Trump so much that they cannot express love for ordinary Americans that he has embraced.

And nota bene: all of these people were African American.

Perhaps that explains the Democrats’ sourness. Yes, Trump threw plenty of red meat to his base (e.g., the awarding of the Medal of Freedom to Rush Limbaugh). But he also quite plainly went straight for the Democrats’ base, by making appeals to their single-most important constituency. Trump has already made inroads there, and I have no doubt that he built on that last night. Hence, the Democrats are afraid. Very afraid.

As a result, expect them to crank the racism charges up to 11. And not against Trump only–against you, if you have the temerity to support him, or even if you merely fail to engage in the most vituperous denunciations of him. We are in for a very ugly 9 months.

Of course the piece de resistance was Nancy Pelosi’s peevish and theatrical ripping of her copy of Trump’s speech after he concluded.

Expect to see that over and over and over again. It was not a good look, and the Trump campaign will remind you of that repeatedly.

There’s the old expression: never interrupt an enemy when he (or in this instance, she) is in the middle of making a mistake. And petty, peevish, partisan Pelosi made a big one. So do carry on, Nancy. It may play well in Smallville, but in other precincts, not so much.