Category: Books

Tobin Project Book on Regulatory Capture

By James Kwak

One of the last things I did in law school was write a paper about the concept of “cultural capture,” which Simon and I discussed briefly in 13 Bankers as one of the elements of the “Wall Street takeover.” The basic idea was that you can observe the same outcomes that you get with traditional regulatory capture without there being any actual corruption. The hard part in writing the paper was distinguishing cultural capture from plain old ideology—regulators making decisions because of their views about the world.

Anyway, the result is being included in a collection of papers on regulatory capture organized by the Tobin Project. It will be published by Cambridge sometime this year, but for now you can download the various chapters here. It features a lineup including many authors far more distinguished than I, including Richard Posner, Luigi Zingales, Tino Cuéllar, Richard Revesz, David Moss, Dan Carpenter, Nolan McCarty, and others. Enjoy.

Regression to the Mean, JPMorgan Edition

By James Kwak

I haven’t been writing about the JPMorgan debacle because, well, everyone else is writing about it. One theme that has stuck out for me, however, has been everyone’s reflexive surprise that this could happen at JPMorgan, supposedly the best and most competent of the big banks. For example, Lisa Pollock of Alphaville, who has provided some of the most detailed analyses of what happened, asked, “could this really happen under CEO Jamie Dimon’s watch?” Dawn Kopecki and Max Adelson at Bloomberg referred to “JPMorgan’s cultivated reputation for policing risk.” Articles about Ina Drew’s resignation are sure to point out her relative success at dealing with the financial crisis of 2007–2009.

“Highly intelligent women tend to marry men who are less intelligent than they are.” Why? Is it that intelligent men don’t want to compete with intelligent women?

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My Daughter Will Be CEO of the World’s Most Valuable Company Someday

By James Kwak

At least, that’s the impression I get from reading Walter Isaacson’s biography of Steve Jobs, which I finally finished this weekend. It’s not a particularly compelling read; it basically marches through the stages of his professional life, which is already the subject of legend, so there isn’t much suspense. I fear that it will inspire a new generation of corporate executives to imitate all of Jobs’s personal shortcomings—but without his genius.

The picture you get from the book is basically that Steve Jobs acted like a five-year-old for his whole life. He could be wrong about some basic, uncontroversial fact yet insist stubbornly that he was right. He divided the world into things that were great and things that were terrible, and his classifications could be arbitrary. He was an obnoxiously picky eater, constantly complaining about his food and sending it back. He threw epic tantrums that only a CEO (or a five-year-old) could get away with.

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Public Service: Why Nations Fail Crib Notes

By James Kwak

I’m reviewing Why Nations Fail for a print publication, so I’m out of basic courtesy I’m not going to preempt my review here. But if you’re like me and not an expert in the history of every part of the world, sometime around page 250 you probably got confused about where Acemoglu and Robinson discussed the Kingdom of Aksum as opposed to early modern Ethiopia or the Kuba Kingdom as opposed to the Kingdom of Kongo. After a while I created my own crib sheet, which I reproduce here for those who may find it helpful.

1. So Close and Yet So Different: Spanish Conquest, Jamestown, Mexico (19th century)

2. Theories That Don’t Work

3. The Making of Prosperity and Poverty: Korea, Kingdom of Kongo

4. Small Differences and Critical Junctures: The Weight of History: Black Death (14th century), early modern Western Europe

5. “I’ve Seen the Future and It Works”: Growth Under Extractive Institutions: USSR, Kuba Kingdom, Neolithic Revolution, Mayas

6. Drifting Apart: Venice, ancient Rome, Kingdom of Aksum (Ethiopia)

7. The Turning Point: England (17th-18th centuries)

8. Not on Our Turf: Barriers to Development: Spain, Austria-Hungary and Russia, China, Ethiopia, Somalia

9. Reversing Development: Dutch East Indies, Central Africa

10. The Diffusion of Prosperity: Australia, French Revolution, Japan

11. The Virtuous Circle: Great Britain, United States (Progressive movement and 1930s), Argentina

12. The Vicious Circle: Sierra Leone, Guatemala, American South, Ethiopia

13. Why Nations Fail Today: Zimbabwe, Sierra Leone, Clombia, Argentina, North Korea, Uzbekistan, Egypt

14. Breaking the Mold: Botswana, American South, China

15. Understanding Prosperity and Poverty: China, Brazil

Why White House Burning Is Wrong, Liberal Edition

By James Kwak

Dean Baker, a leading economic commentator and author of the Beat the Press blog, has written a review of White House Burning for the Huffington Post. Baker manages the admirable feat of being gracious and complimentary while delivering several serious criticisms of the book.

I’ll skip over the nice things he said and get to Baker’s main objections, of which I think there are three. The first is that long-term fiscal sustainability is the wrong problem to be focused on:

 “While the solutions do not especially upset me, I do very much disagree with the diagnosis of the problem. The most immediate issue is that we have a fire at the moment in the form of too little demand leading to too much unemployment. This is wrecking the lives of millions of workers and their families.

“Johnson and Kwak understand this and certainly do not argue for deficit reduction in the short-term, but their focus on a longer-term deficit problem can be distracting from the more urgent problem.”

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What Is This White House Burning?

By James Kwak

Loyal blog readers have surely noticed the new left-hand sidebar of the blog and may be wondering what this “White House Burning” thing is about. I wanted to give you a bit more background than the jacket flap copy you can read elsewhere.

You don’t have to know a lot of American history to know that the War of 1812 began two hundred years ago. Yet I doubt there will be much celebration, since it’s not a war we’re particularly proud of, like World War II, nor is it one that is particularly controversial, like Vietnam. Its most famous moment is perhaps the burning of Washington in August 1814, although it also gave us the phrase “We have met the enemy and they are ours” (Commander Perry, Battle of Lake Erie), the words to the national anthem, and the political career of Andrew Jackson, victor at the Battle of New Orleans.

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State of Nature

By James Kwak

I’ve been reading a lot of books lately, some of which I’ve mentioned here: The Submerged State by Suzanne Mettler, Invisible Hands by Kim Phillips-Fein, The Wealth and Poverty of Nations (finally) by David Landes, Exorbitant Privilege by Barry Eichengreen, and a pile of books on the national debt and deficit politics. (Despite moonlighting as a blogger, I find books more satisfying than the constant stream of newspapers, magazines, and blogs.) But my favorite book I’ve read in a while is Railroaded: The Transcontinentals and the Making of Modern America, by the historian Richard White.*

For some people, most notably Rick Perry but also much of the conservative base, the late nineteenth century was the golden age: of the gold standard, no income tax, senators elected by state legislatures, and, most importantly, little to no government “regulation” of business. White shows what that world was really like.

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What Government Aid?

By James Kwak

Earlier this year I wrote about a paper by Suzanne Mettler that included a survey showing that a large proportion of beneficiaries of government programs insist that they have never been beneficiaries of any “government social programs”—60 percent for the mortgage interest deduction and 44 percent for Social Security retirement benefits, for example. This provides ample evidence that “keep your government hands off my Medicare” is not a fringe opinion.

Recently, I read Mettler’s book, and there’s more to the story. One of her arguments is that hiding government programs in the tax code undermines the democratic system because it obscures the role that government plays in society. There were two quantitative examples I thought were particularly revealing.

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The Smugness of Unintended Consequences

By James Kwak

After my post on Corey Robin’s new book, a friend recommended Albert O. Hirschman’s Rhetoric of Reaction. As the title suggests, the book is about the rhetorical style of conservative thought dating back to Burke. Hirschman identifies three common tropes: perversity (that great-sounding progressive idea you have will have the opposite of its intended effect), futility (that great-sounding progressive idea won’t change anything, because you don’t understand the fundamental laws of the world), and jeopardy (that great-sounding progressive idea will destroy some other thing that we all agree is valuable, making everyone worse off in the end). Hirschman doesn’t dwell on this specific point, but it’s obvious that, similar to the argument Robin makes, these rhetorical devices can only exist in opposition to some progressive reform movement.

I thought the description of the contemporary form of the perversity thesis (e.g., welfare programs create poverty) was especially good. “Here the failure of foresight of ordinary human actors is well-nigh total as their actions are shown to produce precisely the opposite of what was intended; the social scientists analyzing the perverse effect, on the other hand, experience a great feeling of superiority—and revel in it” (Belknap Press, 1991, p. 36). This seems to me an accurate description of why the Economics 101 ideology is so powerful. People get a sense of superiority from owning counter-intuitive theoretical insights—even if those insights are wrong.

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Edmund Burke and American Conservatism

By James Kwak

It has become a truism that modern American conservatism is revolutionary in the sense that it seeks to overturn the established order rather than to preserve it. “Reagan Revolution,” “Tea Party”—the very names for the movement announce that is about more than defending the status quo. In the conservative worldview, America (or “Washington,” or the “mainstream media,” or some other powerful stratum) is dominated by a liberal-intellectual-academic-bureaucratic-socialist-internationalist (pick two or more) elite that must be overthrown. So in at least a mythical sense, conservatism is about restoration, which is something very different from “conserving” what exists today.

When did this happen? According to one view of the world, to which I have been partial in the past, there was once an ideology called conservatism that really was conservative in the narrow sense: that is, it counseled maintaining existing institutions on the grounds that radical change was dangerous. The Rights of Man and the Citizen may be great, but soon enough you have the Committee of Public Safety and the guillotine. On this reading of history, conservatism became radical sometime after World War Two, when it gave up accommodation with the New Deal in favor of rolling the whole thing back, ideally all the way through the Sixteenth Amendment.

In The Reactionary Mind,* however, Corey Robin has a different take: conservatism, all the way back to Edmund Burke, has always been about counterrevolution, motivated by the success of left-wing radicals and consciously copying their tactics in an attempt to seize power back from them. Conservative thinkers were always conscious of the nature of modern politics, which required mobilization of the masses long before Nixon’s silent majority or contemporary Tea Party populism. The challenge is “to make privilege popular, to transform a tottering old regime into a dynamic, ideologically coherent movement of the masses” (p. 43). And the way to do that is to strengthen and defend privilege and hierarchy within all the sub-units of society (master over slave, husband over wife, employer over worker).

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Happy Constitution Day

By James Kwak

(Actually, it was on Saturday.) I just read Invisible Hands: The Making of the Conservative Movement from the New Deal to Reagan (W.W. Norton, 2009), by Kim Phillips-Fein. It’s a history of the resistance from the business community to the New Deal and how it gave birth to at least one major strand of the modern conservative movement. One of Phillips-Fein’s major points is that the conservative movement is not just a reaction to the civil rights movement, the 1960s, and the women’s liberation movement (and Roe v. Wade). Those trends gave the conservative movement more energy and support, but business leaders had for decades been trying to build an intellectual and political movement that could reverse the New Deal. And while some of them talked about Christian values, what they really cared about were breaking unions and lower taxes.

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My Christmas Present

By James Kwak

For Christmas, Simon gave me a copy of Why the West Rules — For Now, by Ian Morris. I thought it was an amusing but flawed book and put it back on my shelf, but yesterday a friend told me that everyone was talking about the book and I should say what I thought about it. So here goes. (And bear in mind that I do have a Ph.D. in history — though no one has a Ph.D. in all of the history that Morris covers.)

First of all, it’s a fun read. It isn’t particularly engaging, and the narrative is pretty weak (not the author’s fault — it’s just that the history of all of human civilization just doesn’t make for a great story), but it’s filled with interesting historical facts and fills in all those gaps in your knowledge of ancient history. My knowledge of ancient history was mainly gaps, so it was news to me that Western civilization began not in Mesopotamia, as I was taught thirty years ago, but in the “Hilly Flanks” — an arc that runs mainly through Western Syria, Southeastern Turkey, and the Iraq-Iran border.

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Lessons from the Oracle

By James Kwak

[I wrote this post a month ago but just realized I never clicked “Publish.” It’s about a book that was published more than two years ago, though, so it shouldn’t have gotten any more stale.]

I recently finished reading Snowball, Alice Schroeder’s 2008 biography of Warren Buffett. It wasn’t a bad read, although at over eight hundred pages it was on the long side and began to seem repetitive; the impression I got was that Buffett had the same kinds of relationships with his family and friends for a long time, and not much changed over the decades.

The big question about Buffett for people like me — people who invest in low-cost index funds, that is — is whether he is smart or lucky. After all, since Burton Malkiel’s Random Walk Down Wall Street, the main argument against stock-picking skill has been that in a coin-flipping tournament featuring thousands of players (and with survivorship bias), someone is bound to win time after time after time.

The answer, at least the one from the book, is that Buffett is smart. And that shouldn’t be too surprising. I recently read a pile of papers about active mutual fund management, mainly from the Journal of Finance, and I’d say that while there’s no consensus per se, the general trend has been that there are some mutual fund managers who can beat the indexes and can more than cover their costs.* There aren’t many of them, they are outnumbered by the ones who do worse than the indexes, and they are probably hard for you and me to find, but they exist. And I say this despite the fact I didn’t want it to be true.

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How Dumb?

By James Kwak

In his latest column, “Dumbing Deficits Down,” Paul Krugman has harsh words for Republican nonsense about the budget deficit:

Today’s Republicans just aren’t into rationality. They claim to care deeply about deficits — but they’ve spent the past two years putting cynical, demagogic attacks on any attempt to actually deal with long-run deficits at the heart of their campaign strategy.

But he’s only slightly less harsh toward President Obama:

The president and his aides know that the G.O.P. approach to the budget is wrongheaded and destructive. But they’ve stopped making the case for an alternative approach; instead, they’ve positioned themselves as know-nothings lite, accepting the notion that spending must be slashed immediately — just not as much as Republicans want. . . .

the White House is aiding and abetting the dumbing down of our deficit debate.

In this context, this concluding passage from the book I just read seems appropriate:

U.S. political leaders now seem determined to follow Nero’s reputed example when setting budget policy. They dicker with trivial deficit reduction packages, and then on a regular basis stoke the fire by passing much larger tax cuts, while the long-term budget picture keeps getting worse. They know what is happening, as do the voters.

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