Soak the Poor, Feed the Rich

By James Kwak

After the dangerous clown show that has been the Trump White House, it’s comforting to return to some good, old-fashioned conservative policymaking: bashing the poor to cut taxes on the rich. I’m talking, of course, about the Republican plan to repeal and replace Obamacare.

Health care financing can sometimes seem like a complicated topic. Adverse selection, risk adjustment, blah blah blah. But it’s easy to understand the American Health Care Act or, as it is sure to be known, Trumpcare. In the medium term, financing policies have little effect on the price of health care. At most we can hope to “bend the [long-term] cost curve.” So health care policy essentially comes down to a single question: Who pays?

Continue reading “Soak the Poor, Feed the Rich”

Review Copies of Economism

By James Kwak

If you teach introductory economics or introductory micro, at either the high school or university level, and you’re interested in possibly using Economism in your class, let me know and I’ll send you a (free) review copy. Just email me at james.kwak@uconn.edu from your school account, tell me what class you are thinking of assigning the book to, and let me know your shipping address, and I’ll order a copy for you.*

Quick summary: The central theme of Economism is that some of the basic models taught in “Economics 101” have acquired disproportionate influence in contemporary society and are routinely and systematically misapplied to important policy questions. The problem is not that introductory models are wrong, but that too many people forget their limitations and believe that their simple conclusions can be reflexively applied to the real world. As Paul Samuelson said in the first edition of his textbook, the idea that “any interference with free competition by government was almost certain to be injurious … is all that some of our leading citizens remember, 30 years later, of their college course in economics.” In chapters on labor markets, taxes, trade, and other topics, Economism first walks through the implications of introductory models before explaining how a richer understanding of economic reality, including empirical research, teaches different and more interesting lessons.

If you worry that the typical first-year curriculum produces too many students who think unregulated markets are the answer to every problem, Economism may be the antidote you need. In the Financial Times, Martin Sandbu wrote, “Economics lecturers, take note: include [Economism] on your syllabus and set aside ample time to discuss its arguments in class.” The book has also received praise from many economists including Ian Ayres (Yale Law School), Jared Bernstein (former chief economic adviser to Vice President Joe Biden), Heather Boushey (chief economist, Washington Center for Equitable Growth), Simon Johnson (MIT Sloan; former chief economist, IMF; and my frequent co-author), Dani Rodrik (Harvard), and Noah Smith (Bloomberg View).

For more about the book, you can visit economism.netThe Atlantic also published an excerpt. (It’s basically the first half of the labor market chapter, on the minimum wage; the second half of that chapter deals with the compensation of very high earners.) And again, email me if you want a review copy.

(Note: I’m not doing this for the money; I’m doing it to get the book in the hands of as many students as possible. I have donated all of my royalties from 13 BankersWhite House Burning, and Economism to charitable organizations. I can’t anticipate my financial situation for the rest of my life, but I will donate all royalties from Economism for at least the next five years.)

* The fine print (updated): In the past twelve hours, the large majority of requests I’ve gotten have not actually been from people who teach introductory economics classes, so here are some clarifications:

  • You know how publishers send you review copies of textbooks, hoping that you’ll assign them to your students? This is the same thing. That’s why I ask that you tell me what class you might use the book in. If it isn’t introductory economics or introductory micro, or if you don’t specify a class, I may send you a review copy, but only after seeing how many requests I get from people who are teaching those classes.
  • I’m not actually going to try to check what your teaching schedule is, so this is on the honor system. But please remember that I’m paying for these books, not the publisher.
  • Let me know if you prefer hard copy or Kindle. If the latter, I need to know the email address of your Amazon account.
  • Non-U.S. requests: I can’t send hard copies outside the U.S. because I’m ordering the books individually from Amazon. (It’s too much work for me to mail them individually.) I can send you a Kindle copy. So please send me the email address of your Amazon U.S. account; I don’t think the book is for sale from most other Amazon subsidiaries, and in any case I’m buying the books with my Amazon U.S. account.

 

Why Is Connecticut Giving Its Employees’ Money to the Asset Management Industry?

By James Kwak

In general, the State of Connecticut offers pretty good defined contribution retirement plans to its employees. Most importantly, it offers several low-cost index funds in institutional share classes. For example, you can invest in the Vanguard Institutional Index Fund Institutional Plus Shares, which tracks the S&P 500 for just 2 basis points, or the TIAA-CREF Small-Cap Blend Index Institutional Class, which tracks the Russell 2000 for just 7 basis points. Administrative fees are unbundled, and are only 5 basis points. For no good reason I can discern, however, you can also invest in actively managed stock funds like the JPMorgan Mid Cap Value Fund, which costs 80 basis points.

As I’ve previously said, I have mixed feelings about target date funds. In principle, they do the reallocation and rebalancing for you, so they could be appropriate for people who want to make one choice and then forget about their investments (which, in many ways, is a good strategy). The hitch is that a target date fund is only as good as the funds inside it. Fidelity, for example, puts twenty-five different funds inside one of its target date funds, including thirteen U.S. stock funds, eleven of which appear to be actively managed. This is just a clever way to sneak expensive active management back in through the back door.

The Connecticut retirement plans do have target date funds, but luckily they use Vanguard’s versions, which are made up of index funds and only charge 14–16 bp (as opposed to 77 bp for the Fidelity Freedom 2040 fund) … until now. As of February, the Connecticut defined contribution plans are switching away from Vanguard to something called “GoalMaker,” which takes your money and spreads it out among the various funds offered by the plan—including those expensive, actively managed funds. For example, if you say you have a moderate risk tolerance and want to retire in 2034, it puts your money in fourteen different funds—including six U.S. stock funds, three of which are actively managed.

This is just fake diversification. On one level, it may seem more prudent to have money in both the Vanguard S&P index fund and the Fidelity VIP Contrafund Portfolio (wow, “VIP,” that must be special!). But mutual funds are already diversified—particularly index funds. If you have some reason for thinking that the VIP Contrafund Portfolio will beat the index, then you might choose to invest in it—but, in fact, it’s trailed the S&P 500 over 1, 3, 5, and 10 years.

Most likely, the people who are currently invested in Vanguard target date funds will get shifted into GoalMaker portfolios. They will pay several times as much in fees for basically the same thing, except with a little additional risk due to managers’ attempts to beat the market. It’s hard to see how this makes anyone better off—except the asset managers themselves.

The Right to Have Rights

By James Kwak

There’s a story you hear often these days. The story is that America has too many lawsuits: too many lawyers, too many people filing frivolous suits, too many excessive damages awards by juries, and so on. This story is the reason for all the “litigation reform” in recent decades: the Private Securities Litigation Reform Act of 1995, Prison Litigation Reform Act of 1996, the state-level tort reform movement, Bell Atlantic v. TwomblyAshcroft v. Iqbal, and so on.

There are two problems with this story. The first is that it isn’t true. Take medical malpractice, for example—a frequent target of tort reform advocates. Only a tiny fraction—probably under 2%—of people harmed by negligent medical care actually file suit. Of suits that are filed, according to an after-the-fact review by unaffiliated doctors, 63% involved errors by doctors, and another 17% showed some evidence of error. According to the most basic economic theory of torts, we want people harmed by negligence to sue, because otherwise potential defendants (doctors, companies, etc.) will not have sufficient incentive to make the efficient level of investments in preventing injuries. In short, it is highly likely that we suffer from not enough lawsuits, not from too many lawsuits.

The second problem is more important, however. That problem is that while the costs of litigation are real—not just money but also defensive medicine, intimidation of startups by patent trolls, intimidation of the media by billionaires—the exclusive focus on costs overlooks the crucial role of litigation in our democracy. That is the focus of the new book In Praise of Litigation by Alexandra Lahav, a colleague of mine at the University of Connecticut School of Law. (The book is also where I got the statistics in the previous paragraph.)

Continue reading “The Right to Have Rights”

Economism and Economics

By James Kwak

One point I try to be clear about in my new book is that economism—the assumption that simple Economics 101 models accurately describe the real world—is not the same as economics. There are people who think that all of economics, or at least all of modern, mathematically inclined, “neoclassical” economics, is at fault for the growth of neoliberal capitalism and the increase in inequality in rich countries. I am not one of them.

In my mind, the problem is knowing just a little bit of economics—the proverbial little bit of knowledge. (My favorite form of that proverb, despite its religious origins, is the following: “A little knowledge is apt to puff up, and make men giddy, but a greater share of it will set them right, and bring them to low and humble thoughts of themselves.”) When you learn more economics, you learn that the world has more than just supply, demand, price, and quantity.

Matt Yglesias has even tried to argue that “on a whole lot of issues the basic econ 101 view supports the liberal position.” I think he’s exaggerating his point—on a whole lot of issues, Economics 101 tells you that market failures are possible, but that doesn’t necessarily dictate a liberal policy outcome. But whatever is actually in an introductory textbook, the problem is that what people think they remember—or what people who never took economics think the subject teaches—is that competitive markets produce optimal outcomes. As Paul Samuelson wrote in the first edition of his textbook (and I never tire of quoting), the idea that “any interference with free competition by government was almost certain to be injurious … is all that some of our leading citizens remember, 30 years later, of their college course in economics.”

The historical development of economism, and its divergence from economics, is the subject of chapter 3 of my book, and also of my new article in the Chronicle Review. The article also includes some of my thoughts on how the teaching of economics might be modified to give students a richer and more balanced understanding of the discipline. For more, head on over there.

Economism and the Law

By James Kwak

Economism—the simplistic, unreflecting application of Economics 101 models to complex, real-world issues—is particularly influential in the law, including both legal academia and actual court opinions that decide important questions.

https://twitter.com/Noahpinion/status/821440674675335168

Noah Smith, for example, points to a paper by a law professor arguing that forced prison labor deters crime because it effectively raises the price of crime in a supply-and-demand model. The problem with this model is that it doesn’t accurately describe criminal behavior. Smith quotes economist Alex Tabarrok on what happened when the United States dramatically increased the harshness of punishments:

In theory, this should have reduced crime, reduced the costs of crime control and led to fewer people in prison. In practice … the experiment with greater punishment led to more spending on crime control and many more people in prison.

Continue reading “Economism and the Law”

Economism and Health Care

By James Kwak

A core feature of competitive markets, according to the basic model, is that they allocate goods to the people or companies that are willing to pay the most for them. In theory, and in many situations, this is a good thing: If I am willing to pay $1,000 for a custom portrait of my (daughter’s) dog, and you are only willing to pay $1 for it, then aggregate satisfaction is likely to be higher if I get the portrait. But not always: If I am willing to pay $10 for a turkey sandwich, but you are only willing to pay $1 because you only have $1, and have no borrowing capacity, then society may very well be better off if you get the sandwich. Yet in an ordinary, healthy market, I get the sandwich.

This problem is acutely apparent when it comes to health care. People place a high value on not dying, but when it comes to the allocation of medical treatment, they can’t bid more than their income allows. The obvious result is that markets deliver unnecessary procedures to rich people while denying essential care to poor people—because that’s what markets do. Obamacare attempted (with mixed success) to mitigate this problem. The Trump administration is rhetorically committed to deregulating health insurance; the question is whether they are willing to accept the political consequences of pricing millions of people out of not dying.

This is the topic of my new guest post, “Health Care and John D. Rockefeller’s Dog,” on Econbrowser (a fabulous economics blog, by the way, written by Menzie Chinn and James Hamilton). For more, head on over there.

Conflicts and Corruption

By James Kwak

To be clear, the idea that Donald Trump will be president while he or his children effectively own a company that does business all over the world is preposterous. (Quick primer on trust law: A trust is managed its trustees for the benefit of its beneficiaries. In this case, we know the trustees include two of Trump’s children, and the beneficiary is likely to be either Trump or his children.) If people, companies, and foreign governments want to pay bribes to the president of the United States, they need only give favorable deals to the Trump Organization. An in any of his official actions, the president will have the temptation to do what’s right for his company, not for the country.

The point I wanted to make in my Atlantic column today, however, is that this is just the most obvious and egregious example of the larger problem of corruption: government officials acting in the interests of themselves, their family and friends, or their business associates. The example I focus on is estate tax repeal, because that one thing alone would be worth more than $1 billion to the Trump family. It’s a classic example of a president doing what’s in his own personal interests and the interests of his core constituency of gazillionaires, while pretending it’s for the good of the country.

Betsy DeVos is another great example, perfectly illustrated by this graphic from the AFL-CIO:

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The way American politics works is that people and organizations with money—today, largely billionaire families—invest in politicians and demand policies that favor their private interests. Donald Trump just eliminated the middlemen—not only winning the presidency, but also inviting fellow billionaires like DeVos into his cabinet. This is why, beyond the ongoing catastrophe that is the Trump presidency (which technically hasn’t even started yet), we still need to fix our democracy, so everyone has an equal say in our government.

For more, see the full article in The Atlantic.

Economism Typo Contest

By James Kwak

Today, you may be getting your copy of Economism: Bad Economics and the Rise of Inequality in the mail. Or you may even be able to buy it in a bookstore. But before you crack it open, I want to tell you something.

I hate typos.

I try to read each of my book manuscripts carefully before submitting them. I hire my own line editor to go through my writing for grammatical and stylistic errors. The publisher then does a copy edit. When I get the “galleys” back from the publisher, I hire my own proofreaders to scour them again for mistakes. But inevitably typos sneak into the published books. Here’s one from 13 Bankers:

20170108_205851

(That should be “economic policy,” in case you’re wondering.)

Furthermore, I am almost incapable of reading anything that I’ve written before. It’s just too boring when you already know what the next sentence is going to say; at best I can skim. So it’s very hard for me to catch mistakes in anything that I’ve published. Out of sympathy to my fellow writers, I often circle typos when I find them in books that I am reading. Sometimes I even email the author out of the blue with a list of mistakes, if there is still time to fix them in the paperback version.

So, before you start reading, I’d like you to know about the Economism Typo Contest. If you are the first person to find and tell me about a mistake, I will send you a limited edition, spiral-bound, 5×8 notebook with the jacket cover of Economism on the front (signed on the inside if you like). Or, if you prefer, I will pay you ten dollars in cash money.

The detailed rules and instructions for submitting mistakes are over at the version of this post over at Medium.

Thanks for your help.

Economism and the Future of the Democratic Party

By James Kwak

I haven’t written much about the election itself (except to point out that the same data can be interpreted in diametrically opposing ways). That’s because the election was so close that the fact that Clinton lost can be explained by any number of but-for causes, and much of the Democratic Internet has been a cacophony of people insisting that their preferred cause (Comey, Russian hacking, not enough attention to African-Americans, too much attention to minorities, not enough attention to the white working class, too much emphasis on Trump’s personality, etc.) was the One True Cause.

I do think, however, that if Democrats (a group in which include myself) want to return to power and change the overall political dynamics of this country, one thing we need to recognize is that Republicans have been crushing us on the economic messaging front for decades. We have adapted by becoming Republicans Lite—no longer the party of jobs and the working person, but now the party of minimally intrusive market regulation, technocratic expertise, and free trade agreements.

This is the subject of my article in Literary Hub today, “The Failure of Democratic Storytelling.” Now that Democrats are out of power virtually across the board, we have the opportunity to develop a new vision, without having to compromise with Joe Manchin, Arlen Spector, and Susan Collins to squeak legislation through Congress. The question is what we make of that opportunity.

A Change Is in the Air

By James Kwak

There was one moment, when I was finishing up the manuscript of Economism, that I thought someone had already said what I was trying to say in the book. This is what I read:

“The beauty and the simplicity of such a theory are so great that it is easy to forget that it follows not from the actual facts, but from an incomplete hypothesis introduced for the sake of simplicity. … The conclusion that individuals acting independently for their own advantage will produce the greatest aggregate of wealth, depends on a variety of unreal assumptions …

“Individualism and laissez-faire could not, in spite of their deep roots in the political and moral philosophies of the late eighteenth and early nineteenth centuries, have secured their lasting hold over the conduct of public affairs, if it had not been for their conformity with the needs and wishes of the business world of the day. …

“These many elements have contributed to the current intellectual bias, the mental make-up, the orthodoxy of the day.”

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The Curse of Credentialism

By James Kwak

I just finished reading J. D. Vance’s memoir, Hillbilly Elegy. I don’t feel like adding to the torrent of instanalysis of the “white working class,” however, so I’ll just comment on the description of Yale Law School—which, in the book, serves the dramatic function of introducing the author to the Elite.

yale_law_school_in_the_sterling_law_building
Photo by Shmitra at the English language Wikipedia (CC BY-SA 3.0)

There are a few details that seem unfamiliar to me—I can’t recall attending a single one of the “cocktail receptions and banquets” that Vance describes as the school’s social rituals—but then again I was thirty-nine and married with a child when I started law school. But there is one thing that Vance nails: the culture of credentialism.

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Larry Kudlow and Economics in the Trump Administration

By James Kwak

Noah Smith (along with a fair section of the Internet) has some concerns about Larry Kudlow as chair of the Council of Economic Advisers: he’s overconfident, too much of a partisan, and fixated on nonexistent problems (e.g., inflation). I’m not so worried that he’s on Team Republican; after all, Donald Trump gets to pick the advisers he wants, and they shouldn’t be rejected solely because they take political sides. But I am worried about what Kudlow’s appointment means for the relationship between economics and policy.

The world is a complicated place. Anyone who studies society in depth should learn to have respect for that fact. At any given moment, we have only a hazy understanding of what combinations of transitory phenomena and underlying structural factors produce what outcomes. (For Exhibit A, see the election that took place on November 8.) This tweet at the beginning of Game 7 of the Cubs-Indians World Series, channeling the great French historian Fernand Braudel, is one of my all-time favorites:

Continue reading “Larry Kudlow and Economics in the Trump Administration”

How Not to Invest

By James Kwak

Forty years after John Bogle launched the Vanguard 500 Index Fund, passive investment funds now account for about one-third of the mutual fund and ETF market. You would think this would pose a threat to traditional asset managers that charge hefty fees for actively managed mutual funds, and this is true in part. On average, index funds charge 73 basis points less than active funds, and the average expense ratios for actively managed funds have fallen from 106 bp to 84 bp over the past fifteen years (Investment Company Institute, 2016 Investment Company Fact Book, Figure 5.6).

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Continue reading “How Not to Invest”

Jeb Hensarling and the Allure of Economism

By James Kwak

The Wall Street Journal has a profile up on Mike Crapo and Jeb Hensarling, the key committee chairs (likely in Crapo’s case) who will repeal or rewrite the Dodd-Frank Wall Street Reform and Consumer Protection Act. It’s clear that both are planning to roll back or dilute many of the provisions of Dodd-Frank, particularly those that protect consumers from toxic financial products and those that impose restrictions on banks (which, together, make up most of the act).

Hensarling is about as clear a proponent of economism—the belief that the world operates exactly as described in Economics 101 models—as you’re likely to find. He majored in economics at Texas A&M, where one of his professors was none other than Phil Gramm. Hensarling described his college exposure to economics this way:

“Even though I had grown up as a Republican, I didn’t know why I was a Republican until I studied economics. I suddenly saw how free-market economics provided the maximum good to the maximum number, and I became convinced that if I had an opportunity, I’d like to serve in public office and further the cause of the free market.”

Continue reading “Jeb Hensarling and the Allure of Economism”