Coordination Problem

"When You Kick a Tiger in the Ass, You Better Have a Plan for When He Turns Around"

|Peter Boettke|

This is part of the wisdom the great coach Bobby Knight provided to Trine University graduates last month.  Knight certainly isn't a perfect human being, but he never claimed to be.  All he wanted to do was be a great basketball coach.  And he was (is), perhaps the greatest college coach.  

Trine University Commencement Address by Coach Bob Knight from Trine University on Vimeo.

His form of "tough love" coaching is unfortunately dying.  When several years ago I was going through a state required coaching course for HS basketball coaching, Bob Knight was used as the example of 'what not to do'.  REALLY?, is all I could think about while watching the required video of "positive coaching".  But except for a short intervention to the course director that night (an old basketball coach who I knew well) that could only be described as 'snarky in the extreme' I kept my mouth shut and answer the questions asked as the state education board expected me to.

My particular taste in coaching style in tennis and in basketball was more teacher/instructor, than motivator.  My approach to emphasis skill development, and execution.  My mantra in basketball was speed, intensity and execution.  Hard to win if you are slow, sleepy and sloppy.  But in practices my goal was to raise intensity through competition, develop drills that worked skill at game speed, and established expectations of perfection.  In that sense I tried to be more like John Wooden (or at least the mythology around Wooden) than Knight.  I never received a technical (though I came up to the edge a few times) and I expected my players to conduct themselves with composure at all times.  Coach Larranaga at GMU says it is all about attitude, commitment, and class; and he has run his program along those lines with the result that in my mind he not only runs one of the best D1 basketball programs in NCAA, but is perhaps GMU's most valuable public face.  Coach L's program and his points of emphasis in his practices (which I have had the great opportunity to witness multiple times during my years at GMU) had a major influence on me.  Set high expectations, and in turn treat players with respect and as vital contributors to the team.  As one general wisdom says, treat people as if they matter, and they will. 

But like all coaches, I would at times yell and of course hold players accountable for mental errors (physical errors are part of all sports and it is stupid for coaches to complain about them).  But I tried to learn from the great coaches and try to focus on knowledge of how to compete, rather than complaining that my players are not trying hard enough (the ESPN announcer disease -- 'the losing team just didn't want it enough'; really?!).  Competitive athletes want to win every time they step on the court; when that goes away they stop being competitive athletes. But not every competitive athlete works smart to put themselves in a position to win.  This is where coaches by making adjustments can put their team (player) in a better position to win.

Coaches and players have to understand that there is no such thing as luck, what there is, is preparation.  All luck is, is when preparation meets opportunity.  And when it comes to stressing this point, nobody was (is) better than Bob Knight.  As he always stressed, it is not the will to win that matters, but the willingness to prepare to win that matters most.  And Knight, like all the great coaches, knows that his message to his players transcends sport, and emphasizes life lessons.

So his message to the graduates included such important points as:

-- observe; watch and listen to learn and you don't necessarily learn from talking;

-- don't ever be satisfied; satisfaction is the first step toward failure;

-- you win in sport (and life) by eliminating the things that cause you to lose;

-- preparation is the key to victory.

And, just remember, when you kick a tiger in the ass, you better have a plan for when that tiger turns around.

Holtz-Eakin and Smith on the Real Costs of Obamacare

Steven Horwitz

A new, and short, analysis by Douglas Holtz-Eakin and Cameron Smith looks at the effects of Obamacare on the deficit and US labor markets, focusing on the ways in which it will likely lead employers to drop health care coverage for lower and middle income workers and how it raises the effective marginal tax rate for those very same workers.

The key point on the total costs of Obamacare is that the CBO radically underestimated the number of people likely to take advantage of government insurance exchanges because they didn't account for the dynamic incentive effects of the subsidies for those who get insurance outside of their work and the penalities for employers who drop coverage. 

The basic question is whether it's cheaper for employers (and better for workers) if they drop insurance coverage and pay the penalty, but offer the employee additional wages/salary that, combined with the subsidy, enables them to both have health insurance and be better compensated than they were with the status quo ex ante.  In other words, is the sum of the pre-tax wage necessary to make the worker at least as well off and the $2000 penalty less than the cost of providing the employee with insurance?  They argue that it may well be for workers at 250% of the poverty line or less who have a fairly typical health insurance plan through their employer.  They conclude:

This suggests that there are about 43 million workers for whom it makes sense to drop insurance if the health plan costs the employer $11,941. CBO estimated that only 19 million residents would receive subsidies, at a cost of about $450 billion over the first 10 years. This analysis suggests that the number could easily be triple that (19 million plus an additional 38 million in 2014) – the gross price tag would be roughly $1.4 trillion.

If anyone was seriously naive enough to think Obamacare would be deficit-neutral or -reducing, this should be another wake-up call.  Add to this the fact that virtually every major social program of the last 50 years has ended up costing multiple times its original estimates, and you can see the nature of "the profound challenge we face."

Their analysis of the effective marginal tax rate effects is also worth reading.

The Profound Challenge We Face

|Peter Boettke|

I visited with Richard Cornuelle last Monday.  I have written before about how influential Cornuelle has been in my life and my work.  Cornuelle was Mises's research assistant at NYU in late 1940s, and he then worked at FEE and with the Volker Fund.  He is the author of many brilliant articles and books, focusing primarily on the role of non-market yet voluntary civil society, and the possibility of decentralized and non-hierarchical forms of business enterprise and entrepreneurship.  He also has a better understanding of the destructive influence of the "progressive" movement than anyone I have ever met.

During my visit, Dick gave me a copy of his book, Healing America: What Can Be Done About the Continuing Economic Crisis (1983).  Ironically, this is the one book of Dick's I had not previously read.  But as with Reclaiming the American Dream and De-Managing America, this book is full of brilliant insights and wonderfully written.

I particularly was struck by these paragraphs written in the context of the late 1970s early 1980s:

"The proposed fiscal prohibitions all represent some sound principle.  Government should not habitually monetize debt; government should not tax destructively; government should not grow so large as to crowd out the possibility of collective action outside of government."

"But these proposals are not cures; they are tardy preventatives masquerading as cures.  They may become practical after we have solved the problem, after the role of government has been reduced to a manageable dimension.  The enactment of such reforms could someday be one result of restoring institutional balance, but they could not bring that restoration about."

"Caps of whatever kind, put in place before the source of the fiscal pressure is confronted and relieved, will simply put new pressure on a system that is already showing serious signs of strain. ..."

"But these debates are premature.  Such constraints made sense before Americans came to depend on government for essentials it cannot deliver.  They may make sense again when these elemental dependencies have been corrected.  But now it is both too late and too soon for them.  Or, to reverse one of Lord Keynes' aphorisms, we cannot get thin by buying a smaller belt."

These paragraphs can be found on pp. 116-117 of Healing America in a chapter entitled "The Unmanageable State."  And to me they hit not only the supply side of government, but also the demand side.  In my opinion, only James Buchanan's "Afraid to Be Free" and Vincent Ostrom's The Meaning of Democracy and the Vulnerability of Democracies address this issue with the same profound understanding as Cornuelle.

I have repeatedly stressed on this blog the problem of deficits, debt and debasement and the need to identify the destructive policy cycle and to find institutional constraints to curb this natural proclivity of democratic politics.  But Cornuelle is right, we don't get thin by buying a smaller belt.  We have to address that demand side which puts expectations on what government is supposed to deliver for us.  This is a deeper cultural battle that we economists may in fact be ill-equipped to fight.  But we must.

Exonerating the Community Reinvestment Act (from causing the crisis anyway)

Steven Horwitz

In my various talks and written work on the financial crisis and the recession, I've taken pains to minimize the responsibility assigned to the Community Reinvestment Act for causing the high-risk loans that led to so much trouble.  This point often bothers many free market types in the audience/readership who are convinced the CRA was a major cause of the high risk loans that were the core of the problem.  I have responded by saying that what I knew of the empirical evidence showed that the CRA was a minor factor, if one at all.  Today, I came across a piece that really makes that case clearly and points to the relevant empirics.

Dwight Jaffee of the Berkeley Business School testified in front of a Congressional Commission on the crisis and the written version of his remarks are linked here (Note:  it's on Scribd and can only be printed off the web, not downloaded).  Those remarks are one of the best overviews of the role of housing policy and the various agencies that I've read since the recession began.  I recommend it highly.  He puts the blame squarely on Fannie and Freddie and the way in which they combined private profits with a public mission and an implicit government guarantee. 

But he also exonerates the CRA.  Based on a Fed study by Canner and Bhuta (2008) (and a similar study by Traiger and Hinckley in 2008 that reached similar results) that compared default rates and the like between zip codes that just qualified for CRA credit and those that did not, Jaffee reports:

Only 6 percent of identified subprime mortgages in 2006 were made to CRA-qualified borrowers or neighborhoods by CRA-covered institutions.

For loans originated between January 2004 and April 2008, the observed 90-day delinquency rates are actually slightly lower in zip codes that are CRA-qualified than for zip codes with median incomes that are just sufficiently higher to make them CRA-unqualified.

The reason why the CRA wasn't a factor is two-fold:  it does not cover non-bank lenders, such as mortgage and finance companies, which means all the high-risk loans originated from those sources (which were many) were taking place without CRA incentives.  They were much more about being able to sell them off to Fannie and Freddie.   Second, in theory, the banks to whom the CRA does apply still had to demonstrate their loans were "within the norms of safe and sound operation."

As Jaffee says, there may be lots of other reasons to not like the CRA, but that list should not include any responsibility for the financial crisis.  So folks, it's time to stop blaming the crisis on the CRA and get the attention back where it belongs:  expansionary monetary policy combined with GSEs with a government guarantee.

Ask the Professor on Mises and Today's "The Calling"

Steven Horwitz

It's a Horwitz two-fer today.

1.  Over at the Fraser Institute's "Ask the Professor" feature, my essay for this month is on Mises's Human Action and I'll be doing a live chat/Q&A at 2pm EDT at that same site.  Feel free to join us.  Here's an excerpt from that piece:

From Mises’ understanding of the subjective nature of knowledge, valuation, and choice, he attempted to build up a complete understanding of economics in Human Action, from the basics of how prices emerge from valuation and choice and monetary exchange to the business cycle to the problems with various forms of government intervention and the impossibility of socialist planning.  In all of these cases, the central insight was that the market was not a “place or a thing” but “a process.”  Markets, particularly the exchange of private property for money, were a way in which humans attempted to improve their perceived situations.  Markets were not, as they were being more frequently depicted in mainstream economics, simply places where consumers and producers met to maximize utility and profits respectively based on prices “given” to them.  The market was not, for Mises, a maximization machine; the market was a dynamic process of change, learning, and growth. 

2. This morning's Freeman Online column is titled "Two Structural Reasons Why Government Fails."  It's the third part of the trilogy that began with "Neither Evil nor Incompetent" and "Conspiracy-Theory Socialism."  A snippet:

Together the knowledge and Public Choice problems provide the structural critique of government that enables classical liberals to avoid the pitfalls of assuming malevolence, incompetence, or grand conspiracy.  This structural critique is robust precisely because it applies even if we assume politicians and bureaucrats are incredibly smart and well-meaning.

The European Debt Crisis Explained

Steven Horwitz

And you don't even need a PhD to do it, or understand it, courtesy of Australia's premier political satirists.

HT: My son.

What I Am Reading Tonight

|Peter Boettke|

J. M. Buchanan and R. Wagner. The Consequences of Mr Keynes. 1978.

H. G. Brennan and J. M. Buchanan. Monopoly in Money and Inflation: The Case for a Constitution to Discipline Government. 1981.

M. Friedman and C. Goodhart. Money, Inflation and the Constitutional Position of the Central Bank. 2003.

E. Butler. Ludwig von Mises -- A Primer. 2010.

Each of these titles were (are) published by the great Institute for Economic Affairs of London.  IEA has always played the important role of not only representing liberal ideas in the UK policy discourse, but in promoting sophisticated economic argument and the best of contemporary scholarship in economics.

I am also reading L. Kotlikoff's Jimmy Stewart is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking. 2010. 

I'd be very interested in a discussion among our readers (and Steve) on Kotlikoff's proposal or for that matter the older Chicago School proposal for monetary stability developed after the Great Depression.  I think that might produce a more fruitful discussion; I know it will produce a conversation that is more directly relevant to the problems the global financial crisis has thrust upon us.

A Little Bit of Good News

Steven Horwitz

With all the economic doom and gloom out there and folks thinking we're on the precipice of the decline of Western civilization, some good news about the bigger picture seems in order.  A new study in the British medical journal Lancet finds that mortality rates of children under the age of 5 are falling in just about every country on the planet. 

Using a new method of calculating mortality that they say is more complete and accurate than previous methods, the team at the University of Washington says the number of under 5 has plummeted from 11.9 million in 1990 to 7.7 million in 2010.

When we think about long-run human progress, the infant and child mortality rate is as good an indicator as any about how far we have come.  When we consider that almost half of children died before age 18 in the richest countries in the world 200 years ago, and that under-5 death rates 100 years ago were multiple times what we see now, the progress of humanity becomes clear.

Even as the economic challenges we face are very real, the world's increased ability to enable children to see their 5th birthday is equally real and I believe a much better indicator of where we are headed in the long run than is the price of gold or the Dow.  I'm a short-run cynic but a long-run optimist!

One side point:  some reports on this study have tried to make hay out of the fact that the US child mortality rate is 42nd in the world (having fallen from 29th).  The hay they want to make is usually about the failures of the US healthcare system.  However, that higher child mortality rate can be explained by two factors, one of which has nothing to do with healthcare and the other being an unintended consequence of how good our system is.

1. Kids in the US are more likely to die in car crashes and from violence as those are more common here than elsewhere.

2. Because the US healthcare system is so good at caring for very premature babies, more babies are born alive in the US pre-term than anywhere else in the world.  In the rest of the world, those babies would be stillborn or perhaps even aborted.  Because they are born alive in the US, they count in the denominator of the infant/child mortality rate.  And despite medicine's best efforts, a fair number of those premies don't make it, increasing the numerator.  The result is a higher infant/child mortality rate than other places because we are able to save enough premies that more get born alive than elsewhere. 

So the next time someone tells you that Cuba's healthcare system is better than that in the US because it has a lower infant mortality rate, the proper response is "yes, that's what happens when your system is so awful that you can't do much of anything for children born prematurely and your only choice is to deliver them stillborn.  If you think a system with more dead babies is better, you can have it."  A lower infant mortality rate doesn't mean you have fewer dead babies.  You just have fewer babies born alive.

Bonus Econ 100 point:  it's amusing how the reports note that the rate of decline in the infant mortality rate has leveled off in the advanced countries and the reporters gloss this as an indictment of those countries.  Rising marginal costs anyone? 

The Strength of Weak Ties Once Again

|Peter Boettke|

In 1973, the sociologist Mark Granovetter pioneered an understanding of how the market and commercial society operates.  The textbook neoclassical model of atomistic markets did not capture the reality of the social relationships that enable commercial society to function, and for individuals within that setting to achieve their goals --- from finding a job to starting a business.  Granovetter titled his idea "The Strength of Weak Ties" and built his idea not on the basis of neoclassical economics but on social network analysis.

A new article in Science raises the link between these social networks and generalized prosperity.  The greater diversity of social connections available, the greater the prosperity of the city or region under examination.  What do you think the implications of such a finding are for our understanding of the market economy and commercial society?  How do you think this finding compares to Mises's discussion of Ricardo's Law of Association?  How about to Adam Smith's and F. A. Hayek's discussion of the cooperation of strangers evidenced in the complex coordination of the division of labor required to produce the common woolen coat in Smith's time or a #2 pencil in Hayek/Friedman's time?  What do you see as the intellectual link between classical and new institutional (including market process) analysis of the market economy, and the sociological and social network analysis of the market economy?

HT: Karol Boudreaux

Quicksilver Capital or Bumper to Bumper Traffic Jam?

|Peter Boettke|

As "globalization" took off in the public imagination in the 1990s, many economists (myself included) viewed this not only as a great manifestation of the gains from trade, but also as a disciplinary check on politicians and policy.  Policies which are counter-productive to wealth creation will lead to capital moving away from the counter-productive and to the more productivity friendly policy regimes.  Countries will lose both creative people and capital when they adopt stupid policies, and attract them when they follow more "friendly" policies for creativity, entrepreneurship, and investment.  Globalization will discipline governments through a competitive process to attract a tax base, etc.  In short, a process analogous to the Tiebout process associated with local public economies is applicable to the global economy.  The best book on this, in my opinion, was Quicksilver Capital by Richard McKenzie and Dwight Lee.

Unfortunately, Tiebout competition can be derailed when there are effective mechanisms of collusion among the various levels of government.  The collusion among governments subvert the competitive pressures that Tiebout identified as my colleague Bryan Caplan demonstrated in one of his first academic papers.  As market-preserving federalism breaks down due to government collusion with respect to key policy variables, the discipline of competing for a tax-base is muted.  Capital doesn't exist as quickly.

In the NYT today Thomas Friedman argues the current global financial system is more analogous to bumper to bumper traffic where one accident can result in a long traffic jam, rather than continuous competitive pressure caused by the ability of individuals to move and investment in more favorable locations.

What do you think?  Are the forces of quicksilver capital defeated by the collusive behavior of leading governments to check the disciplinary competitive pressures for good economic policies?  Or do you think this is the wrong way to think about international political economy and globalization?