Terry Pratchett: How High Interest Rates Hurt the Poor

Part of the resistance to monetary policy remedies to serious recessions comes from the idea that high interest rates are inherently good. Not so. High interest rates are good for those earning them, and bad for those who are paying them. It is not clear that those who earn high interest rates are always morally more deserving than those who pay them. Through one of his fictional characters, Terry Pratchett gives this example of the suffering sometimes caused by high interest rates that make it hard to make good investments.  

The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.

Take boots, for example.  He earned thirty-eight dollars a month plus allowances.  A really good pair of leather boots cost fifty dollars.  But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars.  Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.

But the thing was that good boots lasted for years and years.  A man who could afford fifty dollars had a pair of boots that’d still be keeping his feet dry in ten year’s time, while a poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.

This was the Captain Samuel Vimes “Boots” theory of socioeconomic unfairness.

The upshot is that the good boots cost less if you can borrow to buy them at a reasonably low interest rate, but if you either can’t borrow at all, or can only borrow at a very high interest rates, you face high expenses either way: either paying high interest rates on the money you borrowed to buy good boots, or paying to replace the bad quality boots frequently. The rich effectively face low interest rates, while the poor face high interest rates.  

Stepping away from the difference in interest rates the poor face as compared to the rich, whatever the level of interest rates, the poor are likely to suffer more from a given increase in all interest rates simply because they are more likely to have a negative wealth position that makes them pay interest on net, while the rich are more likely to have a positive wealth position that enables them to receive interest on net. So it takes more to justify high interest rates than to say that they are always better morally and ethically than low interest rates. If high interest rates make the economic system as a whole work better, that could be a good justification. But when low interest rates would help the economic system as a whole work better, any complaints by those earning low interest rates as a result need to be counterbalanced by the benefits to those paying low interest rates. 

Hat tip to my brother, Joseph Kimball, for pointing me to this passage

Why You Should Care about Other People's Children as Much as Your Own

Here is a link to my 53d column on Quartz: “Why You Should Care About Other People’s Children as Much as Your Own.”

This column doesn’t just say we should care, it gives a plan for getting there. In particular, how we handle long-run fiscal policy can make a big difference to the level of altruism in our nation. 

You can see links to all of my other Quartz columns lined up in reverse chronological order here, and in order of popularity here. 

It's My Life; Let Me Live It!

The parts of political philosophy that make the biggest difference in the world are those that even kids know. When I was a kid, I often heard other kids say

It’s a free country, isn’t it?

What they meant was a distillation of what John Stuart Mill laid out in On Liberty, Chapter IV, “Of the Limits to the Authority of Society over the Individual” paragraph 7:

 The distinction between the loss of consideration which a person may rightly incur by defect of prudence or of personal dignity, and the reprobation which is due to him for an offence against the rights of others, is not a merely nominal distinction. It makes a vast difference both in our feelings and in our conduct towards him, whether he displeases us in things in which we think we have a right to control him, or in things in which we know that we have not. If he displeases us, we may express our distaste, and we may stand aloof from a person as well as from a thing that displeases us; but we shall not therefore feel called on to make his life uncomfortable. We shall reflect that he already bears, or will bear, the whole penalty of his error; if he spoils his life by mismanagement, we shall not, for that reason, desire to spoil it still further: instead of wishing to punish him, we shall rather endeavour to alleviate his punishment, by showing him how he may avoid or cure the evils his conduct tends to bring upon him. He may be to us an object of pity, perhaps of dislike, but not of anger or resentment; we shall not treat him like an enemy of society: the worst we shall think ourselves justified in doing is leaving him to himself, if we do not interfere benevolently by showing interest or concern for him. It is far otherwise if he has infringed the rules necessary for the protection of his fellow-creatures, individually or collectively. The evil consequences of his acts do not then fall on himself, but on others; and society, as the protector of all its members, must retaliate on him; must inflict pain on him for the express purpose of punishment, and must take care that it be sufficiently severe. In the one case, he is an offender at our bar, and we are called on not only to sit in judgment on him, but, in one shape or another, to execute our own sentence: in the other case, it is not our part to inflict any suffering on him, except what may incidentally follow from our using the same liberty in the regulation of our own affairs, which we allow to him in his.

The only problem with the retort “It’s a free country, isn’t it” is that in some countries the answer is “No, it isn’t.” So it is worth having an alternative slogan that works even when a country is less free than it should be:

It’s my life; let me live it! 

Why Economic Theory Predicts a Chronic Shortage of Nurses

The word “shortage” says more than you might realize. A shortage is when there is too little of something to clear the market at the going price. Thus, a shortage is a sign that the price is too low to clear the market. Usually, this is a temporary situation: the price adjusts upward and people quit complaining about a shortage and start complaining about high prices instead.  

There are two general situations in which a price might be too low to clear the market for a long period of time. One case is when the government imposes a price ceiling. For example, rent control leads over time to a chronic shortage of apartments.

The other general situation in which a price is chronically too low to clear the market is when there is only one big buyer or only a few big buyers in the relevant market. Having only one buyer is called monopsony. Having only a few buyers is called oligopsony. 

In any local commuting area, there are typically only a few hospitals, that account for a large share of all nursing employment–particularly for the higher-skill, higher-paid nursing jobs. Because each hospital is big enough to affect the wage in the local labor market, it worries about driving up the wage of nurses by hiring too many.  That is, the cost of the last nurse a hospital hires is not just the wage of that one nurse, but also the cost of the rise in the wage to all the other nurses it employs due to that extra hiring.

In other words, the hospital might be willing to pay a little extra to get one more nurse who is a little more reluctant to come back into the labor force, say, except that paying that higher wage to the one nurse would force it to pay more to all of its other nurses. 

Why doesn’t the same logic cause a doctor shortage? It is because doctors operate in a national labor market. Doctors make enough money that it is worthwhile for them to consider moving to other cities at some distance in order to take advantage of a modest percentage difference in pay. By contrast, nurses are often secondary earners in their families and so tied to one commuting area, or even when they are free agents,they make little enough money that the cost of moving to a whole new region to make a few percent more doesn’t seem very attractive.

Someone might object to my account of where chronic nursing shortages come from by saying it is a problem of too few spots available in programs that train nurses. Too few spots in programs training nurses would indeed reduce the supply of nurses, but should lead to complaints about nurses being expensive rather than complaints about a shortage of nurses. Yet for some reason, there are a lot more complaints about nurse “shortages” than about how expensive nurses are.  

The blue line is the frequency of the phrase “nurse shortage” in ngram viewer. The red line is the frequency of the phrase “expensive nurses." 

The blue line is the frequency of the phrase “nurse shortage” in ngram viewer. The red line is the frequency of the phrase “expensive nurses." 

The Wall Street Journal Editorial Board Comes Out for a Straight 15% Equity Requirement

Carmen Segarra’s secret tapes from inside the New York Fed prompted a Wall Street Journal editorial about financial regulation. (You can jump over the paywall by googling the title: “Regulatory Capture 101: Impressionable journalists finally meet George Stigler.”)    Here is one key passage:

The journalists have also found evidence in Ms. Segarra’s recordings that even after the financial crisis and the supposed reforms of the Dodd-Frank law, the New York Fed remained a bureaucratic agency resistant to new ideas and hostile to strong-willed, independent-minded employees. In government?

***

Enter George Stigler, who published his famous essay “The Theory of Economic Regulation” in the spring 1971 issue of the Bell Journal of Economics and Management Science. The University of Chicago economist reported empirical data from various markets and concluded that “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.”

But what is most striking is the Wall Street Journal's endorsement of a simple 15% equity requirement:

Once one understands the inevitability of regulatory capture, the logical policy response is to enact simple laws that can’t be gamed by the biggest firms and their captive bureaucrats. This means repealing most of Dodd-Frank and the so-called Basel rules and replacing them with a simple requirement for more bank capital—an equity-to-asset ratio of perhaps 15%.

This is much more important than any of the Wall Street Journal’s other recommendations in the article. I favor an equity requirement of 50%, implemented as a capital conservation buffer prohibiting firms with less equity and more leverage than from paying dividends, buying back stock or bailing out foreign subsidiaries under looser rules until the bank reachs that 50% equity to assets ratio. But a straight 15% would be a good start.

"The Geography of Financial Misconduct," by Christopher A. Parsons, Johan Sulaeman, Sheridan Titman →

The badness you do is not only bad in itself, it has offspring. This paper is interesting in providing some empirical evidence that being bad encourages others around you to be bad as well. Here is the abstract:

We find that a firm’s tendency to engage in financial misconduct increases with the misconduct rates of neighboring firms. This appears to be caused by peer effects, rather than exogenous shocks like regional variation in enforcement. Effects are stronger among firms of comparable size, and among CEOs of similar age. Moreover, local waves of financial misconduct correspond with local waves of non-financial corruption, such as political fraud.

Noah Smith: Render unto Ceasar

Rembrandt’s etching “The Tribute Money,” depicting the moment Jesus said “Render unto Caesar the things which are Caesar’s, and unto God the things which are God’s.”

Rembrandt’s etching “The Tribute Money,” depicting the moment Jesus said “Render unto Caesar the things which are Caesar’s, and unto God the things which are God’s.”

I am pleased to be able to put up another guest religion post by Noah Smith. I find this post especially interesting because it raises deep issues of individual libertarianism vs. group libertarianism vs. Utilitarianism.

This is Noah’s 8th guest religion post on supplysideliberal.com. Don’t miss the other seven days’ worth of Noah’s creations!

  1. God and SuperGod
  2. You Are Already in the Afterlife
  3. Go Ahead and Believe in God
  4. Mom in Hell
  5. Buddha Was Wrong About Desire
  6. Noah Smith: Judaism Needs to Get Off the Shtetl
  7. Why Do Americans Like Jews and Dislike Mormons?

Here is Noah:

Recently, the radio show This American Life had an episode called “A Not-So-Simple Majority,” about Hasidic Jews is a town called Ramapo, about an hour north of New York. Apparently what happened was that the Hasidic Jews moved in until they were a majority, then threatened to strip funding for public schools unless the local school board didn’t investigate what was being taught – or not taught – in the religious private schools the Hasids were running. Naturally, the school board takeover was accompanied by copious references to Hitler and the Nazis.

Another incident I noticed recently was an incident in which a Hasidic Jew refused to sit next to a woman on a flight – ultra-Orthodox Judaism requires that men view women not in their family as “unclean,” because they might be menstruating – which caused the flight to be delayed. I realized that if this disruption had been caused for other, non-religious reasons – say, because someone refused to sit next to a fat person, or a person of another race – the offenders would likely have been thrown off the plane. (Because the airline is a corporation, this may not sound like a church/state issue, but the airline was no doubt worried about legal issues, which brings in the state. And separation of church from public corporation is important for some of the same kinds of reasons that separation of church and state is.) 

These incidents illustrate the importance of separation of church and state, even in the case of religious minorities. The U.S. and other Western countries have a tendency to enforce separation of church and state more forcefully when the “church” in question is the nationally dominant religion (Christianity). This is a bad policy born of a good impulse – it’s important to protect minorities against the tyranny of the majority. But national dominance doesn’t equal local dominance, as the case of Ramapo shows. Another example is the battle over whether to allow Muslim communities to enforce sharia law in Canada.

This is a bad road to walk down. If religious minorities are given special license to violate the separation of church and state, there will be a number of negative consequences. First of all, it will provoke resentment among the religious majority, potentially leading to violent backlash or to the election of right-wing, intolerant politicians.

Second of all, it incentivizes the creation of more and more religious minorities, since these can expect to enjoy special rights and privileges. That in turn would lead to a Balkanized nation, in which religious communities rule everything, and very few people have a stake in civic life – imagine the airline brouhaha described above, but writ large, so that splintered religious communities simply refuse to allow public, cosmopolitan spaces to exist.

Finally, the Western value of equal treatment of individuals under the law is utterly violated if rights are accorded to groups rather than individuals. Affording rights to groups removes the government’s ability to protect individuals from “local bullies.” (In fact, I’ve argued that this is the big mistake modern American libertarianism makes.)

Jo Craven McGinty: Easy to Lose and Expensive to Produce: Is the Penny Worth It? →

The U.S. Mint makes billions of new one-cent coins every year—more than any other denomination. But the penny costs more than its face value to produce.

Like my graduate school advisor Greg Mankiw, I am for the abolition of the penny. This Wall Street Journal article gives good reasons why. If you hit the paywall, googling the title like this jumps over it. 

The problem with pennies isn’t just the cost of producing them, it is the extra time it takes to handle them. My former student Ed Knotek provides some evidence that there are costs to non-round transaction amounts in this paper. (There is no problem with individual items having non-round prices, if the total transaction amount rounded off. Ed’s evidence is that items that are often purchased individually, rather than as part of a basket, often are given round prices. Establishing that it is legally OK to round off transactions amounts to the nearest or next nickel is what getting rid of the penny is all about.)  

American Wizards

In H. W. Brand’s excellent book American Colossus: The Triumph of Capitalism, 1865-1900he retells this story from Lee Chew, “The Life Story of a Chinaman” (in the collection The Life Stories of Undistinguished Americans, as Told by Themselves, pp. 178-179). The moral of the story is that technology matters, and differences in per capita income matter.   

Even more compelling than letters were the actions of emigrants who returned home. Lee Chew grew up on a farm near Canton during the 1860s. Some of the neighbors had left for California, but Lee Chew’s father wished to keep him home and so told him stories of what “foreign devils” the Americans were. They were powerful, with great fire-belching ships and a kind of sorcery that allowed them to light the darkest night and communicate over long distances, but they lacked anything that passed for civilization. Their language was barbaric, they practiced all manner of violence, and they disrespected their ancestors. No correct-thinking Chinese should wish to go to America. Lee Chew had little reason to doubt his father, and he resigned himself to life as a Chinese farmer–until new evidence surfaced.

I was about sixteen years of age when a man of our tribe came back from America and took ground as large as four city blocks and made paradise of it. He put a large stone wall around and led some streams through and built a palace and summer house and about twenty other structures, with beautiful bridges over the streams and walks and roads. Trees and flowers, singing birds, water fowl and curious animals were within the walls. … When his palace and grounds were completed he gave a dinner to all the people, who assembled to be his guests. One hundred pigs roasted whole were served on the tables, with chickens, ducks, geese and such an abundance of dainties that our villagers even now lick their fingers when they think of it. He had the best actors from Hong Kong performing, and every musician for miles around was playing and singing. At night the blaze of lanterns could be seen for miles.

The lesson was lost on no one there, least of all Chew.

The man had gone away from our village a poor boy. Now he returned with unlimited wealth, which he had obtained in the country of the American wizards. … The wealth of this man filled my mind with the idea that I, too, would like to go to the country of the wizards and gain some of their wealth.

Barbara Oakley: How We Should Be Teaching Math

Given my efforts in “How to Turn Every Child into a ‘Math Person’" to figure out something helpful to say about math education, I was delighted not too long after to run across Barbara Oakley's Wall Street Journal op-ed

How We Should Be Teaching Math: Achieving 'conceptual’ understanding doesn’t mean true mastery. For that, you need practice.

(As with all Wall Street Journal articles, if you hit the paywall, just google the title. The Wall Street Journal lets you jump the paywall if you come from Google.) Here is the key passage:

True experts have a profound conceptual understanding of their field. But the expertise built the profound conceptual understanding, not the other way around. There’s a big difference between the "ah-ha” light bulb, as understanding begins to glimmer, and real mastery.

As research by Alessandro Guida, Fernand Gobet, K. Anders Ericsson and others has also shown, the development of true expertise involves extensive practice so that the fundamental neural architectures that underpin true expertise have time to grow and deepen. This involves plenty of repetition in a flexible variety of circumstances. In the hands of poor teachers, this repetition becomes rote—droning reiteration of easy material. With gifted teachers, however, this subtly shifting and expanding repetition mixed with new material becomes a form of deliberate practice and mastery learning.

I also especially like her conclusion:

Understanding is key. But not superficial, light-bulb moment of understanding. In STEM, true and deep understanding comes with the mastery gained through practice.

For anyone learning math, the key to learning is patience–patience with both with the mental training needed to become good at working through details and with moments of confusion that come along the way. Believe me, those who do math for a living (as I do in important measure) face many moments of confusion in our work. What makes a mathematician is patience and persistence through those moments–and often hours or days, and sometimes months–of confusion, as well as the hours of honing skills for getting mathematical details straight.  

John Stuart Mill on Other-Regarding Character Flaws (as Distinct from Self-Regarding Character Flaws)

One of the things people forget about John Stuart Mill's On Liberty is that he lays down rules for when society can appropriately apply social pressure against bad behavior as well as when society can appropriately use the apparatus of law to punish people. When what is at issue is the appropriate use of the powerful apparatus of social pressure, John feels it is appropriate to act against a wide range of anti-social acts and character flaws. The following passage from  On Liberty, Chapter IV, “Of the Limits to the Authority of Society over the Individual” paragraph 6, is an important list of antisocial acts and character flaws. I think we would have a better society if we all took seriously this list of things for which society can appropriately apply “moral reprobation”: 

What I contend for is, that the inconveniences which are strictly inseparable from the unfavourable judgment of others, are the only ones to which a person should ever be subjected for that portion of his conduct and character which concerns his own good, but which does not affect the interests of others in their relations with him. Acts injurious to others require a totally different treatment. Encroachment on their rights; infliction on them of any loss or damage not justified by his own rights; falsehood or duplicity in dealing with them; unfair or ungenerous use of advantages over them; even selfish abstinence from defending them against injury—these are fit objects of moral reprobation, and, in grave cases, of moral retribution and punishment. And not only these acts, but the dispositions which lead to them, are properly immoral, and fit subjects of disapprobation which may rise to abhorrence. Cruelty of disposition; malice and ill-nature; that most anti-social and odious of all passions, envy; dissimulation and insincerity, irascibility on insufficient cause, and resentment disproportioned to the provocation; the love of domineering over others; the desire to engross more than one’s share of advantages (the pleonexia of the Greeks); the pride which derives gratification from the abasement of others; the egotism which thinks self and its concerns more important than everything else, and decides all doubtful questions in its own favour;—these are moral vices, and constitute a bad and odious moral character: unlike the self-regarding faults previously mentioned, which are not properly immoralities, and to whatever pitch they may be carried, do not constitute wickedness. They may be proofs of any amount of folly, or want of personal dignity and self-respect; but they are only a subject of moral reprobation when they involve a breach of duty to others, for whose sake the individual is bound to have care for himself. What are called duties to ourselves are not socially obligatory, unless circumstances render them at the same time duties to others. The term duty to oneself, when it means anything more than prudence, means self-respect or self-development; and for none of these is any one accountable to his fellow creatures, because for none of them is it for the good of mankind that he be held accountable to them.

“Suicidal depression is a state of cold, agitated horror and relentless despair. The things that you most love in life leach away. Everything is an effort, all day and throughout the night. There is no hope, no point, no nothing.”