Laura Overdeck: Math for Pleasure

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A guest post by Laura Overdeck, whose theme is that kids might embrace and excel at math if we made it a part of playtime. The picture above is from one of Bedtime Math’s Crazy 8s club sessions called Glow-in-the-Dark Geometry. You can see Miles’s evaluation of statistical evidence for the efficacy of the Bedtime Math app here. Below are Laura’s words.

College-educated people aren’t afraid to read. When they open a newspaper article or blog post, they assume they’ll be able to read it. That’s because the content is written at roughly the 9th-grade reading level. But do we all feel just as solid on 9th grade math?  Clearly not, as restaurants now calculate the tip for customers – a task that requires only 5th-grade math skills. Americans are afraid to divide by 5. 

Our country bemoans its weakness in math on two levels. On the macro level, our students are regularly trounced by other countries on international tests. On the individual level, kids and adults alike get nervous about math and even despise it, making these test outcomes not all that surprising. As we collectively fret over curricula and lurch from one solution to another, we ignore a much larger piece of the puzzle: our sharp double standard in how we present reading vs. math to our kids. In launching the nonprofit Bedtime Math and navigating the world of early math, I’ve been stunned to discover how our society relentlessly stokes math anxiety – and often from birth.

Let’s quickly run some numbers. Kids live about 8,800 hours a year. Of that, they spend 1,200 hours in school, or fewer if it’s a typical 180-day year. Even if you chop out 3,000 hours or so for sleep, that still leaves far more waking hours spent outside school than in it. As we pound on our schools to perform better, what matters just as much is kids’ exposure to learning outside school. That includes playtime, mealtime, and regular family routines. And the fact is, math is not a big part of that equation.

It begins with our radically different approaches to numeracy and literacy. As Miles Kimball noted in his column “How to Turn Every Child into a “Math Person," if a child is struggling with reading, we don’t give up on him or her. Parents and kids do give up on math, however, eventually decaying to “I’m just not a math person.”  In fact, the more positive thinking about reading takes hold even before a child tries to read himself: most parents know to read bedtime stories at night, creating cozy rituals that lead kids to associate books with loving parental attention. Hence many of us read for pleasure as adults. Sadly, “math for pleasure” just isn’t a phrase we throw around.

That’s because most parents don’t do math for fun with their kids. My husband and I did do this, and frankly on a whim: when our first child turned two, we started giving her a little “bedtime math problem” alongside her bedtime story, simply because we both enjoy math. Together we’d count the ears and noses on her stuffed animals; as she grew, we advanced to a wild range of topics, from flamingos to ninja stunts to the chips in chocolate chip cookies. We rolled in addition, then subtraction, then a second child. Years later when our third child turned two, he ran in one night yelling that he wanted a math problem, alerting us that we’d unwittingly created a very unusual household. Math for pleasure is possible.

Friends urged me to share these enticing math problems, and so I launched Bedtime Math, plying porcupines and pillow fights as vehicles for numbers. The wake-up call came when I told people about the blog and get the reaction, “Ewww…math for little kids? How could you do that?” Would we ever say ewww about reading a book to a 6-month old? Is counting so different from learning the alphabet? And yet the time-honored way to fall asleep is to count sheep! But somehow, some parents had come to view counting as a borderline dangerous endeavor for kids.

Even when ambitious parents introduce math through books, they tack hard towards the serious. Among Amazon’s 100 top-selling educational books for children, not only are there three times as many reading/writing books as math books, but their difference in tone is night and day. The ABC books sport Bob, Dr. Seuss, Richard Scarry characters, and Mad Libs. By contrast, the math books are almost entirely workbooks, and “work” sure doesn’t sound like play. Note that parents see the list of top sellers before anything else, so they’re more likely to click on these workbooks and buy them, thus perpetuating the imbalance. What message does this send to kids about math? I’m proud to say that Bedtime Math has lived among Amazon’s top 20 kids’ math books since it was published, perhaps because it’s often the only playful option on the list. 

On the toy front, we again miss an opportunity to spark a love of math early in life. In Amazon’s current 100 bestsellers for babies and toddlers, which were admittedly wholesome, I counted exactly four even vaguely math-related toys: two shape sorters, a cash register, and the eternally fabulous Spirograph. Everything else was oriented towards music, arts and crafts, and bath splash. Again, we signal that math isn’t part of the fun. 

Thus, a lot of kids meet math for the first time in kindergarten, as they enter the world of homework, quizzes and tests. That’s probably not the most fun way to meet a subject for the first time. Not coincidentally, studies have shown that math anxiety can surface as early as age 5, right when kids start school. What’s worse is that this fear becomes a self-fulfilling prophecy: MRIs of people tackling math problems reveal that anxiety causes blockages that slow one’s working memory, making it harder to perform well. The resulting struggles propagate more math anxiety, and the cycle reinforces itself. 

The final nail in the coffin is our after-school infrastructure. Again, let’s run the numbers: Tens of millions of kids – about 60% of them – play organized sports. Nearly as many embark on music or art activities. I haven’t found hard data on book clubs, but such clubs are plentiful, with offerings from Scholastic, Disney and other nationwide players. There are a couple million Boy Scouts and nearly as many Girl Scouts. By contrast, each year only about 180,000 kids participate in arguably the top organized STEM recreational activity, FIRST Robotics. When you slice down to math itself, the fractions ratchet down even faster: only about 70,000 high schoolers compete in the American Mathematics Competitions (AMC), and about 40,000 in MATHCOUNTS. For elementary school kids, there’s no truly widespread or culturally popular offering, as confirmed by a search on Change the Equation’s database; only engineering initiatives pop up for nationwide K-5 activities. By offering only hardcore competitive options in the pure math space, we again signal that math is work intended only for hard-driving achievers, not a fun subject for everyone to enjoy.

In the face of this, we decided that Bedtime Math should create a truly “recreational” after-school club. Less than a year ago we launched our experimental Crazy 8s Club – deliberately without “math club” in the name, lest we send people screaming for cover. Unlike the competitive-worksheet, Olympiad-style clubs, kids in Crazy 8s explore math by building with glowsticks, competing in “Toilet Paper Olympics,” and playing bingo on a life-size board across the floor, all while engaging in fairly real math. The lively (and sneaky) branding seems to have worked: within just a few months we’ve received orders for over 2,000 kits, serving over 30,000 kids in grades K-5. No matter how hostile our culture around the subject, kids are clearly still hungry for fun math, and open to giving it a chance.

This gives me hope that broader change is possible. True, the challenge is enormous: more than one-third of Americans report that they’d rather clean the bathroom than answer a math question. Parents who didn’t like math during their childhood will be hard to convince to buy math toys for their own kids. They’re the same grown-ups sliding the check towards someone else, pleading, “Could you calculate the tip?” – and in front of their ever-observant children. But at Bedtime Math I’ve received some encouraging emails from such parents. They unload about how they hated math as kids, how they grew up to hate it as adults…but how in doing Bedtime Math with their own kids, they’re starting to enjoy math themselves for the first time ever. By returning adults to simple counting and single-digit addition, we can remind them that they are able to do math and should give it another try – not as work, but as play.

Photo of Laura Overdeck by Kathryn Huang

Photo of Laura Overdeck by Kathryn Huang

Cognitive Economics

The image above is a computer simulation of the branching architecture of the dendrites of pyramidal neurons from the Wikipedia article on “Mind.”

The image above is a computer simulation of the branching architecture of the dendrites of pyramidal neurons from the Wikipedia article on “Mind.”

Here is a link to an ungated copy of my paper "Cognitive Economics" as it appears in the Japanese Economics Review. By special arrangement with the Japanese Economics Review, this paper is in the public domain. The presentation I gave at the Japanese Economic Review conference for this conference volume is here. 

This paper is written in the same style as my more academic blog posts. So I count it as a major blog post as well as an NBER Working Paper. It just happens to be a blog post that you need to follow a link to see in full. (And sadly, like the typical blog post, despite diligent efforts, a few typos have crept through. The number and severity of typos I find will have to reach a certain critical threshold before I put the NBER staff to the work of putting together a new version. Please let me know if you find a typo)  

Let me give you a bit of a preview, in the form of an outline with one or more key quotations from each section and subsection:

I. Introduction

  • … research in “Cognitive Economics” has already been underway for a long time. But as a participant in this subfield, it seems to me that research in this area has been growing in recent years.

II. Defining Cognitive Economics

  • Cognitive Economics is defined as the economics of what is in people’s minds. In practical terms, this means that cognitive economics is characterized by its use of a distinctive kind of data. This includes data on expectations, hypothetical choices, cognitive ability, and expressed attitudes.

  • The name “Cognitive Economics” might initially sound as if it might be yet another synonym for Behavioral Economics … The most obvious difference is that Cognitive Economics is narrower. Behavioral Economics addresses a huge range of issues and cuts across all of the data types listed above, while Cognitive Economics focuses primarily on innovative kinds of survey data … Second, important pieces of Cognitive Economics are inspired by the internal dynamic of economics rather than by psychology.

  • … there is an obvious complementarity between Cognitive Economics and Behavioral Economics. Although it is possible to consider nonstandard theories of human behavior on the basis of standard data on market decisions alone, freeing up economic theory from traditional assumptions tends to increase the number of free parameters. There is a great value to additional data that can help pin down these additional free parameters.

  • … let me give my opinion on existing research and future directions in Cognitive Economics, organized around three themes: using data on hypothetical choices and mental contents (1) to identify individual heterogeneity, (2) to revisit welfare economics and (3) to study finite cognition.

III. Identifying Individual Heterogeneity

  • Heterogeneity across individuals in preferences and cognitive ability is not at all controversial. But data limitations have often forced economists to assume uniformity. Here the kind of data discussed above can do a lot to allow economists to capture some of the heterogeneity that exists.

IV. Revisiting Welfare Economics

  • The use of self-reported happiness to study welfare issues illustrates a key methodological issue in Cognitive Economics. Whenever a new measure is used, its relationship to standard concepts of economic theory is at issue.

  • It is possible, however, that happiness data could have a tight relationship to preferences even if the level of happiness does not. In particular, to explain the data, Kimball and Willis (2006) suggest that a large component of self-reported happiness depends on recent innovations in lifetime utility. Whenever people receive good news about lifetime utility, self-reported happiness temporarily spikes up; whenever people receive bad news about lifetime utility, self-reported happiness temporarily dips down. If true, this means that while it is questionable to use the level of happiness to infer preferences, the dynamics of happiness are informative about preferences and so can be used to inform welfare economics.

V.  Studying Finite Cognition

  • Moreover, to avoid the judgment Herbert Simon’s phrase “bounded rationality” can inadvertently suggest, I will refer instead to “finite cognition.”[3] Finite cognition means something more than just imperfect information—it means finite intelligence, imperfect information processing, and decision-making that is costly.

  • [3] Often, the inadvertent judgment suggested by “bounded rationality” is quite inappropriate. For example, if decision-making is actually costly, which is more “rational,” to choose in a way that takes into account the costliness of decision-making or to pretend that decision-making has zero cost? If one’s intelligence is actually finite, which is more rational, taking into account the limits on one’s intelligence, or pretending that one’s thinking power is unlimited? There is certainly a sense in which knowing and adjusting to one’s own limitations can often be the height of “rationality.”

  • finite cognition implies that even in the absence of externalities, welfare can often be improved by economic education, setting up appropriate default choices for people, or providing disinterested, credible advice. By contrast, explanations of puzzling behavior on the basis of individuals maximizing exotic preferences imply (if true) that welfare improvements must come in the standard way from addressing externalities, or in the case of inconsistent preferences, by taking sides in an internal conflict. Once puzzling behavior that is difficult to explain on the basis of standard economic theory is identified, it is hard to think of a more important question than whether people behave that way because they want to, or simply because they are confused.

A. The Reality of Finite and Scarce Cognition.

  • Although the inadequacies of our current tools can make it hard to study finite cognition theoretically, the claim that human intelligence is finite–and that finite intelligence matters for economic life—scarce cognition—is not really controversial.[4]

  • [4] There are many problems that are too hard for even very high levels of intelligence. For example, one of the problems with Bayesian updating is that, strictly speaking, it involves putting a positive probability on a much greater than astronomically huge set of possibilities. Various strategies of economizing on information processing are always essential in practice. Even the existence of a utility function itself is, in a sense, a technique of economizing on information transfer and processing. If evolution could process an infinite amount of information, and the genetic code could transmit an infinite amount of information, we could be endowed with decision rules embracing essentially all contingencies instead of mere objective functions and calculation capabilities.

B. Difficulties in Studying Finite Cognition with Standard Theoretical Tools.  

  • One key reason it is not easy using our standard theoretical tools to model finite cognition is the “infinite regress” problem emphasized by John Conlisk (1996). The infinite regress problem afflicts models that assume a cost of computation or other decision-making cost. The problem is that figuring out how much time to spend in making a decision is almost always a strictly harder decision than the original decision.

  • Costs to decision-making are a natural enough assumption for economists that a substantial percentage of all applied economic theory papers might include them, if it were not for the infinite regress problem. Finessing the infinite regress problem somehow is essential if economists are to develop effective theoretical tools for studying finite cognition. There are several feasible strategies for getting around the infinite regress problem—every one of which requires breaking at least one inhibition shared by many economists.

  1. Least transgressive are models in which an agent sits down once in a long while to think very carefully about how carefully to think about decisions of a frequently encountered type.

  2. A second strategy is to give up on modeling finite cognition directly and use models of limited information transmission capacity as a way of getting agents to make more imperfect decisions. In other words, one can accept the fact that our standard tools require constrained optimization with its implication of infinite intelligence somewhere in the model, but handicap agents in the model by giving them a “thick skull” that is very inefficient at transmitting information to the infinitely intelligent decision-maker within (that is, the perfect constrained optimizer within).

  3. A third feasible strategy is in the spirit of what the complexity theorists call “agent-based modeling. … This type of modeling substitutes the problem of agents that have unrealistically subhuman intelligence for the problem we have been focusing on of agents that have unrealistically superhuman intelligence. Despite this lack of realism, the results can be very instructive because the failure of realism is in the opposite direction from what economists are used to.

  4. I would like to focus on a fourth strategy for getting around the infinite regress problem–one that seems to me less commonly used: modeling economic actors as doing constrained optimization in relation to a simpler economic model than the model treated as true in the analysis. This simpler economic modeled treated as true by the agent can be called a “folk theory.“ … A folk theory should not be confused with the Folk Theorem of repeated game theory. I am talking about folk economics in the same sense as the well established ideas of “folk psychology,” “folk physics” and “folk biology.”

C. Modeling Unawareness Requires a Subjective State Space for the Economic Actor Distinct from the True State Space.

  • Dekel, Lipman and Rustichini (1998) argue for relaxing what they call the “real states” assumption as follows:

  • In standard state-space models, states play two distinct roles: they are the analyst’s descriptions of ways the world might be and they are also the agent’s descriptions of ways the world might be. If the agent is unaware of some possibility, though, ‘his’ states should be less complete than the analyst’s. In particular, the propositions the agent is unaware of should not ‘appear in’ the states he perceives.

  • Departures from the real states assumption would allow agents to have a different model of the economic situation in their minds than the maintained assumptions the analyst is using to model the situation of those very agents.

  • Note that if someone is successfully taught a more sophisticated model, this would involve an expansion in the individual’s subjective state space. If positive probabilities were accorded to the newly added states, this must necessarily involve a departure from Bayesian updating. Presumably it is also possible for people to “see the light” even without being explicitly taught. For example, the agent might be driven to entertain an expanded model if the probability of observed events conditional on the initial folk model ever appeared sufficiently low. We all recognize the practical importance of expansions in one’s subjective state space when in scientific contexts we say “Asking the right question is half the battle.”

D. Using Folk Theories to Model Finite Cognition: A Portfolio Choice Example. 

  • Clearly, the desirable properties for a modeled folk theory are quite different from the desirable properties for a theory proposed as a good approximation of reality. A folk theory need not be logically consistent at a deep level. Indeed, in representing reality, it may be a positive virtue for a folk theory to have logical inconsistencies of a form similar to the logical inconsistencies real people might have in their views of the world. Other than (a) descriptive accuracy as a reasonable representation of how people actually view the world, for theoretical purposes the key desirable properties for a modeled folk theory are (b) providing a clear prediction for how the people holding that folk theory will behave in various circumstances and © representing clearly what the people holding the folk theory are confused about and what they do understand. In terms discussed in Richard Herrnstein (1997)–particular in the chapters with Drazen Prelec–a folk theory should at least implicitly model the accounting framework that an agent uses, in addition to the objective function. Because it need not be logically consistent at a deep level, the argument for a folk theory can involve (correct reasoning about) logical leaps and plausible, though fallacious reasoning.

  • In reality, I am confident that people’s thinking about portfolio choice varies from person to person with a wild profusion of different kinds of misunderstanding. In most other contexts as well—at least where there is some complexity–any model that assumes everyone’s folk theory is of the same type is likely to be false. Realizing that people don’t always have the same mental model of a situation as the economist studying that situation is the first step toward facing the motley truth about people’s folk theories.

VI. Conclusion

  • Economic research using more and more direct data about what is in people’s minds is flourishing. But much more can be done. Fostering continued progress in this area of Cognitive Economics calls for three inputs. First, new theoretical tools for dealing with finite cognition need to be developed, and existing theoretical tools sharpened. Second, welfare economics needs to be toughened up for the rugged landscape revealed by peering into people’s minds. Third, the statement “The data are endogenous” needs to become not only an econometrician’s warning but also a motto reminding economists that new surveys can be designed and new data of many kinds can be collected to answer pressing questions.

“So endemic did these and other philosophers [Kierkegaard, Kant, Nietzsche, Schopenhauer, etc.] find envy… it becomes clear that one must factor in envy in considering our judgments of our own and of others’ actions. If one’s judgments are to be straight and honorable, one must be certain that they are not infected by envy. To do so one must begin by understanding the mechanics of envy: what triggers it, what sustains it, what effects it can cause.”

– Joseph Epstein, Envy, p. xxii

Noah Smith: Islam Needs To Separate Church and State

The Islamist terrorist attack on the French satirical newspaper Charlie Hebdo and the hideous nightmare of ISIS have reignited the controversy in the West over the nature of Islam. President Obama and others have argued that ISIS is “not Islamic,” and some Muslim scholars have called the Charlie Hebdo attacks a “betrayal” of Islam. The French gunmen and ISIS warriors, of course, beg to differ.

I’m not going to take a position on whether modern Islamist violence is truly Islamic or not - I’m not a scholar of Islam, and thus I am not qualified to judge (and neither is President Obama). That is a question for Islamic scholars to decide. But as an outside observer, I do think it is pretty clear that the wave of Islamist violence that has rocked the world in the last few decades shows that there is a major, deep-seated problem with the Islamic religion, and I think I know what it is. Most of Islam has not yet recognized the importance of the separation of church and state.

Consider the most famous waves of Christian violence, in the 16th and 17th centuries. Wars of religion devastated Europe, killing huge percentages of national populations. States disintegrated and acts of terror were commonplace. The main impetus for these wars was the question of which Christian sect - Protestantism or Catholicism - would rule each state. Clergy had great amounts of political power, dispensing law and owning huge tracts of land. Nationalism was, as yet, weak. The question of which religion would dominate in which area was also the question of who would rule. 

Eventually Europe’s religious wars calmed down, and a solution was reached. In the Peace of Westphalia, it was agreed that governments - not clergy - would get to decide which religion would prevail in their territories. A century later, the founders of the United States went even further, declaring that religious institutions and governmental institutions should be separate. No doubt the holocaust of the previous century loomed large in their minds.

Nowadays, the Middle East is embroiled in a set of conflicts that look a bit reminiscent of the European Wars of Religion. A few powerful, cohesive states - Iran, Saudi Arabia, and Turkey - are fueling proxy wars in anarchic areas like Iraq, Syria, Pakistan, Afghanistan, Somalia, Libya, and Yemen. The wars are being carried out by religious zealots, who have heeded a global call to arms. Meanwhile, lone individuals or small groups carry out horrific acts of individual violence that we now know as “terrorism,” claiming religion as their motivation. Two sects - Sunni and Shia - are pitted against each other, although there is also fighting among Sunnis of different sects, and ethnic and tribal fighting mixed in. Just as the European Wars of Religion featured Christians mostly killing Christians, the Islamic Wars of Religion feature mostly Muslims killing other Muslims.

It’s worth noting that the Islamic Wars of Religion are, so far, much less violent and deadly than their European predecessors. Christianity’s troubles killed tens of millions; Islam’s have probably killed less than one million, out of a much larger population. The modern age really is less violent than the past. But the violence in Islamic countries and by Muslim terrorists is still disturbing and needs to stop.

The obvious solution, it would seem, is for Islam to come to the same collective realization that Christianity came to after 1648 - that church and state make for a volatile mix, and should be separated. I believe this will eventually happen. But it is going to be difficult, for three reasons.

The first reason is historical. Islam, unlike Christianity, was originally sold as a means for creating the Good Society. I highly recommend Tamim Ansary's Destiny Disrupted: A History of the World Through Islamic Eyes, which explains the political orientation of early Islam. Whereas Christianity, like most religions, was born as a spiritual cult, Islam was born as a conquering empire and a system of jurisprudence. Christianity acquired its addiction to state power long after its founding, while Islam’s came immediately and never really went away.

Whatever the reason, most Muslims still seem to think of Islam as a legal system, rather than as a path to salvation or spiritual enlightenment. According to a 2013 Pew survey, large majorities in most Muslim countries support making sharia (Islamic religious law) the law of the land. If Islam is ever going to embrace separation of church and state, this idea will have to go.

The second reason is linguistic. Countries like Iran, Turkey, Indonesia, and Bangladesh, though majority-Islamic, have had far more success in escaping theocracy (and avoiding the scourge of Islamist violence) than have the Arab countries. (Iran is only a partial exception: Iran has remained largely peaceful since its revolution, and is quasi-democratic. Its sponsorship of international terrorism has been very limited.) Since Arab countries share a common language, the forces of nationalism in Iraq or Syria or Saudi Arabia will naturally be weaker, and the forces of theocracy will be that much stronger in comparison. Saddam Hussein and the Assad family tried to substitute nationalism for theocracy, but their regimes ultimately proved too fragile.

The third reason is economic. The Arabian peninsula and Iran are rich with oil, which brings the curse of bad institutions. National governments have little incentive to build strong secular national institutions like bureaucracies, educational systems, and courts, because they can just tax oil revenue and live like princes (which, of course, many of them are). That lack of good institutions opens a vacuum for Islamists to fill.

So the deck is stacked against the Arabian peninsula and North Africa. It will simply be harder for these countries to embrace separation of church and state than it was for European countries to do so. But still, I think that there is only so much theocratic violence that people can stomach before they wake up to the collective realization that a religion does not make a good government. Separation of church and state may be late in coming to the Islamic world, but come it must.

Virginia Postrel: The Glamour of Star Trek

“Star Trek’s allure may be lost on fashionistas, but for the right audience, the show’s distant and idealized universe offers it own glamour, arising from the graceful, mysterious setting: a future where today’s conflicts and frustrations have disappeared. … Like studio-era movies, this fictional setting addresses not one but many different kinds of desire. It offers the obvious allure of adventure and exploration, along with Star Trek’s famously inclusive vision of “infinite diversity in infinite combinations.” But many fans cite another, less remarked-upon appeal, analogous to the glamorous portrayal of married affection in old movies: the idea of a highly functional, meritocratic workplace where ‘everyone has a role, and is important.’”

– Virginia Postrel, The Power of Glamour, p. 40

Quartz #54—>The National Security Case for Raising the Gasoline Tax Right Now

Link to the Column on Quartz

Here is the full text of my 54th Quartz column, “America’s national security case for raising the gasoline tax right now," brought home to supplysideliberal.com. It was first published on December 5, 2014. Links to all my other columns can be found here.

At this writing, this is one of my most popular Quartz column ever. You can see a list of my most popular columns here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© December 5, 2014: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2017. All rights reserved.

The world is a dangerous place. The Russianannexation of the Crimea and invasion of Eastern Ukraine behind tissue-thin pretenses has set Europe on edge. Hard-line factions in Iran are working to sabotage talks to rein in Iran’s nuclear program, in counterpoint to dark words from Bret Stephens in the Wall Street Journal speculating that the Obama administration has accepted the inevitability of an Iranian atom bomb. Meanwhile the Islamic State has carved out large chunks of Iraq and Syria for its grim caliphate. And China, despite its growing economic problems amidst its periodic saber-rattling, is still on track to besting the US in the overall size of its economy, simply because it has four times as many people as the US. (While GDP per personmatters for many international comparison it is total GDP that matters most for military strength.)

To deal with the long-run danger of Chinese dominance, the best strategy is to bring more people into the American fold, as I wrote in “Benjamin Franklin’s Strategy to Make the US a Superpower Worked Once, Why Not Try It Again?” But to shrink the more immediate threats from Russia, Iran, and ISIS down to size, there is another remedy: low prices for oil. Russia’s and Iran’s economies survive economic sanctions as well as they do because of oil revenue. Iran has plenty of money to enrich uranium and build missiles because of oil revenue. And the Islamic State earns millions of dollars a day from smuggled oil to help fund its murderous operations. Lowering the world price of oil puts less money in the hands of our enemies.

More subtly, lowering the world price of oil may help undercut or prevent dictators that may become our enemies in the near future. Economists and political scientists have noticed the “natural resource curse” in which many countries have dysfunctional politics because of natural resources. In a country without many natural resources, people are the main source of wealth; they have to be handled with care by rulers or they won’t produce much wealth. But in a country with oil, controlling the oil fields is enough to control most of the wealth of the country, and provides enough funds to buy off the people without giving them freedom, or to pay soldiers to intimidate the people.

Fortunately, the world price of oil has just fallen dramatically. On November 28, 2014, the Wall Street Journal began its editorial “The New Oil Order” with these words:

America’s unconventional oil boom continues to yield major benefits—economic and geostrategic. The latest evidence is OPEC’s decision on Thursday to defy expectations and maintain its current oil production target despite the steepest price decline since the 2008-2009 recession. The price of Brent crude, the global oil benchmark, plunged as a result to about $70 a barrel, continuing its decline from a peak of nearly $116 in June.

Here, the Journal appropriately gives much of the credit to the fracking boom in the US. In addition, the world’s economic troubles have reduced the demand for oil. And the rulers of Saudi Arabia realize (better than most Americans) that low oil prices are a way to weaken its rival Iran.

What can we do to keep the price of the oil that Russia, Iran and the Islamic State are selling as low as possible?

1. We can keep the fracking boom going

…and open the way for building the pipelines needed to ship oil and natural gas from point A to point B.

2. We can pour more money into solar power research

On November 19, I saw a talk by former Energy Secretary and Nobel Laureate Steven Chu at a (natural gas and oil-funded) conference in Doha, Qatar. He said solar power is close to being cheaper than conventional energy sources even without subsidies. (See also Ramez Naam’s Scientific American article “Smaller, cheaper, faster: Does Moore’s law apply to solar cells?”) Already, solar panels are cheap enough that installation costs are becoming the biggest issue. And there, German firms have figured out how to bring installation costs down far below installation costs in the US. Pushing solar power faster along the path it is already going could do a lot to keep oil demand from pushing prices up as the world economy improves.

3. We can increase gasoline and oil taxes and devote the proceeds to rebuilding our military to combat the new national security challenges that confront us

Gasoline and oil taxes raise the price of oil to consumers, but they also lower the price of oil to producers like Russia and Iran—especially if we convince our allies to raise their gasoline and fossil fuel taxes as well (which they might be willing to do, even though for many, their gasoline taxes are much higher than ours already). A basic principle from Economics 101 is that at the end of the day, taxes affect all players in a market, whoever officially pays them. For oil what that means is that although higher gasoline and oil taxes would involve some sacrifice from US consumers and US producers for the sake of national security, they are also taxes that, at the end of the day, are paid in a real way by US enemies.

One way to make an increase in gasoline and oil taxes easier to swallow is to phase those taxes in over time. Economic theory predicts that credible future gasoline and oil taxes will bring down the price of oil now. If everyone knows and believes gasoline and oil taxes will increase over time, the value of keeping oil in the ground to sell it in the future will be lower, so that oil is more likely to be put on the market now—at a lower price. And down the road, if solar power continues to get cheaper—and new ways to store power get cheaper, too—those gasoline and oil taxes in the future won’t be as painful as they would be now.

For too long, the US and many of its allies have either ignored the dangers of the world and turned inward, or have been drawn into fighting wars against dictators or terrorists funded by oil riches. One of the best ways for the US and its allies to support the valiant men and women who fight and die to defend the free world and to keep those parts of the world that are struggling towards freedom from descending into chaos is by taking high oil revenues out of our enemies’ war chests.

Technical Note: In light of the title, I should point out that, from an efficiency standpoint (without regard to politics), there may no justification for phasing in a gasoline tax increase slowly. If a national security externality were like an environmental externality, that externality should ideally be reflected in the tax rate right now. But the national security externality is actually a pecuniary externality, so it would take some nontrivial reasoning to figure out whether or not there is any justification for phasing a gasoline tax in. It is an optimal taxation problem in which money in the hands of certain parties counts negatively. 

Syndication: I am pleased that this column was syndicated here to another Atlantic Company website as well: Defense One. Here is a screen shot: 

Facebook Convo on Women in Economics →

Posting a link to Noah Smith’s Bloomberg View article on women in economics sparked a very interesting, and sometimes heated, discussion on my Facebook page. I especially like Robert Flood’s argument that things will get better because there is a market opportunity: an economics department could rise in the ranks (according to where judgments are headed in the future as the total number of women in economics increases) by hiring more women. I think there is some truth to this. If I went to a currently somewhat obscure economics department as department chair, with a big pile of money for hiring, I think the best chance to ultimately move that department up in the rankings would be to get a reputation of being very friendly to female economists, starting with making offers to many women at once. Just like there are departments that draw strength from having many econometricians–far above the percentage of econometricians in the profession overall, I think a department could draw reputational strength from having 55% women. The idea is that they would come in part for the agglomeration benefits of being in a department with many other female economists, especially if the women in that 55% and the men in the other 45% were also chosen in part for being especially good people and so likely to be supportive of others, including junior colleagues. 

(The other thing I would do would be to focus on new modes of teaching, such as flipped classes and intensive writing like what I have students do in my Monetary and Financial Theory class.)    

By the way, don’t miss my new column on women in economics, “How big is the sexism problem in economics? This article’s co-author is anonymous because of it,” coauthored with a female economist who chose to remain anonymous.

Happiness and Satisfaction Are Not Everything: Toward Well Being Indices Based on Stated Preferences

How Big is Economics' Sexism Problem? This Article's Co-Author is Anonymous Because of It

Here is a link to my 58th column on Quartz, “How big is economics’ sexism problem? This article’s co-author is anonymous because of it,” coauthored with an anonymous female economist. 

Justin Wolfers has more tweets listing excellent female economists than my editor thought we could include without breaking up the flow too much. You can see them at 

https://twitter.com/justinwolfers

I also lobbied unsuccessfully for this sentence 

What we mean is that female economists should be encouraged to assert their power, but male economists should find it hard or impossible to exert illegitimate, sexist power over their female colleagues.

to be changed to this more subtle take:

What we mean is that female economists should be encouraged to assert their power, but male economists should find it hard or impossible to exert illegitimate power (which gives those men an unfair advantage over women when that illegitimate power is exercised to intimidate other men into favoring them over women as well as when it is used directly against women).

But my editor thought that was overkill. 

Reactions: Jeff Smith had a nice blog post reacting to the column, and Claudia Sahm had a very interesting Ello post.

Noah Smith: Economics Is a Dismal Science for Women →

Noah asked me to follow up on this hard-hitting Bloomberg View column with one of my own. Along with an anonymous female coauthor, I expect to have a new column on gender bias in economics out tomorrow morning (Tuesday). I will post a link as soon as I see it up.

This is an issue I feel strongly about, after having been on the losing side of many battles within my department in which I wanted to hire or promote a female economist. (To avoid giving the wrong idea, I should say that having been in on hiring decisions for over 27 years and in on tenure decisions for over 21 years, I have also opposed the hiring or promotion of more than one female economist. That side is easier sailing.)

Rebelling Against the Arbiters of Taste

There is a lot to say about this passage from On Liberty, Chapter IV, “Of the Limits to the Authority of Society over the Individual” paragraph 12, but let me encourage you to read it first:

And a person’s taste is as much his own peculiar concern as his opinion or his purse. It is easy for any one to imagine an ideal public, which leaves the freedom and choice of individuals in all uncertain matters undisturbed, and only requires them to abstain from modes of conduct which universal experience has condemned. But where has there been seen a public which set any such limit to its censorship? or when does the public trouble itself about universal experience? In its interferences with personal conduct it is seldom thinking of anything but the enormity of acting or feeling differently from itself; and this standard of judgment, thinly disguised, is held up to mankind as the dictate of religion and philosophy, by nine-tenths of all moralists and speculative writers. These teach that things are right because they are right; because we feel them to be so. They tell us to search in our own minds and hearts for laws of conduct binding on ourselves and on all others. What can the poor public do but apply these instructions, and make their own personal feelings of good and evil, if they are tolerably unanimous in them, obligatory on all the world?

One thing this reminds me of is my post “David Byrne: De Gustibus Non Est Disputandum,” where I wrote:

Economists use the Latin adage “De gustibus, non est disputandum”—“There is no disputing of tastes"—to express the idea that in assessing an individual’s welfare, economists should use that individual’s preferences, not their own. This doctrine of deference to the desires, likes and dislikes of those who are affected by a policy is also evident in the praise economists usually intend when they use the word ”non-paternalistic.” What this doctrine means in practice is that when economists are acting in their capacity as policy advisors, their self-appointed task is to arrange things so that people get more of what they want, whatever it is that they want.

I strongly recommend the passage from David Byrne I quote in that post, which is long enough I won’t repeat it here. 

Sometimes we think of the rule of deference to people’s own tastes when they make their decisions only in relation to government interference. But in matters of taste, interference from social approval or disapproval is often just as important. Throughout On Liberty, John Stuart Mill is greatly concerned with interference from strong social disapproval as well as government interference.

Sometimes social disapproval causes people to avoid something that they like which should be considered innocent. Sometimes it only causes them to hide the fact that they like something (say, one music playlist to show, another to listen to in private). Unfortunately, keeping an aspect of one’s preferences secret makes it easier for social disapproval to cause someone else to avoid something they like that should be considered innocent. So there is a positive externality for freedom whenever someone comes out as liking something that often meets with social disapproval but is fundamentally innocent. My use of the words “comes out” point to the obvious example of people contributing to freedom by telling the world that they are attracted to members of the same sex, if in fact they are. I can’t honestly contribute to freedom in that way, because I don’t happen to be homosexual, but I can tell some of the preferences I have that are sometimes looked down upon. 

In giving this partial list, let me say first that any defensive notes in my remarks about each thing are a reflection of the social disapproval I have sometimes felt. Second, let me say that I am only so brave. Like almost everyone, there are other preferences I have that I am not willing to share! They fall under what I said in “The Government and the Mob”:

… the selective revelation of one person’s secrets and not the secrets of others makes the person whose secret is revealed look much worse than if all secrets were revealed. I think I would fare very well if the day ever came that Jesus predicted when he said:

For there is nothing hidden that will not be disclosed, and nothing concealed that will not be known or brought out into the open. (Luke 8:17)

But I have no doubt that if someone revealed all of my secrets, while everyone else got to keep theirs, I could be made to look very bad.

Here is my partial list of things I like that are sometimes looked down on or sideways at:

  1. I like TV. We are living in the golden age of TV, when TV is one of our premier arts, but unthinking negative statements about TV are extremely common in our culture.
  2. I like scented candles. This is only dicey because of gender norms.  
  3. I like Country Music. I have often been struck with how strong a negative class marker this seems to be within academia. 
  4. I like German-language Schlager music, which seems to be an even stronger negative class marker in German-speaking countries than Country Music is in the US. (In my Powerpoint file for class on International Finance that complements my post “International Finance: A Primer,” I use the purchase of downloads of Helene Fischer music as an example of a purchase of a foreign good.)  
  5. I also like many other genres of music, including the unusual taste for a nonsupernaturalist of liking Contemporary Christian Music, as I mentioned in my post “Godless Religion.” But perhaps one of the most unusual things about my musical tastes is that my vast music collections is about 99% female vocalists. In general, there are enough more male singers in the business than female singers that I think the opposite preference of liking male singers more might actually not be noticed, but my relatively strong preference for female singers seems to be unusual. 
  6. I like Science Fiction. There are a lot of great things that can be said about Science Fiction, but the literary snobs who not only look down on it but urge everyone else to look down on it are legion.  
  7. I like comic books. For anyone who shares this taste, I strongly recommend a trio of books by Scott McCloud:

I would be glad for comments about things that you like that deserve to be considered innocent for which you have felt some degree of social disapproval.

Note: On gay rights, which I touched on briefly above, you might be interested in my column “The Case for Gay Marriage is Made in the Freedom of Religion.”

Paul Krugman Deconstructs Martin Feldstein's Critique of Quantitative Easing →

Since I had starting thinking of what I could write myself about Martin Feldstein’s Wall Street Journal op-ed “The Fed’s Needless Flirtation With Danger,” I am able to appreciate what a good job Paul Krugman did in analyzing Martin’s op-ed. 

You can see my response to an earlier Martin Feldstein anti-QE op-ed here:

QE or Not QE: Even Economists Needs Lessons In Quantitative Easing, Bernanke Style.

Edward L. Kimball: Civil Disobedience

In 1969 to 1971, my father, Edward L. Kimball, was on the editorial board for a short-lived periodical: The Carpenter: Reflections of Mormon Life. A week ago, on Christmas, I posted an excerpt from my father’s Carpenter article “Creative Stewardship,” coauthored with Keith Warner. Today, New Year’s Day, let me post an excerpt from another article my Dad published in The Carpenter: “Civil Disobedience.” (It appeared in no. 2, Summer 1969, on pages 7-14.) I excerpted with an eye toward choosing things of interest to a general audience. Those whose who personally remember the Vietnam war will find it especially interesting. I’ll have a few comments afterwards. 

… under ordinary circumstances, obedience to law is a virtue. … This is … acceptable when the law is morally neutral–requiring payment of taxes, the obtaining of an occupational license, or compliance with traffic rules which involve no question of safety. This principle, however, raises difficult questions when compliance with law seems to the citizens to foster some evil. …

An important consideration is that the principle of obedience to law is entitled to a strong presumption. This is true of bad laws as well as good laws. … This is consistent with our acceptance, in the United States, of government by representatives and by majority vote. Acceptance involves a willingness to abide by decisions with which one disagrees, in the belief that in the long run the majority will is preferable to the will of any elite. We dare reject the law only when it is so basically destructive that obedience is intolerable. 

Before one undertakes to commit unlawful acts, he ought to be clear about the facts. The difficulty of knowing what the real facts are, and the real consequences of alternate courses of action, can be overwhelming. The question, for example, as to what we should do in Viet Nam depends on the facts. If the withdrawal of American troops would lead to the fall of South Viet Nam, the slaughter of its citizens, the collapse of free nations in Southeast Asia and Communist dictatorship over millions of unwilling subjects, then we might conclude that we should fight on, however difficult and costly it might seem. 

On the other hand, it it can be said that with American withdrawal these alleged consequences would not occur or that in any event they would occur ultimately, we might well conclude that we are merely squandering lives and resources to no good end. Much of the debate over Viet Nam is futile because it proceeds upon factual assumptions on which the debating parties disagree. 

As basic as is the need for accurate factual information, it is important that we not hide behind our own ignorance. It would be too easy to say that we must support American policy because we are ignorant of the merits of the dispute. If information is to be had, we have an obligation to seek it out. On the other hand, when information is unobtainable, the presumption against civil disobedience should surely govern. One is free to use lawful means of influencing policy or protesting, even on the basis of partial information; but when he chooses to transcend the law he ought to be very sure of his ground. 

We have need of humility; we need a healthy skepticism of our own views. We are all in the wrong on occasions, and before we set ourselves above the law it is incumbent upon us to consider how likely it is this is one of those occasions. When a jury is unable to agree on a verdict because of one or two dissenters, the judge will instruct them that while they need not give up their conscientious feelings, they should consider whether, in light of the fact that all the other jurors feel differently, their view may be in error.

The strength of one’s feelings is not a fair test of its accuracy; his feeling of sureness does not make him right. 

Part of that humility should be awareness that we may be influenced, perhaps subconsciously, by self-interest. The fact that self-interest is involved does not invalidate in itself the decision, but it needs to be included in the calculus.  

Still another aspect of the need for caution in engaging in civil disobedience is the tremendous destructive power of the individual. A small number of dedicated men can often bring a major institution to a halt. It is so much easier to tear down than to build that the power to obstruct or destroy must be used with greatest reluctance. 

The man who considers civil disobedience must weigh not only the immediate consequences of his act, but how it may affect the decisions of others. The precedent for violation of the law is easily extended by others to use of force and even to terrorism. Ghandi once terminated a campaign of passive resistance because some of his followers turned to violence. The arguments are so similar that refined distinctions among them may be lost upon others. And it is also essential to predict the reaction of persons in opposition. If the response of others to one’s disobedience to law is harshly repressive, much more may be lost than gained. The law is the ultimate safeguard of the dissenter who is not prepared for revolution. There is a great pool of irrationality in the community, which is largely restrained by a general commitment in the society to the ideal of adherence to law. If disobedience leads either to anarchy on the one hand, or dictatorial control on the other, it will have destroyed the very structure which gives broad protections to minority viewpoints. 

If, as Herbert Marcuse has urged, the American system is hopelessly corrupted through control by vested interest of the minds of the people then perhaps any means to destroy that tyranny is proper. The question is again one of fact. If there is still considerable opportunity for dissenting views to be heard and for policy to be changed, then the subversion of the existing system is wastefully destructive. It is often difficutl for the young to understand that to be heard is not the same as to be obeyed. Their great certainty and impatience lead them readily to civil disobedience. On the other hand, their elders may be so sunk in complacency that they do not seriously consider that the factors mentioned above, for all their caution against disobedience, may nonetheless lead to the conclusion that the presumption is overcome and the violation of civil law is justified. 

… We are faced with the possibility of error on both sides–relying placidly on our ignorance as a basis for doing nothing or acting upon well-intentioned impulse without having considered well enough the fundamental social value and … obligation to live within the law.  

ran the following comments past my Dad, who is now 84. He leaned toward agreeing. But I don’t know whether or not his 38-year old self who wrote the article would have agreed.

First, the problem with saying

On the other hand, when information is unobtainable, the presumption against civil disobedience should surely govern.

is that often information is unobtainable precisely because the government is keeping secrets. It seems to me to be stacking things too much in the favor of a potentially oppressive government to say one should always defer to the government when one is quite uncertain. In particular, it seems the presumption should not be so strong against civil disobedience to cause government secrets to be revealed if one does not already know those secrets. If one does know those secrets, then one is responsible for judging the consequences carefully with some deference. But there is at most a weak presumption against the civil disobedience of breaking in to find out the secrets and then make one’s judgement if, given what little information one has before getting hold of those secrets one has legitimate reason to suspect that those secrets maybe should be revealed. But to repeat, the weakness of the presumption against civil disobedience to get access to secrets is only for those who do not already know those secrets. The civil disobedience of those who do know must be judged in the usual way.

I talked about the government and other people’s secrets previously in “The Government and the Mob.”

Second, my Dad’s use of the example of a requirement to get an occupational license as morally neutral seems to me a quaint relic of the days before the rampant overgrowth of occupational licensing requirements seen today. Indeed, when given a chance to judge, the Supreme Court has on many occasions declared an occupational licensing requirement as an unconstitutional abridgement of the freedom to make a livelihood. Now I think that many occupational licensing requirements are highly immoral. I have written about the morality of occupational licensing requirements before:

On this topic of occupational licensing, you may also be interested in these posts:

Gary Conkling on My Federal Lines of Credit Proposal →

I recently stumbled across the Under the Dome, CFM Federal Lobbying blog post “Put Economic Growth on the Card, Please” by Gary Conkling, inspired by William Greider’s interview with me about my Federal Lines of Credit proposal. For my original post on Federal Lines of Credit, see “Getting the Biggest Bang for the Buck in Fiscal Policy.” That was my second post after I started this blog, right after “What is a Supply-Side Liberal?” 

Q&A on the Swiss National Bank's Move to Negative Interest Rates

Cezmi Despinar

Cezmi Despinar

Link to this interview on Cezmi’s blog Accemax Analytics

I did an email interview with Cezmi Despinar about the Swiss move to negative interest rates. Cezmi posed great questions. 

Cezmi: Is the SNB now engaging in a “beggar thy neighbor” policy with the Fed, the ECB and the BoE by introducing a negative interest rate? Some people even talk about “currency wars”.

Miles: No. It is only a “currency war” if it involves a policy that would cancel out if every country did it. But if every country introduced negative interest rates, it wouldn’t cancel out, it would be a worldwide shift toward monetary stimulus. Actually, at the zero lower bound, and assuming it focused mostly on short-term government bills, the Swiss National Bank’s already existing policy of purchasing foreign assets to keep the Swiss franc from appreciating was a policy that would cancel out if all countries did it. So the shift toward negative interest rates, which will then require less purchasing of foreign assets, is a shift away from currency war on the Swiss National Bank’s part.     

Cezmi: Have the SNB’s policy tools been reduced significantly? What else can the SNB do to prevent an excessive appreciation of the Swiss franc or to make it less attractive to hold Swiss franc investments? Helicopter money?

Miles: As I explain in my column “The Swiss are now at a negative interest rate due to the Russian ruble collapse,” negative interest rates are a very powerful policy when not only the interest on money kept at the central bank and the target rate, but also the paper currency interest rate is reduced:

There is a world of difference between a central bank that cuts some of its interest rates, but keeps its paper currency interest rate at zero and a central bank that cuts all of its interest rates, including the paper currency interest rate. If a central bank cuts all of its interest rates, including that paper rate, negative interest rates are a much fiercer animal.

The Swiss National Bank knows how to do this. So it has all of the policy tools it needs. The key extra tool in its back pocket is the possibility of using a time-varying paper currency deposit fee to create a negative interest rate on paper currency. 

Cezmi: Switzerland’s monetary base has almost increased by eightfold, but the overall inflation is negative for many months in a row. Which macroeconomic lessons are we supposed to draw from the current unconventional action of the SNB? 

Miles: NYU Professor John Leahy framed it this way when he visited the University of Michigan this Fall: when interest rates on short-term government bills are almost the same as the interest rate on paper currency, the monetary base becomes a misleading measure of monetary policy because some of the monetary base is being used for saving (like short-term government bills at a similar interest rate) rather than transactions. For the size of the monetary base to mean what people are used to, the monetary base has to earn a lower interest rate than short-term government bills, so that the monetary is once again primarily devoted to supporting transactions. 

If the interest rate on the monetary base–including paper currency–were 100 basis points (1%) below the interest rate on short-term government bills, a much smaller monetary basis could be very stimulative. But with interest rates on the monetary basis essentially the same as interest rates on short-term government bills, some of the “monetary base” is not being used as monetary base, but as an equivalent for short-term government bills.

The bottom line is that at low interest rates, the paper currency interest rate is important enough that cutting other interest rates and increasing the monetary base doesn’t do that much (though it has somestimulative effect). So it is crucial to make the paper currency interest rate a tool of policy rather than keeping it always at zero, as has been the tradition.    

With Donna D'Souza, I wrote a children’s story to explain how money being used simply for saving rather than transactions doesn’t stimulate the economy, and how negative interest rates can help: “Gather ‘round Children, Here’s How to Heal a Wounded Economy.” And my column “Optimal Monetary Policy: Could the Next Big Idea Come from the Blogosphere? explains the famous Quantity Equation MV=PY, which says that it isn’t the amount of money M alone that matters for monetary policy, but money’s velocity V as well. When the interest rate on short-term government bills gets too close to the paper currency interest rate, velocity goes way down. The way to restore velocity is to cut the paper currency interest rate.

Does the Fabric of Our Society Depend on a Lie?

On a walk the day after Christmas, I was thinking about the interaction of inflation and loss aversion and about supernatural religions. Loss aversion is when someone, for example, treats something they code as a $10 loss as twice as painful as something they code as a $10 gain, and so have a substantial risk premium even for small risks. If gains and losses are coded in nominal terms, then for the same real return distribution, low inflation makes more of the returns into losses, and so can easily raise the risk premium. In my view, 98% of loss aversion is irrational, so in these cases, the higher effective risk premia are steering people wrong. Irrational loss aversion can thus create one of the few benefits of having higher inflation (something I need to add to my post “The Costs and Benefits of Repealing the Zero Lower Bound … and Then Lowering the Long-Run Inflation Target.”) But this benefit comes from the lie of inflation helping to partially counteract the bad effects of an irrationality.

Similarly, for many people, believing in some supernatural being helps counteract other irrationalities and sometimes even antisocial tendencies. And in the political realm, what Michael Huemer would call the illusion of political authority sometimes helps avoid anarchy and chaos that could cost many lives.

In this line of thought I thought

There is always the logical possibility that the fabric of our society depends on a lie. But I prefer not to think that way.

But should I be saying “I prefer not to think that way?” If I believe in facing the truth, then sholuldn’t  I face the truth about the fact that our society is based on key lies, if it is the truth? 

But besides hating the idea of a “noble lie” (see my post “John Stuart Mill on the Protection of ‘Noble Lies’ from Criticism”), I am not convinced that it is true that “noble lies” are needed. I have often encouraged myself with the thought  "If I am clever enough, I can get away with telling the truth.“ And I believe the same is true for society as a whole:

If we are clever enough, we can get away with telling the truth. 

This is a matter of faith for me, in the sense of "The Unavoidability of Faith.” In religion, my belief that if we are clever enough, we can get away with telling the truth is the theme of my sermon “Godless Religion.”

Technical Note: In addition to loss aversion, Kahneman and Tversky’s Prospect Theory is risk averse among gains and risk loving among losses. So while having the boundary between perceved gains and losses shift closer to the middle of the distribution of real returns can make for a bigger risk premium, pushing the bulk of the return distribution into the category of perceived losses can reduce the risk premium and even turn it negative. If the risk premium falls below the rational level, the resulting behavior is often called reaching for yield.

There is another possible source of “reaching for yield.” If an investor’s agent gets compensated out of “gains” or returns above some specific level, then there is a great incentive to try to encourage risk taking if necessary to have a good probability of getting above that level. The same can be said if there is a fixed reward for getting above some level. 

In any case, if there is either an institutional or psychological reason to care about  nominal “gains” versus “losses” or “above” versus “below” a given nominal level of returns, changing the level of inflation might make a difference for good or ill.