She’s a Hurricane: Evidence That Gender Bias Is Not All Fully Rational Statistical Discrimination

Link to Wikipedia article on “Hurricane Katrina”

I have gotten much more interested in the issue of gender-bias since working with my (still anonymous) coauthor on our column “How Big is the Sexism Problem in Economics?”  It is often devilishly hard to tell whether discrimination is statistical discrimination that would be rational for an unbiased individual based on genuine differences between groups or evidence of actually being willing to pay a price to discriminate. Sometimes it is possible to identify directly the price someone is paying to discriminate by the higher profits or otherwise better deal to be had by dealing with disfavored groups. But there is another type of evidence for gender bias: situations in which everyone ought to know there is no genuine difference by gender in which people treat males differently than females. Such is the case with hurricanes. I was pointed to a report by Nicholas Kristof in the New York Times on the following research:

Researchers find that female-named hurricanes kill about twice as many people as similar male-named hurricanes because some people underestimate them. Americans expect male hurricanes to be violent and deadly, but they mistake female hurricanes as dainty or wimpish and don’t take adequate precautions.

The study, published in the Proceedings of the National Academy of Sciences, underscored how unconscious biases shape our behavior — even when we’re unaware of them.

The article should have completed the logic by stating that male and female names are in fact assigned to hurricanes in a way unrelated to severity, but I assume that is the case, since meteorologists on their own would not want to deal with the criticism from discriminatory naming of hurricanes. 

Update: Of course, everything I say above depends on the names of hurricanes being randomly assigned. One reader pointed out that all hurricanes used to have female names, so if they didn’t correct for that, the conclusion I make above is not warranted. But in that case, the data should be reanalyzed for the later time period when hurricane names were randomly assigned. 

Make sure to read the comments below, which cast doubt on the care of the analysis in the paper behind Nicholas Kristof’s article. In the light of the criticisms, I have to apologize for relying too much on Nicholas Kristof’s vetting of the empirical paper, just as I had to apologize for relying too much on Carmen Reinhart and Ken Rogoff in “An Economist’s Mea Culpa: I Relied on Reinhart and Rogoff.” 

“…for most country X year observations in the Piketty and Zucman (2013) [data], aggregate Tobin’s q is less than 1—the book value of wealth exceeds the market value. …if corporate market equity value is lower than properly measured book equity value, it may be that assets are less valuable in corporate hands—due, perhaps, to poor shareholder control. (Piketty and Zucman (2013) discuss this hypothesis, which seems plausible in light of the cross-country pattern in Tobin’s q.)”

– Matthew Rognlie, in “A note on Piketty and diminishing returns to capital” June 15, 2014, which I discuss and link to in “The Wrong Side of Cobb-Douglas: Matt Rognlie’s Smackdown of Thomas Piketty Gains Traction.” Piketty and Zucman (2013) can be found here. 

The Arbitrage Pricing Theory as a Noise Trader Model

image source

The Arbitrage Pricing Theory or APT is not only one of the most basic theories of finance, it is one of the theories that is closest to being true. The theory itself gives a reason the APT is so close to being true: because it depends primarily on the principles of arbitrage and diversification being applied by some investors. So the APT is robust to large numbers of investors with a huge amount of investable wealth behind them being irrational–the “noise traders” of the post’s title–as long as there is a remnant of rational investors who also command a significant amount of investable wealth. 

In this post, I want to explain what I see in the APT at the level I do finance in my undergraduate “Monetary and Financial Theory” class. In particular, I am assuming the level of knowledge in my handout “Notes on the Capital Asset Pricing Model.” You can see another take on the APT in the Wikipedia article on Arbitrage Pricing Theory, and I would be glad for recommendations for other links to especially accessible and well-written treatments of the APT. 

To simplify, I am thinking about real returns over a short period of time, coming out of the usual jagged path of prices without sudden jumps. And I am leaving aside issues of intertemporal hedging so that everyone’s objective boils down to a function of only the mean and variance of the overall portfolio returns over that short span of time. (Key issues this leaves out are intertemporal hedging, which Matthew Shapiro, Tyler Shumway and Jing Zhang talk about as the issue of appropriate numeraire for each age by risk tolerance group by which to evaluate returns in our paper “Portfolio Rebalancing in General Equilibrium” and integration of human capital into portfolios.)   

The returns for different assets often covary, either positively or negatively. Some of this return variation and covariation might be due to the actions of the noise traders. Indeed, the returns due to variation in the required return for risky assets are a good candidate for noise-trader-induced return variation and covariation. 

If the way the return of each asset varies is thought of as a vector, then two assets that covary positively–that is, move together to some extent–can be thought of as vectors with an acute angle (of less then 90 degrees) between them. Two assets that covary negatively can be thought of as two vectors with an obtuse angle (of greater than 90 degrees) between them. Two assets that are uncorrelated can be thought of as two vectors that are orthogonal to one another–that is, two vectors that have a right angle of 90 degrees between them. From this point of view, all the variation and covariation of all of the assets out there can be thought of as an ellipsoid with many, many dimensions. 

To give you a little of the picture of what an ellipsoid in many dimensions is like, let me quote in full the text of my post “My Proudest Moment as a Student in Ph.D. Classes”: 

Ellipsoids, which are more or less a watermelon shape, are important in econometrics. In my Ph.D. Econometrics class at Harvard, Dale Jorgenson explained the effect of linear constraints by saying that slicing a plane through an ellipsoid would be like slicing a watermelon. Slices of a 3-dimensional ellipse–a watermelon–are in the shape of a 2-dimensional ellipse–a watermelon slice. Dale’s analogy of watermelons and watermelon slices inspired me to exclaim that slicing a 4-dimensional ellipsoid with a hyperplane would get you a whole watermelon! 

No matter how many dimensions are in play, except in rare cases of equal lengths, there will be one major axis (usually at a slant) along which the ellipsoid representing all the asset returns is the longest. In the APT, this represents the “first factor” or most important way in which the universe of assets covaries. Then, among all the directions at right angles to that, the longest axis is the “second factor” and so on. When the covariances of the returns are analyzed, it turns out that after a few factors (each at right angles to all the previous factors), the ellipsoid is pretty thin in all the directions at right angles to the first few factors.

Suppose that each of these factors is made into a hedge fund or mutual fund. If we go through all the factors, even the minor ones, and make them each into a hedge fund or mutual fund, these hedge funds and mutual funds (hereafter “hedge funds”) will cover all the bases and make any position possible that was possible with the full set of assets.

Imagine that there is a set of rational investors who all agree on these covariances and on the mean excess returns that each asset earns above the safe rate. These investors may differ in their risk aversion. I am going to leave aside any rational investors who are ever limited from short-selling or from borrowing to take a more than 100% position in risky assets overall, and focus on a core group of rational investors who are never limited in those ways.

Asset Demand by the Unconstrained Rational Investors 

Each unconstrained rational investor k will want to choose a share in each of the factor funds obeying the following equation:

share of wealth in factor fund i 

= risk tolerance of k * mean excess return of i / variance of i 

Here, risk tolerance is just a name for 1/relative risk aversion. Risk tolerance turns out to be a very useful concept because risk tolerance averages across people as a simple wealth-weighted mean, while risk aversion correspondingly averages across people as a more complex harmonic average. To see this note that 

total holdings of factor fund i by all unconstrained rational investors =

sum over unconstrained rational k of wealth of k * risk tolerance of k 

* mean excess return of i / variance of i.

It is convenient to define aggregate risk tolerance of unconstrained rational investors by 

aggregate risk tolerance of unconstrained rational investors

= sum over unconstrained rational k of 

(wealth of k / total wealth of core rational investors) * risk tolerance of k.

Then dividing the equation just before that by the total wealth of all unconstrained rational investors, 

share of the wealth of all unconstrained rational investor in factor fund i 

= aggregate risk tolerance of unconstrained rational investors  

* (mean excess return of i / variance of i). 

Setting Supply Equal to Demand

Think of the supply of each asset left over for the unconstrained rational investors as if it were exogenous. At any rate, however endogenous that is, since someone must hold all the assets that exist, whatever assets are left over for the unconstrained rational investors must be held by them as a group. I will represent the key aspects of the supply of assets left over for the unconstrained rational investors by the shares of the various factor funds in the total pile of wealth that the unconstrained rational investors as a group hold. 

It is natural to define the aggregate risk aversion of the unconstrained rational investors as 1 / aggregate risk tolerance of unconstrained rational investors. Given that definition, after setting the shares in the supply left over for the unconstrained rational investors to the share on the demand side for the unconstrained rational investors, a little algebra gives a formula for the mean excess return of factor fund i when the 

mean excess return of i 

= aggregate risk tolerance of unconstrained rational investors 

* variance of i 

* share of i in what is left over for unconstrained rational investors.

The interesting thing about this equation is that it has the key asset pricing prediction for the APT: that the mean excess return is almost zero for a minor factor (e.g. the 23d factor) for which the factor fund has almost no variance after the diversification implicit in forming the i-th factor fund. 

Among factors that have some variance even after diversification, the mean excess return will be higher when the unconstrained rational investors are asked to hold a lot of it–as well as, of course, factors that have a high variance. 

The Covariance with the Unconstrained Rational Investors’ Portfolio

Consider an unconstrained rational investor k. Let the risk aversion of investor k be Ak. Call the excess return of this investor’s whole chosen portfolio (including whatever safe assets it contains) yk. Let h be the amount of any asset with excess return x more or less than what investor k actually chooses. By the definition of h as a perturbation, the optimal level of h is 0. That is:

h* = 0.

Because of the simplifying assumptions (including continuous time), the investor maximizes a mean-variance expression:

{max over h} E ( yk + hx) - (Ak/2) Var( yk+ hx).

Using a little statistical algebra, including expanding the variance as one would the square of a sum, this optimization problem becomes

{max over h} E (yk) + h E(x) - (Ak/2) Var( yk) - h Ak Cov(yk,x) - (h2/2) Ak Var(x).

(h2 here is just h squared.) As a function of h, this is a smooth parabolic hill. The easiest way to find the top of the hill–the optimal value of h or h*–is to use the fact that the top of a smooth hill has a zero slope. Taking the derivative with respect to h and writing that it is zero at h*, 

E(x) - Ak Cov(yk,x) - h* Ak Var(x) = 0.

But because h* was a disturbance or perturbation away from what the rational investor chose to do, h*=0. Thus, after a tiny bit of rearrangement: 

E(x) = Ak Cov(yk,x)

or

( E(x) / Ak ) = Cov(yk,x).

If zk is the fraction of all the wealth of unconstrained rational investors held by investor k, then 

sum over unconstrained rational k of [zk ( E(x) / Ak )]

= sum over unconstrained rational k of [zk Cov(yk,x)].

This boils down to the very interesting equation

aggregate risk tolerance of unconstrained rational investors * E(x)

= Cov(y,x),

where y is the excess return of the aggregate portfolio (including any safe assets) of all unconstrained rational investors put together. Equivalently, for any asset with excess return x,

E(x) = aggregate risk aversion of unconstrained rational investors * Cov(y,x).

That is, with supply equated to demand, the excess return of any asset must be proportional to the covariance of that asset with excess return of the pile of assets that have been left over for the unconstrained rational investors. This is true even if most investors are noise traders, as long as there is a core group of unconstrained rational investors. The constant of proportionality is the aggregate risk aversion of those rational investors. 

The Capital Asset Pricing Model

The Capital Asset Pricing Model–or CAPM–is the special case of the APT in which all investors are unconstrained rational investors. Then the assets left over for the unconstrained rational investors is simply the universe of all assets (including any safe assets), and the mean excess return of any asset is proportional to the covariance of that asset with the portfolio composed of the universe of all assets. And the constant of proportionality is equal to the aggregate risk aversion of all investors. 

One nice thing about this proposition is that if there are some households that avoid risky assets, but all investors who do invest in risky assets are rational, then all risky investors are rational, and the logic above implies that the CAPM will still hold (since the covariances only depend on the risky assets), except that the constant of proportionality is their aggregate risk tolerance only if the safe assets held by the households that (perhaps irrationally) do not invest in risky assets are excluded.

Note that if investors cannot see through the government veil so that Ricardian equivalence and Wallace equivalence totally fail, then the unconstrained rational investors would be simply the private investors and the covariance that matters is with the portfolio of private investors and the aggregate risk tolerance is that of the private investors. 

Note on the Integration of Human Capital and Houses into the Rational Investors’ Portfolio

If the unconstrained rational investors integrate human capital into their portfolio decisions, that complicates things. One simple way to modify the propositions above to finesse that issue is to focus on unconstrained, rational, retired investors and to treat their social security wealth as a safe asset.

Their houses should be included in the aggregate portfolio of these investors, however, with the caveat that because of the frictions making it difficult to get a little more or a little less house, the covariance condition may not apply to the houses themselves, though it should apply to other more easily variable assets with the covariance including, in part, the covariance with those houses.

Intertemporal hedging is then one of the biggest remaining issues.

Note that even if everyone is rational, focusing on the covariance of an asset with the aggregate portfolio of retired investors could be helpful in order to avoid concerns about human capital.

Noah Smith: You With the Fro

image source: Plato talking to Euthyphro

This is Noah’s 12th guest religion post on supplysideliberal.com. Don’t miss Noah’s other guest religion posts!

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?
8. Render Unto Ceasar
9. Original Sin
10. Islam Needs To Separate Church and State
11. Noah Smith—Jews: The Parting of the Ways

Here is Noah:

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“All right, then, I’ll go to hell”- Huckleberry Finn

My hair is naturally curly. When I was in high school, I grew it out, and a few of my friends took to calling me “you with the ‘fro.” So you can imagine how happy I was to find that a character in one of Plato’s dialogues had almost that exact same name.

I was not, however, a big fan of the moral and epistemological theory espoused by Euthyphro, the eponymous character. In a classic line, Socrates presents Euthyphro with a question “Is the pious loved by the gods because it is pious, or is it pious because it is loved by the gods?” In other words, is something good simply because the gods (or, to our modern monotheistic sensibilities, God) like it?

Euthyphro says yes. “Piety is what is dear to the gods and impiety is that which is not dear to them,” he tells Socrates. In other words, goodness is something the gods assign. Socrates asks about the case when the gods disagree, and Euthyphro amends his statement to require unanimity - if all the gods think something is good, then it’s good. To a monotheist, the question is simpler. Are good and bad properties of the Universe that God assigns to things, like length, mass, and temperature? If there’s only one God, He can’t disagree with Himself.

But Socrates’ question still nags at us, because we, humans, can disagree with God.

As an example, take a recent moral issue: homosexuality. Lots of people think that gay sexuality is immoral. As justification, they often cite the Bible, which clearly says that homosexual sex is evil. Proponents of this viewpoint have become increasingly alarmed as homosexuality has rapidly become more and more accepted in American society. 

Now suppose I wanted to argue that homosexuality is morally OK (which I do). I could argue with the standard interpretation of the Bible. I could point out a lot of other things that the Bible condemns that we ignore in the modern era. I could even start a new religious faith that says that the Bible is not the exact, perfect word of God. In past eras, I probably would have done one of these things.

But instead, I’m just going to say: No. Homosexuality is not evil, even if God says it is. If God thinks homosexuality is evil, well, I disagree. And lots of other people disagree.

Preposterous, right? How can a mere mortal disagree with a being who is both omnipotent and omniscient? Well, suppose that instead of “Homosexuality is evil,” God said “Radiohead is the best band.” Well, you can bet I’d disagree. No matter how much evidence God brought to bear, no matter what arguments he made, I wouldn’t agree that Radiohead is the best band. Even if God blasted me with a thunderbolt, I wouldn’t agree. Even if He slaughtered my whole family and threw me into a pit of fiery agony for all eternity (things that God actually does to people in the Bible!), I would not agree that Radiohead is the best band.

And even if I did - even if my mind broke under the pain and convinced itself that Radiohead was the best band - so what? Since God is omnipotent, He could have just reached into my brain, switched around a few circuits, and made me have whatever opinion He wanted me to have. But the point is this: it hasn’t happened yet. I am not yet convinced that Radiohead is the best band, and I’m not yet convinced that homosexuality is evil. In fact, I am convinced that homosexuality is just fine. God could mind-control me into having a different opinion, but He couldn’t convince me simply by giving me information.

See, morality is different than length, mass, or temperature. Knowing those things is just a matter of information. Knowing right from wrong is not. To know right and wrong, you need to have an opinion. David Hume made this point in his 1739 book A Treatise of Human Nature. You can’t get from facts to opinions without some kind of moral intuition or emotion. People don’t discover right and wrong from observing the Universe - they feel right and wrong by observing their own emotions.

Philosophers since Hume’s day have tried to overturn Hume’s conclusion, without (as I see it) much success. Yes, there are some moral propositions on which almost all humans agree. But there are obviously others - homosexuality, for example - where we don’t all agree. Disagreements exist. And God weighing in on one side or the other isn’t going to change that.

Detractors of the Humean point of view sometimes denigrate it as “relativism,” or even “nihilism.” But it is neither. Just because my idea of right and wrong comes from my own moral intuition doesn’t mean I think your intuition is OK for you, and we all have our own little pocket universes of right and wrong, and they’re all equally acceptable. My moral intuition often brooks no disagreement.

For example, take homosexuality. The other day I watched this video of fan reactions to the airing of the last episode of The Legend of Korra, a cartoon show whose final moments depict the beginning of a homosexual relationship between the two female protagonists. I never watched the show, but the video of crying, cheering fans provokes an unequivocal emotional reaction in me. These kids are beautiful. Seeing their happiness makes me happy (note especially the reaction at 6:30, where a girl breaks into Christian prayer at the anticipation of seeing two women enter a romantic relationship). To me, there is no question that this is good and moral and right. If you tell me it’s evil or filthy or immoral, yes I know that your opinion comes from your own moral intuition, but so what? My own moral intuition says you’re totally wrong. Even if you have an army behind you, with nukes and rocket artillery. Even if you torture me and everyone I know. 

Even if you’re God. Even infinite might doesn’t make right.

In fact, the recent acceptance of homosexuality in American society - which is quickly spreading to other countries, like Japan - seems like it represents a watershed in the moral evolution of human society. In the old days, those of us who believe homosexuality is OK would have tried to enlist religion and God on our side, as abolitionists did in the fight against slavery. But this time, we didn’t have to do that. This time, when traditionalists told us that God condemned homosexuality, we shrugged and said “So what?”

To me, this seems like the democratization of morality. The democratization of politics was a grand experiment, a test of the radical idea that humans are mature enough to govern themselves without having order imposed by a higher power. The democratization of morality is the realization that we are mature enough to know what’s right and wrong, without having our morality imposed by a higher power. 

So humanists should be happy. But at the same time, theists shouldn’t despair. After all, human moral intuition had to come from somewhere, right? My sympathy with the fans in the Korra reaction video didn’t just come from nowhere - nor did their sympathy with the imaginary cartoon characters. Humans are built a certain way, and if you believe in God, you (probably) believe that God made us the way we are - that God created us to watch two cartoon women kiss and think “This is good.” (As for why He would create us to have that reaction and then tell us the opposite in the Bible - well, I leave that one to you to figure out!)

Oh, and in case you were wondering, the best band is The Flaming Lips. You can’t beat the 'fro.

Will Storr on Roy Baumeister: The Man Who Destroyed America’s Ego →

via Diana Kimball

Jaewon Lee: Lobbying vs. Bribery

Link to Jaewon Lee’s Facebook page

I am pleased to host this guest post by Jaewon Lee, a student in my “Monetary and Financial Theory” class. This is the 15th student guest post this semester. You can see the rest here. Jaewon’s thesis is this: 

Lobbying is an effective tool to reduce corruption and expand public involvement across economic and political sectors.

I found his contrast between the US and South Korea especially interesting. This post also reminds me of Matt Stambaugh’s very interesting proposal to restrict lobbying by having every meeting with a government official videotaped and posted on YouTube. Although at the end of the day, I felt this hampered free speech too much, it could be just right for convincing South Koreans to allow lobbying at all. 

Here is Jaewon:

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In the United States, there are many complaints about the influence of lobbyists. Lobbying is defined as a legalized activity in which special interest groups hire professional advocates to argue for specific legislation in decision-making bodies (Wikipedia). Lobbying activity is controversial. Lobbying is often perceived to be a symptomatic problem that has corrupting influence. The concern is that only wealthy companies and interest group will be able to influence lawmakers and government officials. However, the proponents of lobbying argue that the process of lobbying provides legislators and other government officials with necessary information to convey the viewpoints of constituents.

In South Korea, lobbying is illegal. On March 3, 2015, South Korea’s legislative approved a new anti-corruption law that reinforces stricter regulations and restrictions on lobbying. The bill punishes government officials and lawmakers for accepting any form of funding from private interests even without conditions attached. It will be the a very restrictive set of regulations for blocking any form of lobbying or favor in the political area. Moreover, the legislation “sets a maximum penalty of up to three years in prison as well as 30 million won ($27,300) in fines for bribery involving public officials.” The public believes that corruption in business and government remains a major problem. So when I came to the U.S. from South Korea and found out that lobbying was legal, I was surprised. The very different perspectives on lobbying in the United States and South Korea raise the question of whether lobbying is an effective tool to reduce corruption.

Is it a good idea to make lobbying illegal? If lobbying were banned, bribery might take its place. According to Giovannoni’s academic article on “Lobbying, corruption and political influence,”lobbying and corruption are substitutes and lobbying is a more effective instrument for political influence than corruption, even in poorer, less developed countries. Lobbying often occurs in a system that enjoys high levels of political stability. Because lobbying and corruption are substitutes, eliminating lobbying to fix the unequal influence of money is not an optimal choice. What eliminating lobbying does is to drive efforts to influence the government underground. In countries where lobbying activity is illegal, legalizing lobbying might be seen as legalizing corruption. However, it is not right to equate lobbying with bribery. A responsive government needs to hear various viewpoints to inform the legislative process. In the absence of lobbying, the public would lose an importance channel to influence policies. As for concerns about the influence of wealth on politics, if lobbying is made illegal, policies might favor wealthier individuals even more because rich and powerful people can afford to spend money on even more costly bribery activities. As I have wrote in my previous blog post about big Korean conglomerates (the chaebols), these conglomerates that dominate the wide spectrum of Korean society are expanding to the point where they are too big to fail. A failure to democratize the business environment and an effort to ban lobbying minimizes the access and contribution of the public to the debate about what to do with these conglomerates.

Of course, lobbying has its own flaws it is unrestricted. Unlimited contributions from lobbyists, along with the preferential access that leads to may disrupt access by others to political influence and can tilt things toward wealthy groups even if not so badly as out-and-out bribery. To the extent democracy is defined by equal participation and influence by individuals, unregulated lobbying will not meet such goals. According to Mullin’s article in the Wall Street Journal, Comcast Corps engaged in massive lobbying activities when they heard that President Obama was preparing to call for tough new Internet regulation. The sight of companies exerting that kind of influence through lobbying is why most Koreans oppose lobbying. But strong enough restrictions may alleviate such concerns. If Korea legalized lobbying, it could address this issue by granting making lobbying easier for non-profit organizations than for profit-making corporations. For instance, by disallowing lobbying as a business expense in the tax code, the government can make it more expensive for for-profit firms to lobby. Moreover, transparency in the flow of money used in lobbying can minimize negative consequences. The rules could also require lobbyists to report all meetings with government officials.

Lobbying activities, under the right restrictions can improve the participation of the people in influencing government policy. Money previously spent on bribery can come into the light of lobbying reporting requirements. And in Korea, properly managed lobbying might provide a countervailing influence for the power of the big conglomerates–the chaebols.

Citi Economist Willem Buiter Says It Might Be Time to Abolish Cash →

It is nice to see Willem Buiter’s insights in the news. From an academic perspective, my work on eliminating the zero lower bound is all footnotes on what Willem Buiter laid out. As my brother and I said in our column yesterday, my role is to work out the nuts and bolts of how central banks can do it, so that it is possible to eliminate the zero lower bound next month rather than a few decades from now. 

However Low Interest Rates Go, The IRS Will Never Act Like a Bank

Here is a link to my 61st column on Quartz, “However low interest rates might go, the IRS will never act like a bank,” with my brother Chris.

Chris has appeared before on supplysideliberal.com. For example, see

• Big Brother Speaks: Christian Kimball on Mitt Romney
• Christian Kimball on the Fallibility of Mormon Leaders and on Gay Marriage

Although I differ with John Rawls on details, I like John Rawls’s perspective very much. And this is a very cute kitten. So I love this econlolcats post by Ishita! 

When uncertainty and randomness form the basis of your philosophy… 

This econlolcats post is a harbinger of a Quartz column with the working title “How Low Can Interest Rates Go?” It is coauthored with my brother Christian Kimball, who as a top-flight tax lawyer is well equipped to help take down John Cochrane’s claim that tax arbitrage is enough by itself to create a lower bound on interest rates. 

Tor Martinsen: The Hyperloop is Coming

Link to Tor Martinsens’s LinkedIn profile

I am pleased to host a guest post by Tor Martinsen, a student in my “Monetary and Financial Theory” class. This is the 14th student guest post this semester. You can see the rest here. Tor’s thesis is this:

The Hyperloop will have long-term economic effects as it disrupts many industries, the first being the container shipping industry.

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Elon Musk’s vision for the hyperloop is finally coming to fruition. This innovation will disrupt the transportation industry as soon as it is implemented, and help clear up traffic immediately.

The Hyperloop is described as:

That far-out idea billionaire industrialist Elon Musk proposed in a 58-page white paper in August 2013 for a vacuum-tube transport network that could hurtle passengers from San Francisco to Los Angeles at 760 miles an hour. Laughed off as science fiction, it is as of today an actual industry with three legitimate groups pushing it forward, including Hyperloop Technologies, the team in Harry Reid’s office. They emerge from “stealth” mode with this article, armed with an $8.5 million war chest and plans for a $80 million round later this year. “We have the team, the tools and the technology,” says Bam Brogan. “We can do this.” The 21st-century space race is on.

This vacuum tube has been compared to sci-fi fantasies, but it is finally becoming a reality, “Fortunately for futurists and people who enjoy picking apart complicated plans, an El Segundo, California-based startup has taken Musk up on his challenge to develop and build the Hyperloop.” This innovation will immediately change the dynamics of transportation. As the channels to utilize this form of transportation expand between major hubs, it will allow cargo to be shipped at high speeds throughout these hubs. This will allow a car made in Detroit to be shipped to its buyer in Los Angeles in a matter of just a few hours. This will also clear up some of the hated traffic on highways. Companies will be able to utilize the hyperloop for long distance shipping, for much faster delivery.

One potential problem I see with implementing this technology (assuming first that some firm develops the technological and economic capabilities to build the hyperloop) is that truck drivers will oppose this with ferocity, but it could actually be good for them. Due to the large expensive infrastructure necessary for the hyperloop, it will only be installed between major cities initially, meaning there will still be a need for truck drivers to then make the delivery from these transportation hubs to their final destination.

The reason that high-speed travel like this has not been previously invented is simply because of the problems related to air. A simple example of this problem is “At walking speed, air is ephemeral stuff. But, as any child who has stuck his hand out of a car window at speed knows, the faster you go the more obvious its effects become. In fact, the grunt needed to counteract air resistance rises with the cube of speed.” Elon Musk proposes to counteract this problem air causes by keeping the tunnels at a much lower atmospheric pressure than sea level cutting the air resistance dramatically. The next problem then becomes that “Hyperloop capsules are designed to sit snugly within their tubes. At high speeds, they would act like a plunger in a syringe, compressing the air ahead of them. That would require large amounts of power to overcome, undoing many of the advantages of a vac-train in the first place. Mr Musk’s proposed solution is to fit each pod with a fan designed to blow what little air is present through a pipe in the capsule and out of the back—essentially drilling a hole in the plunger.” This proposal has all the theoretical support to make it work and sounds like a plausible solution, however it remains to be seen whether this proposal can be turned into a reality, and a financially viable one at that!

The hyperloop will change entirely the container shipping industry immediately by increasing the speed at which goods can be delivered to their final destination. It also has large-scale implications for human travel one day too, as Bruce Upbin wrote in his article, “The hyperloop, which Musk dubs “the fifth mode,” would be as fast as a plane, cheaper than a train and continuously available in any weather while emitting no carbon from the tailpipe. If people could get from Los Angeles to Las Vegas in 20 minutes, or New York to Philly in 10, cities become metro stops and borders evaporate, along with housing price imbalances and overcrowding.” While this may be a long ways in the future, it at least now has the chance to become a reality, rather than just a dream of some sci-fi author.

Yichuan Wang: Stocks for the Long Run—Still a Wild Ride

I am delighted to be able to host another guest post by Yichuan Wang. Yichuan has appeared on “Confessions of a Supply-Side Liberal” in many capacities (as you can see by typing “Yichuan” into the search box down low on my sidebar), but this time it is as a student in my “Monetary and Financial Theory” class. This is the 13th student guest post this semester.You can see the rest here.

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I use simulations of stock market histories to show how long run investing is much more risky than is commonly believed. I show that:Long run average stock returns are a poor judge of how safe stocks are over longer runsReasonable levels of risk aversion can generate scenarios in which stocks deliver the same long run expected utility.Let’s first set up the simulation. Below is a stock price index for the United States from FRED. Stocks tend to trend upwards in the long run, and even when things go down in say 2002, they tend to go back up afterwards. This history makes it look like in the long run, you’re guaranteed to make money.

But as a first approximation, returns in one year should tell you nothing about returns in the next. After all, if you knew returns next year were going to be all of a sudden higher, you would have bought today! Formally, this means that returns can be approximated as being independent over time. So let’s try an experiment. In the data above, the average return in a given year was 7.5% with a standard deviation of 13 percent. Let’s generate returns that follow independent normal distributions with those properties, run it for 40 years, multiply all the returns, and see what stock prices look like:

And so even when returns from year to year are random, you still see “trends”. After the fast run up in the red line, there’s a “natural” pop of a bubble around year 34! But after a few years, you recover again. Hence this model of independent returns is plausible both from an economic theory perspective, and the graphs also look reasonable.

I generate 1000 such paths, and then they start looking like the plot below. Each black line represents some alternative history of the world in which returns every year had a mean of 7.5% and a standard deviation of 13%.

Now that we’ve run the simulation, we can see some interesting phenomenon:

1. Cumulated stock returns can be huge! In some of the best histories, you’ve increased your wealth by a factor of 100 over the course of 40 years. On the other hand, a 2% annually compounded bond would have only put you at a factor of 2.
2. But most of the final returns aren’t that high. Hence when we say that you can expect to earn a lot from holding stocks for 40 years, much of that expectation is being driven by the extreme right tail of extremely high returns.
3. In contrast to the Malkiel graph on the variance of average returns declining over time, it’s clear that the variance of total returns increases over time — the graphs get farther apart! And when you retire, you care about how much wealth you have left over at the end, not some accounting number about how much on average you earned over the past 40 years. In other words, it’s the variance in total returns, not average returns, that matters. Therefore long run average returns are a poor judge of the riskiness of long term investing.

Let’s turn to the second claim. Stocks usually beat bonds handily. But what happens in the nightmare scenarios in which they underperform?

To evaluate these scenarios, we need to plug in the cumulated returns into some kind of utility function. To make it easy, I consider two utility functions — CRRA utility with a risk aversion of 2† and log utility — and then as a comparison I plot just the raw total return. The key part about the utility functions is that there is diminishing marginal utility — a 1 million dollar loss hurts a lot, whereas a million dollar gain isn’t nearly as salient. This means that people are averse to risky gambles such as the stock market, but are still willing to make the bets if they think it will raise expected utility.

Below are the 1000 paths of utility and cumulated returns. The leftmost panel is just the plot of raw cumulated returns from above. The middle plot is what those returns would mean for log utility, and then the right plot is what utility looks like with a risk aversion coefficient of 2. The red line in each plot is a benchmark for what final total return or utility would look like if you instead invested at a risk free rate of 2%.

These charts show two things:

1. No matter your utility function, the probability of stocks outperforming bonds is the same. Roughly the same number of black lines are below the red line in each plot.
2. But when the black lines go below the red line when risk aversion is higher (see far right), the results are catastrophic.

Any measure of risk needs to both take into account the probability of losses and the magnitude of those losses. So as a benchmark risk measure, let’s compare the expected utility of investing in stocks relative to bonds:

Average stock returns trounce bond returns. But once you raise the risk aversion coefficient to 2, the expected utility from bonds is higher than expected utility from stocks. This is because stocks sometimes do really bad, and those scenarios hurt a lot.

Risk adjusted stock returns in this simple model are no safer than a 2% bond yield, and looking at average annual returns tells you little about how much risk there is in stock investing. The motivation for long run investing must be deeper than the higher returns to stocks, but that will have to be saved for a future post.

† I use risk aversion of two because it’s considered as an upper bound based on labor supply data, and although more extreme values come from the asset pricing literature, the more extreme values just reinforce the point that risk aversion matters.

John Stuart Mill: Two Maxims for Liberty

The first two paragraphs of John Stuart Mill’s On Liberty “Chapter V: Applications” speak for themselves, but I changed the formatting and capitalized “First” to highlight the two maxims. He writes:

I offer, not so much applications, as specimens of application; which may serve to bring into greater clearness the meaning and limits of the two maxims which together form the entire doctrine of this Essay, and to assist the judgment in holding the balance between them, in the cases where it appears doubtful which of them is applicable to the case.

The maxims are, 

1. First, that the individual is not accountable to society for his actions, in so far as these concern the interests of no person but himself. Advice, instruction, persuasion, and avoidance by other people if thought necessary by them for their own good, are the only measures by which society can justifiably express its dislike or disapprobation of his conduct. 
2. Secondly, that for such actions as are prejudicial to the interests of others, the individual is accountable, and may be subjected either to social or to legal punishment, if society is of opinion that the one or the other is requisite for its protection.

Will Wilkinson: Belief and the Atomism Of Social Change →

For a long time, I have thought that changing the mind of the public is a more reliable way to bring change than political tactics. One of the best examples I know is the invention and focus on the idea of second-hand smoke, which ultimately transformed tobacco policy in the US. Another great example was the decision to emphasize gay marriage in the effort to advance gay rights–which highlighted the commonalities between gays and lesbians and everyone else. This was combined with the powerful influence of popular TV shows such as “Will and Grace” in getting people to see gays and lesbians in their full humanity.

The link above is to a nice essay by Will Wilkinson on this process of changing the minds of people in general as a way to effect social change.

Robin Green: Don’t Recognize Racist Externalities with a Pigou Tax

Image source: “Gentrification’s Racial Arbitrage” by Peter Frase on Jacobin

Robin Green had a very interesting comment in reaction to my post “The Wrong Side of Cobb-Douglas: Matt Rognlie’s Smackdown of Thomas Piketty Gains Traction” that he made into a Tumblr post of his own. I am grateful for his permission to make it a guest post here. 

Robin was reaction to this idea:

Above, I wrote that developers should have to pay some of the costs of reductions in the quality of life nearby when higher density is unpleasant to live nearby—say by blocking out the sun. In an earlier version of this post, I actually made the serious mistake of saying they should pay for the reduction in “land values” from development nearby. But that is wrong by a cost-benefit test. Suppose a particular housing development is neutral for the quality of life nearby. Then it would still reduce the values of land nearby by providing more housing competition. This is not a social loss but rather a shift in wealth from landowners renters and future buyers of land, which reduces inequality. So a key conceptual issue for appropriate land policy is to not think of everything that reduces neighboring land values as a bad thing, but to distinguish when (and how much) it brings down land prices by reducing the quality of life nearby from when (and how much) it brings down land prices by providing additional housing competition. 

Here is his reaction: 

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While the idea of taxing externalities is broadly popular when it comes to pollution that causes clear harm to others (and in fact I would argue pollution should be taxed punitively, due to the precautionary principle and humility about what science does not yet know about harms of pollution), we very quickly get into seriously morally problematic territory if we consider all factors that might affect local property values.

For example, some people consider that proximity to poor people, or unemployed people, makes a property less desirable. So people could be taxed for being poor or unemployed! Some people are explicitly ethnically biased, and would prefer not to live near gypsies, or black people, or Muslims, or Jews, etc. etc. So people could in theory end up being taxed for being anything other than white anglo-saxon protestant! This is obviously morally unconscionable, as well as politically unthinkable.

So in addition to your point about new housing bringing down (residential) land prices, we would need to be able to reliably exclude factors such as ethnicity- and class-based discrimination to make some sort of generalised externality tax-and-subsidy system viable. I am not sure how we would go about doing that.

Moreover, it’s worse than this. There are innumerable factors that some people might object to, but which some would argue - at least in some cases - should be ignored on the grounds of personal freedom. Examples include playing certain genres of music loudly during the daytime, having a front garden, not having a front garden, having a front garden but leaving it untended, garish Christmas lights displays, political signs, religious signs, playing ball games in the street, etc. (Many of these are currently restricted in various ways by landlords and/or certain homeowners associations.)

Then there are subcultures that some people don’t like, but unlike ethnicity are more a matter of choice, such as: goths, emos, people who dye their hair in “unnatural” colours such as pink or green, environmental activists, members of religious cults, members of intentional communities.

Even a neighbourhood which includes a high proportion of teenagers, regardless of how well those teenagers behave, could be viewed negatively by some people.

It’s a minefield.

On the National Research Council’s Geoengineering Report

image source

The National Research Council recently put out a report on geoengineering as a way to moderate climate change. This report was sponsored by the National Academy of Sciences, U.S. intelligence community, National Aeronautics and Space Administration, National Oceanic and Atmospheric Administration, and U.S. Department of Energy. Thus, there is a lot of heft behind this report.

The University of Michigan’s Atmospheric Science Professor Joyce Penner served on the committee, so I saw an article on it in the UM University Record by Nicole Casal Moore that I thought was very well done. Here are some key excerpts, which I made into bullet points:

• Techniques to remove CO2 include restoring forests and adopting low-till farming—both of which trap carbon in plants and soils. Oceans could be seeded with iron to promote growth of CO2-consuming organisms. And carbon could be be sucked directly out of the air and injected underground.
• Methods to reflect sunlight include pumping sulfuric compounds into the stratosphere to, in essence, simulate a volcanic eruption; and spraying sea water mist or other finer-than-usual particles over the ocean.
• The scientists caution against dumping iron in the oceans, as the technical and environmental risks currently outweigh the benefits. Similarly, they warned against sunlight-reflecting approaches, also known as “albedo modification.”
• Even in its opposition to sunlight reflecting tactics, the committee still recommended more research into them, as it urged more study of all climate intervention possibilities. Penner was struck by this call to action.
• “U.S. agencies may have been reluctant to fund this area because of the sense of what we call ‘moral hazard'—that if you start down the road of doing this research you may end up relying on this or condoning this as a way of saving the planet from the cost of decreasing CO2 emissions,” Penner said. “But we’ve stated that decreasing emissions must go hand in hand with any climate intervention efforts.
• "We need to develop the knowledge base to allow informed decisions before these dangerous effects are upon us,” she said.

Comments: The big news is that the scientists on the committee reject the idea that we should avoid research into geoengineering for fear that such research is part of a slippery slope. However great the problems and disadvantages of certain techniques geoengineering, there are possible futures in which we might need them very badly. So we must risk knowing what we can about them rather than trying to keep ourselves in ignorance to prevent such techniques from being used. 

Among the techniques, anything done on land–such as low-till farming and sequestration–hold no terrors. Human beings have modified the land for many centuries; and any reduction in carbon dioxide from such efforts just slows down our move into uncharted territory. But modifying the oceans or the clouds would take us into uncharted territory in yet other directions, and so is something we should go slow on.

Much of the harm of climate change may not be about global warming per se but about the fact that global warming will make the climate different in the future than it has been in the past. Entropically, to the extent that the places people live are adapted to the current climate, different tends to be worse until very substantial adjustment costs have been incurred. Modifying the clouds along the lines of some geoengineering proposals may make the Earth cooler, but is almost certain to cause the climate to be different from what it has been in the past, creating costs of climate change even if it arrests global warming.  

As for seeding the oceans with iron, this might have little effect on the climate other than through the desired reduction in carbon dioxide in the atmosphere, but it could easily have unforeseen effects on the ecology of the oceans. However, the acidification of the oceans from higher carbon dioxide concentrations is also taking us into uncharted territory for ocean ecologies. So seeding the ocean with iron to increase carbon dioxide takeup by ocean life could at some point be the safer course even for ocean ecologies. We may need to know how to make this judgment sooner than we would like. Hence the urgency of research. 

Update: Nichol Brummer tweeted to say that he has a new website in beta on enhanced Olivine weathering to chemically combine carbon dioxide to form carbonate. This is a promising approach.  

Congyi Liu: America Should Join the Asian Infrastructure Investment Bank

I am pleased to host this guest post by Congyi Liu, a student in my“Monetary and Financial Theory” class. This is the 12th student guest post this semester. You can see the rest here.

I was impressed with how well Congyi persuaded me of something I didn’t want to be persuaded of, since my instinct, like that of the US government, is to wish the AIIB away as a tool of China’s power. Here is Congyi:

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“’China is playing the long game effectively,’ said Cornell University economist Eswar Prasad, a former senior China official at the IMF. ‘They are in absolutely no rush. They know other countries will come to them.’”

This long game’s name is called AIIB (Asian Infrastructure Investment Bank), which was proposed by Beijing in 2013 initially. From the name, we can infer that this is an investing bank mainly for developing infrastructures in Asian countries. However, the members are not limited only for Asian countries, while British, Germany, France have announced to join in. Chinese government injected 49 percent of initial capital to the new bank. Till now, the collected funds have been almost prepared. “Meanwhile, the bank is on track to reach its target of $100 billion in registered capital, up from the $50 billion initially announced and that China is providing, according to Chinese and Western officials.” The start-up capital was only $10 billion of the World Bank, though we should consider about the time cost and inflation rate. But, without doubt, AIIB will definitely not only be an Asian but a worldly economic and financial center.

For such a big game, will America be a role paler? I think so whereas American government officials do not. Admittedly, at the first glance, we may consider that America should set tremendous barriers for China to form AIIB to firm its dominant status of the world’s economy. However, what is the really wise choice for America? Join in!

America’s join will provide a positive influence to form a valid and qualified regulation within AIIB. “Over the past year, however, the U.S. has urged its allies not to sign up for the bank, saying it would be an instrument of Beijing’s foreign policy and that without proper governing rules it could contribute to debt and corruption in borrowing nations.” America expressed that they did not frown to form AIIB, but could not nod to China’s regulatory policies. They worry that China is not qualified to govern and lead such a huge organization successfully. They doubt China is not capable to provide rules and regulations scientifically and efficiently. If America join AIIB, they can bring many matured rules and regulations by their various former experiences from leading the World Bank and IMF. After all, global economic chaos will also present negative effects on America. As AIIB has such a magnificent scale, if this organization expose essential problems, it is hard to image America will not suffer any harm.

Joining in AIIB also help America lessen China’s dominant power. “Another pending issue is how to structure the board of directors at the new bank. In the World Bank and the IMF, countries are represented by resident directors who are actively involved in the institutions and vote on new projects, programs and policies. Those representatives act as a check on management. The U.S. has been pushing the Chinese to adopt the same structure, according to those involved in the discussions, but Beijing is resisting. Instead, it wants the bank’s management, which will likely mean Chinese officials, to have a more powerful position.” Without America’s joining, China will absolutely be the sole dominator of AIIB. Then, China will readily and legitimately introduce some foreign policies that benefit itself. That is definitely what America did not want to see. “Still, Mr. Jin, interim chief of the new bank, said over the weekend that more than 35 countries will join as the bank’s founding members by the end of this month. South Korea and Australia, key U.S. allies in the Asia-Pacific region, are also expected to come on board by then, according to Chinese officials involved in the effort.” Moreover, as some America’s allies joined AIIB for their own profits, America could draw them on the same side to against China and balance the authority in the AIIB.

Till now, 46 countries have applied to join in AIIB and this number will continue goes up seemingly. China successively introduced “One Belt and One Road” and AIIB, the goal is so clear—forming and consolidating the Eurasian Economic Community. After setting down the deep fraternity between African countries, China is ready to lobby Europe with its strong power. If America cannot propose some effective strategy back, the day of China’s dominance will come soon. Actually, Joining AIIB is an indispensable move for America.

Congyi Liu

Linda Sun: Change Airbags to Axes to Save Lives

Link to Linda Sun’s LinkedIn page

I am pleased to host a guest post by Linda Sun, a student in my “Monetary and Financial Theory” class. This is the 11th student guest post this semester. You can see the rest here. Linda’s post is a work of economic analysis satire.

Update: Like Mike Smitka in a comment below, Paulo Mauro tweets that Linda was not the first to come up the essential idea: 

Great economist Mike Mussa used same analogy (he would say a “spike in steering wheel”) to dismiss concerns about moral hazard.

But I think Linda makes the point in a memorable way: 

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The effect of seat belts and air bags on car crash outcomes has a long debated history. On the one hand, seat belt keeps driver and passengers in their seats and airbags make them much safer when a car crash happens, which decreases traffic fatalities. On the other hand, it has been suggested that due to compensating behavior, drivers drive faster and closer to the vehicle in front when they have security precautions, which increase the probability of an accident and therefore put non-occupants, namely pedestrians, bicyclists and motorcyclists at greater risk (Peltzman, 1975).

But what is the ultimate overall effect of seat belt and airbags on traffic fatalities in practice? There is many paper examining the effect of mandatory seat belt law and airbags, reaching different conclusions. In Alma Cohen and Liran Einav’s paper(2001), they control the endogeneity of seat belt usage and find that it decreases overall traffic fatalities. In their paper, the compensating behavior theory (which suggests that seat belt use also has an adverse effect on fatalities by encouraging careless driving) is not supported by the data. Bhattacharyya and Layton(1979) similarly find that seat belt law have significant negative effect on traffic fatalities overall. On the other hand, McCarthy (1999) finds that a mandatory seat belt law increases the number of fatal accidents. 

Though there is no common conclusion on the overall effect of seat belt and airbags on traffic fatalities, in the spirit of the compensating behavior theory, I think there is a surefire way to force drivers to drive more carefully, and reduce traffic accidents: changing all  cars’ front airbags to axes.

Just imagine, what would you do if you know that your car has an axe installed in front of you, which would pop out if there were a harsh impact? You would drive as carefully as possible and try to avoid any potential car accident. In fact, installing an axe is like having a police car right beside you, only more effective because the penalties imposed by the axe are so much more sever than a ticket. By making the cost of careless driving almost infinitely large, no one will drive carelessly.

Second, unlike airbags–which save occupants’ lives but increase the risk on non-occupants by compensating behavior theory–an axe concentrates the cost on the person whose behavior controls the risk. Threatened by the axe, drivers will drive more consciously and cautiously, and they will not compete with pedestrians, bicyclists or motorcyclists any more. (Drivers are the “disadvantaged” group under this plan.) Thus this change saves the lives of non-occupants of a car. 

Third, installing an axe helps by discouraging bad drivers from driving at all–positive selection. If someone is a rookie, will he dare to risk his life in traffic before practicing on low-traffic roads? No! The total number of miles driven by rookie drivers in tough situations would decrease significantly, leading to increases in traffic safety. Indeed, many people who know they would be bad drivers will simply choose to use public transportation instead. Riding the bus can look awfully good compared to facing a threatening axe.

Installing airbags and seatbelts is a way to try to minimize the damage after a car accident has already happened. But an axe can prevent an accident from happening in the first place.

What If Jesus Was Really Resurrected?

Musings of a Non-Supernaturalist

Although I sometimes say I am an atheist, of course I am technically an agnostic: there is no way to fully know if there is already a God or Gods now, or if it is up to us to build God. Since it is Easter, I wanted to think aloud about what I think it would mean if Jesus was, in fact, resurrected. 

Nichole Nordeman has a song on exactly this topic. As background music for these musings, I recomend that you click on the video above of her song “What If?” and continue reading. The video shows the lyrics, but if you want to see the lyrics all at once, they are here. And if you want to see Nichole singing the song live, you can see that here. 

A Plausible Miracle. Let me say first that if any of the miracles in the Bible are real, the resurrection of Jesus seems to me one of the most likely. Many of the other miracles mentioned in the Bible are the sort of thing someone might have written in as a matter of literary license. But the resurrection of Jesus seems to have been quite shocking and jarring to those who attested to it, and not something they understood the meaning of at first, even afterwards. And there seems to have been quite a broad consensus in the Christian community–say around 50 AD or 70 AD–that many people then still living claimed to have seen Jesus after he returned from death. 

Going a different direction, a return of Jesus from death need not be supernatural. Barring an apocalyptic disaster, it would be surprising indeed if human technology 1000 years from now could not bring someone back from the dead as Jesus was claimed to have done. (Remember that I am leaving aside most of the other claimed miracles, and sticking with Jesus’ resurrection itself, which is what there seems to have been the most witnesses for.) In “Teleotheism and the Purpose of Life” I write

Mormon theology, put into a hard science fiction straightjacket, is reminiscent of the idea that we are watched over by benevolent aliens from an advanced civilization.  Not only is this plausible, it is even possible to argue that it is likely.  There are a lot of stars in the Galaxy, but even at a fraction of the speed of light, it would take only a small fraction of the time since the Big Bang to get from one end of the Galaxy to another.   If evolution often favors intelligence, why couldn’t intelligent life arise several times in our galaxy?  If any intelligent life has arisen before us, chances are it arose many, many millions of years before us, simply because it has been billions of years since the Big Bang.  So it is not a big stretch to have aliens from an advanced civilization reach Earth.  The big issue would be Fermi’s paradox: “Where are they?”  “If they are here, why are they hiding themselves from us?”  and whether they are benevolent or not.   If they are here, they don’t seem to have destroyed us, which is something.

To me these are important religious questions, but science fiction is not always recognized for the serious theological speculation that it often is.   A truly open-minded search for God would consider as many possibilities like this as possible, but instead, the focus is usually the much narrower one of whether certain ancient religious texts are true or not.  Looked at without preconceptions, and without regard to which will get you laughed at in polite company, which is harder to believe?  The possibilities laid out in hard science fiction, or the god of the Bible?  By all means, let’s be open-minded about whether God exists or not, but not just about the God of the Bible.

I want to pursue this line of thought, being clear that I am going far afield from orthodox Mormon theology, which sticks much closer to the Bible than I will. 

The Story of the Sages. To give the members of the posited advanced alien civilization a name, let me call them the Sages. I want to spin a story–one that is possible, but most likely not to be true, even in outline–simply because of the large number of possibilities that exist given our current ignorance. 

The original Sages in this story evolved on a planet circling a star within the Milky Way, and gradually spread through the galaxy at sublight speeds over the course of hundreds of millions of years. As part of an almost universal precondition for being a long-lasting advanced civilization (with a few exceptions scattered here and there in the universe, far, far away), the original Sages have developed profound principles of nonviolence and love among themselves. What is more, by human lights, they are mostly what we would call “good,” though they have certain motivations that would seem quite alien to humans–so alien that I personally do not have the eloquence to describe those alien motivations.    

The original Sages put a great value on other intelligent species. When they encounter another intelligent species, it is their practice to bring a critical mass of members of that species immediately into their galactic civilization–so much so that the designation “Sages” has been extended to members of many species who have taken on the values of this galactic civilization.

Although a critical mass of members of each intelligent species is brought into full knowledge of the galactic civilization of the Sages, most of those on a planet such as Earth are left in place because the development of a genuinely native high-level culture for that species is seen as precious. (Of course, there is a limit to how long those on a species’ home planet can effectively be kept in the dark about the galactic civilization, and humans in the 21st century are beginning to approach that limit.) Waiting for native cultural development requires enormous patience on the part of the Sages, but the need for patience is nothing new for a galactic civilization limited to sublight speeds, and there are many other interesting pursuits for the Sages besides their dealings with the home planets of intelligent species. It is not as if this is the main thing they are doing, but many of their other pursuits are difficult to describe.   

To the Sages, within their interest in native cultural development, one of the most important aspects of high-level culture is religion. But here the Sages face a dilemma. On the one hand the Sages want those members of each species who were reserved in ignorance on that species’ home planet to develop religions that are (a) genuinely native to the extent possible, since that will serve that species’ needs and foster that species’ potential best. But on the other hand, at the end of the day, the Sages want the species to come to a set of religions that (b) are in accord with the truth of how the Universe works (which from the standpoint of the vast knowledge of the Sages is nonsupernatural) and © promote nonviolence and love (since a species that had not embraced nonviolence and love would be a danger to the galactic civilization).  

Given the objective of encouraging the development of religions that are as close as possibly to being genuinely native to a species, while being in accord with truth, peace and love, the Sages typically end up intervening in the religious development of a species, but sparingly. They do not routinely do anything in the open that is so technologically advanced that it would be viewed as a miracle, but they do so when necessary for the appropriate intervention in the religious development of that species. The interaction of the Sages with Jesus, including his resurrection, was in this story one of the few times the Sages intervened in an openly technologically advanced way that would be viewed as miraculous by humans on their home world, Earth. 

As I wrote in “The Teleotheistic Achievement of the New Testament,” the overall effect of Jesus and those he is said to have interacted with after his resurrection (including Saul of Tarsus) did a lot to push the development of religion on Earth toward a greater emphasis on nonviolence and love. And Rodney Stark argues in a series of excellent books that Christianity has helped to foster rationality and science as well. Other religions have also contributed a great deal to the positive arc of human history, but few of them required a seeming miracle as big as the resurrection of Jesus to accomplish what they did. (Here I am leaving aside miracles from earlier times that are less convincingly attested than Jesus’ resurrection, which itself is uncertain.) 

Making Our Own Story of the Sages. Let me step back now from the story of the Sages. I want to argue that if the story of the Sages is not true, that we should strive to make our own version of it true. If we are the first advanced civilization to arise in our galaxy, we can strive to be exactly like the Sages in the story. If other advanced civilizations hem us in some way, we should do the best we can. One way or another, we should try to make our home planet, Earth, and the galaxy beyond, a place of peace, wonder, truth, brilliance and love. 

In the words of her song, Nichole Nordeman contrasts a miraculous resurrection to the best that can be said if there were no miracles for Jesus. But if Jesus did not come back from the dead–either through supernatural means or through the intervention of alien Sages–I see a far greater accomplishment than Nichole sees in Jesus being “another nice guy,” in the deepest sense. And to the song’s question 

What if he takes his place in history
With all the prophets and the kings
Who taught us love and came in peace
But then the story ends [without his rising from the dead]
What then?

I say I see grandeur, since Jesus helped to put us on the path to a future for our species that can change the galaxy for the better–if we keep onward and upward in our embrace of all that is good.

Virginia Postrel on Ideals

“Every culture, [Grant McCracken] observes, maintains ideals that can never be fully realized in everyday life, from Christian charity to economic equality. These ideals may uphold incompatible principles, deny the relation of cause and effect, require impossible knowledge, or demand more consistent or emotionally contradictory behavior than human beings can sustain. Yet for all their empirical failings, such cultural ideals supply essential purpose and meaning, offering identity and hope. To preserve and transmit them, cultures develop images and stories that portray a world in which their ideals are realized–a paradise, a utopia, a golden age, a promised land, a world to come (whether after death, the Messiah, the Second Coming, the Revolution, or the Singularity).”

– Virginia Postrel, The Power of Glamour, p. 41