Politics

Book review: Shut Out: How a Housing Shortage Caused the Great Recession and Crippled Our Economy, by Kevin Erdmann.

Why did the US have an unusually bad recession in 2008, followed by years of disappointing growth?

Many influential people attribute it to the 2004-2006 housing bubble, and the ensuing subprime mortgage crisis, with an implication that people bought too many houses. Erdmann says: no, the main problems were due to obstacles which prevented the building and buying of houses.

He mainly argues against two competing narratives that are popular among economists:

  • increased availability of credit fueled a buying binge among people who had trouble affording homes.
  • there was a general and unusual increase in the demand for homes.

Reframing the Housing Bubble

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Book review: The Explanation of Ideology: Family Structure and Social Systems, by Emmanuel Todd.

What features distinguish countries that embraced communism from countries that resisted?

Why did Islam spread rapidly for a century and a half, then see relatively few changes in its boundaries for more than a millennium?

Todd’s answer is that the structure of the family is a good deal more stable than ideologies and religions, and different family structures create different constraints on what ideologies and religions will be accepted. Published in 1983, it still seems little-known.

Maybe this neglect is most pronounced in the English-speaking parts of the world, where one family structure is overwhelmingly popular, and alternatives are often dismissed as primitive relics. France seems more conducive to Todd’s insights, since France has four different family structures, each dominating in various regions.

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It’s been a decade since I blogged about the benefits of avoiding news.

In that time I mostly followed the advice I gave. I kicked my addiction to The Daily Show in late 2016 after it switched from ridiculing Trump to portraying him as scary (probably part of a general trend for the show to be less funny). I got more free time, and only missed the news a little bit.

Then the pandemic hit.

I suddenly needed lots of new information. Corporate earnings releases were too slow.

Wikipedia, Our World in Data, Metaculus, and some newly created COVID-specific web sites partly filled that gap. But I still needed more, and I mostly didn’t manage to find anything that was faster or more informative than the news media storyteller industry.

That at least correlated with higher than normal stress. I suspect that paying attention to the storytellers partly caused the stress.

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TL;DR: loss of topsoil is a problem, but not a crisis. I’m unsure whether fixing it qualifies as a great opportunity for mitigating global warming.

This post will loosely resemble a review of the book Dirt: The Erosion of Civilizations, by David R. Montgomery. If you want a real review, see Colby Moorberg’s review on Goodreads.

Depletion of topsoil has been an important cause of the collapse of large civilizations. Farmers are often tempted to maximize this year’s production, at the cost of declining crop yields. When declining yields leave an empire unable to feed everyone, farmers are unwilling to adopt techniques that restore the topsoil, because doing so will temporarily decrease production further. The Mayan civilization seems to have experienced three cycles of soil-driven boom and bust lasting around 1000 years per cycle.

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Last month, I conceded defeat in my bet (with Robin Hanson) that US COVID-19 deaths would be less than 250,000.

My biggest mistake was thinking voters would care about results, and unite against a common enemy as they did in WWII. I should have been more aware of the tendency to treat natural deaths as more acceptable than deaths due to a hostile agent. Robin clearly did better at evaluating this.

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From The problem with rapid Covid testing, Mayank Gupta writes:

The absolute number of false positives would rise dramatically under slightly inaccurate, broad surveillance testing. At least initially, the number of people going to the doctor to ask what to do would also rise. One can imagine if doctors truly flubbed and didn’t know how to advise patients accurately, a lot of individual patients would lose trust in the medical system (testing, doctors, or both). The consequence of this would be more resistance to health public policy measures in the future.

For a reminder of why rapid testing is valuable, see Alex Tabarrok. Note also the evidence from the NBA that people who need useful tests can be more innovative than the medical system.

This seems like the tip of an important iceberg.

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Lots of people want to frame the 2020 US election as a fight between the left and the right, with the wrong side being near an extreme on that spectrum. They are deceiving you.

The U.S. is facing some extremism, but it has little connection to the extremes of the left-right spectrum [1]. The latest dangers are extreme mainly on a very different spectrum. A spectrum on which Trump and the woke are very similar.

How to describe this spectrum? I’m unsure what the best description is, so I’ll list some that capture important components of it:

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Lots of people have been asking recently why the stock market appears unconnected with the economy.

There are several factors that contribute to that impression.

First, stock market indexes are imperfect measures of the whole stock market. Well-known indexes such as the S&P500 are higher than pre-pandemic, but the average stock is down something like 10% over the same time period. The difference is due to some well-known stocks such as Apple and Amazon, which have unusually large weights in the S&P500.

See this Colby Davis post for some relevant charts, and for some good arguments against buying large growth stocks today.

Stock markets react to the foreseeable future, whereas the daily news, and most politicians, prefer to focus attention on the recent past. People who focus on the recent past see a US that’s barely able to decide whether to fight COVID-19, whereas the market sees vaccines and/or good treatments enabling business to return to normal within a year.

Stock markets don’t try to reflect the costs associated with death, chronic fatigue, domestic violence, etc. Too many people want the market to be either a perfect indicator of how well we’re doing, or to dismiss it as worthless. Sorry, but imperfect indicators are all we have.

Plenty of influential people have been exaggerating the harm caused by the pandemic, in order to manipulate the average person into taking the pandemic seriously. As far as I can tell, this backfired, and contributed to the anti-mask backlash. It also contributed to stocks being underpriced in the spring, so parts of the stock market rebound have simply been reactions to the growing evidence that most large companies are recovering.

The vaccine news has been persistently good, except for the opposition from big pharma and their friends at the FDA to making vaccines available as soon as possible.

Another modest factor is that many companies dramatically reduced their capital expenditure plans starting around March and April. That will reduce production capacities for the next year or two, thus making shortages of goods a bit more common than usual. This should prop up profit margins. But I haven’t noticed much connection between the most relevant industries and rising stock prices.

Why is there such a large divergence between the S&P500 and the average stock?

Investors have developed a somewhat unusual degree of preference for well-known companies whose long-term growth prospects seem safe.

I guessed last year that this would be a rerun of the Nifty Fifty. I still see important similarities in investor attitudes, but I see enough divergences in patterns of stock prices that I’m guessing we’ll get something in between the broad, gradual peak of the Nifty Fifty and a standard bubble (i.e. with a well-defined peak followed by a clear reversal within months).

Remember that high volatility is somewhat correlated with being in a bubble. We’ve recently seen Zoom Video Communications rise 40% in one day, and Salesforce rise 26%, in response to good earnings reports. That’s a $50 billion one-day gain for Salesforce. It reminds me of the volatility in PetroChina in 2007 (PetroChina has declined 87% since then). There was also that $173 billion rise in Apple after it’s latest earnings report, but that was a mere 10.5% rise.

Some of the divergence is due to small retailers losing business to Amazon, and to small restaurant chains losing business to fast food chains.

The bubble is a bit broader than just tech stocks – Home Depot and Chipotle are well above their pre-pandemic levels, by much larger amounts than can be explained by any near-term changes in their profits.

Incumbent politicians have been trying to buy votes by shoveling money to influential companies and people. There’s been some speculation that that’s biased toward large companies. It seems likely that large companies are better able to take advantage of those deals, because they’re more likely to employ someone with expertise at dealing with the government than is, say, a barbershop.

But I don’t see how that explains more than 1% of the stock market divergence. Stocks like Apple and Tesla have risen much more than can be explained by any change in this year’s profits. Any sane explanation of those soaring stocks has to involve increased optimism about profits that they’ll be making 5 to 10 years from now.

Large companies have better access to banks. Large companies typically have someone who is an expert at dealing with banks, and they have the accounting competence to make it easy for banks to figure out how much they can safely lend to the company. In contrast, a family-owned business will be slower to figure out how to borrow money, and therefore is more likely to go out of business due to unusual problems such as a pandemic. That might explain a fair amount of the divergence between the S&P500 and what you hear by word of mouth, but it explains little of the divergence between the S&P500 and the publicly traded companies that are too small for the S&P500.

I’ve only done a little selling recently, and I’ve been mostly avoiding large companies for many years. I’m guessing that Thursday’s tech stock crash wasn’t the end of the bubble. Bubbles tend to continue expanding until the average investor gets tired of hearing pundits say that we’re in a bubble. That suggests the peak is at least a month away, and I could imagine it being more than a year away.

I’ve been brainstorming about what might happen with this year’s election. Here’s one of the more interesting (but not likely) scenarios that I’ve imagined:

Most parts of the US are experiencing their second or third wave of the pandemic. Two of the more heavily funded vaccine trials have just been declared to be failures. No US or European company expects to have a vaccine ready for FDA approval before December. Prediction markets say Trump’s chances of re-election have dropped to 20%.

China announces on October 27 that Sinopharm Group has a COVID-19 vaccine that meets China’s safety and effectiveness standards, and can deliver about 1 million doses by November 2.

China offers to allocate half of this initial batch of vaccines to the US, on the grounds that the US is a relatively needy country, and Donald Trump is currently a close friend of China.

Why, I hear you wonder, would China treat Trump as a friend?

China is strong enough that the government can afford to tolerate Trump’s annoying trade wars, and they maybe even see some benefit from reducing China’s somewhat excessive dependence on the US. It’s important to keep in mind that democracy is one of the larger threats to the Beijing regime (h/t scholars-stage). 2020 has proven to be a good year to mount a campaign to demonstrate that socialism with Chinese characteristics is superior to US-style democracy. I’ll leave as an exercise for my readers to figure out how many ways the idea of democracy could be discredited by a Trump re-election.

Why would a Chinese company be faster than US/European companies at producing a vaccine? My initial guess was differences in regulatory red tape would favor China, but my attempt to find evidence for such a pattern turned up nothing. My current guess is that differences between countries in who volunteers for a vaccine trial will have important effects on how quickly the control groups get infected. Trials in some countries may attract only people who are sufficiently risk-averse that the control groups are slower than expected at getting infected. Please don’t assume that I have any useful expertise here; I’m mostly just guessing.

I also wondered whether willingness to do human challenge trials would determine who verifies their vaccine first. I have vague intuitions that China is more likely than other countries to try that, but I haven’t found evidence to confirm those intuitions.

How would voters react to this scenario? My best guess is that the election would be surprisingly close, but Trump would still lose.

The stock market would rise due to the vaccine benefits. There would be no good way to infer the market’s opinion about the election until the results are announced. I’m still confused as to how this scenario should affect my investment strategies.

P.S. – China and Sinopharm aren’t willing to predict when they’ll able to submit the forms needed for FDA approval, and ask that the US consider the approval of China’s NMPA to be good enough evidence of the vaccine’s safety and effectiveness. How does the FDA react?