Animal Spirits and Positional Ambition

Rob Horning understands me! Please read his post on the economics and politics of “animal spirits.”

There are perplexingly many glosses “on animal spirits.” One of them is “confidence,” which is what investors faced with uncertainty about the economic climate are now lacking. Another might be “ambition.” As Chris Dillow writes in his mini review of Shiller and Akerlof's new book:

What’s more, given that the private benefits of innovation are low, and the probabilities of success in many arts and industry small, it might be only animal spirits that give us artists and entrepreneurs. As Richard Nisbett and Less Ross wrote years ago:

We probably would have few novelists, actors or scientists if all potential aspirants to these careers took action based on a normatively justifiable probability of success. We might also have few new products, new medical procedures, new political movements or new scientific theories. 

Perhaps, then, it’s not just that animal spirits are ubiquitous – but they are necessary too.

It's worth pointing out that it is exactly this sense of animal spirits, animated by the spirit of ambition or “emulation,” which Robert Frank and Phillip Cook declare inefficient in The Winner-Take-All Society, and argue we should tax into submission. But as Gary Becker and Kevin Murphy point out in Social Economics, echoing Nisbett and Ross, the expected payoff to entrepreneurial risk is so low that in the absence of positional competition, we would get very little of it. Entrepreneurial risk-taking is the source of innovation, which is the source of increasing productivity and wealth. So a society lacking this kind of status-seeking animal spirit might not grow at all, unless it was capable of successfully importing and deploying the innovations of more ambitiously inventive societies.

This focus on positional competition recalls the psychological microfoundations of Adam Smith and David Hume's theories of civilization and economic growth. Their theories of motivation seem to me to do much more to illuminate the recent financial collapse than does modern macroeconomics. The myopia of financial executives making huge bets on securities graded according to algorithms that could not begin to understand was certainly driven by positional competition. The key insight of eighteenth-century political economy is that institutional rules and social norms must align ambitious, emulative, and status-seeking animal spirits to the aims of innovation, refinement, and advancement of the public good. The soaring abstraction of techno-high-finance — which decoupled investment decisions from any human sense of real economic value — encouraged the sense that the great race for astronomical bonuses was consistent with the public interest. And the sums involved discouraged the players from double-checking. It does seems that a kind of carelessness became contagious, and I don't think it's wrong to see “greed” as a source of Wall Street's rather astonishing indifference to verifying the real utility of the game it was playing, though “greed” is not a very helpful diagnosis in the end. Ours was a failure of “regulation” in the broadest sense: the joint failure of institutional rules and the cultural climate to regulate the expression of positional ambition. But the lesson is not to discourage it, but to redirect it; to make it again not only safe but serviceable.

The big question is whether a risk-seeking society — which must maintain a status-seeking, ambitious culture — is or is not fated to run some of its institutions into the ground from time to time and occasionally wreak havoc on the context of trust and stable expectations that makes ordinary economic activity possible.

For those of a scholarly bent, here's a passage from Adam Potkay's A Passion for Happiness: Samuel Johnson and David Hume (I've removed the scholarly citation apparatus) on the central role of “emulation”–which is what they called positional ambition — in eighteenth-century accounts of progress.  

“An honest emulation,” rooted in a “self-love” that inspires us to think highly of ourselves in comparison with others,” is the source of all achievements, all greateness: “the philosopher's curiousity may be inflamed by a catalogue of the works of Boyle and Bacon, as Themistocles was kept awake by the tropies of Miltiades.” Again we should recall Pope: “Envy, to which th' ignoble mind's a slave, / Is emulation in the learned or brave.”

The necessity of “emulation” to a beneficient progress is a, perhaps the, great theme of the Enlightenment in Britain, shared alike by Hobbes, Mandeville, and Shaftesbury, Hume and Johnson. It pervades Johnson's Idler essays still more than his Rambler. The “renaissance of letters” that, according to standard eighteenth-century wisdom, began in fourteenth-century Italy is itself a product of emulation: “[T]he European world was rouzed from its lethargy; those arts which had been long obscurely studied in the gloom of monasteries became the general favourties of mankind; every nation vied with its neighbour for the prize of learning; the epidemical emulation spread from south to north and curiosity and translation found their way to Britain. Emulation is responsible for “elegance” of building, clothing, food; “commerce has kindle an universal emulation of wealth.”

Johnson and Hume agree that the fire that animates both the fine and practical arts “is not kindled from heaven. It only runs along the earth; is caught from one breast to another; and burns brightest, where the materials are best prepared.” The theme of emulation is omnipresent throughout Hume's Essays and History of England–its responsibility for the enlightenment of both ancient Greece and modern Europe; the birth and refinement of all arts and sciences, mechanical arts and manufactures.

Barriers to Effective Schooling

The international evidence shows that private provision of education is often better but never worse than public provision. That there is so little private provision — not just in the U.S., but anywhere — can seem like a puzzle if you happen to think policy will tend to reflect the preferences of a benevolent technocrat. As Carney's piece below shows, powerful entrenched interests may have a stake in making sure private provision stays crowded out. So they'll do whatever it takes to make sure only rich people can afford to send their kids to private schools, maintaining a cartel in control of supply for the rest of the population.

Why else might private provision be so rare? Or, put another way, why might there be such a strong interest in maintaining government control over the supply of education? In a recent working paper, Harvard's Lant Pritchett and Martina Viarengo argue that this is explained by, among other things, the desire of those with a stake in government institutions to control the socialization of children. They build a model that illustrates how the the aim of controlling socialization can help explain the pattern of resistance to private provision, even in places where it is clearly vastly superior. I find this pretty intuitively plausible. One of the first arguments against vouchers, tax credits or other systems of publicly-financed, privately-provided education is that taxpayer money should not go to schools that teach this or that allegedly malign belief. It just so happens that, on the way to making certain that children are not taught that the world is 6000 years old (which would obviously neutralize one's ability to earn a living as a middle manager), children are also imbued with a certain nationalistic civic piety and the belief that, say, FDR saved capitalism from itself. Who knows what chaos might otherwise ensue?

The Structural Inequality Lobby

Tim Carney's piece on the power of the teachers' unions and their massive push to drive a stake through the heart of Washington, DC's modest and locally popular experiment in school vouchers should be sobering to anyone with a romantic view of democracy. 

Beltway bandits, defense contractors, influential industries—most of them pale in their influence efforts compared to the teachers unions, according to data from the Center for Responsive Politics.

Take defense contractors. Lockheed Martin, the top recipient of military contracts most years, spent more on politics than any other defense firm in the 2008 elections. They still spent less than the American Federation of Teachers, which shelled out $2.8 million in the last cycle—with nearly every AFT dime going to Democrats.

The top two teachers unions—AFT and the National Education Association—spent more combined, $5.27 million, than the top two defense contractors.

The top five lobbying firms, combined, didn’t equal the AFT and the NEA in federal contributions in the 2008 cycle. Both of the teachers unions gave more than any oil company, and the NEA and AFT combined gave more than the top four oil companies combined.

These contributions give the unions clout, and federal lobbying records show they use this clout. Again, on closer inspection, the teachers unions look an awful lot like those corporate special interests Democrats supposedly oppose.

The NEA employs four different lobbying firms in Washington, in addition to their in-house lobbying arm, which includes at least six lobbyists.  Over the past two years, the NEA spent $10.7 million on lobbying. Reviewing the filings of the NEA, the AFT, and their K Street hires reveals that lobbying to kill DC vouchers was a priority.


Again, there are substantive arguments against D.C. school vouchers. But with this money trail, it appears that congressional Democrats’ push to kill vouchers is simply a case of the piper playing the tune that the AFT has called.

If you believe, as I do, that the returns to further government spending on education, given its present structure, is zero or negative, and that the best hope for increasing the quality of education for the least well-off, and for increasing economic and social mobility generally, is to legalize competitive markets in education, then you will tend to believe, as I do, that this attempt to destroy voucher programs before than can show themselves effective is nothing less than a powerful political interest group screwing over poor people by bending the democratic process to their advantage. The sad thing, from my perspective, is that strong Democratic partisans (and especially members of the teachers' unions) are likely to violently reject any such argument out of hand on the basis of their deep conviction that the Democratic Party cares about the poor, and so would certainly not allow itself to become captured by groups with interests diametrically opposed to interests of the poor. As time goes on, I think the relevant social science is going to brutalize the standard Democratic position, and the clash between the Democratic Party's most powerful client and the poor will become increasingly stark. But for now, the unions will probably succeed in temporarily extinguishing the possibility of demonstrating a superior alternative to the status quo system of education.

Will Coddling the Middle Class Kill Obama's Plans?

Earlier today I was thinking about the same Lane Kenworthy post Matt Yglesias discusses here. The upshot is that if you want to reduce inequality through redistribution, tax progressivity barely helps. You need to take a huge chunk of GDP in taxes in order to finance progressive spending. The more general, sort of obvious point is that if you want to massively increase government spending, the government needs a lot more revenue. But you can take everything from the rich and you still won't have enough. So you've got to massively increase taxation on the middle class. The best way to do this is through a consumption tax. But Obama keeps reinforcing, again and again, that middle-class tax rates won't rise, as if this is itself a matter of justice. So where's all the money going to come from to do all these amazing things? Eventually, it's a huge increase in taxes for the middle class or nothing. This may not be a big political winner.

The progressivity of the American tax system puts big-spending progressives in a bind. They should want a consumption tax with a huge, wide base. The easiest way for government to devour ever-larger chunks of economic output is through the device of a slow series of very small rate increases on a broad base. The smaller the tax base, the more dramatically you have to hike rates in order to significantly increase revenue. But dramatically hiking rates tends to discourage political buy-in from those who must pay. Indeed, it tends to incite heated resistance. Obama did very well with the rich. But that may not last if he hits them as hard as it looks like he's aiming to. At the very least, pushback from this very powerful bloc of voters will limit his success in raising rates at the top. Perhaps he's cagily playing a baseline-setting game, and by announcing large increases, he'll effectively reduce resistance to small ones, which will look good in comparison. But even the large ones leave him massively short. And government spending cannot be debt-financed forever. And he can only inflate so much of it away.

So Yglesias is right (though he doesn't quite put it this way). Democratic strategists need to be looking at clever ways for the government to take a lot more money away from middle-class families without thereby making the GOP look golden again. Obama's been behaving as though he's much less fiscally constrained than he really is. But by catering to the idea that middle-class taxes shouldn't ever go up, he's making it even tougher on himself. Unless he's in the middle of some kind of ten-steps-ahead rope-a-dope wherein reaffirming the middle class' right to not pay taxes is a way of softening them up to accept huge tax increases, he may be making a mistake. 

Here's what I initially said about Kenworthy's post about revenues and inequality, when I was writing for Free Exchange.

A Rare Foray Into Political Strategy

A couple further thoughts about Obama's alleged incoherence. Of course, much of the economic policy stuff isn't really incoherent. It's just domestic Green Laternism. We will be crippled for a decade unless we muster the will to implement the full surge. The politics of this is the usual politics. If this fails, it's because the wreckers refused to get behind it. No politician gets absolutely everything he wants, so in the case of failure there's usually room to bring in the “close call counterfactual” FTW.

Now, Obama seems to be very boldly arguing: “If not my specific package of policies, then surely disaster!” I think this can be a bit perilous but in this case probably smart since the Republicans are so hapless. If Republicans can sabotage the thrust of the Democrats' policies — refuse funding for your state, call for a spending freeze — and the recovery occurs anyway, then Obama's bold conditional is decisively falsified. But voters aren't logicians, and if we get a recovery, Obama's going to get the credit anyway. So that tack seems like a loser for the Republicans even in the best case. (And in the worst case — everything goes further south and they get pinned with the blame — totally disastrous.) The only plausible Republican strategy is to put forward an attractive personality able to forcefully and intelligently explain in a relatively detailed way why the Dem's plans are likely to fail, and to forcefully and intelligently articulate a plan likely to work better. That's the only way to sow broad doubt in the wisdom of the majority's leadership: offer an alternative that looks at least as or more credible. David Cameron is a great example of how to do this incredibly well. But as Jindal's embarrassing performance shows, the GOP has absolutely no one capable of doing anything approaching this. So, as far as I can tell, the GOP is going to continue to get flattened, Obama will get basically whatever he wants, and if it doesn't work, then it almost worked and who else are you going to trust?

Kill the Mortgage Deduction

I agree with Ezra Klein in agreeing with Ed Glaeser. Here's something, like trashing ag subsidies, you can get a lot of libertarians and liberals to agree on. It can be a bit disheartening to see just how little this kind of agreement amounts to when compared to the incentives of the politicans. (Iowa's extremely powerful Senators will die in the last ditch for our subsidies.) But I think this kind of wonk consensus building really matters over the medium-term. Democracy is not a mechanical cui bono machine and elite opinion can, when not coopted by the incentives of the parties, work as a countervailing force.

Redistribution, Fairness, and Stability

Here's my commentary on this morning's Marketplace

It's really terribly hard saying anything in 300 words. If I'd had more space I would draw out how there is no way to succeed in promoting a unifying “we're all in it together” mood when massive government intervention has massive redistributive consequences that track basically NO ONE's sense of fairness or desert. That's sure to be divisive. When Obama said in the campaign he meant to “spread the wealth around,” I'm sure most people took that to mean downward redistribution meant to rectify either the unfairness of rising inequality, the unfairness of the fact that some people are struggling for no fault of their own, or both. But bailouts of all sorts–to banks, to car companies, to underwater homeowners–spreads the wealth around in an entirely different way. “Investment” in the “green economy” spreads the wealth around. Increasing the size of the military spreads the wealth around. And so on. None of this accords with any coherent notion of fairness. And the scale of Obama's initiatives do badly unsettle the structure around which people build expectations, and that's an independent source of unfairness. We desperately need better framework rules for both private and public finance. It would be silly to oppose serious structural reform. But what we're getting is the kind of half-panicked, half-opportunistic myopic intervention that breeds future half-panicked, half-opportunistic intervention. That is the opposite of what we need.

The Color of Government Money

I'm reprinting this in full from Chris Good at the Atlantic. Someone please tell me how this is supposed to work, even in theory. And someone please tell me how speeding up the process of picking winners doesn't simply make well-prepared regulatory capture specialists like T. Boone Pickens (whose PR blitz seems to have worked to get him into the DoE inner circle) richer simply because they've got the resources to hoover up contracts. 

Chu Works to Get the Green Cash Flowing

After environmentalists and mainstream politicians alike succeeded in dedicating a good chunk of President Obama's stimulus package to green energy, Obama's new energy secretary has been working on ways to make that happen more efficiently. Last week, Energy Secretary Steven Chu (who holds a Nobel Prize in physics) announced a slew of reforms to how the department doles out money, and a department official says more are on the way. The goal: streamlining the process so stimulus dollars can get spent sooner.

Many have posed the economic crisis as an opportunity for green revolution, and at a roundtable discussion on energy yesterday at the Newseum, the economy/energy/environment nexus was on the tip of many tongues.

“We have a plan going forward where we can reduce what could have been years down to months, and we feel very strongly that this thing will work,” Chu said of DoE spending as luminaries such as Bill Cinton, Al Gore, T. Boone Pickens, Senate Majority Leader Harry Reid, and House Speaker Nancy Pelosi listened.

Chu's reforms include rolling appraisals of applications for loans and funding, using outside contractors to underwrite loans, more staff and resources to process applications, and simplifying application paperwork. Chu has appointed Matt Rogers, a former senior partner at consulting giant McKinsey & Company, who also worked on energy procurement reform as part of Obama's transition team, to implement these reforms and oversee the stimulus money.

The stimulus placed $38.7 billion in the department's hands, with heavy emphases on alternative energy, efficiency, and infrastructure modernization. DoE says it will start offering loan guarantees under stimulus provisions early this summer, and that 70 percent of the stimulus cash will be spent by the end of next year.

To hear politicians and activists talk about the timing of stimulus cash flow, “now” seems to be the only acceptable answer. A significant part of Chu's job, so far, has been changing the way the department operates in order to make that happen.

The Incoherent Obama

Matt Welch's column enumerating the shameless contradictions in Obama's speech last night is truly devastating. Welch may have the best bullshit detector in the business. That's why his book on that inveterate bullshitter McCain was so good. And that's why his clear-eyed take on Obama, sadly, seems so fresh. Here's a bit, but do read the whole thing:

Obama aims to be the president of all Americans, a position that appears to be sincere. But I wonder whether in the process he might also want to consider appointing himself chief executive of his own head. All night long, with equally sonorous vigor, he served up confident assertions, only to state moments later, with equal conviction, their near opposite. 

“We will rebuild, we will recover, and the United States of America will emerge stronger than before,” Obama crowd-pleased near the beginning, in the slot normally reserved for lines like “the state of our union is strong.” Not long after, though, Americans learned that our very “survival depends on finding new sources of energy.” Also, “there will be no real recovery unless we clean up the credit crisis…our recovery will be choked off before it even begins,” and if we don't do whatever Obama wants us to do about the banking system, “it could result in an economy that sputters along for not months or years, but perhaps a decade.” Better! Stronger! Crippled for a decade!

After detailing some clean-energy advancements in China, Germany, Japan, and Korea, the president averred, “Well, I do not accept”—there's that self-referencing again—”a future where the jobs and industries of tomorrow take root beyond our borders.” A few paragraphs later, however, zero-sum gave way to kumbaya: “The world depends on us to have a strong economy, just as our economy depends on the strength of the world's.” Just don't you get strong by producing clean energy, Koreans!

It was like this all night. The president's stimulus package “will save or create 3.5 million jobs.” One of those, anyway! His adminstration has “created a new website called so that every American can find out how and where their money is being spent,” unless they try to use it to find out how and where their money is being spent.

The source of Obama's incoherence is easy enough to identify. It's that his stated ends and the Democratic Party-pleasing means he has announced to achieve them are flatly incompatible. He's fighting against himself.