Friday, September 20, 2019

An Open Letter to a Smart Young Man About Dating Women


Dear [redacted],

It’s been a while since we spoke. You’re finishing high school and starting college soon, no? Very good. One of your parents (I won’t say which) asked me to talk to you about dating issues. It’s not that they couldn’t tell you some of this stuff themselves. It’s just that teenagers often don’t want to listen to things coming from their parents.

From your point of view, this is basically unsolicited advice. The first rule of interpreting unsolicited advice is that it is nearly always actually about the person dispensing the advice, and only somewhat about the person to whom advice is being given. Solicited advice is fundamentally different in this regard. Usually, the most heartfelt, passionate advice that people give is addressed to a younger version of themselves, no matter who the nominal audience is. It is usually about the mistakes they made that they now understand better, but also sometimes about great triumphs they had which their younger self wouldn’t have envisaged. These two possibilities complicate matters. It's somewhat like Freud. He was wrong on the specific point that everyone secretly wanted to have sex with their parents, but right on the broader point that if you want to understand someone's personality, you need to start with the relationship they have with their parents. So it is here. It doesn't mean that unsolicited advice is wrong, it just means you should consider the extent to which you actually fit the same case as the younger version of them, and adjust accordingly. I’ve tried to tailor this as much as possible to a) the parts I think you might actually listen to, and b) the things you might not figure out on your own. It as much about you as possible, subject to the caveats above.


This is not primarily advice about how women work, or how to find one to date. For that, read the Chateau Heartiste archives, especially the early stuff. He’s brilliant, but you need to be careful with Heartiste. His observations about women and their psychology are very apt and incisive. Follow what Heartiste says, and you will get laid. For a man of your age, this is almost certainly your main concern. But make sure you keep an eye on the positive versus the normative. Heartiste is at his best as a positive description of evolutionary psychology of the sexes - in other words, how the world works. But there's a separate normative question - how ought you act in your life with this knowledge? This is distinct. Just because you can do something doesn't mean you ought to. And we're back at the point above – Heartiste’s advice, like everyone’s, is probably going to be slanted towards being somewhat self-serving. There's a normative suggestion that endless philandering is something that you should do, that it's a life well lived. Well, that's the rub, isn't it? Do you want to end up like Heartiste, at least as much as you can estimate what his life is like?

But you're busy. You don't want to spend weeks reading old blog posts (though you should, they're very entertaining too). Okay, fine. Let me give you the condensed Cliff notes version, as much as I understand it.

Lesson #1.

On average, women will be attracted to behaviors and traits that would have been associated with the alpha male chimp in pre-historic society.

Being big and strong, obviously. But more importantly, how you carry yourself. Are you confident? This is nearly universally stated by women as being attractive. Being confident in a chimp society, if you weren't the top chimp, was a fast way to get yourself killed. Now it isn't, of course, but our brains are still wired the same way. Similar things apply for status and social proof. Acting like you have options with women, and could take it or leave it with any particular girl, is paradoxically more likely to succeed than acting very eager and desperate. Girls can smell desperation at a thousand miles. If you are desperate, it’s all the more important to act like you’re not.

You're a smart young man, and like most smart young men, your social status will probably go up as you leave high school, not down. The dumb jocks peak at age 14. But in the interim, you'd be amazed just how far "fake it" can take you as advice. If you pretend to be confident, it works almost the same as the real thing. Easier said than done, of course, but that's life.

Lesson #2.

In any battle between women's stated preference and their revealed preference, bet on their revealed preference.

Applying this takes some skill, because you have to pay attention to what women's revealed preference actually is, and society tends to give you bad advice on this front. Moreover, you will be tempted to make the worst common mistake that many young men make - if in doubt, they substitute the question "what would I want in this situation", which is generally a very poor strategy. The traits and behaviors that you would want in a woman are generally not the same traits and behaviors that a woman wants in you.

For instance, suppose a woman says that she wants a sweet, funny guy who buys her roses and cuddles her at night. She's not lying, she does want this. But what it's important to realize is that when she says this, she's imagining Brad Pitt doing these things. When a man is high in status, displays of commitment are desired, because the primary worry is that he's going to leave. You, however, have the preliminary problem - how to I become more of a facsimile of Brad Pitt? Not a movie star necessarily, but how do I carry myself like Tyler Durden in Fight Club? This is the problem you need to solve, but women won't tell you this. If you start out being Bob from Accounting and act like their stated preference claims, you'll get fired. If they say they want sweet guys and instead keep going out with the @**hole bass player from the band, you'd do far better learning how to play bass and give less of a damn when dealing with women.

A crude but effective approximation of “bet on revealed preference” is just “act as much as possible like the guys who are successful with women”.

Lesson #3.

Don't be pathetic.

The reason I like this version is that it condenses many things down into one idea, because we all kind of know what "pathetic" looks like. Like many things in life, game advice eventually hits diminishing returns. And the biggest benefits actually come early on, from cutting out the left tail of pathetic, cringeworthy behavior. If you do nothing else, read Heartiste's hilarious "Beta of the Monthseries. This will give you a range of examples of terrible behavior to avoid. If you just avoid this kind of thing, you'll be way ahead of the curve.

As they used to say when people still wrote blogs, go read the whole thing. There are only a few blogs I've gone back and read from start to finish. Heartiste is one, and Moldbug is the other.


At some point, I decided that I was only going to write blog posts about things that I hadn't actually read elsewhere. So think of this letter as an addendum to the kinds of things I've seen written in game blogs, and a way of avoiding the pitfalls that might come from taking 2010-2018 manosphere advice too literally.

Chief among these is the following. One of the most consistently unpopular messages in human society is the reality of the budget constraint. Telling people that life has hard, unpleasant binding tradeoffs, and that something inevitably has to be sacrificed, is a truth that it is human nature to resist as far as possible.

It is extraordinarily unlikely that you will get everything you want. If you are lucky, you will get some or most of what you want, depending on how expansive are your wants. The right choice, in a big picture sense, will very likely involve giving up something else you want, with all the attendant regret that entails.

The fact that people generally don’t want to hear this message goes doubly so for those who write about self-improvement. They’re right to do so for the purpose they have. For game in particular, imbuing a sense of irrational self-confidence is very important when approaching women, especially among self-doubting beginners. It’s not for nothing that I began by saying “read Heartiste first”.

Being irrationally overconfident when it comes to women is great tactics, but not great strategy. In other words, when approaching any one woman at a bar, you absolutely want to be irrationally overconfident. But it doesn’t follow that you also want to be irrationally overconfident about your long-term budget constraint, and what tradeoffs it implies.

The rest of this post is primarily about what some of those budget constraints are, as I see them, and what you should do about them.


Game authors are very good at skewering women's self-deceits and delusions. The largest among these is that they can just date around, prioritise their job and travel, and start thinking about trying to find a husband in their late twenties or early thirties. This is, of course, a disastrous strategy, on average, and comes with a high probability of ending up as a cat lady, or ending up with no children/fewer children than you’d like, if you do find a husband.

But still, there's an equivalent male delusion, and it goes like this.

“Men just keep getting better and better over time.”

It is indeed true that men don't have nearly as steep a decline in sexual market value over time. This is complicated by the fact that wealth and status take on different trajectories, and women's preferences aren't as strictly driven by looks and youth as men's are.

But the basic idea that men just keep getting better seems ludicrous to me, particularly because it violates revealed preference arguments. Limiting oneself to women above the age of consent (here assumed 18), at what age are women the most physically attractive? Probably ages 18-22. Men mostly, but not entirely, have preferences based on age and physical attractiveness, both of which are correlated on average. Great. So who are the 18 year old women actually dating?

The answer is, largely men ages 18-25. The 22 year olds are generally dating men ages 22-28. At least in my observational experience.

Now, part of this is just the mechanics of dating. Who are you actually interacting with? If you're at college, probably other people at college. In a different world, say southern Europe 300 years ago, it may have been much more normal for a 15 year old to marry a 40 year old. But we ain’t in that world. The Smashing Pumpkins put it quite memorably: Love – it’s who you know. At a bare minimum, people the same age have a much higher chance in our largely age-stratified society to meet and interact with hot young women in an environment where dating is on the cards.

But even so, let's consider the hypothesis that 18 year olds are actually more attracted to 35 or 40 year old men. In such a case, we have to posit a fairly significant market failure as to why they aren't dating them. Does Tinder not exist for such women? Could they not just go online and select their desired age range as 35-45? Of course they could. Doesn't revealed preference seem more believable? In this view, your ability to attract 18 year olds probably maxes out at about 22, at least if you’re still in college then. Your ability to date 22 year olds probably maxes out at 26-27. If you're getting better on other dimensions (richer, higher status job), you can compensate partially, but probably only partially.

If you want to date 27 year olds, you'll have a good many years ahead in which you can do this easily. If you want to date college freshmen, you won't. You can still do it, it just involves getting luckier, or drawing from more idiosyncratic bits of the distribution (i.e. paying a cost on some other dimension).

Positing that George Clooney has gotten more attractive to women as he aged is every bit as absurd as saying that Christie Brinkley still looked hot at 50. Neither is remotely representative of the average person's experience. If you want to find out how easy it is for a 40 year old to date 18 year olds, ask a 40 year old. They'll tell you. Or if you don’t believe me, just set up a tinder account yourself with some pictures of decently attractive 40 year old men, set your age as 40, start swiping, and see how many matches with 18 year olds you get.

There is one offsetting aspect to this, however, which is especially apt to confuse some people. Many of the people writing game advice are generally smarter than average. And in my anecdotal experience, smart men who think explicitly about game do so because a) it’s not something that came naturally to them as a teenager, and b) it’s something they only got better at with age. So for these people, the age decline tends to be muted by the fact that their experience with how to interact with women was getting better, at least for some time.

This can indeed offset a good amount of the decline, and as a point estimate will probably actually improve your chances.

But this is best understood as you moving up the cross-sectional distribution over time. It doesn’t change what the age-related decline is for the distribution as a whole.


Why does this matter? Well, in the short term, it tells you that the regret avoidance strategy when you’re just casually dating is to date as young as you can, for as long as you can. There’ll be a good number more years where you can date 25 year olds, but the 18 year olds are going away faster than you think.

But this is a relatively shallow lesson. There’s a more important one.

Suppose you believe, as survey evidence tends to indicate, that marital unhappiness and a woman’s divorce risk increases with her lifetime number of sexual partners. Or, suppose you’re one of the mass of normal men that feels somewhere between uncomfortable, grossed out, or angrily jealous when they think about the idea of one’s dearly beloved having boned other men, especially lots of other men.

Partner counts are a ratchet. They go up, but they never come down.

For any given sex drive that a woman has, her partner count is lower when she is younger.

Add this to the point above, and you have the following.

Your ability to wind up with a wife where you got to enjoy all of her best years and experiences peaks relatively early.

The price you pay is likely giving her most of your best years.

If you choose to spend those years just casually hooking up with random women who you aren’t going to marry, you will get the fun of banging lots of women. But it will probably come at the cost that your wife, when you meet her, will be older, and will have banged more guys already. To make things worse, the longer it takes you to realise this, the more you’ll keep chasing after the dwindling chances of getting the kind of wife you could have gotten if you’d met her at age 22. The longer you wait, the larger the gap between what you ideally want, and what you’re likely to get. At a certain point, you might not end up with anything at all that meets your estimates of minimum acceptable partner.

This is not fun to contemplate, but I think it’s true nonetheless.

I don’t mean this rhetorically to imply one course of action or the other. A budget constraint is not advice. The guys that met their wife when they were both freshmen in college nearly always have regrets about the fact that they didn’t get to have as many years in college and in their 20s being free and single. This message is true, and it tends to get emphasized fairly loudly in the modern world. Which is why I bring up the flip side. The guys that did get to enjoy lots of years of partying in college and their 20s don’t generally get to marry women they met when such women were 18 year old virgins, and go into a relationship with their eventual wife when neither one has very much baggage from past relationships. This doesn’t get talked about at all, because it cuts against much of the grain of modernity to acknowledge that lots of men prefer women to have lower partner counts. It sounds to modern ears like “slut shaming” (a hilarious concept that tries to paper over the reality that the harshest critics of women who sleep around a lot tend to be… other women).

See point zero. The extent to which this applies to you depends to a considerable extent on your preferences.

If you aren’t jealous by nature, great! You can sleep around more in your early 20s and it won’t trouble you that your wife wasn’t a virgin when you met. I think jealousy is an understandable and common human trait, but the more common character flaw comes from having too much of it, rather than too little. If you don’t feel it, I certainly wouldn’t try to talk you into it. You’ve got a preference set that will pose you fewer hard tradeoffs in life. Happy days!

If you aren’t particularly into younger women, also great! You’ve got a much longer horizon in which to meet late 20s and early 30s women. Doubly so if you don’t want to have children. The budget constraint is thus considerably relaxed.

But if you do feel the above things, you might want to ponder such a tradeoff in advance. You’re probably going to have to give up something, unless you get lucky and meet a hot 18 year old when you’re 29 who’s super into you.

On average, by definition, people do not get lucky.


Gary Becker modeled the marriage market as being a matching problem. Men and women assortatively match on some set of traits, whether income, race, intelligence, attractiveness, or what have you. Gary Becker was a God damn genius, so I don’t mean to cast aspersions on this view. But I think there’s another aspect worth understanding that’s better described as an optimal stopping time problem.

If I had to sketch out the model, it would look as follows. Women come along according to some Poisson process. They are drawn from a distribution of quality and interest in you / compatibility. You can date each woman for some time period, during which you stop receiving a flow of new women. Your utility function is increasing in the number of women you hook up with, and with the average quality multiplied by the duration of the women you’re hooking up with. Finally, the average quality rate of the women you meet decreases with time, as per the point above. Your choices are a) which women to date versus reject, b) if you’re going to date them, for how long, and  c) when to pick a single woman to stick with for the remainder of your time period.

Solve for the optimal strategy.

One lesson from this is that the required quality threshold for marriage should be higher when you’re younger to settle on a person as a wife. This holds even if you know the true quality distribution, and would get worse if you were trying to learn about, e.g. how much is that I really love this girl, and how much is this just what nice long term dating feels like?

Another is that anything that increases the rate of meeting women (e.g. online dating) will have large increases in welfare. A lack of new arrivals is the biggest cause of failure to find a wife. If your life station is preventing this from happening, think very hard as to whether it’s worth it.

Yet another is that you should be particularly careful whom you “casually” date for extended periods of time, because this is going to reduce the rate at which you meet someone you might actually settle on. You will feel like you’re still single-ish, but if you’re not actively looking, you’re less likely to find someone.

Still another is that the greater your risk aversion, the more you’re going to settle on a medium quality partner early on.

But for our purposes here, the biggest philosophical difference is that the “optimal” part of optimal stopping time only holds in an ex ante sense. Once you stop, you’ll never really know what else would have come along. Unlike in a matching model where one sees the whole distribution, here you never do. Whoever you pick will always end up containing what ifs and uncertainties.

This setup also highlights the problem of having standards that are too high. I think this is another area where one can get mislead by with manosphere writings. It’s easy to enumerate a list of stuff that’s important in a woman, or stuff that’s a deal-breaker. Women do the same thing all the time, with their endless point checklists.

Rather, what’s hard is know the actual distribution of potential traits that you want, and which combination you might be able to plausibly get.

The “combination” part is especially hard. If you’re someone with options, you can probably score very highly on any one trait that you like in a woman. But the danger is in wanting too many traits at once, each of which is individually attainable. Even if the probabilities are independent, you start multiplying them out, and you realize you’ve got a pretty small chance of meeting them all.

The stereotype of bad women’s checklists is that they all want a 6’4 male model billionaire with rippling abs. But this understates the universality of the problem. The giveaway is “billionaire”, which is shorthand for “unattainable all on its own.”

Rather, the more pertinent problem is if you want a blond, 18 year old, hot, slim, smart Christian virgin with a sweet personality and a sense of humor (and I want to have banged a hundred girls before I met her).

This is the equivalent. But there’s not one single trait that gives it away. You probably could get at least any one trait if you really tried, or perhaps several. It’s unlikely you’ll get all of them.

This problem gets even worse if you fail to account for the likelihood that at least some of the traits you want are probably negatively correlated. For instance, one tradeoff I’ve noticed – being smart, and being easy going (broadly defined) are negatively correlated in women. Not hugely negatively correlated, but negatively correlated. Being smart tends to go with career ambition, and higher than average chances of teeth and claws ball cutting lawyer-like behavior. This is just one example. Being hot and smart might be another. Being hot and a nice person might be another still. When the world is willing to put up with all your b.s. because you’re very attractive, it’s hard to not turn into a bit of a b****. Having a high sex drive and low partner count is a definite one.

This is hard enough to forecast when you know the correlations, let alone if you’re not thinking about them.

Very few people in the manosphere write about which negative traits you should just lump it and put up with in order to compromise, because your wife is going to inevitably have things about her that you don’t like, just like there’ll be things about you that she doesn’t like. It doesn’t fit the “get irrationally overconfident!” vibe.

But I assure you that being irrationally overconfident that you’ll marry a blond, 18 year old, hot, slim, smart Christian virgin with a sweet personality and a sense of humor is not a recipe for winding up happy, if it causes you to reject all sorts of very eligible women who don’t meet that standard, and you only realise your mistake once your pool of options has shrunk.

Compromise is easier to stomach when you’ve got both tradeoffs in front of you, and you can see exactly what you get in return – in other words, when you’re choosing between two direct options. It’s much harder in an optimal stopping time world. Because you’ll have the lingering uncertainty that perhaps if you’d just waited longer and gotten a higher draw, the compromise might not have been necessary in the first place. This is the problem of the optimal stopping time psychology.

But if you set your standards high enough, you only end up with a wife if you effectively win the lottery. Or, even worse, if you win the lottery at the right time in your life, when your optimal quality threshold is sufficiently low that you’d actually take it.


The above is just one example of the point that the budget constraint problem is made much worse when the person doesn't realize that what they want is either impossible, mutually contradictory, or so negatively correlated as to be astonishingly unlikely.

To a psychologist, unlike an economist, the idea that people want impossible and contradictory things is not unusual. Rather, it's par for the course.

So what, in the generality, do men want?

I think they want three things.

First, they want to have a beautiful wife/long term girlfriend figure, who is sweet and caring, loyal and faithful only to them, that they can fall asleep next to at night and wake up next to in the morning.

Second, they want to be able to bang a wide range of hot young women on the side in a casual, no-strings-attached way, in a manner that makes them feel powerful and attractive (which, as I've noted before, rules out prostitution, which is begging for sex via the medium of money).

Third, they want to not feel like a hypocritical @**hole who goes around hurting those near and dear to them.

If you are lucky, you get to pick two out of three. Unless you are a sociopath, and they tend to have other problems. If you are unlucky, maybe you get one or none.

This is a fairly hard tradeoff. The number of women that are genuinely happy with a one-way open relationship is very few. The number of men who are genuinely happy with a two-way open relationship is similarly few.

This has an important lesson.

The hallmark of a good life decision is that it will probably feel vaguely unsatisfying, and there will always be a "grass is always greener" aspect. Beyond a certain point, the married man will vaguely envy the single man's variety of women. The single man will envy the married man's companionship and life certainty. The faithful will vaguely envy the freedom of the man with the selfish courage to have an affair or sleep with a prostitute. The cheater will envy the faithful man's ability to sleep peacefully at night and not have to hide his phone and lie about his whereabouts.

It is unlikely that the right decision will leave you with no regrets whatsoever, unless your preferences score very low on one of the three points above. Way down the line, one should not take the fact of vague regrets as indicating that you’ve made some mistake. The same problem exists on a smaller scale in any long term relationship.


You’re thinking, “Come on Holmes, I’ve barely started in college. I’ve got better things to do than worry about either finding a wife now, or some weird scenario where I’m having difficulty finding a wife at age 40.”


I can only end with the prompting to think further ahead, with a kind of empathy of what things might feel like at the time, and what you might do today as a consequence. This is not most people's default way of thinking, as a famous statesman once said:

The supreme function of statesmanship is to provide against preventable evils. In seeking to do so, it encounters obstacles which are deeply rooted in human nature. 
One is that by the very order of things such evils are not demonstrable until they have occurred: at each stage in their onset there is room for doubt and for dispute whether they be real or imaginary. By the same token, they attract little attention in comparison with current troubles, which are both indisputable and pressing: whence the besetting temptation of all politics to concern itself with the immediate present at the expense of the future.
Above all, people are disposed to mistake predicting troubles for causing troubles and even for desiring troubles: "If only," they love to think, "if only people wouldn't talk about it, it probably wouldn't happen."
Perhaps this habit goes back to the primitive belief that the word and the thing, the name and the object, are identical.
At all events, the discussion of future grave but, with effort now, avoidable evils is the most unpopular and at the same time the most necessary occupation for the politician. Those who knowingly shirk it deserve, and not infrequently receive, the curses of those who come after.

This sounds very downbeat, but it’s not. Quite the contrary. Get it right, and you've got a lifetime of happiness ahead of you. More importantly, only in the fullness of time will you realise just how many options you had in front of you right at this moment, and how much possibility lay ahead of you. It’s an exciting time, and many is the old man who wishes he could be back in your shoes.

Good luck.

Your friend,


Thursday, July 25, 2019

On the Surprisingly Apolitical Nature of the Fed

The eternal question about the civil service is its level of competence. At one end of the spectrum is the fat, curmudgeonly woman at the DMV. At the other is the Hollywood depiction of the CIA. Reality seems to vary by department, and is usually somewhere in between. I think a lot of conservatives tend to be skeptical of government in general partly because the bits of government that they are forced to interact with are so woeful. Waiting hours in line at the DMV to fill in a form that should be able to be done online, for instance. The ridiculous and inefficient security theatre of the TSA, staffed by inept, surly, disgruntled buffoons. The post office managing to screw up deliveries at a far higher rate than FedEx or UPS. It’s only natural that this perception is extrapolated to all the bits of government that we don’t actually interact with personally.

But to a large extent, this is a function of the types of people these places hire. There’s some aspects of government that will inevitably involve distorted incentives and poor performance from a lack of competition. But even if the difference with the private sector is always there, the level doesn’t have to be appalling. In Singapore, government jobs seem to be viewed as prestigious and well-paying, and so attract relatively talented and competent people. Or, to go back further, you would give your left nut to have Evelyn Cromer administering the USA, rather than any of the leaders we’ve had since I’ve been alive. In other words, it certainly doesn’t always have to be as bad as the modern US.

When the US scrapped the civil service exams because of disparate impact (incredible, I know), it ended up having the biggest effect on low level jobs that you can’t sneak in other requirements like college degrees. This is how the DMV and the TSA got so awful – it turns out that IQ matters, even in low level clerical or customer service jobs. In this respect, the Fed has held out incredibly well by virtue of the fact that a lot of its jobs require a PhD in finance or economics from a top university. PhD programs have so far mercifully been largely spared the wrath of the Cultural Marxist need to bring in diversity even at the cost of competence. Moreover, even if you get in, you still need to pass, and convince the hiring committee that your thesis is actually good. In this sense, the Fed is largely drawing on a fairly talented pool of people who are pretty well versed in current economic research (for what that’s worth).

So if the Fed has avoided the obvious failure mode of being staffed by imbeciles, how does it fare on other measures? The interesting one is regulatory capture. Like any regulator, it can be captured by its employees, by politicians (which, ironically, is how the system is meant to work, but which in practice is usually treated as a design defect), or by the companies and groups that it’s meant to be regulating.

In terms of being captured by its own employees, this is hard to discern clearly, but I think that this has happened less than at most agencies. The biggest reason is that, other than the Fed Board, the regional Feds are notionally private, and so can set their own salaries and hiring/firing conditions. Even the Board seems to pay approximately market rates for the people it hires. This seems to gets rid of a decent amount of the insanity of the public service working conditions. When you can’t pay employees more, they extract concessions in the form of goofing off, unions to make it so they can’t get fired, etc etc. But they’d probably rather take the costs just in the form of more cash. This doesn’t have the deleterious effect that them simply being lazy has – it’s at least a transfer, rather than deadweight loss.

The biggest surprise about the Fed, however, is the fact that it seems to have been able to maintain relative political independence up to now. Independent central banks were a radical idea in the 19th century, where monetary policy was hot button political issue. William Jennings Bryan effectively wanted loose monetary policy (in the form of bi-metalism) to inflate away the debts of farmers. Letting a bunch of PhDs just run the show was probably not likely to be viewed as a compromise answer. But oddly, this kind of redistributive aspect of monetary policy doesn’t get thought about a ton anymore. Instead, the main effect seems to be about what monetary policy does to people’s 401K plans via the level of the stock market. This may be dumb short-termism, but at least everyone is on pretty much the same side.

In the modern ear, Donald Trump has decided, at least via twitter, to talk derogatively about the Fed’s policy, and suggest that they need lower interest rates. I don’t think the Fed takes this especially seriously. Which is fortunate, to be honest. Whatever you think about the Fed’s monetary policy since the great recession, you’d have to be incredibly optimistic to think that Congress or the Presidents would have done a better job. Instead, you can see exactly what the pressure would have been – lower interest rates before an election, consequences be damned. If it creates inflation, well too bad for the next guy. In other words, we could have the same level of far-sighted statesmanship that we currently observe with the US fiscal deficit, but with monetary policy as well. What a delight that would be.

At least on the monetary side, part of the reason the Fed seems to have stayed largely professional and apolitical is that it really has only one main button it can press – interest rates up, or interest rates down. And while people debate furiously over the relationship between that and the state of the economy, most people are agreed on at least the outcome they’re aiming it, namely high growth, low unemployment, and price stability, currently taken to mean low but positive inflation. It seems likely that the Fed has only an approximate idea of the relationship between the variables in question. But then again, it doesn’t seem like most of the public has any better idea either, and so are largely content to let them do what they think is best as long as things aren’t collapsing.

The main people with strong views on the matter seem to be people that want the Fed abolished and US dollars replaced with gold or bitcoin. I tend to think monetary policy when implemented sensibly is a useful tool, and giving it up for a fixed money supply would probably cause more harm than good. That said, my priors are pretty wide on what a fixed money supply would actually do for an economy. I found the Friedman case pretty convincing that letting the banks fail in the 1930s was one of the worst things the government did, and contributed significantly to prolonging the depression. But even if you disagree on this (and plenty of smart Austrians do) the Austrians’ view seems especially far-fetched on a political economy basis. When the world is melting down, governments are always going to do something, even if that something turns out to be significantly counterproductive. Even from an Austrian perspective, lowering interest rates is probably among the less harmful knee-jerk policies one could imagine, compared with, say, nationalizing industry or applying across-the-board price controls.

The more interesting question, and the one that’s harder to answer, is whether the Fed has been captured by the banks. In terms of the broad question of monetary policy, and whether and how to intervene during financial crises, there’s probably not a lot of disagreement between major banks and the Fed. If you think that they’re both wrong, this understandably looks like collusion and regulatory capture. But I think it’s more likely that both groups tended to come from the same business schools and economics departments, and this is largely what gets taught there. And while there is reasonable agreement between banks and the Fed on what should happen ex-post in a crisis (grumblingly bail out failed banks), the ex-ante question is not nearly so clear. In particular, most banks would probably like to see capital requirements cut significantly, and scrap the various costly stress tests that the Fed does on major banks. I’m not saying this is a major bone of contention, but it’s not exactly like banks get everything they want either. 

The stronger case, however, seems to involve some of the current implicit subsidies given to banks. I’m not even talking about deposit insurance, which is related to the “letting the banks fail” question above. Rather, the decision since the crisis to start paying interest on reserves looks a lot like a back-door bailout and subsidy. No no, they say, it’s just an important aspect of unconventional monetary policy. Great! So can I, as an individual deposit my own money at the Fed to take advantage of this same policy? Ha ha, no, of course not! Also, we’ll continually shut down any bank that tries to just operate as a pass-through entity to enable this, a proposal called narrow banking. When even John Cochrane is saying this makes you as the Fed look dumb and crooked, you should probably take heed.

But that’s the messy nature of regulation. You’re never going to get all of what you want, and sometimes dumb things happen anyway, usually for a mix of motives. In other words, the Fed isn’t the Hollywood version of the CIA, but it’s a hell of a lot better than it could be. I almost keep expecting it to get gutted and politicized at some point, and end up as some social justice economic group like the CFPB. It could be worse. It probably will be worse.

Contra Chinese folk wisdom, may you continue to live in uninteresting economic times.

Friday, July 19, 2019

On the Divided Nature of the Civil Service

At some point a few years ago, the predictive power of my models of permanent government improved significantly when I stopped conceiving of the government as a single monolithic entity with a single set of preferences. Rather, one usually gets a lot further by conceiving of different parts of the government as separate fiefdoms, with different aims, different power structures, and different allies.

The standard version of this is to distinguish between the politicians and the permanent civil service. It's definitely true that these groups often diverge a lot. You saw this most flagrantly during the 2013 government shutdown, where in response to mild threatened funding cuts, the Parks service put up barricades to shut down the Washington Mall, even though a) it's just some statues and grass, b) it's not clear what the Parks service even does there, and c) it takes less work to just not show up than to show up with barricades to ruin tourists' vacations. If you don't have this in your mental model of the world, I honestly don't know how to help you. But it seems that, even when just considering the actions of the bureaucracy as a whole, similar things apply. A lot of the time, there isn't even just one civil service.

For the US in particular, one occasionally runs into situations where if one is forced to ask "what does the US government want to happen?", the only conceivable description is that the US government is insane, evil and schizophrenic. To me, the cleanest example of this was the late Obama era policy towards Syria, where the US as a whole was supporting three out of the four sides of a civil war. The State Department and the CIA seemed to be gung-ho about regime change at any cost, supporting the "moderate" Sunni rebels, who kept on defecting to ISIS. ISIS was clearly undesirable, but apparently still viewed as better than Assad. While there wasn't any explicit support for them, the constant drumbeat that Assad had to go, and the fact that ISIS were almost certainly the most poised to take over the place, came across as at least tacit support. The Department of Defense was supporting the Kurdish rebels, who were fighting against ISIS. But they were also supporting the Turks, who were periodically fighting against the Kurds, because they were long-term important Defense allies.

Now, if one were forced to explain all this in terms of what "the US government" wanted, the only plausible models would seem to be that the US was just an agent of chaos, supporting everyone fighting everyone else, or that the US had gone completely mad and no longer understood the predictable consequences of its actions. If you break things down into component departments, it looks slightly less insane. Still somewhat insane, mind you, but not completely self defeating given any coherent set of policy aims.

Not only that, but you even get similar dynamics operating at times within government departments. You see this with immigration policy in Australia, and from what I hear in Canada too. Australian legal immigration is a hard-assed, skills-based, points-based system that aims to let in only people likely to be useful contributors to the Australian economy. But meanwhile, the Australian refugee processing apparatus seemed determine to wave in almost anyone, accepting 9 out of 10 claims of boat people. Including, hilariously, the captain of the people smuggling ship Captain Emad, who was also granted asylum, which suggests that they either had no ability to discern true claims from false claims, or were so worried about false negatives that they just accept any old story. If you take this seriously, it suggests that there isn't even one coherent immigration policy. Otherwise, why would it make sense to take in the highest performing migrants and every freebooter and scammer who turns up in a boat with a sob story, but not the people in between? I mean, it's not impossible to rationalise. But doesn't it just seem much simpler to posit that the refugee processing section is stuffed with bleeding heart leftists who stamp in anybody, and the other sections are much more skeptical?

This alternative theory also explains something about the Australian government's offshore processing of refugee claims. The government was eager to process claims almost anywhere except the Australian mainland - Christmas Island, Manus Island, Nauru, Papua New Guinea, you name it. Most people naively focused on the symbolism aspect - asylum seekers don't get to come to Australia! Fine, sure. But what else do all these places have in common? They're basically out of the reach of the Australian court system and existing refugee processing apparatus. It seemed to be easier for the Liberal government to set up an entirely separate parallel system of refugee processing than to reform the existing system which it was nominally in charge of.

You see a similar dynamic at play in the US as well. The only government agency that seems to genuinely support Trump is ICE, since they stand to get more money and power if his policies get through. Meanwhile, an antifa goon actually tried to assault an ICE facility with a rifle and "incendiary devices", and got killed for his troubles. The left seems to have figured out that ICE is in fact aligned with Trump, and is targeting them specifically. You sure don't see them trying to bomb the INS, which assigns citizenship to migrants.

This may sound like an argument that everything is inscrutable and you need to know endless detail about every part of the government, but this isn't really the case. Most the bits of the permanent government are at least center left in their aims and ideology, if not outright leftist. So there usually isn't that much conflict about broad objectives. Things tend to get interesting when the there's departments whose functions involve generally right wing tasks - border enforcement, the armed forces, policing, prisons. This is where the tension between the left wing slant of public servants and the right wing nature of people drawn to the particular job tend to be at odds. It's perhaps not surprising that the authors and commenters on Second City Cop seem far more sensible than Chicago's actual elected officials. They also seem substantially more sensible than Chicago's actual police chiefs of the past, who are basically political appointees.

It's not just that nobody is in charge of Moloch. It's that Moloch isn't even a single entity in charge of itself.

Saturday, June 8, 2019

These are the good times, people

The world's financial commentators reliably inform us that periods of market activity can be divided up into bull markets, where stock prices are generally rising, and bear markets, where they are generally falling.

Of course, the problem with these terms is that a linguistic sleight of hand hides a considerable uncertainty. When we say prices are going down, present tense, we are of course describing a current movement, akin to a derivative in mathematics. But prices are not like an automobile that has an actual velocity and momentum ("momentum" in stock prices being nothing of the sort). Each change is discrete. So what we can measure is that they went down. What we'd like to know is that they will go down. The difference, of course, is the difference between knowing yesterday's winning lottery numbers and tomorrow's winning lottery numbers.

And yet, even in the case of hindsight, there seems to be an odd asymmetry.

When markets are crashing, like they were in 2008, people are fairly quick to label the event as disaster. In other words, negative returns seems to be taken as portending further negative returns.

But oddly, when markets are rising, it seems to my anecdotal observation that it takes a very long period before people are willing to describe it as a bull market. You read about how big the returns were in the 1980's, or the mid 1990's, and assume that everyone must have been partying the whole time. Not necessarily. It turns out, we've been living through an astonishing period of high stock returns for over a decade. Did it feel like that to you each day? It sure didn't to me. Yet it's true.

That's right, the famous financial crisis is that medium sized dip about one third of the way through the picture. The rest is a collossal bull market that you didn't hear much about for most of its history if you just read the front page of the New York Times each day.

Puts a little bit of a different perspective on the matter, no?

Financial markets seem to indicate the Solon perspective that no man should be called happy until he dies. Nothing is a bull market until it is finished.

And while I think financial markets are the somewhat extreme example of this, I think something similar applies in politics.

A recurring theme in recent dissident right twitter commentary is that we live in clown world. The modern west, and America in particular, seems increasingly focused on going full steam ahead with the most absurd aspects of cultural marxism.

Increasingly aggressive propaganda aims to demonize straight white men as the cause of everything wrong in the world. The most pressing civil rights issue in America these days seems to be trans rights. Whatever you think of them, it is striking what a tiny fraction of the population they actually affect. If you're a conservative, the heartening thing about Drag Queen Story Hour is that there just doesn't seem to be a large enough supply of drag queens interested in it to make it anything more than a fringe cultural phenomenon, rather than something coming soon to a library near you.

The clown world critique gets right that the modern west is increasingly absurd. But there are many types of absurd. It is hard to think of a more morbidly absurd, pointlessly gruesome spectacle than the trenches of WWI. And yet you wouldn't be tempted to describe it as clown world. It's just too horrifying for ironic humour to seem appropriate, even as a cynical defense mechanism (though Joseph Heller did a good job of credibly portraying this attitude about WW2 in Catch-22).

No, what clown world also requires is an obsession with trivialities. The correct representation of women and minorities in pop culture. Ginned up internet outrage mobs because some white teenager smirked at a Native American banging a drum in his face. Whether we should pay reparations to black Americans because their ancestors were slaves.

These are the problems you create for yourself when you don't have any real problems to worry about. Like, for instance, the threat that the Russians might nuke you at any moment. Or that terrorists have just murdered thousands of people and destroyed two buildings in New York City. Or even that you're in the midst of the largest financial crisis in eighty years. They are, in other words, not existential threats to the very existence of our society, or terrifying possibilities that might destroy your life, safety or livelihood at any moment. They are the societal equivalent of first world problems.

Reader, I am old enough to vaguely remember when slavery reparations were last a thing. It was the 1990s, an era of similarly aimless cultural drifting, as America struggled to find a purpose after the end of the Cold War. The most pressing social problem was the grim farce of the OJ Simpson trial. The 90's were a decade characterised best by the show Seinfeld, which I loved, a show which billed itself as a show about nothing. This was, of course, misdirection, as the show was an extremely sharp commentary about the ambiguities that occur when societal expectations of manners and behaviour are unclear, or have broken down. And yet, it's extremely hard to imagine Seinfeld working well in a post-September 11th world, when things suddenly became serious. It's not for nothing that Billy Domineau's spec script of the Seinfeld September 11th episode was a huge hit, inasmuch as it insisted on the same irreverence about a topic that is still considered very serious in America. But it's also no coincidence that the spec script was only written in 2016, a time when the events of September 11th were sufficiently far in the past, and no new similarly large and shocking events had been forthcoming, such that people could laugh about this stuff, even in a "can you believe people are making light of this?" kind of way.

Indeed, to me the Current Year feels a lot like the 1990s. Even the crypocurrency boom of 2017 reminded me a lot of the internet boom in 1998. Neither could have taken place in an environment of 10% unemployment like in 2009. And yet, at the time, the 1990s problems felt like real problems. There seems to be something in human nature that laments boredom above everything else, and will raise small problems to the level of large problems if none really exist. In 1999, there were large violent protests in Seattle about... the World Trade Organization. Just think about that. Can you imagine getting in a brawl with the cops today about trade policy?

Because the thing that makes the Current Year even more unnoticed as a pretty good era is the fact that, unlike the Cold War, the end of the previous era was never really announced. On the current trajectory, unless the other shoe drops and there's another major terrorist strike on America, historians of the future will probably view the matter as being that Al Qaeda only really had one big hit in them, before law enforcement and the CIA figured out they needed to throw gigantic resources at infiltrating and destroying them. After that, all that was left was "lone wolf" small scale attacks that, while tragic and attention-grabbing at the time, eventually faded into the background. Once upon a time, I remember wondering seriously about whether moving to New York might mean you'd die in a smuggled nuke attack. I don't get the feeling people worry about this much any more.

This doesn't mean that America doesn't have problems. Far from it. The late stage US empire can't have enough children to sustain itself, and is both aging and replacing itself with third world immigrants. Meanwhile, the increasing rhetorical hostility to white Americans may yet be seen as the precursor to actual rising violence, much like in South Africa. For now, the main effect seems to be the white death, as lower class whites in flyover country kill themselves with opioids, alcohol and suicide.

But these are the grinding, endemic problems of a society that seems to be in decline. They may be very important, but like anything ongoing, they don't seem to present the impression that if they are not solved immediately (as in, this week or this month) then we are forever doomed. The Cuban missile crisis is an urgent problem. Opioids are merely a very serious problem. Societies, like Hemingway quipped about individuals, go bankrupt in two ways - gradually, then suddenly. At the moment, we seem to be in the "gradually" phase. For people who start out with a lot of money, parts of the "gradually" phase are likely to be quite a bit of fun. In many ways, this is exactly the problem. The "suddenly" phase, however, is never fun.

The bad news, therefore, is that we really are living in clown world.

The other news, which I can't tell whether is good or bad, is the following: when serious and immediate problems strike again, as they inevitably will, you will actually miss clown world.

Sunday, April 21, 2019

Reconsidering English Mercantilism

One of the great things about reading old books is that they transport you away from the zeitgeist of the modern era. At any point in time, there are lots of ideas floating around in people's heads that are largely taken for granted, and not seriously examined as to their likely truth content. When you read writings from someone steeped in a totally different tradition, it forces you to reconsider your perspectives on things. 

On matters of how society ought to be organised, those of us of a reactionary bent are likely to find much to agree with in the books of old. Yet in some sense, the best issues on which to read old writings are those where you are genuinely agnostic  where there is a real prospect of genuine progress in understanding, but also significant gaps in our knowledge.

To me, that field is macroeconomics. I consider myself a macro agnostic, with sympathies towards monetarism in some forms. But it's hard not to see enormous shifts in fashions in macro that don't seem to coincide with great increases in understanding. A century ago, everyone with a brain believed that governments needed to maintain a gold standard. Now we all believe that the optimal system is to have pieces of paper not backed by anything, managed by a central bank trying to target 2% inflation, even though most of the real money is electronic and sits on a computer. Also, the existence of the paper tends to cause us problems when a crisis hits, because we can't lower interest rates below zero. I tend to think that monetary policy is useful, if done right (though even on that I'm not certain). Still, let's just say I'm not entirely convinced we've reached the optimal set of institutions.

Then again, there has been enormous and genuine advancement in economic understanding. Trade theory, specialisation and division of labour, the marginal revolution, modern finance, behavioral economics  these things just didn't really exist 250 years ago. So while there may be wisdom in the ancients, it's also likely there was a lot that they didn't understand.

This came up recently in a discussion with some friends about the 16th through 18th century English policy of mercantilism. This is described quite well in Ernst Graf Zu Reventlow's "Vampire of the Continent", which I discuss here. Essentially, England wanted to monopolise trade, not only between itself and its colonies, but also in foreign ports. Reventlow cites an English desire to basically make Antwerp a de facto English port, for instance. In addition, when it came to dealing with foreign powers, it favoured one-way trade deals. You have to be open to free trade, but we get to have complete restrictions on trade. You can see this in the Siege of Havana. The English destroyed the Spanish Navy at Havana, and then conquered the city. But then, two years later, in the Treaty of Paris, they just gave it back. They did, however, extract concessions that they would be able to trade with the port, which they previously were denied. It's possible they just traded the city back because they thought they couldn't hold it, or to avoid endless war. But still, it's a strange move. And it's not just Spain. The Opium Wars were similar, except in this case fought not over the right to trade in general, but specifically the right to sell opium to the Chinese. Which looks pretty damn predatory, with the benefit of hindsight, but that's mostly because it was opium. They wanted to sell stuff to you, and their gun boats were going to turn up if you didn't like it. 

In other words, their ideal situation was that they would sell their goods to you, but you couldn't sell your goods to them. And often they would be willing to go to war over this principle.

Now, from the perspective of modern economics, this is quite weird on a number of levels.

First, these days we don't want to crush the economies of other countries. There's a pretty strong agreement that if a major country enters recession, even if it's a country you don't really like, that's bad news for your economy. Believe me, even the most ardent China skeptics wouldn't be celebrating a major Chinese depression, as soon as they looked at their 401k portfolio and the rising US unemployment rate. The reason is trade theory  there really are gains from trade, and the economy isn't zero sum. Because of this, trying to crush one's enemies may make sense politically or militarily, but it's likely to be counterproductive economically.

Second, not only is trade generally good, but at some point you actually want to consume things. Another name for mercantilism is running a trade surplus  we sell to you more stuff than you sell to us. But what this means is that the other country gets to consume a lot more stuff, while the things you produce end up being consumed by the Spanish. Maybe the wealth England receives is transformed into more productive assets so their economy grows more, but this is not obvious. The standard view of worthless consumption goods versus valuable investment goods is a large part of the reason that the otherwise brilliant Paul Samuelson kept incorrectly predicting decade after decade that the Soviet economy was about to grow like crazy and soon overtake the US. Because they didn't give a damn about consumption for the peasants, all their production was going into valuable investment goods, which would expand out their production possibility frontier. And yet somehow, the US with their frivolous consumption kept outpacing them. This is probably related to the fact that when US consumers stop purchasing their worthless hamburgers and flat screen TVs, that's called a recession, and it's usually considered a disaster. Maybe they could switch to being happy purchasing machine tools instead, but it's not obvious. Same thing with the English centuries earlier. In other words, they thought they were getting rich by their policy, but it's not at all obvious that they were right. Another reading is that they were just financing Spanish consumption, and consuming less themselves. 

A related aspect to all this is that there was a very different idea of what wealth was. These days, we understand it mostly in terms of GDP  the total productive output of the economy. When it grows, you become richer. Money is just the means by which we denominate the value of goods. If you own a factory, or a large corporation, you are rich. You don't need to actually hold the dollar bills. The productive output is the real wealth anyway, and the dollar bills are just the means of transforming your output into someone else's output.

But at the time, I think these guys thought that the wealth was actually the gold and silver they were accumulating. They weren't in the business of measuring economic output. GDP didn't even really exist as a concept. So instead they just maximised a number they called wealth, without wondering if this was the thing they really should be targeting.

So far, mercantilism looks pretty stupid. But is there some way to resurrect it, at least partially? Even if the practitioners didn't understand it at the time?

I think there actually is. 

The reason is that you can't understand mercantilism without understanding the gold-based currency. This is not gold-backed currency, where you hold a piece of paper that can be redeemed for gold, and which can be devalued (though at a large reputational cost). Rather the coins themselves really were made of precious metals, like the Spanish Escudo or the Spanish Dollar. And from my limited understanding, essentially all European countries were using some kind of precious metal as currency.

This has two effects. Firstly, as is commonly understood, countries don't have control over their money supply, inasmuch as the supply of gold and silver is very inelastic. So if you have less money floating around, you're pretty much just stuck. This has its modern equivalents, like Hong Kong having its dollar pegged to the US dollar  you end up with essentially whatever monetary policy the US happens to be implementing at the time, regardless of whether it's appropriate for the state of your economy.

But more strangely, another effect occurs when everyone is on the same currency. Everyone is linked in the same global money supply (except for the minor variant that some places used more silver, and others used more gold). Which means that if the amount of gold (and hence gold coins) is essentially fixed in the short run, then countries really have a zero sum competition over the money supply.

As a consequence, in a world where everyone uses gold coins, you can't separate trade policy from monetary policy. Mercantilism doesn't mean that you're richer in terms of GDP, at least in the short term. But it does mean you end up holding a larger fraction of the money supply.

And if you think, like me, that monetary policy matters, this can end up being important. If the Spanish colonies keep buying off the English, eventually they may face a sufficiently large contraction in the local money supply that it ends up harming local economic output. Of course, if you're not tracking GDP, you won't necessarily know this. You'll just find that it becomes harder to get tax revenue out of the local population, and they start complaining about a lack of coin. 

We can't imagine this complaint, because we've been so thoroughly used to fiat money, whose supply is endless. We can imagine a surplus of money, like in a banana republic going through hyperinflation. But a deficit? What would that even look like? As it turns out, it's people not being able to engage in useful trades, because they have to revert to barter, which is notoriously inefficient. You want to imagine a real recession? Imagine that in order to get bread, the baker has to want your accounting services that day, or be willing to take an IOU.

You actually see this in the story of one of the early experiments in fiat money, in New France. After initially having a beaver pelt based economy (yes, really), they started using coin. But at some point coin become so scarce that they couldn't pay the soldiers, which threatens the whole enterprise. So the governor switched to a currency of playing cards. Which, if you read between the lines of the article, worked pretty damn well.

Without this though, a persistent trade deficit would be experienced as a persistent contraction in the money supply, probably leading to local recession. Meanwhile, England would have a continually expanding money supply. It's not like this immediately leads to economic booms, otherwise everyone would just set interest rates at zero and print money like crazy (hmm, maybe they largely do...). But expansionary monetary policy generally does grow the economy, usually at the cost of inflation. Though since in those days deflation was approximately as common as inflation, this doesn't seem to be a first order concern. So to that extent, I can imagine that mercantilism ended up having some positive effects on the English economy, and negative effects on the Spanish economy, primarily through money supply channels. 

Which was assuredly not the justification that was being used at the time. But if Chesterton's Fence means anything, it's that people often can end up implementing reasonable policies without really understanding why. 

All of this raises a fascinating hypothetical. What if the Spanish (or the French, or whoever) had just decided to respond to English mercantilism by... switching to fiat currency? Fiat currency gets a bad name in this period because its introduction tends to occur by bankrupt governments who can't or won't close a persistent budget deficit, and thus they introduce fiat in order to print like crazy and inevitably end up with a worthless currency. 

But modernity indicates that this doesn't have to be the case. We could imagine a Spanish King who had a stable budget situation switching to pesos. What would happen?

Well, the first thing to note is that they'd have the freedom to implement monetary policy. To the extent that this is economically beneficial if done well, it would be a big help for getting the economy out of recession. Then again, since they didn't understand monetarism, it's not clear this would actually happen. Before you get to this point, you'd need a coherent understanding of "recession", and a way to measure it, neither of which they had.

Still, there would be other benefits. Notably, it would immediately neutralise the effects of English mercantilism. Havana is now operating in pesos. Which means you can let the place trade with the English as much as you like! Why? Because just like in a modern economy, currency movements will act to counteract a trade deficit. Suppose, as seems likely, English merchants keep demanding payment in gold coins. Well, there's going to be some exchange rate between pesos and gold. If Spain as a whole keeps buying foreign goods and supplying pesos in exchange for gold, its currency will depreciate. This will make English imports expensive, until the local population stops buying them all on their own. Gun boats or not, they simply won't have the money, and the population in Havana will find it much cheaper to buy domestic goods. Meanwhile, the same currency movement will make Spanish exports extremely competitive. The mercenary English merchants and smugglers will start buying Spanish goods to sell to England, government policy be damned, because it's suddenly extremely profitable. Spanish exporters don't mind being paid in cheaper pesos, since they work just fine in their local currency. Meanwhile, the extra demand helps to boost the local economy. 

And more importantly, you don't need to fight to keep the English out of your ports! An entire casus belli can be given up at a stroke, at almost no cost. Plus, since the English don't really understand economics at the time either, they'll probably view it as a great victory. Let them. Moving to positive sum trade would be useful in general, but neutralising the English weapon of contracting your money supply would be even better. They only have the weapon because you gave it to them, by using the same currency as them, and one which you don't control the supply of.

This wouldn't solve all of Spain's problems. Because Spain did in fact have a lot of silver coming in from mines in the New World, so a shortage of money wasn't its main issue. In part, it didn't invest the silver into anything other than consumption, cathedrals, and other things. Samuelson may have gotten the Soviet Union wrong, but that doesn't mean the point is wholly incorrect. You really do need to buy investment goods and not just consumption, especially imported consumption.

This is all a hypothetical, of course, and one we don't have great historical analogies to guide us on. When countries abandoned the gold standard, they mostly did so all at once, such as with the collapse of Bretton Woods in 1971. Which means there isn't a clear example of a functional, budget-neutral major power adopting fiat money while all other major countries, including their trading partners, stayed on gold or silver. The Swedes did it in the 1700s, but they ran a huge budget deficit and drove themselves into a ditch. But I don't think this is particularly strong evidence. It's like trying to evaluate whether credit cards are a good idea when the only evidence available is for chronic gamblers and alcoholics. It's not necessarily a good guide to what will happen when John the accountant gets one.

Without that evidence though, I don't really blame the monarchs of the time for not wanting to roll the dice. The whole idea seems weird, and to the extent it's been tried, it's mostly associated with fraudulent, bankrupt governments and terrible outcomes. And they just didn't understand the economics well enough. Maybe we still don't understand it fully. But at least we know something they didn't know. It's possible to have fiat currency without immediately leading to hyperinflation and national ruin. 

We also have a fair idea, thanks to Milton Friedman, that monetary policy is actually important, even when a country is using gold or a gold standard as currency. They didn't know that, but you can't blame them. 

Sometimes, like Bitcoin, you've got to just run the experiment and see what happens, because there is no clear precedent for what's going to happen. All you've got is theory, and the hope that your understanding is correct.

It's enough to make you wonder what economists in 100 years time will marvel at us for doing today.

Sunday, March 17, 2019

A Lower Bound on Viable and Efficient Parenting Reductions

It's been a running theme of mine for a while that prospective parents should invest less in each child, and have more children instead. This is what the twin studies tell you. This is what most of the education random controlled trials tell you. Parental investment just doesn't matter that much. But having more children does matter.

Investment is a loaded word though. The immediate connotation is expensive monetary investments, like college and private school. It's true that you should cut back on these. But in some sense, these can only be the binding constraint if you're very forward looking. By the time you're in a position to actually decide whether to pay for your child's first year of college or just let them have some student debt, it's highly likely that you're long past the point of deciding whether to have more children.

No, the insidious aspects of investment are those in the very early years of a child's life - waking up every two hours to feed them, dealing with crying and tantrums and poopy diapers. And the reason they bite the most is that by the time you're thinking about having another child, many of the worst bits have just passed. The child is now two or three, and you have just started to get the feeling of having gotten over the top of the hill. If you simply stop now, you never have to deal with that phase ever again.

Look, I sympathise with this feeling. I think everyone does, including parents who had lots of children. 

But the mystery is still the time series. Your great grandmother had 7 children, and managed to rub along just fine. Not only that, she did so while washing every dish by hand, washing every shirt by hand, cooking every meal that the household ate, and on a budget a fraction as large in real terms as you have.

Hence the mystery - how did it all apparently get so much harder? What is it your great grandmother knew, but you don't know?

I suspect that one largely unremarked upon aspect is that your great grandmother started much earlier, in her early 20s. All that energy you put into partying into the wee hours and running on a treadmill? She put it into getting up in the night to feed children, and chasing after them by day. 

My guess for the biggest factor is social support structures. Both sets of grandparents living nearby, for instance. Trying to make up for that with hourly babysitters is like running a one man lesson in Ronald Coase's theory of the firm, where you find out that a lot of things are considerably harder to contract on than you thought. Friends and neighbours with lots of children, whom you could turn to when things were tight. Now nobody knows their neighbours. 

So, to the extent you can do this stuff, it's totally worthwhile. Fly in your parents for a while, if they don't live nearby. Try and do like the Mormons do, and make good enough friends with people nearby that you can do shared babysitting things.

These things are hard, though. If your parents live on the other side of the country, or the planet for that matter, rearranging your life or theirs to remedy this distance is probably not practical advice.

But there's another aspect to it. Culturally, a hundred years ago everyone was just far more comfortable with radically increased autonomy for children, and far less moment-to-moment supervision of what they were doing. I remember the Daily Mail depicting this visually in a quite arresting manner, showing how far different generations of Brits were allowed to walk.

Rotherham, Rotherham... where have I heard that name before? Hmm, maybe it's not just cultural norms.

But at a very young age, when children require full time care, was it always this hard? Is it possible to less? Let the kid cry? Let the kid walk around on their own more, at a younger age, without being supervised, even if they sometimes cut themselves or bump their head? Let the kid figure out how to put themselves back to sleep? Let the kid play with the toys on their own, rather than expecting to have one or other parents joining them all times?

Parenting plans, like Mike Tyson's quip about boxing plans, last until you metaphorically get punched in the mouth. It's easy to say in the abstract that you'll just be a little bit more distant when the kid starts demanding attention, but another thing altogether when the kid is screaming their head off. And for someone like me, who has zero kids, there's an inevitable aspect of cheap talk to all this. If someone else has a troublesome child, maybe it's just genetics, or nutrition, or something else hard to fix in the short term. Maybe if you had their child, you'd act the same way.

Still, there is one metric that I think shows that reductions are possible. Namely, the inevitable decline in attention that occurs in nearly all parents between their first child, and their subsequent children. 

For the first child, you're worried about everything going wrong. You're taking endless baby photos, and reading to them all the time. You're doing all sorts of stuff. By child number 4, you just don't have time for that any more. The child is crying? Is this a problem? Depends. Are they fed recently? Is their diaper clean? Are they sick? If the answers are "Yes, Yes and No" respectively, then no, it isn't fundamentally a problem. It's unfortunate, but it's okay to just close the door and let them figure it out. They'll work out just fine.

Hence the minimum viable Holmes advice for new parents:

Aim to bring a fourth child attitude to your first child.

Ask older parents - do they think their fourth child turned out much worse because of the lesser attention paid? Or do the younger children mostly tend to appreciate the more laid back attitude that parents took, and which older siblings are often jealous of?

Not only is it doable, for many aspects of parental involvement it's not even clear what the sign is for the effect of the extra effort.

Of course, there's one caveat here. There is non-trivial evidence of birth order effects, whereby first-born children tend to outperform in life (I trust Scott Alexander probably as much or more than the social science literature on this stuff).  At least some of this effect is probably the extra efforts their parents are putting in.

That said, there's two responses. First all all, this just says that there's something on the revenues side of the ledger. This doesn't mean that the whole project of the extra effort for the first child is actually NPV positive for anyone involved. Indeed, given the extent of the extra effort, finding zero birth order effects would be evidence of a massive failure in rational parental investment.

Secondly, it's not clear how much of the effect of birth order is due to extra parental investment, versus just having more confidence by virtue of being bigger and stronger than one's siblings. It's probably both, of course. But any part of it that's coming from just sibling size doesn't require any investment, and is unbudgeable by your efforts in any case. I think the jury is still out on this one.

More importantly, suppose you believe that there might be an investment and/or confidence channel. If you're worried about this, just load up on the related investment/confidence effect - birth month. It's also true that the oldest children in a kindergarten class tend to outperform in life, for a similar mix of reasons. They're bigger and more confident than their peers, and they get greater investment because teachers and coaches perceive them as more talented when they're young, when they're simply more mature. 

So if you're a big believer in birth order effects signalling something important, just aim to have all your kids be born at the start of the school year. It costs you nothing other than delaying slightly when you start trying to conceive. It'll probably also go a decent way towards offsetting any effects of reduced parenting for the first child (and will be a likely benefit to later children, for no obvious cost). 

And remember, the second you're tempted to feel guilty about this advice and plan, just bear in mind - you're thinking of the wrong counterfactual. The whole point of doing all these reductions in wasteful effort is so that you can easily and cheerfully bring one more child into the world, with a full complement of life's joys, sorrows and experiences. That is something to be proud of, not embarrassed. 

Fourth children turn out just fine.