Friday, June 28, 2013

This just in, from Gene Callahan

"not every single thing that can be put in a ratio has empirical significance"

You may think I am bringing your attention to an obvious point. I am quite sure Gene agrees with you it's a relatively obvious point. Apparently it is one that does need to be belabored, and Gene is doing a valiant job at that.

To be fair, for me this obvious point was buried under a lot of other equations and sentences and ideas rendering it not immediately obvious (to me at least), so in that sense this is most definitely a public service.

Please click through - there's more than just this in there, including why the multiplier is a pro-market idea (I think we Keynesians forget that a lot of people have this odd idea that Keynesianism is not pro-market so we forget to highlight stuff like this because we don't usually think to juxtapose Keynesian ideas with pro-market ideas)

Russ Roberts response, part 2

I'm beginning to wonder if Russ's "questions" were just statements that happened to have question marks at the end of them, but what the hell. Let's talk a little about his first question (his third question was answered yesterday in Part 1... yes I'm trying to confuse you guys). Unfortunately this will have to be more of a sketch of an answer but feel free to jump in in the comment section.

He asks:
What empirical evidence can you provide that suggests that these factors (debt to GDP ratio, supply side factors, crowding out) are not relevant right now?
"Not relevant" needs to be qualified. I may have used language like that in the past, but the real point is that it is not the primary concern.

If he's looking for empirical evidence on labor supply the relevant cites for extended UI are Card and Levine (2000) and Valletta and Kuang (2010) more recently (and a little more quick-and-dirty). Each of these have negative labor supply shocks associated with extensions of UI, they just don't appear to be nearly big enough to be driving this. They are also each the impact of extended UI on individual behavior, not the general equilibrium impact of extended UI (which may very well be positive).

I also don't understand how the significant-supply-shock story makes any sense. We would expect to see much more substantial wage and price growth if this were critical. We don't see any of that in the data. Surely we don't think there was a productivity decline that would have been sufficient to mute the supply shock's effect on wages and prices. And what would the supply shock even be? Usually when we point to supply shocks its nice to know what that entails. The demand shock, alternatively, is quite obvious and the price data seems to support the dominance of the demand shock.

One strategy is to point to Obamacare as the supply shock. I don't find this especially plausible given the sequencing. It can't be an explanation of the recession itself. You can cite it as something that is prolonging the recession, but one wonders why you would need to invoke that - presumably a liquidity trap, austerity, global crisis (THAT wasn't caused by Obamacare), and continued problems in credit markets are more than enough. If Obamacare was really a relevant supply shock I would have expected us to do a lot worse after it passed and especially as provisions have been implemented. Instead we've basically been plateauing after the initial shock, whether you're looking at E/P ratios or NGDP. So we have two options: (1.) all the demand shocks let up just about as much as Obamacare imposed a new supply shock, or (2.) Obamacare actually wasn't much of a supply shock. Occam's razor leads me to (2.) even in the absence of all the other signs of a supply shock mentioned above.

If crowding out was the problem through the crisis we would see rising interest rates. If people thought they had something better to spend on - something where the demand was there - they would dump Treasuries. We have been seeing some of this very recently, and for all I know that's a sign that we're getting to that point in time when crowding out is a problem and calls for stimulus should be moderated... but a much more likely explanation (and the one that everyone I've seen comment on it is saying) is that markets are responding to signals that the Fed will end stimulus. These are long-term rates rising after getting news that future short term rates will rise. Again, I'm siding with Occam unless Russ gives me something else.

Debt-to-GDP ratio would be a much bigger concern for me if stimulus were permanent. It's not. Of course we have debt problems looking forward with the entitlements, but that's there whether or not we do stimulus (so it doesn't hurt my case any more than it hurts Russ's - we just need to deal with it). This is tied to crowding out, if it's a problem we'll see it in bond markets, but we know what kinds of debt levels advanced industrial economies can bear. The Reinhart and Rogoff research shows it erodes growth rates, and that's bad, but depressions and unemployment hysteresis erodes growth rates too. So the sensible answer, it seems to me, is Romer's answer: short run stimulus, long run debt reduction. Short run debt reduction is counter-productive, and I'd rather not be dealing with worse depression and worse debt. The real issue with debt-to-GDP is entitlement reform and the sooner we get out of this the sooner serious movement on that will happen, I think.

I have to toss this back to Russ though (maybe before I answer the last question?). Exactly what empirical evidence is there that these things ought to be the guiding concerns right now? The most sophisticated case on this is the on provided by Casey Mulligan and we've talked about that on here before - it's not especially strong as outlined at the New York Times or the presentations he's delivered (or the free material from his book that's available... maybe he's hiding the good stuff in the rest of the book but I would have expected to see some of that in his seminar). So bracketing off Casey Mulligan for the time being, exactly where is the evidence against what I've said here?

Thursday, June 27, 2013

Big relief!

I passed my advanced macro comp! Now just my labor comp next summer to go (oh... and that dissertation thingamajig).

This is a big relief - the fall is going to be busy professionally anyway not to mention the obligation to keep a small human alive and healthy. I think having to study for a re-take of the comp on top of that would have broken me.

Good news!

The Cato Institute will be publishing a piece on high skill immigration that I submitted. I'll let you know when it comes out.

Thanks to David Henderson for taking a look at it.

After reading the last post, tell me in the comments why I think everybody should email Learn Liberty and ask them take down this video from their website as a highly misleading explanation of the impact of fiscal policy

(Learn Liberty has lots of excellent economics videos, btw - I just don't think this one is one of them)

Questions from Russ Roberts, Part 1

He poses three questions to Krugman and me (and those of you who agree with me should feel free to jump in). Some I think take more thinking than others, and I've got a few other things to do today so I'll probably trickle the answers out. I'll start with the last one, the easiest one, and in a lot of ways the most frustrating one to see Russ asking:
"Third, does the failure of the Keynesian models using multipliers from past economic experience to accurately predict the effect of the 2009 stimulus package give you any uncertainty about your claims?"
I could just say "I reject the premise" and move on, but if someone with a platform like Russ is repeating the claim it's worth walking through what's wrong with it again (we've discussed this many times here and actually I discussed it a lot when I used to comment at Russ's blog too). My short answer is "I am always uncertain about my claims, but nothing in the data since 2009 has made me more uncertain about my fiscal policy claims (I'm not sure whether I should revise my priors on monetary policy)" - for the long answer, read on.

Russ is not being particularly forthright about what he's saying here. What he's actually asking is "why did the Romer-Bernstein prediction get it so wrong?". That version of the question is an excellent question but by skipping from that question to his question about "the Keynesian models" Russ is sneaking in a claim that people need to be aware of.

He is implicitly claiming that the problem with the Romer-Bernstein prediction was the multiplier and not the forecast, because forecasts have very little to do with Keynesianism. What Romer and Bernstein did was estimate a forecast of how the economy would behave with no change in fiscal policy (in their case, how the unemployment rate would behave) and then they subtracted off how much unemployment would have been eliminated by the stimulus package (I think it was a little higher than what was passed, but roughly the same).

I find Russ's implicit claim (and it would be nice if he confirmed that he thinks that so everyone is clear on where the disagreement is and where it isn't) to be entirely implausible. The economy is not a car... the economy is organic. It's a complex system. Forecasting a complex system is extremely challenging - particularly when you're doing it so far into the future (like a meteorologist, our short-term forecasts are decent enough). On top of the normally challenging task of forecasting you have to remember that Romer and Bernstein were forecasting at a time when credit markets were in turmoil and they had no idea how that would be sorted out. So in arbitrating between whether I trust the multiplier half of the prediction which has been carefully worked on and argued over for decades or the forecast half of the prediction which is weak by its nature and done quickly and largely done in the dark I unequivocally trust the multiplier half and am leery of the forecast.

Aside from the normal problems posed by forecasting a complex system, we have very good reason to believe that the forecasts in this particular crisis weren't up to the job because of the problems in the financial sector. I assume something like a DSGE was used to generate the forecast although it might have been even simpler than that, but even DSGE models don't take finance into account. Noah Smith had an excellent post on this issue a few weeks back summarizing research at the New York Fed (Mark Thoma also has thoughts here) that concludes that when you incorporate finance into DSGE forecast models (even without calibration - a critical point), the model does a lot better. Nobody used to use DSGE models in this way, though, because financial crises haven't played such a big role in macroeconomic fluctuations lately.

So trusting that forecast seems like a bad bet to me, but it's critical to understand that if Russ wants to cast doubt on the multipliers it's a bet that Russ is making. It's up to him to explain why - I couldn't tell you that.

So what about multipliers?

We don't actually have real-time estimates of the multiplier associated with the Recovery Act or the changes in state and local spending during that time. We need to "identify the model" to get that, which basically means we need find a way to deal with the fact that causality runs in both directions*. Fiscal policy has some effect on output, but output also determines fiscal policy. For certain components of fiscal policy that vary automatically with changes in the economy like unemployment insurance, taxes, and food stamps (we call these "automatic stabilizers") the causal link from output to fiscal policy is very tight. This means that if we just look at the raw data there is a natural tendency (because of the causality running from the state of the economy to fiscal policy) to observe a negative relationship between fiscal policy and output or at least to underestimate any positive causality running from fiscal policy to output.

I won't go into the details here about how we "identify the model" here (search my archives - we talk about this stuff a lot), but suffice it to say that that is the principal obsession of empirical economists, whether they're doing micro or macro work. These are estimated and argued about in the literature, and if Russ wants me to rethink my views he needs to dig up that literature and tell me why I'm wrong in my assessment of it.

As it stands if I had to choose between (1.) the Romer-Bernstein consensus on multipliers, and (2.) the DSGE forecasts that Romer-Bernstein presumably use, I have considerably more faith in (1.).

Why am I wrong?

I can't decide if Western Civilization is decadent or resourceful

So I was at Whole Foods this morning just grabbing a roll for lunch, and outside I saw Lobster Compost.


Compost made from lobsters. How decadent is our society that we buy lobsters to just throw them on the ground?

I googled it when I got to the office and felt slightly better about it (I actually figured this was what it was in the store) - it's made from the remains of the lobster - the shell, etc. So maybe we're not decadent at all and we're just being resourceful.

But it was selling in Whole Foods so I'm leaning towards decadent.

Disagreeing with Nick Rowe always makes me nervous...

But I shall disagree and take the position that the Keynesian cross should be taught in macro classes.

All of his points are actually well taken, the problem is he makes those points as if it's an either/or choice between AD/AS and the Keynesian cross. Of course it's not. He also makes those points as if you don't have a semester to clean up the Keynesian cross with other intuitions.

I don't have the teaching or the textbook-writing experience that Nick does, I can only say what I did as a TA in a 300-student macro class (which meant weekly review lectures and longer exam review lectures).

Of course the broader set of "I dunno - supply?, demand?" responses came out of instruction with AD/AS but the Keynesian cross was nice to teach too because:

1. They could actually solve it - the math is trivial so you can take non-econ majors that are required to take it and they can work through it.

2. It reinforced the income-equals-expenditure point which is one of the critical differences between macro and micro and for that matter between macro and how people think generally, and

3. It's actually easier to teach AD/AS when you've established my point #2. AD/AS is actually a lot trickier than it first appears. The AD curve does not slope down for the same reasons it slopes down in micro classes. The AS curve does not slope up for the same reasons it slopes up in micro classes. In fact I wish they didn't even call them "supply" and "demand" curves because that makes people get stuck on the micro logic. You need general equilibrium logic to think about the behavior of AD/AS and the Keynesian cross is actually a great tool to teach that.

4. Contrary to what some people have been saying in this discussion, the Keynesian cross is the perfect time to teach about crowding out. Why? Because when you give them plausible numbers to plug in and have them solve you get stupidly high multipliers (and I'm talking about multipliers of four or five, not Landsburg's multipliers). Then you show them a chart that Mark Zandi put together and ask "so why don't we actually get multipliers that are that high? where can we see daylight between what the model says and what happens in the real world?". My (limited) experience is that that tends to be a very fruitful discussion.

Wednesday, June 26, 2013

I refuse to answer this until he calls it a "kwestion"


Paul Krugman is sick of trying to reason with you people

Not only does he cite me and not only did he apparently read through the comment section, but he wrote one hell of a post too.

From Justice Kennedy

"The power the Constitution grants it also restrains. And though Congress has great authority to design laws to fit its own conception of sound national policy, it cannot deny the liberty protected by the Due Process Clause of the Fifth Amendment."

This dovetails nicely with the error in yesterday's ruling. In yesterday's ruling Congress was exercising its "great authority to design laws to fit its own conception of sound national policy" in an effort to protect the liberty outlined in the Fifteenth Amendment.

It was not, in some comparable way, denying the liberties of the states guaranteed by, say, the Tenth Amendment because no one denies that they have the authority to pass legislation to manage states' rights insofar as they pertain to equal access to voting. That was the whole point of the Fifteenth Amendment, to add that qualifier to the Tenth.

So the court was wrong on the Voting Rights Act because it denied Congress its constitutional authority without demonstrating what it demonstrated with the Defense of Marriage Act: that Congressional action "denied the liberty protected by" the Constitution.

Damn it, I hate it when my commenters upstage me

So my point has been that dropping the expenditure obscured the fact that Landsburg was just saying "income is income", which doesn't even amount to an accounting identity (for those of you who have been saying he's been confusing an identity for a behavioral law... a common though not universally applicable mistake).

No expenditures means no MPC which means we're not even talking about "the same logic as the Keynesian cross" anyway, but if you take his implied MPC you get the same result: income equals income (or if you make the mistake he did, income equals 0.99999999 times income).

But my point basically boiled down to "you don't knock the Keynesian cross by saying income equals income".

Commenter Malcolm gets to the point much quicker:
"I just posted this at Landsburg. This is all "a lot about nothing":

Sigh. This is worthless

If Y = E + L and E= .999999Y then L = .000001Y then
Y-E =L means
Y(1-.999999) =L which means that
Y = L/(.000001) which means that
Y = .000001Y/.000001
and all this means is that Y=Y. Hmmm."

Some (edarniw, for example) think that my harping on the expenditure/income distinction and the MPC/income share distinction is beside the point and just adding extraneous complaints to Landsburg's post. It's not extraneous. Malcolm works out in the context of the problem why it's not extraneous and ALSO why I say that Landsburg has an implicit MPC of 1, not 0.99999999, even thought he solved the problem as if his MPC was 0.99999999.

Think of it this way: L pays E for a good or service. Some fraction of E's subsequent spending will go to L for a good or service that L produces. So L's consumption matters too, and if we're conflating income share and MPC the way Landsburg has chosen to that means MPC = 0.00000001 + 0.99999999 = 1.

Which gives you "income equals income".

Which is not any kind of argument against the Keynesian cross. It's an argument that leaves off half the Keynesian cross and any mention of investment which is the crux of the whole theory.

The real problem for the Keynesian cross... the PIH.

To a large extent that's an empirical question, though, and it doesn't unequivocally come out against naïve Keynesianism in the data.

And even on the theoretical side when you build in some kind of expectations in a New Keynesian framework you get all the Keynesian cross logic back even with PIH. You are essentially modernizing the Keynesian cross in the exact same way that Krugman modernized the old naïve liquidity trap. This, I think, is why many of us New Keynesian types are very comfortable saying that Old Keynesianism isn't all that bad - because a lot of the Old Keynesian results pop up in New Keynesian models, so long as keep expectations always in mind. So for the purpose of communicating the basic idea Old Keynesianism still works pretty well.

And if you read Keynes on expectations you realize that he probably had something like the New Keynesian approach in mind anyway, he just didn't get the formal work past the old naïve Keynesian model (and even that he left to Hicks, Samuelson, etc.).

Alright, if you'll excuse me I am going to duck the tomatoes that the Post Keynesians are throwing at me now.

This is just like Jinx

Kate showed me this this morning. It's good to know other cats do this (although Jinx prefers the husk). I don't know why he is so obsessed. Bartleby doesn't do it. Jinx also likes pineapple leaves.

Gene Callahan on the Landsburg-Rothbard-Hazlitt Cross

First, Bob Murphy thinks that we should judge the quality of an idea on the basis of the two equations that make it up and not in the context of all the economics that's taught around it. I think that's stupid and am not going to spend more than these two sentences on it.

Now, on to Gene. He's apparently posted on this critique before (HT noiselull).

It's an argument that was developed in Landsburg's comment section too. I didn't think it made much sense at the time Gene's is a little clearer but I still think there are some problems. First, note that this is different from my criticism. My criticism, in a nutshell, was:
1. Landsburg dropped the expenditure side of the income-expenditure identity so he basically had a one-to-one mapping of income on income, then  
2. Without the expenditure side and with a somewhat confusing conflation of MPC and income share he had an implicit MPC (implicit based on how he was doing the math) of 0.99999999, but probably more accurately (because he left out his own consumption) an implicit MPC of 1.  
3. This was all a little obscured because expenditure was dropped, but once you reconstructed the expenditure side it was a "valid" multiplier result.  
4. "Valid" is in quotation marks because it's only "valid" if you completely ignore... um... economics.
Now, REALLY on to Gene. This is his argument, reproduced in its entirety, which is a little different:

"Murray Rothbard never cared if an argument he offered was sound, but only about whether it seemed to make his opponent look stupid. Consider, for instance, his "reductio" of the Keynesian multiplier:

Social Income = Income of (insert name of any person, say the reader) + Income of everyone else.

Let us use symbols:

Social income = Y

Income of the Reader = R

Income of everyone else = V

We find that V is a completely stable function of Y. Plot the two on coordinates, and we find historical one-to-one correspondence between them. It is a tremendously stable function, far more stable than the “consumption function.” On the other hand, plot R against Y. Here we find, instead of perfect correlation, only the remotest of connections between the fluctuating income of the reader of these lines and the social income. Therefore, this reader’s income is the active, volatile, uncertain element in the social income, while everyone else’s income is passive, stable, determined by the social income.

Let us say the equation arrived at is: V = .99999 Y

Then, Y = .99999 Y + R
.00001 Y = R

Y = 100,000 R

This is the reader’s own personal multiplier, a far more powerful one than the investment multiplier. To increase social in- come and thereby cure depression and unemployment, it is only necessary for the government to print a certain number of dollars and give them to the reader of these lines. The reader’s spending will prime the pump of a 100,000-fold increase in the national income.

-- Man, Economy, and State, p. 867-868

Of course, what has been ignored is the relationship of R to V. In the simplest version of the Keynesian multiplier story, an essential element is that C remains a constant percentage of Y (ignoring autonomous consumption) regardless of what happens to G or I. Therefore, an increase in G or I must lead to enough of an increase in C to keep that percentage where it was. Now, that may be an invalid assumption, but Keynesians have a story as to why we'd expect something like that to happen, and then they actually go and do empirical work to discover to what extent it really does happen.

But if we look at the relationship of R to V, we would expect to find that they vary inversely: If my income was .00001 Y and it doubled the next year, the income of everyone else simply dropped to .99998 Y. Rothbard has played a trick here: because V is such a huge percentage of Y, he can claim it is "a completely stable function of Y." But the correct thing to look at is: When R changes, does V respond so as to maintain its ratio to Y? While the Keynesian story may be wrong, at least it represents a theory as to why the ratio might be roughly constant. Rothbard, on the other hand, has absolutely no theory for positing that V and R are behave like they do in his model, and thus his example is hardly "in keeping with the Keynesian method."

The correct answer for the multiplier in Rothbard's example is roughly 1 rather than 100,000. Rather a bad error. But who cares? For readers who did not bother to analyze the example carefully, it sure made the Keynesians look dumb!"

So one thing I don't like about this is that it seems to accept the Landsburg-Rothbard-Hazlitt conflation of income share and MPC.

Again, that conflation doesn't matter if we are dealing with an expenditure equation, but if we're dealing with an income equation it messes things up because on the income side share of income is not necessarily equal to MPC. I may have 0.00000001 share of total income but my MPC is a lot higher than that. Everyone else has 0.99999999 share of total income but their MPC is almost certainly much lower than that. This is all clear if you have an expenditure equation because then we remember our economics and what we learned about supply and that we need to save some so that we can invest. But if you are just tinkering with an income side you get stupid results like MPC = 1 or near 1.

So Gene has a point - if you're going to use income share at least use it right. Gene shows more clearly than what I was picking up in the comment section how Landsburg-Rothbard-Hazlitt do not use it right. But I think that still misses the bigger point of what dropping the expenditure side of the Keynesian cross does to the logic of the whole theory.

Three worthwhile reads in reaction to the unfortunate Voting Rights Act decision

Georgia Representative John Lewis, at the Washington Post

Andrew Cohen, at The Atlantic

Eric Posner, at Slate

On the narrow point that maybe coverage decision rules aren't optimal perhaps Roberts has a point, but it seems like an awful reason for the court to step on legislative prerogative. There was no argument that I'm aware of (I haven't read the decision - just characterizations of it by people smarter than me) that says the VRA itself is unconstitutional. But by stepping in on a legislative task in a Congress that is not inclined to pass anything they've effectively destroyed the principal guarantor of the fifteenth amendment.

Could it be remedied in the future? Sure, perhaps. We could get new decision rules and everything could be fine. But a lot of damage could be done in the interim and it still doesn't justify a terrible ruling.

Tuesday, June 25, 2013

Apparently this reasoning, which Landsburg got from Rothbard, originally came from Hazlitt... me yet another reason to never, ever, waste any of my precious time on this Earth reading Hazlitt.

Citation provided here.

As misleading as comparing penetration by a rapist to penetration by photons but (mercifully) less offensive

UPDATE for the sake of traffic directed here by Krugman and DeLong: I've written a couple things at this point so the summary is:

1. This post (you're here. you don't need a link)
2. Henry Hazlitt is often promoted as a place for people to start with economics. I don't think that's wise.
3. The estimable Gene Callahan has an older post on this same argument from Rothbard, but I think his criticism doesn't go far enough - explanation here.
4. There is a legitimate problem with the Keynesian cross, but New Keynesianism addresses it.
5. One of my commenters makes my point much more succinctly - I reproduce that with an explanation of how it relates to my point here.


He writes:
"Now, though I cannot seem to find a reference, I have a vague memory that it was Murray Rothbard who observed [<<< DPK: Well we're clearly off to a bad start] that the really neat thing about this argument is that you can do exactly the same thing with any accounting identity. Let’s start with this one:

Y = L + E

Here Y is economy-wide income, L is Landsburg’s income, and E is everyone else’s income. No disputing that one.

Next we observe that everyone else’s share of the income tends to be about 99.999999% of the total. In symbols, we have:

E = .99999999 Y

Combine these two equations, do your algebra, and voila:

Y = 100,000,000 L

That 100,000,000 there is the soon-to-be-famous “Landsburg multiplier”. Our equation proves that if you send Landsburg a dollar, you’ll generate $100,000,000 worth of income for everyone else."
No, no, no, no.

The Keynesian multiplier has two sides: income and expenditure. The economy's income today is the economy's expenditure yesterday. If you had a lot of income today but there was not a lot of expenditure today, then tomorrow you will have less income.

Landsburg drops the expenditure side of that equation. In effect, he swaps:

Y = C + I


Y = wL + rK

Except his income earners are himself and everybody else.

Wonder of wonders, when you set income equal to income you get a forty-five degree line.

So by botching the income/expenditure distinction Landsburg gives us a triviality. Even Say did better than that. Say at least kept income and expenditure separate. His mistake (initially) was assuming they were always equal. But on top of that triviality, Landsburg adds a genuine error.

The slope of the consumption component of the expenditure side of the Keynesian cross (the side that Landsburg is missing) is not strictly speaking determined by the consumption share of output, it's determined by the marginal propensity to consume. When we consider the economy as a whole, of course, we can think in terms of the consumption share of output (investment equals savings and all that). Normally we are talking about the economy as a whole, so it doesn't matter all that much that we make that distinction (when I TAed an intro macro class I always taught it as MPC, though).

Now as I highlighted above, we can't even really call Landsburg's 0.99999999 figure an MPC because it's not expenditure - it's income. But Landsburg is treating "L + E" like expenditure, so let's at least do it correctly for him. Either it's all consumed or part of it is not consumed. Landsburg seems to want E to consume all of it's income (hence the 0.99999999 coefficient) and since he is furnishing that dollar out of L to E presumably he is consuming all of his income, or 0.00000001 of total income. So actually the MPC for the economy is 1, and not 0.99999999, implying an infinite multiplier. I buy something from you for one dollar, you spend that whole dollar buying something from someone else for one dollar, etc. etc. and the dollars keep racking up. You can think of it as shifting the consumption curve (which is parallel to the 45-degree line) up such that there is no longer any stable equilibrium and consumption bounces off to eternity.

This brings me back to my initial point: Keynes made the multiplier go because he had income and expenditure. When you have income and income you get infinite solutions because you just have a tautology. When Landsburg mixed up MPC and income share (and implicitly assumed an MPC of 1 even though he mistakenly called it an MPC of 0.99999999, which gave him a very large equilibrium solution), he was essentially repeating the tautology under the guise of having performed the same exercise.

A very minor additional problem posed by Landsburg

So Landsburg confuses a couple things - he doesn't have an expenditure side so he has to smuggle it in later, and when he smuggles it in later he confuses MPC and income share which concealed the fact that he was only dealing in a single identity (if he had realized his implicit MPC was 1 and not 0.99999999 he might have picked up on what was going wrong).

Econ 101 students ought to know better because of course the Keynesian cross is pretty uniformly taught with both income and expenditure from the get-go!

But this does raise a ([very] minor) additional problem: if people consume a lot of their income then we can get similar outrageously high multipliers! Wouldn't the implication be that policymakers should encourage citizens to consume as much of their income as they can?

Of course not. Because every Econ 101 textbook I know of teaches aggregate supply before they teach aggregate demand. You can gussy that up with as much optimization as you want, but at the end of the day an Econ 101 student can still understand how that pins the multiplier down with the imperative of investment.

One more point

Take the consumption share of income, use that as an MPC for convenience sake, and get a multiplier. What is it - four? five? That's still outrageously high.

I've seen people actually cite this as proof that the Keynesian model is wrong.

Guess what folks: you have to factor in crowding out. As Keynes wrote in chapter 10 of the General Theory: "if the propensity to consume in various hypothetical circumstances is (together with certain other conditions) taken as given and we conceive the monetary or other public authority to take steps to stimulate or retard investment, the change in the amount of employment will be a function of the net change in the amount of investment".

Another way of putting this is that when the government spends money you can't just multiply that by the multiplier from the Keynesian cross! Or, put another way, you have to multiply government expenditure by the multiplier from the Keynesian cross, and subtract out the reduction in investment multiplied by the multiplier from the Keynesian cross (and of course also subtract out any reduction in consumption through taxation, etc., multiplied by a here-unspecified multiplier that will be different from "the multiplier"). In a sense it's misleading to call the empirical government spending multiplier "the multiplier" and to also call the Keynesian cross multiplier "the multiplier", but if you think about what the Keynesian cross is doing it's not all that hard to keep straight.

Barbara Bergmann on a "new empiricism"

HT - Brad DeLong.

Barbara Bergmann (emeritus professor at American University) suggests we need to reorient economic empiricism. Here's the beginning of her column on the subject:

"The New York Times has reported a discovery by biologists studying how bottlenose dolphins hunt fish in groups. They found that individual dolphins consistently took specialized roles: one particular dolphin always served as herder, and the others served as barriers to the fishes’ escape. The scientists discovered this by watching two groups of dolphins during 120 feeding sessions.

Those two dolphin groups probably received more close attention in this single study than any of the human groups known as business establishments had received from professional economists in the last 200 years."
Probably a slight overstatement in that last sentence, but the comparison of biology and economics is still quite stark. To a large extent it's a stark difference for good reasons. We have much better data available than biologists that don't specialize in the particular species of highly evolved primate that interests us. Why go for a small sample field study when there's plenty of work to be done on the ACS?

But clearly there are questions better answered going out in the field, and economics departments don't really prepare you at all to do that work.

One of the things I like a lot about the Urban Institute is that they combine field work with data work. A lot of the field work is headed up by public policy or sociology PhDs, but the economists actually participate in it too. It's a model that more economists should follow.

Field work has costs too, of course. As we know from work with datasets, it's very hard to parse out the truth in observational data. The methods we've developed to do that often require careful model design and lots of sample size. That's just not there in field data. But the point is not to just do one or the other - the point is to rely on the strengths of each approach. Moreover, economists that are trained to worry about model identification are exactly who you want to have working on field studies because they know the pit-falls (and vice versa - you want people trained to do field studies looking over the modeling).

Assault of Thoughts - 6/25/2013

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" - JMK

- Corey Robin responds to his critics. I found the reaction to him quite disappointing. It'll be interesting to see the reaction to this.

- Articles like this (HT Ryan Murphy - who I've already argued extensively with about this on facebook) about how wine ratings are "random" really bug me. The randomness comes from the fact that, in a manner of speaking, the model is mis-specified. Unfortunately this stuff comes up a lot in the Journal of Wine Economics (which I used to follow but haven't lately), probably because the numbers are easily available and economists love using whatever data they can get their hands on. If you think wine ratings are a measure of some objective underlying measure of quality, then you're missing the point. There's nothing objective about this - wine is diverse and wine preferences vary considerably from person to person. Not only is it subjective, but it's also contextual (you are going to respond differently to wine X after tasting wine Y than if you tasted it before). That's why when you do the tastings they give you the whites first, then the reds, then the deserts. All a high wine rating tells you is "a guy that has a lot of experience drinking different wines liked this one time", and if it has a medal it means "a bunch of people that have a lot of experience drinking different wines liked this one time". Those are both very useful bits of information even if there is nothing objective about it, particularly for people who are new to wine. If you know what you like in wine, what's more useful of course is an actual review - a description by someone (that's not selling the wine!) of what characteristics to expect. Again, just like different authors of a book review of the same book you'll find some commonalities between reviews but because of the complexities of books and the different preferences of readers (and the literary and intellectual context of a given reader) book reviews can still vary widely between each other. If I were to say "well that means the book review isn't objective", I would be missing the point. If I were to say "the book review is random" I would be overstating my case. We still think these book reviews contain valuable information. So it is with wine rating, criticism, and reviews.

- I always figured fracking was more or less safe and an important way out of the dirty fuels dilemma, but this study nudges my priors just a wee bit on the drinking water pollution issue.

- "[Joan Robinson] wrote that Piero Sraffa used to tease her, saying that she ‘treated Marx as a little-known forerunner of Kalecki’ (J.Robinson 1966: vi)." from Marcuzzo & Rosselli - Economists in Cambridge, p. 185.

Monday, June 24, 2013

Thinking about Marx tonight it occurs to me...

...what really proved Marx wrong wasn't the failure of communism, as many suggest. What proved him wrong was the success of capitalism.

A nice piece for people who flip out when economists talk about optimizing agents

Botanists say that plants solve optimization problems too!!! And then they model it!!!

Of course, plants don't actually optimize. They have some evolved, biological heuristic they use to approximate optimization. But we model that mathematically and speculate about what they're doing because that is a useful way of trying to understand what's going on.

When people get upset about models that use optimization, it's a pretty good indicator that they don't understand what models are for and what they are not for.

Assault of thoughts 6/24/2013

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" - JMK

- 300 years of financial crises, 1620-1920

- More evidence on how historical censuses counted labor and whether it matters for our estimates of returns to scale in manufacturing

- Why should space exploration get more money than ocean exploration? Paltry as our post-Apollo exploration efforts has been (relative to what they ought to be - of course we've done some amazing stuff), ocean exploration is even worse and arguably ought to be much more substantial. (broader discussion at Nat Geo here).

- More Moynihan Report anniversary work out of the Urban Institute (if you're interested in this they had some stuff out earlier in the year too which you should be able to find discussed with the search function on this blog).

- And speaking of anniversary retrospectives, EPI has a report out on some of the unfinished work of Dr. King (we've also discussed this on here a lot before, particularly policy recommendations in his last book).

Friday, June 21, 2013

The idea of physics envy in economics is stupid

Here's a good example - Lee Smolin. Yes, if you ignore history, if you ignore multiple equilibria, if you refer only to the static case (i.e. - what a physicist trying to learn about economics is going to stumble on first) it all looks pretty silly. The only problem is... that's not economics. People know that the chief determinant of the "deep parameters" is history and path dependence.

This is like saying that astrophysics is nonsense when it purports to explain why the solar system operates the way it does, because the solar system could have formed in all sorts of ways (Mars and the Earth could have been flipped!) and could have been located in any number of locations in the galaxy and that what actually determines what we currently observe is the series of minute historical circumstances that made our solar system take on the unique characteristics that it has. On top of that, physical equilibrium is nonsense because the planets are moving! That's not equilibrium!


"Monopoly power" doesn't mean what you think it means...

...if you think it means 100% or even sizable majority market share.

If you think it means something else then it might mean what you think it means.

Quote of the day

From Alex Tabarrok, via Bryan Caplan:
"As far as wages are concerned the only difference between immigration and birth is that birth takes longer. When your neighbor has a child it as equivalent to a worker entering the country 18 years in the future. The wage argument against immigration thus also suggests that we should have prevented the parents of the baby-boomers from having children."
Plus birth gives us workers that look like us by definition, immigration doesn't, and that bothers people. Sometimes it bothers people so much that instead of just letting people come who want to come they argue that we should choose the "best and the brightest" - whoever THAT is. And notice the people who talk like that never use the corollary. They never call the people that don't fall under their definition of "best and the brightest" the "second-best and relatively dim" or even "the worst and the dumbest".

No, they don't say that. Because that would give away the game.

Great Krugman column today

Here, with motivating model discussion here (how many columnists think through models - even simple ones - before pontificating?). Oh, and of course this was < sarcasm > extraordinarily uncivil < /sarcasm >.

This is what the haters don't seem to understand: Krugman is not popular because he is some kind of political hack. He's popular because he thinks carefully about issues before speaking on them. He's popular because he gives credit where credit is due and then speaks truth to power when he has to. As I've said before he's a goddamned national treasure.

I understand he gets catty sometimes, but usually when you accuse him of being cruel he's actually just saying emphatically that he thinks you're wrong (which is not inappropriate at all). Even when he's genuinely out of line (we all slip into it), he's a paragon of virtue relative to much of the economics blogosphere. To my knowledge, for example, he's never written anything nearly as cruel as this, and people usually (as far as I can tell, rightly) consider that guy to be fundamentally a nice guy.

btw - these connections he's making - separating mark-ups out from rental rates on capital, and thinking about the responsiveness of investment to each component of profit - should be very familiar to anyone that works with Post-Keynesian models. This is why I don't take the Post-Keynesian griping about neoclassicism very seriously: you can get the same result with Cobb-Douglas and Dixit-Stiglitz. The value Post-Keynesians add is in the different sort of questions that they ask, not their stand against neoclassicism.

PSA over.

Today's xkcd has me reconsidering Prometheus...

...his real crime was an intellectual property crime.

Or was it a club good (it's non-rivalrous but it is excludable)?


Wednesday, June 19, 2013

And while I'm riffing on EconLog....

Bryan Caplan has a post up on ideological Turing tests. Long story short, back in the 70s hawks evaluated doves as furnishing exaggerated positions of their views more often than doves said that about hawks.

The most obvious thing that could be behind this is that doves have less realistic views of their ideological opponents. But obvious isn't always right (and there doesn't seem to be any particular reason for this to be right - which should make us more suspicious) so let's look a little deeper.

I don't know what the explanation is but I like all of these better than the raw answer that doves exaggerate more than hawks, because none of them require me to assume the sincerity, open-mindedness, or intelligence are non-randomly distributed across the ideological spectrum*.

1. Selection problems

Another option is that the set of people self-identifying as hawks or doves is different from the set of people identified by out-group members as hawks or doves. The out-group may be very accurately describing a somewhat different group.

For example, a lot more people consider themselves "libertarian" than regular readers of EconLog would probably consider libertarian. As a non-libertarian I typically think of the sort of people who agree with what's on EconLog as "libertarian" and would write my summary of libertarian views using that mental definition. And it's a fine mental definition, I'd argue - one that many libertarians use to characterize themselves. But if Greg Mankiw were reading it (he has referred to himself as a libertarian) it wouldn't describe him very well and he'd say it's extreme. Same with Glenn Beck. Same with Rand Paul. I have a facebook friend I've known since high school (i.e. - not picked up as a friend in my years of blogging) who calls himself a libertarian but isn't exactly in line with the community of libertarians I'm often butting heads with. If any of these people were reading my summary they'd think I was presenting an extreme position even if I described the EconLog libertarian position quite well.

Ideology is not a characteristic like height or weight that can be precisely measured or assigned.

Classifying people based on a survey rather than using self-identification doesn't really help either because even though you clean out the self-identification you still aren't cleaning out what I call a "libertarian".

This is also relevant to "liberal" which is probably more of a bad word in America than "conservative" (where I live neither seems to have any more stigma than the other but I live in a funny place - I am told this is the case in most of the country). People who conservatives would identify as "liberals" probably think of themselves more as "moderate". In that sense the people who self-identify as "liberal" probably are more outspoken than the average person in the group that a conservative would call "liberal".

2. Signaling

There may also be signaling with buzz words and the structuring of the language. It may be that hawks respond more to buzz words and the use of certain language than doves are so they are more clued in when someone tries to imitate that. I'm on record saying that Lind/Dionne pose important questions but even I wince at how they write it up because I know they simply don't speak the same language. If one groups has more buzz-word-based discourse than another they may easily identify out-group members and complain that they are communicating an extreme position.

3. Garbage in, garbage out

Before assuming anything about how doves treat hawks we also have to consider the information that doves are basing their assessments on. It may be that hawks actually have fairly moderate and sophisticated views but in the public sphere, because of its rhetorical power, they communicate with extreme arguments. A dove assuming this is sincere might make an entirely faithful rendition of that argument that the hawk (who is now not making a public appeal) sees as too extreme. Maybe we can blame the hawk here. Maybe we can blame the dove for being credulous or not digging deeper. But we can't say that the dove is misrepresenting the hawk position as it has been communicated.

* We can think of extreme exceptions to this. Almost no one in the U.S. is a Marxist anymore except for people who are intellectually immersed in the legitimately important works of Karl Marx... which means that professors are much more likely to be Marxist. Intelligent people select into higher education so maybe Marxists are more intelligent on average than other people. But that's a very narrow explanation and shouldn't generally apply - and anyway it's not causal from intelligence to Marxism it's just an artifact of intellectual history.

Ah, libertarians...

Paraphrasing Art Carden: "I call people that don't agree with me elitists that are willing to watch people suffer and every once in a while they say mean things to me. So what gives?"

It's a paraphrase. I think it's a fair one. But note that accusing people who disagree with him of being "elitist" and "willing to watch people suffer" is a direct quote, not a paraphrase. So is the question at the end - "so what gives?"

Gee, I wonder!

Tuesday, June 18, 2013

How did I not know this existed? The Muppets on Post Keynesian economics (sort of...)

Jonathan Catalan says that "heterodox" is not necessarily a label that people should aspire to

Here. I agree. As long as the word is in use I'll use it on occasion (I feel like I usually talk about "Post Keynesianism" or "Austrian economics" rather than "heterodox economics" though), but I think this is right.

There's two kinds of economics: good economics and bad economics. Just try to do the first kind. Trace your steps and figure out the problems if you end up doing the second kind.

Kevin Currie-Knight on Markets and Care


He's specifically concerned with "care ethics" and makes the argument that markets extend our care much farther afield than the kith and kin that we are naturally inclined to care for. I think there is an important limit to this argument in that markets can only (1.) produce results that might be comparable to what we like about the results from the intent to care for others and (2.) reduce overt hostility or suspicion of others that is obviously not compatible with care. In other words, when Kevin (in introducing care ethics) makes the distinction between care ethicists who consider intent critical and those who consider results critical, I think markets can ultimately only satisfy the latter. And maybe that's fine - if that's what we can accomplish with markets then that's still a good thing. He even raises this point parenthetically in his post so although I wrote this paragraph up before even coming to that point in his post, he seems to be thinking along the same lines.

Kevin further argues, though, that markets create the opportunity for caring relationships to emerge that wouldn't have emerged otherwise. This is very likely true. We make friends at work. We get to know store owners, etc. This is exactly why I think the "buy local" movement is not as problematic as a lot of people treat it. There is a different social content between buying local and buying from extent networks of trade. Obviously I acknowledge the benefits of globalization but I'll never have the opportunity to form social bonds with the people that sew my clothes an ocean away in the same way I can form those bonds with local store owners. Unless you're a misanthrope, those bonds matter.

I'll add one last thought from the perspective of gender economics (which works a lot with the economics of care). One of the things gender economists point out is that care is one of those "goods" whose very nature changes when it's exchanged in a market setting. If I sent you a bill for coming to visit you in the hospital when you were sick you wouldn't feel particularly cared for anymore. To some extent market substitutes are substitutable, but they're not perfect substitutes. This raises issues around the preferences of the caregiver and whether those are sufficient to really provide the sort of care we require to be fully functional human beings.

Two immigration links

1. Ryan Murphy muses on the implication of French cultural protection arguments for the way some Americans oppose immigration. I actually don't think subsidizing cultural activities like the French film industry is the most awful idea in the world, but on the immigration side it's a pretty distorted sense of American (I'm sorry - Murican) culture that writes out immigrants. Immigrants are like our cultural blood transfusions. I'm sure there's also an asymmetry on this point. Most Americans that rail against Mexican immigration probably have a fairly positive view of Ellis Island. We don't have very many people still going around saying how awful that was. And yes, some of them are George Borjas types that have a somewhat more sophisticated argument for that distinction, but not the vast majority.

2. Anu Bradford proposes immigration bonds to assuage fears of immigrants. Basically immigrants would post bonds and if they became unemployed or went on welfare it would be financed with the bond. If they committed a crime it would pay for deportation costs. I'm not sure what I think of this. Some of it sounds a little odd. Part of me doesn't think there should be an extra cost to living here if we want them to come here. We're basically saying our system ought to be progressive unless you're new here, then it'll be much more regressive. We're also once again saying that low skill immigrants are not the "desirables" and high skill immigrants are, because this quite intentionally raises the cost of immigration for low skill immigrants. Yes I know low skill immigrants impose a higher cost on society than high skill immigrants, but guess what - low skill natives impose a higher cost on society than high skill natives. We want this progressive system and it seems to me if we're welcoming these people as new Americans it shouldn't be selectively applied. Some of it is strange though - unemployment insurance, for example, is only paid to workers if they've paid sufficient payroll taxes in a defined base period. So immigrants would only get that if they have already contributed what we have determined is sufficient for receiving unemployment insurance. It's an interesting idea - and as the author says its much better than government committees picking out desirable traits - but it still makes me uneasy.

Monday, June 17, 2013

What are more diffuse - the benefits or the costs of roads?

It seems to me the benefits, right? Depending on the financing perhaps they might be equal, but probably the benefits.

Another thought - it seems to me we should think a lot about the relative impact on a politician's prospects of tax cuts, spending increases, and debt. Does anyone do this sort of analysis? It seems to me everywhere I turn I see discussions about how politicians like the opportunity to spend money, and that to me sounds like a really sloppy way of doing public choice theory considering the government's budget constraint.

And yet another thought - the government's budget constraint is as hard as anyone else's because like anyone else's a budget constraint is an accounting identity. When people say that governments face "soft budget constraints" what they mean is that they can rely on debt (although that's nothing unique to government budget constraints) and money creation (and it's not even clear how that should be in there since that isn't principally done by the fiscal authority). This gives a false impression, I think, because it provides a misleading view of what politicians are actually doing. They have a hard budget constraint, they have a political constraint, and the objective is a little fuzzy. Most expositions of public choice theory seem to treat the budget constraint as a wild card, only a treat a portion of the political constraint, and are probably more realistic than most people on the objective function (although "realistic" can turn into "jaded" sometimes, and some of the naïve macroeconomists' objective function might be more useful).

If none of this is ringing any bells or doesn't mean anything to you don't worry about it.

Keynes acquisitions and a good Keynes link

I stopped by the used bookstore on the way home and got two books:

1. Keynes and After, by Michael Stewart (1972) which looks like a retrospective on Keynes, his innovations, and his legacy from the early 1970s - a positive take on it all. Stewart was in Harold Wilson's Labour government, apparently.

2. Anticipations of the General Theory? And Other Essays On Keynes, by Don Patinkin (1980). This is based on lectures he gave at the University of Chicago. He is specifically exploring the question of what Keynes's central point was and whether it was a "simultaneous discovery" (he specifically considers the Stockholm School and Kalecki and concludes that in both cases it was not really a simultaneous discovery).

This is related, but I think not quite the same, as work that David Laidler has done. Laidler asks the question of whether the idea of the Keynesian revolution was "fabricated", looks at the interwar literature, and concludes it was. I consider that far too overwrought. Of course other people were thinking along similar lines - you can add Patinkin's cases of Lindahl, Myrdal, and Kalecki to that list too. In fact Keynes cites a bunch of them quite obligingly! I don't think you need to come up with an idea in a vacuum for it to be a legitimate revolution in thought or to give primacy to the scientific contributions of one person in particular.


Also, I wanted to draw attention to an interesting post by Eric Rauchway on the meeting between Keynes and Roosevelt in 1934. He concludes that Roosevelt was probably sharper than he let on and that the friction after the meeting resulted from the fact that Keynes was presenting what ought to be done and Roosevelt was concerned with what could be done. It's an interesting question. I don't know the political situation of the 1930s but it seems to me the real public outcry was over things like cartelization and direct intervention. Would more spending have really hit the same roadblocks? I don't know. There certainly wasn't the same objection ten years later. Circumstances were different, of course, but that's largely my point - a lot of what the public finds acceptable seems to me to be tied to how you define the problem and propose to address it.

Talking outside your discipline FAIL

Just listened to commentary from Sheldon Richman where he said that Peter Berger had a unique perspective for his discipline and that most sociologists see society like The Borg.

My head is aching from the absurdity of both components this remark.

Quote of the day...

"I could develop the Irishman theory of value, whereby all value is produced by Irishmen. According to Matias's taxonomy if I did so that would be "orthodox" economics."

- Current

Oh and another thing on that...

A great way to convince me you're an idiot is to pseudonymously identify subjectivism/social construction/contingency/mediation/pragmatism/post-modernism with some kind of mythical hyper-relativism.

If you do it non-pseudonymously I can tailor my reaction to how much I like you and how smart I think you are otherwise and where I think the error might be coming from - so you might get away with me not thinking you're an idiot.

A collection of thoughts on neoclassicism/heterodoxy/mainstream economics

A few days back Noah Smith wrote a piece on the overuse of the term "neoclassical" to describe anything mainstream for which he got a lot of undeserved criticism from the heterodox crowd. I have a few scattered thoughts on this that I figured I'd share.

First and foremost, definitions are what we decide they are - so the worst thing about the heterodox push-back isn't that any of it is wrong per se, it's that they're wrong for browbeating Noah for using by far and away the most widely used definition and asking, for clarity's sake, that people use that definition when it's appropriate. I couldn't agree more.

In my view "neoclassical" economics is economics that cites optimizing behavior as the principle explanation of human choice under conditions of scarcity. "Self-interested", of course, is not always "optimizing" (although it can be) so we usually date neoclassicism to the marginal revolution rather than what we usually call the "classics". Of course there are hints of marginalism (and therefore proper optimization) earlier and that's fine - these things can be fuzzy. Neoclassicism does not mean hyper-rational actors. Neoclassicism can include things like game theory (that just introduces a strategic framework to the optimization problem) and even behavioral economics (I'm thinking of things like hyperbolic discounting - but probably a lot of behavioral economics can be imported into an optimization problem, though it doesn't have to be).

Neoclassicism shouldn't mean "mainstream" because there was a time when "mainstream" wasn't neoclassical and it might very well not be neoclassical again. "Mainstream" has sociological, not analytic meaning.

This, I think, is basically along the lines of what Noah said.

This isn't the only definition one could use to describe these ideas. Most notably Keynes (borrowing from Marx) called the classics and the marginalists "Classical". Again there's nothing inherently wrong with that, most people just decided that there were more useful ways to divide and sub-divide, and so no one uses Keynes's terms any more.

Matias Vernengo has some good stuff and some bad stuff to say about neoclassicism, but what most struck me was how he bristles at the way Noah used the term "heterodox":
"So Noah Smith thinks that I, Lars Syll and Steve Keen, and other heterodox bloggers (in which he adds Austrians; you see why they should teach History of Thought?* For a discussion of the meaning of heterodox economics, including why Austrians are not so, go here) use the term neoclassical economics as a pejorative term."
The only people who use "heterodox" the way Vernengo uses "heterodox" is fellow Post-Keynesians and Marxists. It's not how the JEL uses the term (they include Austrians) and it's not how most historians of economic thought use the term. Noah (and my) definition of heterodox has a lot going for it for that reason alone, but even if  you were to come at this issue with a blank slate I think it makes more sense. Austrians, like Post-Keynesians, have several elements to work that few mainstream economists use, think are the best way of doing the science, or even know about in a lot of cases. That is what heterodoxy is. "Heterodox", like "mainstream" is a term with sociological rather than analytic meaning. Some (not all) Austrians can be described as neoclassical. Same with Post-Keynesians (Joan Robinson did a lot of great neoclassical work for example - Kalecki did similar things but with non-neoclassical [one could probably say "classical"] exposition - they got along because of a common heterodoxy, but their analysis was in two distinct traditions). That doesn't really matter - they're still heterodox (just like a lot of non-neoclassical behavioral economists are mainstream). There's no litmus test either - lots of people work in both traditions and there's a lot to respect in both.

If Matias wants to use a different definition that's fine. I work with a lot of Post-Keynesians in my department and you all know I think they have some important things to contribute. Among them, when I hear "heterodox" I know how the term is being used and it all works out fine. But one thing they don't do (and something I don't think Matias should do) is lecture everybody else about how they need a class in the history of economic thought when they use a different definition.

Matias seemed to agree with a lot of what Noah had to say about neoclassicism, but he preferred to distinguish neoclassicism for its conclusions about "endogenous distribution". This doesn't make sense to me at all. Obviously what Matias calls "endogenous distribution" emerges in neoclassical economics, but it seems to also emerge in most Post-Keynesian economics (it just doesn't emerge in the same way - often, though not always, factor prices are given and it is the wage share that emerges endogenously - but that's still the distributional outcome). He also mentions "minimal government that protects property rights" as going hand in hand with neoclassicism, which I guess might be true if it is understood very broadly and very weakly, but I don't think these sorts of normative claims have much of anything to do with what we're talking about.

I do agree with Matias's point about the non-neoclassical mainstream work that Noah brings up being within the "protective belt" of the neoclassical paradigm. But this is instructive. Most of this work is what we would call "institutionalist" which is most decidedly not neoclassical. It's published next to neoclassical papers because it provides excellent economic analysis within a different analytic framework. Meanwhile there are other "institutionalists" that are heterodox. There are also "institutionalists" like Doug North who is celebrated by the mainstream despite his best efforts to push the mainstream away and insist he's working on a completely different project! All this is quite instructive! What matters for being in the "mainstream" is mostly about who you are willing to work with, what ideas you are willing to accept as decent ideas, and where you publish. It's a sociological term. To be out of the mainstream you need two things: (1.) you need to have elements of your analysis that is different from most of the mainstream, and (2.) you really need to be exiled from the mainstream or (more commonly) you need to exile yourself. Some institutionalists thrive in mainstream economics. Some institutionalists are very adamant about not being in the mainstream and criticizing the mainstream. The latter are heterodox, but really as a matter of choice and affiliation.

Similar problems come up with the responses of people like Lars Syll (who thinks neoclassicism implies deductivism) and Deirdre McCloskey (who wants neoclassicism to mean Paul Samuelson). You can click through the links (I won't cover them here) but the problems with their thoughts are pretty much the same problems with Matias's: they take entirely reasonable definitions and conditions that they like a lot and are flummoxed that most people seem to think differently.

Here's the point: definitions are useful if (1.) they make meaningful distinctions, and (2.) a lot of people use the same definition to mean the same thing. You need both elements. Noah's use of terms like "neoclassical" and "heterodox" meet both elements. Matias's only meets element (1.) (probably - although maybe not) in general, although it also meets element (2.) if he's talking to other Post-Keynesians.

And Noah uses it how most history of economic thought people use the terms and how most economists use the terms.

So give the guy a break.

Sunday, June 16, 2013


When I haven't glanced at Ricardo for a while I have this image of him in my head as being dull. He fretted a lot about value, then he wrote about the returns to the factors of production, he had a sliver of solid Econ 101 in his trade chapter, and then a bunch of stuff on taxes.

The machinery chapter alone was fairly interesting.

That's the image I always have of what it is to read Ricardo. But every time I pick him up and actually read him I'm surprised at how good a read it is. For one thing he writes clearly and basically gets to the point. Adam Smith goes on and on about the same point (at least he's a good writer - but it's hard to push through much with how much he writes). But there are actually very interesting ideas. The rent chapters especially always surprise me in how insightful they are.

As a side not, Agnar Sandmo's (half!) chapter on Ricardo (he shares a chapter with Malthus - they believe it or not - they don't even get their own!) is really excellent. He covers all of Ricardo's ideas of course but in just two pages or so of that treatment he distills the point down so well that I almost don't want to assign it so I can just use it as lecture notes. I won't - I'm going to be using Sandmo. But the Ricardo section especially is just that good.

Friday, June 14, 2013

Is sexualized the same as sexist? Or: sometimes I'm very concerned about feminist discourse. Or: If you're reacting to a sexualized heterosexual world the same way a fundamentalist reacts to sexualized gay culture, you're doing feminism wrong.

I think the Axe body wash commercials about the astronauts are pretty funny (Kate does too - she saw one before me and excitedly told me I would love it). Here's a sample although they've got a couple that basically go the same way in the end:

Today a female facebook friend - kind of a feminist but not usually one to post a lot about those issues (far, far less than I post on feminist/gender issues) called the astronaut commercials "sexist". I worry when I see things like this because I think overusing the term really twists its meaning (kind of like calling people who advocate policies that are in the end probably bad for minorities "racists"... we can say we don't like that but it's quite a stretch to say they are racists).

It's not even clear exactly what inspires this. My best guess is that it's obviously a super-charged sexual encounter. I don't say that because there's anything that explicit going on, but after almost being eaten most people are probably not going to be weighing which guy they want to be with. The concern may be that the guy is doing the rescuing but that seems like an even weaker case. It's a product for men so obviously the astronaut has to be a guy. The lifeguard could be a girl but for the sake of statistical frequency and ease of exposition I don't see anything especially wrong with presenting heterosexual relationships here (i.e. - the astronaut has to be a guy, if we are assuming heterosexuality for the reasons just stated that makes the victim a girl and the lifeguard a guy). Certainly there's nothing sexist or homophobic about that choice. We see female lifeguards on TV all the time too. There was of course the golden age of Baywatch, but check out any Syfy mutant shark/octopus movie. So I don't think it's that.

There's also, of course, that the victim and the lifeguard here have idealized body types - a perennial concern. There is good reason for this concern, for what the body types we see on TV do for body image, etc. There's good reason to want to see a change. Hollywood and TV go overboard and ought to be disciplined on this point, but this gets tricky too because people have preferences and are attracted to different things. Of course it's socially constructed and might need some tweaking on the extremes, but it gets very tough when you start trying to tell people what they ought to find attractive because then you're just substituting your views about body type for theirs. And who really has a right to scold me for my apparent tendency (completely subconscious - I'm just looking at the data) to like shorter women? In other words, (1.) it's not clear this is "sexist" because body image ideals are around for both sexes, and (2.) there are very real limits to how far you can push this one before you're scolding people for having sexual urges which is presumably NOT the direction we want to go.

So in summation, there are some things you could make some interesting and even important commentary on here (sexualization, body image, MAYBE gender roles but that's the weakest of all) but the case for "sexism" isn't really there at all. If you don't like sexualized advertising you are welcome to gripe about that (say something like "ugh - why does everybody have to be half naked and sweating on TV"). Some of us don't have as refined tastes (I thought it was funny and I found the people attractive). Say that if you want to. But it worries me that people tie their own prudishness/refinement/sense of what's "appropriate" to feminism and "sexism". What I am saying here is not the equivalent of people who say "if it's not overt racism it's not racism". Obviously there's a lot of subtle sexism out there, and some of it is very much tied up into sexualization as well. If you think I'm denying that, start from the beginning and reread. I refuse to play the game of being told I'm missing that. You don't have to convince me that sexism can come through sexualization. You have to convince me that the mere observation of a sexualized culture presents an instance of sexism - because that's not always going to be the case. We're sexual beings. We're going to act like it. Sorry. That means we're going to have thoughts and reactions that some people might even consider crude. Insofar as frustration with that is what feminism means to people, feminism is in trouble.

As a way of making that point consider that feminism is much broader than just male/female dichotomies and issues. A lot of feminism is about LGBT issues too and defending LGBT people when they have sexual reactions that bothers other people. That door swings both ways, feminists. ***If you're reacting to a sexualized heterosexual world the same way a fundamentalist reacts to sexualized gay culture, you're doing feminism wrong.***

This is getting long but I oughta say something about what doing feminism right means (because I'm a feminist, one of my fields is gender economics, and it matters to me. Feminism done right is about opposition to patriarchy (as a matter of historical circumstance), but more practically speaking its an opposition to power relations generally that threaten human capabilities and are organized around gender or sexuality. Since these power relations can emerge through the way culture is sexualized, of course that comes up as a subject to examine. But as a philosophical orientation the key point is the power relations and not the mere fact that we are sexual beings. As a theoretical/scientific orientation in the social sciences it involves a positive acknowledgement of and interest in studying the power relations that are of normative interest to feminists more broadly.

If you take your claim to its logical conclusion and that logical conclusion is that all people should be sexually attracted to everything equally (accounting for differences in sexual orientation, of course), then I think you're making a bad argument and you're missing what feminism is about.

"Fiscalists" is a term that should catch on more widely

Krugman discusses the Cardiff Garcia article here. It divides demand-siders into "fiscalists" and "monetarists". Monetarists is tricky because that already has significance for a theoretical perspective, but I like the term "fiscalists" because it would really help to clarify a lot of sloppy discussion of what Keynesianism is if the policy view is just given a different term. Of course most Keynesians are probably fiscalists (some might not be - for example, John Taylor), but if you had a separate term for a normative, policy perspective people could be more clear about how they use the word "Keynesian".

Krugman goes through his own policy thinking on the relationship between monetary and fiscal policy, but that's mostly old hat. I think everyone gets that except for Scott Sumner acolytes, and I honestly can't imagine they've actually missed that - they just need something to whine about so they say Krugman doesn't think monetary policy makes sense at the ZLB.

Thursday, June 13, 2013

One of the funnier things I read tonight

How constraining are completeness and transitivity assumptions, really?

OK, on Unlearningecon's blog I made a quick point without elaboration that I've made in more detail here - that while most people think economists' assumptions about "rationality" are implausibly strong they're actually quite weak. You basically need completeness and transitivity. Indeed it's impressive that you need such weak assumptions to make an optimizing agent go.

Even this was problematic for one of his commenters:
"The problem isn’t the ‘rationality’, but the completeness and rigid transitivity that economics has to assign to an agent when trying to glean insight into the workings of an economy."
I agree that completeness especially is unrealistic (transitivity, as far as I can figure, actually isn't really that bad), but honestly what changes by assuming it? The biggest problem in a world with transitivity but without completeness is that you just don't have the basis for a choice. The math doesn't work. You can't define a maximal set. But we could imagine some kind of algorithm for dealing with a world where preferences actually aren't complete (i.e. - the world we live in). A couple come to mind. First when you make pairwise comparisons you could just skip the cases where preferences aren't defined. You could also flip a coin (since transitivity holds I don't think this should cause too much trouble - the biggest problem is its randomness).

Let's say you had a bunch of agents with mostly complete preferences and you ran some simulations with these sorts of options. So we're not doing the optimization that requires the rationality assumptions Unlearningecon is uncomfortable with, we're doing more of an agent based approach. I don't do this sort of modeling but I'm guessing you get about the same results (particularly if you skip the undefined elements and the undefined elements are not maximal elements... which makes sense - why would your preferences be undefined on a bundles you highly value? Agents ought to be the foggiest about relatively low value bundles).

A more realistic approach is to assume that it takes cognitive resources to produce completeness in the preference relations. Indeed we could even think about a production function for preference relations and some way of assessing expected benefits of expending cognitive resources. If we think higher-value elements might have undefined preference relations this might be especially important. Think, for example, of grocery shopping that requires you to plan for a week's worth of meals given a huge variety of products. There are many high value bundles and you exert some effort in figuring out the best bundle but there's a point where you quit expending cognitive resources and just make the purchase. Again I'm guessing running this simulation approximates the results from more naïve optimization problems that go in assuming completeness - but of course it won't perfectly hit it.

I don't run agent based models so I'm just thinking through how these seem like they'd work. Is there any reason to temper my optimism? If we were to relax these assumptions how would things really go so wrong that adding the assumptions - for mathematical convenience - is a dangerous move? I just can't think of a reason for pessimism here. The unrealism we're dealing with seems to primarily pose problems for the math, not for the conclusion. Thoughts?

Wednesday, June 12, 2013

Economists provide a dose of reality on benefits of the Human Genome Project

Here (HT - Tyler Cowen). This is a great part:
"Julia Lane, who until last year directed the science of science and innovation policy programme at the US National Science Foundation in Arlington, Virginia, calls the Battelle report's numbers "ridiculous". Lane, now the senior managing economist at the American Institutes for Research in Washington DC, says that the analysis "reinforces this notion that science is a slot machine that you put money in, and magic happens and money pops out at the end"."
My prior is that it has probably generated a whole lot value but you don't determine that number by doing a little linear algebra on genomics firms and multiplying it by the money spent. It's not even that jobs are such a bad outcome to think about, but if you're going to think in those terms you don't want to just multiply out how many people are employed - you want to think in terms of some kind of multiplier estimate and the opportunity costs you face (as the article states).

I was talking with Ryan Murphy about green tech multiplier claims a couple weeks ago and the same sort of thing came up. A lot of time what you'll see is something like the ratio of private sector jobs in the green tech industry to publically supported jobs in the green tech industry that comes to a multiplier of ten or something crazy like that. This is obviously a little better than that, but it could still use a lot of work.

Come to think of this, you see this a lot with high skill immigrants too... I believe the latest figure I've heard is that one high skill immigrant creates four jobs for Americans.

Ummm... I don't think so, guys.

Robert Fogel

Robert Fogel, Nobel laureate and economic historian perhaps best known for his work on the economics of slavery, has passed away.

Tuesday, June 11, 2013

What's in a name?

Jonathan comments on my last post and it's something I really sympathize with:
"I've been flirting with no longer calling myself a libertarian. If I do, it's mostly because I share a similar general world view. But, I don't see any broad difference between liberals and libertarians. Libertarians are liberals that disagree on specific issues (how to maximize "liberty;" how to maximize social well being; how to maximize the standard of living of the worst off; et cetera). That is, they disagree on the specific direction of change. But, at the same time, both agree that there ought to be change, and that this change ought to benefit as broad a group of people as possible."
As a lot of you probably know I don't really think of myself as a "liberal" either, but there's a lot to like in that gang. It's often a self-definition of convenience. Russ and Arnold were talking about libertarians, conservatives, and liberals. In that set I most feel like I'm a "liberal". But from drones to gun control and certain economic issues I'm not really a liberal. Some people say I come across as a libertarian but I think they're just mistaking the common ground that a lot of classical liberals share and that economists are just more likely to pipe up about. I agree with Jonathan that the underlying goals of a lot of these groups are very similar and derive from classical liberal goals. The specific answers have just diverged over time (hell they were divergent a couple hundred years ago too).

Faction - to use an older term for this sort of naming - is useful and dangerous. Let me modify the founders' thinking on this. Faction is useful in that it reduces transaction costs by providing organization around a common denominator. It is dangerous in that it restricts free thinking. I think that's why I resist calling myself anything because I want to think differently about things without feeling like I have to keep the disagreements to a minimum. I want to be able to muse on a State of the Union address and realize "you know what, I really wouldn't mind at all seeing the federal minimum wage struck down". There's something about being unspoken for that lets you pursue your thoughts where they lead you. The same goes with drones. It wasn't an issue several years ago. Because I feel relatively unattached I've felt fine thinking it through and coming to the conclusions that I come to. I'm sort of liberal - if you need to slot me somewhere that's not the end of the world or anything. But there's no real attachment.

I encourage Jonathan to just drop the label (unless someone is interested in labeling - then he can also feel free to take up libertarianism as a "ya, that's as good a label as any" sort of label). There's something about consciously being unattached that's liberating.

Jonathan continues by criticizing my discussion of modern conservatives (see link). I'll grant that I wasn't entirely satisfied with that but the civilization vs. barbarism didn't sound right either. His proposal - "exclusivity" - is an interesting one.

Arnold Kling and Russ Roberts on Political Language

Russ Roberts linked to this old EconTalk with Arnold Kling on his twitter feed today, noting that it was relevant to the responses to Snowden. I hadn't listened to it the first time but since I was just sitting and chugging through data this week it was convenient to have it on in the background.

My non-controversial agreements and disagreements come first and my controversial disagreements come in the next section. However, I think the controversial disagreement should serve to illustrate precisely why the subjectivity of these issues matters so much.

Kling argues that libertarians, liberals, and conservatives think along three very different axes. Libertarians think in terms of coercion and freedom, liberals think in terms of the oppressed and the oppressors, and conservatives think in terms of civilization and barbarism.

I agree with the big picture that people frame their thinking differently and I agree with Kling that a lot of disagreement comes from (1.) the framing itself and speaking different "languages" as he put it, (2.) the fact that man (most?) people don't consider looking at the world through other people's framework, and (3.) as Russ pointed out, people try to fit every issue into their framework (even if it's not a good fit).

So I do agree with all that. I don't agree very much with the axes that Kling chose and I think he's slipping into the same problem he identifies - namely using his own language and framework to try to talk about how liberals and conservatives think. Does the evidence in the talk suggest that Kling could pass the Turing test? I doubt he could. If I had to set out the axis of relevance to each of these groups I would have said they are:

- Libertarians: big state vs. small state
- Conservatives: strong vs. weak and status quo vs. change (I couldn't decide here)
- Liberals: human flourishing vs. lack of flourishing (in the sense of Nussbaum or Sen's "capabilities approach")

I couldn't quite decide on conservatives. If I really had to pick the common denominator it's that they like to approach things from what they perceive as a position of strength and think their adversaries approach things from a position of weakness. This of course is relevant to the defense of the status quo.

The liberal result is obviously more self-serving just like the libertarian axis that Kling provides is more self-serving for him. But it was genuinely tough for me to come up with anything else. Sometimes you hear talk about "equality" or as Kling says "oppression", but that seemed like a very narrow and stereotypical view of what liberals are all about. "Flourishing" or "capabilities" seems better to me because that's truly encompassing of everything that liberals promote. It's the common denominator in the same way that the juxtaposition of a big and a small state is the common denominator for what libertarians think.

The difference is quite obviously not "freedom". Many libertarians don't seem to realize this, but when a liberal hears a libertarian talk about "freedom" it sounds as politically compromised as when George Bush talks about "freedom". Sure, like Bush libertarians get some of what "freedom" means correct, but mostly it's just a word that libertarians use to discuss their position because most people respond well to it (same as why Bush used it). I do not see libertarians I respect like David Henderson or Bob Murphy and think "they like liberty more than I do" and I fully anticipate they think the same of me. What I think is "they like a smaller state more than I do".


As I explain below, I'm going to belabor my disagreement here but not exaggerate it - and the belaboring is to make a point.

Generally speaking I enjoyed the talk a lot and agree with most of the substance of it. I'm focusing on what I disagree with because there's more to talk about there almost by definition. Honestly, some of the things I liked about the talk surprised me. For one thing, Kling has always struck me as being especially guilty of the sort of presumptiveness and dismissiveness of other people's frameworks that he's arguing against here. Of the three classic EconLib contributors (David Henderson, Arnold Kling, and Bryan Caplan), Kling always infuriated me the most of the three because he would make these outrageous claims about "how liberals think" that made no sense to me at all and more often than not came across as not only nonsensical, but an attack.

So the discussion was ironic enough to begin with - Kling was talking good sense on a lot of issues I always thought he was guilty of. Then later on "he" came up. I don't even have to say who "he" is because if the subject of discussion is poor treatment of others in the blogosphere and the people holding the discussion are libertarian economists it can only be a single person.

Paul Krugman, of course.

In the talk Kling said that Krugman "sets a horrible example" and that his "success has not been a healthy thing for economists" because he sticks to his axis (i.e. - oppressed vs. oppressors) and abandons substance.

There's the Arnold Kling I always remembered!

My jaw dropped. It was like a completely different person from the first half of the discussion. From my perspective - and I've been following both Krugman and the libertarian blogosphere for years now  - Krugman's value added is precisely that he stays on substance (an amazing degree of substance given that he's a New York Times blogger... usually Times bloggers don't get too "wonkish"), he challenges people on "his side" (Stiglitz, Obama, Galbraith, etc.) and manages to do both of those things while still passionately makes his case. Most of his attacks are pretty well targeted and directed at politicians but I'm happy to admit he occasionally catches other people in the cross-fire. Still, when he does that it doesn't even approach being as bad as what gets said in the libertarian blogosphere. Taken alone we can obviously criticize Krugman. Taken in the context of the economics blogosphere he's well behaved.

I fully expect thoughtful libertarians to see the situation as being somewhat worse with Krugman than I do. But "sets a horrible example" is just an unreal thing for Kling to say and if it weren't for how good the first half of his interview was with Russ it would completely discredit him.

Now I belabored my difference of opinion with Kling here, but I didn't exaggerate my difference of opinion at all. I belabor the point to drive home three ideas:

(1.) I don't think Kling can pass a Turing test, but
(2.) he is completely genuine when he says this about Krugman - as genuine as I am - and he thinks he is making a comment that ought to be taken seriously, and
(3.) the evaluation of these sorts of framing issues is highly contingent on your framing and your perspective.

I have yet to read Haidt's book but I think this is what bugs me about Haidt too. It's not so much the broad strokes. I agree strongly with both Kling and Haidt that people operating in different ideological spaces frame things differently and think about things differently. It's the details of that claim that seem less sensible. Any kind of content analysis or experiment to derive those sorts of details is going to be plagued by the same contingencies. Certainly Kling drawing on his own personal experience is going to be plagued by the same contingencies.