Category Archives: Mark Thoma is Indispensable

No Economic Experts Agree with Piketty

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The IGM forum asked its panel of leading economists to agree or disagree with

The most powerful force pushing towards greater wealth inequality in the US since the 1970s is the gap between the after-tax return on capital and the economic growth rate.

Actually, one economist agreed with the statement, newly-added panelist Hilary Hoynes. Let me know if you can find another panelist with a less impressive resume or a narrower body of work.

Six economists, including Raj Chetty, answered “uncertain.” Seven economists strongly disagree. The remaining twenty economists who gave an answer (including Emanuel Saez!) checked “disagree.”

UPDATE: Brad DeLong speculates that Piketty himself would have answered “disagree” to the poll. (Pointer from Mark Thoma). Brad thinks that the IGM forum should have asked a different question, but he does not say what that question should be. Let me suggest this, and I hope this would make Brad happy: Going forward, the most powerful force pushing towards greater wealth inequality in the U.S. will be the gap, etc.

Larry Summers Favors Nirvana

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He writes,

the IMF finds that a dollar of investment increases output by nearly $3. The budgetary arithmetic associated with infrastructure investment is especially attractive at a time when there are enough unused resources that greater infrastructure investment need not come at the expense of other spending. If we are entering a period of secular stagnation, unemployed resources could be available in much of the industrial world for quite some time.

Pointer from Mark Thoma.

If we assume that government invests perfectly rationally and efficiently, then I think we have to agree that infrastructure spending is likely to be a free lunch. That is because it is impossible for the private sector to allocate resources perfectly rationally and efficiently.

Of course, in order to assume that government spends money rationally and efficiently, one has to ignore public choice theory. A bridge to nowhere is not a free lunch. A huge loan guarantee to a “green energy” company that goes bankrupt is not a free lunch.

In the real world, human fallibility does not disappear when the decision-maker crosses from the private sector to the public sector. In my area, a highway called the “Inter-County Connector” has cost billions of dollars, caused construction-related disruption for years, and carries almost no traffic. A “transit center” near where I live was structurally unsound, and the excess costs probably will be in the billions. No free lunches there, either.

QE and Fiscal Offset

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Tony Yates writes,

As Summers reportedly put it, while the Fed was engaged in quantitative easing, the Treasury was doing ‘quantitative contraction’. And surely the two arms of government should be better coordinated than that.

Pointer from Mark Thoma. My remarks.

1. Read the rest of his post.

2. Larry Summers is quite late to the party. Some of us have been talking about this issue for years. For example, almost four years ago, James Hamilton wrote,

since 2008, the Treasury has been issuing more long-term debt faster than the Fed has been buying it… What we find in the latest data is that this trend has continued over the last 3 months, even with QE2.

3. Wikipedia defines superstition as

the belief in supernatural causality—that one event causes another without any natural process linking the two events—such as astrology, religion, omens, witchcraft, prophecies, etc

I think that belief in the macroeconomic impact of the Fed can be properly regarded as a superstition. The Fed’s rules and regulations affect the allocation of credit, and it can aid particular banks when they get in trouble. However, its ability to control interest rates and nominal GDP is far less than most economists and investors believe.

Note that, as with the vast majority of my posts, this was written a few days ago and scheduled to be posted at this time. I find that staying away from immediate publication encourages me to evaluate the wisdom of a post using my “future self.”

Mark Thoma on the State of Macro

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He writes,

The problem with macroeconomics is not that it has become overly mathematical – it is not the tools and techniques we use to answer questions. The problem is the sociology within the economics profession that prevents some questions from being asked.

But I see these as the same problem. The sociology of the profession essentially forced anyone who wanted to have an academic career to engage in mindless mathematical self-abuse. If the sociology of the profession had been better, very different sorts of articles would have been published in journals, very different sorts of economists would have earned tenure at major universities, and very different sorts of techniques would have prevailed. And don’t just blame Lucas. Fischer is every bit as much of a villain.

Russ Roberts interviews Elizabeth Green

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She says,

when universities took over teacher training and created the first real professors of education, what they did was they recruited people from other disciplines to do this job. So, they would recruit people who studied psychology, for example–that was one of the first major fields to be imported into schools of education. And then they would have these psychologists. .. You are studying learning, and teaching is very related to learning. But the professors of education, even in psychology, did not have any interest in teaching. In fact, the guy who is known as the father of Educational Psychology, Edward Thorndike, he told people that he thought schools were boring; that he didn’t like to visit them. And when he once was speaking to a group of educators and a principal asked him a real problem of practice–you know, this thing happened in my school today, what should I do, what would you do, Professor Thorndike? And Professor Thorndike told him: ‘Do? I’d resign.’ He had absolutely no interest in real problems of practice. And I think that’s carried through. Today we have, in education schools, we have people in the history of education, the psychology of education, the economics of education. But we have very few people who study teaching itself as a craft. And as a result, the folks who are left to train teachers in teaching methods are drawing on a very impoverished science. And they have very little to draw on. There’s been a little bit of a change in the last 20 years, and that’s what I write my book about. I think there are emerging ideas about what teachers should be able to do. But kind of no surprise that teachers don’t leave teacher training prepared for the classroom when we haven’t really put any resources into figuring out what we should be preparing them to do.

As a teacher, you need to know things like how to explain something to a student who is not getting it, or when to keep reinforcing a concept and when to move on to something else, or how to manage a classroom so you can accomplish what you intend to accomplish. Those are “craft” issues, as opposed to “theory” issues.

There is an analogy with business management. A business school can bring in economists to teach profit maximization using calculus, but that is of little practical value in the business world. Harvard and other business schools try to use case studies rather than rely on pure theory. And there are many books on management that are “craft” oriented with respect to handling people or improving sales.

I say that teaching equals feedback. That means that teachers need feedback in order to improve their teaching. I agree with Green that there are better ways to organize schools so that teachers get faster feedback and incorporate it more effectively. How rapidly that can improve teaching is less clear to me.

Listen to the whole thing.

UPDATE: Her book is also reviewed in the New Republic (pointer from Mark Thoma). The review, by Richard D. Kahlenberg, is tendentiously political and uninformative. He says that Green has “one big idea” and then fails to mention what it is, and in fact he seems to have missed it completely. Kahlenberg really likes the idea of raising teacher salaries a lot. But if Green is correct that good teaching is not just a talent you are born with, then you should not need to attract talented people into teaching by paying them more. Instead, you should put those resources into giving teachers better feedback and training.

I see Kahlenberg’s review as an illustration of the way that people look at education through biased political lenses (not that I claim to be innocent here). This only increases my skepticism about anyone’s solution.

Why Published Results Can be Unreliable

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Mark Peplow reports on research by Neil Malhotra, who tracked research projects to compare those that were published with those that were not.

Of all the null studies, just 20% had appeared in a journal, and 65% had not even been written up. By contrast, roughly 60% of studies with strong results had been published. Many of the researchers contacted by Malhotra’s team said that they had not written up their null results because they thought that journals would not publish them, or that the findings were neither interesting nor important enough to warrant any further effort.

Pointer from Mark Thoma.

This is not shocking news. Can anyone find Malhotra’s paper?

The Courage to Desist

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Robert Shiller writes,

I wrote with some concern about the high ratio in this space a little over a year ago, when it stood at around 23, far above its 20th-century average of 15.21. (CAPE stands for cyclically adjusted price-earnings.) Now it is above 25, a level that has been surpassed since 1881 in only three previous periods: the years clustered around 1929, 1999 and 2007. Major market drops followed those peaks.

Pointer from Mark Thoma. Here is my take:

1. I think investors look at the zero interest rate on short-term money-market instruments and say, “I can’t possibly settle for that.” As they reach for yield, long-term interest rates fall.

2. At low interest rates, long-term bonds become very speculative investments. A small decline in market interest rates, and the market value of your bonds shoots up. Conversely, it takes only a small increase in market interest rates to create a negative return on a bond mutual fund (holding the actual bond rather than a bond fund avoids marking your losses to market, but on an opportunity-cost basis, an actual bond still gives you a negative return in a rising-rate environment.)

3. If Shiller is right and stocks are over-priced, your best strategy may be to sit on those low-yielding short-term instruments and wait for prices to come down. This is hard to do. It is my strategy in fantasy baseball auctions–watch the first 50 players get chosen at prices that I think are too high, and then wait for prices to come down. If prices are too high early, this has to work, because the fixed budgets given to owners mean that prices have to come down eventually. I am not saying you win a fantasy league that way, because luck tends to dominate any advantage you might appear to gain in the auction. But if you wait, you can get good value cheap. I think that we are in that type of stock market.

4. Having said that, we know that for every credible theory that stocks are over-priced there must be an equal and opposite theory that they are under-priced. (See Brad DeLong’s response to Shiller. See also this comment that Tyler Cowen found on his blog) Otherwise, prices would not be as high as they are. The thing is, most of the movement in stock returns is due to changes in the taste/toleranace for risk, and there is no guarantee that this parameter will head toward one particular value.

Related: James Hamilton on the San Diego public employee pension fund reaching for yield.

Universal Basic Income, zero marginal tax rate

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Ed Dolan writes,

a UBI would be administratively efficient and unobtrusive. It would require no verification of any personal trait or behavior…If the UBI were integrated into the existing federal income tax system, only households with no income at all would receive the full UBI benefit in cash. Those with low-to-moderate incomes would receive part of the benefit as a credit toward income and payroll taxes, and the rest in cash. Those with high incomes would get a tax credit

Pointer from Mark Thoma.

A universal benefit with a zero marginal tax rate is expensive. Dolan says that we could replace $500 billion in means-tested programs, but that only allows for a benefit of around $1600 per person. Next, he proposes eliminating important middle-class tax deductions, including not only the mortgage interest deduction but the IRA deduction and the personal exemption (!), bringing the benefit up to $5200 per person.

Dolan would exempt current social security recipients from the UBI, so that allows $5800 for the remaining UBI-eligibles.

I still prefer the solution of a benefit with a marginal tax rate of something like 20 percent or 25 percent. I also think that having a benefit that only can be spent on “merit” goods–food, shelter, health care, and education–makes some sense. However, I am open to the argument that administrative costs would detract from the approach of trying to limit the benefit to merit goods.

UPDATE: Commenting on Dolan’s piece, Timothy Taylor warns,

The U.S. political system does not excel at replacing complexity with simplicity, and then leaving well enough alone.

When to Kill the Export-Import Bank?

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Paul Krugman writes,

under current conditions mercantilism works – so this is exactly the moment when ending an export-support program really would cost jobs.

Pointer from Mark Thoma.

I say that the right time to kill it is any time you can.

If killing the Ex-Im bank is tea-party mischief, then I say let’s have more such mischief.

The AEI’s Tom Donnelly writes,

The worst thing about the defense loan program is that it only applies to our richest and best allies – NATO Europe, Israel, Japan, South Korea, the ones who can most afford to finance arms purchases on their own – and does nothing for real at-risk states in Africa, Latin America or the Middle East. The FMS-DELG duo has hampered, not helped the Pentagon’s security “partnering” efforts. In today’s environment, and particularly when China aims to replace Russia as the alternate, non-US source of front-line military equipment, the United States government needs a bigger, better and more aggressive export credit agency. The Congress should rejuvenate, not exterminate, the Ex-Im Bank.

His case for the Export-Import Bank speaks for (i.e., against) itself.

Who Wrote These paragraphs?

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What other tribe will tell the Fed how to set interest rates, or Congress when to spend money? Mainstream macro has its discontents, but the more time you spend among the people pushing the alternatives, the more you realize how much lesser of an evil the mainstream academics represent.

Check your answer.

We have no business throwing applied-math majors into an economics Ph.D. program. Both a liberal arts mora-philosophy B.A. or equivalent and two years out in the real world working at a job of some sort should be required.

We have no business offering a narrow economics B.A. at all. At the undergraduate social-science level, the right way of organizing a major curriculum is to offer some flavor of history and moral philosophy: enough history that students are not ignorant, enough sociology and anthropology that students are not morons, and enough politics and philosophy that students are not fools. (And, I would say, a double dose of economics to ensure that majors understand what is key about our civilization and do not get the incidence of everything wrong.)

…A first-rate undergraduate economic major will also spend due time on government failure and bureaucratic failure, and thus reach the very economic conclusion that there are substantial trade-offs, and we must pick our poison among inadequate and imperfect alternatives, even in institution design.

Check your answer.

Pointers from Mark Thoma. Some thoughts on why there is such a focus on math.

1. Some economists really believe that the answers can be found inside equations.

2. Some economists (I think of Robert Hall) think that mathematical ability provides a reliable signal of overall intelligence, while other indicators are all more noisy.

3. It is a stable, self-perpetuating equilibrium. Once the math guys took over, they just keep giving the best jobs to other math guys.

4. Important questions in economics tend to have messy, ambiguous answers. Therefore, economists who do a bad job at answering important economic questions, or who do not even bother asking important economic questions, can do quite well for themselves.

5. Graduate students think that a class where the professor explains equations provides tangible training, while a class where a professor poses philosophical issues does not.