Category Archives: Mark Thoma is Indispensable

RCT’s as Slow Learning

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Ricardo Hausmann writes,

Consider the following thought experiment: We include some mechanism in the tablet to inform the teacher in real time about how well his or her pupils are absorbing the material being taught. We free all teachers to experiment with different software, different strategies, and different ways of using the new tool. The rapid feedback loop will make teachers adjust their strategies to maximize performance.

Over time, we will observe some teachers who have stumbled onto highly effective strategies. We then share what they have done with other teachers.

Notice how radically different this method is. Instead of testing the validity of one design by having 150 out of 300 schools implement the identical program, this method is “crawling” the design space by having each teacher search for results. Instead of having a baseline survey and then a final survey, it is constantly providing feedback about performance. Instead of having an econometrician do the learning in a centralized manner and inform everybody about the results of the experiment, it is the teachers who are doing the learning in a decentralized manner and informing the center of what they found.

Pointer from Mark Thoma. Emphasis added.

Read the whole thing. I had never before thought of randomized controlled trials as embedded in a top-down approach to learning. He is suggesting the decentralized learning could be faster. Might the same be true in medicine? And is this also a case against MOOCs?

The Case Against Occupational Licensing

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Edward Rodrigue and Richard V. Reeves write

Since state licensing laws vary widely, a license earned in one state may not be honored in another. In South Carolina, only 12 percent of the workforce is licensed, versus 33 percent in Iowa. In Iowa, it takes 16 months of education to become a cosmetologist, but just half that long in New York. This licensing patchwork might explain why those working in licensed professions are much less likely to move, especially across state lines: [next they have a chart showing the lower rate of mobility for licensed professionals]

Pointer from Mark Thoma. The article points out several other adverse effects of overly restrictive occupational licensing.

It seems to me that in the interest of regulating interstate commerce, Congress could do pass a law saying that someone licensed in state X is entitled to work in that same occupation in state Y unless state Y can give a compelling reason unless state Y can provide a compelling reason otherwise. As its stands, variations in licensing requirements work like interstate tariff barriers, which our Constitution was designed to eliminate.

What is the Stock Market Watching?

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The Bernank applies statistical analysis to the way the stock market has reacted to oil prices. Pointer from Mark Thoma.

Amni Rusli points to a Merrill Lynch study of how markets watch central banks. Pointer from Tyler Cowen.

Am I the only one who thinks that the stock market should be watching the election season, and that it should be tanking even more than it already has? On the Democratic side, the defining issue of our time is rich people making too much money and not paying enough of it in taxes. And the government not providing enough freebies to everybody else.

On the Republican side, the defining issue of our time is immigration enforcement. I cannot get on board with that. Are immigration laws even the most important of all the laws that are loosely enforced? I don’t see speed limits being strictly enforced on the Beltway. I don’t see recreational drug laws being strictly enforced on college campuses.

My point is not that I think we should be moving toward strict enforcement of speed limits and drug laws. My point is that “But it’s illegal!” isn’t the argument-clincher on immigration enforcement that a lot of people think it is.

I am not the type of person who is going to say, “inequality and immigration must be important, because so many people think so.” Instead, I am just going to say that the people who are voting to express themselves on those issues are, in my opinion, flat-out wrong.

I don’t think of myself as a defender of the political establishment. But when see where Sanders supporters and Trump supporters are taking this campaign, it’s enough to make me want to send valentines to Mitch McConnell and John Boehner.

What are the issues I worry about? Our country is sleepwalking toward a fiscal meltdown, as the past debts and future unfunded liabilities get larger every year. We have piles and piles of regulations, without knowing whether they are aligned with or working against their intended objectives–but I strongly suspect it’s the latter. We have a substantial share of the population that is poorly integrated into the productive economy and having most of its children out of wedlock. Our response to Islamic terrorism consists of random flailing overseas and massive inconvenience to innocent people at home, so as not to appear to be engaged in the dreaded “profiling.”

But those issues have been crowded out by inequality and immigration. If other investors shared my view of the political environment–and some day they might–stock prices would be less than half of what they are today.

Ed Kane on Financial Regulation

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The headline on the interview is confusing, but his remarks are not.

She [Hillary Clinton] goes part way toward Senator Sanders in proposing to give regulators more power to break up financial firms. But federal regulators have a lot of authority already. The key is to give them the incentive to use that authority. When a bank is in distress, fear of disrupting the system becomes their dominant concern.

Pointer from Mark Thoma. Kane has been around for a long time, and he has been for right for a long time. In the 1980s, he was among those warning about the weakness of capital requirements and the political power of big banks. The fact that his warnings today are similar tells you that Dodd-Frank and other responses to the financial crisis were not sufficient.

Two Historical Tales of Productivity.

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1. Dietrich Vollrath writes,

the weighted variance of log capital and log coal per worker is either 0.0188 (if you use Clark’s index of capital) or 0.0381 (if you use Clark’s data on looms equivalents). Either way, this is only 2.92% or 5.90%, respecitively, of the total variance in real wages. A tiny fraction of variation in real wages is driven by differences in capital per worker, and the rest must be explained by technology, human capital, or something else. Clark has disposed of technology as an explanation, so it could be human capital. Clark eliminates big human capital differnces (at least in terms of age structure or experience), so it has to be “something else”. That something else is either local effects or culture, depending on your choice of terms.

This refers to international comparisons of productivity in the cotton industry. Clark is Gregory.

2. Gerben Bakker, Nicholas Crafts, and Pieter Woltjer write,

Compared with Kendrick, we find that labour quality contributes more and TFP growth less. For this period as a whole, TFP growth accounted for about 60% of labour productivity growth rather than the 7/8th famously attributed to the residual by Solow (1957).1 Contrary to secular stagnation pessimism, TFP growth was very strong both in the 1920s and the 1930s, at 1.7% and 1.9% per year, respectively – well ahead of anything seen in the last 40 years. Regardless, even though the 1930s saw the fastest TFP growth in the private domestic economy before WWII, it was not the most progressive decade of the whole 20th century in terms of TFP growth. Both 1948-60 and 1960-73 were superior at 2.0% and 2.2% per year, respectively

Pointers from Mark Thoma for both.

Keep in mind that in (2), they are starting with output per worker in the aggregate economy, and certainly there are problems measuring the numerator. Then you adjust for capital per worker, and that raises another measurement challenge. Then, in order to calculate you take a percentage change, which amplifies measurement error. Then, to compare growth rates across time periods, you take the difference in percentage changes, which amplifies measurement error yet further. I’m not criticizing these specific results, but just raising a general caution.

Growth, like the future, is not evenly distributed

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Larry Summers writes,

whereas my grandmother would have been at sea if returned to her girlhood home, I would miss relatively little if suddenly placed in the home I grew up in. It takes longer and is less comfortable to fly from Boston to Washington or London than it was 40 years ago. There are more highways now but much more traffic congestion as well. Life expectancy has continued to increase, though at about half the pace it did during my grandmother’s day. But the most important transformation—child death being an extraordinary event—had already happened by the time I was born.

Pointers from both Mark Thoma and Tyler Cowen.

If you compare 1900 to 1960, you can point to a few innovations that transformed America. The car, radio and television, and household appliances like refrigerators and vacuum cleaners.

Has there been comparable transformation since 1960? I would say that there has, but the improvements have been distributed differently and are not embedded as much in tangible goods. Continue reading →

Olivier Blanchard and Joseph E.Gagnon: This Time is Different

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They write,

the deviations of the P/E from its historical average are in fact quite modest. But suppose that we see them as significant, that we believe they indicate the expected return on stocks is unusually low relative to history. Is it low with respect to the expected return on other assets? A central aspect of the crisis has been the decrease in the interest rate on bonds, short and long. According to the yield curve, interest rates are expected to remain quite low for the foreseeable future. The expected return on stocks may be lower than it used to be, but so is the expected return on bonds.

Pointer from Mark Thoma.

Their point is that when interest rates are low, you can justify exceeding historical norms for the price-earnings ratio on stocks. I made a similar point about the price-earnings ratio for real estate relative to interest rates during the housing bubble.

Evidence for Nominal Wage Rigidity

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Bruce C. Fallick, Michael Lettau, and William L. Wascher write,

Given the relative magnitudes of the various measures of rigidity at the 1- and 2-year horizons, it seems clear that nominal rigidities are less important when one takes the longer view of wage changes over more than one year, suggesting that time is, indeed, an ally of wage flexibility. Even at the 2-year horizon, however, operative wage rigidity appears to have increased in the low-inflation environment of recent years.

Pointer from Mark Thoma.

The paper thus goes against my own views. The excerpt I pulled out is the one that comes closest to giving comfort to my way of thinking.

As you know, I think that many macroeconomists rely much too heavily on the sticky-wage story, which says that real wage rates are strongly countercyclical. I do not think of the job market as a single firm, laying off and hiring workers. Instead, I think in terms of PSST.

The data on Job Openings and Labor Turnover show millions of jobs being lost and found each month. When the creation of new jobs is 10 percent less than the flow of lost jobs, you see a large increase in unemployment. If the creation of new jobs is too slow, I do not attribute much of that to the stickiness of wages in existing jobs.

Given that it took until 2015 for labor utilization to recover from its collapse in 2009 (and it might be argued that labor utilization remains below trend), I think that the sticky-wage story is hard to defend as a main causal factor. It is even more difficult to argue that the 2015 recovery was due to a dramatic upsurge in inflation and consequent decline in real wages.

Dean Baker on Health Industry Economics

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He writes,

Ordinarily economists treat it as an absolute article of faith that we want all goods and services to sell at their marginal cost without interference from the government, like a trade tariff or quota. However in the case of prescription drugs, economists seem content to ignore the patent monopolies granted to the industry, which allow it to charge prices that are often ten or even a hundred times the free market price.

Pointer from Mark Thoma.

His point, with which I agree, is that we should try to find other ways to subsidize drug research, so that drug prices will be closer to manufacturing cost, which is low.

Otherwise, I disagree with a fair amount of his post. I do not think that the wage rate of American doctors is notably high relative to their foreign counterparts. Keep in mind that American wages in general are higher, so that opportunity costs are higher. Keep in mind that American doctors tend to work longer hours. Finally, keep in mind that the mix of American doctors is much more skewed toward specialists than the mix in other countries.

In Crisis of Abundance, I looked at various possible explanations for the high rate of health care spending in the U.S., and I decided that the relative price of medical services is not such a big factor. The main factor is that we utilize many more services that have high costs and low benefits. A government-run health care system, which Baker advocates, ultimately would have to address this issue through refusing to pay for services as readily as we do now. A more market-oriented system would force people to decide for themselves when a procedure has expected benefits that are low relative to costs and hence not worth undergoing.

Why Measure GDP?

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EconoSpeak writes,

The questions we need to ask are: What do we really want to know and why? What purposes were we pursuing when we sought to measure economic activity? Is measuring GDP helping to achieve those purposes? Are those purposes still our priorities? If not, what should be? What different institutions might we invent to achieve our purposes as we NOW understand them?

Pointer fromMark Thoma, whose column stimulated the post quoted above.

Some possible reasons to measure GDP:

1. To provide an indicator of the economy’s capacity to produce the goods needed to win a war (including necessary consumer goods as well as arms).

2. To provide a measure of the economy’s ability to provide for consumer welfare.

3. To compare productivity across countries and over time.

4. To indicate the extent to which an economy is in a recession.

5. To measure economic activity at market prices.

I think that (1) would have been most useful around the time of World War II, when the outcome was very much affected by this sort of productive capacity. It probably is less useful today.

I think that (2) is a very interesting measure. But (a) why not just focus on goods and services consumed? (b) you need to think a lot harder about how to measure consumers’ surplus (c) you have to think a lot harder about how to measure the consumption services from durable goods, particularly housing (d) you need to think a lot harder about what Thoma refers to as “bads,” like pollution.

I think that (3) is useful, but stop pretending that you can be accurate to at least two significant figures. When someone says that productivity growth changed from X over a five-year period to Y over the subsequent five-year period, their view of the signal-to-noise ratio in the data is much more optimistic than mine.

I think that (4) relies too much on the AS-AD framework, to which I do not subscribe.

I think that (5) is useful, but our current approach is wrong. Most government services are not sold at market prices, and so I would exclude them from this sort of measure.