Macroeconomics and Expertise

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As part of a general blog conversation, Noah Smith writes,

Scott Sumner expresses incredible confidence that NGDP targeting is best. Paul Krugman expresses incredible confidence that fiscal stimulus is effective and that austerity is counterproductive. John Cochrane expresses incredible confidence that structural form – removing “sand in the gears” – is the best medicine for an economy in recession. Robert Lucas said that the “central problem of depression prevention has been solved.” And so on, and so forth.

I think normal people realize that that certitude is basically never warranted. Yes, those economists often (but not always) have some evidence to back up their claims. But not the kind of evidence that people have in disciplines where data is more abundant, controlled, and replicable.

Pointer from Mark Thoma. I disagree that this is how normal people think. I believe that the main problem with non-expert opinion in macroeconomics is that normal people can be just as dogmatic in their macro views as self-proclaimed experts.

I would amend the last paragraph to substitute “thoughtful economists” for “normal people.” With that amendment, the quoted passage would have my vote.

What I’m Reading

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The Thing Itself, a new book by Michael Munger, which appeared without fanfare. Much of it consists of ideas that he has expressed previously. One of these is his comparison of private and public bus service in Santiago, Chile.

Here is an update on the story.

less than two weeks later, the week of its planned launch, Night School was postponed indefinitely while its founders grappled with the CPUC, which claimed the start-up was not properly licensed as a passenger carrier.

This more recent instance of government authorities insisting that mass transit not be privately provided took place not in Santiago, Chile, but in San Francisco, California.

The Tesla Battery

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It got lots of media attention. The WaPo writes,

For the millions of consumers frustrated with their power companies thanks to frequent outages and poor customer service, the batteries could be a boon. In general, the choices for how people power their homes is relatively limited. Most have to rely exclusively on their local utility providers. Getting a generator can be expensive — some homeowners pay around $20,000 for back-up generators that run on natural gas. So Tesla is eyeing a market that might be ripe for innovation.

I would be happy to own a battery for that purpose. We looked into generators, and in order to meet safety codes they have to be situated so far from our home that they would not be within our property line.

More generally, if the batteries prove to be economical, they could really change the electric power industry. You can smooth out peak demand, make better use of solar and wind, etc.

What I’m Reading

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A Critique of Democracy, by Michael Anissimov, and Democracy: The God that Failed, by Hans-Hermann Hoppe. Anissimov claims that Hoppe’s analysis can be used to justify a preference for monarchy over democracy. Anissimov writes,

The proposal for private rather than public government, at its core, is extremely simple: for something to be properly valued and taken care of it [sic], it must be owned. That includes government. If we want a government that is properly taken care of for the long term, it must be owned by someone. That means no democracy. Does this mean we’re sacrificing our “freedom”? No, because I don’t define freedom as being able to cast one meaningless vote among millions in an election.

I have no problem with belittling the value of the voice option. But it is not obvious to me that monarchy would work well.

First, there is the succession problem. As a citizen, I value continuity. A succession crisis, particularly one that turns violent, is going to create bad discontinuity. My reading of history is that monarchies tend to have succession crises.

Second, there is the problem of retaining the exit option. Just as I tend to place little value on voice, I place a high value on exit. Hoppe writes,

States will always try to enlarge their exploitation and tax base. In doing so, however, they will come into conflict with other, competing states.

I am more inclined to think that democracies will tend not vote to go to war purely to engage in expansion, whereas there is nothing to stop a monarch from doing so.

A bit later, Hoppe writes,

A small government has many close competitors, and if it taxes and regulates its own subjects visibly
more than its competitors, it is bound to suffer from the emigration of labor and capital and a corresponding loss of future tax revenue.

I believe that a monarch has a very strong incentive to try to close off the exit option. Our democracy may very well do this by making you forfeit some of your wealth if you give up citizenship. But still, I think that democracies will tend to be looser about allowing their citizens to leave.

Jonah Goldberg Asks Who is a Science Denier

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He writes,

Why does the Left get to pick which issues are the benchmarks for “science”? Why can’t the measure of being pro-science be the question of heritability of intelligence? Or the existence of fetal pain? Or the distribution of cognitive abilities among the sexes at the extreme right tail of the bell curve? Or if that’s too upsetting, how about dividing the line between those who are pro- and anti-science along the lines of support for geoengineering? Or — coming soon — the role cosmic rays play in cloud formation? Why not make it about support for nuclear power? Or Yucca Mountain? Why not deride the idiots who oppose genetically modified crops, even when they might prevent blindness in children?

Actually, he is quoting something he wrote three years ago.

The occasion for recycling it is the litmus test that reporters are applying to Scott Walker, namely whether or not be believes in evolution. Can we imagine a reporter asking Elizabeth Warren whether she believes that people at the extreme right tail of the distribution for math skills are more likely to be male than female, and using that as a litmus test for whether she believes in science?

In the case of economics, I think that we should not view “science” as binary, in the sense of truths that are close to 100 percent certain and you believe them or not. Rather, there is stronger evidence to favor some propositions than others. Confirmation bias takes the form of grasping at straws when you want to believe something that runs counter to most evidence (such as refusing to believe that the minimum wage reduces employment or that extending unemployment benefits raises the unemployment rate). Or it takes the form of taking something that has a reasonable probability of being true and believing it with certainty (such as the claim that the Fed caused the recession).

Charles Murray Watch

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Paul Caron writes,

Power couples conceive bright children and bring them up in stable homes—only 9% of college-educated mothers who give birth each year are unmarried, compared with 61% of high-school dropouts. They stimulate them relentlessly: children of professionals hear 32m more words by the age of four than those of parents on welfare. They move to pricey neighbourhoods with good schools, spend a packet on flute lessons and pull strings to get junior into a top-notch college.

The question is to what extent this “coming apart” is treatable by policy.

Roland Fryer, School Reformer

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Timothy Taylor writes,

These methods involved a lot of change at the schools involved, including changing a number of principals and teachers. But the same student body that had been dramatically underperforming was no longer doing so. Fryer draws the hard lesson explicitly. We know many of the changes that can be made to improve low-performing schools dramatically within a few years. The financial costs of these changes are manageable. But the school systems that need to be changed, and many of the people currently working in those systems, are not ready to make the needed changes.

I remain skeptical. I continue to believe in the ultimate triumph of the null hypothesis. But Fryer is a careful, credible researcher.

Probability and Causal Density

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“Scott Alexander” writes,

If ten different factors caused the decline in crime, that would require that ten different things suddenly changed direction, all at the same time in 1994. That’s a pretty big coincidence. . .we should give some credibility penalty to a story with ten factors.

I do not buy this argument. I do not think that one should automatically penalize a study more for claiming that there are ten factors rather than one prominent factor.

My view would be that when there is a lot of causal density, one should be skeptical of any study that claims to have the answer, whether the answer consists of one factor or many. Take as an example the financial crisis of 2008. There are many plausible causal factors. Should we prefer a study that attributes the crisis entirely to one factor rather than a study that attributes it to a combination of factors? I think not. Instead, given the non-experimental nature of the problem, I think we need to accept the fact that we will have to live with some uncertainty about what exactly caused the crisis.

For a phenomenon that is amenable to replicable experiments, it may be possible to obtain evidence against causal density and in favor of an explanation based on one or two factors. But not for something like the drop in crime over the past two decades.

For Econ Grad Students

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Nick Rowe explains the overlapping generations model.

Imagine an infinite line of people, each holding one beer. One equilibrium is where each person drinks one beer. But there is a second equilibrium, where each person gives his beer to the person in front. The person at the front of the line drinks two beers, and everyone else drinks one. The second equilibrium is Pareto Superior to the first, because the person at the front of the line drinks more beer, and everyone else is the same. You can imagine the first person in line giving the person second in line a bit of paper, in exchange for the beer. That bit of paper (money) travels down the line in exchange for the beers traveling up the line.

I think that the OLG model is perhaps the stupidest idea in monetary economics. But if you have to learn it, at least go to Nick’s post in order to understand it.

The OLG model is probably a reasonably good way to think about Social Security. I think that this was probably the original intent. I think that the profession would be better off if it had never been viewed as a way to think about money.

[update: Roger Farmer has an excellent overview, and he points out that Samuelson did originally intend it as a model of money.]

Gregory Clark on (the lack of) Social Mobility

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He writes (concerning China),

the descendants of the pre-revolution elites crop up unexpectedly frequently among high government officials, university professors, and students at elite universities.

Also,

Marriage is highly assortative in all societies. Even in 19th century England, where women had no formal educational status and little control of wealth, women married men who were very like their fathers or brothers in wealth and education.

This is from an article a couple of weeks ago that I missed. Thanks to Jason Collins for the pointer.