Something’s Rotten in Happiness Research

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From a book review:

Those sky-high happiness surveys, it turns out, are mostly bunk. Asking people “Are you happy?” means different things in different cultures. In Japan, for instance, answering “yes” seems like boasting, Booth points out. Whereas in Denmark, it’s considered “shameful to be unhappy,” newspaper editor Anne Knudsen says in the book.

When you ask me to report my happiness, what do I report?

1. How I feel compared to one minute ago.
2. How I feel compared to yesterday.
3. How I have been feeling on average this week with how I remember feeling some time in the past.
4. How I feel about my life as a whole compared to other people’s livs.
5. How I think other people think I am feeling.
6. How I think other people expect me to feel.

…

The one thing I know about my happiness is that it is reduced when people produce charts that are derived from data that lacks reliability. It is hard to get less reliable than a survey that asks a question that does not have a precise interpretation.

How do you say ‘Have a Nice Day’ in Japanese?

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John Mauldin writes,

If interest rates were to rise by a mere 2%, it would take anywhere from 80 to 100% of all Japanese tax
revenues simply to pay the interest on the Godzillaesque Japanese debt.

If you read Mauldin, you should do so over a period of time, to get a sense of his biases, which are strong.

However, his views are consistent with my emphasis on the notion that governments and banks are subject to multiple equilibria, and that when leverage is high, the movement from one equilibrium to another can be sudden and catastrophic.

Pete Boettke on Ideology and Economics

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He writes,

Market fundamentalism is far from the mainstream of economic thought. The mainstream folks consider their work non-ideological and merely technical because they all share the same tacit presuppositions of political economy. It would be healthy if they looked through a different window, and spent some time reading those Nobel economists I mentioned above, or the Nobel worthy economists I mentioned as well.

Read the whole thing. I had a hard time choosing an excerpt. It also could use more fleshing out, in my view.

What Boettke is wrestling with is an asymmetry between mainstream economics and those of us with a free market bent.

Here is how I would describe the asymmetry. I think that the free-market types understand the main arguments of mainstream economists, but I think that mainstream economists only seem to deal with a straw-man version of free-market economics. Keep in mind, however, the Law of Asymmetric Insight: when two people disagree, each one tends to think that he understands his opponent better than the opponent understands himself.

I think that we on the free-market side understand behavioral economics. We understand asymmetric information. We understand market failure. Thus, we differ from the straw-man version of us that mainstream economists dismiss.

On the other hand, mainstream economists appear to me not to appreciate the two most important arguments that we have. One is the socialist calculation argument. My sense is that mainstream economists either do not believe that the socialist calculation problem is real, or they believe that it only applies to socialist dictatorships. In fact, any government program to spend, tax, or regulate will encounter the socialist calculation problem. That is, government planners face a fundamental information problem themselves. Knowledge is dispersed. What planners do not know is important, and indeed it can be more important than what they claim to know about market failure.

The second argument is the public choice argument. This is often over-simplified as “government officials act based on self-interest.” The deeper issue, which Boettke mentions in his post, is that markets and government should be looked at in parallel as institutions. The market process has certain strengths and weaknesses. Government has other strengths and weaknesses. The mainstream approach simply assumes away all weaknesses of the political process. Once an economist identifies a market failure and a policy to treat it, the next step if to play fantasy despot and recommend the policy.

Finally, I have to say that this is not mere abstract philosophy. The socialist calculation problem is real. It affects financial regulators, who in the period leading up to the financial crisis used crude “risk buckets” to alter the incentives of banks. That approach was woefully information-poor, and it created huge incentives for banks to do exactly what they did with risky mortgages. See Not What They Had in Mind. The socialist calculation problem affects every agency of the government, from the FCC to the FDA to the panel of experts who is supposed to determine which medical procedures to allow.

The institutional weaknesses of government are real. Read Peter Schuck’s book. You can get the flavor of it from his talk and my comments.

Wither Macroeconomics?

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The title is not a typo. Brad DeLong reproduces a list of papers that ten years ago he thought were on the frontier of macroeconomics. Pointer from Mark Thoma. My take on the list is that there is a strong negative correlation between the probability that the ideas are correct and the probability that they are relevant.

Some random thoughts about the state of macroeconomics:

1. Any post that contains a sentence “This chart proves that. . .” doesn’t.

2. Macroeconomists should be much more daunted by measurement issues than they are. I think that we have reasonably good ways of counting the number of people who do paid market work. But that is a far cry from knowing “labor input,” because (a) skills are very heterogeneous and (b) as Garett Jones famously tweeted, most workers are not making widgets but instead are building organizational capital. Output has become increasingly difficult to measure. In the case of goods, quality change has sped up, putting more pressure on statisticians to rely on imputations. And in the case of important services, including education, finance, and medical services, we have almost no conceptual idea for measuring output. We do not know how to factor into our statistics the increased diversity in consumption baskets across individuals. All this casts doubt on our measures of inflation, productivity, and real wages.

3. As of the early 1930s, many economists and commentators thought that the capitalist system had broken down. They saw the decentralized market process as no long working effectively to organize economic activity. See Katznelson, or even better read chapter two of Leuchtenburg’s The FDR years. The biggest intellectual influence at the time was nostalgia for the government planning that took over when the U.S. entered the first World War.

In contrast, Keynes blamed the Depression on what he called a drop in aggregate demand, and Milton Friedman blamed it on a contraction of the money supply. In fact, Keynes and Friedman led the profession down a false path. The pre-Keynesian diagnosis was more apt. I just disagree that central planning was the best solution, although I think it is fair to concede that when you have unemployment rates over 15 percent you are giving central planners a decent shot at doing something right.

4. The Monetary Walrasians (Patinkin and everything that followed) wasted our time. Money does not determine nominal aggregates. It does not determine transactions. The causality runs from the desire to undertake transactions to financial institutions/technology to what people use as money.

5. Money does not determine the price level. Habits determine the price level. Consider the amnesia experiment. If everyone developed amnesia about what money prices were yesterday, then Monetary Walrasianism predicts that today prices would soon find an equilibrium determined by the quantity of money. In fact, my best guess is that people would find money to be worthless in such a setting, and they would resort to barter until a new standard of value emerged.

6. The theory of rational expectations is a waste of time. The simple model of employment fluctuations as arising from errors in aggregate expectations is wrong. And the underlying principle of rational expectations, that everyone as the identical information, is anti-Hayekian, and not in a good way.

In short, almost nothing that gets taught in undergraduate macro is correct. And graduate macro is worse.

Community College: What is the Right Price?

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Reihan Salam writes,

Texas A&M economist Jonathan Meer kindly pointed me to their recent work on net prices — that is, net tuition and fees after grant aid — for students attending public institutions, including community colleges. It turns out that in 2011–12, “net tuition and fees at public two–year colleges ranged from $0 for students in the lower half of the income distribution to $2,051 for the highest-income group.” That is, net tuition and fees were $0 for students from households earning $60,000 or less while it was $2,051 for students from households earning over $106,000. While I don’t doubt that many households in the $106,000-plus range will welcome not having to pay for their children’s community college education, I’m hard-pressed to see why this initiative will have a “huge” impact, given that we’re presumably most concerned about improving community college access for students from disadvantaged backgrounds.

My comments:

1. Just based on my gut feeling, I think that the vast majority of students attending community college do not have favorable outcomes. (But note this study,pointed to by Tyler Cowen.

Attending a community college increased the probability of earning a bachelors degree within eight years of high school graduation by 23 percentage points for students who would not have attended any college in the absence of reduced tuition.

My guess is that it does not replicate.)

I am not even sure that students in the lower tier of four-year colleges have favorable outcomes. Instead, the true cost, including what the students pay out of pocket plus subsidies plus opportunity cost, exceeds the benefit for many who attend college. In contrast, President Obama seems to endorse the fairy-dust model of college, where you can sprinkle it on anyone to produce affluence.

He said a high school diploma is no longer enough for American workers to compete in the global economy and that a college degree is “the surest ticket to the middle class.”

He describes the U.S. as a place where college is limited to “a privileged few.” I think a more realistic assessment would conclude that the U.S. errs on the side of sending too many young people to college, not too few.

2. At community colleges, most of the favorable outcomes are middle-class students who, if community college were not available, would find some other path to success. (Possibly related: Philip Greenspun writes,

Amanda Pallais of Harvard presented “Leveling Up: Early Results from a Randomized Evaluation of Post-Secondary Aid”, a paper on the Susan Thompson Buff ett Foundation scholarship for lower income Nebraskans who have a high-school GPA of at least 2.5 and maintain a college GPA of at least 2.0. It turns out that people who are going to attend college and graduate will do so even without this grant and people who were marginally attached to academic will become only slightly more attached. The cost of keeping one student in college for an additional semester is $40,000 of foundation funds.

Pointer from Tyler Cowen.

3. For the students that you want community college to help, I think that the case for community college is sort of like the case for last-ditch cancer therapy. Every once in a while it works, and you want to give people hope. But looking at the overall costs and benefits involved, the money is not well spent.

4. Rather than expand community colleges, I suspect the best approach would be to contract them by making them more selective. Try to find the students who are most likely to benefit, and concentrate on those. Robert Lerman, who is far from an anti-opportunity meanie, suggests apprenticeships.

5. If I were President Obama, of course, I would champion universal “free” community college. Worst case, my proposal becomes law. A lot of money gets wasted, but it’s not my money. Best case, the Republicans vote it down and I call them anti-opportunity meanies.

How to Make Manhattan More Dense

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Shlomo Angel and Patrick Lamson-Hall write,

densities in today’s Manhattan can increase again if we allowed its lower income residents—and lower income, given today’s housing prices, includes its middle income residents as well—to live in more cramped quarters and to consume less floor space per person. As long as public authorities can maintain acceptable elementary standards of health and safety—from access to water and sanitation, to proper ventilation and fire protection—there is no reason to restrict the housing options of lower income residents by mandating a minimum consumption of floor space. A contemporary densification policy may thus entail the removal of zoning and building standards that require minimum apartment sizes, allowing for the construction of micro apartments as well as single rooms sharing common facilities (formerly known as SROs, Single Room Occupancies). It may entail extending legal permission to subdivide larger apartments into smaller ones by furnishing them with additional kitchens and bathrooms. And it may also entail the passage of new regulations that eliminate the exclusionary restrictions now imposed by the boards of cooperatives and condominium associations on the leasing of apartments that are left empty to non-owners, as well as the prohibitions on the rental of rooms on a short or longer term basis.

Most interesting was their demonstration that Manhattan density peaked in 1910, then fell through 1980. Think of the elevator as increasing effective floor space and the subway as reducing the demand for housing right near factories.

December’s Medium-High Employment Growth

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My comments on the latest employment report:

1. Pay no attention to the household survey. That is true in any month. The household survey on a monthly basis contains much noise. The establishment survey is nearly all signal. The establishment survey shows gains of 250,000 jobs per month for the past several months.

2. Employment has a lot of momentum. A few years ago, I wrote,

I have 603 observations of three-month averages followed by one-month values.

327 have medium job growth in the three-month period followed by medium job growth in the next month.
112 have low job growth followed by low job growth
63 have medium followed by low
45 have medium followed by high
33 have low followed by medium
14 have high followed by medium
8 have high followed by high
1 has low followed by high (December 1970, looks fluky)
0 have high followed by low

3. My definition of “high” job growth is 350,000 per month. Medium is 50,000 to 350,000. So what we are experiencing is growth on the high end of medium.

4. What to make of the low increase in earnings–1.7 percent year over year? From the perspective of mid-1970s macro, you say that slow wage growth increased labor demand, raising employment. From the perspective of pre-1970s macro, you say. . .Whaa??? Another data point that lies off the Phillips Curve. If you take a PSST perspective, you say that you did not expect to see a Phillips Curve, anyway.

Now is a Great Time to Subsidize the Housing Market!

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From the WaPo.

The White House announced Wednesday that the Federal Housing Administration will significantly lower the fees it charges borrowers, a move designed to save individual home buyers hundreds of dollars annually and help jump-start the housing market.

It’s always a great time to buy a home–just ask a Realtor™. Similarly, it is always good public policy to jump-start the housing market–just ask anyone in the housing lobby.

One of the best times to jump-start the housing market was the early 2000s. If you need to be reminded of that, attend this event featuring Peter Wallison. Recently, I reviewed his latest book.

The Most Renegade Bank

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Michael Grunwald writes,

That bank currently has a portfolio of more than $3 trillion in loans, the bulk of them to about 8 million homeowners and 40 million students, the rest to a motley collection of farmers and fishermen, small businesses and giant exporters, clean-energy firms and fuel-efficient automakers, managed-care networks and historically black colleges, even countries like Israel and Tunisia. It has about 120 different credit programs but no consistent credit policy, requiring some borrowers to demonstrate credit-worthiness and others to demonstrate need, while giving student loans to just about anyone who wants one.

Read the whole thing.

Another excerpt:

When the U.S. government simply spends money to do stuff, it’s usually clear how much the stuff will cost to do. But that’s not true when the government lends money or guarantees loans by private lenders.

One idea I had for setting national economic priorities was to use scenario analysis to try to expose the risks in these programs. From a taxpayer perspective, this opacity is a bug. From a political perspective, of course, it’s a feature.

World Bank Says Have a Nice Day

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From Ian Talley of the WSJ.

A host of governments around the world don’t have enough income to buffer against growth risks and higher borrowing costs. “You might think that you have sustainable debt dynamics, but that can change dramatically,” said Ayhan Kose, a lead author of the bank’s latest Global Economic Prospects report. Part of the report was published late Wednesday.

Read the whole thing. It is hard to pick out the scariest sentence.

The way I think about institutions that rely heavily on debt is that there are two equilibria. In the good equilibrium, lenders are confident (rightly or wrongly) that the debt will be repaid, interest rates are low, and there is no crisis. In the bad equilibrium, lenders are doubtful (rightly or wrongly) that the debt will be repaid, interest rates are high, and there is a crisis. While you are in the good equilibrium, it looks like borrowing does not cause any problem. When you hit the bad equilibrium, people look back and ask how you could have been so stupid. A few years ago, I explained the challenge with predicting the trigger point for a crisis ahead of time.

The article suggests that emerging markets are more fragile because in those countries private companies often need to be propped up by government, and in a crisis credit dries up for both private and public borrowers. The implicit assumption is that developed countries are immune from such double whammies. I am not so sure.