The Distribution of Leisure

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John Cochrane writes,

a larger and larger fraction of the population, including many prime-age men, are not working and not actively looking for work. . .where does the money come from?

He refers to an article in the NYT showing that people who have abandoned the labor force spend a lot of time watching TV.

I have been predicting for quite a while that the distribution of leisure will be a major social issue going forward. The video of my most memorable portrayal, using a dance, seems to have been taken down by the Kauffman Foundation. Too bad you missed it. Anyway, the issue of the distribution of leisure is the flip side of the issue of the distribution of income.

Raj Chetty on Empiricism Without Theory

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The talk is here. Pointer from Tyler Cowen.

Broadly speaking, Chetty makes two points. One is that behavioral economics has inspired empirical analysis that can be useful for policy. The other is that we do not have to care about theory. Although theory might guide us to try certain empirical studies and might explain why a policy will work, all we need is the empiricism to know that a policy will work.

I found this view at best shallow and at worst not persuasive. Take one of his examples, in which a study guided by the theory of Loss Aversion found that classroom results improve more when incentives are framed in terms of what teachers will lose if results are bad than in terms of bonuses they will earn if results are good. My thoughts:

1. Given that the Null Hypothesis tends to be more robust than studies that purport to show significant effects from educational interventions, one ought to be pretty cautious about this.

2. A non-empirical a priorist of a Misesian bent, without knowing any behavioral economics, would recommend a market-provided school over a government-provided school. Among other advantages, the market will tend to punish poor performance, as markets tend to do. So in this example, without doing any empirical work at all, one can arrive at a recommendation that would be at least as effective as anything that Chetty might propose. While I am no Misesian, I do find the generic arguments against central planning more compelling than just about any empirical finding suggesting nudging opportunities.

3. I think that those who advocate behavioral economics would do well to also acknowledge behavioral politics. If Chetty understood how teachers unions operate where I live, he might be feel less a bit less excited about the opportunities for reform using his findings.

Related: Noah Smith on how the profession has been moving left.

Economics has become much more empirical, and that has made it much harder to wave away the possibility of market inefficiencies.

Pointer from Mark Thoma.

Health Care Policy 101

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Obviously, this NYT story deserved a lot of play.

“Harvard employees want access to everything,” said Dr. Barbara J. McNeil, the head of the health care policy department at Harvard Medical School and a member of the benefits committee. “They don’t want to be restricted in what institutions they can get care from.”

As individuals, Harvard employees are like everyone else. We all want unlimited access to medical services without having to pay for them. Of course, once somebody thinks about that for a a second, they realize that it is unworkable. You either have to limit access to services, or you have to make people pay for services so that they ration themselves. Obamacare tries to do some of both. When it tries to limit access, opponents scream “Death panels!” When it tries to make people pay for services, they scream, as some are quoted in the article “You’re putting a tax on the sick!” Among the latter screamers, I am sorry to say, is Jerry Green, a mathematical micro-theorist who goes back to the heyday of that stuff.

If I’m President of Harvard, I would say, “Fine. We’ll get rid of health insurance altogether if you don’t like it. Instead, we’ll give you that money in cash. Go out and buy your own health insurance. Stop complaining to us about the health insurance plan we provide.”

Which is one of many reasons I am not President of Harvard.

I Disagree with Juan Cole

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He writes,

Extremism thrives on other people’s extremism, and is inexorably defeated by tolerance.

Pointer from Tyler Cowen.

Is it uncharitable of me to point out that the Nazis were not inexorably defeated by tolerance?

One can make a case that extremism thrives on pusillanimity, moral ambiguity, and the inability to give neutrals and moderates a clear message that they will be safer if they line up with the good guys against the bad guys than if they try to stay in the middle.

On a more mundane level, I think that Juan Cole, and just about everyone else, would do better to frame arguments in terms of Type I and Type II errors. A type I error is failing to incarcerate or deport a dangerous individual. A type II error is incarcerating or deporting an innocent individual. (You may reverse the Type I and Type II terminology if you like.)

If you go all out to avoid Type I errors, then you commit more Type II errors, and vice-versa. It is important to keep that in mind. If you say “Close Gitmo now!” then some of the guys you release are going to commit atrocities. If you say “Deport dark-skinned immmigrants now!” then more than 90 percent of those you deport will be decent people and fewer than 0.001 percent will be terrorists.

All that said, I stand by my prediction that there is a good chance that we will see a rapid decline in militant Islam as a force this year.

Kevin Drum’s Crystal Ball vs. Mine

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He writes,

We’ll have useful AI by 2025 and full AI by 2045. This will either transform the world or destroy it. Flip a coin. However, regardless of how the end point turns out, the transition period is going to be pretty brutal for the 90 percent of the population that occupies the middle classes and below.

Pointer from Tyler Cowen. Remember, I wrote,

As for the issue of human obsolescence, I do think that we will see a trend toward more and more leisure. This will raise all sorts of questions of who deserves to have what provided for them. Right now, we say that people aged 67 or so deserve Social Security and Medicare. And people who can command only low wages (already obsolete in some sense?) deserve Medicaid and food stamps. And kids who can get in deserve the leisure aspects of college. My guess is that we will struggle quite a bit over the next forty years to adapt the social bargain concerning leisure.

Overall, there is a lot of similarity in our predictions. In particular, I agree with him that some of the long-predicted gains in medicine will finally come true.

Bitcoin Equals Dollar Plus Amnesia

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Timothy B. Lee writes,

It’s a mistake to read too much into short-term fluctuations in Bitcoin’s value.

On the contrary. Short-term fluctuations in value tell you everything you need to know about Bitcoin. It tells you that as a medium of exchange it is an utter failure. Who wants to undertake daily transactions in a currency whose value gyrates wildly?

Pointer from Tyler Cowen.

The same thing could happen to the dollar, although it won’t.

As a thought-experiment, imagine that everyone developed amnesia overnight about the dollar price of everything. They wake up having to quote prices in dollars. Do you think that anyone would have any clue what to charge in dollars today without knowing what prices were yesterday? Under the amnesia scenario, Americans would pick some other currency to use for ordinary business. Heck, they would be happier taking rubles than dollars, if rubles had some history to them. In the amnesia thought-experiment, the dollar would become like a Bitcoin–a crazy, speculative oddity that nobody would use for daily transactions.

This thought-experiment, which makes perfect sense to me, runs counter to everything economists teach about monetary theory. In standard monetary theory, nobody has to remember anything. Each new day, whether you start with a blank slate or not, the market will grind out the relative prices of everything, and then the dollar prices will be determined by the quantity of dollars in circulation.

Monetary theory wants to make dollar prices precisely determinate. My perspective is that money and prices are consensual hallucinations. We would prefer that prices not be volatile. We conduct our daily business as if most prices were not volatile, and this becomes a self-fulfilling belief. Except when it doesn’t. When we don’t trust that most prices will remain stable, our behavior becomes radically different.

My Review of Colander and Kupers

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I write,

the authors seek to dethrone neoclassical economics. In terms of a metaphor that Colander articulated at a conference, neoclassical economics represents a high mountain peak in terms of insights into social phenomena. However, there is a higher peak to be found, and to reach that summit economists must first climb down from neoclassical economics and scale the peak of complexity economics.

My review attacks the authors for “their failure to stick to a single concept of government.”

Teaching is Not About Teaching

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Eric Loken and Andrew Gelman wrote,

Being empirical about teaching is hard. Lack of incentives aside, we feel like we move from case study to case study as college instructors and that our teaching is a multifaceted craft difficult to decompose into discrete malleable elements.

More recommended excerpts here. Pointer from Jason Collins.

They refer to statistical quality control. Deming would describe what educators do as “tampering.” By that, he means making changes without evaluating the effect of those changes.

I think that there are two obstacles to using statistical techniques to improve teaching. One obstacle is causal density. It is not easy to run a controlled experiment, because there are so many factors that are difficult to hold constant.

But the more important obstacle may be the Null Hypothesis, which is that you are likely to find very discouraging evidence. Sometimes, I think that what the various consumers of teaching (administrators, parents, students) want is not so much evidence that your teaching methods work. What they want is a sense that you are trying. Teaching is not about teaching. It is about seeming to care about teaching.

Of course, if student motivation matters, and if students are motivated by believing that you care, then seeming to care can be an effective teaching method. I recall a few years ago reading a story of Indian children attempting distance learning, with the computer guiding the substance of their learning supplemented by elderly women acting as surrogate grandmothers, knowing nothing about the subject matter but giving students a sense that someone cared about their learning.

The Great Depression as a Coordination Failure

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In Fear Itself, Ira Katznelson shows how many intellectuals yearned for a planned economy, but without the ugly police-state repression of Fascist Italy or Communist Russia. As you know, I sense that Katznelson himself seems to still yearn for government oversight of the economy. In fact, Katznelson quote explicitly expresses disappointment that planning was superceded by what he called the “fiscal policy” approach (meaning Keynesian economics). Of course, I think that central planning is not the answer.

Katznelson disparages the Keynesians (and the monetarists) who came up with the aggregate-demand theory of the Depression. He clearly prefers the pre-Keynesian theory that the Depression was a breakdown of the capitalist system.

Here’s the thing. I agree with Katznelson.

The PSST story would look at the Depression as a coordination failure. The market price system, which is supposed to serve as a decentralized planning apparatus, screwed up. Old patterns of specialization and trade became unsustainable, and for a long time the market could not figure out new, sustainable ones.

The modern macroeconomic view is that the Depression was caused by a shortfall in aggregate demand, as opposed to a breakdown of the capitalist system. Instead, I prefer the pre-Keynesian diagnosis, although I do not believe that government officials could have done better by taking over more of the planning. To the extent that they attempted central planning through the NRA and various other New Deal initiatives, the results were certainly not good.

Condivergence: A Theory of Changes in Income Distribution

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The WSJ blog writes,

Within the United States, income inequality is most pronounced in the Southern half of the country

This is consistent with a theory that I call Condivergence. It combines convergence with respect to geography and divergence with respect to innate ability.

For two people of equal innate ability, their place of birth matters less than it did fifty years ago. Within the U.S., this means that the South appears to have closed much of the income gap with the rest of the country that existed in the 1930s. Across countries, we have seen incomes rising more rapidly in China, India, and other low-income countries than in the U.S. That is what economists call convergence, or factor-price equalization.

At the same time, however, we have seen a widening of income disparities within regions. House prices in one suburban neighborhood in St. Louis are several times those in a neighborhood just a few miles away. Income inequality has soared within the South, and within the U.S. I see this as a reflecting larger reward differentials for a given differential in innate ability. That is known as divergence.

The two processes are linked. As the effect of geography on income edges down, the effect of innate ability goes up. The winners are people with high ability in erstwhile low-income locations. The losers are people with moderate to low ability in erstwhile middle-income locations.