The Sociology of Economists

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Marion Fourcade, Etienne Ollion, and Yann Algan write,

we document the pronounced hierarchy that exists within the discipline, especially in comparison with other social sciences. The authority exerted by the field’s most powerful players, which fosters both intellectual cohesiveness and the active management of the discipline’s internal affairs, has few equivalents elsewhere.

Pointer from Tyler Cowen. As I describe in my macro memoir, Stanley Fischer, now vice-chairman of the Fed, controls a remarkable proportion of the sub-discipline of macroeconomics. For better or worse–and I strongly believe it is for worse–he has decided who is a macroeconomist and who isn’t.

Paul Krugman’s take:

It has been all too obvious that there are people with big reputations who can push equations around but don’t seem to have any sense of what the equations mean.

My only quarrel with that statement is that I believe it applies to equation-pushers from saltwater institutions as well as those from freshwater institutions.

Macroeconomics is Infinitely Confirmable

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John Cochrane writes,

Keynsesians, and Krugman especially, said the sequester would cause a new recession and even air traffic control snafus. Instead, the sequester, though sharply reducing government spending, along with the end of 99 week unemployment insurance, coincided with increased growth and a big surprise decline in unemployment.

Sometimes, I think that there are macroeconomists (Krugman is not the only one) for whom there is no path of economic variables that could ever contradict their point of view. They remind me of the climate scientists who tell us that Buffalo’s Snowvember came from global warming.

Macroeconomics is infinitely confirmable because of its high causal density and lack of controlled experiments. The macroeconomist has enough interpretative degrees of freedom to twist any pattern of economic activity to fit his or her priors.

In theory, you could ask macroeconomists to place bets on their predictions. However, that, too, would run afoul of causal density. If you make unconditional predictions, then an oil shock or other event could make you right or wrong more or less by accident. And the conditional forecasting space gets very complicated very quickly.

John Cochrane’s Monetary Thought Experiment

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He writes,

The Fed or Treasury could easily say that the yield difference between TIPS and Treasuries shall be 2%. (I prefer 0, but the level of the target is not the point.) Bring us your Treasuries, say, and we will give you back 1.02 equivalent TIPS. Give us your TIPS, and we will give you back 0.98 Treasuries. (I’m simplifying, but you get the idea.) They could equivalently simply intervene in each market until market prices go where they want. Or offer nominal-for-indexed swaps at a fixed rate.

Scott Sumner enthuses,

Excellent. And so Neo-Fisherism has now arrived where David Glasner, Bill Woolsey, Bob Hetzel, Milton Friedman and I were a few decades back. Target the market forecast.

The idea is to pin down expected inflation at 2 percent. I gather that Cochrane figures that actual inflation will then converge to expected inflation. I am not so sure. Suppose that “expected inflation” (defined as the spread between the interest rates on the 5-year nominal Treasury and the five-year TIP) is 2 percent but actual inflation is running at 1 percent for the indefinite future. What sort of arbitrage is available? Go long the spread and short everything in the CPI?

I think that the error is in thinking in terms of “the” rate of interest. There are many different rates of interest. The five-year nominal Treasury and the give-year TIP are just two of them. If the Fed pegs the spread between the two, I am not sure that has any consequences for the other interest rates in the economy. In particular, as I see it, there is nothing to ensure that actual inflation converges to the targeted spread.

If you’re new to this blog, I take an outlier point of view, which is that the Fed is not important for the macro economy. Walrasian economists needed something to pin down the nominal price level, so they nominated the money supply. I instead take the view that money and inflation are largely social conventions. Extreme measures by the government can change these social conventions. Otherwise, in my view, the belief in the power of the Fed is a superstition. This superstition is best maintained if the Fed’s actions are mysterious. If the Fed were to follow a transparent rule, I think that the superstition would be exposed for what it is.

The Unlimited Wealth Gains from Transfer Payments

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Gary Burtless writes,

For middle-income families, tax cuts and higher government benefits erased almost 90% of the market income losses caused by the recession. For Americans with lower incomes the combination of tax cuts and more generous benefits offset virtually all the market income losses. Millions of laid off workers were clearly made worse off by the recession. But income replacement through the permanent tax and transfer system plus temporary measures to boost families’ spendable incomes achieved their intended goal. For poor and moderate-income families, wage and capital income losses caused by the recession were largely or wholly offset by tax cuts and benefit increases.

Pointer from Mark Thoma.

When someone’s analysis is contrary to what one believes, the overwhelming temptation is to nit-pick the methodology. I try to restrain myself, but in this case I cannot.

What Burtless demonstrates is that the government wrote checks. Did anyone ever question that?

What some of us questioned was the macroeconomic impact of those checks. If you believe that government can manufacture wealth by writing checks, then a zillion dollar combination of tax cuts and transfer payments would make the American people a zillion dollars better off. Seeing that this is absurd, one might want to go back and think more carefully about the macroeconomic analysis.

I am not saying that macroeconomic analysis definitely proves that the stimulus failed. But I fail to detect in Burtless’ piece any contribution to the discussion.

Capitalist Tentacles

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From Fortune,

Founded in 2006, the company has grown to 1,200 employees and operates in 40 countries. With 11 billion page views, 25 million listings, and 8.5 million transactions per month, it is the largest marketplace in India, Poland, and, as of last year, Brazil. Funded by U.S. venture firms including Bessemer Ventures and General Catalyst Partners, OLX sold a majority stake to the African conglomerate Naspers in 2010.

This story made me feel good. I thought I would pass it along.

William Galston’s Growth Proposals

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He writes,

Here’s a simple, easily administered proposal along these lines: a five-year reduction in Social Security payroll rates — by 3 percentage points during the first three years, phasing down to 2 points in the fourth year and 1 point in the fifth. (General revenues would fill the gap in the Social Security trust fund, protecting current and future beneficiaries.) A Joint Economic Committee report on the effects of the 2012 payroll tax cut suggests that the proposed five-year reduction could increase growth by 0.75 percent during each of the first three years while increasing net jobs by 600,000 annually during that period.

I have been advocating cuts in the payroll tax for six years.

And here is another interesting proposal:

If everybody were required either to purchase insurance against the possibility of nursing home care or to save for that eventuality, states could be relieved of the long-term care burdens for which they now pay in the Medicaid program.

Is Demography (Economic) Destiny?

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The Economist blog writes,

An ageing population could hold down growth and interest rates through several channels. The most direct is through the supply of labour. An economy’s potential output depends on the number of workers and their productivity. In both Germany and Japan, the working-age population has been shrinking for more than a decade, and the rate of decline will accelerate in coming years (see chart). Britain’s potential workforce will stop growing in coming decades; America’s will grow at barely a third of the 0.9% rate that prevailed from 2000 to 2013.

Pointer from Tyler Cowen.

Along seemingly similar lines, Karl Smith writes,

It’s no accident that this phenomenon appeared in Japan first. As its population began to stagnate well before the rest of the industrialized world, investors found themselves with loads of capital, a dearth of workers, and repayment terms they could not meet.

First, think about this in the absence of inter-generational transfer schemes like Social Security.

1. If people live longer than they used to, then they either have to produce more (probably by retiring later) or consume less.

2. If birth rates decline, then you let capital depreciate faster than it would otherwise. Think of an economy where the only capital goods are houses that stay in good condition for fifty years. When birth rates are rising, you need to keep using some houses longer than fifty years, even though they no longer are in good condition. When birth rates are falling, you can take some houses out of service before fifty years, even though they still are in good condition.

This seems quite straightforward to me, and it is does not suggest that demographic changes should be highly disruptive. I am not persuaded by just-so stories about Japan. One can conjure many such stories. For example, maybe Japan slowed down because its corporatist approach to capital allocation was only effective for a decade or two.

Casey Mulligan on Obamacare Tax Effects

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He said,

In summary, the ACA has three major taxes in it. Two are taxes on full-time employment and the other is a tax on income. They may be implicit, they may be hidden, politicians may not call them taxes, but that’s what they are. Their economic impact on workers varies widely, affecting low-skill workers the most. They create all kinds of productivity problems and will have visible and permanent effects on the economy. I have estimated that employment will be three percent less over the long term because of the ACA, and that national income—or GDP, if you like to think of it that way—will be two percent less. If you look at the productivity costs alone—forgetting the fact that there will be a number of people not working anymore—they come to $6,000 per person who gets health insurance because of the law. And I’m not beginning to count the payments needed for health care providers.

Pointer from Don Boudreaux.

Ryan Avent on Urban Housing Supply

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He writes,

Housing is more costly in the most expensive cities because so little of it is built. In the 2000s, Houston’s housing stock grew by more than 25 percent while that in the Bay Area grew just over 5 percent. In 2013 Houston approved 51,000 new homes while San Jose okayed fewer than 8,000, despite the booming Silicon Valley economy. Glaeser and Kristina Tobio find that since the 1980s, the extraordinarily rapid growth in the population of Sunbelt cities is due primarily to the receptiveness of those cities to new construction. A strengthening economy in places like Texas and Georgia leads to a construction boom and rapid population growth, while economic booms in coastal cities lead to very little population growth but soaring housing costs.

More Q where construction is allowed, higher P where it is not. Read the whole thing.

The Year of Flawed Books

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Writing a “best books of the year” post for 2014 means choosing among flawed books.

Six months after Piketty’s Capital made its splash with the “law of capitalism” that r>g, we have Pikettarians saying that, of course, Piketty never said that r>g explains the rise in inequality in recent years that concerns everyone, and in fact anyone who thinks he said that is a knave who has not read the book. I was among the many who never made it through Capital (it gave a new and different meaning to the expression “widely unread”), so I will take it on faith that the whole r>g thing was a head fake. Anyway, Capital does not make my list.

I think that number 1 is Complexity, by David Colander and Roland Kupers. On many pages, I highlighted insightful passages. On many other pages, I highlighted irksome passages. Look for a longer review from me next year.

Probably number 2 is Trillion Dollar Economists, by Robert Litan. It is a great achievement, but even so I wanted a different book.

Number 3 might be Isabel Sawhill’s Generation Unbound, about the pathology of unwed motherhood (it’s not just for teenagers any more) and what to do about it. However, I think that the question of whether “society” should be trying to prevent births of a certain type (namely, from unplanned pregnancies) is more difficult than she makes it out to be. Again, I have a review forthcoming.

Number 4 might be Charles Calomiris and Stephen Haber, Fragile By Design. The financial crisis continues to stimulate books on banking and related topics, and of the recent lot I thought this one had the strongest historical and international perspective. However, in the end, I found its main thesis, that U.S. banking policy is hindered by populism, unpersuasive.

Number 5 might be Mark Robert Rank, PhD, Thomas A. Hirschl, PhD, and Kirk A. Foster, PhD, Chasing the American Dream, which provides a good empirical study of income dynamics using longitudinal data.

Finally, there is a category of books written by friends of mine, in which I recommend Russ Roberts’ How Adam Smith Can Change Your Life, Megan McArdle’s The Upside of Down, and Elizabeth Green’s How to Build a Better Teacher.

UPDATE: Here is Tyler’s list.