Category Archives: Economic education and methods

FITs No. 25

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The post is here. I express my (possibly unfounded) worries about polygenic scores for outcomes like educational attainment.

I can’t help thinking that the “genes” for educational attainment, after you control for the genes for intelligence, might not be causal factors. I worry about culture as a confounding factor. For example, suppose that Asian parents successfully encourage their children to do well in school, and this accounts for all of the educational attainment of Asians over and above what you would expect based on their intelligence. Then you would find that genes that are associated with Asian-ness help to “explain” school attainment, even though the causal factor is actually cultural. (Note that if you are one of those people who insists that IQ itself is culturally determined, then this would lead you to question the interpretation of polygenic scores for IQ. I myself am willing to believe that psychometricians have figured out a way to measure IQ so that it picks up genetic causes rather than cultural causes. But I really don’t believe that one can do that with educational attainment or with income.)

What does consumer sentiment tell us?

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A newspaper story says,

America has already slipped into a recession that could be as bad as the 2008 financial meltdown according to key consumer data, a Dartmouth College professor has warned.

David Blanchflower, of Dartmouth, and Alex Bryson, of University College London, say that every slump since the 1980s has been foreshadowed by 10-point drops in consumer indices from the Conference Board and University of Michigan.

The abstract of the Blanchflower/Bryson working paper says,

We show consumer expectations indices from both the Conference Board and the University of Michigan predict economic downturns up to 18 months in advance in the United States, both at national and at state-level. All the recessions since the 1980s have been predicted by at least 10 and sometimes many more point drops in these expectations indices. A single monthly rise of at least 0.3 percentage points in the unemployment rate also predicts recession, as does two consecutive months of employment rate declines. The economic situation in 2021 is exceptional, however, since unprecedented direct government intervention in the labor market through furlough-type arrangements has enabled employment rates to recover quickly from the huge downturn in 2020. However, downward movements in consumer expectations in the last six months suggest the economy in the United States is entering recession now (Autumn 2021) even though employment and wage growth figures suggest otherwise.

When I worked on forecasting, which was at the Fed almost 40 years ago, we thought that those consumer sentiment indices were too volatile to be useful in forecasting. Some possibilities:

1. We were stupid. We just did not understand that you could filter out volatility by looking just at large drops.

2. The consumer sentiment surveys were bad indicators in the 1970s and early 1980s, but they are better indicators now. Perhaps households have gotten better about sensing when firms are getting ready to initiate layoffs, so that their sentiment is now a good leading indicator. Perhaps the survey methods have improved.

3. The relationship that they found is mostly coincidental. Consider that “all the recessions since the 1980s” is not a particularly big sample. Since 1982, we’ve only had four. With so few observations, you cannot confirm that a statistical relationship is reliable.

My money is on (3). I wouldn’t call this work “research.” If you want to verify a statistical relationship that you will arrive at by trial and error, you need two samples of reasonable size. One sample is used to hunt for a relationship. The other sample is used to verify that you did not discover a coincidence. You can’t follow such a procedure with only the recessions since the 1980s to work from.

Blanchflower makes it sound as though their results imply a 100 percent probability that the U.S. economy is entering a recession. I think that the true probability is less than 25 percent.

Use your economics!

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I write,

If you use your economics, then no matter how complex the supply-chain problems might appear, they can be solved using the price system. The price system may or may not be able to call forth more supply, but it certainly can ration demand, and it can do so more efficiently than is being done at present. Everywhere the supply chain is “broken,” higher prices can ensure that scarce goods are allocated to the highest-priority uses.

The latest Nobel Prize in economics

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Timothy Taylor has coverage

The award announcements says that one-half of the award is given to David Card “for his empirical contributions to labour economics,” while the other half is given jointly to Joshua D. Angrist and Guido W. Imbens “for their methodological contributions to the analysis of causal relationships.”

All three are involved in what Angrist and Jörn-Steffen Pischke dubbed the “credibility revolution” in empirical economics. As Alex Tabarrok puts it,

Almost all of the empirical work in economics that you read in the popular press (and plenty that doesn’t make the popular press) is due to analyzing natural experiments using techniques such as difference in differences, instrumental variables and regression discontinuity.

Last year, I suggested that a Nobel should go to Edward Leamer, the economist who set off the credibility revolution.

The Leamer critique caused economists to largely abandon ordinary multiple regression and to instead employ more credible research designs, such as natural experiments.

Leamer in 2010 pointed out that the newer methods also come with limitations. But, alas, he was bypassed by the Nobel committee.

Noah Smith goes way overboard in praise of the new laureates. He makes it sound as though the results that David Card and Alan Krueger claimed about the minimum wage were only controversial because they were surprising. But they were also controversial because they were wrong.

Are the laws of supply and demand broken?

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Everywhere, one hears about shortages. Not enough trucks to pick up goods at ports. Six-month waits for appliances. Car dealers with empty lots. Grocery shelves with missing goods. Book releases postponed because of lack of paper and printing facilities.

None of that is supposed to happen. When you have an adverse supply shock, prices are supposed to rise to clear markets. Even if a higher price does not summon more supply, it serves to ration demand. A shortage, where people have to wait or the quantity is rationed, only takes place when the price is artificially held down.

Why are markets not clearing? More remarkably, why aren’t economists talking about it?

The best explanation this economist can offer is that firms do not want to raise prices because they are afraid of blame. If you walk into a store and the price has gone way up, you blame the owners and managers, because the store has discretion over the price. But if the store runs out the stuff, a typical customer will think, “They couldn’t help it. It’s a supply shortage.”

Of course, if you had internalized freshman econ, you would not blame the store for high prices, because the the price comes from market supply and demand conditions. And you would blame the store for being out of stuff and thereby making you wait or else run all over town trying to find stuff. They are just as responsible for setting their price too low. But because most customers have not internalized freshman econ, stores think they will have better customer relations if they run out of stuff than if they raise prices.

If this is the explanation, then I think that the price stickiness will not last forever. Over time, firms will gradually raise prices. I believe that what we are seeing right now is a considerable amount of repressed inflation, and it won’t stay repressed for much longer. By the end of next year, I predict that “shortages” will have been replaced by higher prices.

Science: method vs. sayings

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Emily Oster writes,

Back in spring 2020, many of us (here’s my particular take) argued that the only way to really track case rates (and serious illness rates and so on) was to engage in a program of random testing. Some countries, like the U.K., did that. But the U.S. did not. And we still do not have such a program. And while our tracking of the pandemic has improved tremendously with better testing and better data reporting, this would still be helpful.

Consider this. Right now South Dakota has low case rates relative to most places with its vaccination rates. Is this because of natural immunity from very, very high infection rates in the winter? Or is it, more plausibly, a lack of testing? We have no idea, since without random sample testing, we cannot know.

Rigorous thinkers, like Oster, naturally employ a scientific mindset. Apparently, many people trained in epidemiology don’t. Epidemiological “science” seems more like a set of sayings that students learn. They learn to scold people based on those sayings.

Even when they do studies, epidemiologists do not seem to think like scientists. Hence you have many irreproducible and unreliable results.

Road to sociology watch

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Noah Smith writes,

doing an econ PhD no longer means having to worry (or at least, not having to worry nearly as much) about navigating an entrenched old boys’ club of right-wing bullies. That’s a big plus!

As an aside, it’s as if all the writers that I follow on Substack went to the same training seminar, where they were told to make their prose sound conversational. By using exclamations! All the time! It’s annoying!

But I also object to the substance of Smith’s remarks. There was some bullying at MIT when I was there, but it was equal-opportunity bullying. There, even Chicago-influenced professors, notably Stan Fischer and Rudi Dornbusch, were left of center. The professors who had their egos most assaulted and who departed as a consequence were Fischer Black, a libertarian, and Robert Hall, who was to the right of the departmental mean.

My impression is that there is more bullying than ever in economics. White men are the ones being bullied. And conservative economists are an endangered species.

December 1978

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Going through some old letters I wrote to my father, which he saved. An excerpt from December 4, 1978, when I had been a section leader for the first-year econ course at Harvard.

My exam really separated the men from the women. The four worst grades in the class were all from women, and a woman tied for the fifth worst. My class is a sample of students in which sex-based differences in upbringing are apparent. The women are not math and science oriented, whereas the men have some background in math and science.

The exam was not mathematical, but like all economics exams stressed applications to problems rather than knowledge of facts or formulas. I felt that the results, with a few exceptions, represented what people knew about the course.

One sad comment on my teaching is that the student who got the best grade is the one who comes to class least often.

Today, I would say that my teaching was a perfect example of the Null Hypothesis.

Being a teaching assistant at Harvard was eye-opening. It was scary how many weak students were in my section. I remember teaching a simple consumption function, C = a + bY and five of my students independently came up to me afterward because they did not understand what a and b were supposed to mean. They had been too uncomfortable with 8th-grade algebra to understand the concept of line with a slope and an intercept but too ego-protective to ask the question publicly in class.

By the way, if I had to bet, I would wager that Harvard students today are much better at 8th-grade algebra but are even more ego-sensitive. And I would wager that the male–female difference in ability to handle a course with simple applied math has narrowed or even reversed.

The next year, I was a teaching assistant at MIT. That was a completely different experience. There, when I was trying to explain the concept of “rational expectations,” (a concept typically not taught to first-year students in those days) one student piped up skeptically, “That’s like saying that the batter knows what the pitcher is going to throw before he throws it.” That was a darn good analogy.

Ken Rogoff told his first-year students at MIT that he would give an A to anyone who could help him prove a mathematical conjecture (this was for his Ph.D thesis). He ended up getting two different correct proofs.

MIT undergrads were scary that way.

Price discrimination explains everything

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Tyler Cowen writes about what should be taught more in econ grad school,

Price discrimination. They do it to you more and more! Or perhaps you are striving to do it to others. This is typically covered in a first-year sequence, but how many second-year students really have mastered when it is welfare-improving or not? How it relates to product tying? When it is sustainable against entry or not?

If I were in charge of undergraduate economics, no one would come to graduate school needing to learn about price discrimination. When I taught AP economics in high school, I taught that price discrimination explains everything. That is, most real-world business practices that might seem odd can be explained as attempts to charge more for consumers with the least elastic demand. An intermediate undergraduate microeconomics course ought to spend a lot of time on the topic of price discrimination.

The fundamental question that economic grad schools face is whether to teach math or economics. When I was in grad school, the answer was to teach math. The case for teaching math is that to succeed in the profession you need to be able to “use the tools.”

I think that, at the margin, economics graduate students should study more economics. Economic history is very much worth studying. Financial institutions are worth studying. Calomiris and Haber invites the reader to contemplate financial institutions, history, and public choice.

Intangible factors in the economy are worth studying. You could spend at least a semester with a course on organizational capital, institutions, innovation, trust, etc.

There is No Labor Shortage

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I reprint an essay I first posted almost a quarter century ago.

Although most economists would share my confidence that the market can take care of a labor shortage, there is much that we do not know. We do not know how far away the current wage rate is from the one that is consistent with no excess demand for labor. We do not know if the process of wage adjustment will be inflationary (nominal wages rising) or deflationary (prices falling relative to wages). We do not know how long the process may take.

That was in 1997. In today’s environment, I would bet that the upward adjustment of wages will take place in the context of inflation. As I write this, prices are going up faster than wages, which exacerbates the appearance of a “labor shortage.” Market forces are likely to drive wages higher, and we will see history repeated. Not like 1997. More like 1977.