Category Archives: Economic education and methods

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.

Sentences I Might Have Written

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A tropical forest is a complex system, but a suburban garden is not. The reason is the the former is deeply interconnected, and it is the interconnected links that define it. A tropical forest will likely collapse if you disturb the natural balance too much, while in a suburban garden you can generally safely remove entire flower beds without affecting its overall health or integrity.

The standard way of doing policy considers our social system as a suburban garden. It tills, plans, and cultivates as if the parts are not interrelated.

That is David Colander and Roland Kupers, writing in Complexity and the Art of Public Policy: Solving Society’s Problems from the Bottom Up.

I am only part way through the book (by the time this post goes up I may be nearly finished). My initial reaction is that it is either more or less Austrian economics. It could be more if I decide that the explicit complexity theory really adds something to what otherwise is a very Austrian critique of mainstream economics. It could be less if I decide that I am disappointed by what I fear will be a treatment of government that I find unsatisfying.

In any case, it looks like one of the better books of 2014. In fact, relative to a very weak 2014 crop, so far this is looking like the best. I first became aware of the book here, but Tyler Cowen never gave it more than an “arrived in my pile” mention, which suggests that he did not find it worthwhile.

Coincidentally, Jason Collins points to an essay by Brian Arthur, who coined the term complexity economics. Arthur also has some sentences that I might have written.

think of the agents in the economy – consumers, firms, banks, investors – as buying and selling, producing, strategizing, and forecasting. From all this behavior markets form, prices form, trading patterns form: aggregate patterns form. Complexity economics asks how individual behaviors in a situation might react to the pattern they together create, and how that pattern would alter itself as a result, causing the agents to react anew.

…It views the economy not as machine-like, perfectly rational, and essentially static, but as organic, always exploring, and always evolving – always constructing itself.

Why Jonathan Gruber is Paid the Big Bucks

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Tyler Cowen comes to his defense.

I’ve disagreed with Gruber from the beginning on health care policy and I thought his ObamaCare comic book did the economics profession — and himself — a disservice. But I’m simply not very interested in his proclamations on tape, which as far as I can tell are mostly correct albeit overly cynical.

My remarks:

1, Gruber is not paid the big bucks to be a political tactician. In particular, whether or not Obamacare was sold deceptively was not his call to make.

2. For me, the problem with democracy is not the intelligence, or alleged lack thereof, among voters. I just think that the wisdom of crowds is channeled more effectively through exit than through voice. As for democracy, it is a good way of arranging for the routine replacement of high-level officials. It is otherwise much over-rated.

3. Gruber is paid the big bucks because he has a quantitative model of how insurance health reforms will play out. Relative to most academic economists and policy makers, my level of trust in such models is rather low. For me, it would be a better world if Gruber and his model were not held in such high regard. But I would have made this point, and probably did so, before the recent controversy.

4. If you need proof of Gruber’s contempt for your intelligence, all you need to do is skim the comic book to which Tyler refers. The comic book left me with the impression that Gruber lives in a Krugmanesque bubble, in which any disagreement must be dismissed as stemming from extreme ignorance and/or evil intent.

5. I think that the extent to which the attacks on Gruber have become personal is something that every economist, regardless of ideology, will come to regret. I am all for criticizing the ideas and the world view that underlie Obamacare. However, a world in which every economist who steps into the policy arena is subjected to opposition research and “gotcha” attacks is not going to be pretty.

Luigi Zingales on Economists’ Capture

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I passed on listening to this podcast with Russ Roberts last week, but Russ insisted that the paper is important, and I have come around to agree. Zingales concludes,

The purpose of this article is to highlight the parallelism between the forces that we use to explain regulatory capture and the ones that can capture economists. Unless we economists are made of a different fabric of the regulators, I do not see why we should not be subjected to the same kind of pressures.

Based on the analysis of these forces, I discuss several mechanisms to can help prevent (or reduce the effects of) capture: from a reform of the publication process, to an enhanced data disclosure, from a stronger theoretical foundation to a mechanism of peer pressure. Ultimately, the most important remedy, however, is awareness of the problem, an awareness most economists still do not have.

Read the whole paper. I thought that Zingales’ proposed remedies were too much on the clever and cute side. A couple of examples

Social handicaps make a person less suitable to an industry job, reducing the value of what business has to offer down the line and thus reducing a possible channel of capture.

If authors can post rejection letters, they can embarrass the editors when they make mistakes, especially when these mistakes seem to be driven by outside interests.

The conventional wisdom is that issues of professional ethics revolve around who pays you to do research. But money is not necessarily the driving force in economists’ capture. To borrow an expression from Roberts’ new book on Adam Smith, economists will respond to those who make them feel lovely. So if your paper with a statistically significant result gets published and your paper with a statistically ambiguous result does not, you stop submitting papers with ambiguous results. If the one-sided, uncharitable opinion pieces that you write get widely circulated and praised, then you stop writing charitable, balanced pieces. If the unreliable study that gets a result that is so exciting or pleasing that the press picks up on it, then you stop worrying about whether your results are reliable.

Although Zingales is correct to stress that it is vital for economists to be aware of the issue of capture, I would go further in the direction of deep cultural change, as opposed to clever incentives or procedural tweaks. I think that the challenge is to make feeling lovely align with intellectual honesty, as opposed to just getting articles accepted at journals or being a popular opinion-writer. That in turn requires thinking about, agreeing about, and caring about what it means to be intellectually honest.

My thoughts (these ideas may overlap):

1. Fight against confirmation bias. Work very hard to convince yourself that you may be wrong, and work less hard to convince yourself that you are right. When you come across a paper that goes against your views, look for its strong points. When you come across a paper that aligns with your prior views, look for its weak points. (I think that failure to uphold this standard accounts for a lot of the degeneration of academic journals. More generally, it contributes to the tend toward conformity and unreliable research findings rather than open intellectual inquiry and genuine progress.)

2. Resist the temptation to write in ways that work to persuade those with whom you agree to keep their minds closed. Instead, seek to open their minds to possible problems with their ideas.

3. In the political realm, try to pass Bryan Caplan’s ideological Turing Test. State the other side’s case in a way that they would mistake you for being one of them.

4. Be charitable to those with whom you disagree. Try to engage their strongest arguments rather than harping on their weakest arguments.

5. Steer clear of asymmetric insight. That is, do not claim to understand your opponents better than they understand themselves.

6. In particular, steer clear of reductionism. Rather than trying to explain away other’s beliefs, assume that others have arrived at their views on the basis of reason.

Clarify the Counterfactual

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Neil Shah of the WSJ writes,

If Census were to exclude Social Security benefits from income, the poverty rate for American seniors would jump from 14.6% to a whopping 52.6%—roughly 23.4 million people.

Consider three counterfactuals.

1. The government makes a sudden, surprising decision to renege on promised SS benefits.
2. The government tells all young people that SS is abolished for them, and they are on their own in terms of planning for their retirement.

The analysis of the Census data tells you what is probable under (1), but that is not a terribly interesting scenario for policy purposes. The interesting policy scenario is (2). In that case, when the hypothetical young people retire, their poverty rate could be either higher or lower than under SS, depending on how much they save and how well they invest that money.

Paul Krugman on the State of Macro

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He writes,

whenever somebody claims to have a deeper understanding of economics (or actually anything) that transcends the insights of simple models, my reaction is that this is self-delusion. Any time you make any kind of causal statement about economics, you are at least implicitly using a model of how the economy works. And when you refuse to be explicit about that model, you almost always end up – whether you know it or not – de facto using models that are much more simplistic than the crossing curves or whatever your intellectual opponents are using.

Pointer from Mark Thoma.

Shorter version: it takes a model to beat a model

I find that persuasive, although I wish we had a less pretentious term than “model,” which makes us sound more scientific than I believe we are. What I would like to do is compare the state of the IS-LM-Phillips Curve model with that of the PSST model. PSST, or patterns of sustainable specialization and trade, says that a sharp rise of unemployment is the result of patterns of trade made unsustainable by changes in technology and/or asset prices, and that only a gradual process of entrepreneurial trial and error can discover new patterns of sustainable specialization and trade. More about this model can be found here (see items 2,3, and 4).

Some comments:

1. I think that both PSST and IS-LM-Phillips are difficult to falsify. In some sense, the macroeconomic data are over-fit, so that the dataset cannot be used to decisively reject one model in favor of another.

2. I would counter one of Krugman’s narrow points, where he says that the liquidity trap explains why the huge reserves in the banking system have not had major effects. If this is true, then why did the Fed need to pay interest on reserves? I assume that the Fed thinks that if they had not paid interest on reserves, then its huge injection of reserves would have caused rapid money growth and high inflation. It would be interesting to poll economists on whether they would agree–my guess is that most would. It seems to me that Krugman would have to say “no” to the poll, but perhaps I am misunderstanding him. I am not sure how I would answer such a poll myself.

3. I do not align myself with those who see the Fed as the prime mover of inflation. My “model” of inflation is a pretty weak one. Basically, I just think that businesses get into habits about how much to raise workers’ wages each year. Maybe those habits are affected by the aggregate unemployment rate, as in the Phillips Curve, but I would caution that we do not have homogeneous “labor.” Some folks can be getting regular raises that are large, while others may fail to get raises at all. Each business looks at its own labor market, not at the economy-wide unemployment rate.

What about the 1970s? I would say that the 1970s were a period of “inflation consciousness.” Everyone became aware of it, and “cost-of-living” raises got built into the system, because so many employers incorporated recent inflation into current wage increases. I am tempted to suggest that the advent of wage-price controls starting in 1971 had the adverse consequence of raising inflation consciousness.

What about hyperinflation? I believe that really, big, long-term inflation is a fiscal phenomenon. That is, the government runs huge deficits, people stop lending to government, and then it meets its deficits with paper claims. We are not at that point in the U.S., but if we ever do reach the point where bond investors lose confidence–watch out.

4. So I have a PSST model for unemployment, and my “weak” model[s] for inflation. I think it is fair to criticize them as “just-so stories.” But I would say the same thing about the sorts of models preferred by Blanchard or Krugman. Just-so stories, dressed up in pretty math.

5. Elsewhere, Krugman writes,

Basically, the new IO [industrial organization, the field of recent Nobel Laureate Jean Tirole] made it OK to tell stories rather than proving theorems, and thereby made it possible to talk about and model issues that had been ruled out by the limits of perfect competition. It was, I can tell you from experience, profoundly liberating.

Jean Tirole and Josh Lerner on Open Source

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They wrote,

Open source and academia have many parallels. The most obvious parallel relates to motivation. As in open source, the direct financial returns from writing academic articles are typically nonexistent, but career concerns and the desire for peer recognition provide powerful inducements

They wrote this almost ten years ago. I bring it up because of Tirole’s Nobel Prize, announced yesterday.

Tirole and Lerner noted, with a bit of puzzlement that, compared with open-source software writers, academics were less likely to make their data sources public and more likely to allow their work to be hidden behind publishers’ paywalls. I think that in those ten years there has been a shift, at least in economics, more in the direction of the open-source model.

Undebunkable

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Jesse Rothstein writes,

Like all quasi-experiments, this one relies on an assumption that the treatment – here, teacher switching – is as good as random. I find that it is not: Teacher switching is correlated with changes in students’ prior-year scores

Pointer from Tyler Cowen.

Thus, Rothstein hopes to debunk a famous paper by Raj Chetty and others which claimed to shows that great teachers add a lot of value. My guess is that Rothstein will fail. It reminds me of when Bill Wascher and others debunked the Krueger-Card paper claiming to show that higher minimum wage laws do not reduce employment. Once a result is put into the literature by a high-status economist and the result supports progressive policy preferences, it becomes undebunkable.

And you’re right, I’m not being charitable to those who disagree.

The State of Macroeconomic Analysis

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Olivier Blanchard, who in August of 2008 describe it as “good,” has modified his views. Concerning the consensus methodology that he praised back then, Blanchard writes,

However, these techniques only made sense under a vision in which economic fluctuations were regular enough so that, by looking at the past, people and firms (and the econometricians who apply statistics to economics) could understand their nature and form expectations of the future; and simple enough so that small shocks had small effects, and a shock twice as big as another had twice the effect on economic activity. The reason for this assumption, called linearity, was technical. Models with nonlinearities – those in which a small shock, such as a decrease in housing prices, can sometimes have large effects, or in which the effect of a shock depends on the rest of the economic environment – were difficult, if not impossible, to solve under rational expectations.

Pointers from Mark Thoma and Greg Mankiw. Read the whole thing. I have to give Blanchard credit for writing this:

The reality of financial regulation is that new rules open new avenues for regulatory arbitrage, as institutions find loopholes in regulations. That in turn forces authorities to institute new regulations in an ongoing cat-and-mouse game (between a very adroit mouse and a less nimble cat). Staying away from dark corners will require continuous effort, not one-shot regulation.

That is the theme of The Chess Game of Financial Regulation.

However, my overall take on Blanchard’s essay will be harsh.*

1. He still wants to believe in equations and technical brilliance. He implies that if we were just better at manipulating nonlinear models, all would be well. Once again, an MIT economist is unable to grasp Hayek’s insight that there is knowledge embedded in the economic order that no individual can possess. No thanks to MIT, and long after I had left it, I wound up on the side of Hayek. In fact, when it comes to macro I would argue that I am more Hayekian than Hayek.

2. Rational expectations helped make the careers of Fischer, Blanchard, and other MIT contemporaries, and refusal to tool up in rational-expectations modeling is what un-made my own academic career. In hindsight, and with an assist from Frydman and Goldberg, I would say that rational expectations was the ultimate anti-Hayek proposition. In effect, Chicago said that everyone knows everything. Eventually, MIT countered with “behavioral economics,” which said that some people are often mistaken while assuming at least implicitly that the technocratic elites know everything.

3. My least favorite paragraph:

Now that we are more aware of nonlinearities and the dangers they pose, we should explore them further theoretically and empirically – and in all sorts of models. This is happening already, and to judge from the flow of working papers since the beginning of the crisis, it is happening on a large scale. Finance and macroeconomics in particular are becoming much better integrated, which is very good news.

I’ll be uncharitable (and sarcastic) and say that he is telling us once again that the state of macro is good, because the same modeling hubris still predominates. The way I see it, the drunks are still looking under the same lamppost.

As for integrating finance and macroeconoimcs, my prediction is that this will accomplish nothing. I believe that mainstream macroeconomists are over-stating the importance of the financial crisis. Instead, I am inclined to treat the financial crisis as a blip, one whose apparent macroeconomic impact was made somewhat worse by the very policies that mainstream economists claim were successful.

This blip took place in the context of key multi-decade trends:

–the transition away from goods-producing sectors and toward the New Commanding Heights of education and health care

–the transition of successful men away from marrying housekeepers and toward marrying successful women

–the integration of workers in other nations, most notably China and India, into the U.S. production system

–the increasing power of computer technology that ise more complementary to some workers than others

These trends are what explain the patterns of employment and relative wages that we observe. The financial crisis, and the government panic in response, pushed the impact of some of these developments forward in time. Overall, however, the focal points of mainstream macroeconomics, including fiscal and monetary measures, are not nearly as significant to the actual economy as they are on paper in the models.

I have always been harsh on Blanchard. You should discount for that.