Velasquez-Manoff on Causal Density

Posted on by
1

From An Epidemic of Absence.

The scientific method that had proven so useful in defeating infectious disease was, by definition, reductionist in its approach. Germ theory was predicated on certain microbes causing certain diseases. Scientists invariably tried to isolate one product, reproduce one result consistently in experiments, and then, based on this research, create one drug. But we’d evolved surrounded by almost incomprehensible microbial diversity, not just one, or even ten species. And the immune system had an array of inputs for communication with microbes. What if we required multiple stimuli acting on these sensors simultaneously? How would any of the purified substances mentioned above mimic that experience? “The reductionist approach is going to fail in this arena,” says Anthony Horner, who’d used a melange of microbes in his experiment. “There are just too many things we’re exposed to.”

In an essay over ten years ago, I wrote,

E.D. Hirsch, Jr., writes, “If just one factor such as class size is being analyzed, then its relative contribution to student outcomes (which might be co-dependent on many other real-world factors) may not be revealed by even the most careful analysis…And if a whole host of factors are simultaneously evaluated as in ‘whole-school reform,’ it is not just difficult but, despite the claims made for regression analysis, impossible to determine relative causality with confidence.”

In the essay, my own example of a complex process that is not amenable to reductionist scientific method is economic development and growth. In that essay, I also provide a little game, like the children’s game “mastermind,” to illustrate the difficulty of applying reductionism in a complex, nonlinear world. Try playing it (it shows up better in Internet Explorer than in Google Chrome).

The phrase “causal density” is, of course, from James Manzi and his book, Uncontrolled.

The Financial Crisis and Wealth Transfer

Posted on by
8

Amir Sufi writes (with Atif Mian).

The strong house price rebound in high foreclosure-rate cities likely reflects these markets bouncing back after excessive price declines. But these foreclosed properties are not being bought by traditional owner-occupiers that plan on living in the home. Instead, they have been bought by investors in large numbers.

This is from a new blog spotted by Tyler Cowen, and both of the first two posts are worth reading in their entirety.

The picture that I get is of a pre-crisis economy in which middle- and lower-middle-income households thought they were doing well in the housing market. Then their house prices collapsed. Vulture investors swooped in to buy. Meanwhile, the government bailed out big banks and the stock market boomed. Some folks will credit the Fed for the latter. I don’t, but that is a bit beside the point here.

Net this all out–the sucker bets on housing by the non-rich, followed by big gains by wealthier folks in stocks and in foreclosed houses, and you get a picture of a huge regressive wealth transfer engineered in Washington. Carried out primarily by those who profess to be outraged by inequality.

Labor Force Participation Chartfight

Posted on by
9

1. John Cochrane presents a chart showing that over the last 25 years, the employment-population ratio tracks the ratio of people aged 25-54 to the total population.

Pointer from Mark Thoma. The chart is from Torsten Slok of Deutsche Bank.

2. John Taylor has a chart showing that the labor force participation rate is several percentage points that which was projected several years ago based on demographics. The chart comes from a paper by Chris Erceg and Andy Levin.

The first chart suggests that most of the decline in the employment/population ratio in recent years is due to demographic changes. The second chart suggests the opposite. How to reconcile the two?

3. And then there is Binyamin Appelbaum:

In February 2008, 87.4 percent of men in that demographic had jobs.

Six years later, only 83.2 percent of men in that bracket are working.

Pointer from Tyler Cowen.

My verdict is that Slok’s chart, referred to by Cochrane, is misleading. Here is the chart:

The way that the two lines are superimposed makes it appear that 2007 was a glorious year of over-employment, and the plunge in the employment-population ratio looks like a reversion to trend. Suppose you were to slide the blue line up vertically so that it just touches the red line at the peak in 2007. That would make the chart look much more like Appelbaum’s, shown below:


Some other issues:

–I suspect that some of the drop-off in employment has occurred among youth, who are outside of the 25-54 bracket that Slok uses.

–Another issue is what you think should have happened outside Slok’s bracket at the other end, namely 55-64 year olds. These are baby boomers, so that their share of the labor market has been soaring. The most likely reconciliation of the two charts is that the baby boomers have been retiring early at rates higher than historical norms.

As far as labor force participation goes, is 55 the new 65? If so, then somebody should trace out what that means for Social Security. Fewer people paying in and more people collecting disability cannot be a good thing for solvency.

Update: Cochrane offers another take, more nuanced.

Caroline Hoxby on Education

Posted on by
9

She writes,

(1.) A teacher who is in the top 10 percent of the current distribution of value-added raises student achievement by several times what a teacher in the bottom 10 percent does.

(2.) If all US teachers had value-added equal to what the current top 10 percent has, the average American student would achieve at the level of students whose parents have incomes in the top 10 percent of the family income distribution. This is approximately equivalent to the level at which the average student in Singapore achieves.

Clearly, this contradicts my null hypothesis, which is that there is no intervention that can achieve a significant, durable, replicable impact on student outcomes.

She also favors choice and competition, as well as attempts to introduce technology in a cost-effective way.

Perhaps most interestingly, she begins the essay by saying that she is describing what might be feasible ideally, not with what the political system is likely to produce. Implicit in this view is that the political process is likely to be distorted by interest groups. This is something that progressives tend to ignore when they advocate for government playing a larger role in education, health care, and so forth.

Working with the Tautology Model

Posted on by
4

Scott Sumner writes,

the NGDP approach is a very naive model that treats NGDP sort of like a big pot of money, which is shared out among workers with sticky wages. If some day the pot is smaller, then there’s less money to share, and some workers end up disappointed (unemployed.) It’s completely agnostic about the micro foundations…

Which is fine with me. Again, think of the mineshaft analogy, with real-world observations on the surface and the optimization-equilibrium paradigm buried below. To connect the two, you can try to start inside the mine and tunnel out, or you can start outside and tunnel in. My displeasure with much of macro the past thirty years is that it insists on the inside-out approach.

Consider the tautology model: hours worked = total wages divided by the hourly wage.

If the Fed were to target total wages, what could go wrong? Sumner cites the Lucas critique. In this context that would mean that the sticky nominal wages you observed in the past were due to the Fed not trying to mess with total wages. As soon as the Fed tries to mess with total wages, workers will catch on and start paying closer attention to real wages.

I believe that something else will go wrong. The Fed will not be able to hit its target for total wages! Suppose we write MV = W, where W is total wages and V is the velocity of money expressed in terms of total wages rather than nominal GDP. What I am inclined to believe is that moderate changes in M will lead to approximately equal and opposite changes in V.

Picture this as the Fed having a steering wheel, M, that is only loosely connected with the front axle, W. The Fed can turn the wheel quite hard while the axle barely wiggles. It may take extensive turning of the monetary steering wheel over a long period of time to obtain a response of total wages. In fact, the period over which wages are sticky may turn out to be shorter than the lag between shifts in monetary policy and changes in total nominal wages.

We have a complex, sophisticated monetary system, in which people’s ability to undertake transactions is not proportional to the amount of currency in circulation. We have a large financial system, in which the Fed is only one player. I keep trying to hold down people’s estimation of the power of the Fed.

Peak Political Psychology

Posted on by
6

Chris Mooney gives a careless, almost entirely uncritical review of two books that I recently read: Predisposed, by John R. Hibbing, Kevin B. Smith, and John R. Alford; and Our Political Nature, by Avi Tuschman. Mooney writes,

Liberals and conservatives, conclude Hibbing et al., “experience and process different worlds.” No wonder, then, that they often cannot agree. These experiments suggest that conservatives actually do live in a world that is more scary and threatening, at least as they perceive it. Trying to argue them out of it is pointless and naive. It’s like trying to argue them out of their skin.

Note that it is conservatives who Mooney characterizes as intractable. The implicit assumption is that progressives have it right. Political psychology helps to explain the persistence of the wrong-headed view.

Mooney waxes enthusiastic about the genetic/psychological explanations for political differences. The authors of both books are careful to point out that the correlations between personality traits and political beliefs are, while statistically significant, not overwhelmingly large. They explain much less than half of the variation in political beliefs.

Mooney leaves readers with the impression that psychologists explain a larger share of political differences than they themselves claim to explain. In contrast, my guess is that they explain less. These are the sorts of studies that tend to suffer from publication bias (20 studies are tried, one out of 20 passes the “significance test” of having a 5 percent probability of being true by chance, and that study gets published). In these sorts of studies, attempts at replication sometimes fail completely, and even when successful the effects are smaller than in the original published study.

In fact, my guess is that we are approaching peak political psychology. I would bet that ten years from now the links between political beliefs and psychological traits will be regarded as a very minor field of inquiry.

For me, the main problem with this research is that it is almost impossible to reconcile with well-established findings on voting behavior. In my own review of Tuschman’s book, I wrote,

Consider, for example, the fact that Jews and blacks vote predominantly for liberal Democrats. According to Tuschman’s model, this must mean that Jews and blacks are less ethnocentric than other voters (notwithstanding the apparent tribal solidarity of their voting behavior), as well as more Open and less Conscientious. That seems doubtful.

In his conclusion, Mooney advocates tolerance for other political points of view. That is generous of him. Others who have thought that their political opponents had psychological issues came up with idea of the Gulag.

Want more fun? Read Ethan Watters on the germ theory of political beliefs.

he is certain that the most effective way to change political values from conservative to liberal is through health-care interventions and advances in providing clean water and sanitation. “That is clearly the conclusion that the bulk of evidence supports,” Thornhill says. “If you lower disease threats in countries they become more liberal, and that is true for states in this country. The implication is that if you effectively target infectious diseases then you will liberalize the population.”

That explains why Japan liberalized earlier than England. It explains why Germany turned to Hitler. I don’t know why I didn’t think of this theory before. Pointer from Tyler Cowen, who is not buying it, either.

This is not charitable, but what I want is a psychological explanation for why progressives need to make disagreement with their outlook a pathology. I want to know why their capacity for critical thinking disappears when they read studies that make them feel better about being on the left.

Freddie and Fannie Shareholders vs. Government

Posted on by
8

Richard Epstein cries “Fraud.”

The initial bailout terms were contained in a Senior Preferred Stock Purchase Agreement (SPSPA). Under its terms, each corporation had to issue a new class of senior preferred stock to the United States, which bore interest at 10 percent per annum. That sum increased to 12 percent if Fannie and Freddie chose to conserve cash instead of paying dividends. For the next two or so years, as conditions in the housing market improved, the arrangement proceeded more or less as planned. The entire legal landscape, however, was radically changed in August 2012, when the Third Amendment to the 2008 SPSPA was passed. It called for a “net worth sweep” under which FHFA and Treasury entered into a deal that magically converted all the net receipts of Fannie and Freddie as “dividends” to be paid to the government.

Peter Wallison says it’s not so sad.

The original shareholders of Fannie and Freddie, as noted above, should have been wiped out by a receivership. The Treasury’s mistake in keeping shareholders’ rights “alive” was a windfall for this group. The shareholders that bought in after Fannie and Freddie were placed in the conservatorship were largely hedge funds, speculating on later developments. Speculation is certainly good, and is vital to price discovery, but in this case the hedge funds probably realized not only that Fannie and Freddie—because they continued to dominate the housing market—would eventually become profitable but also that they could probably push Congress to do what Entine recommends: allow these profitable companies to exit the conservatorship and resume their role as profit-making enterprises. That would have made a fortune for the hedge funds. Indeed, the Treasury’s move to extract all the profits from Fannie and Freddie was probably developed to prevent the success of this strategy. The Treasury was worried that it might succeed.

I’m with Wallison. If you bought Freddie or Fannie stock any time after 2008, you were not investing in fundamentally sound private businesses. You were buying a political lottery ticket. If the politicians had decided to perform financial CPR on Freddie and Fannie and then re-privatize them, you would have made a fortune. Given that they decided otherwise, you lost a pittance. Don’t sue because your lottery ticket lost. Don’t pay Richard Epstein to plead your case in public. Just tear up your worthless lottery ticket and shut up.

Crowding Out

Posted on by
6

Timothy Taylor writes,

Huntley describes the central estimate about the long-run effects of more government borrowing based on the review of the evidence like this: For each additional dollar of government budget deficit, private saving rises by 43 cents, and the inflow of foreign capital rises by 24 cents. Thus, [e]ach additional dollar of deficit leads to a 33 cent decline in domestic investment.

Jonathan Huntley works for the Congressional Budget Office. Taylor links to the full report. I like the way that Taylor explains the issue.

A few remarks:

1. A Keynesian would be quick to note that crowding out varies over the business cycle. When the economy is weak, there is excess saving, and there is no crowding out.

2. Larry Summers’ hypothesis of secular stagnation says that there has not been crowding out for two decades.

3. I have never heard a conservative economist complain about crowding out during a Republican Administration.

4. I have never heard a liberal economist complain about crowding out, ever. Complaining about (3) does not count.

This report comes out at a time in which the CBO has gotten an unusual amount of negative press. See this WaPo story, for example. Some remarks about this:

1. I think it is difficult for journalists or the general public to understand that some economic estimates are more unreliable than others. For example, estimating the cost of a government program is subject to some error, but most of the time you can get in the ballpark. There is more uncertainty about revenue from tax changes, because of behavioral responses, but one can still arrive at a reasonable range of estimates. On the other hand, estimating the macroeconomic impact of fiscal policy (the so-called multiplier) poses a much higher level of difficulty. You need a macroeconomic model. You need to take a position on the theory of monetary offset. When I was invited to give a lunch talk at CBO, I tried to emphasize that the difference between the uncertainty involved in macroeconomic forecasting and analysis on the one hand and the uncertainty in forecast and estimating the cost of a government program is a matter of kind, not just of degree. And I recommended that CBO should do something to emphasize this to the public. The crowding-out analysis is one that I would put in the high-uncertainty category.

2. It disturbs me that the press takes shots at the CBO only when the analysis raises doubts about progressive policies. If you are not going to raise doubts about CBO analysis of the stimulus, which is based on models that by now are far out of the mainstream, then you should not raise doubts about legitimately mainstream analysis of minimum wages, the employment effects of Obamacare, and, yes, crowding out.

3. Progressives who attack the CBO may be seeking a short-term gain in material at a long-term positional cost. Looking ahead a few moves, I do not think it helps progressives if they convince the public to distrust nonpartisan government experts.

My next reads

Posted on by
Reply

1. Everything is Obvious, by Duncan Watts. In the section available as a free sample, he writes,

whereas a formal system of knowledge would try to derive the appropriate behavior in all these situations from a single, more general “law,” common sense just “knows” what the appropriate thing to do is in any particular situation, without knowing how it knows it.

I think that there is something to be said for framing the “macro wars” as a tussle between a formal system of knowledge (microfoundations) and common sense (Keynesian macroeconomics). In this instance, I think that neither formal knowledge nor common sense delivers helpful answers.

More generally, Watts has a theme that we should be careful to question what we strongly believe to be true. I am quite sympathetic to that position.

2. An Epidemic of Absence, by Moises Velasquez-Manoff. The topic is not economics. It is the “hygeine hypothesis” as a possible explanation for a rise in autoimmune diseases. In this case, it is the Russ Roberts podcast that caught my interest. The author says,

When you have a peanut allergy, the immune system sees the peanut and rejects it, and sees it as an enemy. Now, what the parasites do is they convince you to tolerate them and treat it like some food that’s supposed to be there. That’s how they live for years inside of their hosts. And by strengthening that part of your immune system, the thinking goes, they then prevent allergic disease and possibly the autoimmune disease from ever emerging. So now you back up for a second. You realize that that kind of tweaking of your immune system was constant throughout not just our evolution but through probably most animals’ evolution. You rarely find an animal that is not parasitized by a few parasites at some point in its life. Usually early in life you are parasitized the most. And that’s when of course these diseases tend to emerge these days in humans, early in life. So you have this strengthened, let’s just call a part of the immune system that’s like a muscle, that helps you tolerate things. That helps you not respond; that helps you, say if you are a very well-balanced person and people provoke you in a way that could lead to some sort of conflagration, you are just very well balanced; you have an equilibrium, you don’t respond. That’s what those parasites help you do–they help strengthen that part of your immune system, that aspect of yourself.

What is to be Done?

Posted on by
7

My reader was not satisfied with the answer I offered in Libertarians and Politics. Here are a few more thoughts.

1. For economic libertarians who do seek to engage in politics, I do not think that the current environment is conducive to success. I use the modifier “economic,” because the same dominant progressive ideology that stifles economic libertarianism is quite friendly to libertarian positions on many social issues.

2. Perhaps one way to change the environment is to engage in political action and failing. The old Goldwater-made-Reagan-Possible theory. I am not terribly sold on that one.

3. I think that public schools are a major problem. Whether you think they make a difference at the margin in terms of student learning (I am skeptical), they probably are somewhat effective at progressive brainwashing. If you don’t believe that, consider what an uphill battle one faces trying to explain the beneficial effects of the capitalist system on reducing poverty, conserving natural resources, and so on.

4. The strong component of progressivism in the identity of intellectuals is another major problem. In order to feel welcome among highly-educated people, you have to affirm belief in ideas that are at best dubious and at worst just flat-out wrong. It takes too much courage these days to question progressive dogma in certain segments of the population, including non-Orthodox Jews