Caroline Hoxby on Education

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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

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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

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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

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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

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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

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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?

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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

Made Me Think of Garrett Jones

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Ellen R. McGrattan and Edward C. Prescott write,

In 2008, only a small part of all intangible investment was included in the measure of GDP from the Bureau of Economic Analysis (BEA). As a result, the fact that labor productivity rose between 2008 and 2009 is not inconsistent with theoretical predictions. The intuition is simple: during a downturn, measured labor productivity rises if we significantly underestimate the drop in total output. We underestimate the drop in total output if there are large unmeasured investments.

Pointer from Mark Thoma. Recall that Jones once tweeted that most workers do not make widgets. Instead they help to build organizational capital.

The authors, who were let go by the Minneapolis Fed several months ago in what was widely viewed as a “purge,” go on to point out that the Commerce Department recently decided to incorporate investment in intellectual property into its measure of investment, and that in recent decades this category accounts for about 1/3 of all investment. They point out that the government does not include other forms of intangible investment, including “advertising, marketing, and organizational capital.”

On the input side, we measure Garett Jones workers. However, on the output side, we tend not to count what they produce. This creates a mis-measured economy. When firms are undertaking a lot of intangible investment, measured productivity is understated. When they cut back in intangible investment, measured productivity growth is overstated.

I think, though, that in order to explain the reduction in intangible investment, you have to tell a PSST story. That is, I do not think that there was an economy-wide “shock” that reduced productivity. I think that there were firms that came to the realization that the outlook did not warrant continued intangible investment. Think of bookstores, newspapers, and other victims of creative destruction.

The Establishment View of Higher Education

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Suzanne Mettler writes,

Tougher regulations of the for-profits, long overdue, are the quickest way to help the poorest Americans who seek college degrees. States, too, should be held accountable; a perverse incentive permits them to gain more in federal student aid if they commit less of their own resources to helping poorer students. Nonprofit schools must also be responsible partners with government in furthering opportunity. Lawmakers should curtail the money we spend on tuition tax policies and for-profits, and invest more in Pell grants and community colleges.

She views the problem in higher education as one of distribution. In Three Languages of Politics terms, she implies that for-profit schools and conservative politicians are the oppressors, and lower-income youth are the oppressed.

My own view is that we are sending many students to college who are not prepared for the traditional liberal-arts college. From a public policy perspective, this is banging your head against the wall. I would not defend current policy in higher education, but I think that investing more in Pell grants and community colleges would not lead to different results.

Pointer from Mark Thoma.

My Review of Calomiris and Haber

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Is here. An excerpt:

The authors posit a contrast between what they call liberal democracy and populist democracy. Liberal institutions are designed to limit the power of what James Madison called factions, in part by making the government relatively unresponsive to public clamor. Populist institutions are designed to increase the power of those who can command electoral majorities.

A central claim of the authors is that banking crises are more likely in heavily populist countries than in countries that are less populist. They cite Canada as an example of the latter. For instance, in Canada, Senators still obtain office by appointment, rather than by direct election.