Monthly Archives: February 2013

Did Jewish Genius Really Decline?

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Andrew Gelman summarizes some criticisms of the data that went into the Ron Unz article that I cited in this post.

Pointer from Tyler Cowen. Some of the criticisms seem powerful to me, others less so. Basically, it possible to come up with disparate measures for the proportion of Jews in a segment of the population. Unz appears to have over-estimated the proportion of Jews admitted to elite colleges and under-estimated the proportion with high achievement (such as wins in the Putnam math exam). Note, however, that the people proposing revised estimates may be stretching things in order to prove their point.

What Belongs on the Left-Hand Side?

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Business Week reports,

The rate of short-term unemployment—six months or less—is almost back to normal. In January it was 4.9 percent of the labor force. That’s only 0.7 percentage point above its 2001-07 average. But the rate of long-term unemployment, 3 percent in January, is precisely triple its 2001-07 average, according to a Bloomberg Businessweek calculation based on Bureau of Labor Statistics data. (Those two rates—4.9 percent and 3 percent—add up to the overall unemployment rate of 7.9 percent.)

Pointer from Tyler Cowen.

Beware of the interpretation that there is a clump of “long-term unemployed” that is separate and distinct from the short-term unemployed. That is, I would not assume that the causality runs from long-term unemployment to the unemployment rate, with the former boosting the latter.

Consider the alternative of putting total unemployment on the right-hand side. That is, the length of time to find a job is a function of the number of unemployed people with whom you are competing. As the unemployment rate goes up, the rate of long-term unemployment goes up.

How much long-term unemployment can be mathematically explained by the overall drop in the job-finding rate, and how much represents a drop in the job-finding rate for the long-term unemployed relative to that for the short-term unemployed? The article hints that perhaps some of the latter has taken place, but it is not clear how much.

A Housing Discrimination Rule

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From HUD.

the charging party or plaintiff first bears the burden of proving its prima facie case that a practice results in, or would predictably result in, a discriminatory effect on the basis of a protected characteristic. If the charging party or plaintiff proves a prima facie case, the burden of proof shifts to the respondent or defendant to prove that the challenged practice is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests. If the respondent or defendant satisfies this burden, then the charging party or plaintiff may still establish liability by proving that the substantial, legitimate, nondiscriminatory interest could be served by a practice that has a less discriminatory effect.

So, suppose that a lender uses a credit-scoring algorithm produces scores below the approval cutoff for blacks more often than whites (step one). Then, the lender shows that the credit scoring algorithm predicts default probabilities accurately for both blacks and whites. Does that satisfy step two? And then what sort of can of worms is opened by step 3? Suppose a community-action group claims that “If you pay us to set up a lending diversity program, we can bring you minority loans with acceptably low default rates,” does it have to prove its claim? If so, then this is actually harder on community-action groups than the current situation, in which all they have to do is threaten to sue and a bank will pay them protection money to make them go away.

I am only sort-of kidding. I would put the burden of proof to HUD to show that in recent years there has not been a lot more suffering caused by anti-discrimination regulations than by actual discrimination. And I am talking about suffering by people with “a protected characteristic.”

Alexander Field vs. Scott Sumner (and others)

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Field writes,

The thesis that massive monetary accommodation in the early 1930s could have almost entirely eliminated the output cost of the Great Depression needs to be reconsidered. Balance sheet considerations were likely implicated in the slow recovery then as well as now, and might have resulted in persistent output losses, even in the presence of different monetary policy.

In fact, the analysis behind this claim is certain not to impress Sumner, because Field views monetary policy in the recent crisis as accommodative and Sumner does not.

Later, Field writes,

whereas the real economy appears to have largely shrugged off the end of the residential real estate bubble in 1926, that does not appear to have been the case with the stock market crash of 1929 and the slow, sickening slide to a trough in 1932, marked as it was by some of the largest one day percentage increases in stock prices. And whereas the real economy appears to have largely shrugged off the collapse of the Tech stock bubble in 2000-2001, that does not appear to have been the case with the real estate collapse that began in early 2006…This asymmetrical real economy response to asset price deflation is associated with almost diametrically opposed opportunities for leveraged asset acquisition in housing and equities during the run ups to the two crises.

In other words, there is a parallel between buying houses with little money down in the recent period and buying stocks on margin in the 1920s.

Some other points.

1. In both circumstances, the leverage created in the financial sector was even greater than that among households. Think of the thin capital margins that banks had for their mortgage security portfolios. Think of the stocks that were issued in the 1920s merely to buy other stocks.

2. Field’s view that the real estate collapse of the 1920s was relatively harmless runs explicitly counter to that of Steven Gjerstad and Vernon Smith.

3. Field notes that in the 1920s the housing collapse was larger in construction volume but much smaller in house prices than the recent collapse. I imagine that one explanation for this is that in the early 19th century there was much less land use regulation, so that the supply elasticity of housing was greater.

George Lakoff and the Three-Axes Model

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He writes,

These ideas are placed into public discourse via a sophisticated conservative communications machine: think tanks, messaging experts,Grover Norquist’s weekly meetings at Americans for Tax Reform and across the country, training institutes, booking agencies, talk radio, Fox News, Rupert Murdoch’s media empire, chambers of commerce, bloggers and the rest. This network puts those words and their frames, both political and moral, into the brains of a huge number of our citizens.

In my forthcoming e-book, I point out that each political tribe puts forth a narrative that blames the existence of the other tribe on a conspiracy of this kind. Lakoff lists the standard villains from the progressive point of view. For conservatives, it is “Hollywood” and the “mainstream media” that are to blame for people’s false consciousness.

In fact, Lakoff is most famous for Moral Politics, in which he argues that the difference between conservatives and progressives is that conservatives use a “strict-father” morality to evaluate public policy and progressives use a “nurturant parent” model. Never does Lakoff recognize that equating government-citizen and parent-child is a mistake.

Libertarians think that the false consciousness of people comes from academics such as Lakoff. For decades, we have hoped to change the narrative within universities.

Ralph Raico and the Three-Axes Model

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Don Boudreaux offers an hour-long video of a talk by Ralph Raico in 1986. I found it well worth watching.

In three-axis terms, Raico begins his talk by saying that we consistently are taught to think of the role of government during the Industrial Revolution along the oppressor-oppressed axis. He ends his talk by saying that the welfare state’s origins in Germany should be viewed along the freedom-coercion axis.

In my forthcoming e-book on the three-axis model (not sure when it will appear, because I have just begun the process), I point out that every partisan blames the media for pushing the (false) narratives of the other side. Thus, it is quite typical for libertarians to complain about the false narrative of the Industrial Revolution and to try to supply the “true” narrative.

Having said that, and keep in mind that I put myself in the libertarian camp, I think that Raico makes a very good case, at least in the first half of the talk. That is, progressives tell a story in which whenever laissez-faire breaks out for a while, it has horrible consequences in terms of oppression, until government rescues the common man. A quarter-century after his talk, that is exactly how progressives tried to frame the financial crisis. Concerning the Industrial Revolution, this oppressor-oppressed narrative with government as savior is, as Raico points out, a baloney sandwich.

A Development to Watch

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From a WSJ blog.

Wages rose 3.4% from 2011 to 2012 for full-time workers in computer and mathematical occupations, 5.1% for accountants and auditors, 7.5% for electrical engineers, and 4.4% for mechanical engineers.

…For job seekers across the occupational spectrum, bigger paychecks for the most sought-after workers could signal higher turnover and faster wage growth throughout the economy.

But the ratio of employment to the working-age population remains abysmally low, and unemployment among workers under 30 remains abysmally high. I would think that if you’re an aggregate-demand, Phillips-Curve type of guy, you have to forecast continued low wage growth. If instead we see bigger paychecks “across the occupational spectrum,” what sort of AD story could you tell?

Ronald Coase on the State of Economics

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He writes,

In the 20th century, economics consolidated as a profession; economists could afford to write exclusively for one another. At the same time, the field experienced a paradigm shift, gradually identifying itself as a theoretical approach of economization and giving up the real-world economy as its subject matter. Today, production is marginalized in economics, and the paradigmatic question is a rather static one of resource allocation. The tools used by economists to analyze business firms are too abstract and speculative to offer any guidance to entrepreneurs and managers in their constant struggle to bring novel products to consumers at low cost.

Pointer from Jason Collins.

As a counter-example, I offer Information Rules, by Varian and Shapiro. And note that Varian was hired by Google and has played a significant role there. Coase later writes,

Today, a modern market economy with its ever-finer division of labor depends on a constantly expanding network of trade. It requires an intricate web of social institutions to coordinate the working of markets and firms across various boundaries. At a time when the modern economy is becoming increasingly institutions-intensive, the reduction of economics to price theory is troubling enough. It is suicidal for the field to slide into a hard science of choice, ignoring the influences of society, history, culture, and politics on the working of the economy.

I really like the phrase “increasingly institutions-intensive.”

John Papola on the State of Economics

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From a post on Facebook:

More than ever I am convinced that the professional study of economics peaked in the classical liberal era with John Stuart Mill and rapidly became a mostly destructive force in society thereafter. What was once an area of inquiry dedicated to counteracting intuitive-yet-bad ideas has overwhelmingly devolved into a pseudo-scientific industry of naval-gazing in support for some of the worst fallacies these classical thinkers devoted their lives to refuting, such as utterly absurd claims like “consumption increases output”.

My current theory for why this has occurred is that the classical thinkers were a diverse group with many of them devoting their lives to actual value creation for other people through commerce and most of them multi-disciplinary polymaths. They had an integrated view of the world that was rich and realistic. All of that has been sandblasted into oblivion. This seems to be the result of the mathematization and hyper faux-specialization of the “economics profession”, combined with the fact that most employment opportunities for economists are in academia (where the real world is irrelevant) or government directly (same problem, worse incentives).

If you want to glimpse economics from the inside, read Miles Kimball on three goals for Ph.D courses.

My instinct is that the profession is not as bad as Papola portrays it, although I have sympathy with where he is coming from.

1. I see strong gains in economic history, understanding the causes and consequences of economic growth, finance theory, mechanism design, game theory, and other areas. Yes, there is over-hyping, but I believe that the progress is genuine.

2. In academic economics, the emphasis is on “tools,” meaning mathematical techniques. This crowds out thinking either about deep philosophical issues or the real world. I wish that philosophical rigor were emphasized as much as mathematical rigor. In terms of the real world, what troubles me most about economists’ mindset is the failure to appreciate the importance of conflict within organizations and radical ignorance/uncertainty.

3. Macro is a disaster area. I have said before that it ought to be relegated to a “history of thought” course, rather than given equal billing with micro. But hardly anything else in economics is as bad as macro.

4. For a long time, applied econometrics was a disaster area. What Angrist calls the “credibility revolution” has helped, I think, although again there is over-hyping.

5. I have said before that I think that the economics profession is far too heavily influenced by a few “top” departments. I do not know how much worse things are in economics than in other disciplines. But in economics, the control that MIT, Chicago, and Harvard exert is so strong that they can pull several generations of economists in the wrong direction. Tyler Cowen cites relevant data and remarks,

It has been evident for a while that the former “top six” is in some ways collapsing into a “top two,” namely Harvard and MIT.

It is a self-perpetuating, in-bred, smug, narrow guild. I do not know what to do about it.

Jeremy Stein on Credit Markets

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His says,

a fundamental challenge in delegated investment management is that many quantitative rules are vulnerable to agents who act to boost measured returns by selling insurance against unlikely events–that is, by writing deep out-of-the-money puts. An example is that if you hire an agent to manage your equity portfolio, and compensate the agent based on performance relative to the S&P 500, the agent can beat the benchmark simply by holding the S&P 500 and stealthily writing puts against it, since this put-writing both raises the mean and lowers the measured variance of the portfolio.7 Of course, put-writing also introduces low-probability risks that may make you, as the end investor, worse off, but if your measurement system doesn’t capture these risks adequately–which is often difficult to do unless one knows what to look for–then the put-writing strategy will create the appearance of outperformance.

The whole speech is a must-read. One more excerpt:

Quantifying risk-taking in credit markets is difficult in real time, precisely because risks are often taken in opaque ways that escape conventional measurement practices. So we should be humble about our ability to see the whole picture, and should interpret those clues that we do see accordingly.