The Macro Book: An Update

I think that the basic approach is now stable. I might have a draft completed by the end of October. It is now a drama in four acts (have I said that before?). I have no idea how it will work for readers, but if I try appealing to an imaginary reader, I can’t write the book at all. As Ricky Nelson sang, “you can’t please everyone, so, you’ve got to please yourself.”

The “drama” approach allows me to speak favorably of points of view that I do not really share. I make a case for DSGE models. I try to make Scott Sumner’s case. Below the fold are some excerpts from the current version of the book.
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Lifted From the Comments

On this post, Jeff R. writes

The uncharitable view of liberal empathy is that humans did not evolve to feel empathy in order to solve problems; empathy exists because it helped our ancestors build and strengthen coalitions and outcompete other coalitions to ascend the status hierarchies of their tribal/feudal world.

There are two kinds of empathy: cognitive empathy (being able to gauge others’ thoughts or perspectives) and affective empathy (being able to gauge others’ emotions and attitudes). Cognitive empathy helps us guess what our adversaries are thinking and perhaps anticipate their actions; it is this capacity which made Robert E. Lee a great military leader and Boris Spassky a great chess player. It has tremendous value in the modern economy for entrepreneurs and managers, helping them predict what new products and services consumers (many of whom will have much different tastes and preferences from their own) might want to buy and how much they’d be willing to pay for them.

Affective empathy isn’t actually very useful for solving problems of any real complexity. It’s primary usefulness is enhancing group cohesion. We praise people who demonstrate affective empathy merely because we recognize that they’d make a good and loyal ally, and we want to signal to our existing allies that they should empathize more with us. Affective empathy is thus reduced to a crude Machiavellian tool for attaining (and retaining) power and social status. Liberals have much of this latter kind of empathy and somewhat less of the former.

One might think that we would evolve low-cost ways to signal affective empathy. For example, putting a political bumper sticker on your car is cheaper than making a large donation to charity.

The Wall Street Menace

1. Stephen G Cecchetti and Enisse Kharroubi write,

we find that manufacturing sectors that are either R&D-intensive or dependent on external finance suffer disproportionate reductions in productivity growth when finance booms. That is, we confirm the results in the model: by draining resources from the real economy, financial sector growth becomes a drag on real growth.

Pointer from Mark Thoma.

2. James Kwak writes,

According to Wilmarth, the fundamental problem, and the reason things don’t get significantly better, is the political power of major financial institutions.

He refers to this article.

Pointer also from Mark Thoma.

I would add that the proposed housing finance “reform” in Corker-Warner is exactly what Wall Street wants. If enacted, it will move essentially all of the risk in housing finance to the shadow banking sector. My guess is that interest-rate risk will prove to be the next bomb to go off, and it will not have a very long fuse.

Two Recommendations From Reihan Salam

I. On higher education, he recommends a proposal for a $10,000 degree, written by Anya Kamenetz. She concludes,

Making college affordable—without loans—by stripping it of its perks, refocusing the mission on education, using new technology in a blended learning model, and cutting administrative costs could be one of the most important economic boons for the middle class and the poor. Graduating students with massive debt—and even worse, failing to graduate students who acquire massive debt—is the worst way to start young people toward meaningful and productive lives. Change is hard, but colleges need to do so to fulfill their mission of preparing subsequent generations to succeed.

If you’re so smart, why aren’t you an entrepreneur? That is, what is stopping someone from starting a college like this and making a killing? Some possibilities:

1. The credentials cartel is too strong. You cannot get accreditation unless you waste a lot of money on admin, old-fashioned teaching methods, and non-educational resources.

2. The consumers are too stupid. Students will not to go low-cost, efficient schools. They would rather run up big debts an high-cost, inefficient schools.

3. Entrepreneurs are stupid. Only policy wonks can come with ideas like this.

I have to say that I really get annoyed when policy wonks write as if the answer is (3). The whole Obamacare thingy fits in that category. If health insurance exchanges are the answer to affordable health insurance, what was stopping entrepreneurs from creating them? (And if your answer is “moral hazard,” your assignment is to read David Hogberg’s essay, which describes the logic of paying the fine until you get sick under Obamacare) What is it that is stopping insurance companies from compensating doctors on the basis of outcomes rather than procedures, if that is so great?

II. On poverty programs for an Average is Over world, he recommends an article by Oren Cass, who writes,

Rather than have numerous federal agencies each administer numerous programs, the federal government would ideally have a single agency apply a formula, establish the year’s lump-sum payment for each state, and transfer the funds. Call it the Flex Fund. States happy with the existing funding allocations and program structures could continue to apply the funding as they do today. But states with better ideas—even radically different ones—would be free to pursue them.

Also,

An adjustment in benefit types offers the best opportunity to incentivize work without slashing benefits or increasing spending. Two families—one whose head of household works, one whose head of household does not—may both need $3,000 worth of nutritional support. But if the non-working household receives the $3,000 in food stamps while the working household receives it as cash via a wage subsidy, the latter might feel substantially better off. While the Affordable Care Act draws an arbitrary line, providing Medicaid to those below 138 percent of the poverty line and a subsidy for private insurance to those above 138 percent of the poverty line, the benefit could instead be provided as Medicaid for those who do not work and, for those who do work, as additional cash provided via wage subsidy.

Changing some income-support programs to wage subsidies sounds like a good idea to me. The Flex Fund I’mm no so sure about. Many wonks have thought in terms of replacing food stamps, Medicaid, and the rest with a simple cash assistance program. Cass is suggesting replacing all the Federal programs with a state program. Will the states make fewer mistakes with the money than individual poor people? My guess is “no.” Also, if the money comes from the Federal government, how strong is the incentive for states to use it well? If a state puts together an inefficient transfer system, funded by the Feds, how much will voters care?

Genes and Environment

This week’s links from Jason Collins are interesting, as usual. For example, Alison Gopnik writes,

When psychologists first started studying twins, they found identical twins much more likely to have similar IQs than fraternal ones. They concluded that IQ was highly “heritable”—that is, due to genetic differences. But those were all high SES twins. Erik Turkheimer of the University of Virginia and his colleagues discovered that the picture was very different for poor, low-SES twins. For these children, there was very little difference between identical and fraternal twins: IQ was hardly heritable at all. Differences in the environment, like whether you lucked out with a good teacher, seemed to be much more important.

If you read this paragraph, you may pick up inferences that I suspect are not supported by the data. One inference is that IQ is not heritable among low-SES children. I do not know much about genetics, but it is hard for me to see how a characteristic can be heritable at one SES level but not at another. Yes, I can see how a characteristic can be affected by the environment at one income level but not another.

The other inference is that what accounts for the difference in IQ between two low-SES children could be having “lucked out with a good teacher.” There is no evidence that teachers have anything to do with this.

College: Who is the Consumer?

Mike Gibson has a piece on the bundle that is college education.

Taken together this is like an awful cable TV package. To get HBO, you also need to pay high prices for all those unwatchable stations like the Hallmark Channel. The future of higher education will involve unbundling this package and offering cheaper, higher quality substitutes.

Many of us have said that there is some potential to unbundle college. Gibson points to Reid Hoffman’s recent piece on separating out the credential.

Ten years ago, I wrote,

A generation from now, the most successful colleges may be the ones that provide the best aesthetics, while outsourcing the actual function of education.

It may be a mistake to make forecasts about the economics of college based on what we presume that students want, or even based on what we presume that parents want. Suppose that the most influential consumers of college are government and wealthy donors. If those consumers want bundling, then they will get bundling.

Consider the possibility that the biggest implication of Average is Over is the growth of toadyism. Be careful about predicting the evolution of goods and services based on consumer sovereignty. Instead, make your predictions on the basis of what will help in pleasing the very rich and the politically powerful.

What do Low Unemployment Insurance Claims Tell Us?

Scott Sumner raises the issue.

with today’s numbers (308,000 on the 4 week average) we have fallen below the 0.1% level, meaning that fewer than 1/1000ths of Americans now file for unemployment comp each week. That’s not just boom conditions, it’s peak of boom conditions. The only other times this occurred since 1969 (when unemployment was 3.5%) were just a few weeks at the peak of the 2000 tech boom and a few weeks at the peak of the 2006 housing boom. In other words, the puzzle is now even greater than 6 weeks ago, as the unemployment rate is still at recession levels (7.3%.) Something very weird is going on in the labor markets.

Some possibilities:

1. We are in a “slow-churn” economy, with fewer jobs being created or destroyed.

2. The financial crisis time-shifted layoffs from 2010-2013 back to 2008-2009. Without the financial crisis, firms would have gradually noticed that they were carrying unproductive workers. The financial crisis made them realize this suddenly. By now, the companies are lean and do not need to shed anyone. As a result, the unemployment rate, instead of climbing steadily from 5 percent to 7 percent, first overshot and is in the process of dropping back.

3. Michael Mandel is right, and the unemployment rate is poised to drop swiftly.

The Toady Class On Average is Over

Random notes from a discussion of Tyler Cowen’s Average is Over:

Michael Mandel is optimistic. He thinks that the baby boomers are about to retire in droves (in part because of health reasons), helping to solve the unemployment problem of the young. Tyler, Robin Hanson, Megan McArdle, and I are unpersuaded.

Tyler pictures an economy evolving over the next twenty years to one with a slice of high earners (the 20 percent or so whose skills complement the ever-expanding power of computers) and then a large group that lives comfortably but without a financial cushion to protect against adverse shocks to health or other major risks.

Matt Yglesias wonders how, in a world that requires technical skill and social skills, those of us in the room have survived. It seems that most work for think tanks, newspapers, and other non-profits. Tyler replies that our presence in the room is indicative of marketing skills. Each of us has proven adept at marketing, with wealthy donors as our consumers in most cases. Steve Teles points out that as society’s rich accumulate wealth beyond what they can consume, their philanthropic ideas will, for better or worse, allocate society’s resources. Afterward, it occurs to me that this suggests that there will emerge a toady class, meaning people whose work in one way or another flatters the wealthy.

James Manzi points out that many people work in fields where output is hard to evaluate, such as education and health care, and I would add that entry to these fields is restricted by credentials. Tyler thinks that as we gather more data we will overcome our inability to evaluate performance sooner than people expect. If that is correct, then the credentials cartel would seem to be destined to fall. I believe that a lot of the thesis of his book stands or falls on whether such data-driven evaluation systems pan out. He would agree that we are far away right now, but he would argue that progress is fast.

What most concerns the discussants, including McArdle, William Galston, Jonathan Rauch, and Brink Lindsey, are the social implications of losing the middle class. (Hanson comments on this focus.) Tyler insists that societies will not fracture, nor will redistributionist demagogues take power. Factors favoring stability include aging, surveillance technology, the skill of the rich at controlling the political environment, nativism, NIMBYism, and the basic comfort achieved by the lower class. He points out that Britain and Germany are farther along than the U.S. in the growth of the new lower class, and their societies appear to be stable–Merkel just won re-election by a wide margin.

Tyler says that in the long run mood-altering drugs may be a solution. Teles suggests that Tyler’s next book will be The Great Medication.

Civilization vs. Barbarism Watch

A reader points me to a story in Wired.

The prevalence of gun crimes in Chicago is due in large part to a fragmentation of the gangs on its streets: There are now an estimated 70,000 members in the city, spread out among a mind-boggling 850 cliques, with many of these groupings formed around a couple of street corners or a specific school or park. Young people in these areas are like young people everywhere, using technology to coordinate with their friends and chronicle their every move. But in neighborhoods where shootings are common, the use of online tools has turned hazardous, as gang violence is now openly advertised and instigated online.

My guess is that this sort of story will freak out conservatives. But my guess, and this is somewhat supported by anecdotes in the story, is that social media will not turn out to be a long-run boon to the forces of barbarism.

Note that much of the description of gang behavior favors Mark Weiner, not Michael Huemer.

Christopher L. Smith on Job Polarization

Recommended. A few highlights:

the inflow rate to middle-type jobs from unemployed formerly non-middle-type workers appears to be falling over time. Further, these transition rates appear to drop discretely following the 1990, 2001, and most recent recessions.

There is no evidence of an increase in the rate at which unemployed middle-type
workers transition to non-middle-type jobs (bottom middle plot). Instead, there
is an upward trend in the rate at which these workers remain non-employed,
though this is true of unemployed workers of all types…

For all horizons, the rate at which persons from low- or middle-type jobs transition to high-type jobs is rising over time… This is particularly true for the transition rates from middle-type jobs.

Conversely, the rate at which persons transition from low-type jobs to middle-type jobs is falling over time…

Later, he suggests that it is workers 55 and older who are transitioning out of (I assume losing) middle-type jobs, while it is younger workers who are not transitioning into middle-type jobs.

Pointer from Tyler Cowen, although I had seen an article on the paper somewhere else, also.