Monthly Archives: October 2015

Idiosyncratic Charts

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Kevin Erdmann writes,

there was little change in the share of securitized mortgages during any of the boom years from the mid-1990s to the height of the boom. The share of these pools was 57% in 1995 when rent inflation began to rise, it peaked at 62% by 2002 before the steepest moves in home prices, and then declined back to 59% at the end of 2005 when housing starts and home prices peaked.

Within this group, there was a shift to private pools, much of which were subprime. But, as we can see in the graph, there was a gradual shift from Ginnie Mae to private pools from about 1990 to 2003.

…After 2003, the GSE’s began to decline as a portion of the market also. It was during this period that private pools shot from about 10% to about 20% of the market, until the private pool market collapsed in 2007. This period was not associated with a rise in homeownership, and included the last period of sharply rising prices followed by two years of flat prices.

What I find idiosyncratic about the chart is that it is based (I think) on total mortgage debt outstanding. Also, he charts the share of mortgages, rather than total amounts. Both of those factors tend to make the chart tamp down changes in dollar mortgage flows.

One point is that the issuance of mortgages by agencies was affected by loan limits interacting with higher house prices. My guess is that the substitution of private mortgages for agency mortgages took place in locations where house prices were rising faster than the loan limits adjusted.

Yet another point is that a lot of lending was in the form of cash-out refinances (people using their homes as ATMs). I may be wrong, but I don’t think that FHA was in that business.

Another chart shows the increase in mortgage debt by income class. Kevin writes,

The proportion of mortgage debt held by the bottom 80% of households declined during this period [2004 to 2007].

What I would want to see is the behavior of the ratio of debt to equity by income class. Suppose that everybody is using their homes as ATMs. If a rich guy with a million dollar home raises refinances his $400,000 mortgage for $500,000 and a poor guy with a $100,000 home refinances his $90,000 mortgage for $100,000, then most of the new mortgage debt goes to the rich guy. But it’s the poor guy whose equity is disappearing.

Paging Daniel Klein

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Don Boudreaux writes,

The bad news is that 74 percent of these surveyed economists either disagreed, were “uncertain,” or expressed no opinion that such a huge hike in the minimum wage would cause substantial shrinkage of low-skilled workers’ job prospects.

My stream-of-consciousness reaction was this:

1. These economists must be mood-affiliating with sociologists, or other left-wing academics.

2. I’ll bet that non-academic economists would think about this question in a more detached, business-informed way.

3. This sounds like a project for Daniel Klein. Conduct a large survey of economists affiliated with academia and economists affiliated with businesses, and find out questions on which they differ. Interesting questions would include the one on the minimum wage, whether Obamacare is lowering health care costs, whether more inflation would be lead to better economic growth, . . .

Null Hypothesis Watch

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David Autor and co-authors write,

Although family disadvantage is strongly correlated with schools and neighborhood quality, the SES gradient in the sibling gender gap is almost as large within schools and neighborhoods as it is between them.

Read the whole paper, which focuses on the question of why males from low-income families do poorly–even more poorly than females from low-income families. I view the quoted sentence as throwing some cold water on Raj Chetty’s view that neighborhoods make a big difference.

Null Hypothesis Watch

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A reader points me to a piece by Dale C. Farran and Mark W. Lipsey, which studies the long-term effects of the TNVPK pre-kindergarten program.

As is evident, pre-K and control children started the pre-K year at virtually identical levels. The TNVPK children were substantially ahead of the control group children at the end of the pre-K year (age 5 in the graph). By the end of kindergarten (age 6 in the graph), the control children had caught up to the TNVPK children, and there were no longer significant differences between them on any achievement measures. The same result was obtained at the end of first grade using two composite achievement measures (the second created with the addition of two more WJIII subtests appropriate for the later grades). In second grade, however, the groups began to diverge with the TNVPK children scoring lower than the control children on most of the measures. The differences were significant on both achievement composite measures and on the math subtests. Differences favoring the control persisted through the end of third grade.

The null hypothesis is that educational interventions make no difference. Technically, the last two sentences suggest that the null hypothesis is rejected here. The intervention of sending kids to pre-K made their outcomes worse in a statistically significant way.

Read the whole article. This will create some cognitive dissonance for progressives who have faith in universal pre-K and also believe in using rigorous social science to guide policy.

And some cognitive dissonance for James Heckman. He argues that measurements at third grade are noisy, but lifetime outcomes favor pre-school education. Pointer from Mark Thoma. I think Heckman is really reaching.

Solution Disconnected from Problem

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From a WSJ profile of Raj Chetty.

High-mobility metro areas have a combination of greater economic and racial integration, better schools and a smaller fraction of single-parent families than lower-mobility areas. Integration is lagging in Atlanta, he said. “The strongest predictors of upward mobility are measures of family structure,” Mr. Chetty said.

His proposal: move poor children to high-mobility communities and remove the impediments to mobility in poor-performing neighborhoods. He now is working with the Obama administration on ways to encourage landlords in higher-opportunity neighborhoods to take in poor families by paying landlords more or guaranteeing rent payment.

Pointer from Tyler Cowen.

The problem is family structure. The solution is engineering the spatial/income distribution of households. The connection is not there for me.

And if the problem is a need to improve teacher quality, then the solution is not for economists to run regressions on test scores. The solution is to put the power in the hands of people who care about quality and are close to the situation (i.e., parents), not in the hands of teachers’ unions.

Proper Critiques of Economics

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Noah Smith writes,

some econ literatures are still crammed with mutually contradictory models for which the scope conditions are neither known nor specified. And the stock of existing theories is still enormous. In some areas, especially in macro, economists really do have theories that make almost any prediction, with no real way to choose between them except priors and politics. And many economists still have very little problem using modeling assumptions that have already been taken to the data with discouraging results.

Pointer from Mark Thoma. In his post, Smith tries to “score” various criticisms of economists. His post made me want to recycle a quote from Herbert Stein:

1. Economists do not know very much.

2. Other people, including politicians who make economic policy, know even less about economics than economists do.

[typo corrected]
Non-economists are responsible for many of the critiques of economists to which Smith gives a low score.

I have come to believe that economics is epistemologically difficult. That is, it is difficult to answer the question, “How do you know that?” Non-economists do not have much insight into this issue. Unfortunately, many economists lack insight as well.

The appeal of the mathematical approach is that it provides rigorous connections between assumptions and conclusions. The weakness of the mathematical approach is that it places tremendous pressure on one’s choice of assumptions. And, as Smith has pointed out, these choices are more arbitrary than they are in the hard sciences.

Economists can almost never directly test their assumptions. Milton Friedman famously suggested not worrying about direct testing. Instead, he proposed the indirect approach of testing predictions. In practice, however, this does not work, or at least it does not work cleanly.

One problem is that you can have two interpretive frameworks that both “predict” one observed phenomenon yet have different predictions about other phenomena about which we do not have precise observations. Consider the vast array of candidate explanations for the financial crisis, with widely varying implications about how one might try to prevent a recurrence.

Another problem is that when an anomalous observation appears to confound an interpretive framework, this fails to result in a decisive rejection of that framework. Instead, the framework is tweaked in order to accommodate the observation. So, when the huge fiscal contraction in the United States at the end of World War II did not lead to another Great Depression, the explanation might be “pent-up consumer demand.” When the inflation rate failed to obey the Phillips Curve in the 1970s, the explanation might be “supply shocks” and/or “higher expectations of inflation.”

If assumptions cannot be tested directly, and Friedman’s proposal to test predictions does not work, how will assumptions be chosen? The answer, all too often, is a combination of mathematical tractability and faddism. Economists will jump all over a model because it is fun to play with, regardless of how silly or irrelevant the set of assumptions may be. The overlapping-generations model of money would be a prime example.

My main concerns with mainstream economics include:

1. A bias toward “engineers” rather than “ecologists.” That distinction comes from Greg Ip’s new book, Foolproof. The engineer is like Adam Smith’s man of system, who ignores evolution, both as a factor that may permit markets to over come their own failures and as a factor that may cause government “solutions” to become obsolete.

2. A bias toward simplifying the phenomenon of specialization. Macroeconomists live in a world with one producer and one consumer (the “representative agent.”) Microeconomists live in a 2x2x2 world, with two factors of production, two goods, and two producers. They miss important differences between those worlds and the real world of millions of tasks being performed to lead to a final product.

Grumpy Monetary Economics

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John Cochrane writes,

I don’t think there really is such a thing as monetary policy any more. Money and government bonds are perfect substitutes. At that point, central bank interest rate setting is the same thing as if the Treasury simply decreed the rate it will pay on government debt. When (if) the Fed raises interest on reserves, and Treasury interest goes up similarly, it will be just as if the Treasury announced it will pay 1% on short term debt.

Read the whole post.

John Taylor, who claims to be the intellectual heir of Milton Friedman, says that the Fed’s big mistake was loose monetary policy prior to the financial crisis and the Fed is too loose now.

Scott Sumner, who claims to be the intellectual heir of Milton Friedman, says that the Fed’s big mistake was too tight monetary policy during the financial crisis and that the Fed is too tight now.

John Cochrane, who claims to be the intellectual heir of Milton Friedman, seems to be saying that these days the Fed is impotent.

I do not claim to be the intellectual heir of Milton Friedman. My views happen to be closest to Cochrane’s.

Clay Shirky’s Little Rice

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The book is centered on Xiaomi, a Chinese cell phone firm. I found the writing rather jumpy, almost ADD. Here are some random excerpts (each of these is from different parts of the book):

This focus on a handful of individual product lines in turn allows the company to stay small. Employees who have been through Xiaomi’s hiring process are told that the company’s goal is to hire as few people as possible, by concentrating on attracting and retaining talented employees.

China, remarkably, has managed to create an alternate path, building a country where information moves like people,, in highly identified and constrained ways

the usual modes of censorship and surveillance are no longer enough to keep control of public opinion, and the government is expanding its online propaganda efforts. The people who flood online conversations with pro-Beijing sentiment are . . .paid half a yuan for every post.

the People’s Liberation Army paper published one saying, “The Internet has grown into an ideological battlefield, and whoever controls the tool will win the war.”

Of course, the idea of trying to operate a firm with a relatively small cadre of talented employees sounds very reasonable to someone in the tech business. But note that it is quite different from old-fashioned economic models, in which you hire “labor” until marginal revenue equals marginal cost.

But the issue that I am still mulling is the role of social media in affecting the evolution of beliefs and behavior. My sense is that people’s dislike of “the other” has gone up quite a bit during the relatively short period in which social media went from a small niche phenomenon to a mass-market phenomenon.

Contrarian Betting/Forecasting

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Bryan Caplan writes,

I doggedly take the outside view. When long-run trends say X, and the “latest news” says Y, I go with X. When Democrats won big in 2008, I saw good luck, not a new political regime. That’s why, in 2009, I bet my former co-blogger Arnold Kling that the Republicans would regain control of one branch of the federal government by 2017. I won in 2010.

I sometimes think that there are two major types of investors. Momentum investors say that “the trend is your friend.” Contrarian investors say, “if something cannot go on forever, it will stop.” The former investors look at short-term developments. The latter investors look at long-term averages. If the long-term average in U.S. politics is that no party dominates for extended periods, then I was making a momentum bet, which is not what a good economist should do.

Read Bryan’s post, which talks about superforecasters looking first to general statistics (what proportion of households own pets) and then to specific factors (what about this family suggests pet ownership?). Momentum investors probably are more likely to look at specific factors.

Paul Romer on Growth

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He writes,

It is not enough to say “_________ explains why Malthus was wrong,” and to fill in the blank with such words as “technological change” or “discovery” or “the Enlightenment” or “science” or “the industrial revolution.” To answer the question, we have to understand what those words mean. As I’ll argue, there is no way to understand those words without understanding the more fundamental words “nonrival” and “excludable.”

…The second question, about missed opportunities, asks what that other variable might be. Once again, it is not enough to say that “many poor countries fail to take advantage of rapid catch-up growth because they ____________” and then fill in the blank with such words as “have bad institutions” or “are corrupt” or “lack social capital” or “are held back by culture.”

Pointer from Mark Thoma. I plead guilty to the second.