Tyler Cowen Juxtaposes

There is this.

whoever you think the four most likely Americans to be the next president of the United States—who are probably Ted Cruz, Donald Trump, Bernie Sanders, and Hillary Clinton—none of them are in favor of TPP.

That is a quote from Larry Summers.

Then there is this:

Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize.

That is from David H. Autor, David Dorn, and Gordon H. Hanson.

Politicians, unlike tenured academics, have to cater to what the authors call “exposed workers.”

But note that the last sentence in the quote from Autor, et al. Does it not sound like the PSST story for recessions?

Dean Baker on Health Industry Economics

He writes,

Ordinarily economists treat it as an absolute article of faith that we want all goods and services to sell at their marginal cost without interference from the government, like a trade tariff or quota. However in the case of prescription drugs, economists seem content to ignore the patent monopolies granted to the industry, which allow it to charge prices that are often ten or even a hundred times the free market price.

Pointer from Mark Thoma.

His point, with which I agree, is that we should try to find other ways to subsidize drug research, so that drug prices will be closer to manufacturing cost, which is low.

Otherwise, I disagree with a fair amount of his post. I do not think that the wage rate of American doctors is notably high relative to their foreign counterparts. Keep in mind that American wages in general are higher, so that opportunity costs are higher. Keep in mind that American doctors tend to work longer hours. Finally, keep in mind that the mix of American doctors is much more skewed toward specialists than the mix in other countries.

In Crisis of Abundance, I looked at various possible explanations for the high rate of health care spending in the U.S., and I decided that the relative price of medical services is not such a big factor. The main factor is that we utilize many more services that have high costs and low benefits. A government-run health care system, which Baker advocates, ultimately would have to address this issue through refusing to pay for services as readily as we do now. A more market-oriented system would force people to decide for themselves when a procedure has expected benefits that are low relative to costs and hence not worth undergoing.

Machine Learning and Holdback Samples

Susan Athey writes,

One common feature of many ML methods is that they use cross-validation to select model complexity; that is, they repeatedly estimate a model on part of the data and then test it on another part, and they find the “complexity penalty term” that fits the data best in terms of mean-squared error of the prediction (the squared difference between the model prediction and the actual outcome).

Pointer from Tyler Cowen.

In the early 1980s, Ed Leamer caused quite a ruckus when he pointed out that nearly all econometricians at that time engaged in specification searches. The statistical validity of multiple regression is based on the assumption that you confront the data only once. Instead, economists would try dozens of specifications until they found one that satisfied their desires for high R-squared and support for their prior beliefs. Because the same data has been re-used over and over, there is a good chance that the process of specification searching leads to spurious relationships.

One possible check on the Leamer problem is to use a holdback sample. That is, you take some observations out of your sample while you do your specification searches on the rest of the data. Then when you are done searching and have your preferred specification, you try it out on the holdback sample. If it still works, then you are fine. If the preferred specification falls apart on the holdback sample, then it indicates that your specification searching produced a spurious relationship.

Machine learning sounds a bit like trying this process over and over again until you get a good fit with the holdback sample. If the holdback sample is a fixed set of data, then this would again lead you to find spurious relationships. Instead, if you randomly select a different holdback sample each time you try a new specification, then I think that the process might be more robust.

I don’t know how it is done in practice.

Market Monetarism Watch

David Beckworth, with Romesh Ponnuru, makes the NYT.

It took a bigger shock to the economy to bring the financial system down. That shock was tighter money. Through acts and omissions, the Fed kept interest rates and expected interest rates higher than appropriate, depressing the economy.

In a way, this is an easy argument to make.

1. A recession is, almost by definition, the economy operating below potential.

2. Operating below potential is, almost by definition, a shortfall in aggregate demand. The only other type of adverse event is a supply shock, which reduces potential but does not force the economy to operate below that reduced potential.

3. The Fed controls aggregate demand.

4. Therefore, all recessions are the fault of the Fed. Either by commission or omission, the Fed has messed up if we have a recession.

It is an easy argument to make, but I believe close to none of it. I do not believe in the AS-AD framework. And I do not believe (3). If you do not know why I have my views, go back and read posts under the categories “PSST and Macro” and “Monetary Economics.”

My view is that the housing boom and the accompanying financial mania helped hide some underlying adjustment problems in the economy. The crash, the financial crisis, and the response to that crisis all helped to aggravate those underlying adjustment problems. I suspect that, on net, the bailouts and the stimulus diverted resources to where they were less useful for maintaining employment than would have been the case if the government had not intervened. My basis for this suspicion is my belief that people who do not need help are often more effective at extracting money from the government than people who do need it.

There has been much other commentary on the op-ed–see Scott Sumner’s post.

Update on Computers Playing Go

From Bloomberg:

Jon Diamond, president of the British Go Association, said machines are five to 10 years ahead of where he expected them to be. “It’s really quite a large, sudden leap in strength,” he said. “This is a significantly better result than any other computer Go program has achieved up to now.”

Technology that improves exponentially will do that to you. Once somebody has a program that is sort of on the right track, you feed it more data and give it more processing power. Once the computer starts to get in the same range as the human, it very quickly races past and leaves the human in the dust.

As Tyler Cowen Alex Tabarrok puts it,

Win or lose, I will bet that Lee Sedol is the last human champion the world will ever know.

Why Measure GDP?

EconoSpeak writes,

The questions we need to ask are: What do we really want to know and why? What purposes were we pursuing when we sought to measure economic activity? Is measuring GDP helping to achieve those purposes? Are those purposes still our priorities? If not, what should be? What different institutions might we invent to achieve our purposes as we NOW understand them?

Pointer fromMark Thoma, whose column stimulated the post quoted above.

Some possible reasons to measure GDP:

1. To provide an indicator of the economy’s capacity to produce the goods needed to win a war (including necessary consumer goods as well as arms).

2. To provide a measure of the economy’s ability to provide for consumer welfare.

3. To compare productivity across countries and over time.

4. To indicate the extent to which an economy is in a recession.

5. To measure economic activity at market prices.

I think that (1) would have been most useful around the time of World War II, when the outcome was very much affected by this sort of productive capacity. It probably is less useful today.

I think that (2) is a very interesting measure. But (a) why not just focus on goods and services consumed? (b) you need to think a lot harder about how to measure consumers’ surplus (c) you have to think a lot harder about how to measure the consumption services from durable goods, particularly housing (d) you need to think a lot harder about what Thoma refers to as “bads,” like pollution.

I think that (3) is useful, but stop pretending that you can be accurate to at least two significant figures. When someone says that productivity growth changed from X over a five-year period to Y over the subsequent five-year period, their view of the signal-to-noise ratio in the data is much more optimistic than mine.

I think that (4) relies too much on the AS-AD framework, to which I do not subscribe.

I think that (5) is useful, but our current approach is wrong. Most government services are not sold at market prices, and so I would exclude them from this sort of measure.

Dealers vs. Brokers in Housing

Tyler Cowen points to a WSJ story about a start-up that will buy your house and flip it, so that you don’t have to spend time selling it.

In securities markets, we differntiate between brokers and dealers. A broker brings together buyers and sellers. A dealer buys from sellers, holds securities in inventory, and sells to buyers out of this inventory.

One challenge with trying to be a housing dealer is that it adds another transaction in a market where transaction costs are artificially high. Some jurisdictions have transfer taxes. You might have to pay for an extra title search. Another home inspection. Etc. Also, while a security still accrues interest while it is in inventory, an unoccupied house does not generate rent.

Impressions from Israel

I am back now.

1. There is a construction boom underway. My best guess is that until recently household formation grew faster than supply, but now the opposite is going to happen. I believe that there are long lags between intent to build and completion. Perhaps projects that complete after the middle of next year will face some downward price pressure, although that seems inconceivable to Israelis.

2. The Israeli center-left seems bereft at the moment. They perceive themselves as lacking leaders. Netanyahu faces stronger threats from the right than from the left. No politician can get away with advocating a policy based on trust and confidence in Palestinian leaders.

3. My center-left friends, who were enthusiastic about Obama in 2008, feel very differently now. I think that on a scale of 1 to 10, where I might rate his foreign policy as about 4, they seem to rate it lower than 2. They believe that Europeans are similarly disillusioned with Obama. I have no first-hand evidence for or against that.

4. They don’t know what to make of U.S. politics. Israelis whose sympathies lie with Democrats have trouble grasping Hillary Clinton’s struggles. Those who align with Republicans cannot grasp what has happened to establishment candidates there. I cited Martin Gurri frequently.

5. On security, I never felt danger, nor did I sense an increased presence of guards.

6. What will Israeli Arabs do? There is a case for saying that rationally they are fortunate to be living in Israel, and polls show that close to half feel that way. In the Haifa area, there are middle-class Arab families moving into Jewish neighborhoods. But I would guess that ethnic identity and resentment are potentially strong.

The Quotable James Bartholomew

He writes,

It’s noticeable how often virtue signalling consists of saying you hate things. It is camouflage. The emphasis on hate distracts from the fact you are really saying how good you are. If you were frank and said, ‘I care about the environment more than most people do’ or ‘I care about the poor more than others’, your vanity and self-aggrandisement would be obvious, as it is with Whole Foods. Anger and outrage disguise your boastfulness.

I think this is spot on. It may help explain some of the anger in political discussions.