Monthly Archives: September 2016

Haidt, Cosmides, and Tooby on Socialism’s Attraction

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Self-recommending. I went to the event with high expectations, and I was not disappointed. I will post on the substance once I have watched a re-run. Each of the speakers had problems. Jonathan Haidt was flustered by technical difficulties which delayed the start of his talk. Leda Cosmides had a sore throat from a cold. And John Tooby reminded me of Paul Samuelson, in that it appeared that his mind was working much faster than he could talk, giving the listener the feeling of missing out on insights that were in the speaker’s head but never made it out of his mouth.

In general, I wish the event had been longer.

Paul Romer, Macroeconomics, and Trouble

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Romer writes,

In the last three decades, the methods and conclusions of macroeconomics have deteriorated to the point that much of the work in this area no longer qualifies as scientific research. The treatment of identification in macroeconomic models is no more credible than in the first generation large Keynesian models, and is worse because it is far more opaque. On simple questions of fact, such as whether the Fed can influence the real fed funds rate, the answers verge on the absurd. . .The larger concern is that macroeconomic pseudoscience is undermining the norms of science throughout economics. If so, all of the policy domains that economics touches could lose the accumulation of useful knowledge that characteristic of true science, the greatest human invention.

Pointer from Mark Thoma. I am on board with the above passage, but soon Romer writes

To appreciate how far backwards our conclusions have gone, consider this observation, from a paper published in 2010, by a leading macroeconomist:

… although in the interest of disclosure, I must admit that I am myself less than totally convinced of the importance of money outside the case of large inflations.

Romer could be talking about me, except for the “leading macroeconomist” part.

Anyway, he goes on to argue that the disinflation that took place in the early 1980s is evidence that monetary policy matters. My comments.

1. I agree that for those (few) of us who doubt the importance of monetary policy, the “Volcker disinflation” represents the most difficult data point.

2. Still, Romer appears to me to distort things. He calculates a rise in the real interest rate of 5 percent. But I believe that a lot of that comes from inflation falling–not just the Fed raising nominal rates.

3. Long-term interest rates rose dramatically as well. Arguably, the “Volcker disinflation” should be called the “bond-market vigilante disinflation.”

4. In general, although much of Romer’s critique focuses on the identification problem and the challenge of teasing out causality, it is impossible for him (or anyone) to demonstrate that changes in the money supply are exogenous rather than endogenous.

Overall, I agree with Romer that the methodological challenges in empirical macro are daunting–I would say overwhelming. For my take, see Macroeconometrics: The Science of Hubris.

I am just quibbling over the one instance which he argues demonstrates an empirical truth.

Book Discussions

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If any readers are willing/able to organize a group interested in Specialization and Trade, I am willing/able to travel to talk with such a group. I think about 10-20 people would be a good size. I am particularly interested in speaking to autodidacts in their 20s and 30s.

There are several topics in the book which, in hindsight, could have been developed further. One of them that I have been thinking a lot about recently is the long shadow cast by World War II on economic thinking and policy. In the book, I do mention that all of the major nations fighting the war used central planning to a considerable extent. But other points are worth noting, including:

1. In Great Britain, major industries were nationalized from the post-war period all the way up to the late 1970s, when Margaret Thatcher took over as Prime Minister.

2. In the U.S., price controls were used during the war to fight inflation, and the belief in price controls died hard. If I recall correctly, many in the Truman Administration wanted to continue controls after the war, and they were disappointed when Congress abolished them. As late as the early 1970s, the Nixon Administration attempted to go the price-control route, with disastrous results.

3. Another challenge during the war and the post-war period was the potential for labor unions in key industries, such as steel and coal, to bring the economy to its knees. In the decades following the war, Presidents had to resolve major strikes by cajoling (or even forcing) industry and labor leaders to accept settlements. Finally in the 1980s, both Thatcher (coal miners) and President Reagan (air traffic controllers) won important confrontations with striking workers. Many on the left are still bitter about this. They long for the days when unions were more of a force.

4. Because the wartime economies were centrally planned, a lot of economic research involved developing tools for such planning. Prior to the war, the idea of representing an entire economy using mathematical symbols and equations to represent inputs and outputs was adapted from the Soviet Union by Wassily Leontief, who was awarded the Nobel Prize in 1973. After the war, MIT economists, notably Robert Solow (who had studied with Leontief at Harvard), thought that Leontief’s model of production was both too detailed and too rigid. They worked on solutions to the problem of optimizing output that involved linear programming, resulting in an important textbook on programming techniques by Joseph Dorfman (Harvard), Paul Samuelson, and Solow.

5. Also, the MIT economists developed and elaborated on the concept of an aggregate production function. This eliminates the detail by aggregating “capital” and “labor” inputs and treating the economy as a GDP factory. This generated an extensive, but now largely forgotten, literature, including the so-called Cambridge Capital Controversy.

6. The advantage of the aggregate production function is that there are mathematically tractable ways to represent substitution between capital and labor. The Constant Elasticity of Substitution production function, which includes Cobb-Douglas as a special case, was another topic that filled the journals of the early 1960s with now-forgotten articles. I recall that in the early 1970s one of my undergraduate professors, Bernie Saffran, pointed out to us that econometricians trying to estimate the CES production function were trying to tease second and third derivatives out of data where you could be lucky merely to find that the first derivative had the correct sign.

New Commanding Heights Watch

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Two posts from Matthew Klein.

First

96 per cent of America’s net job growth since 1990 has come from sectors known to have low productivity (construction, retail, bars, restaurants, and other low-paying services were responsible for 46 percentage points of total growth) and sectors where low productivity is merely suspected in the absence of competition and proper measurement techniques (healthcare, education, government, and finance explain the remaining 50 percentage points)

Second

since 1990. . .a whopping 88 per cent of the total rise in the price level boils down to four sectors of the US economy [health care, education, housing, and prescription drugs]:

Pointer from Tyler Cowen. There is much to chew on, and probably much to quibble about. What I want to suggest is that the relative price shifts involving the New Commanding Heights sectors of health care and education in relation to goods-producing sectors ought to be considered much more important than the comparatively trivial amounts by which the “aggregate price level” (a concept for which I have little use, but so be it) has wiggled around.

Over the past 25 years we have had major structural shifts in the economy. I claim that those structural shifts have played a larger role than monetary policy in the behavior of employment and “the aggregate price level.” But if you look at both the journalistic accounts and the academic literature, I am confident that you will find many more mentions of monetary policy than of structural change in interpreting economic events. If I had any influence, that would change.

Asking Different Questions

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Tyler Cowen writes,

note that essentially none of those income gains went to rural areas. That meant a 7.4% wage gain for larger cities — does the raise the import of the case for deregulating building?

I think that he took his figures from the Census report, but I cannot be sure. I think that “wage gain” should be “income gain,” but again I cannot be sure.

I would ask different questions:

1. Does it raise the import of the case for looking carefully at making cost of living adjustments that differ by location? If the cost of living fell in rural areas, then they had some real income gains. If the cost of living soared in larger cities, then they had less real income gains than are reported if one uses an aggregate price index as the denominator in a real income estimate.

2. In which location–rural areas or large cities–are government transfer payments a larger share of household income? My guess is that transfers make up a larger share in rural areas. In that case, in spite of (1), the report may under-estimate the relative economic strength of larger cities.

Two Random Thoughts on Artificial Intelligence

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I attended a talk and two panels, one of which was moderated by Alex Tabarrok.

1. Susan Athey said that companies like Facebook and Google are learning rapidly by doing many large randomized controlled trials. This gives them a way to lever their leadership positions. It suggests that “deep learning” might boost economies of scale.

2. Colin Allen suggested that if self-driving cars are programmed to stop for pedestrians, and pedestrians know this, pedestrians could become more reckless and aggressive. Hmmm.

Technical Difficulties

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I continue to have problems reaching this blog (which means I have a hard time updating it). Others are also reporting problems.

The best advice I have gotten has been to re-start my router. This has worked a couple of times, including just now. I have no idea why the router wants to stop talking to the site. It is fine with arnoldkling.com in general, but getting to arnoldkling.com/blog often fails, and logging into wordpress often fails.

An Abundance of Workers?

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I received an advance electronic copy of Ryan Avent’s forthcoming The Wealth of Humans. I have not read very far, but he seems to say that a major social problem these days is an over-abundance of workers. However, consider this WSJ blog post.

traits that are hard to define, but ever-present among good employees: professionalism, determination and adaptability and the ability to communicate, work together and take criticism. Or even just show up on time and follow a dress code.

The claim as that these soft skills are in short supply.

I am going to be old-school and say that whenever you see a “shortage” or an “over-abundance” you should ask what is wrong with the price mechanism. If you are having trouble finding workers with the traits that you want, then you are not paying enough for those traits.

Back to Avent. If there appears to be an over-abundance of workers, then what is going wrong? Maybe those individuals have, in Tyler Cowen’s evocative phrase, Zero Marginal Product. Also, it could be that the required marginal product is high because of minimum wages and labor market regulation. Or it could be that labor supply is reduced because of government programs that subsidize non-work and tax work.

Avent wants to assign a large causal role to capital equipment, especially smarter capital equipment. I think that is only one of the four forces, the others being: a shift toward the New Commanding Heights (education and health care) where soft skills matter more; factor-price equalization, meaning that foreign workers now compete more with domestic workers; and assortive mating, which breeds greater inequality.

When journalists and academics warn of a future with a job shortage, the cynic in me is inclined to say, “You mean a shortage of jobs that journalists and academics think of as appropriate for themselves.” Keep in mind that many colleges attempt to indoctrinate students that business is unfulfilling and profit is evil. But profit-seeking businesses are motivated to find uses for otherwise-idle productive resources. The fate of the next generation of Ryan Avents is not to be unemployable. Rather, some of them may end up in business jobs that journalists and academics might have trouble picturing themselves doing.

My Early Prediction of I-Phone’s Latest Innovation

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When I saw this story,

Now it’s headsets: spending on wireless headsets overtook wired ones last year, says Steven LeBoeuf, founder of Valencell, a developer of biometric sensor technology for wearable devices.

I was reminded that back in 2001 I wrote,

I can imagine a world in which everyone spends several hours a day wearing a headset. There will be a software industry devoted to building applications for the headset platform, which consists of earphones, a microphone, and something that I call a “tuner.”

It is an amusing essay to read–wrong in many respects, but actually quite prescient in others.