Category Archives: Mark Thoma is Indispensable

CBO under attack

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Marc Short and Brian Blase write,

The CBO’s methodology, which favors mandates over choice and competition, is fundamentally flawed. As a result, its past predictions regarding health-care legislation have not borne much resemblance to reality. Its prediction about the Senate bill is unlikely to fare much better.

1. Note that both authors work in the Trump Administration.

2. Sherry Glied and others wrote,

This analysis finds that the CBO overestimated marketplace enrollment by 30 percent and marketplace costs by 28 percent, while it underestimated Medicaid enrollment by about 14 percent. Nonetheless, the CBO’s projections were closer to realized experience than were those of many other prominent forecasters.

I would not take the position that there is an obviously better model than what the CBO uses. The problem in the policy environment is that CBO estimates are treated as scientific truth. This misleads participants in the policy process into believing that predicting the outcomes of policy is a science. This in turn biases policy toward aggressive intervention.

The false belief in economic science imposes a real cost. Legislators and bureaucrats become overconfident in their ability to manage market processes.

Catherine Rampell takes the opposite point of view as mine.

Contrary to the predictions of economists everywhere, the HHS propaganda document claims that the Cruz amendment would cause insurance coverage to go up and premiums to fall. Astoundingly, even premiums for people in the Obamacare-compliant plans — which, again, economic theory suggests would get stuck with only the very sickest, most expensive Americans — would allegedly decline relative to current law. (Compare “2020 Current Law Enrollment Weighted Average” to “2020 Silver ACA Compliant” in the chart below.)

This is garbage, and exactly why we need nonpartisan scorekeepers like the CBO.

Rampell is right to attack the memo that she criticizes. But she is wrong to wish to anoint the CBO as a scientific umpire.

Suppose that the CBO were asked to “score” the employment effects of a minimum wage increase, and suppose that their most preferred model projected a large decrease in employment. Would the Catherine Rampells and the Mark Thomas be so eager to say that “this is exactly why we need a CBO”–in order to settle the argument about the minimum wage?

If the science is not definitive with respect to the employment effect of the minimum wage, then it is surely not definitive with respect to the insurance-market effect of allowing health insurance companies to offer less comprehensive policies with lowerpremiums. The CBO should not be the ultimate arbiter of contested economic analysis.

Peter Turchin on mathematical modeling

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He writes,

Models clarify the logic of hypotheses, ensure that predictions indeed follow from the premises, open our eyes to counterintuitive possibilities, suggest how predictions could be tested, and enable accumulation of knowledge. The advantage of clarity that mathematical models offer scientists is nicely illustrated in the following quote from Economics Rules: “We still have endless debates today about what Karl Marx, John Maynard Keynes, or Joseph Schumpeter really meant. … By contrast, no ink has ever been spilled over what Paul Samuelson, Joe Stiglitz, or Ken Arrow had in mind when they developed the theories that won them their Nobel.” The difference? The first three formulated their theories largely in verbal form, while the latter three developed mathematical models.

Pointer from Mark Thoma.

Are you kidding me? The meaning of Arrow’s Impossibility Theorem has been endlessly debated.

With mathematical models in economics, the question is whether the conclusions of the model apply in the real world. That is something that cannot be settled mathematically. It often cannot be settled empirically.

If I had chosen to write a review of Turchin’s latest book, Ages of Discord, I would have devoted most of the review to criticism of Turchin’s statistical methods. I am quite confident that if you formulated his project as “Come up with a set of indicators that represent the concepts here,” there would be no consensus, and that almost no one would come up with the indicators that he selected. The overall thesis of the book might turn out to be right. But in terms of methods, it could be held up as the poster child of what Paul Romer calls “mathiness.”

Wal-Mart and Banking, Once Again

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Lawrence J. White writes,

it is exactly this demographic group—low- and moderate-income households—that is most in need of reasonably priced financial services. The percentage of U.S. households that are unbanked (i.e., do not have a bank account) or underbanked (i.e., have an account but rely on non-bank providers for some financial services and products) has been a longstanding policy concern. The most recent data (from a FDIC report that covers 2015) in this regard—based on a survey of more than 36,000 households nationwide—show that 7% of all households were unbanked and an additional 20% of all households were underbanked. Unsurprisingly, the percentages are substantially larger for low- and moderate-income households

Pointer from Mark Thoma. I wonder, though, whether Wal-Mart really has an advantage in serving these households as a bank. It is one thing to develop a great logistical system for moving products from far-flung suppliers to stores. It is another thing to deliver financial services to people with relatively low transaction sizes and more difficulty avoiding default.

The problem of overconfidence

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Chris Dillow writes,

overconfidence can be a form of strategic self-deception. A new paper by Peter Schwardmann and Joel van der Weele shows this. They got subjects to do intelligence tests and then selected some at random and told them that they could earn more money if they could convince other subjects that they had performed well on the tests. They found that the selected subjects were even more overconfident about their performance than non-selected ones.

Pointer from Mark Thoma.

We might ask when overconfidence will be selected for. Perhaps in sales. Perhaps in high-level executives. Almost certainly in politicians.

When will overconfidence be subject to checks and balances? My first thought is when firms face competition, profits, and losses.

When to break up the big banks

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Stephen G. Cecchetti and Kermit L. Schoenholtz write,

From our perspective, by raising the odds of an effective resolution, FIBA (as a complement to Dodd-Frank) boosts the credibility of the U.S. regime. Over time, foreign regulators also may be reassured that the Chapter 14 mechanism is similar to the FDIC’s SPOE strategy, which they have welcomed. In both cases, the regime’s credibility depends on the presence of living wills and adequate loss-absorbing capital.

Pointer from Mark Thoma.

No, I don’t expect you to be able to follow what they are saying, even if you read the whole post. What it boils down to, and this is a mainstream view, is that with the right tools in place, the next time a big bank gets into trouble, the regulators will be able to “resolve” it without a bailout.

In effect, they are saying that we do not need to break up big banks now, and in fact that would be a bad idea. But when a crisis comes along, then, by golly, that will be a marvelous time to break up the big banks. The way I see it, “resolution” is nearly synonymous with breakup.

Again, this is a mainstream view. But to me, it could hardly be more absurd. In the middle of a crisis, the appeal of an untried approach for breaking up big banks is going to be nil. If you cannot break them up now, when there is no crisis, you will never break them up. Bailouts are an absolute given.

The Labor Share Story

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Noah Smith writes,

There are, by my count, now four main potential explanations for the mysterious slide in labor’s share. These are: 1) China, 2) robots, 3) monopolies and 4) landlords.

Pointer from Mark Thoma. Smith’s essay is a useful summary. However, note that he writes this:

Matt Rognlie found that national income accounts showed an increasing amount flowing to owners of land. More recently, economist Dietrich Vollrath examined a paper by Simcha Barkai about rising profits, and found that profits from owner-occupied housing also rose sharply.

The national income accounts include a category called “imputed income from owner-occupied housing.” The term “imputed” is a fancy way of saying “made up.”

It is possible that the made-up numbers on income from owner-occupied housing make as much sense as anything else in the national income accounts. In that case, there might really be something going on that has increased the share of income accruing to land and reducing the share accruing to labor. But keep in mind that land is not homogeneous, and neither is labor. And keep in mind that if the ratio of house prices to income falls back to what Robert Shiller thinks is the normal level, these land-owners all of a sudden are not going to feel so rich.

Perhaps we need peer regulation in finance

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Guy Rolnik writes,

After acknowledging that the OCC knew of the issues within Wells Fargo as far back as 2010, it stated that “The OCC did not take timely and effective supervisory actions after the bank and the OCC identified significant issues with complaint management and sales practices.” The report also said that the team in charge of Wells Fargo “focused too heavily on bank processes versus what those processes were actually reporting” and “reached conclusions without testing or determining the root causes of complaints despite the existence of red flags.”

Pointer from Mark Thoma. Read the whole essay, which concludes,

Executives knew, board members knew (or should have known), and regulators knew almost all along, yet failed to do anything about it.

To me, this hints at the problems with the way that we currently try to deal with misbehavior on the part of financial firms. Top executives can be unreliable. Boards of directors are often unwilling or unable to delve deeply into operational issues. Regulators are just going through the motions.

There is one constituency that often really cares about financial firms that misbehave: their peers. When you lose customers to a firm that is using shady products and sales practices, you get angry. Unfortunately, the most profitable response is often to copy what the bad guys are doing.

I suggest creating a Financial Ethical Standards Board (FESB), which is analogous to FASB. FESB would provide a forum for discussing and offering guidance on ethics in the financial industry. If you see a competitor doing something unethical, you can take your complaint to FESB. FESB would have the ability to name and shame the wrongdoers, and it would have the ability to focus the attention of regulators.

I believe that a down side of FESB, or peer regulation in general, is that firms would try to use it to resist innovation that they find threatening but which in fact is not unethical. But I think that we can live with this potential down side in exchange for better regulation of the financial industry.

The way I see it, ordinary regulation simply gives clarity to banks about what they can get away with. As the banks adapt, ordinary regulation becomes ineffective, or even counterproductive. Peer regulation would be more adaptive. I believe it would be better, although nothing is perfect.

What Drives the Result?

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Douglas L. Campbell writes,

the Glick and Rose estimation strategy implicitly assumes that the end of the cold war had no impact on trade between the East and the West. Several of the Euro countries today, such as the former East Germany, were previously part of the Warsaw Pact. Any increase in trade between Eastern and Western European countries following the end of the cold war would clearly bias the Glick and Rose (2017) results, which naively compare the entire pre-1999 trade history with trade after the introduction of the Euro.

Pointer from Mark Thoma.

Campbell is criticizing a paper that found that the creation of the Euro increased trade by 50 percent. He is suggesting that the result could have been driven by the fall in the Berlin wall, which was not caused by the advent of the Euro. The question “what drives the result?” is one that you should ask about any empirical paper. Sadly, it is rarely disclosed honestly by authors, who may not even be aware of the answer.

War, State Capacity, and Economic Growth

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Jared Rubin looks at the literature which says that European states fought many wars, that this required them to add “state capacity,” and this in turn produced economic growth. He concludes,

while the war argument has many merits, it needs to be complemented by other arguments for “why the West got rich.” Specifically, we need to understand i) why Europe was so fractionalized in the first place, and ii) why northwestern Europe pulled ahead first. As I noted at the beginning, I think that combining the war argument with ones that look at other aspects of political institutions (especially legitimacy!) and certain aspects of culture paints a more complete story.

Pointer from Mark Thoma. Read Rubin’s whole post. A few quick points.

1. For libertarians, the idea that state capacity is important for economic growth is hard to swallow. But it may be correct. Remember your North, Weingast, and Wallis.

2. I am looking forward to Rubin’s discussion of “certain aspects of culture.” As you know, I take the view that mental-cultural factors are under-emphasized in most of the disciplines that study human behavior, including economics.

The Case for Government Statistics

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Nicholas Eberstadt, Ryan Nunn, Diane Whitmore Schanzenbach, and Michael R. Strain write,

Objective, impartial data collection by federal statistical agencies is vital to informing decisions made by businesses, policy makers, and families. These measurements make it possible to have a productive discussion about the advantages and disadvantages of particular policies, and about the state of the economy. This document demonstrates a portion of the breadth and importance of government statistics to public policy and the economy.

Pointer from Timothy Taylor. who adds his endorsement.

Cynics who have read James Scott would mutter something about making the citizenry more “legible.”

So be it. I think that the private sector also benefits greatly from government statistics.

But are the data any good? Thomas Piketty, Emmanuel Saez, and Gabriel Zucman write,

Macroeconomics relies on national accounts data to study the growth of national income, while the study of inequality relies on individual or household income, survey, and tax data. Ideally all three sets of data should be consistent, but they are not. The total flow of income reported by households in survey or tax data adds up to barely 60% of the national income recorded in the national accounts, with this gap increasing over the past several decades.

Pointer from Mark Thoma.

The authors proceed to use this data to make dramatic pronouncements and to propose major policy changes. This is the sort of move that disturbs Russ Roberts and me. If you know that the data are too inconsistent to be allowed to speak for themselves, and you know that other methods of working with the data might yield very different results, why do you pretend to speak with the voice of divine revelation?