Category Archives: Tyler Cowen is my Favorite Blogger

Chris Blattman on Experiments

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In a must-read post, he describes a number of methodological problems with the interpretation of experiments in social science, but says

There’s no problem here if you think that a large number of slightly biased studies are worse than a smaller number of unbiased and more precise studies. But I’m not sure that’s true. My bet is that it’s false. Meanwhile, the momentum of technical advance is pushing us in the direction of fewer studies.

For me, the crux of the issue is this remark from Blattman.

It’s only a slight exaggeration to say that one randomized trial on the shores of Lake Victoria in Kenya led some of the best development economists to argue we need to deworm the world. I make the same mistake all the time.

The way I would put it is that there is no such thing as a study that is so methodologically pure that by itself it can serve as a reliable guide to policy. As I wrote in What Else Would be True?, the results of any study need to be thought about in the context of other knowledge.

Often, one encounters studies with conflicting results. You tend to focus on the methodological flaws only of the studies with results that you do not like. But remember Merle Kling’s third iron law of social science: the methodology is flawed. That law applies to every study, including experiments.

Matt Ridley’s Explanation for Mass Shootings

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Tyler Cowen asks,

What is the best theory for the rise in mass shootings?

In The Evolution of Everything, Matt Ridley writes,

Surely the explanation for most killing lies in the fact that natural selection has endowed human beings with the sort of instinct that means that (in [Martin] Daly and [Margot] Wilson’s words) ‘any creature that is recognizably on track towards complete reproductive failure must somehow expend effort, often at risk of death, to try to improve its present life trajectory’.

I would note that (a) the proportion of young men without fathers has gone up, and (b) I cannot recall any mass shooters who came from households where their father was present.

The problem with this explanation, from Tyler’s point of view, is that it should point to an increase in violence of all sorts, not just mass shooting. But overall violence is down.

Perhaps the decline in overall violence is due to high rates of incarceration? Not a very libertarian thing to say.

Computers and Go, Continued

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MIT Tech review reports,

This is how Tian and Zhu begin. They start with a database of some 250,000 real Go games. They used 220,000 of these as a training database. They used the rest to test the neural network’s ability to predict the next moves that were played in real games.

Pointer from Tyler Cowen. Quite a while ago, I thought that computers could master Go, in part by doing something like this.

On another AI note, this article says,

Tenenbaum and colleagues tested the approach by having both humans and the software draw new characters after seeing one handwritten example, and then asking a group of people to judge whether a character was written by a person or a machine. They found that fewer than 25 percent of judges were able to tell the difference.

To me, the program did not sound like the great breakthrough that the media are touting. But I am not an expert in the field of AI, just an opinionated observer.

Tyler Cowen’s Militarism Matrix

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He writes,

There are the libertarians, who hate martial culture on the international scene, but who wish to allow it or maybe even encourage it (personally, not through the government) at home, through the medium of guns. They are inconsistent, and they should consider being more pro-gun control than is currently the case. But I don’t expect them to budge: they will see this issue only through the lens of liberty, rather than through the lens of culture as well. They end up getting a lot of the gun liberties they wish to keep, but losing the broader cultural battle and somehow are perpetually surprised by this mix of outcomes.

To put his post in matrix terms, suppose that we have

low-profile foreign policy high-profile foreign policy
anti gun control Reason supporters Trump supporters
pro gun control Bernie Sanders Democrats Hillary Clinton Democrats

Tyler’s claim is that only the diagonal positions are culturally consistent. The upper right quadrant is into defending personal honor and national honor. The lower right quadrant is into Kumbaya pacifism. The off-diagonal positions face the problem of cultural dissonance. One likes to see Americans use guns abroad but not at home. The other likes the reverse.

My thoughts:

1. You can see the Presidential candidates in the off-diagonal boxes struggling with the awkwardness of this cultural dissonance. Reason fave Rand Paul is soft-pedaling his anti-interventionism, in what seems to be an unsuccessful attempt to avoid alienating the upper right quadrant. Hillary Clinton will not concede that intervention in Libya and Syria had adverse consequences. (As Bryan Caplan puts it, politicians are adept at “packaging even their worst actions in conventional moral garb.” ) But I bet that you will not see her trying to put foreign policy on the top of the debate agenda within the Democratic Party.

2. The quadrants do not quite map to Walter Russell Mead’s four foreign policy types. The Bernie Sanders Democrats might be Mead’s virtue-seeking Jeffersonians. The Hillary Clinton Democrats might be Mead’s safe-for-democracy Wilsonians or his safe-for-capitalism Hamiltonians. The Trump supporters might be his Jacksonians. The Reason supporters are Jeffersonian in spirit, but they do not get along with the Bernie Sanders Democrats.

3. I will say it again. This is not a libertarian moment. Still, I think that libertarians have a lot to contribute to the public debate. What we should do is remind others that (a) the political process almost never adopts an ideal policy or executes a policy well and (b) policies that seem good today can have unintended consequences tomorrow.

4. I do not see any guaranteed solutions here. If you think that unrestricted gun ownership promotes freedom, are you prepared for the police powers that the public will gladly accept in order to prevent more mass shootings? If you think that gun control is the answer, do you have a credible enforcement strategy? If you want more intervention in the Middle East, are you prepared for the winners that we back to turn out to be not such good guys? If you want less intervention in the Middle East, are you prepared for what the bad guys might do?

Libertarian Scandinavian Welfare State?

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Olivia Goldhill writes,

The Finnish government is currently drawing up plans to introduce a national basic income. A final proposal won’t be presented until November 2016, but if all goes to schedule, Finland will scrap all existing benefits and instead hand out €800 ($870) per month—to everyone.

Pointer from Tyler Cowen.

Before the 2016 election turned into a Trumped-up referendum on immigration, I had a vague hope of promoting a roughly similar idea for the U.S. Get rid of food stamps, housing subsidies, Federal payments for Medicaid, etc., and replace with a basic income. Let the states or local governments deal with people who have particular needs, such as people with uninsurable medical conditions.

I Admit I Do Not Understand a Negative Bond Interest Rate

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The FT reports,

The Swiss 10-year yield fell (meaning prices rose) 0.02 percentage points this morning, touching minus 0.41 per cent, breaking the previous record low of minus 0.39 per cent it hit last week.

Pointer from Tyler Cowen.

Why would I not rather hold Swiss currency than Swiss bonds? Currency would seem to be just as safe, and it does not earn a negative interest rate. Some possibilities:

1. There is a “convenience yield” from holding bonds. If you want to store a lot of wealth, currency is bulky and more easily stolen. So very wealthy individuals and large institutions are willing to hold bonds, even though they yield less than currency.

2. There is a bond bubble. That is, everyone knows that eventually bond prices have to fall (meaning that the interest rate rises), but momentum traders are willing to bet that in the near term bond prices will rise (meaning that rates will fall further). They think that when they buy bonds they will make a short-term profit by selling to the next sucker.

Neither of these stories is persuasive to me, but if I were forced to choose, I would pick (2).

Since writing the above, I came across Scott Sumner’s useful thoughts. He writes,

I recall reading that the SNB was informally discouraging currency use, by telling banks not to pay out large sums of currency to depositors. (Unfortunately I forgot where I read that.) Of course the US government has been trying to criminalize the use of significant sums of currency.

I still think it’s a bond bubble. I personally believe that the odds are that we will see positive interest rates a few years from now, and the people buying medium- and long-term bonds today will get burned.

Two Thoughts on Douglass North

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1. Deirdre McCloskey treated him as an adversary.

2. I cannot think of any other Nobel Laureate who produced anything as significant after winning the Nobel Prize as Violence and Social Orders (My most recent essay about that book is here, and more links to my use of his framework can be Googled), or even come close.

Tyler Cowen has more.

Is Larry Summers Getting Ready to Ditch Secular Stagnation?

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He starts with the puzzle that employment and measured productivity growth have both been weak. If we are replacing less-skilled workers with machines and more-skilled workers, then why isn’t labor productivity going up?

This leads Summers to suggest that labor productivity is going up, but this is not being captured in the productivity statistics.

I am struck that there is likely what may well be an increase in unmeasured quality improvement. To take the first example that comes to mind and I’ll do an experiment with this group. I’ve done this experiment with other groups – which would you rather have for you and your family, 1980 healthcare at 1980 prices or 2015 healthcare at 2015 prices? How many people would prefer 1980 healthcare at 1980 prices? How many people would prefer 2015 healthcare at 2015 prices?

There are a fair number of abstainers but your answer was pretty clear. What does that mean? That means that healthcare inflation was negative from 1980. That is very different than the 6% or so that is reflected in the
national income accounts.

Again, thanks to Mark Thoma and Tyler Cowen for pointers.

My thoughts:

1. Since people do not face health care costs directly (with their own money), perhaps this is not a fair question.

2. What about Hansonian medicine?

3. And yet, I agree with Summers on this. I certainly would prefer today’s health care at today’s prices. One of the first points I made in Crisis of Abundance is that we could afford to give everyone in the U.S. the health care of 1970. The main reason we are spending more on health care today is that it is more capital intensive and more specialist intensive. (Incidentally, I predicted when Crisis of Abundance was published in 2006 that its relevance would last a decade. I am now confident that it will be relevant even longer.)

4. Ask Summers’ question about higher education. Would you prefer a 1980 college education at 1980 tuition or 2015 college education at 2015 tuition? Personally, I see no reason to choose the latter.

In some sense, it does not matter whether Summers’ point is valid. Productivity has been been going up quite well in manufacturing and in some other sectors (e.g., Walmart). However, labor is shifting to the New Commanding Heights sectors. Maybe productivity is rising in those sectors and inflation is over-stated, or maybe they suffer from Baumol’s cost disease and there is no overstatement of inflation. Either way, once we ditch the GDP factory and disaggregate the economy, the productivity puzzle goes away.

Summers points out that if you take the view that inflation is lower than what is measured, then real interest rates are higher than typically measured. This is not good for his previous views on secular stagnation, as he points out:

to be fair [it]has an implication for views that I and others have expressed about secular stagnation, at one level you can say, well real interest rates really aren’t that low once you subtract inflation. Once you subtract properly measured inflation, there has been less of a decline in real interest rates than we thought.

And what if we think about a disaggregated economy, with deflation in some sectors and inflation in others? Does it even make sense to talk about “the” real interest rate? Obviously for a business, it is the rate of price change in your sector that matters. For a household, you care about some average rate of price change, but which average? My girls are done with schooling, so do I care about college tuition changes? Does it matter to me whether health care inflation is overstated or not, given that my only option is to purchase health insurance at current prices?

“Secular stagnation” is anachronistic, AS-AD, GDP-factory thinking. We are in a specialized economy. Eventually, otehr economists are going to come around to PSST.

Is Larry Summers Getting Ready to Ditch AS-AD?

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Both Tyler Cowen and Mark Thoma point to a discussion by Larry Summers.

I want to argue that the traditional oppositional pairing of supply side secular stagnation and demand side secular stagnation is more of a confusion, than a truth.

His current approach involves thinking about interactions between aggregate supply and aggregate demand. I hope the next stage in his thinking, and that of other macroeconomists, is to ditch AS-AD altogether. Don’t think of the economy as a GDP factory!

Instead, think in terms of a specialized economy. It is affected by secular trends, such as labor force participation increasing for women and decreasing for men from 1970-2000. It is affected by adjustment problems, such as the oil shock of the 1970s or the house-price and mortgage debt crash of 2008.

My Macro Framework

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Scott Sumner and Tyler Cowen have given you theirs. Here is mine.

1. Ditch the concepts of aggregate supply and aggregate demand. Thinking of the economy as if it were a single business, what I call the GDP factory, is misleading. Also, there are two versions of aggregate supply, and no one can keep them straight. Version I treats the GDP factory as operating in a world without prices, or with fixed prices. Version II treats the GDP factory as operating with a sticky nominal wage, so that the profitability of output increases with price.

2. Instead, think of all recessions as adjustment problems. We are in a specialized economy, and at any point in time some people are employed in ways that do not earn a profit. These jobs are unsustainable, and the workers will be let go. Sometimes, the dislocation is temporary, and they can go back to their old jobs. But often the dislocation is permanent.

3. Arriving at sustainable patterns of specialization and trade requires two types of adjustment: static adjustment and dynamic adjustment.

4. Static adjustment means solving for the price vector that clears all markets. What I called Version II is an example of a static adjustment problem–getting “the” real wage to adjust the right level. This problem might exist, but I think it is at most one of many adjustment problems.

5. Dynamic adjustment means entrepreneurial trial-and-error to come up with businesses that employ otherwise-idle workers at a profit. Mathematical models are mostly focused on static adjustment problems, but I think primarily in terms of dynamic adjustment problems.

6. Adjustment is how we get out of a mess. How do we get into messes? To some extent, each unhappy economy is unhappy in its own way. But some elements that one tends to find include Minsky-Kindleberger manias and crashes, sudden changes in credit conditions, sharp movements in important relative prices (oil, home prices), and permanent shifts in the skill structure of work.

7. Kindleberger has a useful concept, which he calls “displacement,” which causes a large shift in wealth. For example, after a war, the winning side can feel wealthier. A bundle of technological innovations or new trading opportunities can have the same effect. The sense of increased wealth that arises from displacement can evolve into a mania. A decade after the end of the first World War, the U.S. experienced a mania. A decade after the end of the Cold War, the U.S. experienced first an Internet mania and then a housing mania.

8. Manias can create unsustainable patterns of specialization and trade and postpone the adjustment to deeper structural change. The mania of the 1920s helped to temporarily disguise the impact of the adjustment to the tractor, the truck, and the electric motor. Many jobs involving manual labor in factories and farms were becoming unsustainable. Ultimately, many of the new jobs were in wholesale and retail trade, but these jobs typically required a high school education. An important part of the adjustment process was that by 1950 a generation of poorly-educated workers had aged out of the labor force. Meanwhile, the U.S. experienced the Great Depression of the 1930s.

9. Similarly, the housing mania of the early 2000s helped to temporarily disguise the impact of the adjustment to the changes brought about by the Internet and globalization. Once again, the composition of the work force appears to be undergoing a shift, as signified by the low rate of labor force participation.