Category Archives: Tyler Cowen is my Favorite Blogger

End of the Pax Americana?

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Fonzy Shazam summarizes a talk by Tyler Cowen.

1. Globalization will decline.
2. There is a myth of the rational autocrat.
3. “Fortress (North) America” will see a continuation of the current stagnating trend.

To me, this sounds as if the underlying theme is the end of Pax Americana. Imagine a world in which irrational autocrats launch wars, and the U.S. is unable/unwilling to stop them. Global trade will decline, and the U.S. will see little economic progress, in part because our progress relies on increased globalization. I cannot tell which way the causal arrows run–from American stagnation to American weakness to an inability to contain armed conflict, or the other way around. In fact, the prospect of increased armed conflict is something that I am imputing–it may not factor into Tyler’s forecast at all.

I have been reading George Friedman’s Flashpoints. One theme that struck me was the way that Europe changed in 1914-1918 from being accustomed to civilization to being accustomed to barbarism. He argues that World War I desensitized people to barbarism, and this in turn made possible Soviet and Nazi atrocities. So far, I have only read the historical parts of the book, not any discussion of the present situation or future scenarios.

On a related note, what should we make of the fact that in response to the murder of one of its citizens, the United States is less forceful than Jordan? Your choices include:

a) Jordan currently has more forceful leadership than the U.S.
b) In fighting ISIS, the United States has a strategy that is more nuanced and will ultimately be more successful.
c) The United States is wisely playing down the significance of terrorism in order to save its resources for dealing with bigger threats.
d) The United States in fact does not have the military capability to defeat ISIS, and attempting a decisively forceful response would only expose that fact.

Health Spending: Individual vs. Aggregate

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From an NYT article on Obamacare,

“I’m always curious when I read this ‘good news’ that health costs are moderating, because my health care costs go up significantly each year, and I think that’s a common experience,” said Mark Rukavina, president of Community Health Advisors in Massachusetts.

While much of the focus in the past has been on keeping premiums manageable, “premiums now tell only a part of the story,” Mr. Rukavina said, adding: “A big part of the way they’ve kept premiums down is to shift costs to patients in the form of co-pays and deductibles and other types of out-of-pocket expenses. And that can leave patients very vulnerable.”

Pointer from Tyler Cowen.

I find that the simplest way to explain health care policy is to say that as individuals what we want is unlimited access to medical services without having to pay for them. To the extent that we have our way, the overall spending on health care in the economy will be very high. To limit overall spending, either (a) we have to pay more as individuals, so that we ration ourselves, or (b) our access to services must be rationed by others (insurance companies or the government).

The article consists of people complaining about either being limited in terms of access or having to pay more out of pocket. But that is not news. Again, we know that as individuals we want unlimited access without having to pay for services. You could easily have an improvement in health care policy that is experienced negatively by individuals.

The Source of the College Earnings Premium?

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Gustav Bruze writes,

A collective marriage matching model is estimated and calibrated to quantify the share of returns to schooling that is realized through marriage. The predictions of the model are matched with detailed Danish household data on the relationship between schooling and wage rates, the division of time and goods within the household, and the extent to which men and women sort positively on several traits in marriage. Counterfactual analysis conducted with the model suggests that Danish men and women are earning on the order of half of their returns to schooling through improved marital outcomes.

Pointer from Tyler Cowen. I find this more plausible than the signaling model. Assortative mating is one of the four forces I will discuss in my St. Louis talk. Fifty years ago, my guess is that the majority of men who were in the top 30 percent of the earnings distribution were married to women without a college education. Today, my guess is that only a small minority of men in the top 30 percent of the earnings distribution would be married to a woman without a college education. What the Danish study suggests is that if people married randomly with respect to education that would greatly reduce income inequality.

Yanis Varoufakis talks with Russ Roberts

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He says,

You and I would not be talking about Greece today if Greece in 1999 by some miracle of politics and rationality had stayed out of the Eurozone. That is the reason why it is such a disaster; and it’s why it’s so significant in the world economy and pipsqueak Greece has been dominating for three years. The headlines of [?] which is a sign that something is definitely wrong with the international economy. And the reason for that was that Greece was in the Eurozone. The tragedy of course is once you are in, you can’t get out. You are trapped. And so on and so forth.

The podcast is a year old. It is of interest now because he is now finance minister of Greece.

What’s In Alexis Tsipras’ Wallet?

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He is soon to be the Greek premier. The Independent reports,

A Syriza government would have to rely on taxes but tax revenues are down as people wait to see if taxes will be reduced by the new government. This means that Greece may only have the money – though this is disputed by Syriza leaders – until the end of February to pay state employees and pensions and service the debt.

As a far leftist, we can presume he wants to spend lots of other people’s money. Where can he get it?

1. Greek taxpayers. Greece actually was supposed to run a primary surplus this year, meaning that they would only have to borrow to pay interest on debt, not to fund ordinary spending. But apparently the Greek taxpayers do not see it that way. UPDATE: Tony Yates points out a problem even if you have a primary surplus and decide to blow off the interest on your debt. (pointer from Mark Thoma),

the Greek government does not have the funds to stand behind its own banks. They would be left insolvent by a Greek default [economically, they are already, really]. A run on Greek banks, either prompted by default or the threat of it, could not be stemmed by a credible guarantee of deposits.

2. Non-bank investors willing to invest in Greek bonds. Considering that Tsipras does not sound particularly eager to pay off such investors, they might be a bit shy.

3. Banks willing to invest in Greek bonds, since those bonds carry zero risk (according to capital regulations). Still, I can imagine that bank managers are a tad worried that the regulators who designated sovereign debt as risk-free don’t actually have any money with which to back that up.

4. The European Central Bank, which just announced a big “quantitative easing” program, so it needs stuff to buy. The question is how eager Germany and other European countries are to be Tsipras’ sugar daddies.

Pointers in (1) and (4) from Tyler Cowen. Possible outcomes, in order from highest probability to lowest:

1. Eurocrats devise a new elaborate shell game under which they funnel money from other countries to Tsipras while pretending not to do so, hoping that ordinary voters in those countries will not notice, or that even if people notice they will be powerless to do anything about it.

2. The European central bank goes ahead and buys bonds from Tsipras, because the alternative is scarier.

3. Tsipras ends up implementing austerity, because his wallet is empty.

4. Tsipras ends up printing a new Greek currency, as Greece exits the Euro.

Bob Hall on Labor Force Participation Trends

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With Nicolas Petrosky-Nadaeu, he writes (scroll down at the link for the paper),

In the bottom 10 percent of households by household income, 33 percent of individuals participated in the labor market in 1998-1999. By 2011-2013 this proportion was 44 percent. At the other end of the household income distribution, the rate of labor market participation fell from 81 to 76 percent. The largest decline was for individuals living in households in the third quartile of the household income distribution, where the participation rate fell from 74 percent to 68 percent.

Pointer from Tyler Cowen.

Usually, I would have possible explanations handy. In this case, I am so stumped that I am willing to offer the possibility that their statistics are not accurate.

UPDATE: Possibly relevant:

According to a recent Pew report, the percentage of mothers who stay at home with their children (a statistic that includes non-working single mothers) fell from 49% in the late 1960s to a low of 23% in 1999, but then rose to 29% by 2012.

Arrow’s Impossible-to-Understand Theorem

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Tyler Cowen writes,

Can one economist in forty properly define the “independence of irrelevant alternatives” axiom behind the Arrow Impossibility Theorem

That one I think I understand. What I do not understand is the “nondictatorship” axiom. Does it mean that ex ante no one is given the privilege of selecting for the group? Or does it mean ex post that no one’s preferences are perfectly satisfied? My impression, which may be wrong, is that it is the latter, in which case I think that nondictatorship is a misleading term for it. [UPDATE: commenters point out that I am wrong, and that it is an ex ante assumption]

As an undergraduate, I spent a lot of time trying to understand the Arrow Impossibility Theorem. I was much more fluent with it then than I am now, and yet I never thought that I had it. I think that every attempt to explain it in simple terms is wrong.

I agree with Tyler that much of modern finance is not well understood. The Portfolio Separation Theorem is very important, and yet few can explain it. My attempt is here.

One of my long-standing complaints is that nobody is sure whether aggregate demand slopes up or down. In undergraduate macro, it slopes down. In graduate macro, with inflation on the vertical axis, it slopes up (although in graduate macro nobody draws it–they just write down equations.)

The Tea Party, McBoehner, and ObamaCare

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Tyler Cowen has referred a couple of times to a book by Philip Klein on Republican politics and health care reform. I am not a political analyst, but here is my impression:

1. The most important Republican divide is between the Tea Party and McBoehner. The Tea Party wants policies to change, and McBoehner want most of all to be Senate Majority Leader and House Speaker, respectively.

2. The Tea Party wants to overturn Obama’s policies on immigration and health care. McBoehner wants to loosen environmental regulations and tweak Dodd-Frank, because that is what their friends in business are telling them are priority issues.

3. I think that a conservative consensus on health care reform is there to be formed, but McBoehner are not the ones to form it. I think that the Tea Party is likely to be shafted both on immigration and on health care reform. That might make them a bit ornery during primary season in 2016.

Community College: What is the Right Price?

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Reihan Salam writes,

Texas A&M economist Jonathan Meer kindly pointed me to their recent work on net prices — that is, net tuition and fees after grant aid — for students attending public institutions, including community colleges. It turns out that in 2011–12, “net tuition and fees at public two–year colleges ranged from $0 for students in the lower half of the income distribution to $2,051 for the highest-income group.” That is, net tuition and fees were $0 for students from households earning $60,000 or less while it was $2,051 for students from households earning over $106,000. While I don’t doubt that many households in the $106,000-plus range will welcome not having to pay for their children’s community college education, I’m hard-pressed to see why this initiative will have a “huge” impact, given that we’re presumably most concerned about improving community college access for students from disadvantaged backgrounds.

My comments:

1. Just based on my gut feeling, I think that the vast majority of students attending community college do not have favorable outcomes. (But note this study,pointed to by Tyler Cowen.

Attending a community college increased the probability of earning a bachelors degree within eight years of high school graduation by 23 percentage points for students who would not have attended any college in the absence of reduced tuition.

My guess is that it does not replicate.)

I am not even sure that students in the lower tier of four-year colleges have favorable outcomes. Instead, the true cost, including what the students pay out of pocket plus subsidies plus opportunity cost, exceeds the benefit for many who attend college. In contrast, President Obama seems to endorse the fairy-dust model of college, where you can sprinkle it on anyone to produce affluence.

He said a high school diploma is no longer enough for American workers to compete in the global economy and that a college degree is “the surest ticket to the middle class.”

He describes the U.S. as a place where college is limited to “a privileged few.” I think a more realistic assessment would conclude that the U.S. errs on the side of sending too many young people to college, not too few.

2. At community colleges, most of the favorable outcomes are middle-class students who, if community college were not available, would find some other path to success. (Possibly related: Philip Greenspun writes,

Amanda Pallais of Harvard presented “Leveling Up: Early Results from a Randomized Evaluation of Post-Secondary Aid”, a paper on the Susan Thompson Buff ett Foundation scholarship for lower income Nebraskans who have a high-school GPA of at least 2.5 and maintain a college GPA of at least 2.0. It turns out that people who are going to attend college and graduate will do so even without this grant and people who were marginally attached to academic will become only slightly more attached. The cost of keeping one student in college for an additional semester is $40,000 of foundation funds.

Pointer from Tyler Cowen.

3. For the students that you want community college to help, I think that the case for community college is sort of like the case for last-ditch cancer therapy. Every once in a while it works, and you want to give people hope. But looking at the overall costs and benefits involved, the money is not well spent.

4. Rather than expand community colleges, I suspect the best approach would be to contract them by making them more selective. Try to find the students who are most likely to benefit, and concentrate on those. Robert Lerman, who is far from an anti-opportunity meanie, suggests apprenticeships.

5. If I were President Obama, of course, I would champion universal “free” community college. Worst case, my proposal becomes law. A lot of money gets wasted, but it’s not my money. Best case, the Republicans vote it down and I call them anti-opportunity meanies.

Raj Chetty on Empiricism Without Theory

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The talk is here. Pointer from Tyler Cowen.

Broadly speaking, Chetty makes two points. One is that behavioral economics has inspired empirical analysis that can be useful for policy. The other is that we do not have to care about theory. Although theory might guide us to try certain empirical studies and might explain why a policy will work, all we need is the empiricism to know that a policy will work.

I found this view at best shallow and at worst not persuasive. Take one of his examples, in which a study guided by the theory of Loss Aversion found that classroom results improve more when incentives are framed in terms of what teachers will lose if results are bad than in terms of bonuses they will earn if results are good. My thoughts:

1. Given that the Null Hypothesis tends to be more robust than studies that purport to show significant effects from educational interventions, one ought to be pretty cautious about this.

2. A non-empirical a priorist of a Misesian bent, without knowing any behavioral economics, would recommend a market-provided school over a government-provided school. Among other advantages, the market will tend to punish poor performance, as markets tend to do. So in this example, without doing any empirical work at all, one can arrive at a recommendation that would be at least as effective as anything that Chetty might propose. While I am no Misesian, I do find the generic arguments against central planning more compelling than just about any empirical finding suggesting nudging opportunities.

3. I think that those who advocate behavioral economics would do well to also acknowledge behavioral politics. If Chetty understood how teachers unions operate where I live, he might be feel less a bit less excited about the opportunities for reform using his findings.

Related: Noah Smith on how the profession has been moving left.

Economics has become much more empirical, and that has made it much harder to wave away the possibility of market inefficiencies.

Pointer from Mark Thoma.