Category Archives: Tyler Cowen is my Favorite Blogger

If Economists had a PAC

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It would not lobby for what one of Tyler Cowen’s readers calls

political solutions which represent common sense agreement on a variety of issues

My guess is that it would lobby for more NSF grants in economics and more college subsidies for students to take economics courses. Or for barriers to competition that might reduce the incomes of American economic professors.

To see what PACs are all about, follow my rants about housing policy (note that Tyler links to data saying that the realtors are the largest PAC, and they donate almost equally to both parties). Or John Cochrane’s rant on energy policy absurdities. Or follow the Washington Post editorial page as it discusses Montgomery County unions.

If libertarians are guilty of averting their eyes to economic inequality, then progressives are guilty of averting their eyes to the reality of public choice.

The Null Hypothesis in Health Insurance

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is that, in the United States, better health insurance produces no difference in health outcomes. Recently, for example, Katharine Baicker, et al, found

This randomized, controlled study [in Oregon] showed that Medicaid coverage generated no significant improvements in measured physical health outcomes in the first 2 years, but it did increase use of health care services, raise rates of diabetes detection and management, lower rates of depression, and reduce financial strain.

Pointer from, well, everyone. All I can say is that this is really separating what David Brooks calls the “detached” from the “engaged.” The latter are making an all-out effort at what I call trying to close minds on your own side.

Somewhat detached commentary includes

Tyler Cowen, Ray Fisman, and Reihan Salam.

Robin Hanson has an even stronger version of the null hypothesis. His version says that differences in health care spending produce no difference in health care outcomes. He and I disagree about how to characterize this result. Let me try to explain how we differ. Let us stipulate that:

1. Some medical procedures improve health, but not in a way that shows up in statistics. For example, if you get your broken arm fixed, you are much better off than not getting it fixed, but this will probably not show up in measured statistics of health outcomes, including longevity.

2. Some medical procedures are a waste (futile care, unwanted care, treatments of non-existent ailments, treatments that do not work, and so on).

3. Some medical procedures have an adverse effect on health.

4. Some medical procedures improve health outcomes, but only with a low probability (e.g., precautionary screening).

5. Some medical procedures definitely improve health outcomes in a measurable way.

Note also, that most studies of medical spending are not controlled experiments. In observational studies, including cross-country comparisons, the results tend to be dominated by a 6th factor, namely that health outcomes are determined much more by individual genes and behavior than by medical intervention.

Robin and I agree that (5) is true. The question becomes, how does (5) wash out in the statistics on differences in spending? His view is that there has to be enough (3) to offset the (5). My view is that it is mostly that (1), (2), and (4) serve to dilute (5). If I am correct, then researchers should find some quantitative differences in health outcomes, but these differences will not be statistically significant. Out of (bad) habit, they will report this as “no difference in outcomes.” This makes it sound as if they have proven the null hypothesis, when they have merely failed to reject it.

Of course, in a large study (as this was), there may not be much difference between failing to reject the null and proving it. The confidence interval around zero could be small (if someone has access to the paper, you can let me know).

Interesting Paper on the STEM labor force

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From Hal Salzman, Daniel Kuehn, and B. Lindsay Lowell. It covers a lot of ground, but I was struck by the education/employment disconnect.

[1] For every two students that U.S. colleges graduate with STEM degrees, only one is hired into a STEM job.

[2] 36 percent of IT workers do not hold a college degree at all.

[3] The annual number of computer science graduates doubled between 1998 and 2004, and is currently over 50 percent higher than its 1998 level.

Pointer from Tyler Cowen, who focuses on other results.

My questions:
[1] What are the other 50 percent of STEM grads doing? How many are going to grad school? How many are flipping burgers? If the latter, are their degrees maybe not so impressive, for whatever reason?

[2] What counts as an IT worker? The security guard at Google? Or only people who do technical work?

[3] Does everyone agree on this? Using a different endpoint, Alex Tabarrok wrote,

we graduated more students with computer science degrees 25 years ago!

Assuming consistent measurement between Alex and these authors, we must have had a huge drop in computer science degrees between 1985 and 1998. Note that the drop from 2004 to today seems to be large, also.

S – I = G – T

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Recently, I have seen two pieces that brought up the issue of corporate saving. Tyler Cowen cited Martin Wolf on the high corporate saving rate in Japan. John Mauldin reproduced an essay arguing that the ratio of corporate profits to GDP is currently above normal.

Consider some basic national income accounting, and simplify by ignoring international capital flows. We have

S + T = I + G

which means that

S – I = G – T

On the left, we have net private saving, which is private saving minus investment. On the right we have the government deficit.

We can separate private saving into saving by corporations and saving by individuals. Corporate saving consists of profits that are not invested (call this E). Call saving by individuals P. Then we have

S – I = E + P = G – T

So why is E so high? From a pure accounting standpoint, when the government runs a big deficit saving has to be high elsewhere. If individual savings flows do not rise, then the savings must flow to corporations.

Hyman Minsky viewed this as a causal model. Government dis-saving turns into corporate profits. He thought that this was how Keynesian deficit spending worked–it siphons profits into corporations. When they are in their conservative mode (“hedge finance”) they will only invest if their balance sheets are strong, so that is why you need deficits to recover from a financial crisis.

I think it is often misleading to treat accounting identities as causal models. But by the same token, when you propose a causal model you should work it through in terms of the identities. And I do not think that one should treat corporate profits as some sui generis phenomenon.

Both Japan and the U.S. have run soaring deficits. From an accounting perspective, there has to be an offsetting increase in saving somewhere in the private sector. Note that corporations are owned by people. So there is a sense in which the question you should be asking is, “Why are people choosing to do so much saving indirectly, via corporations, rather than in personal accounts?” Rather than attach great economic significance to this, as Cowen and Mauldin are inclined to do, I would guess that institutional habits and/or tax incentives are the story.

Redistribution Recession watch

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The WSJ reports,

Michael Feroli, chief U.S. economist for J.P. Morgan, JPM +1.40% estimates that since the recession, the worker flight to the Social Security Disability Insurance program accounts for as much as a quarter of the puzzling drop in participation rates, a labor exodus with far-reaching economic consequences.

Pointer from Tyler Cowen.

This is one of those topics where the three-axis model correctly predicts that there will be no communication across ideological boundaries.

1. From the progressive perspective, an unemployed person is oppressed by a lack of aggregate demand, end of story. Anyone who suggests otherwise (I’m looking at you, Casey Mulligan) is going to be attacked without mercy. And these are people on disability, for crying out loud. If they are not members in good standing of the oppressed class, then who is?

2. Libertarians see government coercing some of us to give others incentives to be unemployed. In fact, if I were one of those libertarians who felt schadenfreude pleasure out of pointing out the stupidity and perversity of the way that government executes programs, disability insurance would make me happy.

3. Conservatives think that everyone should be like this guy:

Mr. Mann, age 30, said many disabled people can work with the right help, and he included himself. Paralyzed in a diving accident as a teenager, he graduated from Princeton University and earned a doctorate in economics from the University of Pennsylvania. He uses a motorized wheelchair to navigate Mathematica’s Princeton, N.J., offices.

Now that’s civilization for ya.

Since I do not think that there will be a meaningful debate or attempt to reach middle ground, I want to lie low on the issue. For substantive analysis, I outsource to Reihan Salam.

The Minerva Project

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David Brooks mentions it. InsideHigherEd describes it.

While MOOCs are basically supersized lectures offered to tens of thousands rather than hundreds of students, Minerva wants to use learning analytics to scale up Oxbridge-style tutorials to seminar-size online classes taught by professors who can work remotely from any location in the world.

…This, Nelson says, will avoid the limitation of the in-person lecture — namely that whatever is said just “vanishes into thin air.”

Thanks to Tyler Cowen for the pointer.

This sounds interesting. I was hoping to create a virtual seminar when Nick Schulz and I used Google+ hangouts. Here is where we discussed Charles Murray’s book Coming Apart.

I liked the seminars when I was at Swarthmore College. Each week the seminar met, one or two students would be assigned to write short papers to be the center of discussion. For example, I once was assigned a paper on the “cobweb model,” in which farmers base next year’s output on this year’s price. After much painful thinking, I denounced this model as irrational. On my own, I located John Muth’s paper, but I could not follow the math. What I came up with on my own instead was essentially the hypothesis of perfect foresight. It turned out, unbeknownst to me, that right at that time the topic of “rational expectations” was about to take the economics profession by storm.

The other characteristic of Swarthmore that I also have championed is the outside examiner. That is, the professor who puts together the syllabus and leads the class is not the same as the professor who puts together the assessment and grades the students.

I hope Minerva is successful with the idea of virtual seminars. I think that the risk is that it is positioned in a sort of no-man’s land, in between the backward model of existing universities and some more radical model of self-directed education that will emerge over the next decade. On the latter, look at these Unschooling Conferences, such as the Trailblazer gathering. Right now, these conferences signal the participant’s weirdness (as Bryan Caplan would predict), but if that should tip….

Chris Peterson is a Minerva skeptic.

If Minerva has higher standards then Harvard, than how is a student who can’t get into Harvard supposed to get into Minerva?

Read the entire rant. I, too, am skeptical. I remember Chris Whittle’s big education venture, called The Edison Project. It was pretty much all hat and no cattle, as they say in Texas. I was wary when he hired Benno Schmidt of Yale for a lot of money. I think if you are going to be an outside force disrupting education, you need to be an outside force. Somebody who has achieved prestige in the existing system is less likely to have the drive and originality to change it.

If I had a lot of VC money to do a project to execute a higher education start-up, I would consult with creative, unhappy professors at low-prestige places to mine their ideas. That said, I would not put them onto the management team. Unhappy people are unhappy people, so I would go with a non-academic management team to keep things sane. You can get inspiration from crazy, unhappy people, but they don’t do well in organizations.

Speaking of organizations, Henry Brighous writes,

While Fisman and Sullivan don’t really comment on this – they simply go on to describe the other kinds of coordination that AA undertakes – it’s hard for me to see how firing an employee simply for explaining how the internal process works to good effect could be efficient. It doesn’t provide any clear, useful incentives to improve overall efficiency. Nor is it conducive to a happy and productive employee culture. The simplest explanation is that Mr. X got fired because his bosses were self-aggrandizing *****s, who saw any public commentary as potential insubordination to be ruthlessly punished, even if this made for a more dysfunctional organization.

To get the context, you have to read the post, and perhaps read the book that he is discussing.

I remember when a project manager at Freddie Mac organized a session where team members could air their gripes. When she had heard all of the complaints about the stupidity and disorganization of the higher-ups, she said told the group that they should be happy that Freddie Mac wasn’t perfect, because if it was already perfect none of them would have jobs.

Indeed, one way to think of an organization is as a mountain of dysfunction. The job of managers at all levels is to try to chip away at that dysfunction. Maybe Henry is correct that Mr. X got fired because his bosses were jerks, but maybe Mr. X got fired because instead of chipping away at the dysfunction, he was contributing to it. I am not saying that I think he should have been fired. I have no idea. Corporate soap opera is complicated.

The Null Hypothesis in Education is Hard to Disprove

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Tyler Cowen reports on a study that shows no difference between students taught traditionally and students taught with a blended-learning approach (combining on-line and in-person teaching). Tyler entitles his post The Hybrid Educational Model Works. I would only have said that if the blended-learning approach were shown to be better.

In education, the null hypothesis is that nothing makes a long-term, scalable, replicable difference. That is:

1. Take any pedagogical innovation or educational intervention.

2. Subject it to a controlled experiment.

3. Evaluate the experiment’s outcome several years later.

4. If the experiment works, attempt to replicate the experiment in more situations.

By the time you reach step 4, if not sooner, you will be unable to show that the innovation makes any difference in outcomes. What this suggests to me is that in the long run it is the characteristics of the students that determine outcomes, at least on average. Think of an individual student as “predestined” to reach a certain outcome. An educational intervention can disturb their path to the predestined outcome but will not change the outcome. I do not literally believe this model, but it is a null hypothesis that is difficult to disprove.

Cass Sunstein’s New Book

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It’s called Simple, or perhaps Simpler (the letter r appears with a cross-out). Tyler Cowen says that Sunstein is always worth reading. In this case, I am unable to agree. The book is a retrospective on Sunstein’s time in the Obama Administration as “regulatory czar.” Its message is that he and his colleagues did everything right, and their critics either did not understand or were dogmatically partisan. On p. 5, he writes,

To resolve disputes about the likely effect of rules, economists are essential.

Two pages later, he writes,

Insisting on careful analysis of costs and benefits, we issued historic rules to increase the fuel economy of cars and trucks…

I think it is fair to say that many economic studies question the value of fuel economy standards. I am not saying that fuel economy standards are utterly refuted by economic analysis, but I would have liked to see a serious discussion of the literature on fuel economy standards, or at least a mention of the fact that they are controversial with economists.

I do not disagree with his view that regulation ought to employ economically sound principles. However, I do not think he has made a persuasive case that the Obama Administration made significant strides in that direction.

[UPDATE: Sam Batkins and Ike Brannon write,

Currently, when an executive agency proposes an “economically significant” regulation (meaning that its estimated effect on the economy would be $100 million or greater), it must submit a regulatory impact analysis (RIA) to OIRA for review. The current administration’s OIRA has returned for reconsideration precisely one regulation in its first four years, which suggests a lack of interest in regulatory oversight

]

Tyler Cowen on the Classical Liberal Tradition

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He writes,

The nation-state is a good practical institution, but it does not provide the final moral delineation of which people count and which do not. So commentators on trade and immigration should stress the cosmopolitan perspective, knowing that the practical imperatives of the nation-state will not be underrepresented in the ensuing debate.

Read the whole column.

Also, read Peter Sutherland.

migration is the original strategy for people seeking to escape poverty, mitigate risk, and build a better life. It has been with us since the dawn of mankind, and its economic impact today is massive. Migrant remittances exceed the value of all overseas development aid combined, to say nothing of the taxes that migrants pay, the investments they make, and the trade they stimulate.

Pointer from Kari Kohn.

Development economist William Easterly coined the dichotomy between searchers and planners. The strong relationship between migration and poverty reduction shows the value of bottom-up searching.

Russ Roberts and Edward Leamer

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I love this video, but that is because I agree so much with Leamer.

One thing I would point out about his charts is that he uses trend lines and implies that mean reversion is the norm. That is, for most of the postwar period, if you had a recession that took GDP below trend, you would then have above-trend growth. An alternative hypothesis is that real GDP follows a random walk with drift. That would mean that it always tends to grow at 3 percent, regardless of its recent behavior. The last three recession seem to follow such a model.

In the late 1980s, some folks, notably Charles Nelson and Charles Plosser, argued strenuously against mean reversion and in favor of the random walk with drift. Note that this is back when Leamer describes output and employment as mean-reverting. I wonder if what happens as data get revised over long periods of time is that random walks get turned into mean-reverting trends.

Note Tyler Cowen’s comment on the latest employment report:

we are recovering OK from the AD crisis, but the structural problems in the labor market are getting worse. It’s becoming increasingly clear those structural problems were there all along and also that they are a big part of the real story. On the AD side, mean-reversion really is taking hold, as it should and as is predicted by most of the best neo-Keynesian models.