Off Topic: Don’t Take Up Swimming

I took it up in early October. About a month ago, I developed a bad cough, and which I just took to be “cough due to cold.” I curtailed many activities, including swimming. The other day, I felt better enough to try swimming again. Yesterday, not long after my swim I had a horrible runny nose, and I became suspicious. So, I did some Internet searching, and it turns out that breathing a lot of chlorinated air is not good for you. Or at least not for me.

Jonathan Haidt on Academic Monoculture

On the field of social psychology, he writes,

The lack of political diversity is not a threat to the validity of specific studies in many and perhaps most areas of research in social psychology. The lack of diversity causes problems for the scientific process primarily in areas related to the political concerns of the Left – areas such as race, gender, stereotyping, environmentalism, power, and inequality – as well as in areas where conservatives themselves are studied, such as in moral and political psychology.

As you know, I am concerned about a monoculture in economics, particularly in macroeconomics. I believe that the dynamics behind this monoculture are somewhat different than the ones that underly the alleged monoculture in social psychology. I think that macroeconomics came to be dominated by just a few professors who were so successful in placing their students that they came to dominate the entire ecosystem.

Is This True of Progressive Education?

Peter Berkowitz writes,

Progressives also abandon the idea of liberal education. Rather than transmitting the basics of the humanities and sciences, teaching the principles of freedom, and cultivating the capacity of students to think for themselves, progressivism supposes that the purpose of education is to mold students who think and act like progressives. They embrace the pedagogical creed of John Dewey, who held that “education is a regulation of the process of coming to share in the social consciousness”; that “every teacher” is properly “a social servant set apart for the maintenance of proper social order and the securing of the right social growth”; and that in instilling a democratic faith, the true teacher serves as “the prophet of the true God and the usherer in of the true kingdom of God.”

I think that the goal should be for students to know how to learn and how to search for truth. Am I so out of step with the times?

Solow vs. Solow

Robert Solow writes,

The custom is to think of value added in a corporation (or in the economy as a whole) as just the sum of the return to labor and the return to capital. But that is not quite right. There is a third component which I will call “monopoly rent” or, better still, just “rent.” It is not a return earned by capital or labor, but rather a return to the special position of the firm. . .The division of rent among the stakeholders of a firm is something to be bargained over, formally or informally.

Pointer from Mark Thoma. If this is true, and I believe it is, then the marginal product of a worker cannot be reliably measured, nor can it be proxied by a measure of the wage rate. That makes some of Solow’s early empirical work, and much that followed in its wake, somewhat problematic.

Recall what I wrote.

Separately, each worker’s contribution to the process is not marketable. It is the final product that can be sold. In a sense, there is a “production externality,” in that the finished product is worth something, even though the individual worker’s output is worth nothing by itself. The task of Coasian bargaining among the workers to come up with a way to allocate this externality is onerous, so it is handled by a manager in the context of a firm.

Also, see my post on the Alchian-Demsetz theory of the firm.

Questionable Journalism Regarding Maury Obstfeld

The WSJ blog writes:

Mr. Obstfeld said in 2012 that, should Berlin agree to backstop the debt of European countries, the eurozone as a whole would be better off if the bailout was unconditional, rather than requiring labor market reforms and budget controls. If Germany failed to bailout out weak southern eurozone members, he believed it would hurt Germany’s economy more than an unconditional bailout.

…The currency union requires stronger integration to overcome its vulnerabilities, Mr. Obstfeld wrote in a study of the lessons from the euro crisis. That means member governments would have to sacrifice far more of their economic sovereignty than they currently allow.

I believe that he said something along the lines of the second paragraph. The first paragraph sounds too extreme for any mainstream economist. I have made a few attempts to find a citation, but without success. Note that the first paragraph also strikes me as somewhat inconsistent with the second paragraph, because the latter seems to imply that he would expect bailed-out countries to have to give up some sovereignty.

In any event, Maury is a nice guy who subscribes to a technocratic view of the world that is quite different from mine. There is a group of economists, heavily represented at the International Monetary Fund, who will tell you that the world’s economic problems are caused by “global financial imbalances” (some countries save too much, others save too little) and that more management by the IMF is the solution. I, on the other hand, am among those economists who think that the IMF logically should have been abolished in 1971, when President Nixon ended the regime of fixed exchange rates.

It is easy to understand why the IMF did not consider me for chief economist.

State Nullification of the Federal Income Tax?

Ryan H. Murphy writes,

In principle, the state could effectively end the federal income tax by using two surprisingly simple and straightforward legislative maneuvers—neither of which involves secession. Texas could choose to send its federal taxpayers a check in the form of a state tax credit equal to their federal income tax liability. It could then pay for the credit by increasing the state sales tax in a revenue-neutral way. effectively, that would mean the end of all income taxes in the state while significantly raising sales taxes. This isn’t about cutting taxes per se; rather, this is the tax swap to end all tax swaps.

This is an interesting and original proposal, but surely he has not thought through all of the consequences. For example, if this were enacted, then residents would have no incentive to minimize their tax liability. Go ahead and realize all of your capital gains, because when you pay more Federal taxes, your state sends you a credit. So it seems to me that one consequence would be a huge windfall increase in Federal revenue, financed by higher state sales taxes.

Rent Control, House Prices, and Incomes

A commenter on my earlier post writes,

In San Francisco, over 70% of rental units are rent-controlled. This allows a lot of low-income people to live there, pushing down the median income. Meanwhile, there are no price controls for home sales, and these are pushed up by the shortage of market-rate units.

If you excluded everyone in a rent-controlled unit, I think the price-income ratio would look more reasonable.

Arithmetically, this explanation works. The median income would be artificially low relative to the median house price. But what about the economics?

I expect rent control, along with building restrictions, to lower the quality and quantity of housing services supplied. It also creates a big incentive for owners to convert rental properties into homes for sale. Over a long enough run, these supply effects tend to push up rents. I am a bit reluctant to believe that rent control achieves an equilibrium in which housing is affordable for renters and not for buyers. I am more inclined to side with the view that rent control backfires in the long run, leading to high rents.

Of course, one can argue that there will still be a gap between prices and rents, particularly if conversion of rental units is impeded by regulation. In that case, the only option available to property owners would be to limit maintenance. If the quality of rental units has tended to deteriorate, then that would support the commenter’s explanation.

Incidentally, another commenter suggested that the ratio of wealth to income might be high in cities with a high ratio of house prices to income. This would be very plausible if we were talking about average ratios. It is somewhat less plausible for median ratios, because median wealth tends to be pretty low.

Adam Gurri on Persuasion and Economics

A long post, difficult to excerpt. A few snippets:

One of the things that I found jarring about The Rhetoric of Economics is that McCloskey argues, among other things, that appeals to authority are natural and necessary. That pointing out that an argument involves an appeal to authority does not invalidate that argument.

What I would say is that what people think of as scientific discourse does not rely so heavily on appeals to authority. At some point, you can say, “If you don’t believe in gravity, try an experiment yourself. Jump out of a 10-story window and see what happens.”

But when Olivier Blanchard tells you that every macro model includes an aggregate demand relation, a Phillips relation, and a monetary policy relation, he cannot issue an equivalent challenge. Instead, the literature emerged that way mostly because scholars published papers that borrowed from other published papers.

I would not argue that there is a scientific method that is so pure that it can be operated without any bias or other human characteristics. But clearly there are arguments that are more persuasive than others, and arguments that apply the scientific method can be more persuasive than arguments that rely primarily on authority.

For Smith, trade was never a mechanistic process. The act of offering payment is itself an act of persuasion.

I think this notion of the centrality of persuasion in human affairs, and in markets in particular, is what economics should strive to rebuild itself around. This does not mean that the insights from economists’ contributions up to this point should be discarded, just that we should seek to find their appropriate context.

My Essay on MIT Economics

It covers a number of themes recently discussed on this blog.

My sense is that the MIT-dominated profession has experienced a decline in critical thinking. Instead, once a modeling assumption has appeared often enough in the literature, it no longer is questioned. This creates an element of arbitrariness and path dependence to the professional consensus about the equations used to characterize the economy.