Sentences to Ponder

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Charles Hill wrote,

To understand the current Islamist assault on world order, it is necessary to recognize that every major war of the modern age has been an ideologically driven attempt — no two alike — to overthrow and replace the Westphalian international state system.

The quote is from page 49 of Trial of 1000 Years: World Order and Islamism, cited by Roger Kimball.

I have not read the book, but I would be curious how Hill fits World War I into this framework. Instead, this might be an example of over-reaching along the conservative civilization-vs.-barbarism axis.

Pratap Bhanu Mehta writes,

Let us take at face value the claim that the protections of US citizens against surveillance were violated only incidentally. Let us also accept that states will privilege their own citizens over others. Implicit in the debate is a premise few seem to have questioned: that it is justified for the US to violate the privacy rights of citizens of other countries without just cause. It has rendered meaningless whatever domestic protections citizens of other nations may enjoy against their own democratic governments. Why should an Indian citizen fight unregulated surveillance at home when the US can carry it out anyway?

Pointer from Tyler Cowen.

I wish more people took David Brin’s approach to thinking about surveillance. We do not necessarily have to see surveillance as a tool of coercion or as oppression. But once people put it one of those axes, it is hard to get them to reconsider.

Sumner vs. Williams

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John Williams writes,

The intuition for policy attenuation is that uncertainty about the effects of policy creates ex post policy errors that cause economic outcomes to differ from the policymaker’s intentions. The magnitude of the policy error is multiplicative in the policy action; that is, the larger the action, the greater the expected squared error. Therefore, the expected size of the policy error is affected by the size of the policy action, creating a bias toward muted policy actions.

Think of the shower-tuning analogy. Suppose the water is too cold. If you know exactly how the water temperature will change as you move the knob, you turn it quickly. If you are not sure how much the water temperature will change for a given amount of turning, you turn the knob more slowly, to avoid getting scalded.

Scott Sumner comments,

Williams misses the bigger picture, those “demand shocks” were contractionary Fed policy. More specifically they were caused by the failure of the Fed to do NGDP level targeting. The Fed set the wrong target in each year, and this caused the vast majority of the “demand shocks”. With a policy of NGDPLT along a five percent trend line, the recession would have been far milder, with unemployment probably peaking at 6 to 7 percent.

A digression for people of the concrete steppes. No, it wasn’t just “errors of omission”. After growing at 5 percent per year during the Great Moderation, the Fed brought growth in the base to a sudden halt from July 2007 to April 2008. Yet the Fed saw itself as a valiant knight fighting off recession by cutting the Fed funds rate, as if interest rates were a reliable measure of the stance of monetary policy. They aren’t. But even if they were, the Fed drove real interest rates sharply higher in the second half of 2008, a time when they weren’t at the zero bound. So there were plenty of affirmative actions taken by the Fed to drive us into a deep slump. BTW, the base isn’t a reliable indicator either, only NGDP expectations count.

Sumner thinks that the Fed ignored the temperature of the water and just stared at the knob.

The Theory of the Firm: Hospital-Provided Health Insurance

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Sarah Kliff writes,

Insurance plans and hospitals are typically at loggerheads. They squabble over claims that the hospitals submit and insurers sometimes deny…

Now, a growing number of large hospital systems are betting that, with a little help, they can do that just as well — or even better…Seeing health insurance companies as the middlemen, these hospitals are only too eager to squeeze them out.

Often, there is a lot of back-and-forth between hospitals and insurance companies over paying a claim. The hospitals think that by vertically integrating they can get rid of the unnecessary paperwork.

I think that Ronald Coase and Oliver Williamson might be a bit more skeptical. Or at least I would. The hospital half of the insurance-hospital hybrid still has an incentive to do find ways to raise charges. And the insurance half still has an incentive to find ways to reduce charges. They no longer have the cost of dealing with each other at arms length. Instead, they face the cost of creating internal alignment. Do not assume that this cost will be trivial.

Taking Care of Elderly Parents

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Timothy Taylor writes,

Some other high-income countries have government programs to pay for long-term care. Not surprisingly, they spend a substantially greater share of GDP on long-term than does the U.S. In any event, the long-term U.S. budget picture is grim enough that adding another entitlement for the elderly isn’t likely.

As usual, he has useful links, primarily a CBO study.

I have a vision of the year 2025 in which the difference between the rich and everyone else is that the rich can afford to send their children to private schools, pay full fare for the children’s college education, and pay for their own parents’ long-term care. Everyone else will depend on public schools, community colleges and scholarships, and government-provided nursing homes. Otherwise, the lifestyles of the rich and the non-rich will look pretty similar.

Fertility to Increase?

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That is the prediction of Jason Collins.

As those with higher fertility are selected for, the “high-fertility” genotypes are expected to come to dominate the population, causing the fertility rate to return to its pre-shock level. We show that even with relatively low levels of genetically based variation in fertility, there can be a rapid return to a high-fertility state, with recovery to above-replacement levels usually occurring within a few generations. In the longer term, this implies that the proportion of elderly in the population will be lower than projected, reducing the fiscal burden of ageing on developed world governments.

A Grandparent Effect?

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The BBC covers a study that suggests that social status depends on grandparents, not just parents.

“It may work through a number of channels including the inheritance of wealth and property, and may be aided by durable social institutions such as generation-skipping trusts, residential segregation, and other demographic processes.

Pointer from Jason Collins. He also has more.

My first thought is “mean reversion.” That is, suppose that you have two genetic types–rich and poor, call them R and P. Suppose that R and P each have children. Some of R’s children get unlucky and some of P’s children get lucky. Now the grandchildren of R still carry the R gene, so unless they are unlucky, they will revert to being rich. And conversely for the grandchildren of P. So you could observe a strong grandparent effect, based on mean-reversion and genetics alone.

But I have not read the paper.

Some Thoughts on Higher Education

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From Megan McArdle

it is [among] the graduate schools that the collapse has begun. That doesn’t mean that graduate education will go away (after all, neither tulip bulbs nor stock exchanges went away when those bubbles collapsed); rather, the market will get dramatically smaller, with the shakiest programs going bust, others retrenching, and the top ones continuing to draw more students than they can enroll. If it spreads to college, we should expect to see the same pattern: top tier schools surviving and even thriving, while lesser ranked schools pitched into financial crises by declining enrollment.

In some sense, the most fundamental question about the economics of higher education is: what it the relevant margin along which a degree adds to an individual’s future earnings?

In particular, if there is a marginal return of close to zero for “additional students who otherwise would not have been pursuing the degree,” then a lot of people need to stop and think.

On a possibly related note, Bryan Caplan is looking for uncharitable reasons for economists to stick to the human capital model of education.

I go with social pressure/ideology. Progressive ideology is in the DNA of the American Economic Association. In downplaying ideology, Bryan is treating Republican allegiance as if it were a proxy for classical liberalism. I see Daniel Klein’s research on the profession as suggesting otherwise.

By the way, I take a similarly uncharitable view for explaining the persistence of Quackroeconomics.

Quackroeconomics

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I’m back to that title. Comments welcome on this idea for how it might open:

In discussions of macroeconomic policy in Washington and in the press, these four propositions are taken as given:

(S) Spending is what drives the economy. Spending creates jobs, and jobs create spending. When unemployment is high, the problem is too little spending.

(M) Monetary policy must steer the economy carefully between overheating and slumping. Doing so requires high levels of skill and intellectual resources.

(F) Fiscal policy is just as important. When there is unemployment, monetary policy cannot do the job alone, because the Federal Reserve also has to keep an eye on inflation. So the Federal government must engage in deficit spending to stimulate the economy.

(C) Computer models are essential tools that enable economists to forecast the economy and assess the impact of alternative economic policies. Using computer models, the Congressional Budget Office is able to score the number of jobs a particular policy will add to or subtract from the economy.

These four propositions are what I term quack macroeconomics, or quackroeconomics for short. Like quack medicine, quackroeconomics is unproven, unreliable, inconsistent with the views of leading researchers in the field, and possibly dangerous.

Until now, however, there has not been a book that confronted quackroeconomics head on. Other economists seem reluctant to do so. Instead, they prefer to accommodate it.

Academic economists who would never teach it to students nonetheless write op-eds that employ quackroeconomics. When they come to Washington as economic advisers, they adopt quackroeconomics with alacrity.

The authors of undergraduate textbooks provide theoretical analysis that, if properly understood, discredits quackroeconomics, but such conclusions are never spelled out. As a result, students come away from class with quackroeconomic intuition rather than an understanding of the analytical models.

In graduate school, professors discard what students learn as undergraduates and teach something else entirely. The advanced material is even further removed from quackroeconomics, but by this point it does not matter. Most of these students will never again think seriously about macroeconomics as a whole. Those who are troubled by the discrepancies between quackroeconomic intuition and what is taught in graduate courses are those who are least likely to stick with macroeconomics. Instead, they will go into another economic sub-field, such as environmental economics, economic development, or industrial organization. Those who pursue macro will do so because they enjoy the sort of mathematical puzzle-solving that nowadays leads to a tenured professorship in macroeconomics.

I worded M, F, and C carefully so that just about every economist would disagree with them. In fact, my guess is that many would object that I am attacking a straw man. I believe, however, that this is not a straw man when it comes to economic journalism. If readers spot articles in the press that pertain to this issue, please leave a comment (you do not have to go back and find this post–any post on the blog will do)

Yglesias vs.Edelman, Continued

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A reader writes,

What Yglesias doesn’t discuss is WHY this might be the case. Sorting is part of it, but one interesting and often overlooked dimension is the end of earmarks. It used to be you could buy votes for middle-of-the-road legislation by getting pols to cash in whatever principles they had for funding for a bridge or a hospital or day care center with earmarked $$$. You can’t do it anymore. So now pols are more responsive to movement political forces and donors. I’m not sure which system is better or worse, but it certainly has been a part of the recent dynamic.

Actually, I think Yglesias is speaking to this. I think he would say (or at least could say) is that the price of buying a vote with earmarks has gone up. Moreover, the reason that it has gone up is that there are now well-sorted, politically-engaged, ideologically-driven groups out there. That is, the inability of centrist leaders to use earmarks to obtain legislation is not some causal force that appeared out of nowhere. It is the result of the forces that have created ideological polarization.

A commenter writes,

What would such an example [of insiders not winning] … It can’t just be a lot of incumbents losing power; I anticipate you would simply characterize that as one group of insiders being replaced with another.

Right, it’s not about who wins elections. It’s about the farm lobby controlling farm subsidies (including food stamps), the teachers’ unions controlling education policy, the real estate lobby controlling housing policy, Wall Street controlling financial regulation (as actually implemented), health care providers controlling health care policy, and so on. Those are the real insiders. You know that insiders have been defeated when consumers win and rent-seekers lose.

Anyway, my original point is that while more partisanship might be changing the dynamics between centrist and non-centrist legislation, it is not changing the dynamics between insiders and outsiders. And, while I have not read This Town, to which Yglesias referred in his original post, the commentaries on it suggest that it speaks to the issue of insiders and outsiders.

By the way, this week’s econtalk also is on the topic of polarization. The guest, Morris Fiorina, seems to me to offer support for Yglesias.

Quackonomics Wins

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Shortened from Quackroeconomics, although I still could revert back.

It didn’t necessarily get the most votes in the comments, but it’s the one I can put the most personal oomph into. In fact, I conceive of one of the early chapters as quasi-autobiographical. I will attempt to bring the reader along as my own views on macroeconomics evolve. That might be a risky approach, but we’ll see…