Friday, May 14, 2010

Assault of thoughts - 5/14/2010

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" -JMK

- I want to bring people's attention to a blog I've started following - Tom's cleverly titled blog Cobb Dug Less. He comes from a libertarian perspective, but not the knee-jerk kind that regularly pisses me off! I had a few classes with Tom at George Washington University.

- Ben Bernanke is much more natural touring factories than Barack Obama (make sure you read all the captions on these pictures!). Maybe it's because Bernanke knew he'd get a cupcake at the end. Or maybe it's because of something I highlighted a while ago on the blog: that Ben Bernanke is just a "regular guy" with real concern for the American people, and it shows - particularly after Alan Greenspan's tenure.

- A couple articles in the most recent Journal of Economic Perspectives has launched a debate about the state of econometrics. Some are contending that it is in its golden age. Others are less sanguine. There are also interesting looking articles on experimental economics. Russ Roberts interviewed Ed Leamer on these issues here. Arnold Kling discusses it here. I confess I haven't read any of the JEP articles yet or the responses yet, but I know the general outline of this debate and I want to impress upon readers that it's an important one that's worth exploring. Surprise, surprise - I take a somewhat middle course. I unequivocally agree with Angrist and Pishcke that econometrics is far more credible now than it was when Ed Leamer came out with his critique in 1983. People are very closely in tuned with identification problems and design questions now, and there are a lot of good strategies for addressing these concerns - and perhaps more important, there are good diagnostics for assessing the success of those strategies. That having been said, I share a lot of Ed Leamer's skepticism. I think it comes from learning econometrics (and labor economics - aka, applied econometrics) from David Jaeger, who went to great lengths to make us all skeptics of Angrist, Krueger, Card, and instrumental variables in general. Generally speaking, I accept the logic of IV models, but I simply am not convinced about most of them. Extremely clean designs with unanticipated breaks that are used for identification - the kind of situations that you could use a regression discontinuity design for, for example, strike me as being a lot more credible than your average instrumental variable model. I also prefer strategies like propensity score matching to something based in difference-in-differences logic for the same reason - less assumptions are required for the counter-factual. I think it's important not to get too infatuated with fancy techniques. This was driven home for me when I presented a paper at an IZA symposium on the economics of risky behaviors. I was very nervous - it was easily the most distinguished audience I had ever presented for - and all the other papers except for mine and one other woman's seemed to rely on some kind of instrumental variable. It was a pretty rough presentation, but I wasn't too worried about the IV models at the end of it. I noticed something - even though the other papers were more methodologically sophisticated than mine, no one at the symposium bought into anyone else's IV strategy. We have made great strides in econometrics - it's silly to assert otherwise. But for the most part, the IV movement has been about getting excited about a really cool natural experiment that you dug up which everyone except you is convinced is bullshit.

- If you haven't been following, I've had a series of posts on "calculation problems" vs. "incentive problems". I think people are more in agreement on and cognizant of the calculation problem debate than some people are willing to accept, and that a lot of disagreements are over "incentive problems" (although I think perhaps a better word is "institutional problem"), where the informational advantage of the market is far less obvious. My posts are here, here, and here.

- So I started reading Wilhelm Röpke's Crises and Cycles this morning. It's very good so far. A few thoughts: (1.) Joseph Schumpeter seems to me to draw heavily from Röpke. Schumpeter strikes me as a sort of pessimistic Röpke (at least on the question of socialism). Oddly enough, I checked Capitalism, Socialism, and Democracy, and I didn't see Röpke cited in the index. Doesn't mean he's not mentioned - I just found that curious. (2.) In the introduction, Röpke has a very interesting discussion on intensive vs. extensive growth in capitalism. In the 30s, a lot of people thought that since colonialism had about run its course, new outlets for surplus production would be closed and capitalism would start to collapse. It's obviously a Marxist argument, but non-Marxists have made the case too. Röpke highlights the fact that this is what you might call "extensive growth", but that there is still wide scope for "intensive growth". This reminded me of Barry Eichengreen's recent book on the post-war European economy. Eichengreen somewhat inverts the concerns of Marx and the reassurances of Röpke by arguing that economic planning in Europe in the immediate post-war period was only conceivable because of the prospect for extensive growth after the destruction of World War II (shhh - don't tell Bastiat!). In a sense, growth in the immediate post-war period consisted of plucking low-hanging fruit: something that planners can even do a half-decent job at. Eventually, though, this low-hanging fruit and re-capitalization opportunities dried up and Europe had to begin relying on intensive-growth and innovation. This was something that centrally planned social democracies were not well-positioned to do - hence the stalled Wirtschaftswunder and Thatcherism. I think it's a decent argument, and it's formed my views on post-war Europe ever since reading it. I don't think it contradicts Röpke at all, it's just a different engagement of the idea of intensive vs. extensive growth. (3.) Röpke also engages the concept of "too big to fail" in the introduction. Obviously, he's generally opposed. However, he hides in a footnote that he thinks it's appropriate to socialize the losses of major companies (as long as it is temporary) in one industry: banking. That is to say, Röpke feels about the same that I do about "too big to fail": rescue the banks unless you want a major emergency, but stop saving things like car companies (in our case), or steel companies (in Röpke's case). Of course Röpke doesn't come out and say it so blatantly - as I said, you have to scour the footnotes. I started reading this for two reasons: (1.) I need to fill out my paper with more Austrian perspectives on 1920-21, and (2.) this calculation problem vs. incentive problem thread got me interested in German Ordoliberalism again, and convinced me that I'm an Ordoliberal that's embraced liquidity preference, effective demand, and all that that entails.

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