Another question I had on Ron Paul

He has a lot of money in gold. Is this important to consider in thinking about his views on monetary policy? Would we be as silent if Congressmen on the other side of the bailout issue had (and kept) lots of money in AIG and GM? What do libertarians think of this? What do public choice theorists think?

"I am not a defender of the economic policies of the Emperor Diocletian"

Krugman dominates the master politician (obviously).

Current asks a question

Here:

"It's true that there was strong growth after WWII, this doesn't mean that there couldn't have been stronger growth without WWII.

What is the right measure depends on what were interested in. I remember having this discussion with Anthony Evans. He mentioned a colleague of his who said that GNP shouldn't interest us and we should use consumer spending instead because that's a measure of the wealth of the population. Anthony said well in that case we should use consumer surplus. That's true for measuring the result of long run changes, for measuring "material progress".

Output measures, like GNP and GDP are about estimating how things are going by looking outside of consumer goods. By looking at investment goods too as a proxy for future consumer goods. There is a lot to be said for doing this, but it's necessarily inaccurate. The prices of capital goods are principally tools of entrepreneurial calculation, using them to estimate the future is dicey. Mises discusses this problem in Human Action p.520-522, as far as I can remember. I'm sure Post Keynesians have reams to say on the matter. Statistics bear this out, if you look at the investment series in the Penn World Tables, they don't predict the future of the consumer goods series well, or the growth series well.

Using the prices of investment is likely to be particular dubious in a situation where the government are spending a lot of money which pushes up the value of investment goods (existing and new). So, the output we get isn't likely to be the same as sustainable output.

So, how is output useful in this case?"

The answer, I think, is relatively straightforward: we care about output because we care about employment. If we didn't care about employment we probably would only be interested in a consumption aggregate. Investment aggregates might be produced (or more likely capital stock estimates) as a predictor of consumption production. But it wouldn't be as important. We care about total output because we care about employment.

I would agree investment would be a funny thing to use to predict consumption - I'm not sure why anyone would do such a thing. You'd want to think about capital, not investment.

Arnold Kling, probably unintentionally, does an excellent job of highlighting the similarities between private investment multipliers and government spending multipliers in a recession

Here. We shouldn't fault entrepreneurs for not following this advice, though, because they have to keep prospective demand in mind when making these decisions. Government doesn't because government isn't profit maximizing.

But a multiplier is a multiplier, and crowding out is crowding out. Governments and entrepreneurs want to avoid crowding out for the same reasons: crowding out works against the ultimate goal of both of them.

J.R. Vernon on R. Higgs and WWII

"In my view, the Commerce Department's practice of including all war product in real GNP is valid for the analysis pursued in this article. Just as military personnel were considered usefully employed for computing the unemployment rate for the total labor force, government purchases of their services and of other war goods and services were product, and product that was necessary for preserving the nation, its institutions, and its social fabric in the face of an external threat."

Vernon, J.R. 1994. "World War II Fiscal Policies and the End of the Great Depression". The Journal of Economic History. 54(4) p. 854.

The sentences that surprised me most to read today

"The origins of “liberaltarianism” are found in the fact that the conventional libertarian philosophy — embodied by property rights “absolutism” — simply  does not resonate amongst the majority of people. It is difficult for someone to accept that, in the grand scheme of things, property rights are more important than, say, a welfare check that allows someone to survive."

[UPDATE: These sentences still perplex me. Jonathan's comment below perplexes me even more (as you'll see in my reply). But the point is, Jonathan claims he's not saying what I suggest he's saying - so please take a look at his comment to get his actual take. I'm still keeping #2, #3, and #4 because they're still important for anyone who does think those things]

This is in Jonathan Catalan's defense of bleeding heart libertarianism from recent critics. I am making the assumption that the second sentence is intended to shed light on the factors driving the situation described in the first sentence. Operating on that assumption, I have a few thoughts:

1. Jonathan has a much weaker grasp than I would have thought he would on why libertarianism doesn't resonate with the majority of people.
2. To state the obvious, I think if you ask most people what they think is the source of our ability to survive and thrive today, far, far more people will cite property rights or markets or something like that than will cite welfare checks. Most of these people will not be libertarians.

3. If you press them on what would be best for a poor person - a welfare check or a private sector job - very few people will say "welfare check". Most of these people will not be libertarians.

4. If the BHL movement or the libertarian movement in general doesn't realize this, it's never going to make much headway.

Because nothing scares libertarians like modern infrastructure...

...seen on facebook.

I'm honestly not sure who this is supposed to make look ridiculous.

Keynesians on NGDP-growth paths: Confusing arguments about policies and arguments about the goal

Bob Murphy recently suggested that a DeLong post expressing shock at Bernanke's policy decisions struck him as "B.S." because DeLong didn't endorse Scott Sumner's plan back in 2008. As I've noted here before, this kind of thinking bungles what Keynesians thought in 2008/09 (...10/11/12), and what the real differences are between Sumner and Keynesians. Scott Sumner's own spin on things has had an impact on the way people talk about this. Scott is an important voice in this crisis, but he also carefully manages the image of himself as a voice in the wilderness, and in a lot of ways I think that image is misleading. His position is unique (although getting less so every day) in his singular faith in the monetary authority's ability to successfully implement NGDP level targeting. He is not unique at all in (1.) thinking that expansionary monetary policy until we're back on trend is wise, and (2.) thinking that Bernanke of 2008-12 is not the Bernanke we used to know.

Let's get the easy part out of the way. I seem to remember Brad talking a lot about the gap between trend nominal GDP and actual nominal GDP in the early days of the crisis. I seem to remember lots of graphs of the gap on his blog (like this) that he would update on a regular basis and keep on a little banner at the top of the blog. I remember that it was Brad DeLong that challenged Ben Bernanke directly on the point of nominal growth in January 2010. I remember DeLong explicitly stating the problem in terms of nominal spending growth in 2009 when he contrasted the pragmatists (us) with the purists (the Fama gang), and I remember that from the beginning he explicitly pointed out that Fisher and Friedman and other quantity-of-money enthusiasts were on our side precisely because they recognized these points. Oh, and in March 2009 Bryan Caplan certainly seemed to be under the impression that Brad DeLong cared about NGDP trends.

So I think it's abundantly clear that NGDP was on Brad's radar from the beginning. It's also abundantly clear he had concerns about the Fed doing enough from the beginning. Which raises the question - why do people act like there's this gaping chasm between Keynesians and Sumner?

The answer is not that Keynesians don't care about NGDP, nor is it that they don't agree that the Fed should have a more expansionary stance. They are 100% on board with both of those things and as far as I can tell they have been from the beginning.
The real difference is that for Scott Sumner monetary policy is sufficient, and for Keynesians it's necessary, and there's a real chance it's not sufficient at a time like this. Sumner has a habit of strategically framing his position on this. He calls it "NGDP level targeting". Well what could be wrong with that? If the level is targeted then practically by definition we're doing OK, right? What Keynesians try to point out is that a level that is successfully targeted is a policy goal, not a policy. The policy is an expansionary monetary stance. The policy goal is targeting the level of NGDP. And the economic environment, agents' responses, etc. are what determine whether the policy is sufficient for achieving that policy goal.

Let's start with one objection by Keynesians (from Brad) that has been getting the most press: "The divide that worries me isn't sensible Democrat-sensible Republican. The divide that worries me is between economists who understand that the nominal money stock is not a sufficient statistic for the flow of nominal demand--especially when interest rates on short-term Treasuries are very low--and those who don't know enough to have figured that out, and who think that the nominal money stock is a sufficient statistic for the flow of nominal demand--even when interest rates on short-term Treasuries are very low."

This is the liquidity trap point. No, the interest rate mechanism is not everything. Yes, the interest rate mechanism is extremely important particularly when demand expectations are weaking MEC assessments anyway. Scott obviously scoffs at this. We say it's a good reason to not put all our eggs in one expansionary monetary stance basket in the effort to get total spending (again - note - we've gotta distinguish between the policy and the policy goal). That link up there is a good one because he also discusses other reasons to consider fiscal policy, including the expectations problem.

This is the Krugman point. Since the 1990s, Krugman has pointing to the possible new relevance of liquidity traps and has noted that a credible commitment to being irresponsible, monetary policy will still work in a liquidity trap. This is not new to the market monetarists, guys. It's all in the Japan paper. The problem is, a credible commitment to being irresponsible is hard for the monetary authority to do for the simple reason that all their pre-Fed work has been dedicated to convincing people that their policy responses are not going to be sustained indefinitely. There are Brad DeLong links above - if you want lots of links from me on why Krugman has always been on board with this (and why the distinction for Krugman too is really between policy and policy goals - two things that Sumner often confuses) see this post of mine.

So liquidity trap cuts out the interest rate mechanism. Anchored expetations and the Fed's track record (not to mention stubborn FOMC members) raise serious doubts about credible commitments to acting irresponsible can act on nominal spending through expectations.

That leaves fiscal policy.

And that's another difference between Keynesians and market monetarists. Sumner says that if the Fed is doing its job fiscal stimulus is pointless.

This is a reasonable statement to make.

But again, let's not confuse policies with policy goals. Has the Fed been doing its job? Has it succeeded in the expectations game that Krugman outlined many years ago? No.

Ergo...

Policies and policy goals are two different things. As far as I've been able to tell Brad DeLong has always been more or less on board with Scott's policy ideas. He has always been more or less on board with his policy goals. He has surpassed Scott in recognizing that those are two different things, and in recognizing that those are two different things he has been open to the idea of fiscal policy and not as sure about the efficacy of Scott's policy ideas (good ideas though they are).

So let's be careful when we talk about Keynesians and nominal spending.

Here's a good parting thought, also from an old post of Brad's:

"The government [he is referring to the Fed in this post] can buy more than Treasuries. After Treasuries, you buy GSE debt. And if that doesn't work, you buy bank and corporate debt. And if that doesn't work, you lend JPMorganChase $30 billion on the security of Jamie Dimon's dog. And if that doesn't work, you buy equities. And if that doesn't work, you buy the services of construction workers--by which time you are explicitly doing money printing-financed fiscal policy.

The thing that scares me is that I am not at all sure what or how much the Fed would have to buy. If you had asked me back at the start of 2008 how much the Fed would have to buy in order to keep nominal GDP on its pre-2008 growth trend, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet from $1 trillion to $1.5 trillion. And if you had asked me in the middle of 2008, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $2 trillion. And if you has asked me at the end of 209, I would have said that it was almost certain that the Fed could do it by expanding its balance sheet to $3 trillion. Yet here we are with a Fed with a $3 trillion balance sheet..."

Policies and policy goals are two very different things. An NGDP level target is a policy goal, not a policy.

Yes, another puff post...

... because I don't feel able to exert the required effort for a more substantive post. But this may be interesting.

It's the last week of classes - I've already had my last econometrics class and U.S. economic history class, and tonight is my last macro class. I was going to share a few things I learned or gained a greater appreciation for in each.

Econometrics
1. Two thirds of the class was math stats (not untypical of graduate econometrics), but one thing that was more atypical (for me) is that we worked a lot more with specific distributions. So I feel much more comfortable demonstrating things with gamma distributions, beta distributions etc. - some of which I had never heard of before much less played around with.

2. This is kind of simple, but the professor also focused more on maximum likelihood than past professors of mine had. I always used to get the intuition behind it, but then we just did stuff on the computer. In this class we actually did a lot of derivations of maximum likelihood estimators by hand, which was an exercise I really appreciated.

3. Throughout the professor emphasized the role of subjectivity and judgement in doing empirical work, which is something that I think a lot of people gloss over - that was good.

U.S. Economic History
1. I got closely acquainted with the organization of work/agency costs take on corporate and labor history. Major players here are Stephen Marglin, Richard Edwards, and Katherine Stone - but going back to Charles Babbage. I wonder if the Kirzner types ever read any of this stuff - it seems very relevant. Back during the Mankiw bruhaha I didn't think all that much of Stephen Marglin. I think more highly of him now (not that my appreciation of Mankiw has declined or anything).

Macroeconomics
1. I always thought highly of Robert Lucas, but I appreciate him even more after this course. That's not even to say I think all of his points were even right. For example, I'm still pretty Keynesian in the way I think about the Phillip's Curve. But this course has only improved my respect for his methodological point.

2. I am more and more convinced that the label "microfounded" is a misnomer. What these models are is grounded in optimizing behavior. For the most part, they really aren't "microfounded" as you would think a word like that would imply.

3. The conservative central banker model still really bothers me... perhaps I'll return to this again at a later point. Assumptions matter a great deal.

Anybody know what the new Larry White book is like?

Is it good? I think we've all gotten a massive dosage of history of twentieth century macroeconomic thought in the last several years, and it ranges between being a stiff regurgitation of what everyone knows to a good rendition (which may or may not be objective). Knowing White I'm guessing that his book is not on the regurgitation end of the spectrum, but is it worth a read outside libertarian/Austrian circles? Does it give a new and insightful look at this history or is it just a well-done presentation of the libertarian angle on the matter?

I'm hoping to get more reading done this summer. Aside from a few during winter break I haven't really gotten a chance to read much of anything. My May will be spent reading Wickens and Varian practically cover to cover to prepare for my theory comps. But after that I want to read Pissarides's Equilibrium Unemployment Theory (which I started for a paper this semester - it's quite good and well written despite being fairly technical) and probably Roger Farmer's Expectations, Employment, and Prices. This is all of course the labor/macro literature that I should know before getting out of the program. I want to read some history too - Dolan's history of the American whale fishery has been on my list for too long... need to get to that.

I've also tossed around the idea of reading two classic labor books: Labor Supply, by Killingsworth, and Labor Demand, by Hammermesh, but I'm not sure if they're "read straight through" books or more reference books. They're both a little dated, although the Hammermesh book is newer. The advantage is that reading them thoroughly would really bring me up to date on the labor literature in a way that course work just can't.

Any other ideas?

Headslap

Sometimes impacts are big enough in magnitude that they shine through the fog of endogeneity. In that sense, there may be something to this. I'm convinced enough by the Keynes-Hicks argument that I personally think that's probably exactly what this is: impact shining through the fog of endogeneity.

But damn, Paul. It sure makes it tough to talk about good empirical practice when you're so loose with throwing up the scatterplots.

Smith responds on ethics

Karl Smith responds to my post on secular ethics here. I think if I give this another shot I might win him over a little more, because he raises good points that I don't feel like I personally have trouble grappling with. So here it goes.

Karl responds:

"I don’t mean the following in any dismissive way but simply to articulate my understanding. Daniel seems to be making three statements to me

1. Secular Ethics is Pluralistic Cultural Politics
2. Hurrah for Pluralistic Cultural Politics!
3. I am not interested in playing ethics-game

I am understand that pull of this approach. I find this unsatisfying because, like Daniel I assume, I see limits to coexistence. As a contemporary practical matter for example, are we willing to accept, acceptance of human trafficking as a within-community ethical standard that should be tolerated, without even protest or disapprobation?

And, if you do think that we should attempt to morally press a community which accepts human trafficking, not to do so, are you not at minimum initiating a neutron-bomb moral assault. Where in this case you hope to leave the actual human participants unharmed, but to obliterate the underlying ethical standard."

Jonathan Catalan, in the comment section to my original post, suggested I was being Rawlsian which seemed fair enough to me, although that was not my original intent. Originally I had a more Rortian liberalism in mind. Rawls works too I suppose, but Karl's comment here shows exactly where Rawls and coexisting communities gets strained and where Rorty shines a little brighter. Needless to say, I would press communities who find it morally acceptable to engage in human trafficking. My concern is not at all with taking ethical stands. My concern is with chasing the phantom that is a foundationalist ethics. This is the sense in which I agreed that Karl and Douthat are both right: secular ethics is very hard to justify. My point is that theistic ethics is no better.

And my approach to this problem is that we should not hold good ethics hostage to obsessions over justification, particularly because justifications seem to be so specific to particular communities. The problem facing modern, cosmopolitan humans is the coexistence of very different populations. Since ethics governs human relations, it seems to me that our ethics should facilitate this coexistence the best it can, right? That's the extent to which you can call me "Rawlsian". Indeed, if a secular ethics can facilitate this coexistence such that micro-ethics are practiced in separate communities, then all the better - we're all happy.

This seems like a good route to me, and it seems to me we have lots of ethical standards accessible to us as secular animals (see the Sam Harris stuff on the moral landscape... there's quite a bit of naturally available ethical intuition out there). The great thing is, maintaining and respecting this secular ethic rarely impinges on religious ethics people may also want to adopt. And when it does, it's usually indicative of something wrong with the religious ethic (human sacrifice, honor killings, what have you).

So that's all why a secular ethic is appealing on a practical level. My point is that to embrace all this it seems to me you really have to stop worrying about justification and foundations (which Karl and Douthat initially seemed too caught up in). This is where Rorty trumps Rawls. Rawls risks being a least common denominator ethics. Rorty doesn't because if you reject the justificationist project you're quite comfortable saying "I have no foundational justification for this ethics, but I'm asserting it because we seem to live much better together when we adopt it". If you're enraptured by justification, that sounds inadequate. If you're concerned with getting along in the real world, it's one of the best defenses of an ethical position I can come up with.

And again, the great thing about this approach is that it tends towards a minimalist cosmopolitanism, right? So the Douthat's of the world have the opportunity to articulate and construct communities around their own ethics. The only ones who are really left out in the cold are the Wahhibists and those types. And the Rortians are quite comfortable saying "I don't really care if those sorts are left out in the cold".

Life becomes a matter of arbitration and discussion - not justification and ethical calculus. That seems nice to me, and very workable.

Keynes on Bones tonight

At least someone in government gets it.

I think he means "new classicals", but maybe the writers were talking to you Steve Keen types.

Food blogging

1. Ryan Murphy, and then Gene Callahan, and then Ryan Murphy on signalling and organic and local food. I've never cared all that much about organic food, but I do pretty consciously buy local food when I can, and I try to ascertain the conditions that my meat and seafood lived under (although I'm less good about doing that consistently). What always amazes me is that the people who have the strongest opinions about my buying behavior always seem to be those people who are... well... not me. I have to agree with Gene. What exactly is Ryan signaling by analyzing what we do in the grocery store! I have a genuine preference for buying locally. I don't think it's signalling, because like Gene says I can't imagine who I'd be signaling to (that's kind of a critical element of a signalling model!). I think it's more likely to say that I'm being anti-cosmopolitan, but that doesn't seem right either because I don't think twice about being cosmopolitan in other areas and I regularly talk about the benefits of trading freely and widely. The most likely thing is that I think these sorts of exchange relations build a sense of local community that is (1.) meaningful, and (2.) clearly not antagonistic to a wider sense of cosmopolitanism.

2. And here's a good recipe from a food-blogging friend of ours that we tried  yesterday morning. The bacon we used was local (because said friend brought it special and left it with us on Friday), but the eggs were not (cause I bought them earlier). Although, since there's a lot of chicken farms on the eastern shore they probably were local anyway.

Karl Smith grapples with secular justification of morality

Here. Although I think he overcomplicates the issue. The real question for me is, why this obsession with justification in the first place?

Yes, secularists (I wouldn't say atheists... I'd think this applies to anyone who grounds their sense of ethics outside of religious mandate) have a tough time "justifying" morality. As Douthat (who Smith quotes) notes, there is no absolute human equality in evolutionary theory (quite true). But the whole point is that non-secularists have a tough time offering a reasonable justification too, they just don't seem to realize it.

"It's written in a book - that's the justification". OK. So if secularists point to a book that has their moral code in it, we're all cool? Of course not. All communities maintain their own constructions of the way the world works. Within a given community, of course that construction is taken as valid. But to someone outside the community, the non-secularist hasn't given solid justification at all! Think, for example, about white supremacists who ground their ethics in the Bible (and there is some pretty xenophobic stuff in there). Do we say that they have thoroughly justified their views? No - we think there are a lot of problems with that!

It seems to me that secular ethics distinguishes itself by recognizing the fundamental pluralism of society, and that while these community-level constructions of the world are useful for getting along in the world, in a community - they don't quite reach a standard of justification they claim for themselves. So we need a broader, more pluralist ethics and Douthat is right - that often consists of dismissing the justificationist, foundationalist project itself. Why? Because an ethics that you can get by writing a poetic book and waiting a couple centuries for it to gain mystical significance does not seem like a very laudable ethical code. You'll get some gems from that approach, of course. We humans learn how to get along with each other, and that is going to be distilled in these various books. But it's not a very strong justification. What much of the world has converged on is that since within-community justifications don't work outside of the community, we need to come up with an ethical orientation that allows the coexistence of multiple potentially contradictory communities, justification and foundation be damned. This is liberalism.

Another way of putting it is this: have an orthodox Jew tell someone who is deeply anti-circumcision like Andrew Sullivan that circumcision is morally jutsified. Have an orthodox Muslim tell an American that practically enslaving women is morally justified. Have an orthodox Christian tell a homosexual that they are beyond the pale of moral justification. Get the six of them (the Jew, Andrew Sullivan, the Muslim, the American woman, the Christian, and the homosexual) together in a room together to talk about this stuff, and then try and tell me with a straight face that non-secular ethicists have a solid justification for their ethics. They don't. The beauty of secular society (and I want to clarify - that does not mean "atheist society") is that it recognizes that you can't provide an ultimate foundation for these claims. They are claims about how society ought to live together, and they are claims that we assert based on our experience with the sort of society we'd like to live in - not claims that we can justify with proof or citation.

Glenn Greenwald bothers me in a really deep, genuine way...

...and I'm always a little shocked that a lot of people don't see it that way.

A facebook friend shared this post by Glenn on Tarek Mahenna's statement in court on facebook. I don't know the case, but I did read the statement. This was my response on their page:

"Four immediate reactions -
1. He has a surprisingly nationalistic/parochial view of the world
2. He seems unable to distinguish between acts we generally consider crimes (Haditha, Sept. 11, the gang rape, Malcom Xs assassination) and those that we don't (war against al Qaeda, revolt against the British), which is disturbing to say the least.
3. Minutemen the equivalent of jihadists??? Maybe some people who claimed the name "jihadist", but certainly not al Qaeda, who he referenced earlier in the statement.
4. The insinuation that one can't be whole without Islam is bothersome as well.

I don't know if he actually made these plots regarding a shopping mall or not. He seems to admit some connection to al Qaeda on his own, so I imagine they had good reason to pick him up. Whether he is guilty of the charges, though, is for the judge to decide. Based on the statement, it wouldn't surprise me either way. If he's just making claims like this - apologizing for terrible acts and analogizing purveyors of tyranny with champions of justice (like Mandela and King) - that's pretty sick, but he's within his rights. If he's guilty, then hopefully he gets what's coming to him.

Either way I don't quite understand why Greenwald is championing him. Greenwald has really disturbed me these last few years, and a lot of people have been taken in by him because he makes it sound like liberty and justice."

I've made a habit of closing comments for anything about the war, because there's only so much of being accused of indifference towards the death of innocent people that a guy can take. I think I'll try an experiment and leave the comments open this time. Don't give me reason to close it.

I don't know this Mahenna guy. Maybe he's just crazy and not violent - I sure hope so. But this statement bothered me. And it also bothers me that doesn't seem to bother other people.

The Facebook tells me we have a birthday

Have a happy one, Gene Callahan!

Slow posting

Sorry about that. There have been some medical issues, buying a house (a pain in the ass to do, it turns out!), finishing the Sloan proposal, and - oh ya - finals followed by a month of fear of the comps.

So it's been a little slow and it's likely to continue to be slow, but hopefully I'll have the opportunity to post more - and post more substantively - by early summer. In the meantime, if anyone is interested in guest posting the way Blue Aurora did a couple weeks back, let me know. I'm very open to that. You know the sort of themes this blog goes for and that readers enjoy.

A good thought from Stephen Fry memorializing Christopher Hitchens

"A true thought, badly expressed, is a lie"

Now that - from Fry - is a well expressed thought, I think. But is it a true thought? What do you think? I think there might be something there. Then again, I've seen a lot of very well expressed thoughts that are turned into other views entirely by critics (Gene discusses how challenging it is to grapple with that sort of thing here), so there's no guarantee provided by good expression.

Any reactions?

I can only imagine that this means the Market Monetarists are making a concerted effort to lure Ryan Murphy deeper into their camp

Here.

There's some interesting history in there.

Do we need more engineers?

That's the title of this post and accompanying public radio story. The author interviewed my co-author, Hal Salzman. I provided him with a lot of background information from our work for the stor as well. He was going to get me into a studio for a taped interview, but with some crazy personal stuff this week I never got the chance.

You don't always get sociologists that think like this:

"The conventional wisdom is that more engineers will lead to more innovation and help create the so-called jobs of tomorrow. But when Hal Salzman heard that from the President, he had a very different reaction: disbelief...

Salzman says hoping more engineers would help the economy is kind of like saying building more cars would help the auto industry. Instead, he says, the market does a pretty good job in this field. For instance, an oil boom in recent years has increased demand for petroleum engineers.

“The response is just what you’d expect out of Econ 101, which is: salaries went up and almost immediately the number of graduates increased,” Salzman said.

Salzman doesn’t disagree that engineering can be a good job, and he says graduates landing lots of jobs is exactly what we want. In recent years, the unemployment rate among engineers is about half the national average. But adding 10,000 more to the pool, he says, could make it harder to find work, and drive down wages. Already, many of the best and brightest students are attracted to higher-paid Wall Street or consulting careers."

I thought the author did a good job representing our position. There's so many people in this discussion that say "there are too many scientists and engineers!" or "we need more scientists and engineers!" that people often try to put this argument of ours on that spectrum, but it's harder.

My view at least - and I think Hal pretty much shares it - is that "how many engineers do we need?" is a question that's contingent on demand for engineers. Without talking about the demand schedule for engineers, some of these statements don't make very much sense. But I would say that:

1. We have decades of empirical evidence that scientists and engineers respond strongly to market signals, although it's often with an adjustment lag

2. While their may be "market failures" (ugh... hate that word) associated credit constraints and things like that that affect the supply side of this market, there's no real market failure I can think of that would affect the flow of students going into science and engineering majors, and

3. There are lots of important externalities that we know about that affect the demand for science and engineering labor.

So, my take follows pretty simply from all that. I understand if this is not quite the innovative and exploration-oriented society that you would like. I agree with that sentiment, in fact. But the evidence seems to suggest that that is because of a problem with the market for the output of scientific and engineering labor (and therefore the demand for that labor), and not the rate at which we are producing scientists and engineers.

Optimizing with Heuristics

This is a really fascinating talk on heuristics shared by Pete Boettke.

What I found most interesting was the part at the end when he was talking about the bias-variance tradeoff in using heuristics. It was kind of ironic - he was showing us a graph of the prediction error as a function of the order of the polynomial, and minimizing it. In other words, he was optimizing again. It's important to keep this in mind - heuristics aren't an alternative to optimization. They are a kind of optimization. What they are an alternative to is calculation.

Listening to this now

Sounds so much better with them doing it than that godawful Neil Young. Maybe it's a generational thing, but I never got that guy. Then again - it's probably not too much of a generational thing, since apparently Lynyrd Skynyrd agreed with me on that.

Jared Bernstein on taxes

This is a very good post by Jared Bernstein on the issue of the low responsiveness of output to corporate tax increases.

I think there are two important things to remember on these questions: (1.) make sure you're thinking in terms of the response of the right variable, and (2.) Ask yourself how the margins change - because decisions are made on the margin.

On (1.): A lot of people are shocked when they hear things like "output is not substantially reduced by a higher corporate tax". I don't think they'd be as surprised if they thought in terms of the right variable. After tax corporate income, of course, may be reduced by a lot. That's why people expect a big output effect. If you keep your variables straight, the answer to the question "what is the effect on output?" is actually pretty ambiguous. It basically relies on two issues: (a.) what does the tax do to capacity to produce output (let's assume in the short term that is negligible), and (b.) what does the tax do to decisions that producers make? That brings us to...

(2.) How do the margins change? Lets ignore brackets and marginal tax rate issues and just keep this simple for thinking about a straight up tax rate increase. Let's say y = f(k) and pi = f(k) - rk. What is output with a tax rate on pi of zero? Solve f'(k) = r for k* and output is y = f(k*), right? Now lets say a tax rate of 90% is imposed on pi. What is output with that tax rate?

Solve 0.1(f'(k)) = 0.1r for k**, and output is y = f(k**). Hopefully you all see where I'm going with this. As it's set up here, k* = k**. As a first cut, there's no reason to expect any change in output. Of course there's a big change in after tax corporate income! But if they're profit maximizing it shouldn't change any behavior on the margin.

Now, of course the real world isn't that simple. I only gave the firm one margin to operate on. If there are other margins, of course we may have different behavior that may lower output. The most obvious example is that firms may move their activities overseas. That probably only affects certain sectors (although the corporate tax is probably a big deal for those sectors). There's also the issue of the decision to start a business in the first place.

So there are wrinkles, to be sure.

But the basic issues facing a firm thinking about profits - the basic margin they're working off of - is revenue and cost. And if we just restrict it to a simple revenue and cost model, there's not a real obvious reason to expect a big change in behavior.

This is a good example of how thinking like an economist rather than thinking with your gut reaction is critical to approaching policy.

It also explains some things politicians do that sometimes we yell and scream about, such as:

1. Tax breaks to repatriate jobs back to the U.S., and
2. Lower burdens on small businesses.

Naive economic logic says that that sort of special treatment is bad policy. And maybe it is bad policy if we clutter up the tax code with too much special treatments. But when you think about the exceptions to the simple model which I mentioned above, you start to realize there may be good reasons for politicians to do this. Optimal tax theory says that you should tax things with inelastic responses the highest and things with elastic responses the lowest, because this is least distortionary.

That's exactly what politicians are proposing when they propose tax breaks for bringing jobs back to America and for small businesses.

UPDATE: Oh and one more thing. This is one teeny tiny example of why taking math out of economics is not a good idea at all. I probably could have said that with words too (well, I mean exclusively with words), but the point isn't illustrated nearly as well if you take out the math - and that was just a dinky little optimization problem.

I guess since demonizing soldiers is more of a faux pas than it used to be...

...the morally superior bullies among us have turned to demonizing machines.

Which I guess is still better than demonizing soldiers, but I think the same message is still communicated.

You'd think from this tumblr we just send drones out to hunt down civilians and small children. Tell me - how is this any different from screaming "baby killer" at a soldier?

If you want to have a conversation about the very real costs of war, that's definitely a conversation worth having. It's critical to have, in fact. But of you want to just distort and demonzie, don't pretend you really care about the costs of war - just admit you enjoy being a jackass.

[Comments closed... it's just the smart thing to do on military-related posts, I've found]

It was the one thing that Keynes was fundamentally wrong about (Malthus too, for that matter)

And Scott Sumner, Matt Yglesias, and Karl Smith (at the end of the post) are promoting the idea again today.

Is it possible? Of course its possible that we could enter a period of weaker growth that implies the prospect of liquidity trap recessions in the future. Depending on how we deal with aging populations, it might even be plausible as a medium term forecast.

But I'm not personally willing to be so pessimistic just yet. Reaching frontiers matters, but frontiers can be pushed out too.

A "Republic" doesn't mean you're obligated to broadcast every sensitive policy

Sorry, Russ.

I like my government republican too, and I'm not going to have you twist the meaning of that word. Russ Roberts is concerned about secrecy at the Fed, calling it "unacceptable in a democracy", titling the post "A Republic, if you can keep it". I guarantee you the founders didn't feel obligated to announce they were going to celebrate Christmas with a bunch of Hessians.

Some policies require secrecy to work well. In our republic, we constitute a limited government, and empower it to make policy consistent with those limits as long as the means of making it are necessary and proper. Secrecy, in many cases, is both necessary and proper. Certainly in a financial crisis it is.

I plan on keeping my republic, Russ. That does not entail mutating it beyond recognition into some libertarian construct.

I had a great day today

The foundation of the house we're under contract for met the engineer's approval this morning. Not done quite right, but in no need of additional work. So we should be able to close with no problems now.

Even more exciting, I was interviewed by an NPR reporter today on some engineering workforce stuff. I was giving him background, but he says he might want to get me in studio later in the week for material that will go on radio. Very cool!

And now the final version of the Sloan proposal is almost ready to go out the door.

A couple other family and school related hurdles to jump this week, but I'm hoping this unusually decent Monday bodes well...

Jonathan makes Austrians sound like Keynesians who think the Fed kept rates too low for too long in the 2000s

Here. And Greg Ransom applauds him which is a big flashing red light to me that something is wrong here. To me, ABCT is Wicksell plus Bohm-Bawerk, while Keynesianism is Wicksell plus Marshall. Taking the Bohm-Bawerk out of ABCT and just talking about capital theory the way most non-Austrian neoclassicals talk about capital theory seems like something different to me.

It ultimately doesn't matter what you call it. To me, this means that Jonathan is closer to the way I think about the economy (he just worries about price distortions at slightly different points in the business cycle). But it does make me wonder where Hayek has gone in all this.

I know that it is said that generalized problems occur across more and less roundabout points in the capital structure. That's precisely why I asked what we can and can't look for empirically. But let me quote an article of Jonathan's that he links to in this new blog post:

"What triggers the revelation of this incomplete investment, oftentimes described as "malinvestment," is a consequent rise in the price of consumer goods relative to capital goods. That capital deepening did not come at the expense of consumer demand but instead was made possible by an artificial increase in loanable funds, suggesting that the initial fall in the price of consumer goods that should have otherwise taken place did not actually occur. Consumer-goods prices will also rise as a factor of an increase in the price of labor, a product of an increase in the demand for labor as a factor of production, and as a result of a possible diminishing in the stock of capital goods, as some nonspecific goods are used in earlier stages of production. The rise in the price of consumer goods catalyzes the abrupt shortening of the structure of production, revealing a mass of malinvestment."

OK, so there obviously isn't a single "capital structure". Different industries have different periods of production. Andrew Young and others have shown that the length of the period of production does vary over the business cycle as Hayek suggested. Hayek's reason was related to the intertemporal coordinating role of the interest rate (which - I should add emphatically - we all agree on, we just all haven't made the contribution of applying it to the question of the length of the period of production the way Hayek did). When there is this "abrupt shortening" that Jonathan refers to, entrepreneurs are realizing that the price signals of the earlier monetary injections into the loanable funds market were actually giving a misleading signal about the value of time. Time is actually more costly than they thought. This ought to make a lot of particularly long produciton processes less profitable. Production processes that are shorter by their very nature shouldn't take as much of a hit because less of their costs are tied up in the cost of time - which was revealed to be distorted by the moentary authorities.

Now clearly this is going to have a broad impact. If workers in longer-period-of-production-industries are out of work they're going to buy less of everything, including goods from shorter-period-of-production industries. This criticism is fine and makes sense to me, I just wanted to clarify that that wasn't the only thing going on. But even in that case, I would think we would still see less of an impact on industries with naturally shorter production periods, whose profit margins are less contingent on the misinformation provided by the interest rate.

I guess I'm just wondering how this is really "Austrian". I'm thinking about ABCT more again and I'm thinking along the lines of contrasting "Wicksell + Bohm-Bawerk" with "Wicksell + Marshall", but Jonathan seems to be suggesting that is the wrong approach. I'm not sure I'm convinced.

Great sentences

From Dan Crawford:

"The point of the post is that while one AEI economist [Viard] is willing to state the obvious about tax cuts [that since Reagan at least they have reduced revenue], and though he may state that no economist disputes the obvious, his more prominent colleagues at the AEI do dispute what the data so obviously shows. I went further, and noted that Viard had to know that his own institute is a big part of the problem. Pethokoukis' [his more prominent colleague] next sentence: "Supply-side economics is simply a school of economic thought that believes a) incentives matter, b) high tax rates are bad for growth, and b) inflation is fundamentally a monetary phenomenon."

I'll ignore the grammatical error toward the end of the sentence - there are enough substantive issues in the post - and merely point out: "incentives matter" is not something that defines supply-side economics any more than having two arms and two legs is a defining property of people of Swedish extraction.

I have yet to meet an economist of any stripe who doesn't believe incentives matter, just as I cannot think of any country whose citizens don't typically come equipped with four limbs. Its just that typically different schools of thought think incentives matter in different ways."

The rest of the post goes on to discuss incentives in Marx and Keynes, and how ridiculous this claim about supply side economics is. The thing is, "supply side economics" isn't really even an economic theory. It was a disposition of policymakers and some economists close to policy makers originating in the 70s and 80s that had some tangential relation to some of the discussions going on among economists at the time.

New Acquisitions

From the public library spring book sale:

1. Learning from "Learning by Doing": Lessons for Economic Growth, a short one by Robert Solow. Arrow's "learning by doing" plays an important role in endogenous growth theory, and I hope to do one of my dissertations essays on endogenous growth theory, so this seeemed nice to have. I'm interested in some modifications of the production of knowledge in those models, particularly the role of labor in that knowledge-production sector (basically some thinking about the macroeconomics of the S&E labor market).

2. Human Exploitation by Norman Thomas. It's a first edition of the 1934 book by the socialist candidate for president. One more to add to my bookshelf of the history of American economic thought.

3. A History of the Federal Reserve, vol. 1: 1913-1951, by Allan Meltzer. Been meaning to pick this one up for a while. Didn't see volume two (and is three out yet?) at the sale, but 1913-1951 should be a pretty exciting span for now!

Andrew Bossie is skeptical of Barro-Gordon too

A couple posts back I vented about the Barro-Gordon model. It's pretty goofy stuff. It turns out that when you observe in the wild a assume the existence of a central banker that is completely clueless about the fact that people form expectations by inferring from past experience, that central banker will act on their ignorance, thus underestimating the dangers of inflation through its impact on inflation expectations. And when you discover make it your explicit modeling assumption that central bankers underestimate the consequences of inflation, it turns out you get the result that they over-inflate!

Shocking stuff, right!

You all are amazed, I know. Well get this. If you think assume the central banker will over-inflate, one solution might be to hire a curmudgeon who doesn't give a damn about the social welfare function so that his stodginess will at least partially outweigh his ignorance the modeling assumption of central banker ignorance, and get something closer to socially optimal monetary policy.

That is "conservative central banker theory" in a nutshell. I don't think I'm exaggerating but a Barro-Gordon defender can correct me if they so choose.

It turns out, Andrew Bossie has an issue with this stuff too. He recently brought my attention to an older post of his that makes a similar point w.r.t. Bernanke. He writes of the theory:

"I have never really liked the claim that you need an overly conservative central banker to maximize social welfare because your normal run of the mill central banker will over inflate. This always bothered me. There always seemed to me to be a fair amount of intellectual path dependence to that finding in the 1999 "Science of Monetary Policy" paper. I'm just not sure how you come to that conclusion without looking for it. Like, it seemed to me the New Keynesians were looking to prove the ad hoc finding that you need a central banker who's DNA tells him to keep inflation low."

This pretty much sums up our current political rock-and-hard-place in the context of a "conservative central banker":

"No securities, no stocks, no bonds, nothing but a miserable $500 equity in a life insurance policy. You're worth more dead than alive. Why don't you go to the riff-raff you love so much and ask them to let you have $8,000? You know why? Because they'd run you out of town on a rail."

Nothing teaches economics at Christmas time quite like It's a Wonderful Life.

Two random notes

1. From now on whenever I read Scott Sumner write anything about "Keynesians" I'm just going to pretend he wrote "people who don't support monetary accomodation". It's getting really tiring to read through his posts expecting to get to a point worth discussing only to find that the whole damn thing is about something we all already know (which isn't to discount Scott's enthusiasm - I think it's probably done some good bringing people who would otherwise be too conservative on demand-side policies into the fold... it's just been too consistently low quality when he tries to talk about his imagined enemies - I have to stop reading enticing post titles that regularly end up being so quixotic).

2. Happy Birthday Thomas Jefferson!

Quote of the Day

"The true task of economics appears to me to be quite different, especially in a modern mass democracy. Its unglamorous but all the more useful mission is to make the logic of things heard in the midst of the passions and interests of public life, to bring to light inconvenient facts and relationships, to weigh everything and assign it due place, to prick bubbles and expose illusions and confusions, and to counter political enthusiasm and its possible aberrations with economic
reason and demagogy with truth." - Willhelm Ropke (1957)

HT Don Boudreaux. Ironically, this is precisely why a spend so much time arguing with libertarians like Don. You all know there are libertarians I have a great deal of respect for - and who make high quality contributions to the discussion. But there is a lot of bad libertarian commentary out there too, and it's (part of) the task of economists to combat that, particularly because this particular ideology is so good at posing as economic wisdom.

But this is also the sort of thing that has really sucked me into the science and engineering labor market work. It's an interesting labor market to be sure. Unlike the "labor market" writ large, there are a lot of neat institutions, incentives, and problems that make it a great niche to study. But it's also a labor market that's susceptible to a lot of "political enthusiasms" and "demagogy", which means that analyzing it closely can contribute a lot to the debate.

Cowen on Food/Kuehn on Wineries

From that last post - I'm struck by how much of his advice transfers over to visiting wineries. I imagine this applies everywhere, but of course I'm most familiar with Virginia:

- The crowded places with the rented van services bringing lots of laughing women around are always the worst.

- There are a few grapes that do better in Virginia: Viognier, Cab Franc. Because of this lots of places have a signature wine of that varietal. That's a stand-by when you're tasting in Virginia, but because of that it can be deceptive. Not all are good.

- Similarly, there's a big variety of Chardonnay's out there because it's familiar. There are many good Virginia Chardonnay's, but you have to actually look for them.

- If you can taste with an owner or winemaker instead of just someone at the bar your experience will be ten times better. If you make it clear that you know something about Virginia wine you'll get a lot better service and often they'll pull out a lot of extra wines they don't serve to other customers. If they start drinking with you, it's a very good sign. We've literally talked with a wine-maker for over an hour at a tasting. If they're out in the tasting room, it means there's not a lot of work to do at that time of the year and they love talking to people and tasting with people that love talking to them.

- Lots of people get excited when new wines are released. I don't. I've never understood this. Wines are never as good when they first get released. Don't run out when you get an email from them saying they just released something - just wait a while.

- Do go to brand new wineries. They can be very surprising. People are still enthusiastic about what they do and they've been experimenting for a few years with exactly what they want to put forward (unlike restaurants, winemakers are operating for a while before they open up to the public - often several years). It's surprising how good new wineries can be - and if they are good you want to patronize them to keep them in business.

- Unfinished tasting rooms (like barns or framed rooms without any drywall up yet) are always better. It means the owner has been focusing on the right thing: the wine. I can think of four or five unfinished tasting rooms that have all had high quality wine.

- If you like a winery, find out who they are friendly with. Virginia wineries (maybe other regions?) are incestuous. Winemakers often work at a couple places. People know each other socially. Friends who help out with a winery start their own. Grape growers who supply wineries for years decide to start making their own wine. Styles and methods flow through social networks. If you like winery X and you find out winery X has connections to winery Y and Z, go to winery Y and Z, and you're likely to get a new twist on something you already know you like.

- Finally - terroir really does matter. We stick around Loudon County a lot for proximity, but going into the piedmont type areas or into the mountains really gives you different wine, so make sure you go further afield when you can.

Cowen on Food

I'm sure all of you have heard about his new book. I've been prety irresponsible in usually glossing over his food posts on Marginal Revolution, which is a shame since I live near him so he's often talking about restaurants that I've heard of or could find easily. I am trying to get the gist of this book, though - this is a good short article summarizing some of its points. I especially like this:

"At fancy and expensive restaurants (say, $50 and up for a dinner), you can follow a simple procedure to choose the best meal. Look at the menu and ask yourself: Which of these items do I least want to order? Or: Which one sounds the least appetizing? Then order that item.

The logic is simple. At a fancy restaurant, the menu is well thought-out. The kitchen’s time and attention are scarce. An item won’t be on the menu unless there is a good reason for its presence. If it sounds bad, it probably tastes especially good.

Many popular-sounding items, on the other hand, can be slightly below the menu’s average quality. For instance, you should be careful not to get too enthusiastic about roast chicken, especially if you are in a restaurant that, like virtually all restaurants, does not specialize in roast chicken. Roast chicken is an exceedingly familiar dish, and many people will order it to experience the familiar. Consider the incentive this provides the chef. And consider that a few items may be on the menu specifically because they are generally in demand, not because the chef cooks them with special brilliance.

So order the ugly and order the unknown. You’ll probably get a better and more interesting meal."

We go out to "fancy" restaurants less than we did a couple years ago because our financial constraints and aspirations have change, but I've long followed a rule somewhat similar to this. I've always hated the idea of ordering (saltwater) seafood more than about an hour or two from the coast or in our case the bay. There's a sign for a crab shack on Rt. 29 that we pass way out near the mountains and it always sends chills down my spine. It's not even really a freshness point. You can get fresh seafood out there. It's largely a culture thing (do they really know how to cook this?) and as Tyler says - a familiarity thing (are they just putting this on the menu because htey know people like crab cakes?). Crab cakes are actually one of those things - like the chicken he mentions - that I rarely order at restaurants anyway, even though I love them. And it's for exactly the same reason - everyone likes them and orders them for their familiarity and so they're not always made well. We make them at home a lot too, so we have a pretty good idea of what we like in a crab cake. There are a few places I like to get it: The Backfin in Williamsburg and Phillips always has good crab cakes. But usually I don't order it when we're out. When we are near the coast, I usually order the seafood. When we are futher west, I usually order a pork dish.

He says order Vietnamese instead of Thai... that's interesting. I haven't made that transition yet, but I do know what he means about the diluted quality of Thai food. We only have it from one or two places. He also says have Pakistani instead of Indian. Whereas I've had some Vietnamese food I've never had Pakistani food. But again - I know what he means. We've had so many Indian duds that while we get it fairly often we only get it from one places (and - not surprisingly - it's a hole in the wall that isn't downtown).

One thing I need to get over with food is that when I'm less familiar with a cuisine I don't experiment. At American restaurants (sandwich places, burger places, BBQ, seafood places), which unfortunately Cowen doesn't talk about nearly as much as ethnic restaurants, I'll order lots of different things even if I'm attached to a particular item at a particular place. I think a part of this is because I know the distribution of American food, I know what it's supposed to taste like and I know what I like in a particular American food, so I'm interested in seeing where they fall on that spectrum and how they experiment. At an ethnic place - particularly one I'm not familiar with - I stick with what works too often. Indian is by far the worst for me. I get pretty much the same thing every time (to be fair, we've gone to some pretty bad Indian places, so I feel like it's just self-preservation).

Email sent to Tim Groseclose

Subject: Question about "Left Turn" Methodology

Hi Tim -
I haven't read your book yet, but I was made aware of it yesterday through David Henderson's review in Regulation magazine. So my understanding of what you were doing is based on that and a review of your QJE article on the slant quotient.

I had a question about your approach that I just couldn't figure out and I was hoping you could explain it to me. Given that it's the media's job to report facts impartially, and given what we know about how politicians present facts to win votes and funding, why are you judging the bias of the media using the standard of the ideological composition of politicians? That seems backwards to me, so I'm wondering if I've missed something. One would think - when observing a difference between media views and politician views - that it's probably indicative that politicians are biased. I would have thought the title of your book should be "Right Turn".

Now of course this approach isn't perfect either. It's likely that both are biased to a certain extent, and therefore it's impossible to pin down exactly who is biased in which direction. But even in that case, I'm not sure how you can confidently claim that the media has a liberal bias.

Perhaps I should put it this way: how would you arbitrate between the claim (1.) politicians have a conservative/libertarian bias and (2.) the media has a liberal bias. You might address this in the book (and I plan on picking it up and reading it once I'm out of classes this summer). But at the moment I'm not sure why you opt for (2.) instead of (1.).

Thanks
Daniel Kuehn

*****

If I had to arbitrate between the two, I'd do two things. First, I'd focus on cases where there was a clear "right" answer - or at least a strong consensus - so that my measure of bias is nailed down better.

Second, I'd talk a lot about incentives and public choice type issues - and make a theoretical argument for why it makes more sense to say "politicians have a conservative/libertarian bias" than it does to say "the media has a liberal bias". Both may be a little true (or maybe the truth is so far left that both the media and politicians have a conservative/libertarian bias). But that would help to get at it. It's like Bryan Caplan's point about voters. When there's a difference in opinion between the experts and the general public, you probably don't want to argue that the experts are biased because they don't conform to the general public. I would probably choose to avoid the assertions about rationality or irrationality about why the two populations diverge.

I don't think that means what you think it means

"That" being the term "media bias".

I have a lot of comments on an interesting post by David Henderson on "media bias" and a new book on the subject by Tim Groseclose. It was similar in a lot of ways to my interest in his earlier article with Gochenour on presidential greatness: great subject discussed by a guy I consider both sharp and fair, but a deeply problematic argument.

The problem with Henderson and Groseclose's discussion of "media bias" (aside from a few bad variable choices - see my comments on that) is that the case boils down to something like "the media is biased because it is more liberal than the average American and a lot more liberal than me". If this is how we're talking about "bias" now, we're in trouble. I don't know where this view comes from that it's the media that's biased if it doesn't reflect the population. Maybe the population is biased. We are too willing to use the term "unbiased" to mean that both sides of the debate get equal air time. It's hogwash. Of course truth can be contested - most definitely. And as a guy that leans toward pragmatist explanations of these things I'm more than willing to say that. But the fact that truth is contested does not mean that truth is the average of what the population thinks about something. Truth is contested because of our observational, analytical, and computational frailties - not because truth is a mirror of all of our views.

What's most amazing to me is that Henderson and Groseclose use the distribution of the political views of Congress as the yardstick to judge the bias of the media. That seems almost exactly backward to me. Why don't we instead say "the media's job is to report the facts - they are obviously not perfect at it, but since they are the fact-reporters perhaps we should judge the bias of Congress by their conformity to the media". If Groseclose and Henderson took that approach, instead of concluding that the media has a liberal bias because they don't reproduce the political pathologies of the Congress, they would have concluded that Congress has a conservative/libertarian bias.

I didn't plan on sharing my thoughts on Henderson's review here, but this post by Krugman inspired me to. It's a great example of a case where there's a real divergence between media positions and political positions, but I think it's fair to say that it's the politicians that are biased - not the media - and if you judge the media by their conformity to the political discourse you get exactly the opposite answer that you should get (if you're concerned about bias).

So what's the source of this argument? Confirmation bias? Would Groseclose and Henderson be arguing these positions if it cut the other way? Would I?

Smith on Inflation Expectations

One of the risks of typing your homework late at night is that the ease of writing it up lets you slip into editorializing. I did this some last night (after solving the problem of course) complaining about a Barro-Gordon model exercise we did about central bank inflation bias. I think the argument makes very little sense. You basically only get the inflation bias result by assuming the central banker understands all sorts of things about the macroeconomy, but somehow doesn't understand how inflation expectations are formed (I'll give you a hint for inflation expectations in this particular case: they take the expected value of inflation! Real tough, huh? Clearly a central banker can't figure that one out). When you assume a dumbass central banker you get a dumbass policy. That seems dumb to me.

So it was nice this morning to see Karl Smith provide a dose of reality on inflation expectations modeling too - this time, thinking about what agents in the economy know about central bank behavior. He writes:

"My understanding is that the principle fear regarding inflation is that if a sustained period of high inflation were allowed expectations would become unmoored and the Fed would loose it hard won credibility.

The problem with this view is that it flies in the face of the notion that inflation expectations are rational.

A rational agent, however, incorporates knowledge not only of Fed behavior but of the informational and operational constraints facing the Fed. If it is in fact the case that the Fed is only risking higher inflation because it is

- Uncertain about potential output
- Concerned about hysterias
- Has difficulty adjusting policy at the zero lower bound
- Is operating in the wake of a major international financial crisis

Then a rational agent should not conclude that long run inflation targets have meaningfully changed."

Again - if you assume a dumbass agent you get dumbass agent behavior. We really should make sure our claims pass the smell test. Making simplifying abstractions is just fine. I'm hardly a praxeologist, as you all know. But you need to ask yourself if the only reason you're getting the result you're getting is because of an unrealistic assumption. If that's the case, then you've got a problem.

OK... now I need to reread my homework and make sure I didn't put it quite as bluntly as that.

Brad DeLong appears to be blogging an extended essay of some sort...

...start here and keep reading.

There's an interesting connection between E.M. Forster (a Bloomsbury member) and Henry Thornton. Lot's of other good stuff too.

A quick appeal on power analysis

So the stata commands that put in sample sizes, group means, and standard deviation to get out power are straightforward. Likewise, puting in power, group means, and standard deviations, and getting out sample size are straightforward.

It seems like it should be trivial to put in power and sample size and maybe a baseline group mean and get out a minimum detectable effect.... but stata doesn't seem to be able to do this with anything I've been able to put my hands on. If I had more time I'd do it by hand but I don't trust myself to do that right.

Anyone familiar with power analysis to get minimum detectable effects - preferably in stata, although possibly elsewhere?

A note on Cafe Hayek and civility in the economics blogosphere

So Don has a new book coming out collecting his letters to the editors. It's called "Hypocrites and Half-Wits: A Daily Dose of Sanity from Cafe Hayek". I know people don't always pick their titles, but the point still remains that he could have protested that one (if it wasn't his) - he doesn't seem to have. As anyone that knows about Don is aware, Paul Krugman's columns are a regular target of his letters, so presumably Krugman is a major player in the field of hypocrites and half-wits. Certainly lots of people that disagree with Don are.

This is the guy that complains about people like DeLong and Krugman being mean-spirited hacks, ideological, and ill-mannered. This is the guy that few if any libertarian economists have come out and said "gee Don, I really don't think that's a nice thing for you to say about X, Y, and Z".

This is exactly why I think 99.763% of complaints about Krugman and DeLong are total B.S. and not worth worrying about. Can you imagine the uproar in the libertarian blogosphere if either of those guys published a collection of screeds against people they disagreed with, titling it "Hypocrites and Half-Wits"? If we had a situation where anyone out there actually showed any sign of being even-handed about blogging etiquette, maybe we could talk. But we don't, and it's ridiculous to pretend that we do. So what I do is just pay attention to the people I think are nice and worth paying attention to (and there are LOTS of bloggers I disagree with that I think are nice and worth paying atention to), and ignoring the rest to the best of your ability.

While we're talking about forthcoming books from economics bloggers, I'd remind people that Krugman's new book on the Great Recession is coming out soon too.

UPDATE: This does have consequences for public education and communication, of course. A book called "The Conscience of a Liberal" is going to get very different results compared to a book called "Hypocrites and Half-Wits". Cause people do judge a book by its cover. The former says "I have my own perspective and I think it carries ethical weight, and here's why". The latter says "if you don't agree with me you're a dumbass or worse".

Gene Callahan just helped the security state pass the cost-benefit test

I'd be very curious of David Henderson's position on this. It's actually not a bad idea, and given the shocking degree to which people embrace the lottery, it may even amount to a good idea.

That would address many complaints. But the cost-benefit issues are only one side of airport security. It's also gotta be assessed as a security policy, and that's something I can't personally speak to.

Assault of Thoughts - 4/11/2012

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

- Noahpinion on the new Wieland paper, and when it makes sense to use structural or non-structural models ("ad hoc" always seemed a little harsh to me... they're not ad hoc, they're just not structural! It's not like you just write up a non-structural model on a whim or something!). He distinguishes between two uses of models: forecasting and policy analysis. For forecasting, "all of the above" strategies are fine. For policy analysis, you want structural models. I think this is basically right. However, there's a third thing that we want to get out of economic models that is actually the most important reason for me: explaining the economy. Not predicting its future path. Not advising policymakers. But simply understanding how it works. And for that, I think both non-structural and structural models are useful. Since explanation is preferably causal rather than just descriptive, we don't want to ignore the microfoundations.

- The IMF says that we should look to the 1930s for housing policy. As Keynes might say, appeasing the rentier will not get us out of the slump. I'm interested in Andrew Bossie's thoughts on this.

- Speaking of Keynes, Jared Bernstein discusses George Bush the Keynesian. Now I kind of miss the guy. Maybe we should have had Gore 2000-2004 to keep us out of Iraq as we prosecuted the war on terror, Bush 2004-2012 to ignore the deficit when it actually made sense to ignore the deficit, and Obama 2012-2020, to swoop in and fix health care and entitlements.

- More Keynes: Jonathan on Chapter 3 of the General Theory. Haven't gotten a chance to read closely yet, but you should not make the same mistake.

- I am trying to pull together a power analysis for our Sloan Foundation proposal, at their request. I know generally what these entail, but it's not something that economists generally use - usually it's used by people with smaller scale experiments in fields like psychology. Although just out of curiosity I've picked the brains of a friend (who just finished a psych PhD) and my sister-in-law (who is in the midst of a psych PhD) about it, and neither of them are big fans of the approach. But you do what the funders ask you to do (so long as it isn't blatantly wrong, of course). Anyway - because economists don't generally use these methods, I wanted to share what I found out about power analysis in stata in case any of you are interested. The UCLA site has two commands of interest: powerreg and sampsi. You can import both by typing "findit powerreg" and "findit sampsi". Powerreg does a power analysis for regressions and sampsi does it for difference of means tests. I didn't even know you could do power analysis for regressions, and it's a little screwy - you ultimately get out the improvement in R-squared that you can detect with a given sample size and power level... but who thinks about regressions in this way? I would have thought you'd be most interested in the change in coefficient that you'd be able to detect with a given sample size and power level. So I think I may stick with the more traditional difference in means to satisfy Sloan's curiosity. But stata can do both if you ever have a need for it.

Two links

It was a somewhat disappointing home inspection... an issue we'll have to call in an engineer for. It may be fixable, or it may be a deal breaker. All we have to do is wait.

Anyway - not a fun day, but it's always good to come home to two solid pieces of economic analysis that I can nod my head vigorously to:

1. The indispensable Paul Krugman on how annoying it is when people lump Social Security, Medicare, and Medicaid together, and

2. Adam Ozimek on four things that "all economists" agree on. What's most impressive about this post is that for the most part he did not pick stereotypical things like rent control.

Industrial Policy

Ezra Klein asks if the debate about it is back. Hopefully not. I think reasonable economists who understand that some interventions correct rather than create market distortions should be very careful how they talk about these things, because discussions about "industrial policy" very quickly become big tents that everyone can latch on to. We need to make specific cases for externalities that need to be addressed, so that people understand why one action that may help manufacturing firms is reasonable while another action isn't. We can't let people get away with the idea that anything that helps American manufacturing is good policy. And we really, really need to drop this term "market failure" (which Klein uses in the post). It's a terrible term. Markets haven't "failed", they're distorted or operating sub-optimally for one reason or another. If people start questioning the validity of market allocation, that too will become a free for all.

We should be talking about specific externalities and helping people understand them - we shouldn't be sowing seeds of doubt about markets writ large.

A few questions about Hayek and Keynes

1. Exactly why are so many Austrians so convinced Keynes botched Wicksell? I hear this all the time, but I don't know if I've ever heard why. I'm not sure they even know why I say this. The best explanation I can get isn't from any modern Austrian, but from Hayek himself who talked about how concepts of saving weren't exactly consistent between them. This is something I thought Keynes noted explicitly, so I'm not sure this amounts to him "not understanding" him. Am I missing something?

2. It will feel like we've been over this before, but why would it be wrong (or wouldn't it be wrong?) to look at employment fluctuations in more and less roundabout industries as a test of ABCT?

3. How do Austrians think about the yield spread as a predictor of recessions? For me, it seems to highlight changing subjective expectations of future profit opportunities, so it seems to have an obvious Keynesian interpretation. It's less obvious to me how Hayek especially would think about it, because he didn't talk about short and long term rates as much as Keynes did that I know of.

Stickman defends Malthus

Here. Good for him! I've always thought people were unfair to him too. I've talked about the "Malthus PR Problem" here, and in a few other cases. I also suggest reading the sections on general gluts in his Principles of Political Economy.

Sumner on Krugman

Recently I've been bothered off and on by Scott Sumner's insistence that everyone has it wrong but him, and his regular claims that somehow there's a debate between Keynesians and market monetarists over whether monetary policy is wise right now. He strikes me as inventing enemies because... well I'm not sure exactly why - it seems like a dumb thing to do right now.

In light of that, it's worth reading this new post by Scott on Krugman, where he acknowledges Krguman's support of monetary policy and presents the expectations-based argument that Krugman and other Keynesians make now that we're in a liquidity trap (in which the short-term interest rate mechanism of monetary policy is less relevant to talk about).

Life updates

I don't know why, but I kind of like writing these autobiographical updates when things move into the "inbox" and get put in the "outbox". So here's another one.


- As I noted, there were a few counter-offers on the house but we finally settled on something that we're happy with, and the contract is ratified - closing May 10th if everything goes well. This whole process went surprisingly smoothly, but I imagine when it comes to juggling selling and buying at the same time it would have been a lot harder. Home inspection Monday - I'll try to remember to take pictures and post.

- A draft proposal that Hal Salzman (Rutgers), Lindsay Lowell (Georgetown) and I are writing for the Sloan Foundation was submitted today. They have an interesting grant process - we submit a draft, they circulate and critique it, then send it back to us to change before the quarterly meeting where they make the decision. This is very exciting because it will fund my stipend so I don't have to TA anymore! The proposal is for research on "loose coupling" between science and engineering education and the labor market. Basically, lots of S&E majors don't get S&E jobs and we're looking into why. Hal is a sociologist and Lindsay is a demographer and they have analyses they're spearheading, but the part of the work I'll be directing will be a standard occupational choice model with a few important twists, which will hopefully be intriguing enough to be one of my dissertation essays. I am very excited about this - it could really change the complexion of graduate experience if we get it (which I get the impression there's a good chance of).

- With that off my plate for a little while, I got another thing on my plate that's very exciting! I was invited to write an article for a special issue about Hayek of Critical Review. I was asked to write a "fair but critical" assessment of ABCT. Due in a little down the road, which is good because this will be a busy summer. There are some big names among the other contributors, so this is a great opportunity.

But for now - finishing off the school year, and finishing off a few current projects.

Now that's a good way to scare off potential reviewers!

I am looking through Richard Edwards's Contested Terrain: The Transformation of the Workplace in the Twentieth Century for a paper for my U.S. Economic History class, and he writes this in the preface after thanking some people for reviewing the manuscript: "While I suppose I must accept final responsibility for any mistakes in what follows, these friends have pored over enough of my drafts that they cannot escape completely blameless" !!!!

Labor Supply Functions are Real

I meant to share this the other day. It's a great follow-up coverage by Bill Maher on welfare recipients. If you think labor supply theories are just things that mean neoliberal economists invent to trash poor people, you're wrong. Labor supply curves are upward sloping, and there's a good reason for that, and that's something policymakers should be cognizant of. That's not to say by any stretch that there aren't good arguments for policies that may have negative labor supply effects. There are.

One thing I do agree with Keen on

Is the criticism of representative agent models.

Represenative agents aren't the end of the world, of course, but I think they're very misrepresented. All representative agents give you is a macroeconomics grounded in optimizing behavior. That is the sense in which they are "microfounded". A better word might even be "optimization-founded". That's an important technique to use, but it's not entirely satisfactory. Agent based modeling (or something else other than representative agent) is what really gets you microfounded models.

Do agent based models get you substantially different insights than well done representative agent models? That I don't know.

Am I being too hard on Keen in LK's comment section?

Here. He's got a really bothersome video posted that's worth watching just to get a sense of what Keen's position is. I have to say, my opinion of this guy has dropped like a rock ever since this Krugman/Keen thing started. I always gave him the benefit of the doubt because so many people spoke so highly of him. The blog back-and-forth made me leery, but I figured maybe they were just talking past each other. But this video is chock full of cases where Keen is either completely ignorant or completely disingenuous when it comes to mainstream economics.

One thing's for sure though - I'm really looking forward to my Macro Political Economy class in the fall now. It's basically a post-Keynesian political economy class.

I still have a lot of respect for most of the post-Keynesianism I've run across. But this Keen guy is really starting to rub me the wrong way.