I'm getting close to the point where I feel like I must be missing an important component of the literature if I search on google scholar and don't see a paper by James Heckman

That's all.

Feminism or industrialization? - but why the "or"?

Don Boudreaux agrees with an author at The Atlantic that the decline in home cooking was due to industrialization "and not by feminism".

He makes an excellent case for the role of industrialization which I hope everyone is aware of. He makes no attempt to refutre the idea that feminism has made a difference, so I'm not quite sure what reasons he has for claiming that. Decisions (largely by women) about home production and about labor supply (which allows women to access the benefits of industrialization) are made in the context of:

- Female bargaining power vis-a-vis men in the household
- Female preferences
- Employer preferences

Each of these has been dramatically influenced by feminism. It seems obvious to me that that has played a role as well, and indeed that activating this enormous segment of the workforce has had important implications for economic growth.

Remember - it's not always one answer or the other. It's often  both and they're often intimately connected.

This will probably only interest two to three people :)

This is a discussion from a little while back on facebook with Daniil Gorbatenko about praxeology, preferences, choice, etc. I thought it was interesting at the time and meant to post it but forgot until Daniil reminded me to recently.

It kind of picks up in the middle of the conversation (although not too far in) - we were getting into the weeds on a post on Steve Horwtiz's wall and decided to take it to messaging. Daniil strikes me as making very strong claims here. I'm not sure all Austrians agree with this take on praxeology, but I think there are good arguments against it. There's also simply a disagreement over useful modeling assumptions. There are a lot of wrong abstractions we make that have a big payoff and relatively little cost. The retort "but that's not true" has very little bite in this case, unless you can show that the cost that comes with it not being true is bigger than I think it is.

Daniil summed up his position in discussion in this post. I will do no summing up, but you can get a sense of the concerns I have about his position and about the strengths of the mainstream viewpoint.

*****

DK: People have preferences before an exchange happens. Those preferences are consistent with a whole set of possible exchanges. Obviously only one exchange happens. But it's not wrong to say at all that a person with free will and preferences has a set of possible exchanges and it's not wrong to talk about bounds to that set. Now, to talk about functions we have to make some assumptions about those preferences. But the assumptions aren't all that strenuous and nothing is really lost in making them for analytic purposes.

DG: re: "People have preferences before an exchange happens. Those preferences are consistent with a whole set of possible exchanges."

No, we don't have the grounds to say that. It's an unjustified psychological assumption that mainstream economists use to be able to use calculus.

DK: No, we do have grounds to say that. I prefer coffee to tea. That will inform exchanges I make. The assumptions we make are around the rationality of those preferences - transitivity, completeness. The first assumption there is a reasonable one. The second one probably isn't true but its being wrong doesn't carry much cost and it provides a lot of analytic benefit. THAT is for the calculus. The idea that humans have preferences is very different, and we do have grounds for that.

DG: From the praxeological standpoint you only have preference when it is reflected in the particular exchange. Otherwise you may have preferences in the psychological sense about many things, though I doubt that you may have in your mind at one moment a systematics set of preferences about all the goods. Introspectively, I'm sure this is not the case. But anyway, from the praxeological standpoint it's irrelevant. For a more detailed exposition of this point I recommend chapter 9 of this text http://mises.org/journals/scholar/long.pdf

DK: Well if you want to redefine the word that's one thing. But then if you redefine the word you can't very well use that definition to dispute the definition used by mainstream economists! I can do that. You say exchanges exist. I redefine exchanges to mean "a round square". I insist to you that exchanges don't actually exist. In fact from my perspective they are a logical impossibility. That doesn't get us anywhere, now does it?

DG: Definitions matter here because free will implies that there is no causal connection between psychology and choices. That means that psychological preferences may not explain exchanges the way you want them to.

DK: re: "though I doubt that you may have in your mind at one moment a systematics set of preferences about all the goods"

In my conscious mind? No. In my brain? I carry around a lot of preferences that I am not consciously holding at any given moment. For example, I had to think a second or two to come up with my coffee vs. tea example. Now - as to the point about preferences over "all" goods, this is an assumption that is made for mathematical reasons. But I can't conceive of how making this assumption causes any real problems.

re: "Definitions matter here because free will implies that there is no causal connection between psychology and choices."

No, it doesn't.

DG: re: "In my conscious mind? No. In my brain? I carry around a lot of preferences that I am not consciously holding at any given moment. For example, I had to think a second or two to come up with my coffee vs. tea example."

It doesn't at all imply that you'll necessarily choose in accordance with these preferences which returns us to the free will point. Free will implies that there is no sufficient cause of your particular choice.

DK: re: "It does. Free will implies that there is no sufficient cause of your particular choice."

That sounds more like something like "stochastic will" than "free will". But I'll work with that definition. Again, mainstream economists make rational choice assumptions so the math works. If you want to argue that people will always act exactly according to their preferences is a rational choice simplification that seems right to me. But it still seems like a very reasonable simplification to make for the math. Certainly it doesn't challenge the point that preferences exist prior to exchange and that they inform the exchange.

DG: re: "That sounds more like "stochastic will" than "free will". But I'll work with that definition."

Well, this aspect free choices share with stochastic processes.

re: "If you want to argue that people will always act exactly according to their preferences is a rational choice simplification that seems right to me."

Just for clarification, Austrians (at least of the persuasion that I adhere to) do not believe in our being able and are not trying to, explain human choices in terms of their prior psychological preferences. They (we) say nothing about that. And we believe the attempts of mainstream economists to psychologize economics are mistaken precisely because of the free will property. Again, free will implies that there is no remotely precise mapping from psychological preferences at some point in time (even if they exist without your thinking of them which is not at all clear) to choices at another point in time.

DK: So you don't just think that psychological preferences sufficiently explain choice. You actually think they are a bad predictor of choice. That is interesting. On what grounds do you make that claim? That seems like a very strong claim indeed. Not sufficiently explain I would agree to and I would say that we argue they sufficiently explain it for the math. But to say that it's "not remotely precise" seems absurd.

DG: re: "That is interesting. On what grounds do you make that claim? That seems like a very strong claim indeed."

Well, because free choices are not outcomes of a stochastic process. Thus, the talk about predictors is misplaced.

DK: So you believe its true because you assert its true. I see. Hmmm...

Let me clarify. I believe that psychological preferences are very close causal predictors of choices because I prefer coffee to tea and I buy a lot more coffee than tea. I prefer jeans to khakis and I buy a lot more jeans. I prefer bacon to sausage and I buy a lot more bacon. It seems to me that these psychological preferences I have right now, sitting down, not confronted with any choices are fairly stable and have a lot to do with the choices I do make. That's my reason. Can you tell me your reason other than just saying "because its true"?

DG: My reason is twofold. First. I know from introspection that I made many choices differently from what I had thought I preferred. Second, I don't think you have psychological preferences unless you conceptualize them. And due to time limits and distractions to other things you're only able to conceptualize very little of your psychological preferences, anyway. Conceptualize prior to choice situations.

DK: re: "First. I know from introspection that I made many choices differently from what I had thought I preferred."

This seems very atypical. I mean, everyone has impulse purchases. We can file that phenomenon under "maybe choices aren't perfectly rational". But do you think this is typical?

re: "Second, I don't think you have psychological preferences unless you conceptualize them"

Then why is my "coffee preferred to tea" preference so persistent between the times that I do and don't make the effort of conceptualizing it? The consistency seems to suggest that these preferences exist in our brains even if we're not conceptualizing them at any particular moment.

DG: re: "This seems very atypical. I mean, everyone has impulse purchases. We can file that phenomenon under "maybe choices aren't perfectly rational". But do you think this is typical?"

Yes, I believe that this is more typical than the reverse. Most of our choices are spontaneous, in my view.

re: "Then why is my "coffee preferred to tea" preference so persistent between the times that I do and don't make the effort of conceptualizing it? The consistency seems to suggest that these preferences exist in our brains even if we're not conceptualizing them at any particular moment."

I'm afraid you're here conflating the praxeological preference that you infer from your choices of coffee over tea with psychological preference. And that's why you are probably so sure that you are always acting in accordance with your psychological preferences. You infer them largely from your actual choices which is a mistake.

DK: On psychological/praxeological preferences - so you are claiming that my preference for coffee over tea comes up repeatedly simply as a matter of chance - that there is nothing more fundamental in my brain driving that (even though that preference is not always conscious for me). What you call praxeological preference I call "revealed preference", and it seems to me there if very good reason to believe that those revealed preferences are grounded in pre-existing preferences.

DG: re: "On psychological/praxeological preferences - so you are claiming that my preference for coffee over tea comes up repeatedly simply as a matter of chance"

No. It comes as a result of evaluative process that is neither stochastic nor determined by previous mental or brain states.

re: "What you call praxeological preference I call "revealed preference", and it seems to me there if very good reason to believe that those revealed preferences are grounded in pre-existing preferences."

'Grounded' is a loose word that can mean many things. I'm not saying that choices are not at all related to psychological preferences. What I'm claiming is they are neither strongly, nor loosely determined by them (there is no probability distribution of choices derivable from psychological preferences).

Essie Massoumi Lecture

I just wanted to share some quick thoughts from a great lecture today in my microeconometrics seminar with Dr. Essie Massoumi, of Emory University. He's in town for the week working with my professor so he came in to talk with us about some of the interesting growth areas in econometrics.

He started by laying out the fundamental problem a lot of econometricians feel like they are dealing with, and how they solve that problem: identification of some treatment effect. He was specifically discussing propensity score matching and describing the average treatment effects that come out the other end. There is not a lot of work to do elaborating on that method, he said. His concern is that this way of thinking about the problem eliminates a substantial amount of information.

Focusing on average treatment effects ignores how distributions change as a result of a treatment. This can make a big difference for certain populations if treatment effects are not constant over the distribution of the outcome variable. Consider the case of the gender wage gap, which is reported as an average gender effect, but is different along the income distribution (plausibly, it is lower for low income individuals and higher for high income individuals). Of course you have to know where your treatment group is on the distribution of outcomes as a counterfactual to assess this (that was the point of starting with a propensity score set-up). Probably the most common way of addressing these concerns is with quantile regressions.

Another line of research he talked about was on establishing stochastic dominance of a distribution - in other words, identifying whether one distribution can be said to be preferred to another according to a wide class of preferences. If stochastic dominance could be established, that would solve a lot of policy choices. He also pointed out that if one could not establish stochastic dominance that tells us something interesting too: that disagreements over policies have more to do with values and preferences than they do about disagreements over program impacts.

One of the points I raised - in the context of his discussion of propensity score matching - is that when we do propensity scores we're typically most concerned about unobservable characteristics. We wave our hands at that and say that the observables are a good proxy for the unobservables so its like we've matched on unobservables too. No one really believes that deep down, but people go along with it anyway. My point was that this becomes a much bigger deal when we do what he proposes - consider treatment effects separately across the distribution of outcomes, rather than just looking at average treatment effects. If the unobservable characteristic is correlated with the outcome (which it ought to be), then a lot of the heterogeneity in the effect size across the distribution of outcomes is going to be driven by unobservables. Taking an average treatment effect at least had the virtue of averaging that out too - you could imagine situations where looking across the outcome distribution would be a liability if unobservables were a substantial problem. He seemed to agree with me, although the professor pointed out that conditional treatment effects would also probably solve some of this.

I know this is all a little vague - I'm as much jotting this down so I can remember the issues that came up as anything else.

I have not really digested the tools he talked about (he didn't even get to talking about them in great detail). I think what's important is the principle that is motivating the use of those tools: how average treatment effects can sometimes be very misleading.

That's not a good sign!

I saw an H&R Block ad on the metro today that said something to the effect of "On a scale from 1 to 10, our customer service is an 11!"

I'm not sure I want someone doing my taxes or financial planning if they are that innumerate!

Frank Hahn, 1925-2013

As I'm sure many of you have heard by now Frank Hahn - who has come up lately on this blog - passed away.

Urban Institute heavy-hitters on the budget

This new paper from Gene Steuerle, Benjamin Harris, and Caleb Quakenbush reminded me that I forgot to post the video of the fiscal cliff event at the Urban Institute I attended a couple weeks ago.

If you want to know where I stand, I found very little to disagree with in what Robert Reischauer said (not a new phenomenon for me). Marron and Penner were of course great too, though. They were all mostly focused on long-term sustainability, but you'll notice that the short term impact of this tightening played a big role in how he evaluated the ultimate agreements made at the beginning of this month.

This is not really old news even though that fight is past - as they highlight in the talk, the agreement laid out earlier is going to keep reemerging over the next several months.


Video streaming by Ustream

Remember, there is no invisible hand

And I don't mean that it's a metaphor and it's not "real". I mean there is no such metaphor in the way we normally think about it. I noted this on Coordination Problem the other day.

I hope most of you are familiar with the arguments of Gavin Kennedy. I agree completely with him on this. When people like Kenneth Arrow refer to "the invisible hand", I take it to be the shorthand we've adopted for Smith's claims that private action leads to public good. That was all over the Wealth of Nations. But the actual passage discusssing the "invisible hand" has nothing much to do with it.

As a matter of terminology, I don't personally mind that we've adopted "the invisible hand" to mean that (that's why I was quoting Arrow and Hahn uncritically on this last night). It's a nice phrase, after all. But as a matter of history of thought I've always agreed with Kennedy on this.

Thanks for reminding us, Gavin!

Kenneth Arrow and Adam Smith

"...the notion that a social system moved by independent actions in pursuit of different values is consistent with a final coherent state of balance, and one in which the outcomes may be quite different from those intended by the agents, is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes. [Adam] Smith also perceived the most important implication of general equilibrium theory, the ability of a competitive system to achieve an allocation of resources that is efficient in some sense. Nothing resembling a rigorous argument for, or even a careful statement of the efficiency propositions can be found in Smith, however."  

- Arrow and Hahn, 1971

Arrow of course proceeds to provide some efficiency propositions that most economists would find relevant to think about, and he rigorously demonstrates the point that individuals pursuing their own interests can generate beneficial results for society in a system of market exchange. Adam Smith took an enormous step forward and provided arguments that had been fairly convincing. Walras, Arrow, Hahn, Debreu, etc. picked up where Smith left off. I'm sure they found Smith's arguments plenty convincing, but they were nevertheless able to provide new arguments - and they did.

Is Arrow's efficiency criteria Smith's? No, of course not. They didn't even talk about "efficiency criteria" back then and Pareto hadn't even been born yet (much less Kaldor or Hicks). To point out that this is not precisely how Adam Smith addressed the question misses the point. We don't want to keep providing the same answer, we want to make this Smithian channel of thought deeper, broader, and stronger.

Are the parameters of Arrow's inquiry exactly the same as Smith's? No, of course not. The analytical toolbox gave primacy to some assumptions and made others less relevant. In the end Arrow did not speak to all that Smith spoke to, and vice versa. But again, we don't want to keep providing the same answer in science. We want to take a good answer and make it deeper, broader, and stronger. And that's what Arrow did.

Mark Blaug has called this a "travesty", but Mark Blaug seems to think Arrow's citation of Smith indicates that Arrow thought he was reproducing Smith's argument as opposed to doing constructive work in the same channel of thought. Mark Blaug is a historian of thought, but in calling Arrow's citation of Smith a "travesty" he demonstrates that tendency that we all succumb to sometimes when we hold a hammer: the tendency to see nails everywhere.

I, for one, am always in awe whenever I even dip my toes into the work of someone like Arrow. The suggestion that he is not moving forward Smithian economics because his framing of the issue is not identical to Smith's seems to miss the whole point of "moving forward Smithian economics" to me. The most important element here is that private choices in market exchange are socially beneficial. Arrow has that. The idea that he brings in certain efficiency criteria and assumptions to talk rigorously about this phenomenon doesn't change the fact that he's doing Smithian economics. Smithian economics is about the heart of the theory, not the minutiae of approaching the question that change over time. On the flip side, the idea that Arrow is not moving forward Smithian economics because he only provided his answer to a relatively restricted case is laughable. You try to do better if you are tempted to throw this at him. I know I can't!

Two gender econ things

First - you all might have missed it but Krugman recently favorably cited research by freshwater economists. And not just any freshwater economists, but real business cycle theorists! This was in his post about the decline in non-work hours over the last several decades.

Real business cycle theorists have been doing a lot of fantastic work incorporating gender and household production into macroeconomics, because time spent in (unpaid) household production turns out to be quite important in considerations of labor supply levels. Unfortunately, they don't get a lot of credit for this either from macroeconomists (who are not primarily concerned with these issues) or from economists interested in gender (I think probably because they're just not reading the real business cycle literature as much, because they don't figure it will be relevant).

But don't ever say Krugman doesn't have a kind word to say about RBC!

*****

In the gender macro class, we have to do weekly reaction essays to readings as well as participate in an online discussion board for the class. Lately we've been working with models by development economists as well as some post-Keynesian models that look at the role of gender wage disparities and the feminization of the labor force for how economies react to price shocks (generally export prices). One of the points I raised on the discussion board recently concerns the mainstream vs. heterodox issues that come up on the blog occasionally, so I thought I'd share it:

"I don't necessarily agree that heterodox models are either "more realistic" or better equipped to incorporate gender than mainstream models. I think the case for heterodox models along these lines is overwrought. The advantage of heterodox models (post-Keynesian, Kaleckian, Kaldorian) is that since the eclipse of the use of the Keynesian cross in formal macro work, they are some of the only models that give prominence to issues of effective demand, paradoxes of thrift, the futility of wage cuts, and those sorts of things. That's a major advantage, and one of the reasons why I like these models - but I don't think it makes them more realistic than mainstream models. Mainstream models generally do a better job of incorporating expectations, price setting behavior, intertemporal choice, and microfoundations. These are all areas the mainstream has pushed forward while heterodox economists have been working on other problems. You really need a rich set of perspectives to draw on, I think.

This is a little tangential to the point about gender, though. The special advantage that heterodox models have for gender is their tendency to divide economic actors into classes (sort of a classical/Marxian carry-over), which lends itself naturally to gendered classes like "men" and "women". If we think the response of investment and savings are sensitive to the relative participation of men and women in the labor force (as Erturk and Cagatay (1995) propose), a heterodox approach is a natural one.

Mainstream models have advantages in working with gender too, though. Bargaining models are mainstream, and one of the big reasons why we think gender disparities exist is because of power relations between men and women that can be easily modeled by assigning men higher bargaining power in a model. Standard labor supply models have done a fine job incorporating unpaid work - I don't know of an equivalent heterodox approach to labor supply (which is not to say there isn't one).

The more tools you've got in your toolbox the more likely you are to be able to answer a question that pops up."

Yep, that's a REAL Keynesian Congress we've got!

Ugh.

A study in contrasts

"He [James Buchanan] got a lot right that desperately needed to be gotten right and that nobody else would have gotten right in his absence. He made a difference in economics at more than the margin, which is something you can say of very few economists." - Brad DeLong, 2013

"Thus Say gives what is the first thorough explanation I have ever seen of irrational exuberance, overtrading, excessive leverage, disappointment, panic, flight to quality, excess demand for high-quality and liquid assets producing excess supply of goods and services and labor, falls in incomes, and the fall in incomes causing the initial problem to snowball..." - Brad DeLong, 2010

"The resurrection of Keynes among professional economists, public intellectuals, and especially politicians and policymakers in the wake of the global financial crisis of 2008 has been one of the most disappointing developments I have witnessed in my career as an economist... Keynesianism is indeed a disease on the body politic in democratic society. An economic doctrine of technocratic arrogance, it suffers from the “pretense of knowledge” and gives scope to the opportunistic behavior of politicians who become unconstrained by Keynesianism in practice." - Peter Boettke, 2012

*****

I always enjoy reading what Boettke has to offer - the point of this study in contrasts is not at all to try to slam him as some kind of meanie (although his discussion of Keynes in the chapter I quote is surprisingly aggressive and dismissive).

What I want to highlight here is how I think he diagnoses the fault lines in economics, the nature of economics, and the primary issues at hand quite inaccurately. As I noted in a comment yesterday, it's not so much that Boettke's conception of "good economics" is bad (although of course I'm sure we'd all have our tweaks we'd make) - it's that he cannot take "yes" for an answer and seems to insist that there is a large divide that isn't really there.

The heart of Boettke's dissatisfaction and disappointment in my opinion has very little to do with economics and a lot more to do with what he considers to be good and bad political ideology. People on the "bad" side of the political ideology question are interpreted to have abandoned Smith, abandoned Hayek, abandoned Buchanan, signed off on any sort of interention and written off any concern with institutional design or constraint.

This, in my opinion, is barking up the wrong tree.

...speaking of dusty books

I have Liberty Fund copies of Smith which I use more regularly, but my favorite copy of Smith is one from my great-grandad's library. I'm no book expert, but I think it is from 1910. Edwin Seligman (Columbia University) has an introduction to it, and in its list of previous printings of the Wealth of Nations by other publishers, the most recent it lists is 1904. The earliest edition from this publisher with a Seligman introduction is 1910, so I'm guessing this is from 1910 (if it were one of the later editions, you'd think it would have listed the 1910 edition).

Who taught me Smith

This is probably of interest. Three people, mainly - two directly. My history of thought professor at William and Mary, my history of thought professor at American University, and of course Paul Krugman who was the writer that really turned me on to economics about a decade ago at this point.

Both of my history of thought professors didn't just teach Smith. They taught me that Smith was one of the indispensible economists, not just a dusty book on the shelf. They both loved him, particularly my American University professor.

Both also happen to be quite a bit to the left of me!

And of course, you all know Paul.

Russ asks about my Smithianism

Russ asks what is Smithian about my perspective:

"What is Smithian about me is that I start with what Dan Klein calls a "presumption of liberty." I also have little faith in precise models of human behavior. I believe that good social science is narrative in nature using facts and observations about the world. I am suspicious of politicians who try to engineer economic systems from the top down. I think people are a mix of self-interested and altruistic but the self-interested part dominates. What induces altruistic behavior is a desire for respect. I believe people (even economists) are prone to self-deception. I think the division of labor is limited by the extent of the market and is likely more important for creating prosperity than Ricardian comparative advantage.

What's on your list?"

The presumption of liberty (where he starts) is a good place for me to start too. From my perspective we presume liberty - we are not awarded liberty by the state. That's not to say I believe in natural rights. When the state acts it acts because free people empowered it to to achieve our ends, under the strictures of constitutional restraints (ideally).

As far as "precise models of human behavior", I don't have faith in these as deterministic accounts, but I do have faith in them as representations of less precise theories that help us to understand human behavior. I think this is exactly how Smith would view things. For example, take Smith's high esteem for the "precise model of human behavior" offered by Quesnay (a sort of proto-Keynesian model, in fact!). He seems to have the same reaction that I do to economic models today. So I'm not sure it's especially Smithian to "have little faith" in models, as Russ puts it. But it is important to know what they're used for.

The economy is a very complex phenomenon. Without mathematical models its very hard to ensure that all the assertions you're making are sensible and consistent. It is sufficiently complex that we are never going to get a deterministic model, but nobody really has a serious hope of keeping everything straight and sensible if they don't discipline their economics with equations and mathematics. Without that all you've really got is gussied up man on the street musings. But with math you can make sure that you are putting together a sensible argument and not just offering an impressionistic set of passages.

I strongly agree that good social science is narrative, using facts and observations about the world (the latter being particularly near and dear to my empirical heart). Of course it's not limited to narrative (see my discussion of models above). In my view one of the unsurpassed examples of narrative along with observation is Friedman and Schwartz's Monetary History, and I think it is also apparent in the natural experiment literature which really is an attempt to use neat little stories to demonstrate the veracity of a theory in a rigorous way. Adam Smith, like Friedman, was also a master of narrative (to bring us back to the point of the post!).

I have nothing to disagree with in the rest of Russ's post. I also am suspicious of politicians who try to engineer the economy from top down. Our institutions have evolved over time and while that doesn't mean they are inviolate my regular readers know I'm suspicious of radical changes that are motivated by utopian expectations.

I also think people are self-interested but altruistic and that self-interest dominates. I'd add that self-interest is not the same as "greed". I am not sure if I agree that the desire for respect is what induces altruism (although certainly it can). I'm not sure if this puts me on the outs with Smith, but if it does that's OK. I think people genuinely care about each other, and that that co-exists with our self-interest, and that economists who study the economics of care (like van Staveren, Grown, Folbre, etc.) are doing tremendously important work that has only recently captured my imagination and spirations.

Russ ends on a theme that is also near and dear to my heart - that the division of labor is limited by the extent of the market, and that these forces are more important in the long run than Ricardian forces.

I had known this part of Smith very early on, of course, but it was really driven home for me by Paul Krugman about a decade ago at this point. Reading Krugman on geography and trade for a class paper was what first really got my excited about economics, and Krugman talked emphatically about why Smith was in a lot of ways a lot more important than Ricardo. This is trade, but for Smith it also applied to growth in general, which is why I also value work by people like Paul Romer who ties Smithian themes on increasing returns and growth to scientific progress. This has been a big reason why I've fallen in love with the science and engineering workforce as my own research interest. This optimistic, market-oriented, innovation-driven view of growth is why (even though some of its predictions are off), Economic Possibilities for Our Grandchildren is still one of my favorite writings of Keynes.

But aside from this headline stuff, something else I love about reading Smith that isn't on Russ's list is all the little insights that you get reading him. Efficiency wages are in Smith. Credit rationing is in Smith. Of course there's lots in there on market power. Hell, if we wander out of Wealth of Nations and into his History of Astronomy we get a Kuhnian account of scientific development (and a third, less remarked on reference to an "invisible hand"!). So what I like about Smith is that he understands and expounds upon the sense in which the social world is a complex place. That's satisfying enough as a reader of Smith, but when he anticipates things like Stiglitz's work or Kuhn's work in the 20th century (which in turn has had its impact on me), that is truly impressive to me.

UPDATE: I forgot one of my favorite senses in which I am a Smithian economist! I feel that one of the most important ways that economists can contribute to debunking popular fallacies is in pointing out when people commit fallacies of composition. Avoiding fallacies of composition is critical to social science in general, and economics is no exception. This was the heart of Smith: free pursuit of self-interest benefits everyone. Debunking these fallacies of composition is of course also one of the things I like most about Keynes.

Russ Roberts responds, and asks a question

As many of you know, I poke bigger names in the profession on here and when they are kind enough to take the time to respond I usually like to share their comments in a post. So here's Russ:

"My team didn't get our way in the crisis. Neither did yours. But your side got a lot closer. Don't you think that the $820 Billion dollar "stimulus" package had more in common with Keynes than Hayek?

Alan Blinder is a pretty Keynesian guy. He thought it was about the right size: http://www.npr.org/templates/story/story.php?storyId=100018973 I know--some people wanted a bigger stimulus. But it's a Keynesian stimulus not a Hayekian one. What is Smithian about me is that

I start with what Dan Klein calls a "presumption of liberty." I also have little faith in precise models of human behavior. I believe that good social science is narrative in nature using facts and observations about the world. I am suspicious of politicians who try to engineer economic systems from the top down. I think people are a mix of self-interested and altruistic but the self-interested part dominates. What induces altruistic behavior is a desire for respect. I believe people (even economists) are prone to self-deception. I think the division of labor is limited by the extent of the market and is likely more important for creating prosperity than Ricardian comparative advantage.

What's on your list?"

I had responded: "Right but everything that has happened since the stimulus has been holding federal spending steady and they've all been arguing about how to reduce it - in the middle of a depression. That sounds closer to your response (cut) than mine (grow)."

What is the primary fiscal task that both parties see as being before them right now? Cutting the deficit and cutting spending, and for some people even raising taxes. Politicians see the deficit and spending as the problem and their answer is to cut it. Federal workers are under a pay freeze and a hiring freeze. The identification of the problem and the proposed solution to the problem are all Russ's "teams" problems and proposed solutions. Now ultimately they'll tinker around the edges, do a lot of dumb stuff, not make either of us happy, and probably continue this slow-motion austerity. But the idea that they're even in the ballpark of a Keynesian diagnosis and solution is a claim that doesn't make sense to me. If it weren't for automatic stabilizers that politicians have no control over, we'd have even less Keynesianism.

My solution is an institutional one - we need institutions that are less prone to these problems. We cannot hope that politicians are suddenly going to get Keynes. But we can influence institutions in a way that will improve performance - reform around debt limit laws, filibusters, ethics enforcement that guarantees we are actually providing for the general welfare and not individuals' welfare (consistent with Constitutional mandate), perhaps term limits, etc. And then of course we just need better economics education to reorient the discussion away from austerity.

In the next post I'll answer Russ's question on Smith.

The cost of living on Mars

Here.

Expensive, but not insurmountable. A no-brainer when you think of other things that government and private individuals spend their money on, and the depression that we're in right now.

And this is a conservative cost estimate for any reasonable accounting for a colonization initiative in that it does not take any Ken Arrow type insights into account.

You can't forget that beautiful little expression, bG^-n, when you talk about these sorts of things!

"It's not in their DNA - it's a footnote"

Wow. There's some surprising stuff in this Peter Boettke interview. This one is speaking of questions of rent-seeking and the economic analysis of policy for Stiglitz and Krugman. I'm shocked he could say that.

If he actually thinks this of people it's no wonder he's frustrated. It's entirely baseless, IMO - but it explains a lot about where he's coming from.

Earlier he said that "we" - mainline economists - think about economics 24/7 and that "mainstream" economists think about it 9-5 - they don't have it in their blood, and that's an important difference. This was a point he said David Friedman made once and that Pete and Russ both agreed with strongly*.

I had always thought the big problem with Boettke's definition and criticism of the "mainstream" was an analytical problem. But it seems to be a lot more tribal/us-vs.-them/identifying "the other" than I had ever thought before.

The funny thing is, I nod my head at almost all of what Peter says constitutes "good economics" (less of what he says constitutes "bad economics", but still a great deal). But the way he sees other economists is very surprising to me listening to this.

* - Ironically this came up in a converation with Kate this weekend - that I think about economics all the time - 24/7. She said that's why she wanted to make sure I followed through and got a PhD and didn't just make do without going through that.

An assertion

I think this ought to be fairly non-controversial, but I have a feeling it might be: Economists like Russ Roberts have a greater influence on the decisions of Congressional Republicans than economists like Paul Krugman have on Congressional Democrats, when it comes to macroeconomic questions. This is not to say that either have the sort of pull with lawmakers that they'd be satisfied with. In the end, politicians pretty much do their own thing. But a Republican majority would be more likely to make macroeconomic policy Russ could live with than a Demoratic majority would be to make macroeconomic policy that Krugman could live with.

Not a good post from Russ

You guys know that over at Cafe Hayek Don's style and content bothers me leaps and bounds more than Russ's. But today's post is not a good one for Russ. A couple observations:

1. He really can't juxtapose Smith/Hayek with Keynes the way he's doing here. Economics, in reality, is actually not a boxing match. That's not to say Hayek and Keynes can perfectly co-exist. There were clearly specifics they disagreed on and one (or both) has to be wrong on something. It's irresponsible to look at the success of Keynesian economics and conclude Adam Smith has fallen. I guarantee you, Russ - we are Smithian as much as you are. Very few economists aren't. By acting like these cannot co-exist you're getting a bad answer to your own question.

2. There is a "market for science" in both the strict supply-and-demand market and in the broader sense of a set of exchange relations. In neither sense is science produced predominantly for the consumption of politicians and the general public. Scientists try to convince other scientists. To the extent that they are public expositors, that's not going to drive their scientific conclusions.

3. The idea that modern policy is supported by Keynesianism is nonsense. Why do you think Keynesians have been pulling their hair out for almost five years now? It is amazing to me people are still claiming this. There's this weird assumption that because Russ didn't get what he wanted we must be getting policy justified by Keynesianism. That's not how it works.

4. Ultimately, the same critique needs to be made here that needs to be made about the Keynes v. Hayek raps that Russ worked on: it's not so much the finer points as it is the big picture - if you see this as a battle royale or if you see this as "bottom up" vs. "top down", you are fundamentally misunderstanding the nature of economics discussions right now and you are fundamentally misunderstanding what the other side claims. I'm a bottom-up guy. I'm a Smithian. I'm a Hayekian. I'm also a Keynesian.

"Many a reformer perishes in his removal of rubbish"

"Many a reformer perishes in his removal of rubbish, — and that makes the offensiveness of the class. They are partial; they are not equal to the work they pretend. They lose their way; in the assault on the kingdom of darkness, they expend all their energy on some accidental evil, and lose their sanity and power of benefit. It is of little moment that one or two, or twenty errors of our social system be corrected, but of much that the man be in his senses.

The criticism and attack on institutions which we have witnessed, has made one thing plain, that society gains nothing whilst a man, not himself renovated, attempts to renovate things around him: he has become tediously good in some particular, but negligent or narrow in the rest; and hypocrisy and vanity are often the disgusting result.

It is handsomer to remain in the establishment better than the establishment, and conduct that in the best manner, than to make a sally against evil by some single improvement, without supporting it by a total regeneration. Do not be so vain of your one objection. Do you think there is only one? Alas! my good friend, there is no part of society or of life better than any other part. All our things are right and wrong together. The wave of evil washes all our institutions alike...

I do not wonder at the interest these projects inspire. The world is awaking to the idea of union, and these experiments show what it is thinking of. It is and will be magic. Men will live and communicate, and plough, and reap, and govern, as by added ethereal power, when once they are united; as in a celebrated experiment, by expiration and respiration exactly together, four persons lift a heavy man from the ground by the little finger only, and without sense of weight. But this union must be inward, and not one of covenants, and is to be reached by a reverse of the methods they use. The union is only perfect, when all the uniters are isolated. It is the union of friends who live in different streets or towns. Each man, if he attempts to join himself to others, is on all sides cramped and diminished of his proportion; and the stricter the union, the smaller and the more pitiful he is. But leave him alone, to recognize in every hour and place the secret soul, he will go up and down doing the works of a true member, and, to the astonishment of all, the work will be done with concert, though no man spoke. Government will be adamantine without any governor. The union must be ideal in actual individualism."

- Ralph Waldo Emerson, 1844

I suppose once I go through a full four seasons, some of this house stress will end

It's relatively obvious that a 45 year old house is not the same thing as a 20 year old apartment. But learning how it's not the same is a different and more nerve-wracking process than knowing abstractly that it's not the same (particularly when you're not just paying rent). Much of this has come with the change of temperatures, of course. In the late fall the duct sounds had me worrying briefly something was wrong in the crawl space. I'm learning when I should panic about settling and when I shouldn't. Now this morning I see cracks under the moulding which apparently can also happen because of the cold (caulk and repaint, that's all). In the end, I usually end up knowing more about the house than I did before the worry, which is nice. Houses are like people - they're each unique and have their own quirks that you get to know over time.

Four thoughts:

1. Google is such an amazing invention. It's very easy to check up on questions I have.
2. Once I go through four seasons in this house I imagine I'll learn most of the big things that are ever going to catch my attention in the future.
3. One comforting thought is always: this structure has been standing for over 45 years. It is not invincible, but if it's survived this long it's clearly gotten through everything it's going through now before. Just maintain it and gussy it up especially nice when it's time to trick someone else into buying it several years from now.
4. When there is work to do (and there has been), good help is always nice:

Getting ready to put up pantry shelves yesterday

Kan't forget Kalecki

I put Kalecki in the "simultaneous discovery" category rather than the predecessor category, but he needs to be noted in light of the last post. Kalecki is right there with Hicks as a guy that could have been Keynes if there was no Keynes.

Kaleckian models are also a good illustration of my point in the last post about the difference between a theory and a model. If you figure that many models can operationalize Keynes's theory, Kaleckian models are also good competitors with Hicksian (and for that matter New Keynesian models) as an operationalization of the foundational Keynesian theory.

Kaleckian models are very good for thinking about the macroeconomics of income distribution. They're also good at operationalizing Keynes's idea that wage cuts are not always the answer, because these models allow for what is called "wage led" and "profit led" growth.

What unique insights did Keynes provide in the General Theory?

Jonathan Catalan asks this question in a recent post.

He goes through all the important material I think - where Marshall and Pigou got, what Hicks was doing, etc. Laidler came up in the comment section as one might expect. Hawtrey was there on money. There was surprisingly little discussion of the predecessors of effective demand - arguably the most important "contribution": Malthus, Marx, the mercantilists, and the various assorted underconsumptionists.

I'll let you read the post for what was offered there and just stick to my own thoughts on the question here. I'm not going to go into the details of the ideas here - assuming many of you have some background in it - I'll do more to think about the question itself.

To a large extent, I think it's an ill-posed question, not because it's not getting at something interesting (Keynes's contributions) but because of the sort of expectations it sets up. I doubt there's anything in The General Theory that wasn't anticipated in some way by many others. But this is how every great scientist works. All scientists stand on the shoulders of giants and progress is usually of two forms: tweaking and reorienting. I think Keynes did both to move the science forward, which is why he is so celebrated today.

It's for this reason that I've always thought Laidler's thesis and title in Fabricating the Keynesian Revolution were widely off the mark. His content is fine of course. The problem is it doesn't support the case that the Kenyesian revolution is a myth. Laidler goes through the same usual suspects that Jonathan does, but again misses the point - science isn't conjured up from thin air. It's a social enterprise and it advances by tweaking and reorienting (and funerals, of course). It's not like Keynes or Keynesians try to hide this either. Except for a few contemporaries I'm not sure there's anyone highlighted in Laidler's table of contents that Keynes doesn't himself cite frequently in the book! The same goes for the early Keynesian revolutionaries. One of my favorite early popularizations - Klein's The Keynesian Revolution - goes into great detail on all of these roots. If anyone was under the misapprehension that Keynes sprang fully formed from the head of Zeus it's because they stopped taking economics after their first macro course gloss-over of the man. The simplistic gloss-over is perhaps fine for every-day macroeconomic needs but it's hardly a thesis that a historian of thought needs to tackle. Anybody who cared on a deeper level pretty much  already knew this.

I think it's important not to overstate this point, though. Nothing in Keynes came out of the blue but he didn't just restate things either. Take this whole point about money demand that Jonathan raises. Yes, it's been long recognized that people want to stay liquid. The Cambridge version of the quantity theory made this explicit in a way that the version everyone's used to (do we just call this the monetarist version?) did not. And Keynes was talking about demand for money back when he was a sort of monetarist and long before The General Theory came to be. You don't have to stop with Marshall, though. Thomas Mun - a mercantilist I had mentioned the other day - was talking about this centuries before any of them, and he used it in a Malthusian way to talk about depressions in economic activity. But with perhaps one or two dubious exceptions, Keynes is the first one I know of to have discussed liquidity preference as the foundation of an interest rate theory (those dubious exceptions are both Americans actually: Benjamin Franklin and Irving Fisher each circled the same notion... I'd be interested in others if anyone knows of anyone else). This is a really important contribution even if it's only tweaking what others said. There's a big difference between saying that money demand can cause monetary disequilibrium - people have known that since the dawn of the modern age - and saying that money demand can influence interest rates.

This is the heart of Keynes's critique of the underconsumptionists: they had effective demand and money demand ideas right, but since they didn't have the right interest rate theory they wrongly focused on consumption.

This gets me to what we really celebrate Keynes for: the way he discriminated between ideas and then mixed them together in the right way. Keynes in a nutshell is effective demand, plus liquidity preference theory of the interest rate, plus some observations about the nature of long-run expectations that gives us a theory of investment behavior. Effective demand and the expectations point operate today effectively as they did then. We've re-Wicksellized interest rate theory, but we haven't lost Keynes in the process of doing that. A lot has changed - a lot in the very early years changed in fact. But it all hangs together in broadly the same way.

In many ways, this is a lot like Darwin. The structure of evolutionary biology today is fundamentally Darwinian but that doesn't mean that you can read Origin of the Species and participate in the issues at hand today. Too much has changed. Too much of Darwin's particulars are not operable any more. But the big-picture mechanisms are there which is why we celebrate Darwin. Darwin is also worth pointing too because clearly he too did not make things up out of thin air. Lots of people had not just questioned creation myths before - but had actually proposed evolution by natural selection. So what did Darwin provide that was unique? He put it together in a way that convinced his fellow scientists (eventually) and ushered in a shift in thinking in a way that earlier contributors didn't.

Einstein of course did not emerge out of the blue either! Relativity wasn't new. Poincare was there before (I imagine most of you are up to the task of manipulating m_r = E/c² into something familiar - if so, you need to give Poincare some credit). So was Lorentz, and several others. One thing that Keynes has over Einstein on this count is that at least Keynes went out of his way to cite Marshall, Malthus, Pigou, Hawtrey, Cassel, Fisher, the mercantilists, the underconsumptionists, Marx, etc. as predecessors to his work. As I said before - there's not a whole lot in Laidler's book that Keynes himself doesn't give you! Keynes probaly even cited people that he didn't have to (the "underworld" that wasn't really part of the mainstream scientific enterprise was nice of him to cite, but probably not necessary). When you read Keynes he is just oozing with praise and acknowledgements of the work of others (even people he was allegedly cutting ties with, like Marshall and Pigou). In contrast Einstein was notorious for not citing anyone that had come before him when he wrote up special and general relativity.

But Einstein pulled it together in a way that made it click for people. That doesn't sound as exciting, but that's what it takes. To move science forward you have to present a picture of the world that convinces people. It's one thing to say "people like to stay liquid so they demand money". OK. So? What kind of mileage can you get out of that point? For centuries people pulled a general glut out of that point, which was important. But Keynes got more mileage out of that than anyone else.

Now there's also the question of whether anyone else could have done it. I think the answer to that for any scientist is always "yes, of course someone else could have and in all likelihood would have done it". Intuition and special genius plays a role in the "who" and the "when" of scientific advances, but seemingly simultaneous discoveries are still not that much of a mystery. Current explanations are alway imperfect in certain ways and over time the nature of those imperfections become increasingly obvious. People start to focus on the imperfections and they try to fix them, sometimes through augmentation and sometimes through just reorienting the whole view of things in a way that seems to provide a more natural fit for the world we perceive around us.

Hicks is the natural candidate for who would have done it first if Keynes hadn't. Keynes's priority is of course in part chronological, it's part promotional (Keynes had been pushing these ideas even earlier htan 1936 and was good at pushing them afterwards), and I think it's also that Keynes provides a theory while Hicks provides more of a model.

You need the model-builder, of course. We were on the verge of a new standard for rigor in economics that Hicks played a tremendous part in inaugurating. Keynes probably wouldn't have been as popular as he was if it weren't for Hicks matching a rigorous model to his theory (Hansen as well, I should add). But under the classical theory/model distinction, Keynes really provides the theory and there's some natural primacy involved in that.

Keynes also talked extensively about the psychology of markets and about expectations. I'm sure he had nuggets in there that are genuinely "original". I don't mean to say that no word Keynes wrote was new. But that's obviously not why we celebrate Keynes. We celebrate Keynes because of how he pushed things forward and fit the pieces together.

A few more Mulligan things

- This is his blog. I'm following it now, and of course I'll post anything interesting. He also posts at the New York Times, and I've linked to those a lot in the past.

- This is the website for his book. You can get the chapter with the labor market figure I shared yesterday on this site. I haven't read the chapter yet, but looking through it only the "HA equilibrium" (without shifting labor demand the same way he shifted labor supply in response to the safety net expansions) is in the chapter - presumably the other equilibria he cited are somewhere else in the book, and might even be referenced in the chapter (I'm swamped right now but you've got the link). Taking everything into account to determine how much worse (or better!) the safety net made the recession is quite a task, but if you want to say something about the impact of the safety net on the labor market, I do think you need both supply and demand effects.

- Speaking of making claims about the impact on the recession, this Q&A answer from the same site is interesting:

Q2. Are you saying that the entire recession was caused by redistributive public policy? A2. No: expanded redistribution made the recession at least twice, and probably four times, as deep as it would have been with a constant set of rules for disbursing subsidies to the poor and unemployed. Nor do I say that redistribution was the root cause of the recession – Chapters 9 and 10 of the book explain how the mortgage mess and financial crisis made it politically feasible, if not necessary, to expand the amount of redistribution. [emphasis is added]

So it seems to me to make that bolded claim you really do need take labor supply and demand effects of the safety net into account (I've only seen his take on labor supply effects so far - I need to see the book to understand the rest), but also everything else that's going on. If the recession would have been three times as worse (just throwing numbers out there) without the interventions of Bernanke, Bush, and Obama in late 2008/early 2009, your "at least twice, and probably four times" assessments are obviously going to change!

This is a big job, don't get me wrong - I understand that. I just feel like I need to read Mulligan as analysis of the labor supply impact of recent safety net changes - not as a case for a "redistribution recession".

- Finally - data. Here and here. As you guys know I've done a lot of work on racial and gender disparities. Mulligan - because he's interested in macroeconomic questions here - is aggregating the eligibility and benefits indices. One thing I'm curious about is how these increased eligibility and benefits have differentially impacted UI receipt by race. It's always nice to use and cite someone else's constructed data for this sort of thing. It ensures consistency in the literature and guarantees that you use the best out there (assuming - and I think it's safe to assume - that Mulligan's work on this has been among the most meticulous).

Noah Smith on Solar Power

Here.

He starts with a point that has always puzzled me: "Many conservatives appear to have an unshakable, bedrock belief that solar power will never be cost-effective. Talk about solar, and conservatives often won't even look at the numbers - they'll just laugh at you."

Maybe this is just the conversations I've stumbled into, but it always seems like people have trouble applying Julian Simon's logic to anything other than fossil fuels, when it seems fairly obvious to me that it (along with some of Arrow's learning by doing) applies to any energy source or any resource, period.

A market monetarist talking about the ZLB and normal vs. alternative monetary policies!

Here.

It will be interesting to see if Sumner endorses this or accuses him of thinking monetary policy is useless... I'm guessing he won't do the latter in the case of fellow market monetarist. I'm not sure if he'll do the former.

I think they are trying to tell me I need to turn the heat up

That little nest is cozy for one, to say nothing of two. I took this yesterday - they were napping like that for about an hour before I took the picture. 

 

First snow on my first house

A quick additional thought on Mulligan

I'm getting a few people saying that I'm being unfair to Mulligan - he's just pointing out something everyone ignores: the labor supply effects of the safety net.

First (if you're tempted to say something like this), people don't ignore that. That's just marketing for the research agenda (which is fine - you always talk like you're doing something new... no big deal at all). I'd venture to say that the labor supply effect of the safety net is the most studied thing about the safety net by economists. In addition to the safety net literature, of course, the optimal tax literature is also obsessed with labor supply effects (and rightfully so!). Indeed, the labor demand effects are what are relatively neglected (labor demand in general is relatively neglected compared to labor supply because data on labor suppliers is a lot more plentiful than data on labor demanders).

I say demand "relatively neglected" because of course there are lots of multiplier estimates associated with social welfare spending, and that includes the labor demand effects along with labor supply effects. When you estimate a multiplier for food stamps, you're really getting the net effect of supply and demand.

And if we want to explore a "redistribution recession" that's what you want. You don't want to isolate labor supply (unless of course you just have a research interest in labor supply - but not if you want to know the impact on employment)!

Theologians on Externalities

My brother, Evan, shares these thoughts from a fellow theology doctoral student:

"Each one of us benefits from the protection assured by the threat of guns; each one of us could be the next life they claim as recompense, without regard for personal rectitude. This perspective would require us – all of us, though in different ways and to different degrees – to see ourselves as both complicit with this power and the victims of it."

Yep!

Very good sentences on what it means to be an economist

Brad DeLong, talking about debt hysteria:

"Economists do not look at quantities only but at prices. That is the very point of being an economist: to not simply be some operations-research material-balance accountant of product flows but to look deeper and take market prices as indicators of Lagrangian multipliers associated with the appropriate social-welfare maximization problem."

Someone remind me to talk about real wage cyclicality in the next week or two

I forgot to mention that - that came up in the Mulligan seminar too and he thought it was a big argument against demand-side stories.

Real wage cyclicality confusion has been explored for something like seventy five years now, and it is not proof that demand side stories are wrong because of how its driven by some aggregation biases. And, of course, any sort of non-budging wages may very well be a sticky wages story rather than a safety net/reservation wage story.

Anyway - I have some engineering workforce stuff to do right now, but I wanted to note this came up too before I forgot.

Casey Mulligan and Political Economy

The seminar I talked about in the last post was held by the philosophy, politics, and economics group, so naturally a lot of the questions were political economy related. Someone asked Mulligan why he thought these safety net policies were passed in the first place, given how negative they are (negative according to Mulligan of course, not me).

His response deserves a post all its own. I was floored (1.) that he gave this response and (2.) that no one challenged him on it.

He said that we have these increasingly generous safety net policies because the "elites" on the "right tail of the income distribution" (his words) feel good about themselves when they give a generous safety net to the poor. He said the amount of money involved is small enough that it doesn't matter to them and they increase the generosity and they feel better about themselves for doing it.

If I had not come in late I might have spoken up when he said that, but I felt like enough of an interloper already between coming in late, it not being in my own department, and the general hostility towards Keynesianism. Plus I'm sure I would have addressed it in an entirely inappropriate way, like "are you shitting me?" or "is it April Fool's Day already?".

That was by far and away the most absurd thing I heard during the whole seminar: low income families are screwed by the safety net because rich people are just too generous and want to use their power to redistribute money to low income families.

I know I'm elaborating on my interpretation of it in the last two paragraphs, but if anyone that was there (Peter Boettke, Bryan Caplan, Pete Leeson, Chris Coyne, Virgil Storr, Harrison Searles, probably others) wants to challenge my account of what he said in the third paragraph, feel free to. I was jotting down notes during the seminar so I think it's pretty faithful.

Casey Mulligan Seminar at GMU

[UPDATE: Just to clarify - as I say below, Mulligan claimed that labor supply effects of these programs "a lot of the increase" in non-employment. He doesn't say all. When I talk about being concerns that "he's explaining the Great Recession" with these labor supply effects, I mean I'm concerned that he's using that one gross effect on its own - not that he's alleging that he has completely explained it. If you want to say something about the impact of the safety net on non-employment, you cannot just look at labor supply and then formulate your conclusion. If you want to say something about the impact of the safety net on labor supply, then of course you can just look at labor supply.]

 

[UPDATE 2: OK, Casey Mulligan just went absolutely nuts on me over email and said some very insulting things - apparently completely misconstruing the post. Let me give some take aways I intend here:

1. I think labor supply effects are important - that's why I wanted to go see him.

2. I think you can't talk about the impact of the safety net without talking about labor demand effects.

3. There are a lot of issues I'm still getting my head around so I want to read more.

4. There are a lot of concerns I had about the seminar that may be in the book so I want to read more.

5. You all should think about the arguments that Casey raises.]

 

Yesterday I went to see Casey Mulligan speak on his book Redistribution Recession at GMU's workshop on philosophy, politics, and economics. I misjudged how long it takes the shuttle to get from the metro to campus, so I came about ten minutes late into a packed seminar room, but it was worth going and hearing the details of Mulligan's argument (and if I ever attend again I'll definitely be on time!). I'm taking a few slides from his AEI talk, which seems to have been essentially the same as the talk I saw yesterday.

 

His argument - in my own words - is that unemployment in the Great Recession has been so bad because changes to the safety net have raised marginal tax rates, which has reduced labor supply. The second half of that thesis, stated in that way, is eminently reasonable. Part of my interest in going was that we talked about the marginal tax rates implicit in safety net programs all the time at the Urban Institute, precisely out of this concern for the counter-productive impact on labor supply.

 

The first half of the sentence, stated that way, is what people are incredulous about - not the idea that the safety net has labor supply effects.

 

I came out of it intrigued enough by his argument to take a look at his book, despite some very questionable analysis at the New York Times by Mulligan that had put me off him for a while. As you'll see, though, I mainly want to take a look at his book because I either did not get the entire argument in the seminar or I think he made a weak defense of his case in the seminar - not because I think he clearly had the right answer.

 

I know this is long - the real meat of the problem is in the third section: "Assuming his own conclusions?"

 

Marginal tax rates

 

Mulligan began by describing the many changes to safety net programs that occurred during the Great Recession and the impact that these had on marginal tax rates. The idea is that if you have a benefit that's contingent on low income (like SNAP - i.e., food stamps) or not working (unemployment insurance), increasing your labor supply is going to reduce your income because those benefits go away - so it's like you're being hit by a tax by moving from poverty to somewhat-above-poverty. This has been a concern for safety net and labor market policy design for a long time. Mulligan's question is whether this can explain the decline in employment we've been experiencing.

 

Using an approach I'd have to read the book to get a better sense of (involving eligibility for certain programs and income levels), Mulligan aggregates these marginal tax rates to get an average marginal tax rate for prime age heads of households. It's very hard for me to compare Mulligan's aggregate marginal rate measure over time with other marginal rate measures I've seen calculated over the income distribution, but looking at - say - Gene Steuerle's numbers over the income distribution, it seems like Mulligan's rates that top out at just under 50 percent in 2009 are plausible if you were to take Gene's rates and get a population average.

 

Mulligan switched back and forth between talking about marginal rates and program generosity, but the measures are essentially the same - take the decline in generosity associated with an increase in income and you've basically got a marginal tax rate. The generosity changes, mapped against hours not at work, are presented below:

 

 

Now Mulligan was quick to note that he knows these two series are endogenous. "Don't call the causality police on me!", I believe were his words. I believe he knows that, but I could not for the life of me understand how that knowledge informed the rest of his analysis (which is another reason why now I want to see the book to understand if it ever informed any of his analysis). The endogeneity problem is very serious. Mulligan concludes that a lot of the increase in non-employment is due to safety net generosity, but if in fact safety net generosity is due to increases in non-employment, it's no wonder you would find these results. The actual role of labor supply could be considerably diminished.

 

He seemed unconcerned with endogeneity. My impression of the reasons for this was that he was taking labor supply elasticities from the literature and using his measure of increases in benefit generosity to estimate the change in labor supply. If these estimates are well identified, then the endogeneity is not a problem because he's not estimating the relationship from the (highly endogenous) relationship depicted in the graph above.

 

Which elasticities?

 

I had a very tough time getting my head around the elasticities he used to simulate labor supply changes (which I'll show you below). He said he was using Frisch elasticities and he was clearly using intensive margin elasticities. The intensive margin is the choice of how many hours to work. The extensive margin is the choice of whether to work or not. What concerns me is that Frisch elasticities (and perhaps others?) are very different depending on whether you estimate it at the micro or macro level. Since we're looking at macro series here, presumably we'd be interested in macro elasticities, but Mulligan and Peter Boettke (the workshop organizer) kept talking about it as a micro story.

 

The programs have very different impacts on the extensive and intensive margin. Increased unemployment insurance generosity has a big impact on the extensive margin, because if you go back to work you lose all of it all at once. Food stamps, on the other hand, impact the intensive margin because you can get them while you're working, but the level of benefits phase out as your income increases. It would seem tough to combine these.

 

I think everything is probably above board here. Mulligan finds large effects, which is what you'd get if you use macro labor supply elasticities that incorporate both intensive and extensive margins. It was a little confusing that it was referred to as a "micro story" in the seminar (maybe they just take "micro" to mean anything that's behavioral?), but I know he was definitely looking at macro labor supply. Anyway - the elasticities were one area where I'd be interested in taking a look at the book.

 

Assuming his own conclusions?

 

All the material above is just my general sense of the issues and some things I want to learn a little more about. The really glaring problem with Mulligan's presentation that I asked him about but I feel like he kind of dodged is that he just ignored the demand side of the programs he looked at. After explaining the aggregate marginal tax rates, he showed us a simple aggregate labor supply and demand graph he put together using actual data and estimates of the labor supply response to changes in marginal tax rates (see below). The origin is the 2007 Q4 equilibrium. The 2009 Q4 demand schedule is to the right of that because population grows and that sort of thing. It's presumably not as far to the right as it might have been because he did take wealth effects into account. This may be an overly generous assumption on the demand side, I don't know. Let's give him that one, though, because even bigger problems come up later.

 

 

Mulligan's primary conclusions come from the simulations of labor supply at 2009, Q4 with the actual safety net (the red line) and labor supply at 2009, Q4 if there had been the same less generous safety net that there was in 2007 (the pink line). It makes sense that the pink line is to the right of the red line, because we do expect the marginal tax rates to have a negative effect on labor supply (so removing them has a positive effect). What's incomprehensible to me is how he draws any conclusions from this, because he does not simulate what 2009 Q4 labor demand would look like if benefit generosity was reduced to 2007, Q4 levels!

 

To put it another way, Casey Mulligan sat in the seminar room and essentially told all of us "if you look at the supply effects but don't show any demand effects it looks like supply matters a lot and these programs I'm looking at explain a large share of the downturn". And I was the only one to ask him about it!

 

I tried to keep the comment simple because there was a lot of trashing of Keynesians in the seminar room. Bryan Caplan talked about how he knew a lot of Keynesians at Princeton and that they are not Keynesians because they care about the data - they are Keynesians because of the feelings of introspection they have about workers. Peter Boettke called it "magical thinking". These comments got lots of chuckles of approval, so I didn't want to come out brazenly in a seminar room that clearly didn't think much of the point (after already having snuck in late!), so I just asked why he didn't simulate a shift in labor demand the way he simulated the shift in labor supply. Mulligan's response was that he did do it in the book along with some other sensitivity tests. What happens in those analyses? No word on that.

 

What concerns me a lot is that he is going around presenting half a supply and demand model as his headline result, when the labor demand impact of these policies is substantial. Remember, nobody is taxed today to pay the unemployment insurance benefits today. People are taxed, of course, but most of the benefits come out of a trust fund. Food stamps, Medicaid, and tax credits are a little more complicated. They don't come out of a trust fund but they added to the deficit which is financed with money that was not going into investment otherwise.

 

Multiplier estimates are good to look at to think about the net effect of combined supply and demand shifts because they take both into account, and these estimates suggest Mulligan is making a big mistake by not presenting a full supply and demand story. Zandi estimated that the multiplier for food stamps is 1.73, suggesting that (for that program at least), the labor demand effect that Mulligan ignores is bigger than the labor supply effect that he estimates.

 

This also makes me wonder what's in the book, but if he is presenting this as his primary result and didn't give me details when I asked, I'm concerned.

 

 

What about the rest?

My prior on the economics and the policy of the Great Recession is that we had:

1. A big negative demand shock in response to the financial crisis.

2. A big positive monetary/fiscal/TARP response. You can say it wasn't enough so it wasn't "positive". I'm just saying that it was a big positive relative to doing nothing. My baseline is no policy change, rather than "the policy change that would have fixed everything", which makes it a positive.

3. A small negative effect from the labor supply effects of the safety net.

4. A medium positive effect from the labor demand effects of the safety net.

So in the section above I talk about how Mulligan covers #3 and ignores #4 (or apparently leaves it in his book but doesn't think it's important enough to present). The other problem is that he completely ignores #1 and #2, and tries to assert that he's explaining the Great Recession!

While I may get an answer to what he thinks about #4 in the book, I doubt I'll get much of anything on #1 and #2.

Notice that endogeneity bias and identification issues come back in the picture here. Even if the observed fall in hours is accounted for by the labor supply effects of the safety net (I don't think it is for the reasons I stated in the previous section), you can't conclude that and say demand side stories don't matter! You have to know whether fiscal and monetary policies improved the economy relative to the counterfactual of what would have happened otherwise.

That's a very hard thing to do, of course. You are going to need a lot more data - more countries and more time. Mulligan said he's interested in this, but hasn't had time to do it. That's fine. What really concerns me is that he's willing to draw conclusions like this before getting the other data.

When you see people like Barro, Romer, Ramey, or Vernon arguing over fiscal multipliers they look at all this data in an effort to generate a counterfactual.

To put it bluntly - based on the seminar presentation - Mulligan seems to think it's sufficient to (1.) note a labor supply effect while not mentioning the labor demand effect, (2.) use labor supply elasticity estimates to estimate the magnitude of that effect, and (3.) determine your counterfactual on the basis of that result and some accounting for population growth and that sort of thing.

I may be misunderstanding something (again... why I think it might be worth looking at the book), but I'm not personally left convince by it.

Something I learned that might interest some of you

Paul Samuelson worked on the draft of Science: The Endless Frontier. I did not know that. This is one of those little historical gems in Warsh's book.

A brief aside - if I ever write a book on the scientific workforce I've always thought a good title would be Endless Frontiersmen - i.e., the people that are on Bush's endless frontier.

I really don't caricature Don Boudreaux. This is what he actually thinks.

He has an article in the WSJ today saying essentially that welfare and income are not the same and welfare has unambiguously gone up. You would be very hard pressed to find a single economist to disagree with him on this point. You would have an easier time finding economists who would say "Very true, Don - but income matters too".

That's just context. I found this sentence in his blog post about the article remarkable:

"If I were a “Progressive” I would not deny the facts that Mark and I report in our essay. I would, instead, trumpet and celebrate these facts, insisting that they are the happy and as-promised results of government programs and institutions such as Social Security, Medicare, the National Science Foundation, the U.S. Department of Education, Fannie Mae and Freddie Mac, rarely broken streams of deficit financing since the late 1960s, the ITC’s diligence in protecting Americans from dangerously low-priced (“dumped”) imports, and on and on."

I do not make this stuff up about Don. This is how he actually thinks. He actually thinks that liberals think the market and entrepreneurs are chopped liver.

As I alluded to in my post on Sarah Skwire's take on how to advocate libertarianism, half the problem with arguing with these guys is disabusing them of the idea that we have a beef with the market! I swear, you breath one word of interesting market failures worth thinking about and they think you've abandoned the whole damn thing!

Krugman Prize Lecture

Here. For those of you who never heard it.

One of the more interesting discussions is his take on how we might be actually moving away from a Smithian world and back to a more Ricardian world (not that these are mutually exclusive - meaning of course that the processes Ricardo highlighted seem to be starting to dominate the processes that Smith highlighted, which of course are the same processes that Krugman highlights).

Krugman on Smithian Economics

OK, I knew the Krugman-Bastiat thing several months back would ruffle feathers, but I swear I thought Krugman-Smith was common knowledge. I thought I might have a tougher case on Arrow or Stiglitz - still a good case though - but that everyone knew Paul Krugman was the modern Smithian trade theorist. Apparently not. Here is Krugman:

"The long dominance of Ricardo over Smith of comparative advantage over increasing returns was largely due to the belief that the alternative was necessarily a mess. In effect, the theory of international trade followed the perceived line of least mathematical resistance. Once it was clear that papers on noncomparative- advantage trade could be just as tight and clean as papers in the traditional mold, the field was ripe for rapid transformation." - Rethinking International Trade, 1990

Contrary to assertions that I am sure I will get in the comment section about worshiping Krugman, this is not the case at all. This is a widely recognized point.