A great Krugman op-ed on debt

This has good coverage of misconceptions and that bad tendancy to use false analogies from individual experience to community-level experience.

Since he doesn't use that Dean Baker language about a burden on the future being "impossible", and focuses on misunderstandings about public debt, I suspect even Nick Rowe could get on board with this one.

Don Boudreaux, in responding to the article, makes really excellent points about the costs and benefits of government spending, but makes a bad criticism of Krugman. Why he thinks Krugman said what he's suggesting he said is beyond me.

Noahpinion on Nick Rowe and Debt

He basically makes the same points I made.

He's not particularly concerned whether it is literally "impossible" to burden future generations like Nick was. He says it's possible - I agree. He's more concerned about whether it's responsible or makes sense to talk about "burdening future generations with debt" the way we talk about personal debt.

It depends a lot on whether we're talking about investing or consuming. Nick's post was all about consumption.

One thing I've pointed out is that when we do straight young-people-let-old-people-consume-more-now stuff with government (at least in the United States), we don't finance it with debt. So I have to wonder how much Nick's "cohort A consumes more apples" model really tells us about public debt (again, in the United States at least). It's very good at telling us that we shouldn't borrow money to give old people Social Security checks - but then, we already knew that, didn't we?

Ability Bias and Education

Bryan Caplan has a good post up on ability bias in estimates of the returns to education.

The problem of ability bias is basically that high ability people do better in the labor market, but high ability people also pursue more school. So when you try to identify the relationship between school and labor market performance, you are producing an overestimate of the effect of school if you don't account for ability.

The traditional way of dealing with this for labor economists has been to find a measure of education that is uncorrelated with ability, usually from a natural experiment, an experiment, or an instrument. I haven't talked about this stuff in a while, but long-time readers know I'm skeptical of a lot of instrumental variables (which shows how bleak the macroeconometric estimation prospets are, since I'm willing to accept instrumental variables in multiplier estimates!). Indeed, my skepticism is rooted in precisely this ability bias debate (David Jaeger, a co-author of the linked paper, was my labor and my econometrics professor).

Caplan offers a relatively simple solution - just control for ability!

I think this solution is a lot better than people realize, but I think the problems with it need to be taken seriously too. He writes "Despite their mighty debunking efforts, labor economists almost never test for ability bias in the most obvious way: Measure ability, then re-estimate the return to education after controlling for measured ability." Perhaps it's true that they "almost never" do this, but I certainly have done it! First, in this Urban Institute paper, Vulnerability, Risk, and the Transition to Adulthood (2011), and also in a paper that Marla McDaniel and I are going to submit this week to the Review of Black Political Economy on the differential benefits of a high school diploma for black and white youth (in which, Bryan Caplan will be happy to know, we discuss the signalling role of a diploma).

Now we didn't control for ability to estimate the bias in a standard OLS estimate of the effect of education. We just knew we needed to account for ability bias and we had no interest in developing some crazy IV scheme to get it accepted into a more prestigious journal (in fact, we were rejected from our first more prestigious journal attempt and the endogeneity concern was cited... I think their point was weak, but nevertheless...).

So I am definitely in agreement with Caplan on the value of this approach. He seems to suggest that people don't do this as much as they should because it comes up with the result that education isn't as beneficial as you might think. Maybe, but I don't think it's anything nearly so devious. I think there are good reasons and bad reasons for ignoring this route.

*****

Good Reasons for not using this approach often:

1. Not a lot of data sets with the labor market information we need have intelligence or ability information.

2. We are not psychologists or educational specialists - we know very little about what "abilities" are important for the labor market. We don't even know much about how to define and talk about these "abilities". We do know something about uncorrelated measures and pseudo-randomization. Labor economists are probably wise to stick to what they know. Of course, that's no excuse not to co-author with a psychologist.

3. These ability measures are likely to be endogenous. Bryan Caplan just throws out suggestions like "just control for ability in the NLSY" without giving readers more background on what he's talking about. We used the NLSY in both of the papers I discussed above. Bryan is refering to the ASVAB test that's administered as a part of the NLSY. Let's forget the fact for a minute that my psychologist sister-in-law has told me on many occassions that the ASVAB is not considered a valid test of intelligence or ability by psychologists. It also simply introduces the very endogeneity problems we're trying to get away from. The ASVAB is administered in the first round of the survey (this is a longitudinal dataset, which is what's so nice about it). In the first round, the youth in question are between the ages of 12 and 16. In other words, they've been in school already for 6 to 10 years. And the ASVAB sections that are most used in the NLSY (math and verbal ability) is not like an IQ test - it is much more knowledge-based, like an SAT or a GRE. So those years of schooling are absolutely going to improve the ability score.

That's a big deal for what Bryan is proposing here. He suggests that the impact of education drops by something like 40% when you control for ability. But if this ability score is actually caused by high quality elementary education, then that may mean that a big chunk of that effect actually is caused by education.

Bad reasons for not using this approach as often:

1. I'm going to get more suspicious like Bryan here. The Card/Krueger/Angrist axis in labor economics is powerful and seductive. Labor economists really love tricky identification strategies (I certainly do, even though I'm more suspicious of IV models). Labor economists also have a comparative advantage in doing these things. They lose their comparative advantage if you start simply controlling for a measure that (1.) they don't understand as well, and (2.) you can execute and interpret with an undergraduate econometrics education.

Joan Robinson on Hayek

"The whole argument, as we could see later, consisted in confusing the current rate of investment with the total stock of capital goods, but we could not make it out at the time."

- Joan Robinson, on Hayek's macroeconomics.

I'm still trying to get a sense of what she's getting at here, but I think it might be related to what I was confused about in this post.

I've said it before - you have to be impressed with this guy - nothing gets by Paul Krugman

"I see that some people out there don’t like me."

Honorably defending the ridiculous

F&OST gets an honorable mention, although does not quite make the top tier, from unlearningecon. Plus Ryan Murphy considers F&OST a "friend" despite the fact that we apparently defend the ridiculous here.

So I seem to still be successfully maintaining a careful but amicable middle ground between various heterodoxies and schools of thought.

A "new" Urban Institute publication

I think this has been out a little while, but I didn't realize it. I did all the trajectory analysis work in the paper.

This is a non-experimental analysis of the Moving To Opportunity experiment data. A team at the National Bureau of Economic Research had some arrangement with HUD where they had dibs on releasing the first experimental results. The Urban Institute was involved in the data collection, though, so we were allowed to do this work.

In the next couple weeks I should also have an Urban Institute brief released reviewing black male joblessness in the Great Recession, using National Longitudinal Survey of Youth data. I'll let you know when that comes out - I'm quite happy with how that's shaping up.

Roads to the Austrian School

Austrians and libertarians like to talk about their personal journeys a lot, often because they think of their views as unique and non-traditional to an extent that begs the question "how did you come around to thinking that". Jonathan Catalan has a nice review of his personal journey to the Austrian school here. I don't always agree with that characterization. I think anyone who really takes the time to think about what it is they think is going to end up having some unique views that originated in an interesting way, and there's nothing especially unique about libertarianism or Austrianism in that regard. For me, my libertarianism early in my college career was a pretty "go with the flow" product of being somewhat conservative in high school and then figuring that conservatism plus the standard recreational college activities and attitudes equaled something like libertarianism. That was the natural progression for conservatives - it wasn't particularly hard for me to be a libertarian. Just like in college I don't think it's hard to be leftist. If you came out of high school as a garden variety liberal, and then read a little Marx and discovered the same standard recreational college activities, you kind of naturally fall into being a leftist for a little while the same way conservatives naturally fall into being libertarians.

Personally - my views only got interesting when I stopped going with the flow and really thought about what I thought. Now I'm a much more interesting muddle of American classical liberalism, Keynesianism, Pragmatism, and neoliberalism.

Yesterday I finished my application for an IHS fellowship, and part of the application required reflection on our intellectual beliefs and how they developed.

In writing that up, I realized something interesting: I was a Hayekian before I was a Keynesian (Keynes comes out more, but I still consider myself a Hayekian). Kind of neat, huh? My introduction to the Austrian school came in the summer of 2005, when I participated in a week-long workshop on experimental economics at George Mason University. That was when I first got introduced to Hayek, and (aside from a few really bad claims of his around "scientism") I've found Hayek very compelling ever since. Other students at the workshop talked about Mises and Rothbard. I remember not being particularly interested in that stuff at the time (these students struck me as more interested in exegesis of Mises than actual ideas... a tendancy I would come to notice often). But Hayek seemed to get how markets worked. I definitely benefited from learning Hayek through Vernon Smith, who closely linked Hayek to Adam Smith. I had just finished reading Adam Smith extensively in my history of thought class, so I was particularly receptive to that framing of Hayek (plus, it's hard not to be receptive to Vernon Smith's framing of anything).

That was all in the summer of 2005. In the fall of 2006, after graduating, I first came across Keynes. I knew of Keynes before, of course. We worked with Keynesian crosses in macro, but as an undergrad I didn't like macro very much. I was interested in labor, econometrics, and industrial organization - straight micro stuff. So I didn't really know Keynes, and I remember being confused by him when we covered him in my history of thought class. But in the fall of 2006, for some reason I decided to read the General Theory, and I've been pretty attached to Keynes ever since.

But it was interesting to remember, thinking back for the application, (1.) what a determined libertarian I once was, (2.) how important that GMU workshop was for me, and (3.) that I actually had a decent grasp of the Austrian school over a year before I had a decent grasp of Keynes (of course in the case of both Keynes and Austrianism you always continue learning - but I feel like had a good grasp of the basic points in the summer of 2005 and the fall of 2006, respectively).

Relative vs. average prices, again

It came up twice recently, in fact.

First, Bryan Caplan praised Matt Yglesias as a "good Keynesian" (a little redundant, isn't it?) because he joined Caplan's "wages must fall" chorus...

... sort of.

I say "sort of" because while there is some discussion by Yglesias of the average wage level, most of what Bryan focuses on is the parts discussing wages in manufacturing falling and manufacturing jobs coming back to the U.S.. OK, fine, but this is a relative wage issue. It's one thing to say that U.S. manufacturing jobs have high wages for a variety of institutional reasons - much higher than foreign competitors, and therefore there's going to need to be a fall in wages. But that's all relative wage talk. It has nothing whatsoever to do with the recession.

Of course, as Nick Rowe and Paul Krugman are always good at pointing out, it's not clear that a general fall in wages would help matters, but even if Caplan were to argue that point he's not going to achieve it by making the observation that manufacturing labor is overpriced.

The second instance of confusion over relative and average price changes is covered by David Glasner, who criticizes a recent post by Jonathan Catalan (congratulations, Jonathan, for getting linked to by Glasner! Regardless of whether it's a critical review or not, it's always good to be linked by the high-traffic sites). I interpret Glasner as acknowledging Jonathan's point that not all prices are going to change at the same rate, but contending that this point misses the forest for the trees. Relative prices fluctuate all the time, either as a result of market forces (Caplan and Yglesias's discussion of falling manufacturing wages), the sort of Cantillon effects that Jonathan alludes to, or simply noise from the market process. But these fluctuations don't change the fact that (to quote Glasner): "the existence of inflation is predicated on an increase in total spending compared to an alternative world in which there was no inflation. I am not saying that inflation raises all prices proportionally, I am just saying that if prices in general have risen, total spending, and therefore total income, must also have risen" (I'm not sure this is quite right, though - there's always the prospect of stagflation - but the point about the difference between relative and average prices is important).

In my email exchanges with him, John Papola will often make a point about how strong growth in the health care industry is, as an attempted argument against claims of mine that we are experiencing a general decline in economic activity. My response to him is always the same and quite analogous to the relative wage point: relative economic activity is always fluctuating due to market conditions. Health care was growing before the recession, growing during the recession, and it will grow after the recession. Simply noting that it is growing is not the same as comparing it to a counterfactual. There is a persistent problem among non-economists of not thinking about these things relative to a counter-factual. Health care could be growing at the same time that it is depressed. There's absolutely nothing preventing that.

Assault of thoughts - 1/1/2012

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

- HAPPY NEW YEARS! 355 days left, so make them count!

- John Cochrane, of the University of Chicago, is now blogging.

- I considered a New Years resolution of not blogging about Ron Paul anymore, but then decided against it. There's a duty to face this scourge of the American polity head on, etc., etc., and who am I to put my own blood pressure above duty? But I do want to cut back, because honestly it gets frustrating. So I'm simply going to note that rather than writing a post about this Glenn Greenwald post, I have some comments on it over at Ryan Murphy's blog. Believe it or not people, there is a huge moderate, rational, reasonable, and in my view correct middle ground between the Bush doctrine and the Paul doctrine. Accusing those of us who occupy this territory of sacrificing "intellectual honesty" demonstrates that Greenwald is either confused, a jerk, or both.

- And sort of in the same vein, Bob Murphy has a defense of the Mises Institute inspired by all this "racist newsletter" stuff. He makes some great points. I've said many times on here that I absolutely do not think Ron Paul is a racist. The same goes for the Mises Institute, DiLorenzo's Lincoln stuff, etc.. Of course, that doesn't mean that we can't note that because of our views on race and American society, we have a lot of concerns about Paul, DiLorenzo, Hoppe, etc. - we can absolutely say that. I have said that. But I think people should be careful about throwing around the word "racist" [and perhaps Hoppe does deserves the label... I don't want to weigh in on Hoppe specifically - other people probably know him better].

- Finally, for wine drinkers in the Mid-Atlantic area, I have to recommend Cooper Vineyards and Nassau Valley Vineyards. In addition to some old stand-bys, these made for a nice New Year's Eve party (Norton Reserve from the former, and Cabernet from the latter).