Category Archive for: Economics [Return to Main]

Wednesday, May 27, 2015

'Whatever Happened to Antitrust?'

Robert Reich believes, as I do, that monopoly power is one of the reasons that the distribution of income has been skewed toward the top:

Whatever Happened to Antitrust?: Last week’s settlement between the Justice Department and five giant banks reveals the appalling weakness of modern antitrust. 
The banks had engaged in the biggest price-fixing conspiracy in modern history. Their self-described “cartel” used an exclusive electronic chat room and coded language to manipulate the $5.3 trillion-a-day currency exchange market. It was a “brazen display of collusion” that went on for years, said Attorney General Loretta Lynch. 
But there will be no trial, no executive will go to jail, the banks can continue to gamble in the same currency markets, and the fines – although large – are a fraction of the banks’ potential gains and will be treated by the banks as costs of doing business.
America used to have antitrust laws that permanently stopped corporations from monopolizing markets, and often broke up the biggest culprits. 
No longer. Now, giant corporations are taking over the economy – and they’re busily weakening antitrust enforcement. 
The result has been higher prices for the many, and higher profits for the few. It’s a hidden upward redistribution from the majority of Americans to corporate executives and wealthy shareholders. ...
Antitrust has been ambushed by the giant companies it was designed to contain.
Congress has squeezed the budgets of the antitrust division of the Justice Department and the bureau of competition of the Federal Trade Commission. Politically-powerful interests have squelched major investigations and lawsuits. Right-wing judges have stopped or shrunk the few cases that get through. 
We’re now in a new gilded age of wealth and power similar to the first gilded age when the nation’s antitrust laws were enacted. But unlike then, today’s biggest corporations have enough political clout to neuter antitrust. 
Conservatives rhapsodize about the “free market” and condemn government intrusion. Yet the market is rigged. And unless government unrigs it through bold antitrust action to restore competition, the upward distributions hidden inside the “free market” will become even larger.

Inequality - What To Do About It?

A follow up to yesterday's post on what to do about inequality:

Inequality has been on the rise since the 1970s - Tony Atkinson and Sabine Alkire ask what can be done about it? Inequality was a topic covered in The Economic Journal 125th Anniversary Special Issue, available for free online: http://onlinelibrary.wiley.com/doi/10.1111/ecoj.12230/abstract

Watch the full session here: https://www.youtube.com/watch?v=XpdhdUkza88

'Do Central Banks Need Capital?'

The start of a longer post from Cecchetti & Schoenholtz

Do central banks need capital?: If you ask monetary economists whether we should care if a central bank’s capital level falls below zero (even for an extended period of time), most will say no. Pose the same question to central bank governors, and the answer in nearly every case will be yes.
What accounts for this stark difference? How can something that seems not to matter in theory be so important in practice?
The economists correctly argue that central banks are fundamentally different from commercial banks, so they can go about their business even if they have negative net worth. However, central bankers know instinctively that the effectiveness of policy depends critically on their credibility. They worry that a shortfall of capital would threaten their independence, which is the foundation of that credibility.
The recent experience of the Swiss National Bank (SNB) can help us to explain what we mean. ...

'Bailout Barometer: How Large is the Financial Safety Net?'

John Cochrane points to this from the Richmond Fed (he has a few additional comments):

Bailout Barometer: How Large is the Financial Safety Net?: ...The Bailout Barometer is our estimate of the share of financial system liabilities for which the federal government provides protection from losses. In addition to protection from explicit government guarantee programs, our estimate includes implicit protection that people are likely to infer from past government actions and statements. Despite efforts to end ad hoc bailouts, the financial safety net that protects certain firms remains large under current government policies.

Estimated Share of Financial Sector Liabilities Subject to Implicit or Explicit Government Protection From Loss (as of 12/31/13)

How large is it?

Our latest estimate shows that the financial safety net covers 60 percent of the financial sector. This estimate also includes a breakdown by sector. These measures, compiled in March 2015, use data as of December 31, 2013. Our Bailout Barometer has grown considerably since our first estimate in 1999.

Why does it matter?

When creditors expect to be protected from losses, they will overfund risky activities, making financial crises and bailouts like those that occurred in 2007-08 more likely. An extensive safety net also creates a need for robust supervision of firms benefitting from perceived protection. Over time, shrinking the financial safety net is essential to restore market discipline and achieve financial stability. Doing so requires credible limits on ad hoc bailouts. Read more on our perspective.

Want to learn more?

Links for 05-27-15

Tuesday, May 26, 2015

'Free-Market Dogma has Jacked Up our Electricity Bills'

David Cay Johnston

Free-market dogma has jacked up our electricity bills: A new analysis shows that people pay 35 percent more for electricity in states that abandoned traditional regulation of monopoly utilities in the 1990s compared with states that stuck with it. ....
You might think that the higher prices in the 15 states with markets would encourage investment, creating an abundance of new power plants. That, at any rate, is what right-wing Chicago School economic theories on which the electricity markets were created say should happen. The validity of these theories, and flaws in how they were implemented, matter right now because Congress is considering a raft of energy supply bills that include some expansion of the market pricing of wholesale electricity. ...
Yet just 2.4 percent of new electric generating capacity in 2013 “was built for sale into a market,” electricity-market analyst Elise Caplan showed in a study last fall... The rest were built in states with traditional regulation or under long-term supply contracts that essentially guaranteed repayment of loans to build the plants.
Here’s another measure of failure: Areas covered by electricity markets have 60 percent of America's generating capacity, but enjoyed just 6 percent of new generation built in 2013.
If unregulated markets are invariably better, as the Chicago School holds, why was 94 percent of new generating capacity built in traditionally regulated jurisdictions? ...

Links for 05-26-15

Monday, May 25, 2015

Paul Krugman: The Big Meh

Why hasn't the digital technological revolution had a bigger impact on productivity?:

The Big Meh, by Paul Krugman, Commentary, NY Times: ...Everyone knows that we live in an era of incredibly rapid technological change, which is changing everything. But what if what everyone knows is wrong? .... A growing number of economists ... are wondering if the technological revolution has been greatly overhyped... New technologies have yielded great headlines, but modest economic results. Why?
One possibility is that the numbers are missing the reality, especially the benefits of new products and services. I get a lot of pleasure from technology that lets me watch streamed performances by my favorite musicians, but that doesn’t get counted in G.D.P. Still, new technology is supposed to serve businesses as well as consumers, and should be boosting the production of traditional as well as new goods. The big productivity gains of ... 1995 to 2005 came largely in things like inventory control, and showed up as much or more in nontechnology businesses like retail as in high-technology industries themselves. Nothing like that is happening now.
Another possibility is that new technologies are more fun than fundamental. ...
So what do I think is going on...? The answer is that I don’t know — but neither does anyone else. Maybe my friends at Google are right, and Big Data will soon transform everything. Maybe 3-D printing will bring the information revolution into the material world. Or maybe we’re on track for another big meh.
What I’m pretty sure about, however, is that we ought to scale back the hype.
You see, writing and talking breathlessly about how technology changes everything might seem harmless, but, in practice, it acts as a distraction from more mundane issues — and an excuse for handling those issues badly. If you go back to the 1930s, you find many influential people saying the same kinds of things such people say nowadays: This isn’t really about the business cycle, never mind debates about macroeconomic policy; it’s about radical technological change and a work force that lacks the skills to deal with the new era.
And then, thanks to World War II, we finally got the demand boost we needed, and all those supposedly unqualified workers — not to mention Rosie the Riveter — turned out to be quite useful in the modern economy, if given a chance.
Of course, there I go, invoking history. Don’t I understand that everything is different now? Well, I understand why people like to say that. But that doesn’t make it true.

Links for 05-25-15

Sunday, May 24, 2015

Links for 05-24-15

Saturday, May 23, 2015

Surprise!

How the world has surprised Brad DeLong:

Four Ways in Which the World Has Surprised Me Over the Past Decade with Its Economics: A good day yesterday at the University of California center in Sacramento...

I started out saying: I find my peers, as they age, become increasingly unwilling to mark their beliefs to market. .... So let me ... spend my time this lunchtime detailing four points in economics at which the world has surprised me over the past decade, and in which as a result reality has led me to shift my beliefs.

In brief:

  • The world has turned out to be more Keynesian than I would have imagined a decade ago.
  • Low-tax, low-service U.S. state level political economy has proved to be ineffective as an economic development model. I was always pretty sure that it was a lousy bet from the standpoint of societal welfare. But a decade ago I thought it at least boosted state-level GDP. Now I do not.
  • The success of the implementation of Obamacare has raised my estimation of the administrative competence of the government.
  • And the aggregate economic costs to America of local NIMBYism now appear to me to be much larger than I would have thought reasonable decade ago: we are no longer a country in which people can afford to move to places where they will be more productive and more highly paid because high-productivity places refuse to upgrade their residential density.

All this, I said, has powerful political consequences. And the politics of the last decade has also been very surprising to me. But I did not have time to get into that in any depth…

The biggest surprise for me, and perhaps it shouldn't have been, is the degree to which politicians are willing to put political interests ahead of helping people in need. Watching the political/policy reaction to the Great Recession was both disappointing and eye opening.

Video: Top Rate of Taxation

Taxing high incomes – a special session discussing recent research on top tax rates in the UK, France and Denmark, and their effects on tax revenues, tax avoidance, labour supply and inequality

Slides for this lecture are available here: http://www.fsmevents.com/res/2015/session11

Links for 05-23-15

Friday, May 22, 2015

Paul Krugman: Trade and Trust

The Obama administration is risking its credibility over the trade deal:

Trade and Trust, by Pau Krugman, Commentary, NY Times: One of the Obama administration’s underrated virtues is its intellectual honesty. Yes, Republicans see deception and sinister ulterior motives everywhere, but they’re just projecting. The truth is that, in the policy areas I follow, this White House has been remarkably clear and straightforward about what it’s doing and why.
Every area, that is, except one: international trade and investment.
I don’t know why the president has chosen to make the proposed Trans-Pacific Partnership such a policy priority. Still, there is an argument to be made for such a deal, and some reasonable, well-intentioned people are supporting the initiative.
But other reasonable, well-intentioned people have serious questions about what’s going on. ...
The administration’s main analytical defense of the trade deal came earlier this month, in a report from the Council of Economic Advisers. Strangely, however, the report didn’t actually analyze the Pacific trade pact. Instead, it was a paean to the virtues of free trade, which was irrelevant to the question at hand.
First of all, whatever you may say about the benefits of free trade, most of those benefits have already been realized. ...
In any case, the Pacific trade deal isn’t really about trade. Some already low tariffs would come down, but the main thrust of the proposed deal involves strengthening intellectual property rights — things like drug patents and movie copyrights — and changing the way companies and countries settle disputes. And it’s by no means clear that either of those changes is good for America. ...
As I see it, the big problem here is one of trust.
International economic agreements are, inevitably, complex, and you don’t want to find out at the last minute ... that a lot of bad stuff has been incorporated into the text. So you want reassurance that the people negotiating the deal are listening to valid concerns, that they are serving the national interest rather than the interests of well-connected corporations.
Instead of addressing real concerns, however, the Obama administration has been dismissive, trying to portray skeptics as uninformed hacks who don’t understand the virtues of trade. But they’re not...
It’s really disappointing and disheartening to see this kind of thing from a White House that has, as I said, been quite forthright on other issues. And the fact that the administration evidently doesn’t feel that it can make an honest case for the Trans-Pacific Partnership suggests that this isn’t a deal we should support.

Links for 05-22-15

Thursday, May 21, 2015

Video: Interest Rates, Inflation & Clear Communication

Another interview, this one with Sir Professor Charles Bean, former Deputy Governor at the Bank of England and past President of the Royal Economic Society. I thought this one went well.

'Conservatives and Keynes'

This, from Paul Krugman, is sort of a setup for the post below this one:

Conservatives and Keynes: ...the debate over business-cycle economics has always been a left-right thing. Specifically, the right has always been deeply hostile to the notion that expansionary fiscal policy can ever be helpful or austerity harmful; most of the time it has been hostile to expansionary monetary policy too... So the politicization of the macro debate isn’t some happenstance, it evidently has deep roots.
Oh, and some of us have been discussing those roots in articles and blog posts for years now. We’ve noted that after World War II there was a concerted, disgraceful effort by conservatives and business interests to prevent the teaching of Keynesian economics in the universities, an effort that succeeded in killing the first real Keynesian textbook. Samuelson, luckily, managed to get past that barrier — and many were the complaints. ...
What’s it all about, then? The best stories seem to involve ulterior political motives. Keynesian economics, if true, would mean that governments don’t have to be deeply concerned about business confidence, and don’t have to respond to recessions by slashing social programs. Therefore it must not be true, and must be opposed. ...
If you think I’m being too flip, too conspiracy-minded, or both, OK — but what’s your explanation? For conservative hostility to Keynes is not an intellectual fad of the moment. It has absolutely consistent for generations, and is clearly very deep-seated.

 

'1776: The Revolt Against Austerity'

Steve Pincus at the New York Review of Books:

1776: The Revolt Against Austerity: Was the Declaration of Independence a powerful indictment of British austerity policies? Does America’s founding document need to be seen as part of an economic debate about the British Empire? ... Just as political debates in Britain and the United States today turn in large part on the response to the great recession of 2008, so the events that made the United States were shaped by the British imperial government’s reaction to the debt crisis of the 1760s. What made the Declaration so offensive to British politicians then ... is that America’s founders offered a blueprint for a different kind of state response to fiscal crisis. ... [explains how debt crisis led to austerity policies for the colonies] ...
What alternative strategy did the authors of the Declaration propose? Today, we tend to regard the practice of using government spending to stimulate economic growth as an invention of John Maynard Keynes in the 1930s. But already in the eighteenth century, self-styled Patriots, followers of Pitt on both sides of the Atlantic, argued that what the British Empire needed if it was to recover from the fiscal crisis was not austerity but an economic stimulus. ...
Twenty-first century American politicians routinely draw our attention to our founding moment and founding document... But they fail to understand the economic arguments that in large measure shaped what Thomas Jefferson and his colleagues wrote. When Governor Scott Walker of Wisconsin proudly proclaims that “we celebrate the fourth of July and not April 15, because in America we celebrate our independence from the government, not our dependence on them [sic],” he fails to see that our founders blamed George III and his government not for taxing too much but for doing too little to stimulate consumer demand. ...
America’s founding document called for an American state that would promote economic growth just as the British state had done before the shift toward balancing the books. ... Had George III and his ministers not adopted austerity measures in the 1760s and 1770s, had they chosen to follow Pitt’s policies of economic stimulus, America’s founders might not have needed to declare their independence at all.

[That's only a small part of the essay -- there's a lot more in the full post, e.g. an argument the Adam Smith supported expansionary policy for the colonies.]

Links for 05-21-15

Wednesday, May 20, 2015

'Any P-Value Distinguishable from Zero is Insufficiently Informative'

From the blog Three-Toed Sloth by Cosma Shalizi (this also appeared in yesterday's links):

Any P-Value Distinguishable from Zero is Insufficiently Informative: After ten years of teaching statistics, I feel pretty confident in saying that one of the hardest points to get through to undergrads is what "statistically significant" actually means. (The word doesn't help; "statistically detectable" or "statistically discernible" might've been better.) They have a persistent tendency to think that parameters which are significantly different from 0 matter, that ones which are insignificantly different from 0 don't matter, and that the smaller the p-value, the more important the parameter. Similarly, if one parameter is "significantly" larger than another, then they'll say the difference between them matters, but if not, not. If this was just about undergrads, I'd grumble over a beer with my colleagues and otherwise suck it up, but reading and refereeing for non-statistics journals shows me that many scientists in many fields are subject to exactly the same confusions as The Kids, and talking with friends in industry makes it plain that the same thing happens outside academia, even to "data scientists". ... To be fair, one meets some statisticians who succumb to these confusions.
One reason for this, I think, is that we fail to teach well how, with enough data, any non-zero parameter or difference becomes statistically significant at arbitrarily small levels. The proverbial expression of this, due I believe to Andy Gelman, is that "the p-value is a measure of sample size". More exactly, a p-value generally runs together the size of the parameter, how well we can estimate the parameter, and the sample size. The p-value reflects how much information the data has about the parameter, and we can think of "information" as the product of sample size and precision (in the sense of inverse variance) of estimation, say n/σ2. In some cases, this heuristic is actually exactly right, and what I just called "information" really is the Fisher information.
Rather than working on grant proposals Egged on by a friend As a public service, I've written up some notes on this... [The mathematics comes next.]

'Consistent With'

Chris Dillow:

"Consistent with": ...Peter Dorman criticizes economists' habit of declaring a theory successful merely because it is "consistent with" the evidence. His point deserves emphasis. ...
This is a point which some defenders of inequality miss. Of course, you can devise theories which are "consistent with" inequality arising from reasonable differences in choices and marginal products. Such theories, though, beg the question: is that how inequality really emerged?... And the answer, to put it mildly, is: only partially. It also arose from luck, inefficient selection, rigged markets, rent-seeking and outright theft. ...
Quite often, the facts are consistent with either theory. For example, the well-attested momentum anomaly - the tendency for assets that have risen in price recently to continue rising - is "consistent with" both a cognitive bias (under-reaction) and with rational behaviour; fund managers' desire to avoid benchmark risk.
My point here should be well-known. The Duhem-Quine thesis warns us that facts under-determine theory: they are "consistent with" multiple theories. ...
So, how can we guard against the "consistent with" error? One thing we need is history: this helps tell us how things actually happened. And - horrific as it might seem to some economists - we also need sociology: we need to know how people actually behave and not merely that their behaviour is "consistent with" some theory. Economics, then, cannot be a stand-alone discipline but part of the social sciences and humanities...

Video: Economics Of The Family, with Robert Pollak & Mark Thoma - RES 2015

Links for 05-20-15

Tuesday, May 19, 2015

'The Great Utility of the Great Gatsby Curve'

Alan Krueger kicks off a debate on the relationship between inequality and mobility:

The great utility of the Great Gatsby Curve: Every so often an academic finding gets into the political bloodstream. A leading example is "The Great Gatsby Curve," describing an inverse relationship between income inequality and intergenerational mobility. Born in 2011, the Curve has attracted plaudits and opprobrium in almost equal measure. Over the next couple of weeks, Social Mobility Memos is airing opinions from both sides of the argument, starting today with Prof Alan Krueger, the man who made the Curve famous.


Building on the work of Miles Corak, Anders Björklund, Markus Jantti, and others, I proposed the “Great Gatsby Curve” in a speech in January 2012. The idea is straightforward: greater income inequality in one generation amplifies the consequences of having rich or poor parents for the economic status of the next generation. 

The curve is predicted by economic theory…

There are strong theoretical underpinnings for the Great Gatsby Curve. Gary Solon has shown, for example, that the relationship is predicted by a standard intergenerational model if the payoff to education increases over time. This causes inequality to rise in one generation, but also increases the significance of this inequality for children’s economic success, since well-off parents have more resources and more incentive to invest in their children’s education. 

Other mechanisms could also underlie the Great Gatsby Curve. For example, if social connections are important for success in the economy (e.g., getting the right summer internship), and wealthy parents have access to job networks, then a spreading out of the income distribution would leave children from the bottom of the distribution in a more disadvantaged position in terms of gaining access to networks that will ultimately lead to a higher paid job. 

…and supported by evidence

Most of the available empirical evidence supports the Great Gatsby Curve. ...

Consistent with the Great Gatsby Curve, several studies also point to a growing gap in the resources devoted to education between high- and low-income American families. As predicted by the Great Gatsby Curve, it appears that the dramatic rise in income inequality has created a more tilted playing field for the next generation. ... 

The two key remaining questions now are:

  1. What are the main mechanisms underlying the Great Gatsby Curve?  
  2. What policy actions can be taken to improve economic opportunities for children born in disadvantaged circumstances? 

Learning more about the former can help us to achieve the latter — which is, in the end, the most important goal of all.

'The Most Misleading Definition in Economics'

John Quiggin:

The most misleading definition in economics (draft excerpt from Economics in Two Lessons), by  John Quiggin: After a couple of preliminary posts, here goes with my first draft excerpt from my planned book on Economics in Two Lessons. They won’t be in any particular order, just tossed up for comment when I think I have something that might interest readers here. To remind you, the core idea of the book is that of discussing all of economic policy in terms of “opportunity cost”. My first snippet is about
Pareto optimality
The situation where there is no way to make some people better off without making anyone worse off is often referred to as “Pareto optimal” after the Italian economist and political theorist Vilfredo Pareto, who developed the underlying concept. “Pareto optimal” is arguably, the most misleading term in economics (and there are plenty of contenders). ...

Describing a situation as “optimal” implies that it is the unique best outcome. As we shall see this is not the case. Pareto, and followers like Hazlitt, seek to claim unique social desirability for market outcomes by definition rather than demonstration. ...

If that were true, then only the market outcome associated with the existing distribution of property rights would be Pareto optimal. Hazlitt, like many subsequent free market advocates, implicitly assumes that this is the case. In reality, though there are infinitely many possible allocations of property rights, and infinitely many allocations of goods and services that meet the definition of “Pareto optimality”. A highly egalitarian allocation can be Pareto optimal. So can any allocation where one person has all the wealth and everyone else is reduced to a bare subsistence. ...

Restoring the Public’s Trust in Economists

I have a new column:

Restoring the Public’s Trust in Economists: The belief that economics has become politicized is a big reason the general public has lost faith in the ability of economists to give advice on important policy questions. For most issues, like raising the minimum wage, the effects of government spending, international trade, whether CEOs deserve their high compensation, etc., etc., it seems as though economists who also happen to be Republicans will mostly line up on one side of the issue, while economists who are Democrats mostly take the other. Members of the general public, not knowing who to believe and unable to rely upon the press to sort it out, either throw up their hands in frustration or follow the side that agrees with their preconceived notions and ideological beliefs.
But why is it so hard to sort out? Why can’t the press do a better job of avoiding “he said – she said” reporting and give the public direct and specific answers to these important policy questions? One reason is the “mathiness” that has infected our economic models, something economist Paul Romer recently identified as a big problem with economic theory. ...

Links for 05-19-15

Monday, May 18, 2015

Paul Krugman: Errors and Lies

"The Iraq war wasn’t an innocent mistake":

Errors and Lies, by Paul Krugman, Commentary, NY Times: Surprise! It turns out that there’s something to be said for having the brother of a failed president make his own run for the White House. Thanks to Jeb Bush, we may finally have the frank discussion of the Iraq invasion we should have had a decade ago...
The Iraq war wasn’t an innocent mistake, a venture undertaken on the basis of intelligence that turned out to be wrong. America invaded Iraq because the Bush administration wanted a war. The public justifications for the invasion were nothing but pretexts, and falsified pretexts at that. We were, in a fundamental sense, lied into war. ...
This was, in short, a war the White House wanted, and all of the supposed mistakes that, as Jeb puts it, “were made” by someone unnamed actually flowed from this underlying desire. ...
Now, you can understand why many political and media figures would prefer not to talk about any of this. Some of them ... may have fallen for the obvious lies, which doesn’t say much about their judgment. More, I suspect, were complicit: they realized that the official case for war was a pretext, but had their own reasons for wanting a war, or, alternatively, allowed themselves to be intimidated into going along. ...
On top of these personal motives, our news media in general have a hard time coping with policy dishonesty. Reporters are reluctant to call politicians on their lies, even when these involve mundane issues like budget numbers, for fear of seeming partisan. In fact, the bigger the lie, the clearer it is that major political figures are engaged in outright fraud, the more hesitant the reporting. And it doesn’t get much bigger — indeed, more or less criminal — than lying America into war.
But truth matters, and not just because those who refuse to learn from history are doomed in some general sense to repeat it. The campaign of lies that took us into Iraq was recent enough that it’s still important to hold the guilty individuals accountable. Never mind Jeb Bush’s verbal stumbles. Think, instead, about his foreign-policy team, led by people who were directly involved in concocting a false case for war.
So let’s get the Iraq story right. Yes, from a national point of view the invasion was a mistake. But (with apologies to Talleyrand) it was worse than a mistake, it was a crime.

Comments

I've received several emails saying comments are disabled. Not sure what's up...trying to fix the problem.

Update: All comments are going to spam (even my own). I am releasing them (and will continue to do so periodically until this is fixed).

Update: I believe this is resolved.

Video: Buying, Selling & Efficiency - RES 2015

Efficiency matters! It can make the economy better off. Understanding efficiency in manufacturing and retail markets can help guide policy, according to prize-winning research by Daniel Muller and Fabian Herweg in The Economic Journal. See the summary here: http://www.res.org.uk/details/mediabr...

The interview was recorded at the Royal Economic Society annual conference at The University of Manchester in Spring 2015 and produced by Econ Films.

Links for 05-18-15

Sunday, May 17, 2015

'Blaming Keynes'

Simon Wren-Lewis:

Blaming Keynes: A few people have asked me to respond to this FT piece from Niall Ferguson. I was reluctant to, because it is really just a bit of triumphalist Tory tosh. That such things get published in the Financial Times is unfortunate but I’m afraid not surprising in this case. However I want to write later about something else that made reference to it, so saying a few things here first might be useful.
The most important point concerns style. This is not the kind of thing an academic should want to write. It makes no attempt to be true to evidence, and just cherry picks numbers to support its argument. I know a small number of academics think they can drop their normal standards when it comes to writing political propaganda, but I think they are wrong to do so. ...

'Ed Prescott is No Robert Solow, No Gary Becker'

Paul Romer continues his assault on "mathiness":

Ed Prescott is No Robert Solow, No Gary Becker: In his comment on my Mathiness paper, Noah Smith asks for more evidence that the theory in the McGrattan-Prescott paper that I cite is any worse than the theory I compare it to by Robert Solow and Gary Becker. I agree with Brad DeLong’s defense of the Solow model. I’ll elaborate, by using the familiar analogy that theory is to the world as a map is to terrain.

There is no such thing as the perfect map. This does not mean that the incoherent scribbling of McGrattan and Prescott are on a par with the coherent, low-resolution Solow map that is so simple that all economists have memorized it. Nor with the Becker map that has become part of the everyday mental model of people inside and outside of economics.

Noah also notes that I go into more detail about the problems in the Lucas and Moll (2014) paper. Just to be clear, this is not because it is worse than the papers by McGrattan and Prescott or Boldrin and Levine. Honestly, I’d be hard pressed to say which is the worst. They all display the sloppy mixture of words and symbols that I’m calling mathiness. Each is awful in its own special way.

What should worry economists is the pattern, not any one of these papers. And our response. Why do we seem resigned to tolerating papers like this? What cumulative harm are they doing?

The resignation is why I conjectured that we are stuck in a lemons equilibrium in the market for mathematical theory. Noah’s jaded question–Is the theory of McGrattan-Prescott really any worse than the theory of Solow and Becker?–may be indicative of what many economists feel after years of being bullied by bad theory. And as I note in the paper, this resignation may be why empirically minded economists like Piketty and Zucman stay as far away from theory as possible. ...

[He goes on to give more details using examples from the papers.]

Links for 05-17-15

Saturday, May 16, 2015

'Factoryless Goods Producing Firms'

Tim Taylor:

Factoryless Goods Producing Firms: Andrew B. Bernard and Teresa C. Fort sketch what is known about the "Factoryless Goods Producing Firm" in the May 2015 issue of the American Economic Review: Papers and Proceedings (vol. 105:5, pp. 518-523). The AER is not freely available on-line, but many readers will have access through a library subscription. Succumbing to acronyms, Bernard and Fort write: "We define a FGPF as a firm that has no manufacturing establishments in the United States, but performs pre-production activities such as design and engineering itself and is involved in production activities, either directly or through purchases of contract manufacturing services (CMS)."

Want examples?...:

The best-known example of a factoryless goods producer is Apple Inc. Apple designs, engineers, develops, and sells consumer electronics, software, and computers. For the vast majority of its products, including iPhones, iPads, and MacBooks, Apple does none of the production and the actual manufacturing is performed by other firms in China and elsewhere. While Apple is known for its goods and services and closely controls all aspects of a product, almost none of Apple’s US establishments would be in the manufacturing sector. ...

How prominent are factoryless goods producing firms in the US economy, and how much have they expanded over time? By definition, you don't find these firms in the manufacturing sector of the economy. Bernard and Fort look at statistics on the wholesale trade sector of the economy. As background, wholesale trade is about 6% of the US GDP when measured in value-added terms. which is about half the size of the manufacturing sector, or half the size of the professional and business services sector. Here are a few facts from Barnard and Fort about factoryless goods producing firms:

  • In 2007, the total number of factoryless good producing firms was 13,500, and these firms employed 672,000 workers. "
  • Industries where factoryless goods producing firms tend to focus include electrical machinery and equipment, machine and mechanical appliances and computers, pharmaceuticals, and apparel. 
  • Compared to other firms in the wholesale industry, the factoryless goods producing firms tend to be larger and to pay higher wages. 
  • If you go back to 1992, and look at the factoryless goods producing firms of that time, you find that many of them begin manufacturing in the US at some point. Indeed, "it is likely that the current set of FGPFs are a mix of different types of firms including former manufacturing firms, new firms created as FGPFs from their inception, and other firms that have made the transition to the design and manufacture of products. More work is needed to understand the evolution of FGPFs over time."
  • The imports of factoryless goods producing firms are equal to about 38% of their total sales. Thus, a majority of money spent at such firms ends up flowing to non-manufacturing inputs from the US economy.

The growth of factoryless goods producing firms may have effects on wages, employment, and productivity. It's a phenomenon worth understanding. ...

Video: On Econometrics - Koen Jochmans & Mark Thoma - RES 2015

Koen Jochmans of Sciences Po speaks to Mark Thoma about his research and winning the Sargan Prize for outstanding research in the Econometric Journal. http://www.res.org.uk/details/econome...

The interview was recorded at the Royal Economic Society annual conference at The University of Manchester in April 2015 and produced by Econ Films.

[This is the first of three interviews I did -- will save the best for last.]

Links for 05-16-15

Friday, May 15, 2015

'Mathiness in the Theory of Economic Growth'

Paul Romer:

My Paper “Mathiness in the Theory of Economic Growth”: I have a new paper in the Papers and Proceedings Volume of the AER that is out in print and on the AER website. A short version of the supporting appendix is available here. It should eventually be available on the AER website but has not been posted yet. A longer version with more details behind the calculations is available here.

The point of the paper is that if we want economics to be a science, we have to recognize that it is not ok for macroeconomists to hole up in separate camps, one that supports its version of the geocentric model of the solar system and another that supports the heliocentric model. As scientists, we have to hold ourselves to a standard that requires us to reach a consensus about which model is right, and then to move on to other questions.

The alternative to science is academic politics, where persistent disagreement is encouraged as a way to create distinctive sub-group identities.

The usual way to protect a scientific discussion from the factionalism of academic politics is to exclude people who opt out of the norms of science. The challenge lies in knowing how to identify them.

From my paper:

The style that I am calling mathiness lets academic politics masquerade as science. Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in natural versus formal language and between statements with theoretical as opposed to empirical content.

Persistent disagreement is a sign that some of the participants in a discussion are not committed to the norms of science. Mathiness is a symptom of this deeper problem, but one that is particularly damaging because it can generate a broad backlash against the genuine mathematical theory that it mimics. If the participants in a discussion are committed to science, mathematical theory can encourage a unique clarity and precision in both reasoning and communication. It would be a serious setback for our discipline if economists lose their commitment to careful mathematical reasoning.

I focus on mathiness in growth models because growth is the field I know best, one that gave me a chance to observe closely the behavior I describe. ...

The goal in starting this discussion is to ensure that economics is a science that makes progress toward truth. ... Science is the most important human accomplishment. An investment in science can offer a higher social rate of return than any other a person can make. It would be tragic if economists did not stay current on the periodic maintenance needed to protect our shared norms of science from infection by the norms of politics.

[I cut quite a bit -- see the full post for more.]

'Why You Shouldn't Copy In Class'

Paul Krugman: Fraternity of Failure

Mistakes were made:

Fraternity of Failure, by Paul Krugman, Commentary, NY Times: Jeb Bush wants to stop talking about past controversies. And you can see why. ... The big “Let’s move on” story of the past few days involved Mr. Bush’s response when asked ... whether, knowing what he knows now, he would have supported the 2003 invasion of Iraq. He answered that yes, he would. ...
Then he tried to walk it back. He “interpreted the question wrong,” and isn’t interested in engaging “hypotheticals.” Anyway, “going back in time” is a “disservice” to those who served in the war.
Take a moment to savor the cowardice and vileness of that last remark. ... Mr. Bush is trying to hide behind the troops, pretending that any criticism ... is an attack on the courage and patriotism of those who paid the price for their superiors’ mistakes. That’s sinking very low, and it tells us a lot ... about the candidate’s character...
Wait, there’s more: Incredibly, Mr. Bush resorted to the old passive-voice dodge, admitting only that “mistakes were made.” Indeed. By whom? Well, earlier this year Mr. Bush released a list of his chief advisers on foreign policy, and it was a who’s-who of mistake-makers ... in the Iraq disaster and other debacles. ...
In Bushworld, in other words, playing a central role in catastrophic policy failure doesn’t disqualify you from future influence. ...
Take my usual focus, economic policy. ... Having been completely wrong about the economy, like having been completely wrong about Iraq, seems to be a required credential.
What’s going on here? My best explanation is that we’re witnessing the effects of extreme tribalism. On the modern right, everything is a political litmus test. Anyone who tried to think through the pros and cons of the Iraq war was, by definition, an enemy of President George W. Bush and probably hated America; anyone who questioned whether the Federal Reserve was really debasing the currency was surely an enemy of capitalism and freedom.
It doesn’t matter that the skeptics have been proved right. Simply raising questions about the orthodoxies of the moment leads to excommunication, from which there is no coming back. So the only “experts” left standing are those who made all the approved mistakes. It’s kind of a fraternity of failure: men and women united by a shared history of getting everything wrong, and refusing to admit it. Will they get the chance to add more chapters to their reign of error?

Links for 05-15-15

Thursday, May 14, 2015

Fed Watch: Get Used To It

Tim Duy:

Get Used To It, by Tim Duy: As is well known, second quarter GDP growth is not off to a strong start, at least according to the Atlanta Federal Reserve staff:

Gdpnow-forecast-evolution

If this forecast holds, then the first half of 2015 will be very weak if not flat, slow enough that commentators might be tempted to refer to growth as at "stall speed". But quarterly GDP numbers are fairly volatile. Would two consecutive weak quarters be terribly unexpected, or even suggestive of a troubling undercurrent in the economy? It is somewhat difficult to panic about the GDP numbers just yet, especially in the context of the continuous slide in the forward-looking unemployment claims indicator:

CLAIMS051315

Moreover, should we be surprised by the occasionally GDP number in the context of lower estimate of potential growth? As Calculated Risk likes to say:
Right now, due to demographics, 2% GDP growth is the new 4%.
A simple way to think about this is to look at the confidence interval around the one-step ahead GDP forecast from an AR2 model:

GDP051315

Prior to the Great Depression, it would be very unusual for the confidence interval to include a negative read on GDP outside of a recession. Following the Great Depression, however, the confidence interval around the forecast almost always captures the possibility of a negative outcome. This is likely the consequence of two factors, the downshifting of GDP growth as described by Calculated Risk and an increased GDP growth volatility in the most recent sample.
Bottom Line: We probably need to get used to the occasional negative GDP growth numbers in the context of overall expansion for the US economy. The concept of "stall speed" will need to be revised accordingly.

'Fighting for History'

"Progressives need to fight back":

Fighting for History, by Paul Krugman: ...Progressives ... are much too willing to cede history to the other side. Legends about the past matter. Really bad economics flourishes in part because Republicans constantly extol the Reagan record, while Democrats rarely mention how shabby that record was compared with the growth in jobs and incomes under Clinton. The combination of lies, incompetence, and corruption that made the Iraq venture the moral and policy disaster it was should not be allowed to slip into the mists. ...
There’s a reason conservatives constantly publish books and articles glorifying Harding and Coolidge while sliming FDR; there’s a reason they’re still running against Jimmy Carter; and there’s a reason they’re doing their best to rehabilitate W. And progressives need to fight back.

'Weekly Initial Unemployment Claims Decreased to Lowest 4-Week Average in 15 Years'

Calculated Risk:

... The following graph shows the 4-week moving average of weekly claims since January 2000.

WeeklyClaimsMay142015

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims decreased to 271,750.

This was well below the consensus forecast of 276,000, and the low level of the 4-week average suggests few layoffs. This is the lowest 4-week average in 15 years (since April 2000).

Note: If the 4-week average falls to 266,000, it will be the lowest in 40 years!

'Defend Workers and the Environment Before Voting Fast Track'

Jeff Sachs weighs in on the TPP, TTIP, and TPA:

Defend Workers and the Environment Before Voting Fast Track: President Barack Obama is making a full-court press for two new international business agreements, one with Asian-Pacific countries known as Trans-Pacific Partnership (TPP) and the other with European countries known as the Trans-Atlantic Trade and Investment Partnership (TTIP). To secure these, he is calling on Congress to pass Trade Promotion Authority (TPA), also known as "fast track," so that when TPP and TTIP come up for a Congressional vote, they can only be voted up or down, without amendments. ...
The president portrays TPP and TTIP as part of an overall program of "middle-class economics" in which "everybody gets a fair shot, everyone does his fair share, and everybody plays by the same set of rules." That means "making sure that everybody has got a good education," "women are getting paid the same as men for doing the same work," "making sure that folks have to have sick leave and family leave," and "increasing the minimum wage across the country." It means pushing for investments in infrastructure and faster Internet.
The problem, however, is that the president has not succeeded in getting any of those middle-class policies in place. ...
If the U.S. were a fairer society, in which Obama's vision of everybody getting a fair shot truly applied, then TPP and TTIP would be much easier calls. The losers from trade and offshoring would reliably get help from the winners; workers hit by the agreements would have a clear path to new skills, re-training, family support, adjustment assistance, a higher minimum wage, and all of the other protections that the president rightly seeks but can't secure. Yet America today is not that kind of society. The TPP and TTIP would hand another gift to the multinational companies that are lobbying so hard for the two agreements without providing real protections for workers (and for the environment as well). ...
Obama and the Republicans in Congress have not made the case to American workers that trade policies under TPP and TTIP will be part of a fair, middle-class, and environmentally sustainable economy.

Links for 05-14-15

Wednesday, May 13, 2015

'China and India Overtake Mexico for Inflow of Foreign-Born US Residents'

Tim Taylor:

China and India Overtake Mexico for Inflow of Foreign-Born US Residents: During my adult life, the main source of immigration to the U.S. has always been Mexico. Thus, I was surprised to see that for 2013, immigration from China and India exceeded that from Mexico. The data comes from analysts at the US Census Bureau, Eric B. Jensen, Anthony Knapp, C. Peter Borsella, and Kathleen Nestor, and presented at a recent conference under the title, "The Place-of-Birth Composition of Immigrants to the United States: 2000 to 2013."
Here's a takeaway figure. It's a measure of those who are foreign-born, and who were living outside the US a year ago--in other words, it's a measure of migration to the US in the previous year.

As I have noted in the past, immigration from Mexico has dropped off substantially in the last few years. Indeed, a few years ago when the U.S. unemployment rate was still so elevated in the aftermath of the Great Recession, net migration from the US to Mexico--that is, new arrivals minus departures--may have been slightly negative. Over the last decade or so, a combination of stronger enforcement at the border, along with a gradually stronger economy in Mexico and fewer children per women in Mexico have meant fewer young people on the move looking for work. ...

Video: Stiglitz on Inequality, Wealth, and Growth: Why Capitalism is Failing

'Wyoming’s War on Microbiology'

Mike the Mad Biologist:

Wyoming’s War on Microbiology: Well, they’re not calling it that, but this Wyoming law is definitely not going to make our water cleaner, or stop the spread of antibiotic resistance genes...:
…the new law makes it a crime to gather data about the condition of the environment across most of the state if you plan to share that data with the state or federal government. The reason? The state wants to conceal the fact that many of its streams are contaminated by E. coli bacteria, strains of which can cause serious health problems, even death. ... Rather than engaging in an honest public debate about the cause or extent of the problem, Wyoming prefers to pretend the problem doesn’t exist. And under the new law, the state threatens anyone who would challenge that belief by producing information to the contrary with a term in jail...
The new law is of breathtaking scope. It makes it a crime to “collect resource data” from any “open land,” meaning any land outside of a city or town, whether it’s federal, state, or privately owned. The statute defines the word collect as any method to “preserve information in any form,” including taking a “photograph” so long as the person gathering that information intends to submit it to a federal or state agency. In other words, if you discover an environmental disaster in Wyoming, even one that poses an imminent threat to public health, you’re obliged, according to this law, to keep it to yourself.
While this law will probably be ruled unconstitutional, its intent is horrendous...
For me personally, the timing is ironic, as I’ve spent the last week involved in various agriculture-related microbiology meetings, and the constant refrain was “we need more data on what people are doing” (e.g., how are they using antibiotics?). In the areas of food and water safety, we desperately need more data. ...

Links for 05-13-15