Wednesday, January 28, 2015

Priors and posteriors

A really wonderful blog post by Stephen Senn, head of the Methodology and Statistics Group at the Competence Center for Methodology and Statistics in Luxembourg, sums up the philosophical problem I've always had with Bayesian inference in scientific studies. Basically, the question is: Where does the prior come from? Senn argues that it can't be your real prior, since you can't quantify your real prior.

Where else could your prior come from? Here's the list I thought of:

1. You could use a "standard" prior that a bunch of other people use because it's "noninformative" in some sense (e.g. a Jeffreys prior). See this Larry Wasserman blog post on some of the potential problems with that approach.

2. You could use some prior that comes from empirical data. This is the foundation of the "empirical Bayes" approach.

3. You could choose a bunch of different priors and see how sensitive the posterior is to the choice of prior. This could be done in a haphazard or a systematic way, and it's not immediately clear if one of those is always better than the other. The drawback of this approach is that it's a bit cumbersome, and hard to interpret.

4. You could choose a prior that is close to the answer you want to get. The less informative your data is, the closer your prior will be to your posterior. This seems a bit scientifically dishonest. But I bet someone out there has tried it.

5. You can choose an "adversarial prior" that is similar to what you think someone who disagrees with your conclusion would say. (Thanks to Sean J. Taylor of Twitter for pointing this out.)

Have I missed any big ones?

Anyway, as always in stats, there's some element of intuition that can't be incorporated into the estimation in a systematic way.

Anyway, Andrew Gelman, one of the high priests of Bayesianism, so to speak, had this to say about Senn's post:
I agree with Senn’s comments on the impossibility of the de Finetti subjective Bayesian approach. As I wrote in 2008, if you could really construct a subjective prior you believe in, why not just look at the data and write down your subjective posterior. The immense practical difficulties with any serious system of inference render it absurd to think that it would be possible to just write down a probability distribution to represent uncertainty. I wish, however, that Senn would recognize “my” Bayesian approach (which is also that of John Carlin, Hal Stern, Don Rubin, and, I believe, others). De Finetti is no longer around, but we are! 
I have to admit that my own Bayesian views and practices have changed. In particular, I resonate with Senn’s point that conventional flat priors miss a lot and that Bayesian inference can work better when real prior information is used. Here I’m not talking about a subjective prior that is meant to express a personal belief but rather a distribution that represents a summary of prior scientific knowledge. Such an expression can only be approximate (as, indeed, assumptions such as logistic regressions, additive treatment effects, and all the rest, are only approximations too), and I agree with Senn that it would be rash to let philosophical foundations be a justification for using Bayesian methods. Rather, my work on the philosophy of statistics is intended to demonstrate how Bayesian inference can fit into a falsificationist philosophy that I am comfortable with on general grounds.

Tuesday, January 27, 2015

Postwar vs. New Gilded Age: How did the middle class do?

Here's another point in the ongoing debate over the fate of the American middle class in recent decades (installment 1 here, installment 2 here).

In his original post, Brad DeLong wrote:
Across most of the income distribution Americans today are little if any better off than their predecessors back in 1979...For 150 years before 1979 Americans had confidently expected that each generation would live roughly twice as well in a material sense as its predecessor, not find itself struggling against the current to stay in the same place.
In my previous posts, I pointed out that median household income had increased. But let's just look at median individual income. Was 1979-2000 really worse than the postwar period, for the average person?

Let's look at the relative performance of the period, not its absolute performance.

I found this cool graph from the Russell Sage Foundation. Using Census data, it shows inflation-adjusted median and mean household and individual income, starting in 1947:

Median individual income in constant 2012 dollars is the green time series. I drew three horizontal lines, corresponding to 1947, 1979, and 2000. 

From 1947 to 1979, real median individual income went from around $16,000 to around $21,000 - a total increase of about 32%. That is a compound annual growth rate of about 0.8%.

From 1979 to 2000, real median individual income went from around $21,000 to around $28,000 - a total increase of about 33%. That is a compound annual growth rate of about 1.38%.

Let's do a comparison that's a little more favorable to DeLong and Thomas' argument, and a little less favorable to mine. Let's use 1972 as the end of the "good" times and 1972-2012 as the "bad" times.

From 1947 to 1972,  real median individual income went from around $16,000 to around $23,000 - a total increase of about 48%. That is a compound annual growth rate of about 1.46%.

From 1972 to 2012,  real median individual income went from around $23,000 to around $27,000 - a total increase of about 17%. That is a compound annual growth rate of about 0.4%.

Finally, From 1979 to 2012,  real median individual income went from around $21,000 to around $27,000 - a total increase of about 28%. That is a compound annual growth rate of about 0.76%.

You can play around with these numbers more, but several conclusions emerge:

Conclusion 1: If you go by personal rather than household income, it is not true, as Brad asserts, that the average American saw his or her material standard of living double in the Postwar period.

Conclusion 2: The period from 1979-2000 - the Late 20th Century Boom - was about as good for the average American's income as the Postwar Boom period from 1947-1972. The Postwar Boom wins, but only slightly, since both booms have fairly high compound growth rates.

Conclusion 3: The Total Postwar period, from 1947 through 1979, is almost exactly the same as the Total New Gilded Age from 1979-2012, although both have fairly low compound growth rates.

Conclusion 4: The Late 20th Century Boom thoroughly thumps the Total Postwar Period (1947-1979) in terms of the growth in the material standard of living of the average American.

Conclusion 5: The 1970s was bad, but was over quickly. The Post-2000 period has also been bad, and is stretching out for longer than the 1970s.

In other words, Brad DeLong's contention that the average American saw a dramatic slowdown or reversal in the rate of growth of his or her material standard of living in 1979 is not supported by this evidence. And his contention that the Postwar rate of growth in material standard of living represented a generational doubling is not correct, if you exclude the effects of technological improvements. It was more like a 33%-50% increase.

And my contention that the period from 1979-2000 was a great time for the average American's material standard of living is correct, if you compare it to the period from 1947 -1979, and even looks pretty good if you compare it only to the best Postwar decades.

Again, this is not accounting for leisure and home production. But observe that the Postwar period, just like the period from 1980-2000, saw a steady increase in the percent of women in the labor force:

Therefore, hours spent on home production were decreasing at about the same rate in the Postwar period as in 1979-2000. In other words, although women's workforce entry contributed more to rising income in 1979-2000 (because women's wages had converged somewhat with men's by then), the rate at which household production hours were sacrificed - the rate at which women exited the home and went into the workforce - was roughly the same in both periods.

So as I see it, the entire case that 1979-2000 represented a dramatic slowdown in the growth of material living standards relative to the Postwar period rests on the fact that leisure increased during the Postwar but flatlined during 1979-2000:

If you want to make the case that the American economy did dramatically worse for the average American in 1979-2000 than in 1947-1979, this is the most convincing case I can think of. 

(Note: I still think the Postwar period represented a much bigger jump in the welfare of Americans, since marginal utility of consumption is concave. Getting food on the table, warm clothes, and a roof over your head is vastly more important than getting a bigger house, a second car, etc.)

Monday, January 26, 2015

Working women and the middle class

Kenneth Thomas of Angry Bear thinks I made an error when I said that things got better for the middle class in the last two decades of the 20th century:
Noah Smith put up a post Sunday purporting to show that things aren’t so bad for the middle class. Then he immediately shows us a chart of median household income. Stop right there. As I have argued before, this is always going to give you a rosier picture than reality. We need to look at individual data, aggregated weekly (because average hours per week have fallen for non-supervisory workers), to know what’s going on. 
Because the individual real weekly wage is still below 1972 levels, households have had to compensate by having more incomes and going into debt. They have traded time and debt for current consumption. This is not an improvement in the middle class lifestyle. Commenter Richard Serlin points out that we also need to consider risk as well as average incomes, and he is right. The middle class is less secure than it was in 1972.
Well, here's what I have to say to that.

I don't understand the idea that "households have had to" compensate for lower weekly wages (also the choice of weekly over hourly wages continues to mystify me, since long workweeks suck, but OK).

What does "have had to" mean?? They did not have to. They chose to.

If I can choose how much I work, and my wage stays the same, and I work more and my income rises, then I must be better off. Because if I was not better off, then I wouldn't have chosen to work more and earn more income.

So, median real wages in America stayed roughly flat in America in 1980-2000, and people worked more - actually, what happened is that many women stopped being housewives and began working. The obvious conclusion would seem to be that if this choice represented a deterioration in the standard of living, people would not have chosen to do it. In other words, if you can still afford to buy your old bundle back, revealed preference says you like your new bundle more.

Now, of course, there are some counterarguments you could make as to why what looks like a choice was not a choice:

1. The extensive margin - the requirement that women choose between 0 and 40-hour work weeks, with nothing in between - caused an overshoot, where women (and some men) were working more than they'd like, because it was less bad than working less than they'd like.

2. Social preferences - the need to "keep up with the Joneses" - dominate normal preferences, and everyone was running harder just to keep their place in the line.

Neither of these would be persuasive to me, because as regards (1), it seems likely that there is enough leisure/home-production preference heterogeneity that this isn't going to make a huge difference, and as regards (2), who cares, I don't want to make national policy to help people keep up with the Joneses.

But back to the main argument...

Kenneth Thomas is basically saying that the mass entry of American women into the workplace in 1980-2000 represents a real deterioration in the living standards of the average American, despite the fact that it boosted household incomes substantially.

Why did women stampede into the workforce in 1980-2000?

Possibility 1: The decline of discrimination and/or traditional values allowed them to.

Possibility 2: Advances in home production allowed them to.

Possibility 3: Improvements in consumption technology ("toys", as Brad DeLong puts it) motivated women to go earn more money.

Possibility 4: A shift in tastes away from leisure and/or home-produced goods caused them to.

Possibility 5: A global-game-theoretic equilibrium of "keeping up with the Joneses" emerged in which women all went to work because other women did.

Possibility 6: Something, somewhere has been seriously mismeasured.

To me, Possibilities 1-3 sound like good things, real unambiguous improvements. Possibility 4 sounds either good or neutral, but also mysterious and unlikely. Possibility 5 sounds bad (but if that's really what's going on, why are we talking about absolute measures of income in the first place), and Possibility 6 means this whole discussion is a waste.

So I conclude that the mass entry of women into the workforce in 1980-2000, which raised the income of the middle class, was almost certainly a good thing.

Would it have been better if real median hourly wages had risen, even without taking composition effects and technological improvements into consideration? Hell yes, it would have been.

That doesn't mean 1980-2000 was a crappy time for the American middle class.

Results of my unemployment bets with Kurt Mitman

Back in February, I made a bet with Kurt Mitman, who wrote a theoretical paper about unemployment benefits and unemployment. Based solely on my prior that "all macro models are massively misspecified," I bet that both unemployment and the employment-to-population ratio would remain flat from December 2013 through December 2014. Kurt bet on the point estimates of his model. So it was:

Noah's beta:
Unemployment: 6.7%
Employment-to-population ratio: 58.6%

Kurt's bets:
Unemployment: 5.2%
Employment-to-population ratio: 60.6%

Actual figures:
Unemployment: 5.6%
Employment-to-population ratio: 59.2%

Result: We split the bets. My miss on unemployment was 1.1% to Kurt's 0.4%, so Kurt wins that one. My miss on employment-to-population ratio was 0.6% to Kurt's 1.4%, so I win that one.

As per the terms of the bet, Kurt and I will each buy each other a pizza dinner. However, since Kurt now works in Europe, it may be awhile before we can make good!

Anyway, in retrospect, it was a little careless of me to bet on "no change" for unemployment, which was clearly trending downward as of January 2014:

And it was probably a little careless of Kurt to bet on employment-to-population ratio when his model didn't model the margin between unemployment and out-of-the-labor-force, or the margin between employment and out-of-the-labor-force.

But anyway, as a follow-up, Kurt is co-author on a new paper that gives an empirical estimate of the effects of the termination of extended unemployment benefits. Looking at differences across state borders (and between neighboring counties in different states), they find that the termination of benefits increased the total number of employed people by 1.2%. That doesn't sound huge, but it's actually 1.8 million jobs. Whether it qualifies as an employment "miracle", as the paper's title claims, is up for debate, but 1.2% is not nothing. (Of course, I'm accepting the paper's result at face value; some other studies have yielded very different results.)

So although unemployment benefits don't seem to have been the main reason for the huge decline in U.S. employment since 2008, and their effect isn't as big as in Kurt's original model, they were indeed a non-trivial factor. There were a substantial number of people out there who were being paid not to work, and are now back working again.


Mike Konczal has a blog post in which he reviews some evidence regarding UI extensions and unemployment. The other studies that examined this question looked not at states or counties but at individuals. It would take a lot of effort for me to compare the two methodologies in detail, so I won't. The other studies find that UI extensions decreased employment by about 0.1 to 0.5 percentage points, which is much smaller than the estimate of the recent paper on which Mitman is a co-author.

But I think the bigger point is this. The employment-to-working-age-population ratio fell by a bit little over 5 percentage points in the Great Recession, and since then has recovered by a little over 3.5 percentage points. Mitman and his co-authors estimate that UI extensions were responsible for about 17% of the drop, or about 26% of the recovery. The other commonly cited paper estimates that UI extensions were responsible for around 5.7% of the drop, and 8.7% of the recovery.

Looking at this range, it's clear that UI extensions do hurt employment, but were not the dominant factor in the recent recession.

Monday, January 19, 2015

5 questions for Nick Rowe about the "victory" of the right:

Nick Rowe writes:
How come no economist on the right is asking "Where are the Galbraiths of yesteryear?"? It's because Milton Friedman won the debate, and John Kenneth Galbraith lost...The right won the economics debate; left and right are just haggling over details. [emphasis mine]
This basically agrees with Chris House, who claims that the facts in economics have a well-known conservative bias.

I wonder if this might not be another instance of "Eternally Recurring 1970s Syndrome." Rowe writes about the 70s like that was when it all went down:
We easily forget how daft the 1970's really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages. And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.
I was born after the 70s, and so to me that decade doesn't loom quite so large (see Malmendier and Nagel on how those big macro experiences stick with us). So here are the questions I have for Nick Rowe, and for others who may agree with him:

Question 1: What was the left's position in this debate that the right won in the 70s? 

Was the bulk of the left really in favor of Marxism, rather than just a small fringe element? Isn't that setting the bar a little low for the right to win? Or was the left's vision for the U.S. economy centered on price controls for everything?

What exactly was Galbraith's plan that Friedman defeated?

Or was the right's victory the turn toward neoliberalism  (deregulation, freer trade, lower top marginal tax rates) in rich countries?

Question 2: What about the Austrians and other elements of the right that Friedman fought against?

Milton Friedman famously clashed with "Austrians". They definitely seem more rightist, politically, than Friedman. And although they succeeded in injecting some silly ideas into the minds of some people in the finance industry, the Austrians generally lost out to Friedman. Why doesn't this affect the idea that "the right" won the debate?

Also, what about the RBCers? Friedman fought with them, and monetarism (i.e. New Keynesianism) has probably eked out a slim victory in that battle. Do RBCers count as "the right" in your view?

Question 3: What about the turn against monetarism since the crisis?

Although monetarist (New Keynesian) models continue to be the ones used at central banks, and although some heavy-hitting macro people continue to work on them, these models have received a lot of flak and disfavor in academia since 2008, and attention has turned toward models of the economy in which market failures in the financial sector cause business cycles.

Does this constitute "haggling over details"?

Question 4: Has the victory of the right translated into an enduring policy victory?

Since Friedman's time, many types of regulation have decreased, and many types of price controls have vanished. But some types of regulation - environmental regulation, for instance - that the left has advocated have increased in rich countries. And many are struggling to bring back financial regulation.

Meanwhile, government spending continues to climb and climb as a percentage of GDP in rich countries. Tax revenue has not fallen as a percent of GDP. Income redistribution has increased in most rich countries.

Education has not been privatized. Health care has not been privatized, and even in the U.S. is moving toward more government control.

Do these developments point to a policy victory for Friedman and his slice of the right?

Question 5: Is it accurate to say that the left won the economics debate in the 1900s-1930s, and that since then, left and right have been haggling over details?

In the period between 1900 and 1940, many curbs were placed on laissez-faire capitalism. Child labor laws. Workplace safety regulations. Progressive income tax. Product safety and consumer protection laws. Weekends. Social Security. Medicare (and in some countries, universal health care). Land preserves. Antitrust law. Minimum wages.

In the era since Milton Friedman, none of these policies has been eliminated, and few if any have been substantially reduced. Nor have economists formed anything resembling a consensus against any of these policies. The continue to define and shape the lives of most people in rich countries.

So why is it not correct to say that the left won the economic debate in the early 20th century, and Friedman and his slice of the right were just haggling - mostly unsuccessfully - over the details?


See Nick Rowe in the comment section for answers, and more discussion!

Robert Waldmann offers his thoughts here.

David Glasner criticizes Milton Friedman here.

Sunday, January 18, 2015

DeLong Smackdown Patrol: How worse off are we really?

Brad DeLong has a blog post at the Equitable Growth blog called "Scene-Setting for the Policy Discussion: The American Economy Stumbles." The post is far too pessimistic about America's economic performance, especially over the period from 1980-2000. Here are a few points where I think Brad gets it wrong.

Brad's thesis is the following:
The American economy has done badly over the past generation or so. 
This is not to say other economies have done better: The American economy remains among the richest in the world. However, given the economic lead America had a generation ago, it really ought to still be well ahead of the North Atlantic pack, and it no longer is.
I think this is a defensible thesis, if A) you define "a generation" as 15 years, and B) you deny that Solow convergence should take place at the higher levels of country income.

But in any case, I do not think that Brad successfully defends the thesis!

First, I think Brad dramatically understates the progress Americans experienced during the years from 1980 through 2000:
Across most of the income distribution Americans today are little if any better off than their predecessors back in 1979...Yes, today Americans have remarkable access to incredibly cheap electronic toys. But those are a small part of expenditure, and the costs of securing the standard indicia of middle-class life–a home in a safe neighborhood with good schools and a short commute, college for the children, assurance that a major illness will not lead to bankruptcy, a secure and reasonably-sized pension–have all become more costly relative to incomes. This shift is astonishing: For 150 years before 1979 Americans had confidently expected that each generation would live roughly twice as well in a material sense as its predecessor, not find itself struggling against the current to stay in the same place.
First of all, here is a picture of American median household income:

As you can see, even if we do not adjust for household size, the median American household experienced a substantial rise in income from the 1979 business cycle peak through the 2000 business cycle peak - around a 17% rise. But if you adjust for household size, the increase is around 23%, from a higher base.

Of course, this does not account for A) age, and B) composition. American households got much older from 1980 to 2000, and old people do not work much. Also, there was a boom in low-skilled immigration in the 1990s, which, although it boosted U.S. total GDP and was good for us overall, did tend to reduce the median income through composition effects.

Now, it is true that these figures also do not account for A) home production, and B) leisure. The entry of women into the workforce, which was not fully matched by male exit, meant that parents were spending less time with their children. And leisure did temporarily decline during the 1990s, after holding steady in the 1980s (then soared in the 2000s). So that mitigates the rise in living standards over the 1980-2000 period. But the truth is that in terms of purely material standard of living, the average American was substantially better off in 2000 than in 1980. 

Anyway, Brad claims that the price of housing has gone up. He also claims that people (even well-off people!) live in smaller houses than in 1979:
The rest of the top 5% are about as rich as they might have expected. They have traded smaller houses and more burdensome commutes for more lavish vacations, cheap electronic toys, and greater social order. 
House size, in fact, went up substantially between 1980 and 2000:

Also, I would argue that rent, not the price of a house, is the key measure of the cost of housing. Bubbles in the price-to-rent ratio merely offer households the opportunity for arbitrage. Here, via Mark Thoma and Robert Shiller, is a graph of real rents in the U.S.:

So even as house size soared, real rents stayed flat over the latter part of the 20th century. To me, that looks like a large increase in the standard of living of the average person. 

What about the rest of Brad's "standard indicia of middle-class life," whose cost has supposedly soared? Regarding "a home in a safe neighborhood," the massive crime decline in the U.S. during the 1990s probably helped the lower and middle classes a lot more than the upper classes. Regarding "good schools," the performance of U.S. public schools remained flat or risen slightly relative to other countries, and in terms of NAEP scores, over 1980-2000 (and since). As for "burdensome commutes," this is true: average commute time increased by about 40 minutes per week from 1980 to 2000, and has been flat since 2000 - but this is an area in which new technology may be especially game-changing, since cell phones, texting, games, and podcasts/audiobooks make commuting much more fun. I get more "reading" done on my commute than during any other time.

It is certainly true that college has gotten much more expensive, health care bankruptcies have become more common, and pensions have become less generous (though this last is partly a function of Americans' increased consumption levels as a percentage of disposable income).

But then again, life expectancy has increased by about 5 years since 1980. That is not nothing. And many social indicators, including teen pregnancy and drug abuse, have decreased substantially.

Of course, all these numbers are just statistics - what about the lived experiences of Americans? Over the last two decades of the 20th century, Americans owned more cars, consumed more calories, had more TVs in their house, had bigger houses (as discussed above), and spent much less of their income on food, clothing, and shelter. These are things that mainly affect the marginal utility of the poor and middle class.

Brad's other main contention is that the U.S. is not doing well relative to other rich countries:
If you want a single set of numbers to keep in the front of your mind to understand America’s relative position today, you cannot do better than those in the figure below, copied from the Credit Suisse Global Wealth Report: 
Middle class Americans Not so wealthy by global standards Jun 11 2014 
The median American has only about $45,000 to his or her name, and wealth inequality as measured by the gap between the average and the median wealth is greater by far than in the typical rich country–only Sweden comes close. A generation ago it would have been ridiculous to even consider that the typical middle-class or working-class American might not lose if switched with the typical inhabitant of Australia or Italy or Japan or Finland or Singapore. It is not so ridiculous at all today.
Median net worth, of course, depends heavily on things like asset prices; the number for the U.S. dropped by more than half as a result of the housing bust. Other countries, like Canada, did not experience a housing bust. Also, net worth depends heavily on age, and the U.S. is younger than many of the countries listed above us in the median wealth ranking.

But more fundamentally, is median wealth the proper measure of living standards? Wealth is a function of savings rates, and savings rates depend on consumption levels, which are a choice. During the 1980s and 1990s, Americans chose to consume more of their income than our peers in most rich countries (though this has recently reversed itself in some cases, e.g. in Japan). If you look at median disposable income, the U.S. was ahead of every other rich country except Canada in 2010, despite some convergence:

As you can see, the U.S. was still ahead of the North Atlantic pack in 2010. Only Canada caught up (and we'll see how well that holds now that oil prices have crashed). We still comfortably beat Sweden, Germany, Britain, the Netherlands, and France. Japan is not listed, but the pattern is the same.

If this income disparity continues to hold, then the U.S. can climb back up the median wealth rankings whenever it feels like it - just save more out of disposable income. (Note: This graph does NOT prove that U.S. median standards of living are higher than these other countries, since those numbers are before transfers, and also do not take into account things like transport, crime, pollution, health, nice weather, or good fashion sense. But it DOES show that Americans could climb up the wealth rankings over time, if they wanted to.)

So in conclusion: Bad Brad! In 2000, you believed that American economic policy and the American economy, though far from perfect, had been largely a success (right?). It's understandable to think the 15 years since then have been a big disappointment - they have! - but why should that cause you to revise your evaluation of the period from 1980 to 2000? Do you think that we are now paying for excesses we enjoyed in that period, and that our prosperity increases during that period were thus illusory? I don't think you think that. So don't succumb to excessive pessimism!

Wednesday, January 14, 2015

What does "structural" mean?

There are a million and one definitions of the word "structural." To a builder or architect, the meaning is straightforward: "of, relating to, or forming part of the structure of a building or other item." But that's just the first dictionary definition. The second is "of or relating to the arrangement of and relations between the parts or elements of a complex whole".

In other words, you can use "structural" to mean just about anything you want, as long as you're talking about a complex system. Here are some examples of how people in different walks of life use the word "structural":

1. "Structural estimation"

Econometricians sometimes use a technique known as "structural estimation." This term is usually used in contrast to "reduced-form estimation." It's very difficult to pin down exact definitions of "structural" and "reduced-form" - even economists often don't know where the boundary lies. In general, "reduced-form" models tend to be either linear, or simple stuff like probit or logit. "Structural" models tend to use more complicated functional forms that represent "underlying" economic relationships. The implication of using a "structural" model is that your model can describe a wider array of situations, but this is just sort of implied. "Reduced-form" is often used as a diss, but that's not always fair - after all, if the assumptions that make your model "structural" are wrong, your model will give you a false sense of confidence. 

2. "Structural Poverty"

Advocates for the poor usually don't like the idea that poor people could be non-poor if they altered their behavior. They claim that poverty is the unavoidable result of the way the economy, society, and politics are set up. Being screwed by the system is what they label "structural poverty".

3. "Structural VARs"

In time-series econometrics, you have "reduced-form vector autoregressions," in which the shocks (random stuff) are things you can observe. Unfortunately, because you can observe anything you like and call it a "shock", the shocks in your VAR model will inevitably be correlated, which limits the applicability of the model. So if you want a VAR that will work in all cases - or at least, a much wider set of cases - you need to estimate the "structural" shocks. Since you can't observe these. you have to make some assumptions about how they interact to form the reduced-form shocks.

4. "Structural Deficits"

This refers to government deficits that are unrelated to the business cycle. It is a term used by deficit hawks to mean a deficit that is very dangerous, because it will just keep getting larger unless there are major political changes. A related concept is structural unemployment, which is unemployment that doesn't change with the business cycle.

5. "Deep Structural Parameters"

This is a word that economists use to mean things that don't change in response to economic policy. For example, followers of Robert Lucas often argue that preferences and technology don't respond when policy changes, and should thus be treated as "deep structural" parameters in economic models. In practice, anything will probably change at least a tiny bit in response to some kind of policy, so the assumption of "deep structuralness" will always be an approximation.

6. "Structural Pluralism" 

This is...OK, I don't understand what this is. It's a term used by sociologists. According to this article, "Structural pluralism is defined as the degree of differentiation in the social system along institutional and specialized interest group lines, in a way that determines the potential sources of organized social power." I think that means that when a society has different types of organizations - e.g. religions, unions, corporations, etc. - that all have some sort of influence, you have structural pluralism. But I'm not sure.

7. "Structural Integration"

This is a kooky-sounding type of physical therapy. But it might work!

8. "Structural Assimilation"

This is when minorities have equal access to public institutions. How this could be observed and verified in practice, I'm not sure...maybe you could use a structural model.

9. "Structural Racism"

This is when "dynamics" exist that discriminate against minorities. For the meaning of "dynamics," you will have to wait for a different blog post.

10. "Structural Realism"

This is a philosophy, possibly part of epistemology or possibly part of ontology (I'm never sure where one ends and the other begins), that, according to the Stanford Encyclopedia of Philosophy, "is considered by many realists and antirealists alike as the most defensible form of scientific realism." Further down in the article, we learn that "Structural realism is often characterised as the view that scientific theories tell us only about the form or structure of the unobservable world and not about its nature." Basically, it seems to mean that there's stuff we can't totally know about, but that science can let us know some stuff about that stuff.

So what does "structural" really mean? Looking at all these examples, it seems to mean "stuff I can't directly show you, but which I'm pretty sure isn't going to go away or change any time soon." So basically, "structural" = "stable" + "unobservable". Structure is the man behind the curtain. Does that sound right?

Except for structural integration, of course. I don't know how to fit that one in.

Friday, January 09, 2015


I love it when we get a new word to describe an annoying behavior that has existed for a long time without a name. For example, I loved it when "sealioning" became the term for persistent, annoying demands that people defend their opinions with evidence.

For a long time I've been annoyed by the practice of political movements trying to co-opt branches of science for their own ends. This is less common in the physical sciences, because they rarely have policy implications (though you do see plenty of politics-based science denialism, which is a different thing). In social science, you have lots of implications for policy, and so you get a lot more political movements trying to hijack branches of social science.

Let's call this practice "sci-jacking." (I like this term for a number of reasons.)

One good example of sci-jacking is the field of anthropology, which, as far as I can tell, was long ago eaten up by leftist activism. Sociology seems to have fallen prey to a bit of this as well, though less than anthro.

Economics, of course, is a prime target for sci-jackers. It deals with money, and money is what most people want out of policy. It is more directly connected to policy than anthropology or even sociology.

There are some people who try to sci-jack econ for leftist ends. They are mostly laughable, and they don't have any success, as far as I can see. Econ - especially pop econ - has swung a lot to the left in the last couple of decades, but as far as I can tell that movement came entirely from within, not from any external movement. Left-leaning economists utterly avoid the quasi-Marxist thinking and language and activist ritual that is endemic to anthropology. 

A much more serious attempt at sci-jacking economics comes from the right. This is natural, since the right wants free markets (well, in most ways), and econ treats free markets as natural outcomes. Just as an ecologist would assume that an ecosystem is working fine unless there were something obviously going wrong, economists tend to assume that markets are working OK unless there is obviously something the matter. The basic results in economic theory that say that "markets are good," although expressed in terms of voluntary exchange, utility maximization, etc., are really just formalizations of this naturalistic assumption. 

That makes econ very attractive to rightists - at least, rightists of the libertarian, free-market kind, if not always the traditional-values crowd. A whole movement of quasi-economists emerged after World War 2, whose main purpose seems to be conflating economic science with right-wing politics. In other words, there has been a sustained attempt to sci-jack econ from the right.

If you don't believe me, read the Wikipedia article on the Mont Pelerin society:
In 1947, 36 scholars, mostly economists, with some historians and philosophers, were invited by Professor Friedrich Hayek to meet to discuss the state, and possible fate of classical liberalism. He wanted to discuss how to combat the “state ascendancy and Marxist or Keynesian planning [that was] sweeping the globe”...The Mont Pelerin Society aimed to “facilitate an exchange of ideas between like-minded scholars in the hope of strengthening the principles and practice of a free society and to study the workings, virtues, and defects of market-oriented economic systems.”... 
The society has become part of an international think-tank movement; Hayek used it as a forum to encourage members such as Antony Fisher to pursue the think-tank route. Fisher has established the Institute of Economic Affairs (IEA) in London during 1955, the Heritage Foundation in Washington, D.C., in 1973; the Manhattan Institute for Policy Research in New York City in 1977; and the Atlas Economic Research Foundation in 1981. The Atlas Foundation supports a wide network of think-tanks, including the Fraser Institute.
I especially love this little gem at the end:
In 2006, libertarian theorist and Austrian School economist Hans-Hermann Hoppe founded The Property and Freedom Society as a reaction against what he perceived to be the Mont Pelerin Society's drift towards "socialism." Hoppe stated that individuals, whom he did not identify, had been "skeptical concerning the Mont Pelerin Society from the beginning" in 1947. He said that Ludwig von Mises had doubted as to whether "a society filled with certified state-interventionists" could pursue libertarian ideals.
The only appropriate response to this is: "Heh." 

As you might have realized by now, a big chunk of this movement - though not all of it, by any means - goes by the name of "the Austrian School". The "Austrian School" is mostly made up of quasi-economists, who reject the techniques of mainstream econ. They especially reject math and empiricism - naturally, because those techniques might at some point lead to a conclusion that does not fit with their political goals. They instead embrace something they call "praxeology," which is a complex system of language whose entire purpose and function is to disguise the fact that it has absolutely no substantive content. It is very reminiscent of the Derrida-based "critical theory" common in literature departments. 

Austrians (I'm going to drop the quotes, with all apologies to people from the very lovely country of Austria) claim to follow in the footsteps of their great thinkers, Ludwig von Mises, Friedrich Hayek, and Carl Menger. In fact, all the good ideas (and some of the bad ideas) of those thinkers have already been incorporated into mainstream economics. The Austrian "school" is no longer a school.

Now, there are some self-described Austrians who do not perfectly fit the description above - they have partially embraced the methods of mainstream economics. But this seems like saying that because not all self-described communists believe in pure orthodox Marxism, communism is no longer to be identified with Marxism. "Austrians for mainstream economic methods" sounds to me a little bit like "Jews for Jesus."

Actually this post began as a response to a blog post by Peter Boettke (one of the aforementioned Austrians who deviates from the pure praxeological orthodoxy). I had argued in a Bloomberg View post that economics - especially pop econ - is shifting to the political left.  Boettke says no, actually, econ has always leaned to the left. To not lean to the left, of course, you have to be an Austrian or equivalent free-market activist. This is a natural thing for Boettke to argue, since political movements always like to portray themselves as rebels. 

So the post doesn't really need much of a response. (Though I thought it was funny that Boettke cited Elinor Ostrom, who studied institutions and collective management of the commons, and Vernon Smith, who did the original Bubble Experiments, as "more market oriented thinkers". Just had to get that dig in there.)

The broader point is that the effort to sci-jack econ for conservative purposes is losing force, losing momentum, losing energy, and possibly losing other physics quantities as well. When you have Krugman and Piketty and Sachs and Stiglitz as the face of the profession instead of Friedman and Hayek and Art Laffer, the winds have shifted. Boettke's argument - basically, "even the conservatives were never conservative enough for my tastes" - doesn't change that fact.

But an even broader point is that econ has always resisted being sci-jacked. Studies find that political bias exists, but is small in size. If you've spent much time in an econ department, you know this - economists generally bend over backward to avoid the appearance of politicization. It's impossible, of course, to completely expunge politics from one's opinions and priors and basic beliefs, but economists, in the main, seem to have done an admirable job of staying as politically neutral as humanly possible. Even Milton Friedman, who was a member of the Mont Pelerin society and the most prominent conservative activist in the profession, made an attempt to separate his assessment of the facts from his own opinions and desires. And the "leftward shift" I talked about in my BV article has been more pronounced in the public sphere - in academia, the shift has been only minor and muted, because any earlier rightward tilt was also only minor and muted.

In other words, econ was never in danger of falling prey to sci-jackers, the way anthropology has. The sci-jackers made a lot of noise and established a lot of think tanks and coined a lot of buzzwords, but their assault broke on the walls of academic objectivity. I think econ deserves a lot of credit for that fact.

Update: Chris Dillow has a good complimentary piece on why econ doesn't need "heterodox" methods to arrive at liberal policy conclusions. Econ's relatively strong resistance to political sci-jacking is not inconsistent with its recent leftward turn.

Thursday, January 08, 2015

Lion Dog, Panda Dog

Back in 2013, a Chinese zoo tried to pass off a dog as a lion:

Screen Shot 2013-08-16 at 10.39.59 AM

Most observers laughed, but not Scott Sumner! To Scott, the Lion Dog was a signal of good days ahead for the Chinese economy:
I’m disgusted with the Western media, the way they keep picking on China.  Henan is a poor, heavily polluted inland province of 90 million people.  So what if the lion at their zoo looks a bit dog-like... 
That shows why the China bears are oh so wrong.  No country with that level of creativity, that enthusiasm to “git er done” will ever get stuck in a middle income trap.
Convincing, no?

Now, it's worth asking whether Sumner is also bullish on Italy, in the light of the following news:
An Italian circus is facing possible criminal charges for allegedly trying to deceive the audience with two chow chows painted to resemble pandas. 
Police in the city of Brescia confiscated the white chow chows on Dec. 19 from the Orfei Circus and accused the staff of painting black patches on them in hopes the customers would believe the pups were actually pandas.
Here is Panda Dog:

Obvious, this shows that, just like China, Italy has "that creativity, that enthusiasm to 'git er done'," and we can expect the Italy Bears to be proven wrong...right? Obviously, Italy's rising unemployment and stagnant growth is only a brief pause on that country's upward, march, right?

Good thing development forecasting is so easy, right?

Japan's fertility rate is rising, and you all missed it

Today's Bat Boy Award for crazy blogging goes to Ana Swanson of the Washington Post!

The headline cries: "Japan's birth rate problem is way worse than anyone imagined". The article cites a paper by some Waseda economists, which is all about inflation and deflation, and really has nothing to do with the ostensible point of the WaPo piece. The citation of the paper is really just an excuse to show the following graph:

This is supposed to be one of those charts that shows how the government keeps getting its forecasts wrong. Swanson writes:
The data above...shows just how bad Japan has been at forecasting its fertility rate since 1965. Government projections have been almost comically wrong, as the government repeatedly interpreted the sharp decrease in the fertility rate as a temporary dip rather than a sustained trend.
Except that is not what the graph shows at all. Yes, government forecasts are way off (forecasting is hard). But for over a decade, the Japanese government has been too pessimistic about the fertility rate.

Just Look. At. The. Graph! Since 2005, the black line - the actual fertility rate - has been going up! It is now higher than the blue line representing the forecast from 2002. It is even higher than the blue like representing the forecast for 2008. The graph only looks like it goes through 2010, but a quick Google shows that the fertility rate is still over 1.4, i.e. higher than the 2002, 2006, or 2012 forecasts.

In other words, Japanese fertility has been surprising on the upside for ten years and counting!

People have been tweeting this graph, and the incorrect conclusion, all day. Didn't anyone even bother to take a look at this graph before declaring that it shows the opposite of what it actually shows? Was this just an opportunity to harp on a standard news headline - Japanese people aren't having kids, Japan is dying, etc. etc. - with the graph as just an excuse to re-up the news one more time?? Bat Boy is not pleased! Ana Swanson, our policy is to forgive all crazy blog posts (we all do them from time to time), but you must repent and say fifty Hail BatBoys. Conrad Hackett and everyone else who tweeted it without looking, you get a Bat Boy runner-up ribbon, and you are required to say twenty Our BatBoys.

More importantly, when are people going to start writing news articles pointing out that Japan's fertility is on the rise?

Maybe I better do it.

Wednesday, December 31, 2014

What can be done about the gender problem in economics?

A little while ago, I wrote a Bloomberg View article highlighting some research showing that the economics profession is more biased against women than are the natural sciences or the other social sciences. Following that article, I received quite a number of emails agreeing with what I wrote, and offering opinions about what can be done.

By far the most common suggestion was just to raise awareness of the problem. The modal comment was something along the lines of "I never realized there was a gender problem in econ, but recently I've started noticing it more and more." That is very encouraging. The more economists realize that something is fishy, the more they will act to counter it in their daily lives.

Raising awareness can be done at the individual level and at the official level. Regarding individual-level awareness, Frances Woolley has a great blog post on the subject:
"Sexism" is not the result of some high level conspiracy. It is the product of millions of every day actions by thousands of ordinary people...  
[A] scholars's reputation and impact is determined by the decisions of others: who they choose to acknowledge, who they choose to network with. Every single active academic can, through the citation and other decisions they make every day, influence other academics' reputations - and thus the probability that they will receive tenure or get promoted.   
Who do you cite? If you're like most people, you're more likely to cite the seminal work of some well-known male academic than the work of a female scholar... 
Do you give women credit for their ideas? Just about every woman has had the experience of sitting in a committee, saying something, and having her contribution ignored. A man will then restate her point, and he is listened to, and receives credit for the idea... 
How do you word your letters of reference? Do you use the same adjectives to describe women and men? Or are women delightful, pleasant, conscientious and hard-working while men are strong, original, insightful and persistent? 
Who do you invite to present at conferences or departmental seminars? If a man, do you turn down invitations to participate in conferences with all-male line-ups (see the gendered conference campaign)? Do you make it easy for female colleagues to come for a drink in the bar after a seminar by corralling them into the bar-going group?  
The economics profession is far from perfect...and the power to change it lies within every one of us.
Well said.

Woolley also points out some potential problems with Ginther and Kahn's research (which inspired my post). But that doesn't diminish the case for raising individual awareness in the way Woolley describes.

As for official awareness, things get trickier. As Woolley points out, it's the natural instinct of organizations like the AEA, universities, and journals to try to fight discrimination by giving women more responsibility. But in academia, responsibilities - like department chairs and committee memberships - are often detrimental to a professor's career rather than helpful.

A better way, in my opinion, is to strengthen and increase support for organizations designed to investigate and highlight the gender problem. The main such organization is the Committee for the Status of Women in the Economics Profession, an AEA committee. The AEA might, in the future, increase the committee's size and funding, or perhaps the number of paper sessions allocated to the committee. It also might promote the committee more prominently on its website and in the events at the annual meeting.

As for universities, more might follow the lead of Harvard, whose Task Force on Women Faculty put out an interesting report in 2005 (the link is courtesy of Anke Kessler, head of the Canadian Women Economists Network).

How can journals help? Well, they can invite some publications by top researchers on the subject of gender discrimination in econ. As Frances Woolley points out, Ginther and Kahn's paper leaves some stones un-turned. The more research there is on the topic, the more we will know about exactly where the problem lies.

A final player is the media at large. The media can help highlight the increasing contributions of female economists, instead of ignoring them.

The overall hope here is that gender discrimination in economics is like the Phillips Curve - that the more we believe in it, the more it goes away in reality. Ideally, everyone should do their part.

Update: Here is a piece in Quartz by Miles Kimball and an anonymous co-author, giving first-hand accounts of the culture of sexism in econ.

Sunday, December 28, 2014

Scott Sumner on taxes

Scott Sumner has a reply to a BV piece of mine in which I suggested that the labor disincentive effect of income taxation is relatively modest right now in the U.S.

The required number of hours worked is itself endogenous.  In Europe, required yearly hours are less than in the US, due to higher taxes. 
This assertion might be true. If Scott has evidence to back up this claim, he does not present it in this post.

Second, when you tax people, they are poorer, and they need to work more to maintain their standard of living. 
This is a common misconception that I see all the time.  There is no first order effect of taxes on national income, as the tax money gets recycled into the economy.  Now it’s true that the government might waste the tax money, leaving a country poorer, but in that case it would be more accurate to say that government waste causes people to work harder.  In modern economies most extra spending at the margin goes back in transfer programs.  Since national income doesn’t fall from the direct impact of taxes, there is only a substitution effect on labor supply, not an income effect.
Well, this would be a good point if taxes left income unchanged - in other words, if tax revenue was redistributed lump-sum to the people from whom it was extracted, as is the case in many economic models. However, if taxes represent income redistribution - as they often do in the U.S. - this is not the case, and we do need to think about income effects. In particular, our tax system is highly progressive - rich people pay most of the taxes, poor people get most of the services. Thus, if we want to think about whether taxes make the rich work less, we do need to think about income effects, contra Scott.

You don’t want to use time series data, as there is a long-term downward trend in hours worked due to increasing affluence. 
Of course, but this does give you some general idea of how much we might increase labor supply (or fail to increase it) by cutting marginal tax rates. The long-term trend really seems to dominate. Of course, this by itself is not dispositive, but that's why I mentioned it.

Lower income people face a much higher implicit MTR than in the 1950s and 1960s.
This is a good point, and I probably should have mentioned something about this in my article (I was focused on the idea of taxing the rich). Casey Mulligan has argued that implicit taxes (from benefit phase-outs) are high. Paul Krugman has also made this argument. I'd like to see more research on it, but it's a very important point, and one that is totally left out of the discussion in most U.S./Europe comparisons.

For a rundown of the relevant research on taxation and labor supply, see these fun slides. (hat tip to Claudia Sahm)

Tuesday, December 23, 2014

Time for gaijin to take a second look at Abe's Womenomics

If you follow Japan news, you know about Shinzo Abe's "Womenomics" program/meme. You also know that much of the Western press - especially the Japan-based Western ("gaijin") press - is startlingly vitriolic about the program.

Why? It's not that gaijin want to keep Japanese women in the kitchen - far from it. In fact, Westerners have been writing editorials about how Japan needs to be less sexist for many many years. So why are they so hostile now that Abe is actually trying to do what they've been urging Japanese leaders to do since forever?

Well, first some background. Shinzo Abe is a conservative - and not just a conservative, but a nationalist conservative, one of an outspoken minority of Japanese politicians who want Japan to stop obsessing about World War 2 and go back to being a strong military power. To some gaijin, this implicitly associates Abe with the pre-1945 fascist regime, and also with Japan's xenophobic feudal government back in the 1800s. They instinctively see Abe as part of a long Japanese tradition of anti-Westernism. Their greatest fear is that Abe is the leading edge of a wholesale revival of that tradition. They see Japan as a pendulum that swings back and forth between openness and xenophobia, and Abe's popularity seems like a sign that the pendulum is swinging back. If that happens, their very livelihoods are in trouble, and they could face social and/or official discrimination.

So if Abenomics succeeds, the thinking goes, Abe might be able to push Japan in a xenophobic direction. But that doesn't explain the particular venom many gaijin writers have toward the Womenomics part of the program. I have a hypothesis to explain this: Abe stole their issue.

You see this all the time in politics. Democrats gave Bush little to no credit for the Medicare expansion. Republicans gave Clinton little to no credit for scaling back welfare. And so on. When a leader of the Enemy Party does something you've long been calling for, the instinctual response is to A) discount it as tokenism, and then B) deride the Enemy Leader for engaging in tokenism.

A lot of Westerners went to Japan in the 1990s and 2000s, lured mostly by the explosion of Japanese pop culture. They have been banging the drum for women's equality for years and years, and seen Japanese feminists stonewalled by a seemingly impenetrable wall of conservative LDP politicians. Now along comes one of the most conservative LDP politicians of all, and suddenly he's talking up feminism? It must be a trick! And a dirty, cruel trick at that, designed to subvert the gender equality movement and give it false hope, etc. etc.

I see this kind of thinking a fair amount.

But here's the thing: gaijin/Westerners are not a unified bloc. Many disagree totally with the kind of thinking I've described. And these dissenters, who generally bear no particular love but also no particular animus toward the LDP, have started to realize that Womenomics, no matter what concrete policy changes come out of it, has fundamentally changed the game in Japan.

For example, here's Anthony Fensom in The Diplomat, quoting the excellent Devin Stewart:
Abe has announced a series of reforms to boost Womenomics, including ensuring sufficient childcare centers for 300,000 children by March 2020; requiring listed companies to disclose the number of female executives by March 2015; and reviewing the tax and social security system to ensure its neutrality toward women workers. 
“Together with other measures to facilitate women-friendly work places such as disseminating good practices and promoting disclosure of company information on female participation, the government aims to raise the employment rate of women (aged 25-44) from 68 percent (in 2012) to 73 percent in 2020 and to increase women occupying leading positions to 30 percent in 2020,” the government said in its growth strategy prepared for November’s G20 summit in Brisbane, Australia. 
The strategy also announced plans for the next Diet session to introduce “a new working hour system to break the link between wages and the length of time spent at work, while protecting workers’ health and achieving a better work-life balance,” as well as reviewing international best practice concerning labor disputes... 
[S]igns of progress have been seen in the corporate sector, with brokerage Nomura appointing this year its first woman trust bank head since 1945, and female directors now on the boards of the nation’s three megabanks. Women delivery drivers and construction workers are no longer a rare sight as Japan utilizes its formerly neglected labor resource, in preference to broad-scale immigration. 
Importantly, the government has flagged plans to abolish the current spousal tax deduction system, which offers tax deductions providing the low-income spouse’s salary does not exceed around 1 million yen a year. The system has been blamed for encouraging married women to stay out of the workforce, but according to the Yomiuri Shimbun, the reform will offer tax deductions to the spouse with the higher annual income, with no upper limit placed on their spouse’s income... 
Devin Stewart, Senior Fellow, Carnegie Council, told The Diplomat after a recent Japan visit that progress was apparent, including proposed moves by business lobby Keidanren pushing companies to publish action plans on women employment, immigration policies allowing more nannies, the deregulation of part-time workers beyond the three-year limit, and an increase in childcare leave benefits from 50 percent to 67 percent of initial salaries for both parents. 
“More women are working in the bureaucracy, and they are bringing about reform to the way Kasumigaseki [Japan’s government district] operates. A group of women who were selected to be trained for management training have created a network for change in Tokyo’s central government. In their spare time (often in pre-dawn hours), these women have put together a proposal for change titled, ‘Towards Sustainable Work Style: Proposals from Female Officials Working in the Japanese Central Government.’ Each ministry is now considering how to adopt their suggestions, such as reducing work hours and allowing workers to telecommute,” he said. 
“In the courts, there has been some progress for the protection of women workers. This fall, the Japanese Supreme Court overturned a Hiroshima court ruling about maternity harassment (also known as pregnancy discrimination) in violation of the equal employment act. The Supreme Court has ordered a re-trial– a victory for the plaintiff. It means Japan may start enforcing laws that protect women’s rights like this one, which has been in place since 1986.” 
Despite concerns over the planned female executive target – one analyst described it as potentially creating a small elite of “platinum kimonos” due to the lack of trained talent – Stewart said attitudes were changing. 
“We are witnessing a gradual, nascent feminization of the workplace in Japan, and this is a good change. It is coming from the necessity of a globalized market, a shrinking population, and via the innovations of entrepreneurs and other change-makers. Abe’s rhetoric in the past two years has helped to give this change some momentum,” he said... 
While critics suggest Womenomics will end with Abe’s departure, Stewart said a generational change by 2020 would ensure women’s empowerment “becomes the norm rather than a political buzzword.”
Even if Abe is a lone feminist figure in a party of sexist conservative old men, his rhetoric and his policies have changed something. For the first time, the Japanese establishment - the bureaucracy, big business, and the media - are on the side of women in the struggle for gender equality.

So the gaijin and Western writers who still see Womenomics as tokenism should wake up and realize that Something Is Different In Japan. And like it or not, it is different because of Shinzo Abe.

Monday, December 22, 2014

Commie commie commie commie commie K-Keynesian

Commies. Awesome printing on t-shirt. Credits to whoever made this..

Boy, do people like arguing over whether "Keyneisanism" is right or wrong.

I suspect that much of the motivation for John Cochrane to write this latest blast comes from his ongoing personal feud with Paul Krugman, generally acclaimed as the champion of "Keynesianism". Of course, the Wall Street Journal eats it up, since to most WSJ readers, "Keynesian" is a code-word for "commie" (thanks, Friedrich Hayek). The result of these two forces is an article which has a few good points buried deep inside it, but which is mostly wrong. 

No government is remotely likely to spend trillions of dollars or euros in the name of “stimulus,” financed by blowout borrowing.
Sure, but that's always true. Then when the crash comes, "everyone's a Keynesian in a foxhole," as Robert Lucas said. A few weeks later and everyone is back on the austerity bandwagon. This is a time-stationary process, dude. Fiscal stimulus ain't dead, it's pinin' for the fjords.
Keynesians told us that once interest rates got stuck at or near zero, economies would fall into a deflationary spiral. Deflation would lower demand, causing more deflation, and so on.
Well, that's a good point! Where IS the deflation? When you have to patch up a theory after every contrary fact, you get a degenerating research program. See also: Every other macroecnomics research program.
Our first big stimulus fell flat, leaving Keynesians to argue that the recession would have been worse otherwise. George Washington’s doctors probably argued that if they hadn’t bled him, he would have died faster.
By what measure did the stimulus "fall flat"? Arguing about macro counterfactuals may be a mug's game, but a Booth Business School survey of economists found that 92% thought the ARRA lowered the jobless rate. Check out the list. That's an awful lot of well-respected doctors saying bleeding worked. Maybe they're all wrong! I wouldn't be surprised, given how little we really understand macro.
With the 2013 sequester, Keynesians warned that reduced spending and the end of 99-week unemployment benefits would drive the economy back to recession. Instead, unemployment came down faster than expected, and growth returned, albeit modestly. The story is similar in the U.K.
But didn't a 3% sales tax hike send Japan spiraling into recession? Oh, the competing anecdotes! WHO DO I BELIEVE??
Keynesians forecast depression with the end of World War II spending. The U.S. got a boom.
Well, you know, except for that 12.7% fall in GDP in 1945.
The Phillips curve failed to understand inflation in the 1970s and its quick end in the 1980s, and disappeared in our recession as unemployment soared with steady inflation.
We'll always have Paris.
Hurricanes are good, rising oil prices are good, and ATMs are bad, we were advised: Destroying capital, lower productivity and costly oil will raise inflation and occasion government spending, which will stimulate output. Though Japan’s tsunami and oil shock gave it neither inflation nor stimulus, worriers are warning that the current oil price decline, a boon in the past, will kick off the dreaded deflationary spiral this time.
This is a good point! Liquidity trap models with all those paradoxes are hard to square with reality. though Japan's growth did certainly rise after the 2011 tsunami and has been rising faster than America's since, and they've switched from deflation to inflation, so that might not have been the best example. Generally natural disasters lead to a growth boom due to rebuilding, though you don't need a liquidity trap model to get that.
I suspect policy makers heard this, and said to themselves “That’s how you think the world works? Really?” And stopped listening to such policy advice.
Well I suspect policymakers would be caught dead in bed with Siamese twins before they'd open up a New Keynesian DSGE paper and try to work out its implications, but hey.
Keynesians tell us not to worry about huge debts
Except in, say, Krugman's paper with Eggertsson, which is all about how debt is baaaad. I guess Cochrane means government debt. But I have heard self-identified Keynesians say that government debt isn't as bad as private debt after a recession, and that governments should run deficits in busts and then do austerity in booms. Is that crazy?
Stimulus advocates: Can you bring yourselves to say that the Keystone XL pipeline, LNG export terminals, nuclear power plants and dams are infrastructure?
I bet they could...
Can you bring yourselves to mention that the Environmental Protection Agency makes it nearly impossible to build anything in the U.S.?
This is not necessarily a good point, but it is closely related to a very good point, which is that infrastructure costs are weirdly high in the U.S., and environmental review is part of that (but it's local NIMBY landowners, not the EPA).

...Wait, what did this have to do with Keynesians? Oh, yeah, I forgot. Commies, etc.
Now you like roads and bridges. Where were you during decades of opposition to every new road on grounds that they only encouraged suburban “sprawl”? If you repeat in your textbooks how defense spending saved the economy in World War II, why do you support defense cutbacks today? Why is “infrastructure” spending abstract or anecdotal, not a plan for actual, valuable, concrete projects that someone might object to?
Keynesians tell us that “sticky wages” are the big underlying economic problem. But why do they just repeat this story to justify inflation and stimulus? Why do they not advocate policies to undo minimum wages, labor laws, occupational licenses and other regulations that make wages stickier?
If I recall correctly, Keynesians think getting rid of sticky wages in the middle of a recession is bad. Also if I recall correctly, if you take sticky wages out of a New Keynesian model, you still get a recession when a bad demand shock hits, the recession just reduces people's hours instead of sending them into involuntary unemployment.
Inequality was fashionable this year. But no government in the foreseeable future is going to enact punitive wealth taxes.
Wait, how is this related to stabilization policy? Besides COMMIES, I mean.

So here is my assessment of Cochrane's column:

  1. New Keynesian models do indeed have lots of big holes in them. But most of the things Cochrane characterizes as "Keynesian" (now say that 10 times fast!) seem like things he read Krugman write in a blog post.
  2. I'm sure Cochrane does really, honestly believe that self-identified Keynesians are a bunch of, essentially, commies. Which means that when he says "Keynesians", he's not thinking of Bob Hall, Emi Nakamura, Jordi Gali, or Roger Farmer. But maybe he should.
  3. Cochrane really really really doesn't like Krugman. Krugman's name is never mentioned, but it's clear who this article is aimed at. The feud is getting out of hand!
  4. The WSJ editorial page readership seem mentally stuck in the 1970s. Or at least, some of them do. We live in a Malmendier & Nagel world.

For a more reasonable Cochrane discussion of fiscal stimulus, I recommend this 2012 blog post, and of course, Cochrane's paper on New Keynesian models.

Also: COMMIES!!!

Also: I stole the title of this blog post from @cellsatwork on Twitter, and I'm not sorry.