Thursday, March 23, 2017

What Makes Macro So Hard? Not a Yogi-ism, But Still Good (Optional)

This relates to Aaron’s question from the class quodlibet.

Attributed to Jan L. A. van de Snepscheut:†

In theory, there is no difference between theory and practice. But, in practice, there is.

In a nutshell, this is the problem with teaching macroeconomics. Is there any other field where the theory in texts is more blithely ignored by the practitioners?

Via the comment thread at Newmark’s Door for this post.

† This quote is often mis-attributed to Yogi Berra.

Monday, March 20, 2017

Stephen Ross, R.I.P. (optional)

All finance majors (and most economics majors) should learn about Stephen Ross’ contributions to the field.

He has been on everyone’s short list for a Nobel Prize for years. They are not awarded posthumously, and he passed away suddenly last week.

He did not have a homepage on Google Scholar, but if you search for him you’ll come up with this list of top cited papers. For comparison purposes, at SUU a few thousand cites in your career across all your publications makes you a top researcher in our School of Business. Ross had over a dozen papers that had more than a thousand citations each.

You may have been or will be exposed to Ross’ contributions in Haslem’s FIN 4250 class or FIN 6100. Option pricing using binomials is a topic I covered when I taught each of those classes. Arbitrage pricing theory is something that I helped a lot of students with at my previous school. And the paper by Cox, Ingersoll, and Ross is a big crossover into the macroeconomics taught in graduate programs.

Here’s the obituaries from the Wall Street Journal and The New York Times.

Tuesday, March 7, 2017

Oil and Gas Infrastructure

One more on infrastructure, this one showing mostly privately owned wells and pipelines, and publicly owned resources. The source for this is the piece entitled “The United States of Oil and Gas” that appeared in February 14 issue of The Washington Post. Click through for many more and better graphics.

17-03-07 Capture from The Washington Post about Oil and Gas

The oil is in green and the gas is in purple. In Utah, when we think of oil production we think about Vernal, but note how small that field is compared to other parts of the country.

The trick for a 21st century economy is getting the oil and gas from where it comes out of the ground to where it can be used. The oil and gas pipelines shown pass about 15 miles west of town; you can see them out by the Wecco facility.

It’s hard to tell from the map below, but the gray areas are the earlier gas wells in this area. They did not use horizontal drilling of fracking. Note that they extend into New York. But, for better or worse, New York has largely banned horizontal drilling and fracking, which is why the yellow and red dots pretty much stop at the border.

17-03-07 Capture from The Washington Post about Oil and Gas 2

Part of the reason the estabishment of the Bears Ears National Monument in southeastern Utah is controversial within our state, again right or wrong, is that it’s right in the middle of a large field of relatively unexploited oil (you can see this if you click through to the article). It’s been presented in the media as an issue of Native American rights (and it is), and tourism (and it is), but it’s also about the Obama administrations interests in blocking the oil industry.

More Infrastructure

Electricity generation and transmission is a big part of our infrastructure too. Most people have no idea how it’s generated.

This is another piece that you have to click through to see the interactive graphics. Here’s a non-interactive sample showing where solar power is generated in the U.S.

Solar

17-03-07 Capture from The Washington Post of Solar Generation

Nationwide, most of our electricity still comes from burning coal in large powerplants (like the one outside of Delta, or the smaller one along I-80 on the way from downtown Salt Lake out to the airport). Coal is down to about 1/3 of the total, but in Utah it’s about 80%. This is because of the large coal fields in northeastern Wyoming, and the far better than adequate freight rail network in the intermountain west.

Natural gas also powers about 1/3 of what we do. This is a fairly recent development, mostly related to technological advancements in (primarily) horizontal drilling and (secondarily) fracking. One thing I am curious about, but have not been able to document, is that it seems to me that there must have been excess capacity in gas pipelines before that happened, because it doesn’t seem like they’re building pipelines everywhere.

Nuclear power is next, with about 1/5 of our power generation. This is mostly in the eastern half of the country. Nuclear plants use about twice as much water for cooling as other power plants (although they contaminate none of it, and recycle most of it). There’s a reason the Fukushima plant was hit by a tsunami: they put it on the coast on purpose.

BTW: many people think any cooling tower is a sign of nuclear power, but they can be used for any sort of plant.

Oil is down near the bottom of the list. We use oil for a lot of stuff, but it has transportation costs that are on the high side for electricity generation, so it isn’t used much for that.

***

There’s a huge problem with electricity generation infrastructure that is not mentioned in this otherwise useful source. This is that electricity is very hard to store: you generate, and you use it. Generally speaking, batteries are lousy: inefficient, toxic, and not biodegradable. That’s why we use them in our small devices, but not in, say, hairdryers.

The four sources listed above are the ones that can be ramped up and down to satisfy peak demand (late afternoon into late evening, mostly in the summer). The ones below are unlikely to ever fit our usage patterns, unless we figure out better storage solutions (e.g., molten salt, kinetics, flywheels).

***

Collectively, wind, solar, and hydro cover about 1/7 of our needs.

Hydro appears to be stuck at current production: no one wants any more dams. And, really big ones, like the Hoover and Lake Powell dams don’t generate that much power (I personally recommend a dam tour sometime, it’s sort of amazing how little they actually accomplish with this huge structure). Wind power is starting to be subject to the same problems: the same places with wind are the ones where people have clear views they’'. Solar is fine, but nowhere near as important as people think it is: it won’t be until it’s a lot cheaper.

Sunday, March 5, 2017

Visualizing the Global Economy

A Voronai diagram of the global economy":

This is based on World Bank data, which is adjusted across countries using PPP. PPP isn’t bad or wrong, but it is more of an upper bound that shows poorer countries being bigger than they probably are.

Via howmuch.net, Business Insider, and Newmark’s Door.

What Do Economists Know?

I think I annoy many students.

They come to me with questions, generally about policy. And they want definitive answers: is this policy beneficial or not?

They could ask these questions of anyone.

But they ask me because they think I will be able to back up my answer more solidly. After all, I’m a macroeconomist, and I think a lot about policy.

Here’s the annoying part: a lot of my back up leads me to the conclusion that I don’t know the answer, and no one else does either.

That’s not very comforting. It’s also hard to digest, because when we watch or listen or read about policy analysis, we’re confronted by people who are certain they have the right answer. It’s easy to mistake their certainty for a preponderance of solid evidence supporting one side of the policy or the other. Certainty is very common. Convinving evidence that tilts us one way or the other is much rarer.

Economics is not alone in this problem. It crops up in all the social sciences, and a good chunk of the harder sciences as well (e.g., anthropogenic climate change).

One last note before I move on. At the risk of sounding age-ist, the tendency to see the world in black and white diminishes with age. I think this is a good thing, but I’m no longer young. Here’s the thing: there’s pretty much never been a former student who you run into many years later who remarks that economics make less sense than it once did. And most of the time their opinion revolves around to noting that they didn’t realize how few solid conclusions there were about anything, until they’d gotten out in the adult world for many years.

***

I am not alone in my position. And I fancy it to be rather “grown up”.

Russ Roberts has published an essay on this entitled “What Do Economists Know?”. Read it.

John Cochrane has a good follow up on this, urging more humilty amongst economists. Don Boudreaux riffs on that here.

For my part, the intro to Roberts’ piece happens to me with not just journalists, but students and other professors:

A journalist once asked me how many jobs NAFTA had created or destroyed. [substitute most questions about economics there] I told him I had no reliable idea. …

The journalist got annoyed. “You’re a professional economist. You’re ducking my question.” I disgreed. I am answering your question, I told him. You just don’t like the answer.

Yep, that annoys people. Here’s what we hope happens, but sometimes it doesn’t:

What usually happens is that very smart well-trained people on both sides of the issue argue. …Eventually, sometimes a consensus emerges but that consensus can be reversed by further empirical analysis. … This consensus is … like the two sides in a trial — one hopes the process yields truth more often than not.

But there is no way of knowing reliably if the consensus reflects the truth. It may rely instead on the underlying biases of the prosecutors and defendants in the intellectual trial of ideas. Or where they received their PhD degrees. Or the fashionability of certain positions over time as society changes. … there are no clear feedback loops in the world of academic economics. You can say something that is wrong and the price you pay may be zero. In fact you may be rewarded.

So, here’s where I am coming from in your class:

Where does that leave us?

First let me make it clear that facts and evidence matter. I am not saying that measurement is irrelevant.

Facts matter but some facts are extremely difficult to measure … Some facts are quite difficult to pin down and prone to extreme misinformation and even deception.

Or as Brian Nosek, Jeffrey Spies and Matt Motyl put it:

Published and true are not synonyms.

So where does that leave us?

If I am right, economists are mostly dangerous. At least economists as the world perceives them. But most of the people I am talking about are not economists. They are really applied statisticians.

Those are the people that I think are in the Trump White House. And the Obama White House.

And I think they are mostly applied statisticians who aren’t very comfortable with the tools actual statisticians use.

Think people who spend many seconds perusing the box scores after the game and think they know something about why a certain team won. Policy is made that way in capital cities all over the world.

Roberts continues:

Economics is primarily a way of organizing one’s thinking in considering incentives and costs and the interactions between individuals that we call a market but is really emergent behavior with feedback loops. Studying economics sensitizes you to these things and others and helps you appreciate complexity and various outcomes …

Economists understand that many things are more complicated than they seem. …

… These ideas are not rocket science. But they come easily to economists and not so easily to non-economists. Thinking like an economist is very useful.

… [But we] economists should be more humble and honest …

Cochrane sums up with a discussion of 7 things he thinks we learn from economics (the bullet points and organization are my summary of a couple of pages of finer points):

  • Economics leads you to great sensitivity to the fact that  correlation is not causation.
  • Budget constraints and accounting identities. I think good economists quickly follow the money one more step than most analysts.
  • Unintended consequences. Our field is, perhaps, best described as a collection of funny stories about unintended consequences.
  • Supply response, (or demand), and competition. … we are not always great at quantifying their relative significance. But "not zero" is usually an eye opener in public policy.
  • The fallacy of composition ought to be right up there with correlation is not causation. We can't all negotiate better.
  • In sum, I think economics provides an excellent set of bullshit detectors. This is my stock answer about my own professional expertise. I may not know what makes the economy grow, or how monetary policy works. But I now [sic] with great detail exactly why the ten stories in front of us are all wrong, and typically logically incoherent.
  • … Let's call it Hayekian humility. This is the hardest one for so many economists to admit, as we all like to play central planner.

Boudreaux’s post takes on a faux debate format between a non-economist and an economist over policy questions. Good stuff too.