Sunday, March 21, 2010

Sweden Unwinds Its Welfare State

How can I not post a video that says that devaluing your currency is like peeing in your pants:

Via Cafe Hayek.

The Most Interesting Argument I’ve Heard Against Obamacare

It uses the commerce clause of the Constitution (Article 1, Section 8, Clause 3) – which governs activities – to make inactivity an offense.

… The individual mandate extends the commerce clause's power beyond economic activity, to economic inactivity. That is unprecedented. While Congress has used its taxing power to fund Social Security and Medicare, never before has it used its commerce power to mandate that an individual person engage in an economic transaction with a private company. Regulating the auto industry or paying "cash for clunkers" is one thing; making everyone buy a Chevy is quite another. Even during World War II, the federal government did not mandate that individual citizens purchase war bonds.

This was written by a law professor, at Georgetown University, and published in The Washington Post. None of those are regarded as conservative institutions.

Via Cafe Hayek.

The Most Interesting Argument I’ve Heard Against Obamacare

It uses the commerce clause of the Constitution – which governs activities – to make inactivity an offense.

… The individual mandate extends the commerce clause's power beyond economic activity, to economic inactivity. That is unprecedented. While Congress has used its taxing power to fund Social Security and Medicare, never before has it used its commerce power to mandate that an individual person engage in an economic transaction with a private company. Regulating the auto industry or paying "cash for clunkers" is one thing; making everyone buy a Chevy is quite another. Even during World War II, the federal government did not mandate that individual citizens purchase war bonds.

This was written by a law professor, at Georgetown University, and published in The Washington Post. None of those are regarded as conservative institutions.

Via Cafe Hayek.

Institutions that Matter

One of the things that macroeconomists have learned since retooling to focus on growth models over the last 15 years is that the institutions that make up a society and culture matter to the long-run well-being of its people.

One of those institutions is trusting strangers: every developed country requires people to rely on strangers for fulfillment of some needs … and it works. There are very few developing countries that have cultures with any degree of trust in strangers.

Sciences rely somewhat on confirmation from other fields, and here’s what an anthropologist has found:

… Big step toward resolving this question is being published today in the journal Science [subscription required]. The researchers find strong evidence that market institutions cause people to treat each other, especially, strangers more fairly.

More boldly, their results suggest that this isn’t just about the golden rule:

… Our results contradict previous theories that humans learned to treat strangers fairly by transferring behaviour and norms developed in their actions and attitudes toward family and kin …

Sleeping Through a Recession

How would you know if a recession is just collective laziness?

Our results suggest that in a recession Canadians sleep an average of 2 hours and 34 minutes more per week, or 22 minutes more per day.

Well … yeah … obviously.

The researchers who did this report are not looking at the collective laziness question. They’re just interested in the sociological aspects of a recession: sleep is related to performance and mortality.

But, let me stretch your brains a bit. I’m not claiming that recessions are collective laziness. But, this is a claim I would have laughed at 20 years ago, and now I’m not so sure.

The trick is to convert per capitas to other aggregates. Let’s do the math. They find that the average person sleeps 22 more minutes per day during a recession. That’s an average over a week, so 154 minutes per week. If you work a 40 hour work week, that is 2,400 minutes. Now, if the 154 minutes of sleep come out of what would otherwise be worktime, that’s like you being unemployed for about 6.4% of your time that you weren’t unemployed for before. That 6.4% is in the range of the increase in unemployment in Canada (where the study was done) during this recession – it’s actually quite a bit on the high side since Canadian unemployment only went up by about 2.5%, indicating that increased sleep more than accounts for the increased unemployment.

This is what in econometrics would be called a reduced form explanation. It tells us about associations, but it isn’t a theory of why this happens. That would be called a structural explanation. The problem is that reduced form explanations are usually consistent with more than one structural explanation. Here’s two: 1) a collapse in confidence causes a recession which gives people more time to sleep, or 2) people are tired and need more sleep, so they do less work, and we measure that as a recession. Separating out those structural explanations requires a deeper model, along with all the inherent biases that the researcher builds into it.

Wednesday, March 17, 2010

Government Debt and Promises Graphic

The March 12 issue of The New York Times had an interesting graphic of current government debt and future government obligations for developed countries.

Greece is near the top in both.

Interestingly, Portugal is comparable to the U.S.

Thursday, March 11, 2010

The Richter Scale – Not Testable

This is not testable. But someone asked for this (Kyle, I think), and here it is.

There are two ways to think about the strength of an earthquake as measured by the Richter scale.

One is the amount of back and forth shaking – what you see in movies when the needle goes back and forth.

The other one is the amount of energy released by the quake.

The former is better correlated with damage, but the latter allows reporters to draw pointless analogies — like how many Hiroshima-sized bombs this quake was equivalent to.

For both measures, the Richter scale is a base 10 log, so you have to reverse that to back out the actual value. On a calculator that usually means keying in something like “2nd function”, and then “log”. In Excel, you can do this by raising 10 to the power of the Richter scale reading.

So shaking in Chile was 63-times worse than in Haiti (10^8.8 divided by 10^7.0).

Energy released is measured by taking that ratio and raising it to the 1.5 power, making the Chilean quake 501 times as strong.

This is why the number I used in class to quantify the two quakes was different from what you may have heard in the media.

Sovereign Risk Chart

The Globe and Mail1 offers a heat chart of sovereign risk2 across six categories, and ranked across their average (scroll down to find it). It is sourced to the Royal Bank of Canada.

The U.S. ranks well on government spending – which isn’t something you’ll hear pundits say. Not surprisingly, we rank poorly on fiscal and structural balance.

1 This is a nationally available newspaper published in Toronto: Canada’s equivalent to The New York Times.

2 Sovereign risk refers to default by a country. In the old days, the sovereign was the individual member of the royalty in charge, and at that time bankruptcy on their part was equivalent to bankruptcy of the entire government.

Wednesday, March 10, 2010


Here’s a new government policy!

Instead of helping new businesses start, why don’t we just create facades for imaginary businesses?

It’s hard to believe, but this is actually a municipal policy in North Tyneside – an urban area in northeastern England.


David Cutler – the Democratically-oriented expert on the healthcare bill lists the 10 ways that it can save money:

Over the past year of debate, 10 broad ideas have been offered for bending the health-care cost curve. The Democrats' proposed legislation incorporates virtually every one of them.

Why is reform viewed so negatively? In part, it may reflect the perfect being the enemy of the good. …

Reform is also viewed negatively because official scorekeepers do not believe anything on this …

Of course, no one knows precisely how much medical spending increases will moderate. But one cannot doubt the commitment to try. What is on the table is the most significant action on medical spending ever proposed in the United States. Should we really walk away from that?

David Brooks – a political columnist at The New York Times, and a conservative one at that, on all the (7 !!!)fudges that went into it.

The Democrats have not been completely irresponsible. It’s just that as the health fight has gone on, their passion for coverage has swamped their less visceral commitment to reducing debt. The result is a bill that is fundamentally imbalanced.

David Leonhardt, an economic columnist at The New York Times, and of a liberal disposition, opines that we may as well run with this because the alternative is worse.

I see only two good options for anyone who wants to be fiscally conservative.

The first is to say we cannot afford to cover the uninsured. …

The second option is to say that expanding insurance would bring enormous benefits.

Megan McArdle, a sometimes progressive, always libertarian columnist at The Atlantic thinks the whole issue has too much levity:

… Why can't fiscal conservatives say that if we want to have the entitlement, we should first make sure the cuts we're proposing work?  Why can't they say that we can't afford this particular expansion, and that it's time to go back to the drawing board?  "The fierce urgency of now" is obviously totally compelling to those who think nothing can go wrong, but for the rest of us, it's not a good reason to commit ourselves to a very risky course of action.

The Production Function for Ideas

After class last week, Ammon and a few others were talking about whether idea creation – which we haven’t included in our growth models yet – might have increasing returns to scale.

Think for a little bit now about how quickly ideas evolve once we figure out an algorithm to digitize them …

What was the latest thing to completely blow your mind? For me, it was getting lost in a small city in Iowa this past summer, and not being able to get directions from my cellphone without having an accident. So, I tossed the phone on the floor to concentrate on the street signs, and a few seconds later my phone told me to turn left in 3 blocks. It wasn’t so much that it could give me directions that surprised me, it was this it troubleshot its user.

So consider this from Kottke:

One afternoon … Cope clicked a button and went out for a sandwich, and [his program] spit out 5,000 beautiful, artificial Bach chorales, work that would've taken him several lifetimes to produce by hand.

What will happen to growth rates if the creation of ideas does in fact have increasing-returns-to-scale?

Matched Pairs, Financial Crises, Housing Bubbles, and the Great Recession

Dean Baker* points out that Spain did not have a financial crisis, but it had a housing crisis and a recession arguably worse than most developed countries.

Food for thought: from this he concludes that housing, not finance, is the source of the trouble.

This is consistent with the post by Krugman from a month or so ago – he asserted that Canada got off mildly because it did not have a financial crisis, but interestingly, it didn’t have much of a housing boom either.

But, this is inconsistent with what I pointed out in class that there are lots of states that have floated through this recession, most of which did not have a housing crisis.

*Newspapers in Europe are far more politically biased than those in the U.S. The Guardian is known as a left-center newspaper.

Measuring the Effects of the Stimulus Package

I fall on the Econobrowser side of this debate, but as I’ve said in class, I’ve been moving towards the Cafe Hayek view for about 20 years.

Anyway, Menzie Chinn (a big name macroeconometrician) of Econobrowser says that the CBO estimates of the effects of the stimulus package are believable.

Russ Roberts, a non-macroeconomist and non-econometrician of Cafe Hayek fires back:

I’m skeptical on logical grounds but I confess that I do not have strong empirical evidence on my side.

… The CBO “estimates” are not an analysis of what the stimulus actually did but rather what some predicted it would do. [emphasis added]

Chinn responds:

Yesterday, I had a headache. I took a couple tablets of aspirin. (Actually, it was ibuprofen, but the point remains.) My headache subsequently disappeared. I have no direct empirical evidence that the headache disappeared as a consequence of the aspirin, but I have a plethora of studies that suggest that aspirin (or ibuprofen in this case) can relieve headaches.

As the foregoing example suggests, it does seem to me there is empirical evidence. It's just not the direct sort Professor Roberts desires.

Roberts comes back with another analogy:

That brings me to my second point that seems to be difficult to make clear. The CBO estimates are not estimates. They are forecasts based on previous estimates. They are akin to a golfer who is 150 yards from the flag and asks his caddy for advice on what club to use. The caddy knows that in the past, the golfer has averaged about 150 yards with a 7-iron, so he takes one out of the bag and hands it to the golfer. The golfer swings. He can’t see the green—it’s obscured by trees. The golfer asks the caddy to estimate how far his shot landed from the hole. If the caddy replies that he estimates without looking that the ball is surely within a few feet of the hole because the average 7 iron goes 150 yards when this golfer uses a 7-iron, you don’t call that an estimate. It’s a hope. An expectation. And it might be true. But it’s not an estimate. No caddy would say such a thing. He would wait till he could see where the ball actually ended up.

Surely where the ball goes depends on the execution of this particular swing. The wind. The humidity. How much sleep the golfer got the night before. And so on. Doesn’t the impact of ARRA depend on how it’s structured, who gets the money, the mood of the country, the expectations of increases in future taxes and so on? Yes, these things are hard to measure. So is the mood of the golfer and the angle of club as it strikes the ball. But that’s why the caddy looks and sees where the ball is. Even if the stroke appears to  be well-executed, his ex ante prediction of 150 yards can be way off. That’s why he looks.

In economics, we can’t look. We can’t say that because unemployment remains high the stimulus failed. We can’t say that because GDP grew a lot, the stimulus was a success. We understand there is other stuff going on. But if we can’t control for that stuff, then how can we know (or even estimate reliably) the effect of the stimulus?

What’s the takeaway from all this supposed to be? Reasonable economists disagree over whether the numbers produced are meaningful. You never hear this coming out of Washington – the politicians and bureaucrats use these numbers as facts, and then can’t figure out why their policies don’t do what they expect them to.

Monday, March 8, 2010

More On African Growth

Alwyn Young, another big name in the growth literature, has new estimates of economic growth for sub-Saharan Africa, and also reports that per capita real growth has been strong – 3.3% on average – since 1990. Using the Rule of 72, that implies a doubling of living standards in those 20 years.

A Great Legislative Moment

Love it or leave it, here’s the healthcare bill situation according to Megan McArdle:

… At a defining moment in American legislative history . . . the Mothra v. Godzilla, irresistable force v. immovable object, rock v. hard place of policymaking.  It can't pass and it can't fail.  Yet it must do one or the other.

All I can say is, pass the popcorn.

Are We a Minsky-Jones Economy?

The way you get famous is to make predictions about the future that people find outlandish, and then have them confirmed by reality.

In this case, Arnold Kling of Econlog asserts that if we are in a Minsky-Jones setting, that the economy is poised to add a lot of jobs soon.

Hyman Minsky was a somewhat discredited macroeconomist – I studied a little bit of his stuff in 1983. His basic idea was that bubbles in financial markets were to be expected, and that when they popped we’d have bad recessions. It sounds good in words, but it isn’t so easy to write out the math of how that works (remember, we use math to clarify whether hard ideas are good, or just confused). After the Great Recession, Minsky’s ideas are trendy again.

Garett Jones is an economist at George Mason University. His thesis is that firms increase employment because they want to be capable of increasing output along new dimensions (e.g., different goods, different markets).

Neither of these predictions are typical right now. If they’re right, Kling is on to something that we should pay attention to.

Friday, March 5, 2010

A Double-Dip?

The news hasn’t been so rosy lately. David Leonhardt’s column from The New York Times has the details, and some pessimistic opinions.

Without being pessimistic or optimistic, I’ll note that there are some statistical issues that can lead to this sort of thing in the short-run. In particular, a lot of data can be reported at the end of one calendar term, or at the start of the next one. This can generate an error pattern in the data called a moving average or MA process.

The way to get around that is to express the data as a moving average rather than a raw number. This is a simple thing to do in Excel: average 2 or more adjacent cells in a column, put the answer in one cell of an adjacent column, move down one row and repeat. Basically, this smoothes bumps.

Only time will tell, though, if we are currently experiencing bumps that need to be smoother, or a double-dip.

Wednesday, March 3, 2010

Details On Keynes vs. Hayek

Daily Kos (of all places) has a line by line explanation of everything in the Keynes vs. Hayek rap video we viewed in January.

The poll results at the bottom are surprising!

Has Government Spending Increased At All?

Food for thought from this paper:

… Aggregate fiscal expenditure stimulus in the United States, properly adjusted for the declining fiscal expenditure of the fifty states, was close to zero in 2009. While the Federal government stimulus prevented a net decline in aggregate fiscal expenditure, it did not stimulate the aggregate expenditure above its predicted mean.

Via Marginal Revolution.

Growth and African Poverty

The conventional wisdom is that Africa is doing very poorly.

This started to change about 15 years ago. It’s now becoming clearer that the growth spurt that began in Africa then is ongoing, widespread, and robust.

Critics have said that this is because of rising resources prices. Yet, this growth has occurred in countries that have not benefitted from rising resource prices.

Additionally, large amounts of this growth have occurred to per capita incomes at the bottom of the income distribution.

Social Security Data for Developed Countries

A former Ph.D. student of mine works for the Congressional Research Office on pension issues. He sent me a link to this site with tons of data about how the financing of public and private pensions is going in various countries (with lots of downloadable spreadsheets).