Tuesday, March 29, 2011


Obviously, the post about Excel was supposed to go to another blog. Not required for class …

Excel Tip # 15: Restrict Users Free Space

Got a worksheet whose blank space you don’t want users to use for scratch work?

Open your Developer menu† (you may need to add this through Excel Options). Then paste this code into a module for the file (you may need to create one‡).

Private Sub Worksheet_Activate()

  'Set/restrict sheet's scroll area.

  Me.ScrollArea = "A1:G15"

End Sub

One drawback of this is that you will now have to save as an XLSM file, and your users will have to enable macros when they open it.

† To display the Developer Tab, click on the Office 2007 button in upper left corner, then on options, and select Developer.

‡ Click the Developer tab, then “Visual Basic”. A window will open. On the left, right-click VBAProject and choose “Insert” then “Module”. Paste the code above into the new window that opens.

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Sunday, March 27, 2011

Dependence of Tax Revenue On “The Rich”

A problem of volatile tax revenue is discussed in “The Price of Taxing the Rich” in the March 26 issue of The Wall Street Journal.

Many states (and to some extent the federal government too) have tax revenues that are heavily dependent on taxing the rich. For example, nearly half the income tax revenue in California comes from the top 1% of earners.

The problem is that people at the top also have the most volatile incomes, and thus the most volatile taxes:

In New York, the top 1% of taxpayers contribute more to the state's year-to-year tax swings than all the other taxpayers combined …

The solution to this is pretty simple: smooth spending more than tax revenue.

Rainy-day funds, which can help bail out governments during recessions, have also run into political opposition or proven too small to save state budgets. A study by the Center on Budget and Policy Priorities found that effective rainy day funds should be 15% of state operating expenditures—more than three times the state average before the crisis.

Well-Being and Growth In Africa

David Leonhardt’s March 23rd New York Times column touched on how outcomes are improving faster in Africa than real GDP per capita, suggesting that real GDP per capita is not the best measure of welfare there.

On the other hand, there’s different research (posted here for the 2010 class) showing that sub-Saharan Africa appears to have turned a corner of the last 10-15 years. These pieces are more focused on real GDP.

Monday, March 21, 2011

Ethics, Morals, the Japanese Nuclear Disaster, the Legacy Media, and You

Unlike most other colleges, business schools actually make a point of talking about ethics and morals, rather than just baldly assuming that students understand them.

It isn’t often that I get to talk about them in macroeconomics, but here is a golden opportunity.

The distinction between ethics and morals is often lost on students (and it isn’t like philosophers make a tight distinction anyway). Some argue that morals are what individuals believe, and ethics is the study of that set of beliefs. Some argue that morals are personal, and ethics are cultural or societal. Let’s make it simple: morals are micro, and ethics are macro.

Which leads me to legacy media coverage of the ongoing nuclear crisis in Japan. I assert that it may be moral to be concerned about this, but it is unethical for the legacy media to make it even a secondary focus of their concern. This suggests that it may be immoral to be personally swayed by their coverage.

The issue here is that the legacy media coverage is tantamount to equating a potential disaster with an actual one.

Outside of situations like the current one, we have cases like this crop up in the news every few months: some parent kills their kids because they’re possessed, or an asteroid is going to hit the Earth, or whatever.

Morally, we know precisely what to think of the perpetrators, not because we know the kids weren’t possessed or an asteroid isn’t going to hit us, but because a potential problem has been used to justify an actual one.

My conclusion is then, that a good chunk of the legacy media are ethically ungrounded.

I don’t carry that judgment over to advocates, whose job it is to get people to pay attention to this issue (although I may have an issue with their funders).

I also don’t carry that judgment over to individuals who are swayed by coverage in the legacy media, because your morals are your own.

Now, if your exposure to unethical media coverage leads you into advocacy whose primary compensation is inflation of your own moral position, then I’d say that’s immoral.

FYI: here’s a chart that has been making the rounds on the internet this morning.

What’s the Cost of the Japanese Tsunami?

Dollar value estimates of the costs of disasters — as reported in the legacy media — are usually badly biased on the low side.

There are three reasons for this: 1) property damage estimates come from insurance companies and cover only losses that were insured before the disaster, 2) many things aren’t insurable‡, and 3) the legacy media has an unethical aversion to putting a dollar value on the loss of life.

Believe it or not, yours truly was the first person to come up with an accurate estimate of the damage from Hurricane Katrina. It wasn’t that hard: estimates of private wealth exist for the U.S., and the damage was largely confined to an administrative unit that matched that data set. This doesn’t exist for Japan because the damage covers only parts of 3 prefectures. Arguably, the damage in Sendai alone — which is a larger city than New Orleans, and whose damage appears more extensive — will exceed $100B.

As to insurability, we all know about family memories that can’t be replaced, but the big factor here may actually be goodwill as recorded on business balance sheets. Things like brand names have value, and it isn’t small: dozens of international firms have brands that are values in the tens of billions of dollars for each firm. Physical assets can be replaced, but goodwill will be much tougher.

I am not sure why the legacy media has an aversion to tallying human costs. It’s not like humans don’t actually make choices that make it very clear how much they value their own life (e.g., riding without helmets) or the lives of others (e.g., texting while driving). The newest estimate is $9,100,000 for a human life, and that comes from the EPA; other government agencies use similar values in the high 7 digits. For years, I’ve used $10,000,000 as a high ballpark estimate. The value in Japan would be approximately the same, given that their standard of living is similar. If we tally up the dead (8,450), and assume that the missing (12,931) are gone for good, and round up for good measure, we get 22,000 casualties, with a value of $220B.

To hazard a guess then, I’d say $500B. This may be the largest disaster in terms of physical damage, but once you start counting the value of lost human lives, it will have trouble making the top 10. This actually is a really good thing, and a credit to developed economies everywhere.

How much of a share of the Japanese wealth has been destroyed? As I’ve remarked in class, national wealth statistics are lousy (and don’t even begin to count the value of human life). So, published estimates are on the very low end of the true value. For Japan, $35,000B is a good estimate of national wealth. So, we’re talking probably no more than 2%.

‡ In particular, most people outside of business schools do not understand why insurance companies do not insure against floods, tsunamis, and earthquakes (unless forced to by regulators). The reason is that insurance is based on diversifying one person’s risks by pooling them with someone who doesn’t face the same risk. At worst, this is impossible if the disaster is large enough, and at best it is problematic if one’s choice of insurance company is driven by word of mouth.

Sunday, March 20, 2011

Ezra Klein’s Blindspots of Economics’ Bloggers

Again, quoted nearly in full from his March 10 column in The Washington Post:

1. Political power matters. There are many outcomes that are economically efficient in the short term but lead to a dangerous imbalance of political power in the long term — which is, incidentally, not economically efficient at all. This has particular implications for how a lot of economists view unions.

2. Culture matters, as do the real ways that human beings behave. There are policies that fit with theory and evidence but not with communities and people. David Brooks is right about this.

3. If a policy makes sense only in the presence of a secondary compensatory policy — say, a regressive tax where low-income folks get some sort of refund — then you have to ask yourself whether the compensatory policy will pass. If the answer is no, then you need to come up with something that can pass or rethink your support for the policy. The fact that the losers of trade can theoretically be made whole doesn’t allow you to just assume they will be made whole.

4. Lots of policy problems can be solved with clever policy solutions. But Washington isn’t very good at passing or implementing clever. Simple programs and rules are often better in practice, even if they’re worse in theory.

5. Nationalism is a really, really, really powerful force, and you can’t make it go away by condescending to it.

6. “Theory implies” does not end arguments. Moreover, economic evidence should be treated with more humility. It’s often overturned later, or wrongly understood now. And a lot of the stuff you’ve told us in the past — particularly the recent past — didn’t turn out that well.

7. Listen to political scientists, sociologists, etc. They have perspectives, evidence and training worthy of consideration.

8. Policy arguments are often conscripted for political purposes. You may like Singapore’s health-care system, and a politician might find Singapore’s health-care system useful to invoke — usually incorrectly — in a speech against the Affordable Care Act, but before assuming the two of you are on the same side, try to figure out whether the congressman has introduced or co-sponsored legislation on this topic that you consider constructive. Nothing sadder than a policy expert who doesn’t realize he’s being played.

9. No one knows what the word “stochastic” means.

10. Odds are good that you primarily know one sort of person: highly educated, high-achieving, extremely cerebral, etc. Odds are also good that you give too much weight to feedback and ideas from this sort of person, while discounting arguments and complaints from people who don’t know the right way to persuade you. Try to keep that in mind.

Leonhardt’s Blindspots of the Left and Right

Quoted almost in full from his March 11 column in The New York Times:

On the list of blind spots for the noneconomist left, I’d put the following views (with some partial rebuttals available through the links):

* Economic growth has almost as many negatives as positives.

* The demise of manufacturing is the economy’s main problem.

* Education is overrated.

* The economy is much more volatile than it used to be.

* Deregulation is bad. (And the repeal of Glass-Steagall caused the financial crisis.)

* International trade is bad.

* Overpopulation is a problem.

* Last year’s health reform bill was a sellout to the insurance companies. (Or alternatively, real health reform requires a “public option.”)

* Life is worse today than it used to be.

I’m not saying every one of these views is simply wrong. On trade, for example, liberals have been right about some things that economists were wrong about. But I do think the views above often end up missing something important.

Of course, you could come up with a blind-spot list for the right, too:

* Tax rates are the main determinant of economic growth.

* The rich will always figure out a way to get around tax increases.

* The United States has the world’s best health care across the board.

* The free market is the answer for health care.

* The free market is the answer for everything.

*Illegal immigrants are a major economic problem.

* Global warming is a matter of debate.

* Inequality isn’t a problem.

* Life is worse today than it used to be.

The difference, I think, is that conservative economists’ blind spots overlap more with general conservative blind spots than is the case for liberal economists and liberal blind spots. That’s not a value judgment so much as an observation: liberal economists tend to be more economically conservative than average liberals.

Thursday, March 17, 2011

Interactive Chloropleth of U.S. Well-Being (by Congressional District)

One version looks like this:

We look pretty good … almost as good as … say … North Dakota Winking smile

You can go to The New York Times website and play with this.

But, there’s a statistical problem with this sort of thing. What’s worse is that this problem has been known for a long time (I first heard of it in 1989 shortly after Places Rated Almanac started being published) and the legacy media does not take measures to fix it.

It’s similar to the easily avoidable problem in regression analysis: you need more observations than you have right hand side variables (more rows than columns in your spreadsheet). In the case of a map like this, you need more ranking variables than you do things ranked (the districts). This site uses 20 ranking variables: not enough to even rank the states appropriately.

So, what’s the problem? It’s not that you can’t do the ranking — obviously, you can. It’s that there is not a best ranking that is unique. Every ranking uses weights to add the variables together. So, this may be a pretty good ranking (based on its weights). But … there are other just as good rankings that will come out differently (because they have different weights). It also might be a pretty bad ranking, but you can’t tell that either. And there is no criteria to establish the best set of weights if you have less “rows than columns”.

All of this does not make this sort of chloropleth useless. It does mean that every time you examine one of these you need to play with it a bit and make sure that it behaves in a way that you find sensible.

Wednesday, March 16, 2011

State and Local Employee Compensation

The New York Times had a great set of graphics on March 7 entitled “Are State and Local Government Employees Paid too Much?”

This is big news with the moves in New Jersey since last year, and in Wisconsin this year, to rein in public employees’ unions.

And, of course, it’s a big deal in macroeconomics because most of the goods and services bought by the government are actually compensation costs of labor.

So, what do the graphs show?

  • Public employee compensation has been pulling away from that in the private sector for about a generation (is the scale of axes appropriate?)
  • The difference in benefits is bigger than that in salary.
  • But, government workers tend to have more degrees (which often lead to better pay).
  • Separations (remember those) are low for public employees.

To an economist, the best way to analyze the importance of this is to look at a subset for which most of the qualities like these are matched. And if you look at clerical workers, they get compensated a lot more in government.

A lot of the public debate is about teachers. On this, the graphic is silent. The best way to compare this is with compensation in public vs. private schools. Utah’s paucity of private schools makes us a bad place to look for data — but most people are aware that there is a big compensation premium attached to working in the public schools.

Government Forecasting Errors and Markov-Switching

This is a bit premature — we won’t be doing Markov switching until the end of March.

But, the March 2 issue of The Wall Street Journal contained this graphic to accompany an article entitled “States Fumble Revenue Forecasts”:

What I want you to get out of this is the pattern of errors: long periods of underestimates during expansions, punctuated by recessions with overestimates.

Markov-switching is a process that can explain this, although neither it (or much else) will be much help in solving this problem. We just have to live with it, and recognize that it will happen (that’s not something that government or business owners are very good at).

North Dakota!

Because you folks just can’t get enough info about North Dakota, there’s an op-ed about its boom in the March 15 issue of The Wall Street Journal.

BTW: This is not a new thing either. Try typing the keywords “north dakota boom” into Google and see what you get.

Tuesday, March 15, 2011

Highest Inflation Rate Ever?

Last Thursday morning, you could buy a packet of potassium iodide tablets for $10. Tuesday morning it would have cost you $540.

That is a 5,300% increase in the space of 5 days.

Annualized, that is 3 x 10126%.

Yes, that’s scientific notation.

Here’s the rate written out: 2, 915, 710, 944, 820, 310, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000, 000%.

Is this the highest inflation rate ever? ‡

Believe it or not, it is only the penultimate inflation rate.

It’s more digestible to convert this into a daily inflation rate, which would be 122%.

That rate is higher than that in Zimbabwe a few years ago, but it still falls short of Hungary in 1946.


‡ Strictly speaking, while an inflation rate can apply to one good or many, most published inflation rates apply to a “market basket” of many goods.

Somebody’s Going to Ask …

No link for this post.

What would I say if someone said “Hey Dr. Tufte! Is there one thing you could suggest that’s both feasible and will help solve our government’s fiscal problems?”

Here’s the answer: increase the age at which social security benefits can be paid by 1 month every second month, and sustain that pace for a minimum of 30 years.

This has the advantage that it hurts everyone equitably, doesn’t preclude you from retiring if you’ve got the money, and addresses the fundamental problem with social security.

That fundamental problem is that life expectancy at 65 was 2 years when Social Security started, and it is now in the high teens for men, and low twenties for women.

Don’t believe me? Then take my “Auntie Em’ Test”.

  1. Is it reasonable to believe that Auntie Em’ in the The Wizard of Oz was reasonably portrayed — by the Hollywood contemporary with the creation of Social Security — to be a believable character?
  2. How old did Dorothy’s Auntie Em’ look in the Wizard of Oz?

Your answers are probably “yes” and “pretty damn old — maybe 75.

Now think about that: she was the aunt of a 14 year old girl. So, she might have been 35. Even if she was a great aunt, she’s unlikely to have been 60.

That’s how much our perceptions of age have changed since the creation of Social Security, and that’s what we need to address with the age that benefits begin.

Aargh! The Deficit Is a Secondary Problem

Here’s the headline from a top of page 2 article from the March 14 issue of The Wall Street Journal:

Serious Debate on the Budget Deficit Has Started

Here we go again …

No one chooses a budget deficit. Those choices are primary.

The budget deficit is a result of those choices. This makes it secondary.

The choices in question are spending policies and tax policies. I say policies instead of amounts, because our government officials are forced by bean counters and the legal system to pretend that they can predict the amounts more closely than they actually can.

But, even if we give them a lot of wiggle room on amounts (and we should) there are two bald facts to be reckoned with:

  • Government spending has been trending up.
  • Tax revenues have been flat.

These facts are after scaling for the size of the economy (which takes care of population growth, economic growth and price inflation in one step).

And, these facts are long term trends. We can quibble about short-term rates of change, but the big picture has been stable for 2-3 generations now.

Here’s the graph from the article:

Look closely. Over the last 40 years:

  • Social Security spending is up by 1/3.
  • Medicare spending has quadrupled.
  • Medicaid spending has quintupled.

Do the back-of-the-envelope calculation: these three used to be 4% of GDP, and are now closer to 10%. That 6% difference, in a $13,000B economy, is $780B. That’s far more than the average deficit over the last 10 years (cut Obama and the Democrats a break here by taking a longer sample: if they’d had the Bush economy maybe they would have acted differently).

And yet the article starts out with:

… An adult conversation has begun on the federal budget deficit.

And the follows with this whopper:

… The political climate is growing more hospitable to the kind of grand bargain needed to rein in the rest of the budget—potentially encompassing the tax code, the defense budget …

I’d say the reporters have been fooled about the level of maturity of the conversation.

Krauthammer on Obama’s Priorities

First off … let me emphasize that Obama isn’t doing any worse than almost all other politicians in the last generation.

Having said that, let me link to an op-ed piece by Charles Krauthammer that appeared in the local paper on March 15.

Krauthammer is no friend to Obama, but he’s not a bomb-thrower either. He’s the conservative column for the otherwise liberal Washington Post: so, he’s got to be good, but if he was idiotic that paper wouldn’t tolerate him. Note that the linked piece is from National Review, a conservative publication, so it won’t be as diplomatic as something in the Washington Post.

He starts with:

Everyone knows that the U.S. budget is being devoured by entitlements.

Fair enough. I think we can all agree on that. Then he states:

Everyone also knows that of the Big Three — Medicare, Medicaid, and Social Security — Social Security is the most solvable.

Again, there’s broad agreement there. The he spells out a simple plan:

Back-of-an-envelope solvable: Raise the retirement age, tweak the indexing formula (from wage inflation to price inflation), and means-test so that Warren Buffett’s check gets redirected to a senior in need.

Which brings us to current policy:

The relative ease of the fix is what makes the Obama administration’s Social Security strategy so shocking. The new line from the White House is: no need to fix it because there is no problem. As Office of Management and Budget (OMB) director Jack Lew wrote in USA Today just a few weeks ago, the trust fund is solvent until 2037. Therefore, Social Security is now off the table in debt-reduction talks.

This is the same position that is taken down in the Blahaus piece posted earlier in the semester.

This is the same position that has been rejected in every macroeconomics textbook for the last 20 years or so.

This is the same position that Al Gore adopted in the 2000 campaign, and for which he was widely criticized at the time (even by Democrats).

The sad part about all of this is that, theoretically, there is nothing wrong with a social security system, and they can be stable forever. But, on the ground, flawed humans have intentionally chosen an unstable path that favors people who are old enough to vote over those who are not old enough to vote (or not born yet).

Saturday, March 12, 2011

Mistakes of Left-Wing and Right-Wing Economists

I have copied a good chunk of the original posts (here and here). You should go to those and browse the comments as well.

Tyler Cowen is the dean of blogging economists – he is the better known and more prolific half of Marginal Revolution. I’m quite sure that everyone who reads economics blogs has read these two posts.

Here’s what he sees as the problems of left-leaning economists (e.g., some that are easy to find on the internet are Paul Krugman, Brad DeLong, Mark Thoma, James Hamilton and Joe Stiglitz – Krugman and Stiglitz are both Nobel Prize winners):

1. Suggesting that money matters in politics far more than the peer-reviewed evidence indicates.

2. Evaluating government spending on a program-by-program basis, rather than viewing the budget as a series of integrated accounts.  Cross check with the phrase "Social Security," or for use to take many discretionary spending cuts off the table.

3. A reluctance to incorporate sophisticated "public choice" theories into the analysis of favored programs. 

4. Sins of omission: there are plenty of bad policies, such as occupational licensing, which fail to come under much attack from the left.  Sometimes this is because the critique would run counter to the narrative of needing more government or needing more regulation.

5. Significantly overestimating the quality of the political economy of an America with more powerful labor unions and underestimating the history of labor unions as racist, corrupt, protectionist, and obstructions to positive change.

6. Overestimating the efficacy of fiscal policy, underestimating the power of monetary policy, and sometimes ignoring or neglecting how the two interact ("the monetary authority moves last").

7. Citing weak versions of structural unemployment theories and dismissing them with a single sentence or graph, while relying on stronger versions of structural theories in other, non-cyclical contexts.

8. Lack of interest in discussing ethnicity and IQ as relevant for social policy, except in preferred contexts.

9. Overly optimistic views of the fiscal positions of state governments.  Since the states don't have the same tax-raising powers that the feds do, and since state government spending is favored, there is a tendency to see these fiscal crises as not so severe, or as caused by mere obstructionists who will not raise taxes to the required levels.

10. A willingness to think that one has "done one's best" in the realm of policy, and to blame subsequent policy failures on Republican implementation, rather than admitting that a policy which cannot be implemented by both political parties is perhaps not a good policy in the first place.

11. Use of a strong moral argument for universal health care coverage, combined with a fairly practical, hard-headed approach to the scope of the mandate, and not realizing the tension between the two.  Failure to indicate where the "bleeding heart" argument actually should stop and at what margins we should (and will) let non-elderly people die, if only stochastically.

12. Implicitly constructing a two-stage moral theory, which first cordons off the sphere of the nation-state (public goods provision, etc.) and then pushing cosmopolitan questions off the agenda in the interests of expanding a social welfare state.  (In fairness, many individuals on the right don't give cosmopolitan considerations even this much consideration, although right-oriented economists tend to be quite cosmopolitan.)

13. What about countries?  Classical liberals are increasingly facing up to the enduring successes of the Nordic nations.  There is not always a similar reckoning with the successes of Chile and Hong Kong and Singapore; often this is a sin of omission.  (Addendum: comment from Matt here.)

14. Reluctance to admit how hard the climate change problem will be to solve, for fear of wrecking any emerging political consensus on taking action.

As someone who was conditioned to be a left-wing economist in my early days, I have suffered from 1-2, and 6-12 in the past — although probably only 8 and 11 in the last 15 years.

Here’s what he sees as the problems of right-leaning economists (e.g., Russ Roberts, Greg Mankiw, Mark Perry, John Taylor, Nobel prize winner Gary Becker are fairly easy to find in blogs or columns):

1. There is excess fear of inflation and hyperinflation in the current economic environment.  Further there is often an excess estimate of the costs of inflation in the two to five percent range.

2. We know much less about the causes and drivers of economic growth than we like to admit, and when pushed on this issue we fall back to citing relatively simple cases with extreme differences, such as East vs. West Germany.

3. Lower taxes don't spur economic development as much as it is often claimed, at least not below the "fifty percent or less of gdp" range.

4. There are many climate change issues of relevance here, not mostly economics, but it seems remiss not to mention them.

5. I'm all for Health Savings Accounts, but unless done on a Singaporean scale, and with lots of forced savings, they're not a health care plan to significantly benefit most Americans.  There is less of a coherent health care plan, coming from this side, than one might like to think.

6. There is already considerable health care cost control embedded in the ACA, most of all for Medicare, and this is not admitted with sufficient frequency.

7. When it comes to the historical determinants of the Industrial Revolution, the Great Divergence, and the like, the importance of state-building in that process is often neglected.

8. The story of steady and significant economic progress for most Americans is accepted too readily.

9. The role of market failure in the recent financial crisis is underestimated.  It is also believed that we can somehow commit to a policy of no future bailouts.  Promoting that myth will make future bailouts more likely.

10. Relying on liability law, whether or not it is a good idea, is not intrinsically more pro-market, more libertarian, or less interventionist.

As a fully-fledged right-wing economist, I acknowledge suffering from 2, 4-5 and 8-10, although liberals would probably identify me as suffering from all of them.

Wednesday, March 9, 2011

From Brent


Now for the more serious economic and political implications.

Not spending more than you have is hard when the government’s inflows and outflows are much more uncertain than the typical households.

And, saving for the inevitable emergencies is hard when you 1) operate on a cash-in cash-out basis with a strictly annual budget, and 2) are forbidden from saving in the same sense that most households understand it.

Tuesday, March 8, 2011

More Debt Data

Shaulauna recommended this page for its information about the national debt.

It’s not shrill, but I think it’s presentation suffers from the same problems as many other sites:

  • No adjustment for inflation
  • No adjustment for the size of the economy
  • No adjustment for the size of the population
  • No comparison with national assets.

Having said that, I like the rest of the site: there’s lots of cool data and posts (I liked his dictionary).

Monday, March 7, 2011

Why Is Macroeconomics So Hard?

Macroeconomics is one of the harder classes on a college campus, but that isn’t anything special – there are lots of hard classes.

Macroeconomics is special though, in that it is both hard and beset by an extra set of difficulties.

The list of college classes that are both taken by a lot of students and that cover a lot of hard material is pretty short: calculus, statistics, organic chemistry, microeconomics and macroeconomics.

The list of college classes about whose subject matter non-experts have strong opinions is also pretty short: evolution, human sexuality, some education classes, and macroeconomics.

The only course that is on both lists is macroeconomics, and this can make it extra hard for you to master. Here’s a list of the pitfalls.

  • Everybody has an opinion about macroeconomic issues.
    • Most classes you take in college do not cover subjects on which everyone feels entitled to have their opinion respected.
    • For example, if you take Organic Chemistry, your weird Uncle Fester is not going to want to argue about it over a holiday dinner – but he might about macroeconomics.
    • In many ways, discussing macroeconomics with friends and relatives is like discussing primary education, evolution, religion, or human sexuality – everyone has an opinion, everyone thinks their opinion is right, many people are stubborn about their opinions, and – while most of the opinions are worthwhile – many of them have no foundation whatsoever. They may even know that their viewpoints are incorrect, but they are too wedded to them to change – a psychological condition known as cognitive dissonance.
  • Macroeconomic policies have been practiced for thousands of years – so there is a very strong element of “we’ve always done it this way” in the way government officials think about things.
  • Our Constitution was written over 215 years ago, yet macroeconomics wasn’t recognized as a separate discipline until 70 years ago – so our government isn’t designed for the timely execution of proper macroeconomic policy. We’ve stapled this to their job description.
  • We elect people to do something. In fact, those who have a need to do something are attracted to government. Should we trust them to do the right thing when it is to do nothing at all? We might get better policy decisions if we bought every policymaker a Nintendo Wii to keep them from creating new policies just to stay busy.
  • Legislative politics is about finding acceptable compromises, not making the right choices. If it’s hard to order an 8 slice pizza for 3 people that make them all happy, can you imagine trying to formulate macroeconomic policy in Congress or The White House?
  • For better or worse, a lot of politics is just adversarial grandstanding. Democrats and Republicans, liberals and conservatives, often say one thing when in power, and the opposite when out of power – kind of like a “friend” who is never hungry until you pay for the pizza.
  • The positions of political parties are a mishmash of ideas that have been cobbled together because that combination might attract a majority of the votes. This is like having to choose the better dresser between two old men on the golf course.
  • The individual policy positions of a political party are often swapped or reversed through time without consideration of whether the overall platform is consistent. This makes them act like the “mean girls” in high school – they often drop their traditional friends very quickly, and retain allies for loyalty rather than sensibility.
  • Most members of Congress and other government officials have little or no background in economics – we primarily elect lawyers to write our laws and then dump responsibility for national economic well-being on them as their primary job. Maybe we should feel sorry for them – they know not what they do.
  • Just about everyone gets their information about macroeconomic policy from people in the media who have little or no background in economics – some of them probably even went into the media to avoid economics in college, and now they have to talk or write about it for a living. That must ____!
  • The media is obsessed with presenting viewpoints that are balanced, in the sense that they try to present experts with different opinions. The problem is that they don’t tell you how much work it took to actually find a different opinion – what if there isn’t any disagreement except from crackpots?
  • Policy debates are often lacking answers to really basic questions. How much is this going to cost? Compared to what? How can you be sure? Why do we listen at all if we don’t get answers to these questions first?
  • It’s hard to believe, but there’s quite a bit of evidence that policymakers actively suppress the collection of data on controversial policies, but spend freely to collect repetitive information on uncontroversial policies.
  • The media are availability entrepreneurs: they are actively seeking out information that is available, and which fits the world view of their consumers. If the information isn’t readily available you won’t hear about, and you won’t hear about it if people won’t listen to that viewpoint. Bad news sells because that’s what we want to hear.
  • Many people focus excessively on prices, because they are easy to observe. But, the real action is in quantities: how much did people work, how much did they buy. Increasing and decreasing prices always help one party and hurt another. But, with goods and services, increasing quantities are good, and decreasing ones are bad.
  • We removed one of the checks and balances from the Constitution that kept special interest politics in check. Prior to the 17th amendment, Representatives represented people, and Senators represented state governments. Now Senators are elected the same way as Representatives, meaning that special interests only have to convince one group (the voters) instead of two (the voters and the states’ government officials). It’s not that different from kids getting more special favors when there’s just one parent around.
  • There’s what The New York Times David Brooks calls a metacognition deficit: “Very few in public life habitually step back and think about the weakness in their own thinking and what they should do to compensate.” Outside of politics, this is most commonly seen among those who apply their religious doctrine more broadly that it is applicable or even intended. Reversing that argument, it may be that those on the opposite side of the political spectrum disagree with you because they believe you are acting out of faith, and to them your faith is simply wrong and not worth discussing.
  • Many people suffer from what Bryan Caplan calls the “activist’s fallacy”. It goes like this: 1) something must be done, 2) this is something, 3) therefore this must be done. It’s a fallacy because this could be just about anything. This is compounded by the fact that most government policies don’t have any sunset provision (basically, an expiration date). For example, in the U.S., 85% of the population has health “insurance” provided as a fringe benefit of their job – this is a holdover from World War II when the Roosevelt administration didn’t want employers paying workers more in cash, and this is what managers came up with.

The upshot of all of this is that you will often hear things from friends, relatives, and the media that don’t match up with the textbook, my lectures, or the insights you are getting from them.

Trust what you’ve learned in class – by the end of the semester you’ll have learned more macroeconomics than most people ever get the chance to, and it will be fresh in your mind.

From time to time, in response to some odd observation on the world around you, I’ll say – remember that first lecture of the semester? Don’t take offense when I do!

And don’t forget – while I teach facts and uncontroversial theories about macroeconomics, this is still a dynamic and evolving field, and I might later be proved wrong.

N.B. This is a list that grows every year. Check back to this site in the coming years for new additions.

Thursday, March 3, 2011

More State Budget Data

The big story of the recovery from the Great Recession has not been the problems of industry but those of state governments. This chart came from an article entitled “Budget Battles Roil Straitened States” in the February 25 issue of The Wall Street Journal.

The legend is missing, but Utah is in the best category in this chloropleth.

Wisconsin, which is aggressively reacting to their problems, is in the second to best group.

N.B. The gray states provided no data, so they aren’t necessarily the good ones.

Note that the right hand side of this map is missing from the online version, but is in the print version.

There was another graphic on that same page of hard copy, and it is not available online. The data is here. It showed that Utah is a little worse than average on where state tax revenues stand: the average is 89% of peak levels, and we’re at 85%. It also showed state pension liabilities as a percentage of GSP, and here we’re a little better than average: 5% vs. 7%.