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]]> A Rationale http://www.brentwheeler.com/index.php?itemid=223 Mon, 6 Sep 2010 09:03:00 +1200 http://www.brentwheeler.com/index.php?itemid=847

Economics is Hard. Don’t Let Bloggers Tell You Otherwise

Kartik Athreya
Research Department
Federal Reserve Bank of Richmond

June 17, 2010

Abstract
In this essay, I argue that neither non-economist bloggers, nor economists who portray economics —especially macroeconomic policy— as a simple enterprise with clear conclusions, are likely to contribute any insight to discussion of economics and, as a result, should be ignored by an open minded lay public.

The following is a letter to open-minded consumers of the economics blogosphere. In the wake of the recent financial crisis, bloggers seem unable to resist commentating routinely about economic events. It may always have been thus, but in recent times, the manifold dimensions of the financial crisis and associated recession have given fillip to something bigger than a cottage industry. Examples include Matt Iglesias, John Stossel, Robert Samuelson, and Robert Reich. In what follows I will argue that it is exceedingly unlikely that these authors have anything interesting to say about economic policy. This sounds mean-spirited, but it’s not meant to be, and I’ll explain why.

Before I continue, here’s who I am: The relevant fact is that I work as a rank-and-file PhD
economist operating within a central banking system. I have contributed no earth-shaking ideas to Economics and work fundamentally as a worker bee chipping away with known tools at portions of larger problems. It is precisely from this low-level vantage point that I am totally puzzled by the willingness of many who fearlessly and breathlessly opine about economics, especially macroeconomic policy. Deficits, short-term interest rate targets, sovereign debt are all chewed over with a level of self-assuredness that only someone who doesn’t know more could.

The list of those exhibiting this zest also includes, in addition to those mentioned above, some who might know better. They are the patron saints of the “Macroeconomic Policy is Easy: Only Idiots Don’t Think So” movement: Paul Krugman and Brad Delong. Either of these men will assure their readers that it’s all really very simple (and may even be found in Keynes’ writings). Lastly, before you dismiss me as a right- or left-winger, I am not. I’m simply less comfortable with ex cathedra pronouncements and speculations than the people I have named.

The main problem is that economics, and certainly macroeconomics is not, by any reasonable measure, simple. Macroeconomics is most narrowly concerned with the tracing of individual actions into aggregate outcomes, and most fatally attractive to bloggers: vice versa. What makes macroeconomics very complicated is that economic actors... act. Firms think about how to make profits, households think about how to budget their resources. And both sets of actors forecast. They must. One has to take a view on one’s future income, health, and familial obligations to think about what to set aside for retirement, how much life insurance to buy, and so on. Of course, all parties may be terrible at forecasting, that’s certainly a possibility, but that’s not the issue. Even if one wanted to think of all economic actors as foolish and purposeless organisms making utterly random choices, one must accept that their decisions will still affect, and be affected by what others do. The finitude of resources ensures this “accounting” reality.

Beyond this, some may recall that Economics 101 is usually insistent on reminding students of the Fallacy of Composition: what is true for some may not be true for all. Much of macroeconomics is dedicated precisely making sure that when we talk about the “economy”, we don’t fall afoul of this fallacy. It is therefore not surprising that the majority of the training of new PhDs in their macroeconomic coursework is giving them a way to come to grips with the feedback effects that are likely present. Some of this is nothing more than (valuable) exercises in book-keeping. So much of my 1st year homework involved writing down tedious definitions of internally consistent outcomes.

Not analysing them, just defining them, and so trying to convincing my instructors that I wasn’t inadvertently describing something nonsensical, where resources were being allowed to “fly in (or out) through a window.” In discussions of fiscal policy, such as those regarding deficits, for example, the discipline imposed by an insistence on doing the accounting correctly helps focus economists on the real issue (total spending, and the expected future path of spending), and also learn what might be peripheral (the deficit at any given moment).

The punch line to all this is that when a professional research economist thinks or talks about social insurance, unemployment, taxes, budget deficits, or sovereign debt, among other things, they almost always have a very precisely articulated model that has been vetted repeatedly for internal coherence. Critically, it is one whose constituent assumptions and parts are visible to all present, and can be fought over. And what I certainly know is that to even begin to talk about the effects of unemployment, debt, deficits, or taxes, one has to think very hard about many, many things.

Examples of this approach done right in the context of some of the topics mentioned above are recent papers by Robert Lucas of the University of Chicago, Jonathan Heathcote of the Minneapolis Fed, or Dirk Kreuger and his co-authors. Comparing, even momentarily, such careful work with its explicit, careful reasoning, its ever-mindful approach to the accounting for feedback effects, and
its transparent reproducibility, with the sophomoric musings of auto-didact or non-didact bloggers or writers is instructive. For those who want to really know what the best that economics has to offer is, you must look here. And this will be hard.

But why should it be otherwise? Why should anyone accept uncritically that Economics, or
any field of human endeavor, for that matter, should be easy either to process or contribute to? To some extent, people don’t. Would anyone tolerate the equivalent level of public discussion on cancer research? Most of us readily accept the proposition that Oncology requires training, and rarely give time over to non-medical-professionals’ musings. Do we expect advances in cell-biology to be immediately accessible to anyone with even a college degree? Science journalists routinely cite specific studies that have appeared in specific journals. They generally do not engage in passing their own untrained speculations off as insights. But economic blogging and much journalism largely does not operate this way. Naifs write books, and sell many of them too.

People as varied as Matt Ridley and William Greider make book-length statements about economics. I’ve never done that, and this is my job. This is, to say the very least, bizarre.
The response of the untrained to the crisis has been even more startling. Many books have already been written about the nature of financial markets by non-economist writers, and I listen to Elizabeth Warren on the radio fearlessly speculating about the nature of credit market dysfunction, and so on.

I find the comparison between the response of writers to the financial crisis and the silence that followed two cataclysmic events in another sphere of human life telling. These are, of course, the Tsunami in East Asia, and the recent earthquake in Haiti. These two events collectively took the lives of approximately half a million people, and disrupted many more.

Each of these events alone, and certainly when combined, had larger consequences for human well-being than a crisis whose most palpable effect has been to lower employment to a rate that, at worst, still employs fully 85% of the total workforce of most developed nations. However, neither of these events was met by (i) a widespread condemnation of seismology, the organized scientific endeavour most closely “responsible” for our understanding of these events or (ii) a flurry of auto-didacts rushing to offer their own diagnosis for what had happened, and advice for how to avoid the next big one. Everyone understands that seismology is probably hard enough that one probably has little useful to say without first getting a PhD in it. The key is that macroeconomics, which involves aggregating the actions of millions to generate outcomes, where the constituents pieces are human beings, is probably every bit as hard. This is a message that would-be commentators just have to learn to accept. For my part, seventeen years after my first PhD coursework, I still feel ill at ease with my grasp of many issues, and I am fairly confident that this is not just a question of limited intellect.


So far, I’ve claimed something a bit obnoxious-sounding: that writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy. Taken literally, I am almost certainly wrong. Some of them have great ideas, for sure. But this is irrelevant. The real issue is that there is extremely low likelihood that the speculations of the untrained, on a topic almost pathologically riddled by dynamic considerations and feedback effects, will offer anything new. Moreover, there is a substantial likelihood that it will instead offer something incoherent or misleading. Note also that intelligence is not the issue. Many of those I am telling you not to listen to will more than successfully be able to match wits, in any generalized sense, with me. This is irrelevant. The question is: can they provide you, the reader, with an internally consistent analysis of a dynamic system subject to random shocks populated by thoughtful actors whose collective actions must be rendered feasible? For many questions, I and my colleagues can, and for those that the profession cannot, the blogging crowd probably can’t either.

You might say, “you’re telling us to leave everything to the experts, so why should I believe you are adequately policed?” This is a fair question, but as someone who has worked for a decade to publish in leading academic journals (with some, but hardly overwhelming, success), I now have the referee reports to prove that I live in a world where people are not falling over themselves to believe my assertions. The reports are often scathing, but usually very insightful, and have over the years pointed out all manner of incoherence in my work.

The leading journals have rejection rates in the neighbourhood of 80%, and I’ve had my share of them.

In summary, what I’d like to convince the public that economics is far, far, more complicated
than most commentators seem to recognize. Because if they did, they could not honestly write the way they now do. Everything “depends”, and this is just the way it is. And learning what “it” depends on, exactly, takes enormous effort. Moreover, just below the surface of all the chatter that appears in blogs and op-ed pages, there is a vibrant, highly competitive, and transparent scientific enterprise hard at work. At this point, the public remains largely unaware of this work. In part, it is because few of the economists engaged in serious science spend any of their time connecting to the outer world (Greg Mankiw and Steve Williamson are two counterexamples that essentially prove the rule), leaving that to a group almost defined by its willingness to make exaggerated claims about economics and over represent its ability to determine clear answers.

How can this be changed? A precondition for the market delivering this is a recognition by the general public that they are simply being had by the bulk of the economic blogging crowd. I hope to have alerted you to the giant disconnect that exists between the nuanced discussion that occurs between research economists and the noise (some of it from economists!) that one sees in the web or the op-ed pages of even the very best newspapers of the US. As a result, my hope is that the broader public will ask for a slightly higher bar when it comes to economics, rather than self-selecting into blogs that merely confirm half-baked views that might have been acquired from elsewhere. And I hope that non-economists who write about economics start routinely to do so in a way that references and discusses the premises that lead to particular conclusions about a given issue. Economics is full of this sort of “if-then” knowledge, which, if communicated well, could significantly sharpen the public discussion. This is not asking a lot, it is asking just enough.
]]> General http://www.brentwheeler.com/index.php?itemid=847 Mon, 6 Sep 2010 09:02:27 +1200 http://www.brentwheeler.com/index.php?itemid=845
A sense of fairness, as any parent knows, develops irritatingly early. A wail of “It’s not fair!” is usually the first normative statement to come out of the mouths of babes and sucklings. People seem to be hard-wired to demand fairness. Studies in which people are offered deals that they regard as fair and unfair show that the former stimulate the reward centres in the brain; the latter stimulate areas associated with disgust.

For the British fair play is especially important: without it, life isn’t cricket (especially when you score a perfectly good goal against the Germans and it is unfairly disallowed—see above, ref). Their country becomes quite pleasant when the weather is fair, though unfortunately it rarely is. And these days fair-trade goods crowd their supermarket shelves.

Fairness is not only good, but also moderate, which is another characteristic that the British approve of. It does not claim too much for itself. Those who, on inquiry, admit that their health and fortunes are fair-to-middling navigate carefully between the twin dangers of boastfulness and curmudgeonliness, while gesturing in a chin-up sort of way towards the possibility of future improvement.

The French have taken to using le fair-play in sport, presumably because (as their coach’s refusal to shake hands with his opposite number after losing to South Africa suggested) their own culture finds the concept rather difficult. When talking politics, however, the French, like the Americans, tend to go for the more formal notion of justice. But fairness appeals to the British political class, for it has a common sense down-to-earthiness which avoids the grandiosity of American and continental European political discourse while aspiring to do its best for all men—and of course for maidens too, fair and otherwise, for one of its virtues is that it does not discriminate on grounds of either gender or skin colour.

Not surprising, then, that Britain’s government should grab hold of the word and cling to it in the buffeting the coalition has had since the budget on June 22nd proposed higher taxes and even sharper spending cuts. “Tough but fair” is what George Osborne, the Conservative chancellor of the exchequer, called the cuts he announced. “It is going to be tough, but it is also very fair,” said Vince Cable, the Liberal Democrat business secretary. At last, something they could agree on.

Fair dos

Yet the fact that everybody believes in fairness is a clue to what’s wrong with the notion. Like that other warm-blanket word, “community”, it signals limp thinking. What exactly is “fair” about restricting trade, for instance? Or “unfair” about letting successful people in business or other fields enjoy the fruits of their enterprise without punitive taxes?

“Fairness” suits Britain’s coalition government so well not just because its meanings are all positive, but also because—like views within the coalition—they are wide-ranging. To one lot of people, fairness means establishing the same rules for everybody, playing by them, and letting the best man win and the winner take all. To another, it means making sure that everybody gets equal shares.

Those two meanings are not just different: they are opposite. They represent a choice that has to be made between freedom and equality. Yet so slippery—and thus convenient to politicians—is the English language that a single word encompasses both, and in doing so loses any claim to meaning.
Fairness is fudge. This newspaper will have none of it. We reject the wide, woolly notion of fairness in favour of sharper, narrower words that mean what they say, like just or cruel. Sadly, British politicians are unlikely to follow our lead. They will continue to paper over their cracks with fairness. Which, given how handy the word is, is probably fair enough.

Economist 3 July
]]> General http://www.brentwheeler.com/index.php?itemid=845 Mon, 9 Aug 2010 15:49:52 +1200 http://www.brentwheeler.com/index.php?itemid=842 Who exactly benefits from CSR
]]> General http://www.brentwheeler.com/index.php?itemid=842 Sun, 25 Jul 2010 19:29:50 +1200 http://www.brentwheeler.com/index.php?itemid=838
Bad legislation, maintained by self-seeking interest groups. Back in 1982, I remind Mr. Becker, the economist Mancur Olson published a book, "The Rise and Decline of Nations," predicting just that trend. Over time, Olson argued, interest groups would form to press for policies that would almost invariably prove protectionist, redistributive or antitechnological. Policies, in a word, that would inhibit economic growth. Yet since the benefits of such policies would accrue directly to interest groups while the costs would be spread across the entire population, very little opposition to such self-seeking would ever develop. Interest groups—and bad policies—would proliferate, and the nation would stagnate.

Olson may have sketched his portrait during the 1980s, but doesn't it display a remarkable likeness to the United States today? Mr. Becker thinks for a moment, swiveling toward the window. Then he swivels back. "Not necessarily," he replies.

"The idea that interest groups can derive specific, concentrated benefits from the political system—yes, that's a very important insight," he says. "But you can have competing interest groups. Look at the automobile industry. The domestic manufacturers in Detroit want protectionist policies. But the auto importers want free trade. So they fight it out. Now sometimes in these fights the dark forces prevail, and sometimes the forces of light prevail. But if you have competing interest groups you don't end up with a systematic bias toward bad policy."

Mr. Becker places his hands behind his head. Once again, he reflects, then smiles wryly. "Of course that doesn't mean there isn't any systematic bias toward bad policy," he says. "There's one bias that we're up against all the time: Markets are hard to appreciate."

Capitalism has produced the highest standard of living in history, and yet markets are hard to appreciate? Mr. Becker explains: "People tend to impute good motives to government. And if you assume that government officials are well meaning, then you also tend to assume that government officials always act on behalf of the greater good. People understand that entrepreneurs and investors by contrast just try to make money, not act on behalf of the greater good. And they have trouble seeing how this pursuit of profits can lift the general standard of living. The idea is too counterintuitive. So we're always up against a kind of in-built suspicion of markets. There's always a temptation to believe that markets succeed by looting the unfortunate."
]]> Policy http://www.brentwheeler.com/index.php?itemid=838 Sat, 19 Jun 2010 12:38:10 +1200 http://www.brentwheeler.com/index.php?itemid=837
From ZNET....

Leading up to the launch of the iPhone 4 (Techmeme, live coverage, gallery, all Apple posts), run by the iOS since it powers the iPhone, iPod touch and iPad, there were whispers everywhere about the Android’s turbo-charged innovation cycle, the end of iPhone envy and how other smartphones from the likes of HTC were closing the gap.

Now it wasn’t like the iPhone was becoming a commodity device, but you could see some parity on the horizon. Even Sam Diaz got over his iPhone envy. Enter Apple CEO Steve Jobs who was having none of that talk. Jobs talked about the mix between technology and liberal arts. The emphasis is on technology as an art form.

Throughout Jobs’ talk there were information nuggets that spoke to reclaiming the high-end phone market. Now Jobs did point out that Apple had heft and scale. Jobs wooed developers on many fronts. Jobs mentioned the company had twice the mobile browser share of Android; that developers had access to 150 million accounts hooked up to App Store, iTunes and iBookstore waiting to buy developer apps; and how he loved to return 70 percent of revenue to them. Jobs relished telling developers Apple has forked over $1 billion in payments to them.

But the overall performance was more nuanced. Jobs had many subtle references that indicated that the iPhone was a Mercedes or BMW and the other rivals had more common sedans.

To wit:

Referring to the iPhone 4, Jobs noted how it was thin, but also positioned the device as art. Jobs said the iPhone 4 is “the most precise thing” with “glass on the front and back, and steel around the sides.” And then the kicker: Jobs said the iPhone 4 was like a “beautiful old Leica camera.” Don’t lose the Leica reference since it’s unlikely you’ll hear something like that from all of the rivals gunning to be an iPhone killer.
Jobs also talked about the iPhone 4’s Retina Display, which Apple hopes will set a display standard. “Once you use a retina display you can’t go back,” said Jobs.

Then Apple talked about FaceTime, its video calling system for between the iPhone 4. FaceTime will run on Wi-Fi for now, but Jobs noted that FaceTime “is one of the moments that reminds us of why we do what we do.”
Sure, there are plenty of tech specs to ponder, but Apple is selling a different vibe and a higher calling. Now you can debate forever whether you buy into the Apple zeitgeist, but Jobs accomplished what he had to. Apple is about threading that liberal arts and technology needle and the company just put a little more distance between the big pack trying to hunt down the iPhone.

Will it work?

Piper Jaffray analyst Gene Munster seems to think so. In a research note, Munster said:

While the announced features of the iPhone 4 were as expected, the reality is this phone is significantly more advanced than the next best alternative. We expect another strong product launch for Apple, resulting in Street iPhone estimates for the June quarter (around 8.7 million) moving slightly higher…The bottom line is the iPhone is taking unit and dollar share from other device categories…We believe that the innovation announced is sufficient to maintain Apple’s lead in mobile for the next year.
]]> General http://www.brentwheeler.com/index.php?itemid=837 Wed, 9 Jun 2010 08:51:00 +1200 http://www.brentwheeler.com/index.php?itemid=836
By Peter Boone and Simon Johnson

The big news is France. With sentiment worsening across Europe, France has lost its relative safe haven status – credit default swap spreads on French government debt were up sharply today.

The trigger – oddly enough – was Hungary’s announcement that its budget is worse than expected (blaming the previous government; this is starting to become the European pattern) and in the current fragile environment discussed yesterday, this relatively small piece of news spooked investors. But these developments only reinforced a trend that was already in place.

It did not help that the Irish Minister of Finance announced Ireland has 74.2bn euros of guaranteed bank loans, bonds, and systemic support falling due between now and Oct 1. This is around 55% of GNP. It sounds like everyone backed by the Irish government had the “clever” idea to roll over their debts to just before the guarantees expire.

The big losers are Portugal-Ireland-Italy-Greece-and-Spain as always, but Belgium is now in the line of fire, and France is clearly under pressure. The spread between French and German credit default swaps (measuring the relative probability of default) is up – yesterday this was 40 basis points, today it stands at 44 (up from just 5 basis points at the end of 2009; most of the increase is since mid-March, with a sharp acceleration recently). French bonds have become illiquid, with wide bid-ask spreads; not what is supposed to happen in a safe haven. This is going to make the French angry – watch for more market slanders from top French politicians over the weekend; you know they would just love to ban trading in something.

Earlier today the French Prime Minister came out with a quote for the ages:

“I only see good news in parity between euro and dollar”.

Be careful what you wish for – such statements will drive the Germans crazy as they see further evidence that inflation lovers are clearly winning influence and might just gain control at the European Central Bank (ECB). ]]> General http://www.brentwheeler.com/index.php?itemid=836 Sun, 6 Jun 2010 23:27:39 +1200 http://www.brentwheeler.com/index.php?itemid=834
Even better news is the declining frequency of major oil spills. Some evidence of this healthy trend is the fact that the average time that elapsed between each of history’s top ten accidental oil spills prior to BP Deepwater was 26 months. But the amount of time between the most recent of these top-ten spills (which occurred in September 1994) and the BP Deepwater spill is 187 months. How many Americans today hear of this happy trend?"

From Don Boudreaux.... Cafe Hayek.]]> Environmental http://www.brentwheeler.com/index.php?itemid=834 Sun, 30 May 2010 05:43:00 +1200 http://www.brentwheeler.com/index.php?itemid=833
What it takes to meet consumer demand
This statement says a great deal about:

- one of the most common mistakes made by non economists
- just how attractive rhetoric rather than analysis is for politicians

And it's so simple.....

Ultimately the tragedy in the Gulf is the "fault" - and the term is a nonsensical one - of consumers of oil and all consumers of lifestyle benefits which derive from oil.

If there was no consumer appetite for oil BP would not exist - period. No one can set up an oil company if there is no consumer demand for oil. No one - not even BP - would explore for oil if there was no demand for oil and no demand for oil at the lowest price possible, in stable quantities and at a given quality.

What BP shareholders are responsible for is bearing the risk that meeting consumer demand involves. For a profit, those shareholders are prepared to take the risk of operating an oil company and exploring for oil.

What the President can do is reduce his appetite for oil or be prepared to pay higher prices as exploration efforts reduce or some combination of both.

What he can't do with any semblance of rigour, is simply "blame" BP.... Getting annoyed with business while ignoring the consumer demand which promotes its existence is both futile and an indication that one is more interested in politics than solutions.]]> General http://www.brentwheeler.com/index.php?itemid=833 Tue, 4 May 2010 12:42:19 +1200 http://www.brentwheeler.com/index.php?itemid=832
"For example, before 1996, certain initial public offerings of stocks were subject to merit review in certain states, where the state decided if a security is a "bad" investment and thus not appropriate to be offered to its citizens. In fact, this is exactly what happened to Apple Computer when it first went public in 1980. Massachusetts prohibited the offering of Apple shares because they were "too risky," and Apple did not even bother to offer its shares in Illinois due to strict state laws on new issues. What if federal bureaucrats had had the power to impose their judgment on a "risky" financial product (such as an IPO) on a nationwide scale, or every state followed Massachusetts' lead?"
From Marginal Revolution]]> Regulation http://www.brentwheeler.com/index.php?itemid=832 Sun, 2 May 2010 17:41:51 +1200