Monday, November 23, 2015

Japanese promises (a reply to John Cochrane)

John Cochrane comments on a recent Bloomberg post of mine. In that post I wrote:
[I]nflation reduces the burden of debt. Japan’s enormous government debt represents the government’s promise to transfer resources from young people (who work and pay taxes) to old people (who own government bonds). Since Japan is an aging society, there are more old people than young people. That makes the burden especially difficult to bear. Young people also tend to have mortgages, the repayment of which is another burden. 
Sustained higher inflation would represent a net transfer of resources from the old to the young. That would increase optimism, and hopefully raise the fertility rate, helping with demographic stabilization.
John agrees that (unexpected) inflation is a partial debt default that has (among many other effects) the net effect of transferring real resources from the old to the young. But he believes this to be unfair, and also cruel:
[L]et us remember where debt actually comes from. The Japanese government borrowed a lot of money from people who are now old, when they were young. Those people consumed less -- they lived in small houses, made do with fewer and smaller cars, ate simply, lived frugally -- to give the government this money. The promise they received was that their money would be returned, with interest, to fund their retirements, and to fund their estates which young people will inherit. 
Noah is advocating nothing more or less than a massive government default on this promise, engineered by inflation. The words "default,"  "theft," "seizure of life savings," apply as well as the anodyne "transfer." I guess Stalin just "transferred resources." 
Yes, Japanese Baby Boomers did make real sacrifices in exchange for the promise of future transfers. Yes, inflation (or cutting pensions, or cutting health care spending) does represent a partial default on those promises. It does indeed represent seizure of life's savings. As for "theft", that's a legal term, but if you want, then sure.


Economics involves tradeoffs. I wish it didn't. I wish resources were infinite, but they're not. And sometimes promises can't be kept as easily as you thought they could be when you made the promise. Imagine - as a limiting case - that an entire generation of fifty million produces only one hundred children. The older generation made real sacrifices when they were young, in exchange for government bonds (and suppose the real resources they gave up were spent on useless bridges to nowhere). In order to keep its promise of resource transfer, the government must now pay back those bonds by taxing just one hundred people.

It's not going to happen, no matter how much people want it to happen. One hundred cannot pay back fifty million. Inflation or default will happen.

In Japan's case, the situation is not so extreme, but the principle is similar. The Boomers, who sacrificed real resources (much of which was indeed spent on bridges to nowhere) in exchange for government bonds, had very few children. Japan's population is shrinking by hundreds of thousands per year, and the rate of decrease is set to accelerate. Paying back the older generation will be very, very hard for those less numerous young people. And forcing the young people to make those payments may well cause them to have fewer kids, helping to perpetuate the problem.

Therefore, hard choices must be made. Resources must be allocated - not the way that Stalin did it, thank God, but in a way that will undoubtedly earn the resentment and disappointment of many honest hard-working citizens, and which will undoubtedly cause hardship for many who do not deserve it.

But if you feel the desire to moralize against this "theft", remember that when the promises were made, the younger generation was not yet able to vote. The seizure of the fruits of their labor, in the form of taxes, goes to pay for expenditures that were made without their consent.

In other words, one way or another, some cruel unfairness is going to happen in Japan. And I think our job is to minimize the cruelty and unfairness as best we can - to "spread the pain" as much as possible while minimizing the pain's overall size.

Some more Cochrane points:
Amazingly, to Noah (and the views he ably summarizes here) this "transfer" will "increase optimism." Hmm. Let's look at the evidence for that. We have seen many large inflations, which wiped out middle-class savings along with government debts. Those events have generally been regarded as economically, politically, and psychologically destabilizing tragedies, not FDR-fireside-chat "optimism"-raising sessions. No surprise that few societies have voluntarily signed up for such treatment as Noah recommends. I would be curious to hear of a single happy historical antecedent. (I mean that. Perhaps I am mistaken in my understanding of Noah's proposal. A successful example might correct me.)
The historical example I had in mind was the sustained high inflation between 1945 and 1955, which substantially reduced the debt that the U.S. had incurred during WW2.
How does a government default benefit young people anyway? It does so if a large amount of tax revenue is being used to pay interest or principal on the debt, and the default is accompanied by a large tax cut for young families. Not by the same level of taxes and increased government spending on more railway-to-nowhere stimulus projects.  Without tax cut, there is no transfer. Noah is strangely silent on the essential big tax cut aspect of his plan.
Let me be silent no more! Yes, tax cuts are the plan! Taxes are crushing the youth!!

Of course, given the large tax hikes that will be required to balance the Japanese budget if transfer payments to old people are not cut, even keeping taxes at their current level would constitute a tax cut. But yes, it's about tax cuts.
Quiz: Find in Japanese (or American) government finances the actual "promise to transfer resources from young people (who work and pay taxes) to old people." If you say "government bonds," you (like Noah) got the wrong answer. The right answer is Social Security, Medicare, and public employee pensions. If Noah wishes to reduce the "burden" of intergenerational transfers, no matter that governments have promised to make those transfers and people have planned their lives around them, the silence on these promises is deafening.
I think Japan should absolutely cut transfer payments to the elderly (I said so in this other post, and will say it again, and said it to the Ministry of Finance people when I met them the other day). The problem is that transfer payments are politically hard to cut, while monetary policy is (probably) much more out of the public eye.

But note that government bonds are another promise to transfer resources from young to old. It's not the wrong answer, it's just part of the total answer.
If the purpose is default, why not just advocate default? 
It's one option. But it's an incredibly extreme option, since it would cause lots of business failures, which would cause massive economic disruption. That would put the country in danger of a coup. Sovereign default is a last-ditch option, but I think it would be better than hyperinflation.
So, according to Noah, a self-induced hyperinflation to generate an economy-wide debt default is necessary
No! Hyperinflation is the worst sort of default, since it causes business failures. What I want is sustained moderate inflation of 4-6 percent.

Anyway, that should answer most of John's points. He describes me as having an "insouciant willingness" to upend the lives of millions. I think I'm anything but insouciant. The lives of millions are going to get upended one way or another - Japan's government has made promises that it can't keep. That's not my choice or my doing. I just want to help figure out ways to minimize the overall suffering and spread it around as fairly as possible.

Hopefully that does not make me Stalin.

Friday, November 20, 2015

Unlearning economics

"Just then the floating disembodied head of Colonel Sanders started yelling
Everything you know is wrong"
- Weird Al Yankovic

The problem with discovering how the world works by intuition alone is that the model space is just enormous. Humans are really really smart, but very rarely are we smart enough to just sit down and think about how the world might work and actually get it right. Our most spectacularly successful leaps of theoretical insight - Newton's Principia, Einstein's relativity stuff, Mendel's theory of inheritance - were all very closely guided by data. The general pattern was that some new measurement technology would be invented - telescopes, plant hybridization experiments, etc. - that would provide some new unexplained data. Then some smart theorists would come up with a new theoretical framework (paradigm?) to explain it, and the new framework would then also explain a bunch of other stuff besides, and so people would switch to the new theory.

How about econ, though? Auction theory - a big empirical success - seems like it came out of pure intuition (though that could just be my ignorance of history). But if econ is like natural sciences, then we should expect that sort of success to be very rare. Usually, theories developed from armchair intuition - no matter how mathematical - will be wrong, just because wrong theories outnumber right theories by such a huge margin.

Right now we're in the middle of an empirical revolution in econ, and - unsurprisingly - a ton of standard, common theories are just not matching reality very well. For example:

1. If you slap some quick supply-and-demand graphs on the board, it looks like minimum wages should harm employment in the short term. But the data shows that they probably don't

2. If there's any sort of limits to mobility, then simple labor demand theory says that a big influx of immigrants should depress the wages of native-born workers of comparable skill. But the data shows that in many cases, especially in the U.S., the effect is very small

3. A simple theory of labor-leisure choice predicts that welfare should make recipients work less. But a raft of new studies shows that in countries around the world, welfare programs barely reduce observable work effort.

4. Most standard econ theory doesn't assume the existence of social norms. But experiments consistently show that social norms (or morals, broadly conceived) matter to people. 

Again and again, standard ideas - the stuff that most of the undergrad kiddos learn in their Econ 101 classes - are being smacked down by the heavy hand of new data. We're slowly unlearning economics.

Of course, much of the new empirical literature will eventually prove to be non-replicable or poorly designed, but much of it will prove to be solid and reliable; generations of empirical economists will carefully replicate findings and try to extend them to other contexts to see how well they hold up. And the good results will hold up, and theories will be killed as a result.

(Ultimately, that's good for econ theory, since the usual pattern is for better data to produce better theories. And it means more work for econ theorists, since simple theories will be killed first, and the better newer theories will take a lot of effort to make - so there will be jobs and money for theorists. Still, I expect some theorists to complain, because making simple theories is easy and making useful theories is hard.)

But anyway, what this means is that Econ 101 courses around the country probably need an overhaul. New data is rapidly producing a raft of new theoretical facts that students should be learning. Teachers should still teach the simple, classic theories that the new facts are beginning to kill...but mainly as a way to show how data can tell us when we're wrong.

Update: Here's a follow-up Bloomberg post. Maybe Angrist and Mankiw should team up to write the Econ 101 textbook of the future!

Sunday, November 15, 2015

Gelman vs. Case-Deaton: academics vs. blogs, again

Case and Deaton, welcome to the blogs.

Prominent academics are often astonished at the rapidity with which the blogosphere occasionally pounces on and dissects their research findings. In this case, it happened to Case and Deaton, authors of a recent much-publicized study entitled "Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century." The pounce was done by Phil Cohen, and - most prominently - by Andrew Gelman

The TL;DR version is that rising mortality in some of the subgroups spotlighted by Case and Deaton was increased by a composition effect - the average age within the subgroups increased over the observation period, which pushed up death rates for the aggregated subgroups. If you remove the composition effect, the mortality increase among these groups was considerably less.

Anne Case responded with the consternation typical of researchers first encountering blog attacks:
Case said that she didn’t buy this argument. “We spent a year working on this paper, sweating out every number, sweating out over what we were doing, and then to see people blogging about it in real time — that's not the way science really gets done,” she said. “And so it’s a little hard for us to respond to all of the blog posts that are coming out.”
Academics are used to the cozy, staid world of academia. Responses are slow, polite, and vetted by third parties. Arguments happen in seminars, in office discussions, and at dinners. Disputes are resolved over a matter of years - when they are resolved at all. And never do intellectual adversaries take their case to the general public!

But academics are going to have to get used to blogs. The technological advances of the web have simply made it easier for crowds of outsiders to evaluate research in real time. How often that process produces the "wisdom of crowds", and how often it merely adds unhelpful noise, remains to be seen. Certainly we've seen the internet do both of those things at different times. But blog criticism of research looks like something that's here to stay, and academics whose work appears in the popular press will have to get used to it!

Blog discourse has some distinct advantages - above all, the speed of responses and the diversity of people who get involved in discussions. How often do you see two economists arguing with a sociologist and a political scientist/statistician? That's pretty cool! There is, however, a tendency for blog debates to become too antagonistic. 

I think Andrew Gelman's latest salvo against Case and Deaton falls into this category a bit. He is put out that Case and Deaton have, so far, refused to issue a public mea culpa about what he sees as a major gotcha. Gelman writes up what he thinks such a mea culpa should say, and includes these bits of snark:
Had it not been for bloggers, we’d still be in the awkward situation of people trying to trying to explain an increase in death rates which isn’t actually happening...We count ourselves lucky to live in an era in which mistakes can be corrected rapidly[.]
Gelman is dramatically overstating the importance of what he found! To say that the increase in death rates "isn't actually happening", first of all, is not quite right - Gelman's rough-and-ready composition adjustment removes all of the increase, but more careful examination shows that some portion of the increase remains.

Second, Gelman is kind of assuming that zero is the important benchmark for what constitutes an "increase". He makes sure to point out that the paper's main finding - that American white mortality increased a lot relative to various comparison groups - is not changed by the composition adjustment. But when he claims that the increase "didn't really happen", Gelman is saying that "increase" is an absolute rather than a relative term.

Andrew, you're a stats guy. You know full well that people analyzing time-series data detrend stuff all the time. Measuring increases relative to a trend is totally standard practice! 

So like many blog debates, this one ends up making a mountain out of a molehill. The composition effect was a useful and instructive observation, but it doesn't really change anything about the paper's result. And publicly demanding that the authors engage in an equally public mea culpa over such a non-issue is a little unrealistic. If it leads to rancor in the long term, that will be a shame.

I like what blogs have done for research, but I think we should work to make those discussions less about point-scoring and more about a cooperative, crowdsourced search for truth.

Friday, November 13, 2015

Black immigrants are upwardly mobile

The other day, I noticed something disturbing in a graph from a Brookings report on immigrant mobility:

Embedded image permalink

We see that Hispanics are strongly upwardly mobile from the first to the second generation. Asians are slightly upwardly mobile, but from a pretty high base. Those are both good news. But black immigrants, on average, appear to show downward mobility.

Why would black immigrants be downwardly mobile? I posed the question on Twitter. A smart person called Abraham Bloodshack immediately tweeted this to me:
generational effects? i.e., recent increase in African migration could mean second gen are all quite early in careers
That was smart. We'll follow up on that later. But first, let's review some possible explanations for the mobility disparity:

1. Household size decrease. 1st gen. African immigrant families are probably really big, since Africa is a super-high-fertility place in general, while 2nd gen. families probably have drastically lower fertility.

2. Cohort effect. Recent changes in immigration composition might account for the effect. The average age difference that Abraham Bloodshack mentioned is also a kind of cohort effect. Age differences would affect the black immigrant average much more than the Hispanic or Asian immigrant average if African immigrant families, like the typical African family, are extremely large.

3. Downward assimilation. With many immigrant groups we see the 2nd generation picking up a lot of "bad" behaviors - or at least "bad" for earning power - from their decadent rich-world peers. These include things like not getting married, sponging off parents, and getting involved in the underground economy. 2nd-generation black Americans might be especially susceptible to this sort of thing. (And yes, I know "downward" might be a loaded word; if you want to sponge off your parents and play League of Legends, more power to you.*)

4. Racism. Negative attitudes toward African-Americans might not apply to people with African or Carribean accents, but might be applied toward their more American-sounding kids. (Update: See this excellent comment for more.)

I did a bit of digging on the ol' internet, and turned up this Tyler Cowen post on the subject, from two years ago. Cowen links to two papers (paper 1, paper 2) by Alison Rauh, a Chicago econ PhD, now a research associate at Cornerstone. 

The papers look at personal income, so we don't have to worry about the household size issue. They find broadly the same average income decrease as the Brookings graph, though to a lesser extent. Rauh's first paper attributes the difference to "idleness", her word for "being out of the labor force". Conditional on having a job, 2nd-generation black Americans earn a lot more than 1st-generation - for men, 29 percent more. That's roughly comparable to the average Hispanic increase from the Brookings graph, but from a much higher base. But so many 2nd-generation black Americans are out of the labor force that the overall average income goes down!

That would seem to point to the "downward assimilation" story, perhaps with some racism mixed in. Tyler goes for downward assimilation:
I take this to be a “peer effects are really really important” paper, namely that many of the virtues of immigrant culture are swallowed as the second generation assimilates.  
But this isn't the whole story. In her second paper, Rauh looks at what happens when the generations are adjusted for age, as Abraham Bloodshack might have suggested doing. Here is what she finds:
Note, however, that the average second generation black is more than 8 years younger than the first generation immigrant. Since earnings increase steeply until the mid forties, column 5 uses inverse probability weighting to equalize the age distribution of the first and second generation. Now sons of black immigrants earn $3000 or 8% more than the average first generation black immigrant. The fraction of second generation blacks with a college degree is 35% and therefore 4 percentage point higher than those of the first generation...For women both of these trends seem to be even more pronounced (Panel B). The second generation, once adjusted to have the same age distribution as the first generation, has an earnings premium of $8,600 over native blacks, $6,700 over first generation, and $3,600 over whites.
Lesson: Always read through the papers, don't just skim the Abstract/Intro/Conclusion! 

So if we adjust for age, we see that black immigrants are upwardly mobile, in terms of both income and education. And that upward mobility is from a decently high base for income and a very high base for education. 

In other words, the Brookings graph tells us the wrong story! A lot of those 2nd generation black Americans are either in college, or just starting at the bottom of the career ladder. They will eventually make a lot more money. This is great news.

But although black immigrants are upwardly mobile, they are not as upwardly mobile as they should be. Rauh observes that high incarceration rates play a large part in the fraction of 2nd-generation black Americans not in the labor force. Marriage rates are also much lower. 2nd-generation men are also much less upwardly mobile than 2nd-generation women.

These facts all point to a cultural effect - societal racism and/or downward assimilation, in some combination. Black immigrants are thriving in our society overall, but it's in spite of some headwinds.

Anyway, let this be a lesson: Before you go looking for theories to explain a fact, make sure you've gotten the fact right in the first place!

* Haha, I'm kidding of course. League of Legends sucks.

Monday, November 09, 2015

Case-Deaton and the human capital debate

Everyone is talking about the Case-Deaton paper that shows an increase in mortality among American white people. Most people have noted that the increase is concentrated among less-educated whites. Here is the relevant excerpt from the paper:
The three numbered rows of Table 1 show that the turnaround in mortality for white non-Hispanics was driven primarily by increasing death rates for those with a high school degree or less. All-cause mortality for this group increased by 134 per 100,000 between 1999 and 2013. Those with college education less than a BA saw little change in all-cause mortality over this period; those with a BA or more education saw death rates fall by 57 per 100,000. Although all three educational groups saw increases in mortality from suicide and poisonings, and an overall increase in external cause mortality, increases were largest for those with the least education... 
The final two rows of the table show increasing educational gradients from 1999 and 2013; the ratio of midlife all-cause mortality of the lowest to the highest educational group rose from 2.6 in 1999 to 4.1 in 2013.
And here is the table:

This paper provides some hard data to corroborate a story we have been seeing elsewhere: College-educated Americans are significantly healthier in their personal, family, and social lives. To me this indicates that education has acted to partially innoculate Americans against the overall negative changes that are affecting our society.

This is interesting for the debate on whether education - particularly college - creates human capital or not. Evidence is mounting that college transforms people's lives in ways that are not directly related to natural ability. I suspect that more detailed regressions would find that the difference in social and personal health persists after controlling for income, SAT scores, etc.

Here is an NBER paper by David Cutler and Adriana Lleras-Muney that supports my conjecture. I didn't find any other good-looking recent papers on the topic with a quick Google Scholar search. From the abstract:
There is a large and persistent association between education and health...The education ‘gradient’ is found for both health behaviors and health status, though the former does not fully explain the latter. The effect of education increases with increasing years of education, with no evidence of a sheepskin effect. Nor are there differences between blacks and whites, or men and women...We then consider differing reasons why education might be related to health. The obvious economic explanations – education is related to income or occupational choice – explain only a part of the education effect. We suggest that increasing levels of education lead to different thinking and decision-making patterns. The monetary value of the return to education in terms of health is perhaps half of the return to education on earnings[.]
The Cutler and Lleras-Muney paper also reviews some natural-experiment studies indicating that the effect is causal for pre-college education (though here's one paper they didn't cite, showing no effect). The authors also attempt to control for a large number of personal characteristics that might cause people to be both healthier and more likely to go to college, but find that this only marginally attenuates the relationship. They conclude that it is highly likely that the effect of education on health is, in fact, causal. (If they're right, that's in addition to whatever effect college has on income.)

A tendency toward healthy behavior is a powerful and important form of human capital. It is not at all clear that this kind of human capital can (or will) be created by MOOCs, self-study, or other forms of online learning that are being touted as replacements for college. In fact, right now it looks like the health-related human capital boost from college is all that is holding it together for our upper middle class.

Sunday, November 08, 2015

"Panics and Bubbles" reading list

Tony Yates offers his reading list on "Panics and Bubbles".

The list has some good stuff on it. Diamond-Dybvig, Geanakoplos, and Cogley and Sargent especially stand out. There's also some good stuff on how "expectation shocks" can cause economic fluctuations - for example, Angeletos and Werning, Farmer, etc.

There were one or two incongruous things. (Money search? What does money search have to do with panics and bubbles??) But mostly good stuff to read.

However, there's also a lot that I think Tony left out. His list skews heavily toward macro and money-based models, usually with rational expectations but with a few learning-based models thrown in. It is also mostly made up of theory papers, with little empirical work. This is understandable, since macro theory is what Tony does. But there are a lot of good non-macro and empirical papers out there on the topic of "Panics and Bubbles". For example:

Harrison and Kreps (1978) model how overconfidence can lead to asset price volatility. Scheinkman & Xiong (2003) follow up. Barber and Odean (2001) provide some evidence.

In fact, there are a bunch of papers, both theoretical and empirical, on heterogeneous beliefs and their role in asset pricing. Here is a good overview by Xiong. Here is a classic 1994 paper by Morris and a classic 1993 paper by David Romer. Here is a good, short, simple discussion paper by Barsky, talking about the Japanese bubble.

Heterogeneous beliefs are closely connected with learning. Tony mentioned some learning-based macro models, but I'd also point people to this elegant 1999 paper by Zeira on how learning can produce bubbles even in very simple settings.

Noise trader models are another important strain of the literature. Start with DeLong et al. (1990) and the various offshoots of that paper. Another very important paper is Abreu & Brunnermeier (2003). Mendel and Shleifer (2012) is yet another good one. Then check out Brunnermeier and Nagel (2004) on hedge funds and the technology bubble for some evidence.

A mostly forgotten but incredibly interesting strand of research was the "information cascades" literature, that models bubbles as herd behavior. Check out papers by Avery and Zemsky (1998), Chari and Kehoe (2003), and Park and Sabourian (2009).

In terms of direct tests of bubbles, and why these are so hard to do, you'd want to check out the classic 1980s literature on variance bounds tests (here is a great brief overview), as well as the literature on other kinds of bubble tests (surveyed here by Refet Gurkaynak).

And of course, check out the surveys on bubbles and crashes by Brunnermeier and by Scherbina and Schlusche.

In terms of the interactions between financial market disturbances and recessions, in addition to Kiyotaki-Moore and Bernanke-Gertler, you should check out more recent papers by Curdia and Woodford, and Christiano and Rostagno. I'm mildly surprised those or others like them didn't make Tony's list.

So there you go. I left out stuff like emerging market crashes and capital flight. I also left out economic history (Kindleberger), non-mathematical treatises (Minsky), and various "heterodox" ideas like Austrian theory.

But I think this is a good start. I think this list also shows that much of the finance theory literature has developed in parallel to the macro literature, with incomplete communication between the two. To some degree I suppose that's inevitable.

Tuesday, November 03, 2015

Big TFP data mystery! (Probably solved!)

NOTE: Mystery probably resolved! See update below. Here was the original post, for posterity:

While recently complaining about the overselling of static-efficiency policies, I asserted that rich countries have all grown at about the same long-term rate, despite decade-long divergences. I was talking, of course, about Total Factor Productivity, which at long horizons should be determined by technology.

I had been under the impression that over the last three decades or so, the rich countries had all experienced similar rates of TFP growth. My source for that was the OECD's time-series on multifactor productivity (another name for TFP). Here is a chart of those OECD productivity numbers since 1985:

As you can see, most rich countries grew their TFP at the same average rate, consistent with the idea that TFP mostly measures technology in the long term, and that technology spreads rather easily between rich countries. A few countries, like Korea, Ireland, and Finland, did much better over this period, and a few countries, like Italy, Spain, and Portugal, lagged behind. But most rich countries were clustered along the same basic line. The U.S., UK, France, and Germany (highlighted on the graph) all stayed very close to each other.

But I now see that FRED has its own TFP numbers for various countries, taken from the Penn World Tables. And here's what happens when I plot the TFP numbers for the U.S., UK, France, and Germany over the same time period (1985-2011):


The U.S. and UK lines match up as before, but the Germany and France lines are wildly, totally different! In fact, according to the Penn World Tables, Germany's TFP actually steadily declined from the mid-80s to 2011! 

What on Earth is going on here?? Obviously the two measurement methodologies are very different. So I tried to track down the source of the discrepancy, and I found some interesting stuff. 

First of all, it turns out that the Penn World Tables, currently assembled by a team of economists from UC Davis and the University of Groningen, have undergone substantial revisions to their methodology in recent years. They switched to a new growth accounting method developed by Francesco Caselli in the early 2000s (which I plan to study in detail when I get the chance). As Antonio, and Marek Jarociński pointed out in 2010, these revisions were enough to substantially change the results of all cross-country growth regressions. Simon Johnson, William Larson, Chris Papageorgiou, Arvind Subramanian criticized the new Penn methodology, and suggested possible changes. 

Meanwhile, the OECD methodology for calculating TFP has some questions surrounding it as well. To get TFP you need measures of labor and capital inputs. The OECD uses a pretty textbook method for doing this - simply stick in the raw estimates for the dollar values of labor and capital. But when they tried using another database called EU-KLEMS that tries to adjust for "quality" of inputs, they found totally different numbers.

I am not experienced enough in growth accounting to wade into these disputes in a substantive manner; it would take me at least a month of serious study to be able to say with any confidence which of these methodologies I believe most. The real takeaway here, though, is that TFP measurements are HIGHLY suspect, and will continue to be so for the foreseeable future.

That is bad news for most of modern macroeconomics, both on the growth theory and on the business cycle theory side of things. If differing methodologies for measuring labor and capital inputs diverge by this much, it means that any series you use probably has tons of stuff in it that it shouldn't have. That means that changes in the series at business-cycle frequencies - the good old TFP shocks of RBC models, which are also part of "kitchen sink" DSGE models like Smets-Wouters - are also unreliable. Basically, all those "shocks" are as likely as not to just be noise. That's probably true whether you compare across countries or look only at one country.

So this is a very pessimistic finding, and a huge challenge for the growth accounting field. Hopefully, a meeting of the brightest minds will get to the bottom of the problem and arrive at a consensus solution. If not, it means that any model that relies on measures of aggregate TFP, or factor inputs in general, is unreliable until the accounting problems are worked out.


Robert Inklaar of the University of Groningen contacted me and explained what was wrong! The most recent version of the Penn World Tables, version 8, did not take into account changes in averaged hours worked in some countries. Also, it used a Barro-Lee data source that apparently had some questionable data on trends in education. Inklaar says that the next version of the PWT, version 9, will fix the problems, and until it comes out, to use OECD data.

Well, I am mostly relieved. It's not really a methodology disagreement (except for the Barro-Lee education data). All of macro does not have to be scrapped, just yet. :-)

Thanks to Robert Inklaar for helping me out!

...But the growth economists I talked to about this mystery all expressed deep skepticism about these TFP data sets in general...

Monday, November 02, 2015

Growth vs. static efficiency

I have a new Bloomberg piece where I criticize John Cochrane, and conservatives in general by extension, for selling static efficiency policies as "growth" policies. The title is not the best (and the picture they use of John is also not the best; sorry about that). But the point is one I've really wanted to make for a long time:
Most of the so-called growth policies Cochrane and other conservatives propose don't really target growth at all, just short-term efficiency...Cochrane sells us on the need for growth policies by citing the undeniable benefits of long-term economic growth...But most of the policies Cochrane recommends are most certainly not things that would increase the growth rate for decades on end!...[S]uppose we cut taxes...the deadweight loss goes away...It provides a one-time bump, but nothing more...The same is true of most regulation.
You can read the whole thing here.

Now, Cochrane's piece is a very good one, as far as conservative policy manifestos go - it is non-polemical, thoughtful, and well-researched. It includes not just standard Republican planks like tax cuts, but also some things like increased spending on research. I think Cochrane would be a great chief economic advisor for the Rubio administration.

Nor is he trying to be dishonest here. Cochrane is a good guy. The focus on "growth", and the tendency to sell static-efficiency policies with paeans to the benefits of multi-decade compounding, is just a bad habit - a holdover from Reagan days. But nevertheless, I think it's sloppy. Policies to boost static efficiency should be able to stand on their own merits; they don't need to be oversold like this.

Sunday, November 01, 2015

Robert Lucas in biology class

Back in August, a bunch of people were talking about Paul Romer and Bob Lucas and history of macro and stuff like that. Somehow I missed this post, where Brad DeLong dug up a Bob Lucas memoir and made fun of Lucas' college biology class exploits. For reference, here's a longer version of Lucas' story:
The only science course I took in college was Natural Sciences II - a biology course. We read a modern anatomy text, and also selections from Darwin, Mendel, and others... 
[T]here was nothing spooky about Mendel’s genetic theories. They were clear, they made some kind of sense (though there was nothing molecular in our Nat Sci II readings), you could work out predictions that would surprise you, and these predictions matched interesting facts. We did a classroom experiment with fruit flies, focused on eyes, and pooled the results. Our assignment was to write up the results in a lab report and compare them to predictions from a Mendelian model. I had not enjoyed the actual lab work but I liked writing the report and spent the better part of my weekend on it. It was the first time I can recall ever working out the predictions of a scientific theory from its basic principles and testing these predictions against experimental evidence. 
On Sunday evening, my friend Mike Schilder asked to copy [my report on the fruit fly experiment]. I agreed...Mike came back in half an hour, and told me: “This is a good report, but you forgot about crossing-over.” “Crossing over” was a term introduced to us to describe a discrepancy between Mendelian theory and certain observations. No doubt there is some underlying biology behind it, but for us it was presented as just a fudge-factor, a label for our ignorance. I was entranced with Mendel’s clean logic, and did not want to see it cluttered up with seemingly arbitrary fudge-factors. “Crossing over is b---s---,” I told Mike. In fact, though, there was a big discrepancy between the Mendelian prediction without crossing over and the proportions we observed in our classroom data, too big to pass over without comment. My report included a long section on experimental error, describing the chaotic scene that generated the data and arguing that errors could have been large enough to reconcile theory and fact. I handed it in as written. Mike, on the other hand, took my report as it stood, except that he replaced my experimental error section with a discussion of crossing over. His report came back with an A. Mine got a C-, with the instructor’s comment: “This is a good report, but you forgot about crossing-over.” 
I don’t think there is anyone who knows me or my work as a mature scientist who would not recognize me in this story. The construction of theoretical models is our way to bring order to the way we think about the world, but the process necessarily involves ignoring some evidence or alternative theories - setting them aside. That can be hard to do - facts are facts - and sometimes my unconscious mind carries out the abstraction for me: I simply fail to see some of the data or some alternative theory. This failing can be costly and embarrassing to me, but I don’t think it has any effect on the advance of knowledge. Others will see the blind spot, as Mike did with crossing-over, keep what is good and correct what is not.
DeLong makes fun of Lucas for rejecting chromosomal crossover. which is indeed a real thing, and the discovery of which won a Nobel in 1933. It does seem kind of lazy, actually. Even before Wikipedia, it wouldn't have been hard to go grab an advanced textbook and look up how chromosomal crossover works. Lucas is unhappy that it's presented as a fudge-factor, but by the time you're an undergrad you should be too old to depend on the teacher for 100% of your knowledge. If something isn't adequately explained to you, go look up how it works! 

Lucas says that this episode demonstrates a professional weakness of his - the tendency to want to over-simplify theory in order to "bring order" to the world. But I think it demonstrates something slightly different and more worrying: selective empiricism.

In his bio class, Lucas did an experiment on fruit fly inheritance. After the results didn't completely agree with the predictions of basic Mendelian theory, he attributed the discrepancies to experimental error - basically, to measurement noise. Fine (if slightly lazy). But then he takes the experimental result as support for the Mendelian theory, despite the presence of all that experimental error!

If the experimental situation was such a "chaotic scene," then any seeming agreement between Mendelian theory and the lab results might well have been an experimental error. So if college-age Lucas had really been an empiricist, he would have said "This experiment was such a chaotic scene that it provides only very weak support for Mendelian theory." Instead, he concludes that the experimental setup was reliable enough to support the theory that makes "some kind of sense" to him, but too unreliable to indicate the presence of additional phenomena like chromosomal crossover.

In other words, Lucas' conclusion from the experiment relied strongly on his own priors. Or if you prefer a frequentist term, he protected the null hypothesis. That has little to do with oversimplification; it's just a manifestation of confirmation bias. You pick the theories that make sense to you, and believe in them until the data decisively refute them.

But hey, who among us didn't have silly ideas in college?

Saturday, October 31, 2015

Rap is capitalist

The economics of rap lyrics would be an interesting subject for a pop econ book.

When I was a kid, I barely listened to rap, and most of what I knew was West Coast "gangsta rap." To me, gangsta rap was basically a form of chivalric fiction -  a glorification of the honorable, violent lifestyle of warriors in an anarchic society. It was all just "Mine enemies besmirched my honor, so I smote them down with the strength of my good right arm." Medieval knights were basically just gangsters, after all, so it makes sense that they'd have similar romantic myths.

I also was dimly aware of protest rap ("Fuck tha Police", Public Enemy, KRS-One, etc.) and 80s dance rap (a variant of goofy 80s dance music).

But as I got older and started to listen to more rap, I noticed one theme that was overwhelmingly common, and seemed to be getting more dominant: the rags-to-riches story. A huge amount of rap these days, and for at least the last ten years, has lyrics that are a variation on: "I was poor, then I made high-quality entertainment products, and now I am rich!"

For example, here's an excerpt from "Started From the Bottom," by Drake:
I done kept it real from the jump
Living at my mama's house we'd argue every mornin' nigga,
I was trying to get it on my own
Working all night, traffic on the way home
And my uncle calling me like "Where ya at?
I gave you the keys told ya bring it right back"
Nigga, I just think it's funny how it goes
Now I'm on the road, half a million for a show
This theme is absolutely ubiquitous. In the late 90s and early 2000s, around the time I started listening to more rap, it seemed to be totally replacing gangsta rap as the dominant lyrical message.

One interesting thing is how overwhelmingly capitalist this theme is. A number of (white) lefty humanities students I meet are quite enamored of rap, viewing it as a form of protest against the structural injustice of the capitalist system. But barely any of that has been popular for many years now. The overwhelming majority of the mainstream popular rap music from the last decade and a half has been about working hard, taking risks, reaping financial rewards, and enjoying a money-driven status-conscious consumerist lifestyle. In other words, a total and utter embrace of the capitalist dream. Of course, the successful business exploits of rappers themselves are now well-known; the capitalist dream goes way beyond music-making.

Modern rap also puts the lie to the idea, popular in right-wing media, that rap encourages a culture of poverty. That was true of gangsta rap - even if he amasses money and power, a gangster is expected to stay in his community and remain true to the lifestyle of the streets (much like the ideal of noble poverty in chivalric fiction). But modern capitalist rap is about hard work and risk-taking in the pursuit of prosperity - exactly the kind of values conservatives ostensibly want people to have. Ludacris, whose music O'Reilly has repeatedly failed to recognize for the satire that it is, even has a song advocating Randian selfishness.

So I think both lefties and conservatives get modern rap fundamentally wrong. It's just Horatio Alger, updated for a wealthier, more liberal, mass-media-driven age.

But rap is about the culture of Black America, and therefore it is about scarcity. You can't have rags-to-riches without the rags. Black America is much poorer than the rest of the country, and is therefore a world defined by the daily experience of scarcity; it's a world where every constraint always binds. That makes for some interesting economics.

For example, the drug trade figures prominently in rappers' stories of how they survived before getting rich. The standard rapper autobiographical tale has the rapper selling drugs until his music career takes off. Usually, this involves taking large risks, since it involves operating outside of the protection of the law. This, of course, demonstrates many of the unintended negative consequences of government prohibition of commodities.

Also, a world of scarcity is a world where transaction costs are too high for many kinds of market institutions to function. For example, equity markets. Here is an excerpt from Future's "Where Ya At":
Where your ass was at, dog, when I was in the Pyrex?
Where your ass was at, dog, when I was drinking Hi-Tech?
Where your ass was at, dog, came through the projects?
Where your ass at we keep that fully loaded contracts?
and also:
Where your ass was at when I was trapping in the stove?
Had to struggle to get where I'm at and sell dope
The song is addressed to someone who wants some kind of unspecified favors from Future now that he's a rich, successful musician, but who refused to help Future when he was a poor, struggling chemical manufacturer. Unfortunately, given the lack of formal equity markets, the dispute over just how much the person helped Future must be resolved by extra-legal means. Informal purchasing contracts, barter, and other economic workarounds also make frequent appearances in rap lyrics.

I don't think I'm reading too much into these songs, either; rappers themselves are obviously acutely aware of the importance of good formal economic institutions.

Rap lyrics paint a picture of how government has influenced the economy of African-American society, especially via the War on Drugs. An economic niche has been carved out and reserved for poor Americans. That niche offers the promise of a middle-class income, but at the price of horrible risk to life and limb. It has encouraged informal marketplaces with weak institutions, leading to high transaction costs and numerous market failures.

No wonder rappers are so proud at having escaped that situation and made it into the regular economy! I know I would be. Perhaps our politicians should listen to more rap music.

Monday, October 26, 2015

Russ Roberts predicts my policy positions

Earlier this year, there was an interesting debate between Russ Roberts of EconTalk and Adam Ozimek of Forbes about ideology and economics. Basically, Roberts (mostly on Twitter) took the cynical position that ideology governs much of people's stances on policy positions, that this is inevitable, and that we should just accept it. Ozimek said no, economists aren't as ideological as Roberts thinks, even commentators in the public sphere. He also said that if you find that your own positions are driven by ideology, it's a sign that maybe you should rethink how you form your positions.

More recently, the argument flared up again. Roberts declared the following:

I then challenged Russ to predict my positions on various policies. Initially I suggested that I would tell him three of my positions, and then name three other issues and ask him to predict the second three. He counter-suggested that he would merely pick a bunch of issues and predict my positions on all of them. I agreed, despite the fact that this was not as good a test of Russ' thesis.

Anyway, though, Russ did come through with the promised predictions, and posted them on Twitter. Here they are (sorry for the weird embedding of reply-tweets):

OK, here is a scorecard. Russ named 13 policy issues and predicted my positions on all of them. I will give 1 point for a correct prediction, 0 points for an incorrect one, and 0.5 points if I don't really have a position or am not really sure. I will also include brief explanations of why I hold the various positions - not because I love hearing myself dispense opinions, but so I can prove that I'm being honest about what I think. Here goes:

1. ACA (Obamacare): I'm not sure. I don't really know much about health care policy. My instinct says that the most important health care problem in America is high excess cost of care, not the number of the uninsured. Obamacare does do some things to try to address the cost problem, and costs do seem to have decelerated somewhat in the last few years, but I just don't know how big of a factor Obamacare has been, or whether the cost slowdown is a permanent thing.

Score: 0.5 pts.

2. Minimum Wage Increase: I favor local experiments with $12 or $15 minimum wages but not a national minimum wage hike - at least, not until the results of the experiments have come in, which will take years. Even then, national minimum wages are generally not great because they don't take local cost differences into account. Also I think EITC dominates minimum wage in most respects, and if paid as a wage subsidy instead of a tax credit would dominate in all respects.

Score: 0 pts.

3. 2009 Stimulus: Yes, probably a good idea. The temporary tax credits didn't do a whole lot, but support for state spending probably did do substantial good. And the stimulus included a substantial amount of money to shore up our badly underfunded infrastructure. Moreover, the deficit (and spending as a percent of GDP) has since come down to normal levels, quieting people's worries that the stimulus was a cover for permanent increases in spending and/or deficits.

Score: 1 pt.

4. Bernanke: Yes, Bernanke did a good job. Monetary policy was probably a factor in averting a Second Great Depression.

Score: 1 pt.

5. Bailouts: Probably something like that was necessary. But I think bailouts were handled badly in the heat of the moment; should have been much harder on management of big banks, to avoid future moral hazard. Still, long-term net costs to the government of most of the bailouts (with the exceptions of AIG and GM) were zero. So I'll give Russ the point.

Score: 1 pt.

6. Higher Taxes on the Rich: I don't have a moral problem with raising taxes on the rich, and I doubt the efficiency cost would be that high (rich people aren't really working to consume). However, I am very pessimistic about our chances of actually getting the money from the rich people, who are very good at avoiding taxes. Taxes on the rich used to be much higher, but the share of tax revenue as a percent of GDP was about the same. I do, however, think a higher inheritance tax would be a great idea. Not only would it tax unproductive "trust fund babies", but it would also probably raise the happiness of many rich people themselves in the long run. I think most rich people - or at least, most "self-made" rich people - don't realize how much their kids will be spoiled by large inheritances. So inheritance taxes can help save rich people from their own mistakes!

Score: 0.5 pts.

7. CFPB: Seems like it has been doing good so far, though too early to tell whether it will remain effective in the long run.

Score: 1 pt.

8. Unemployment Insurance Extension: No. We're way past the recession. Unemployment insurance is an automatic stabilizer, but it does discourage work. And the more work gets discouraged, the more people's skills and resumes and work ethic decays, and the more danger they are in of falling into the ranks of the long-term unemployed.

Score: 0 pts.

9. School Vouchers: My God, what a terrible idea. Privatized education just fails, fails, fails whenever it's tried. History is clear: It does not work. Vouchers are also a form of faux-privatization, where the government pays the bills but doesn't administer the service. That is a clear and unequivocal recipe for ineptitude, waste, fraud, corruption, and inefficiency. Russ is totally right about my position on this one.

Score: 1 pt.

10. More Govt. Funding of Education: Not sure. Don't know how effective this is. It would probably depend crucially on how the money was spent, though I don't know enough to know what the "good" way is.

Score: 0.5 pts.

11. Fannie & Freddie: Bad. These agencies seem like yet another example of faux-privatization. Government provides the funding (in this case, in the form of a guarantee), but doesn't do the administration, leading to bad incentives. Also, I think we incentivize homeownership way too much in this country.

Score: 0 pts.

12. Stricter Gun Control: Probably not. I grew up in small(ish)-town Texas, where tons of people had guns and there weren't any shootings that I ever heard of (though probably some accidents). Canada has relatively high gun ownership and very little crime, including few mass shootings. Brazil has a small fraction of the gun ownership we have, and much higher crime. Meanwhile, we've had a huge drop in crime in the last two decades with no real increase in gun control. Let's try to replicate that success before we start disarming the populace. I will admit that my stance on this has wavered recently, in light of the rash of mass shootings, but I still don't think gun control is likely to have a huge effect. A much, much more important policy for reducing gun death would be to end the War on Drugs.

Score: 0 pts.

13. Trade and Immigration: Russ is right. I'm basically pro-trade and immigration, but not for open borders. I'm definitely more skeptical of free trade than the average economist - I think industrial policy can be useful for developing countries, and I think that trade with countries that manipulate their currencies can sometimes be self-defeating. I also think that international capital flows can be destabilizing and can reduce productivity in some countries. But I will still give Russ the full point.

Score: 1 pt.

Total score: 7.5 out of 13

That is slightly better than random chance. But remember, Russ follows me on Twitter, which gives him an advantage. Also, he was able to choose the issues, which gives him a number of additional advantages - he can choose positions on which a substantial majority of Americans agree, he can select several issues correlated to those on which he is most sure about my position, etc. Given this, I don't think Russ was able to predict my positions that well.

The only obvious cluster of predictive success was on policies relating to the financial crisis. Russ correctly predicted my positions on Bernanke, the bailouts, and the CFPB.

I think this exercise shows a number of different "failure modes" of attempting to model people's policy positions based on an assessment of their ideology. For example:

1. You may fail to assess people's ideology correctly. Russ probably didn't expect that I'd intrinsically value the personal liberty of owning guns. He also probably thought I would be more eager to tax the rich simply in order to reduce inequality (regardless of its efficacy).

2. Your model of ideologies may have errors. Russ probably assumed I'd have ideological reasons to support Fannie and Freddie, because he thinks I'm a liberal, and liberals support Fannie and Freddie. But I'm not sure this is true - I've never seen liberals defend those agencies. Maybe some have, but it doesn't seem to be a pillar of liberal ideology.

3. No model of ideology is perfect. "Liberal" is a name given to a cluster of ideas, but few people precisely fit that cluster. Most people have at least one or two positions that don't toe the ideological or party line. Each individual's ideology is complex, and the standard clusters, like "liberal" and "libertarian", are only approximate models. Russ probably didn't guess that my values would be "liberal" on the CFPB, "libertarian" on gun control, etc. Even I don't know what to call myself, ideologically.

4. People disagree on the facts, not just on values. In general, people with heterogeneous priors about the state of the world will fail to reach agreement even after seeing all of the same evidence. And when people form their policy positions, they consider efficacy of policies, not just whether the intended effect would be a good thing. Russ probably didn't bet that I would be pessimistic about the efficacy of taxing the rich, the usefulness of the ACA's tax credits, or the effectiveness of gun control. He also probably underestimated my uncertainty about the effect of Obamacare on health costs, the usefulness of education spending, and the employment effects of minimum wage hikes.

So anyway, this was a fun exercise, and thanks to Russ for taking the time to do it. I'm not sure how it really relates to the original Roberts-Ozimek debate, but it was interesting nonetheless.


A few people have suggested I was too hard on Russ in my scoring. I gave him 0 points on minimum wage, despite the fact that I like the idea of conducting natural experiments with local minimum wages. And I gave him only 0.5 points on taxing the rich, despite the fact that I favor a higher inheritance tax.

Well, maybe; it's hard to score precisely. Some things are closer to 0.7 or 0.3 than 0.5. I did the best I could. On minimum wages, my opposition to a national minimum wage, and my belief that EITC is just better, made me give it 0 instead of 0.5. In reality it's more like 0.2, rounded down. On taxes-on-the-rich, I gave 0.5, because it really depends on what we use the revenue for. If it's for inefficient subsidies or boondoggles like the F-35, I say *cut* overall taxes on the rich, while shifting from income to inheritance taxes. I don't want to raise taxes on the rich just to "soak the rich" and stamp out inequality, as many do. So I don't think this deserves more than a 0.5. 0.6 at most.

Then there were a couple where I rounded *toward* Russ' prediction. For example, on bailouts, I gave him 1 point, even though I think the bailouts were not executed well and created moral hazard. So that's really more like 0.8, rounded up. And on the stimulus, I think about half of it went to utterly useless (but not particularly harmful) tax credits. So that's more like 0.8 or 0.9, rounded up. My skepticism about the pro-trade consensus probably makes that a 0.9 as well, rounded up.

So overall I think I was fair, and my inevitable roundings came out a wash. Plus, this isn't a scientific test, so changing to 7/13 or 8/13 wouldn't change the basic message, which is about how "ideology cluster" models can fail.

Saturday, October 24, 2015

How China got rich

I do not understand this Tyler Cowen post about Chinese catch-up growth:
It seems obvious to many people that Chinese growth is Solow-like catch-up growth, as the country was applying already-introduced technologies to its development. 
But how many other economies have grown at about ten percent for so long?  Was there not a secret ingredient added to the mix? 
Increasing returns to scale?...Something about Communist Party governance which enabled the corruption to be channeled productively into building more infrastructure rather than holding up progress?  Tiger Mom parenting combined with a relatively meritocratic exam system?... 
More radically, is there some “natural,” culture-neutral rate at which innovations trickle down from the world leaders to the poorer countries?  The diversity of growth rates would seem to indicate not.  Is each country then not innovating — with varying degrees of success — by building its culture-specific net for catching and transmitting global innovations throughout the nation?
I don't know about Tiger Mom parenting, effectively channeled corruption, or "culture-specific nets", whatever those are. I do know, however, that Solow catch-up growth is not about TFP increase or the diffusion of innovation!

There are basically two kinds of catch-up growth. The first is where you cheaply copy innovations from countries at the technological frontier. That's what Tyler is talking about. But the second, Solow catch-up growth, is far simpler - it's just about capital accumulation.

Countries don't start out with capital - they have to build it. So they save some of their production each year and use it to build productive capital (or trade it to other countries for capital). They do this until they have so much capital that they hit the point of diminishing returns, and depreciation starts to get so costly that it doesn't make sense to build any more capital (per worker).

Really simple. Save money, build capital. And that's exactly what China has been doing. Here's a graph from a Federal Reserve Board discussion paper from 2013:

A very smooth exponential increase in the capital-to-labor ratio.

Now of course, in the Solow model, that red line should flatten out and turn into an S-curve eventually, as the K/L ratio reaches the steady state. That day of flattening will be delayed by productivity improvements - i.e., by the other kind of catch-up growth (plus any original innovation China does along the way).

But a lot of Chinese catch-up growth - about two-thirds, according to a standard decomposition - looks just like the classic save-money-and-build-capital thing. China has many more roads, many more railroads, many more cars, many more trucks, many more buildings, many more machine tools, and many more computers per person than it did in 1980 or 2000.

We don't need Tiger moms, culture-specific nets, or increasing returns to scale to explain that.

In fact, though China's growth looks more productivity-driven than some other Asian economies, It is probably less productivity-driven than Japan's catch-up was. If you want to look for Asian countries with cultural secret sauces, I'd start with Japan instead of China. Remember, when we talk about China, we're talking about a country whose per capita GDP is still only about a quarter of the countries at the frontier. And it's not yet clear how rich China will get before its growth slows dramatically.

The question of how technology diffusion happens is, of course, one of the great unsolved and under-studied mysteries of economics.

Update: This paper seems relevant.

Monday, October 19, 2015

Econ critique scorecard

I wrote a post about lazy econ critiques, so some folks on Twitter were asking me "Which critiques do you think are good, and which are not?" So since I'm overjoyed when someone actually cares what I think enough to ask, I decided to make a list! Naturally, the critiques will be simplified and a bit straw-mannish, but you get the idea.

Bad Critiques

1. "Econ should stop pretending to be value-neutral."

Call me crazy, but I think researchers should try to keep facts and values ("positive" and "normative" econ) separate. They won't completely succeed, but they ought to try their best. No matter what your values are, you'll be better able to implement them if you know the facts as much as possible. That doesn't mean economists shouldn't have values, it just means they should try not to let those values interfere with their assessment of the facts.

"But dude, being anti-ideological is an ideology too!"

Mmm, an insightful and trenchant observation. Now go take another bong hit and leave me alone.

2. "Econ should stop pretending to be a science. It's just a SOCIAL science."

What does it even mean to "pretend to be science"? Does history pretend to be science? Does anthropology? Does literature? Social science has different kinds of data from the lab sciences, but you do the best with what you have.

As for the idea that human beings can't be studied scientifically - well, you hear a lot of people say that, but it seems blatantly and obviously wrong. There are lots of models that predict human behavior very well in various areas. Not just in econ, either, but in operations research and other fields. So this critique is just incorrect.

3. "Econ has physics envy."


4. "Economists failed to forecast the financial crisis."

Hey, if you can't forecast, you can't forecast. We can't forecast earthquakes at all (except aftershocks). We can't forecast hurricanes very well. Maybe crises and big recessions are just really hard to predict.

Of course, the argument that econ ignored the importance of the financial system, leverage, etc. was totally valid, but much has changed since 2008 (see next section).

And I guess I'd like to see more academic macroeconomists express concern about the forecasting problem, but instead they've decided to just leave the job of forecasting entirely to the private sector (where tons of people are working on it).

5. "Econ focuses too much on equilibrium, which doesn't really exist."

I've got some news for the outside world. Economists have redefined the word "equilibrium" to mean "any solution of a system of equations." Every solution of every model is called an "equilibrium".

Now, some kinds of economic equilibria probably don't exist very much (see later section).

Critiques That Used To Be Valid But No Longer Are 

1. "Econ ignores the financial system."

Not anymore, they don't!

Critiques That Are Less True Nowadays But Still Somewhat Valid

1. "Econ relies too much on theory, and not enough on data."

Empirics are on the rise. Theory is a smaller part of what econ does these days. I still see large numbers of wanky theory papers at seminars and such. But it seems like more and more of them are either A) job market candidates proving they're smart, or B) old folks having fun because they can. Nowadays, as Paul Romer says, "[I]n the new new equilibrium, empirical work is science; theory is entertainment."

But despite the decreasing flow of new theory, or at least prominent new theory, some econ literatures are still crammed with mutually contradictory models for which the scope conditions are neither known nor specified. And the stock of existing theories is still enormous. In some areas, especially in macro, economists really do have theories that make almost any prediction, with no real way to choose between them except priors and politics. And many economists still have very little problem using modeling assumptions that have already been taken to the data with discouraging results.

Also, as someone pointed out in the comments, econ models often sacrifice too much realism for the sake of tractability. If you have to publish theory papers, but it's too hard to get a result using solid assumptions, you go with silly assumptions. Hopefully the decreasing importance of model-making will decrease the pressure to pump out this kind of silliness.

2. "Econ uses too much math."

Go back and read some papers from the 70s and 80s. They are much more obsessed with pointless mathematical rigor and aping the style of math papers.

Of course, that doesn't mean that econ uses math for good purposes. There's a lot of what Paul Romer calls "mathiness" going around.

3. "Econ is a front for neoliberal/laissez-faire politics."

This was definitely somewhat true for a while. Especially in the Cold War, where economists became part of the ideological opposition to communism. Milton Friedman and Friedrich Hayek really were the public face of the profession for a while. But since then, the profession seems to have drifted in a leftward direction, in terms of economists' views, the profession's public face, and probably the implications of the results in econ papers.

There are still a few old Cold Warriors left, of course. There is still a lot of Koch money being funneled to certain econ departments and think tanks. There is probably still a subset of economists who were drawn to the profession because it seemed more conservative than other areas of academia. And there are still the Austrians, running around pretending to have something to do with the profession.

4. "Econ is sexist."

Yep, but it's clearly getting better, thanks to increased awareness and to the efforts of the AEA and other organizations.

5. "Econ colonizes other social sciences while ignoring their input."

My sense is that the Gary Becker project, of trying to understand social/cultural phenomena with standard econ models, is not doing so hot these days. You still see a lot of this on blogs and in pop econ books, but within the profession it seems generally recognized that things like norms and social preferences drive a lot of social phenomena. The problem with Becker stuff, as I see it, was that it focused too much on very standard, classic types of utility. Once you start bringing in new kinds of utility like norms and social preferences, those utility choices end up driving the results completely, and fancy econ techniques become only marginally useful. But it still sells pop books.

As for not taking input from the other social sciences, econ is still very siloed. Behaviorists have taken some input from psych. And poli sci methods and econ methods are converging so much that they are often indistinguishable at this point, in certain fields. But econ still ignores the existence of sociology entirely. Hopefully, as empirical methods become unified in sociology and econ, this will change.

6. "Econ is enslaved to the financial industry."

There has definitely been some corruption. Incentives matter, obviously. I don't think it was ever that widespread - most economists have nothing to do with finance - but there was a bit. But the AEA instituted a stricter ethics code in 2012, and there is more scrutiny of economists who do sponsored research. So the problem seems like it's being addressed.

7. "Economists assume Rational Expectations, which is B.S."

RE doesn't seem to be a very good assumption, except sometimes in the long run when you also have some lucky properties like time-invariant stochastic processes. It is very true that in the past, economists - especially in macro - were essentially forced to assume RE. Nowadays we are definitely seeing more deviation from that orthodoxy - Bayesian and non-Bayesian learning models, bounded rationality models, and other stuff. This critique is still mostly valid, though.

Valid Critiques

1. "Econ spends too much energy on macro."

Yep. Seems like macro is about a quarter of the econ profession. But given data limitations, a lot of that effort seems to go into making useless models. Macro is the glamour division of econ, but maybe more economists should avoid the glamour and get down in the muck where there are real conclusions to be had.

2. "Econ is obscurantist."

Definitely. This is a problem plaguing much of academia. In math and physics there are natural barriers to entry, because getting stuff right, though possible is just really hard, so only really smart people can enter those fields. In lab sciences, huge fixed costs are the barrier, with a fairly high degree of smarts also required. But in social sciences and humanities, there are fewer natural barriers, so the practitioners have to create them in order to increase their monopoly rents.

One way to do this is hyper-specialization. You see a lot of this in history, for example. Another way is to make up a ton of bullshit neologisms and spend all day arguing over what they mean, which requires defining them in terms of other neologisms, ad infinitum. This seems to constitute most of "critical theory". But a third method is to artificially increase the level of intelligence needed to do work in your field. This seems to be the approach taken by econ, where people who will spend their careers digging up natural experiments to test simple linear models are nevertheless forced to learn what a sigma algebra is. It also might be the reason for the use of purely mathematical methods to study every possible problem, even when those methods may not help or illuminate. It might even be one reason for the turgid, impenetrable style of many econ papers...

3. "Economists are arrogant."

Well, when you get paid more than almost any other academics, constantly sought after for policy advice, and treated as a sage on every conceivable topic from how to find a good restaurant to how to find a good spouse, you do tend to get a little full of yourself! :-)

4. "Economists believe their theories too much."

"Models are just tools for understanding specific situations," says every economist who believes his own models are The Truth And The Way.

5. "Welfare economics is silly."

Yeah, pretty much. Add realistic non-standard preferences and everything changes wildly. Add time-inconsistency and it becomes utterly hopeless.

Critiques Of Whose Validity I Am Not Really Sure

1. "Econ makes people bad, selfish, and immoral."

There's some evidence to this effect, but it doesn't seem conclusive.

2. "Economists need to get out and have more contact with the real world."

I hear people say this, but I really don't know how much contact the average economist has with the real world. I know some who seem to have essentially none, and some who seem to have a lot.

3. "Economies are complex adaptive systems, hence you will never be able to understand them."

...Maybe. *shrugs*

4. "Econ 101 is filling kids' heads with bad ideas."

I'm not sure about this, since Econ 101 must be taught very differently at different schools. The only thing I really know that is constant across schools is the identity of the most popular 101 textbooks. And Mankiw and Krugman's textbooks are pretty good, I think, although they're almost all theory and very little about empirical evidence. That's something I'd like to see change at the 101 level, for sure.

5. "General equlibrium/Walrasian equilibrium sucks."

I'm not sure. I haven't seen a lot of general equilibrium models that look like they've had a high degree of success in explaining observed phenomena. But it's a big, big world out there, and there are LOTS of general equilibrium models, and people studying how these models fit the data.

Anyway, off the top of my head, there's my list. Anyone have any more you'd like me to add? Leave them in the comments!