Libertarianism and it's limitations

I have long held that the weak underbelly of libertarian theory (in the modern form) is how to justify current wealth distributions (and thus hold current property rights inviolate). Brad DeLong does a good job of laying out the mental steps required:

Well, let me sketch out the logic of Robert Nozick's argument for his version of catallaxy as the only just order. It takes only fourteen steps:

1. Nobody is allowed to make utilitarian or consequentialist arguments. Nobody.
2. I mean it: utilitarian or consequentialist arguments--appeals to the greatest good of the greatest number or such--are out-of-order, completely. Don't even think of making one.
3. The only criterion for justice is: what's mine is mine, and nobody can rightly take or tax it from me.
4. Something becomes mine if I make it.
5. Something becomes mine if I trade for it with you if it is yours and if you are a responsible adult.
6. Something is mine if I take it from the common stock of nature as long as I leave enough for latecomers to also take what they want from the common stock of nature.
7. But now everything is owned: the latecomers can't take what they want.
8. It gets worse: everything that is mine is to some degree derived from previous acts of original appropriation--and those were all illegitimate, since they did not leave enough for the latecomers to take what they want from the common stock of nature.
9. So none of my property is legitimate, and nobody I trade with has legitimate title to anything.
10. Oops.
11. I know: I will say that the latecomers would be poorer under a system of propertyless anarchy in which nobody has a right to anything than they are under my system--even though others have gotten to appropriate from nature and they haven't.
12.Therefore they don't have a legitimate beef: they are advantaged rather than disadvantaged by my version of catallaxy, and have no standing to complain.
13. Therefore everything mine is mine, and everything yours is yours, and how dare anybody claim that taxing anything of mine is legitimate!
14. Consequentialist utilitarian argument? What consequentialist utilitarian argument?

To be able to successfully explain Nozickian political philosophy is to face the reality that it is self-parody, or perhaps CALVINBALL!

It is step 11 that seems to be the most interesting to me. Nobody really wants to argue for anarchy but that doesn't mean that pools of wealth are good, either. I suspect a false dichotomy is present as other options exist as well.

Furthermore, the system also ignores the influence of wealth on process. Differences in prestige, corruption and credibility can lead to issues with step 5, as well. So I think we need to be careful about making property rights primary. Obviously ownership has important effects in making a specific person responsible for an item (otherwise you can get the "Tragedy of the Commons" issues). But that effect works best on small pieces of property that are directly used by the person (a car, a house, a factory) and seem to become less helpful on larger scales (like in a corporation where you need to hire a management team who then bring in principal agent concerns).

Definitely something to consider.

Jonathan Chait: "I suppose I didn't express myself as well as I could have." -- repeatedly

Jonathan Chait today dismissed this objection (also discussed by Andrew Gelman) that being easily fired really isn't really part of the definition of a professional with the line:

I think Palko's point is pretty obviously just wordplay, but I suppose I didn't express myself as well as I could have.

Normally I'd let it rest there (it was one of the more trivial objections I've raised about Chait's position on education), but we really ought to note that this is not the first time we've seen this line:

But being "treated like professionals" has to mean both the opportunity to earn a good living if you do well and the potential to be fired if you fail.

You can find the full context of that line and my reaction to it here.

My disconnect with Jon Chait

Let me begin with Jon Chait being one of my favorite writers, a must-read, and a person with whom I agree > 90% of the time. I think that the one area we really differ is with teaching:

I think Palko's point is pretty obviously just wordplay, but I suppose I didn't express myself as well as I could have. Being a professional, to most people, means having the opportunity to gain higher pay and recognition with greater success. Such a system also, almost inevitably, entails the possibility of having some consequences for failure. Teaching is very different than most career paths open to college graduates in that it protects its members from firing even in the case of gross incompetence, and it largely denies them the possibility to rise quickly if they demonstrate superior performance.

Obviously the realistic possibility of being fired for gross incompetence would not in and of itself do much to attract more highly qualified teachers, but the opportunity to receive performance-differentiated pay would.

I think I can put my finger on the point of disconnection here. I would gladly take employment In which hard work and results were rewarded (and people who were bad fits were quietly eased out of the profession). These are my favorite work places, as I never want to be in a role where I am not contributing in a substantive way.

But what I think worries me about the attack on teacher tenure is that it seems to be coupled with a small government/austerity movement. I worry that the endgame is no tenure and less compensation (regardless of performance). That approach would open up higher education to worse incentives than it has now and increase the pressure for a parallel (and private) system. Looking at the cost of higher education, my concern is that the poor might be priced out of the education market.

I might be wrong about this pattern, but many countries have balanced job security with quality education (e.g. Canada, Sweden, Finland). I am not against a new pathway, I am just not sure how to increase compensation (to balance against the loss of job security) in the current environment. But I note that Jon Chait is coupling increased compensation opportunities with decreased job security. A reasonable trade, so long as it doesn't fall victim to the desperate need to shrink government that is in the very air these days.

If there is a path forward, I would actually be happy to revisit this question in a positive way. But why is this a burning question in the middle of a period of austerity budgets when it is unclear where the revenue for such reforms would come from?

Another This American Life episode you ought to listen to...

Unless you heard it the first time it ran. The title is "Million Dollar Idea" and it has two stories of interest to OE readers, one on MIT's elevator pitch contest and another memorable piece on the treacherous water of medical PR. On top of that you get an incredible story of a man who figured out a way to rig a game show without actually cheating and the origin of the phrase "the heroin's doing the heavy lifting."

The download is free for the next few days, but you should throw them a few bucks if you can spare it. They do good work.

The discussion continues

Andrew Gelman joins the debate about professionalism and job security. Gelman's posts pretty much always generate high quality comment threads so this will be one to watch.

Declining Salaries for Writers

This is a very sad blog post on the state of pay for role playing game writers. In particular:

Fifteen years ago, I wrote RPGs for 3 cents a word. In these more modern times, though, the pay rate is... wait, it's still 3 cents a word. Come to think of it, the pay hasn't changed much from the golden age of pulps and early sci-fi. The pay is the same as from the 1950s? What's wrong with this picture?
One argument is 'that is all the market will bear'. Okay, but in that same timeframe, other forms of writing (particularly journalism and non-fiction) moved on to dollar-a-word. Sure, we're in a dip for that sort of writing too, with rates often dropped to half that. But a pair o' quarters per word is still a damn site better than RPGing's 3-cents-per.

The part that makes this discussion so painful is that the quality of writing can really make or break what is fundamentally a book project. This is one place where markets really don't seem to be able to adapt as the low rates often lead to weak product. Maybe this is just a consequence of niche markets?

Paul Krugman should continue doing more productive things than watching TV

I think this anonymous commenter may be having a little fun here (The "I said good day" seems a bit over the top), but in case my fondness for obscure references really did go too far, let me close caption my earlier post.

Recently Paul Krugman wrote a smart piece decrying the proliferation of appeal to authority arguments which he closed with the following:

But in any case, this is never an appropriate way to argue — least of all at a time like this, when events have strongly suggested that a lot of work in economics these past few decades, very much including the work on which these guys’ reputations are based, was on the wrong track.

Do I do this myself? Probably on occasion, when I don’t catch myself. But I try not to. I would say that commenters who begin with “I can’t believe that a Nobel prize winner doesn’t understand that …” might want to think a bit harder; mostly, though not always, I have actually thought whatever you’re saying through, and the obvious fallacy you think you’ve found, isn’t. But “Me big famous economist, you nobody” is not a valid argument.

(See John Quiggin and Noah Smith for more on the incident that prompted this)

Having a weakness for snark, I immediately started looking for a silly criticism of Krugman that I could preface with the phrase “I can’t believe that a Nobel prize winner.." I got an opportunity today when Krugman referred to gibberish that sounds like Swedish. The theatrical term for this sort of thing is doubletalk and the acknowledged master of the form is Sid Caesar.

I'm also always on the lookout for excuses to bring in a favorite video clip, like this one from Whose Line Is It Anyway which provides a great example of the form and nicely shows the respect and affection the cast feel for Caesar.



Just to be absolutely clear, I was:

1. Looking for an excuse to use the "Nobel Prize winner" line in an obviously silly and trivial context;

2. Post the Caesar clip;

3. Link to yet another sharp and well-written Krugman post.

In other words, it was a joke.

(And for the record, if I make a disparaging comment about Felix Salmon followed a Kovacs clip, I'll be joking then too.)

Worth keeping in mind

Predictions are hard and sometimes the completely unexpected happens:

You Know, If You Had Told Me a Year Ago That on August 5, 2011 S&P Would Downgrade the U.S, and the 10-Yr Treasury Would Yield 2.5%... I would have laughed at you. I would have said that while there were possible futures in which each of those things happened, they were disjoint futures.

It is humbling to recall just how different events can be from our best possible projections.

A classic natural experiment

This post was requested by Mark.

One interesting natural experiment in diet and exercise was rationing in wartime Britain where the population ate less and exercised more (petrol was also rationed). The results were fairly impressive:

As a result of the balanced diet provided by rationing, children's health improved and on average they were taller and heavier than before the war.

The incidence of anaemia and tooth decay dropped - while the average age at which people died from natural causes increased, despite the stresses and strains of war.

The principles behind rationing sound surprisingly similar to today's health messages: reduced consumption of meat, fats and sugar and more of the sort of foods, such as vegetables, which provide essential vitamins and minerals.

this led to other health benefits:

A war-time regiment would also help reduce your risk of heart disease, Type 2 diabetes and high blood pressure, as well as cancers such as post-menopausal breast cancer, kidney and colon cancer.

The same outcome of rationing was seen in Australia:

The government feared that rationing would result in deterioration in health on the home front but, in fact, the outcome was positive. Rationing resulted in a decline in diet related problems like obesity, diabetes and heart disease.

So it is clear, that whether or not the wartime Commonwealth diet was optimal, there is a known population-level intervention that will result in better health outcomes: restriction of food.

Now, as a matter of public policy, I am clearly opposed to doing this in a coercive manner (but then I still see tobacco smoking as a personal choice). But it is clear that relatively simple diets can have surprisingly positive health benefits.

Paul Krugman needs to watch more TV

From today's Conscience of a Liberal:

Think of it this way: there was a time when you could say that the right had a model of how the economy worked. A silly model, yes, since it depended on implausibly large effects of marginal tax rates on incentives. Still, supply-side economics had a point of sorts.

But can you discern any model in what Malpass wrote, or for that matter in almost anything on the WSJ editorial page? I can’t. All I see is a bunch of prejudices, strung together with some vaguely economistic-sounding phrases, something like someone talking gibberish that sort of sounds like Swedish. In the world according to the WSJ, low taxes are good (unless the people involved are low income lucky duckies), regulation bad, low inflation good, low interest rates bad, strong dollar good — and don’t ask why.

I can't believe a Nobel Prize-winning economist would get this wrong. It's not gibberish; it's double-talk, and this is how it's done:



Co-posted at Mippyville TV.

See update here.

"No linear relationship" does not mean "no relationship"

There's a dangerous type of argument that I've noticed recently: pundits will argue that a certain relationship is non-linear and use this to justify any claim they want to make about that relationship.

The example of the hour is the Laffer curve. The basic concept is so simple we expect every high school algebra student to grasp it: you have a function with a global maxima somewhere between zero and one; if you're to the left of that maxima you want to move to the right; if you're to the right you want to the left. Let me draw a picture I could explain it to reasonably attentive elementary schoolers. (Dynamic laffer effects are a different story that I'll leave to Noah Smith.)

We can argue where the peak is (or where it was in 1960 or 1980), but once you've accepted the basic concept, you have to accept the move-toward-the-peak implication. Despite this, you will routinely see supposedly knowledgeable people on television, in print and online using the Laffer Curve to justify the blanket statement that cutting taxes raises revenue.

We see something analogous with health and fitness journalism. The relationship between calories and weight loss is not linear. Neither is the relationship between aerobic exercise and weight loss. In both cases, it's a strong relationship and you generally won't get in trouble assuming that it's strictly monotonic (within reasonable ranges, of course).

Unless you're an athlete in training or a model getting ready for a swimsuit shoot, you can probably assume that eating less and exercising more will cause you to lose weight, but we still get endless experts citing phenomena like metabolism responding to diet and then concluding that there's no point in going to the gym and passing up that pound o' fries.

p.s. Joseph has a great example of how calorie consumption tends to dominate factors like diet make-up. If he'll answer his damned phone I'll see if we can get a post out of him.

US Credit Rating

From Talking Points Memo:

From the S&P release ...

Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act.

I am skeptical, as I said to Mark, that this measure will influence other countries all that much. Japan switched to AA+ and that did not hurt the US, rather it helped. What it really does it mean about 55% of the AAA sovereign debt in the world just vanished. The UK, Canada, Sweden . . . all of these countries are about to pay a lot less for their debt. That actually makes them more creditworthy and not less so so.

By the way, what do all of these countries have in common? They are willing to raise taxes to pay for debt. I remember when Canada began paying down its debt via a national sales tax. Unpopular as the move was, it moved the country firmly into surplus and prevented a ratings cut.

It is quite possible for a country to pay down their debt via internal revenue generation. The survivors on the AAA list are the countries that have been willing to make hard decisions to raise revenue rather than appeal for help.

Question for economic modelers

Has anyone out there run a simulation of what the economy would look like today if two of the big three auto makers had gone under in 2009?

If America's not AAA, is anybody?

I don't mean that in a jingoistic way; I'm simply wondering where the safe harbors are in the aftermath of a US default. The people at Marketplace (which has been doing some great work lately) have been thinking along the same lines:

Heidi Moore: They downgraded the U.S. credit rating. It's like cutting our credit score. We went from a AAA to a AA+ -- which is more than people expected; people thought we'd just be a AA. The importance of this is largely psychological -- we've always been a AAA country. But now that we are a AA+, that's what everyone else will be too. I think everyone else will follow us.

Carney agreed that other countries would be downgraded as well:

John Carney: Remember, we're the country that supports people when they get in trouble. If our credit rating is lower, so is everybody else's.

Grade Inflation

An early stage professor posted this view on grade inflation:

I have to agree with the article that students do tend to expect A's. But mainly because they work hard, and the expectation is that if you work hard and learn the material, you should get an A. I don't really see this grade inflation as a problem. To me, an A grade means you learned the material and showed proficiency in it, not that you performed better than XX% of your classmates. Grades are not a ranking tool, but an indication of proficiency. I think that having a clear expectation of what you need to do to get an A makes it more likely that students will work harder to meet these requirements and learn the material better.

I think that this really is where the grade inflation is coming from. When I was a wee one, back in my home country, the decoding scheme for grades was:

A: Exceptional Work above and beyond expectations
B: Clear Mastery of material and met all expectations
C: Deficiency in one or more aspects of the course
D: Don't take any more courses in this area
F: Fail (with attendant consequences)

I think that the shift to A's being regarded as showing proficiency has been part of the general creep in academic culture. After all, an A average is starting to look like a requirement for entry to graduate school. I remember when a straight B average was solid evidence that a student was ready for graduate level work.

On the other hand, viewed in this light there isn't any real inflation. We have just changed the definitions of performance and introduced right truncation to make it impossible to pick out the really exceptional students by transcripts alone. I, of course, hate this approach but I can see why it might be popular if the focus is "did they get it or not" and reducing the arms race to demonstrate exceptional performance.

Question for Jonathan Chait

From today's post trying to rebut a movie star's comments (not Chait's proudest moment):

The old liberal slogan always demanded that we "treat teachers like professionals." That entails some measure of accountability -- we can debate the metrics -- which allows both that very bad teachers be fired and that very good ones can obtain greater pay and recognition. That's the definition of a professional career track, and the current absence of it is what drives most of the best college graduates into other professions.

Putting aside the compensation question for the moment, Chait is listing being easy to fire as part of the definition of being a professional. Does anyone else find that a bit odd?

Krugman backslides

Just when it looked like the worst of the punning was over, we get this (which is worth reading, despite the title).

(Still better than "Screw your core-age to the sticking place.")

Excuses, excuses, excuses

Just moved so I'm still threading my way around a maze of boxes and I'm getting my wi-fi from the Starbucks around the corner (which wouldn't be so bad if I didn't hate their coffee), so this won't be much of a post but the Matt Yglesias argument Joseph alludes to just doesn't hold up.

There is plenty of support for merit pay among center and right segments, people who are taking Yglesias's exact position here, so his statement is wrong when applied to the general population. Of course, Yglesias is taking about fighting among progressives so the anti-tax line makes even less sense.

Put bluntly (because my laptop's almost out of power), Yglesias is trying to explain why so many progressives are offended by his movement reformer stand without admitting that he might be the one contradicting progressive principles.

A return to education as a topic

This is an interesting perspective from Matt Yglesias about the tensions in the education reform movement:

The ambiguous policy upshot of this is precisely what makes intra-progressive fights over education policy so fraught. The exact same evidence which suggests that we should offer higher salaries to teachers also suggests that many of our current teachers are sub-par. It’s easy to assemble a “let’s spend less money on teachers” coalition, which is just conventional anti-tax politics. And it’s easy to assemble a “let’s give more money to the teachers we have” coalition, which is conventional service provider politics. What’s tricky is a “let’s spend more money precisely in order to get different people in this field” coalition.

I think that there is another angle to all of this discussion that is often forgotten. Current teachers include people who sacrificed earning potential for long-term job security (and did so in an environment where this was a part of their explicit employment contracts). The modern vogue for reneging on promises that are not inconvenient is not helpful to the debate. There may be cases where this is necessary, but it should be a painful last resort and not a routine talking point (see state pensions and the rhetoric about them).

EDIT: Also worth reading is Dana Goldstein's column

Are we entering the Post-coalition age of American politics?

Probably not, but...

Of the many bizarre turns of the past few weeks, the one that really shocked me was the Republicans agreeing to a deal that will very probably end up gutting the Pentagon's budget. Over less that a year, the GOP has alienated seniors by threatening Medicare, scared the hell out of the financial sector with a threatened shut down, and pissed off the military and related industries by disproportionately targeting defense for deficit reduction.

Perhaps this simply fear of Tea Party retaliation or perhaps the party's stated concern for the deficit was more sincere than most of us realized, but either way this pushes the current political situation even further out of the range of data.

Check out Jonathan Chait's sharp summary here.

Is health care choice important?

Aaron Carroll has a nice overview of the situation in Florida where people who campaigned on health care choice seem to be removing for state employees. He quotes this news story:

Florida is changing part of its state-employee health insurance program to offer only one HMO in each county. The state Department of Management Services, which oversees employee insurance, said changes in the program would save an estimated $400 million over two years. The changes also would require thousands of state employees to switch to different HMOs, a process that would begin in late September.

I wonder if these positions are more harmonious than they appear on first glance. If the goal is to make government service less appealing, reducing health care choice (and thus competition) makes these positions less desirable.

Math issues

Felix Salmon's last two posts are brilliant. I strongly recommend reading both of these posts. Seriously!

Heck, I am likely to come back and post on them later today if I have enough time. Paul Krugman and Mark Thoma might be representing the outrage of progressives, but Felix is documenting the damage coldly and dispassionately.

However, this is a statistics blog. So I wanted to visit a comment on one of Felix Salmon's posts:

The top 10% of Americans pays 45% of all taxes, a higher proportion by far than any other country, while the American top 10% earns only 33% of total income.

By comparison, the 10% of the UK earns 32% of total income and pays only 38% of all taxes. And the UK is one of the more progressively taxed countries. The taxes paid by the top 10% of other European countries are on average around 30% of total taxes.

As an epidemiologist (a field that is in love with proportions), I realize how misleading they can be. In the example above, the rich earn roughly the same amount of income. But they pay a higher proportion of taxes. However, is it the proportion of taxes that matters or the absolute tax burden?

Consider a simple example. In two countries there are 10 people. Of these people, nine make 10 units of income per year and one makes 50 unites of income. This is pretty close to the income distribution of the US and UK cited above.

In country A, the nine people pay 2 units of tax per year and the rich person pays 16 units of tax. Total tax revenues are 34 units (or 24% of GDP). The rich definitely pay more as a proportion of taxes but pay 47% of the taxes overall.

In country B, they pay something more like the OECD average (35%). So the nine people pay 3.5 units of tax (31.5) and the rich pay 17.5 units of tax. That is 49 units of tax collected (exactly 35%). The rich pay 36% of the tax burden.

Which country is a low tax country for rich people to live in? One where they pay an effective tax rate of 32% versus 35%? Or one where they pay a higher proportion of total taxes collected?

The trick here is that the US total tax burden is so light that the top 10% can both pay a higher proportion of taxes than in other countries and, at the same time, still pay less absolute tax. That can make proportional analysis potentially misleading.

Apologies to Mr. Raz

I've never been a big fan of NPR's Guy Raz but his handling of the coverage of the debt crisis was very good today, peaking with this interview with Felix Salmon.

Overly-trusting Straussians

There is a strong strain of Straussianism in the conservative movement. Of course, not all prominent conservative intellectuals believe that you have to lie and oversimplify to move the masses in the best direction for society, but pretty much all have accepted and, more importantly, internalized the fact that many of their colleagues do believe in the need for these noble lies.

Once you've internalized the idea that people in your circle are smart and sane but occasionally make ludicrous statements for the benefit of the crowds (call it the Elsinore strategy -- feigning madness), it becomes easy to ignore craziness in your own party, particularly when there's a penalty for suggesting the alternative (see Bartlett and Frum).

In other words, we have something like conservation of cynicism. The Straussian assumes the worst about the masses, but has an excuse to assume the best about allies, even when they give every indication of being crazy and/or stupid. The result is that it has taken smart, sane conservatives far too long to acknowledge what's going on with House Republicans.

The consequences of this lack of cynicism is spelled out in detail in excellent posts by Jon Chait and Paul Krugman.

A view into the queue

Still in the middle of a move but here are some of the posts I'm trying to find time for. Given the speed at which events are moving, I thought I should at least get something out in preview form.

-- The worst thing about the Tea Party from a Republican perspective is not the movement's extremism. If a (slightly modified) modified stag hunt is an appropriate analogy, players who decrease the chances of a successful hunt (by demanding you take unpopular positions) and who are disloyal (bolting to third party candidates when offended) are the worst possible allies.

-- When Straussianism makes people insufficiently cynical. Conservative thinkers may have underestimated the danger of a default crisis because they assumed the rhetoric coming out of the Republicans in the house was fodder for the masses rather than sincere statements.

-- Fox News and flawed control systems.

-- Political science models may tell us that spouses don't effect candidates' chances, but how far out of the range of data is Michelle Bachmann's husband?

How to improve health care for the poor

I really want to make sure that this post from Megan McArdle isn't overlooked in the discussion of the debt ceiling. There are not a lot of bloggers who have been in my situation in my 20's -- desperately poor and with a difficult medical condition (that was not my fault). But she has.

As a result, she has the correct instincts for services that would really assist the poor:

This is actually not inconsistent with other findings. For example, every time we get a health care expansion, people predict large falls in emergency room usage. Supposedly, we'll save huge sums by shifting people from expensive ER visits to cheap primary care sessions. Unfortunately, the savings have been elusive; in Massachusetts, the largest such experiment we have to date, ER visits actually rose.

Why? ER's are much more convenient. The working poor usually have much less flexibility in their schedules than the middle class. They work shifts, they may need a doctor's note to miss work, and if they don't work, they often don't get paid.

Note that this implies a totally different solution to the problem of "non-emergent ER visits": urgent care or "Minute Clinics" that work odd hours. Otherwise, you just cram even more people into the same ER space*. It is easy to come up with "Just So" stories in health care. The reforms always sound wonderful, and the benefits always unfold in a beautifully logical way. Unfortunately, people, and reality, are rarely as predictable as the models.

When you are short of money for food, leaving work to sit in an MDs office is a major sacrifice. If you are here in the Southeast and do not drive then the cost in time to make it via public transit can be huge. I have seen sick days used as a part of evaluations. I have worked in a small business where I was the only person in the store and leaving it would cause a crisis.

If you are dying of a myocardial infarct then leaving your job is clearly the right decision. But I would leg infections that started small . . . and sometimes did not progress. If I was able to get an antibiotics prescription then I'd avoid the ER.

I have tried going to "minute clinics" but they all refuse to treat because it was not on the symptom list. A last minute appointment at an MDs office was a huge issue.

I saw some good signs of improvement in Seattle where they put an urgent care clinic (open until something like 1 am) right next to the ER. I joined that HMO and it made a huge difference in my quality of life when a medical event happened.

These days I am a professor and these issues are lessened. But I think it is worth keeping in mind just how crucial these services can be for the poor, even if they are unpopular with people who work a 9 to 5 schedule.

"Looks like I picked the wrong week to quit sniffing glue"

A busy, busy end of July here on the West Coast, professionally, personally and socially. The movers come tomorrow. Perhaps I can get the OE posting queue moving shortly after that.

Words of Wisdom -- Weekend Edition

Felix Salmon is unimpressed with Alan Greenspan and suggests a different perspective:

In fact, the opposite is true — ask anybody who has experienced both wealth and poverty. When you’re wealthy — when you have a nice capital buffer to absorb mistakes — you don’t worry so much about running risks, and you’re significantly happier than when you’re poor and you have to be much more worried about where your money might end up. Insurance improves living standards, it doesn’t detract from them. Let’s have more of it.

Too busy to give this the write-up it deserves

But NPR's morning edition has been doing a great series on failing schools. Having taught in the Mississippi Delta, this piece on rural schools struck particularly close to home.

Restoring my faith in public radio

Just when I was losing faith in the medium on this story, American Public Media's Marketplace had segments today digging into the impact of the (manufactured) debt crisis, both in terms of immediate unemployment and long term effects.

Definitely worth your time.

A surprisingly blunt view of finance

I really need to blog on a health policy post by Megan McArdle. But in the meantime, here is a surprisingly sane point of view on the debt ceiling crisis:

My reading of what the ratings agencies have said is that if the GOP somehow manages to force the Democrats to do everything their way, this will not secure our AAA; it will guarantee that we lose it, because it will show that we are currently unable to make the ugly bipartisan compromises that long-term budget balance requires, and raises the risk that sometime in the not-very-distant future, the other party will retaliate by threatening default. That's what Wall Street cares about. Not saving social security. Not lower spending. They just care about getting enough consensus to keep the checks flowing.

I think it is easy to over-estimate ideology among members of wall street because a few of them have decided to spend their wealth on political activism. But, for most businesses (especially in banking), the goal seems to be getting paid and it is worth remembering that. Narrowly averting a disaster is only of limited value if structural incentives (and poor journalism) ensure that it happens again and again.

Why we're where we are

When journalists are determined to find a way to assign equal blame to both sides in every crisis and foul-up, there can be no real accountability and without accountability, a democracy cannot function. If reporters were willing to go where the story led them instead of slavishly following a perverted view of 'fairness,' then politicians would face some consequence for gross irresponsibility.

Paul Krugman recently said

And look at what this does to incentives: no matter how badly Republicans behave, they don’t draw condemnation from the Very Serious People. All you get is tut-tutting about how politics is awful, and if only we had a third party to install Mike Bloomberg as dictator president all would be well.

Pundits who won’t call out extremism without pretending that it’s symmetric aren’t a big part of our problem, but they are a part of our problem.

He's wrong. They and journalists like the Washington Post's Felicia Sonmez are a big part of our problem and more; they are a necessary condition for the mess we're in.

Josh Marshall takes an in depth look at this idea here.

Virtuous Circles

The ever interesting Felix Salmon has reasons for optimism about the future of Paywalls. In particular, he notes how the porous paywall of the NYT beats the FT paywall (which is consumer unfriendly and annoying).

But even better is the marketing opportunity that this sort of paywall creates:

Those paying digital subscribers, however, are much more valuable than their subscription streams alone would suggest. They’re hugely loyal, they read loads of stories, they’re well-heeled, and advertisers will pay a premium to reach them. Judging by the second-quarter results, which is admittedly early days, it seems as though total digital ad revenues are going up, not down, as subscriptions get introduced: the holy grail of paywalls.

This is a principle worth keeping in mind -- there are virtuous circles as well as vicious ones. Not only does the NYT get to collect predictable revenue from a steady stream of subscribers (and predictable revenue is worth a lot), it also gets an advertising boost from being able to identify these readers. It's an amazing outcome and I remain delighted that it worked out for them.

Now I wonder if we could try and apply these principles to public health. How can we create incentives where patients identify themselves in ways that save money and are happy to do so? Because when you manage to get these sorts of two for one punches, efficiency is massively improved.

When all of your studies are ecological

Consider this example:

By contrast, in England during the same period, the nobility and gentry didn’t conspire with the crown to exempt themselves from taxation. Instead, thanks to a number of factors—greater social solidarity, a keener sense of foreign threats, reforms that made the government itself less corrupt, and the principle of taxation only with the consent of Parliament—the wealthy of England willingly accepted higher taxes on themselves. As a result, government spending in England rose from 11 percent of GDP in the late seventeenth century to 30 percent during some years in the eighteenth century. That’s higher than U.S. federal spending today. These higher taxes on the wealthy in England, Fukuyama notes, “did not, needless to say, stifle the capitalist revolution.”

This is a persistent problem in the evaluation of programs: how do you determine the direction of causality in an ecological study? Did England become wealthy and thus feel free to raise taxes or did raising taxes allow England to prosper and become wealthy? The same issue arises with debating points made closer in time:

The idea that the economy will suffer if we modestly raise taxes on upper-income Americans is belied by recent history: we increased tax rates on the rich in 1993 and the economy created more than twenty-two million jobs; we cut them in 2001 and the economy created fewer than seven million jobs.

But it is clear that there were a lot of confounding variables between the two time periods. Still, it is interesting that most people seem to immediately see a link between raising taxes and lower economic growth. Why are we so sure about this link, given the weak relation seen historically?

It's a really challenging problem and, worst of all, one that data can't really help us with.

Mr. Glass vs. the Patent Troll

This American Life takes on Nathan Myhrvold's Intellectual Ventures. What more do you need?

A busy morning

But I'm going to try to find time soon to say something about:

This could be a mistake, argues Paul D. Spudis in “The Case for Renewed Human Exploration of the Moon.” In his study, Spudis argues that Moon exploration could reinvigorate the space program and provide a starting point for future research missions. Spudis suggests using the Moon as a testing ground for new technologies and strategies. He says the Moon’s geological make-up can teach us more about other planets and Earth’s own history. And since it has no atmosphere and a dark sky, the Moon could serve as a better home base for astronomical observation. Furthermore, Spudis specifically makes the case for human exploration, rather than just unmanned missions. As an example, he argues that trained scientists can give context to the evidence they collect, whereas robots just pick rock samples at random. He writes, “[Robots] cannot undertake scientific study, make new observations and let these observations guide subsequent work and iteratively apply the lessons learned to an evolving conceptual paradigm […] Although significant gathering of data can be done with robots, conducting science in space requires scientists.” While Spudis is realistic about the political and financial hurdles, he maintains there’s only one way to prevent NASA’s demise: “We must return people to the Moon.”

from TNR

and

There are trigger issues in which the GOP no longer reflects the thinking of mainstream Americans of either party. In Tuesday's charade as the House put the Tea Party debt legislation to a vote, what we saw was an example of the kind of coalition voting common in Europe, where separate parties arrive at an agreement to govern. There are now essentially three parties in Congress: Democrats, Republicans, and the Tea Party. Reasonable Republicans with a sense of the possible do not subscribe to the Tea Party's implacable ideology, but they feel they must deal with it to placate its zealots. They are essentially in a coalition with a third party.

from Roger Ebert

And of course, this.

Different visions of Health Care

One question that has been pretty persistently part of US public health efforts has been a fundamental disagreement about the role of government in health care. This shows up in all sorts of interesting places but has new entered the debt ceiling negotiations. From Paul Krugman:

It turns out that in the final stages of the debt negotiations, Republicans suddenly added a new demand — a trigger that would end up eliminating the individual mandate in health care reform.

This is telling, in a couple of ways.

First, the health care mandate has nothing to do with debt and deficits. So this is naked blackmail: the GOP is trying to use the threat of financial catastrophe to impose its policy vision, even in areas that have nothing to do with the issue at hand, a vision that it lacks the votes to enact through normal legislation.

Second, this is a demand Obama can’t accept, unless he plans on changing his party registration. Health reform doesn’t work without a mandate (remember the primary? Maybe better not to). And if health reform is undermined, Obama will have achieved nothing. So by adding this demand, Republicans were in effect saying no deal . . .

The alternative interpretation is that there is a large segment of the US population that would rather freedom to choose health care than efficient health care. The focus on individual decisions over public well being has implications on a whole host of medical decisions affecting issues like: disease management, fraudulent medications, antibiotic resistance and so forth.

It is hard to see a clear road forward when there is a legitimate difference in such basic questions of health care organization.

Implications of not raising the debt ceiling

Even Megan McArdle is asking hard questions about the debt ceiling and the consequences of paying just interest on the debt, medicare, social security and military salaries:

•You just cut the IRS and all the accountants at Treasury, which means that the actual revenue you have to spend is $0.
•The nation's nuclear arsenal is no longer being watched or maintained
•The doors of federal prisons have been thrown open, because none of the guards will work without being paid, and the vendors will not deliver food, medical supplies, electricity,etc.
•The border control stations are entirely unmanned, so anyone who can buy a plane ticket, or stroll across the Mexican border, is entering the country. All the illegal immigrants currently in detention are released, since we don't have the money to put them on a plane, and we cannot actually simply leave them in a cell without electricity, sanitation, or food to see what happens.
•All of our troops stationed abroad quickly run out of electricity or fuel. Many of them are sitting in a desert with billions worth of equipment, and no way to get themselves or their equipment back to the US.
•Our embassies are no longer operating, which will make things difficult for foreign travellers
•No federal emergency assistance, or help fighting things like wildfires or floods. Sorry, tornado people! Sorry, wildfire victims! Try to live in the northeast next time!
•Housing projects shut down, and Section 8 vouchers are not paid. Families hit the streets.
•The money your local school district was expecting at the October 1 commencement of the 2012 fiscal year does not materialize, making it unclear who's going to be teaching your kids without a special property tax assessment.
•The market for guaranteed student loans plunges into chaos. Hope your kid wasn't going to college this year!
•The mortgage market evaporates. Hope you didn't need to buy or sell a house!
•The FDIC and the PBGC suddenly don't have a government backstop for their funds, which has all sorts of interesting implications for your bank account.
•The TSA shuts down. Yay! But don't worry about terrorist attacks, you TSA-lovers, because air traffic control shut down too. Hope you don't have a vacation planned in August, much less any work travel.
•Unemployment money is no longer going to the states, which means that pretty soon, it won't be going to the unemployed people.

I think that this post highlights just how desperately we need to increase tax revenues. Even if we might one day repeal them in the face of a lower burden of government spending, the most logical equilibrium seems to be to pay more now and reduce taxes once we work out what we don't want the government to do.

I also have no patience for the dynamic Laffer Curve -- as Noah Smith so nicely pointed out, that line of argument rather suggests Sub-Saharan Africa should have emerged as the great power after the horrible tax policy of the European, Asian, and American nations. Taxes can have bad effects but so can persistent unemployment!

The irrationality of engineers

Andrew Gelman has a new post pointing out a contradiction that keeps popping up in the pop econ world. You should read the whole piece (as well as Joseph's take on it) but this part in particular caught my eye:

The key, I believe, is that "rationality" is a good thing. We all like to associate with good things, right? Argument 1 has a populist feel (people are rational!) and argument 2 has an elitist feel (economists are special!). But both are ways of associating oneself with rationality. It's almost like the important thing is to be in the same room with rationality; it hardly matters whether you yourself are the exemplar of rationality, or whether you're celebrating the rationality of others.

This is an excellent point but I'd go further. The economist's 'rationality' is, as mentioned before, analogous to the statistician's 'significance.' Both are highly specific terms that are just close enough to their general usage to get people into trouble.

I previously gave some silly examples of 'irrational' decision making, here's a more practical one: you're an engineer designing a missile. You're concerned with accuracy, range, speed, payload and cost. The 'rational' approach would go something like this -- for each attribute, come up with a function that assigns its level a dollar value, then pick design x where a(x) + r(x) +s(x) + p(x) - cost(x) is optimized. I suspect that most engineers would find this 'rational' approach highly irrational and would usually choose, instead, to hold three or four of these attributes to an acceptable threshold and optimize the remaining one or two. (check out the cheap beer post for more on thresholds and irrationality.)

There's nothing wrong with having a specialized, field specific definition for rationality; there is something wrong with using confusion over different meanings of the term to make yourself look good.

Popular Micro-economics

Andrew Gelman writes:

Pop economists (or, at least, pop micro-economists) are often making one of two arguments:

1. People are rational and respond to incentives. Behavior that looks irrational is actually completely rational once you think like an economist.

2. People are irrational and they need economists, with their open minds, to show them how to be rational and efficient.

Argument 1 is associated with "why do they do that?" sorts of puzzles. Why do they charge so much for candy at the movie theater, why are airline ticket prices such a mess, why are people drug addicts, etc. The usual answer is that there's some rational reason for what seems like silly or self-destructive behavior.

Argument 2 is associated with "we can do better" claims such as why we should fire 80% of public-schools teachers or Moneyball-style stories about how some clever entrepreneur has made a zillion dollars by exploiting some inefficiency in the market.

[sorry for the general link, there seemed to be technical issue linking to the specific article]

I think that this insight is quite compelling and exposes a real issue with popular micro-economics. After all, these two positions mostly contradict each other!

I see this contraction arising for different reasons than Andrew does. I think that economists are often forced to make strong assumptions in order to deal with the sorts of complex problems that they look at. So they presume rationality on the part of all actors when trying to explain problems (i.e., descprive work). But when they want to improve matters they shift and reject this assumption (as it would suggest everything is already optimized). So they make different (strong and unverifiable) assumptions depending on whether they are trying to explain behavior or give guidence to improve outcomes.

What seems to be more alarming to me that is that this pool of economists often don't "sanity check" the effect size of their analysis. Perhaps it is my background in epidemiology, but if I see a hazard ratio of 5 then I am immediately suspicious that it is too good to be true. However, Ray Fisman can see an analysis that suggests firing 80% of teachers and not necessarily wonder if perhaps there is an overly strong assumption in his analysis (like the pool of new potential teachers not having finite limits or in the real sensitivity of the evaluation process).

Anybody's culpa?

In what might be considered a commissioned blog post, Jonathan Robinson manages to dig up some comments that Steven Levitt would probably like to rebury.



It is, of course, possible to make too much of a bad call or even a bad argument. If the penalty for being wrong is too high it inhibits the conversation, but there does have to be some kind of accountability. When you're this far off on something this big, you really ought to do something: modify your reasoning, concede that your assumptions may need some work, maybe even just acknowledge the error but dismiss it as an anomaly.

Instead, we have a debate where, as Paul Krugman has repeatedly pointed out, no one ever has to admit he or she is wrong. You will occasionally see someone step up, but it's strictly done on a volunteer basis.

Maybe we need to go beyond the honor system on this one.

Subtle satire or ugly glimpse into the mind of the NYT -- you be the judge

Intentional or not, Christoph Niemann has perfectly captured New York journalists strange belief that the rest of the country is fascinated by the minutia of NYC (the relative size of Park Slope and Africa is particularly telling). As at least one commenter noted, this would seem to be a remake of the classic Saul Steinberg cartoon without the self-awareness.

California Education

Janet D. Stemwedel quotes Jerry Brown

I have reviewed the Mercer compensation study and have reflected on its market premises, which provide the justification for your proposed salary boost of more than $100,000. The assumption is that you cannot find a qualified man or woman to lead the university unless paid twice that of the Chief Justice of the United States. I reject this notion.

This is a very odd American idea: that without a huge salary, no competent person can ever be found. I am not sure that this idea passes the "laugh test" as seen by Governor Brown's comments. It also has some very pernicious effects on things like income inequality and the perception of fairness (this has not been the best time for California universities from a fiscal point of view).

I am happy to discuss these matters from first principles but the idea that qualified people cannot be found for less than absurd amounts of money is just berserk.

Grade Inflation

From the New York Times:

Another must-hear from This American Life

Another really outstanding piece of journalism from TAL, this time focusing on the extraction of natural gas from Pennsylvania's Marcellus shale. You can download it for free today and tomorrow but I'd encourage you to donate a few bucks if you can. They do good work.

Felix Salmon addresses something that's been bothering me for a long time

You should read the whole thing, but this passage in particular caught my eye:

The deeper thing going on here is what might charitably be called a momentum trade, or what might less charitably be called a sell-low strategy. First you pick your sector, then you pick funds in that sector. If the funds do well, that’s great; if they do badly, then you sell those funds and instead you buy funds which did do well over the time period in question. Then, next year, presumably, you rinse and repeat.

I realize this is not my field and there are a lot of subtle questions here about random walks and efficiency, but a great deal of the financial advice I hear reminds me of an ad from the late Nineties. In it a man is listening to the radio and hears about a stock that has just doubled in price. He rushes to his computer to buy some of this newly expensive stock only to discover that his cut-rate internet provider is down. He howls in anguish. (even at the time I remember thinking "so this is what a bubble looks like.")

I understand that there's more to investing than buy low/sell high, but many investment strategies seem to strive for the opposite. Wouldn't there have to be an unreasonably big momentum factor for this to make sense?

Wise Bloodsport

OE readers have the coolest noms de plume.

Modeling assumptions

From Matt Yglesias:

I’ll note, however, that you might be a freshwater economist if you think it makes sense to reassure us that a deflationary spiral is impossible because your model says so even though deflationary spirals do, in fact, occur in human history. To me, a model that denies the possibility of something happening that does, in fact, happen indicates that you’re working with a flawed model.

I can't comment on whether or not this is a fair assessment of the work in question. But it is always a good idea to "reality check" model outputs and ensure that the distribution of events generated by the model looks something like real data. If important events occur in real data that your model dismisses as impossible than model misspecification or missing confounding variables should be immediately suspected.


EDIT: Noah Smith also comments and it is well worth the read. He traces these conclusions to some rather strong assumptions . . .

Challenges of causal inference in complex systems

From Felix Salmon:

“Spend less money, create more jobs” is the kind of world one normally finds only in Woody Allen movies, and it’s a profoundly unserious stance for any politician to take. Spending cuts, whether they’re implemented by the public sector or the private sector, are never going to create jobs. And there’s simply no magical ju-jitsu whereby government spending cuts get reversed and amplified, becoming larger private-sector spending increases.

I think that one of the difficulties in macroeconomics is that you have complex systems that are not subject to experimentation. So you are forced to try and use observational studies and analogies with microeconomics to try and determine the causal effects of policies. Even instruments are questionable as they also rely on unverifiable, strong assumptions.

The inability to have a consensus on the counter-factual is pernicious and causes no end of trouble. Consider the tax increases passed at the beginning of the Clinton administration. Are they responsible for the late-1990's boom, unrelated to it, or did they act to slow it down (making the current economy smaller than it could have been)? How would you know this?

Cross country comparisons are possible but you have both confounding factors and effect measure modification. Changing the tax rate in Sweden might have different consequences than in the United States due to both different cultures (confounding) and to differences in current tax rates (effect modification). So, by picking different analogies and different models for the observational data, we can end up with some really strange claims being made about how economies work.

It is not an area with easy solutions. But I think to agree with Felix that the model he is critiquing is making heroic assumptions about the influence of tax levels on economic growth.

Harnessing the power of tax evasion to address climate change

From the comment section for a recent post on the crisis in Greece:

sub-divided said...

The thing I know about Greek tax-evasion is that they know where you live when you hook into the electric grid. So a family I know, owning a small island, avoids paying any taxes by running everything on wind and solar power.