Month: April 2012

Hypothesis, not a fact

Nonetheless you should take it very seriously:

In recent months, though, the third story about demographic change has gained ground. The only way to address it is with a model that compares the decline in labour participation against some kind of trend. Dean Maki of Barclays Capital is one economist who has done so. “Our analysis indicates that the single biggest factor dragging the labour force participation rate down has been the retirements of the baby-boomers,” he says.

Of a 2.8 percentage point fall in labour force participation since 2002, Mr Maki estimates that 1.6 points are due to demographics and only 0.9 points to the economic cycle. As the demographic decline will continue at 0.3-0.4 points a year, his calculations suggest all of the “cyclical” decline could be gone within a couple of years if only modest numbers return to work.

“To the extent this trend is not fully recognised by the Fed, it does raise the risk of greater wage and price inflation sooner than the Fed expects,” says Mr Maki. “The other implication for policy makers is that potential growth in GDP is a lot weaker – we’d put it no higher than 2 per cent – and so budget forecasts are for too rosy a picture.”

Others who have done similar work do not find such large declines. A recent Chicago Fed paper puts the demographic element at a quarter of the total drop and the Congressional Budget Office also projects a slower pace of demographic decline. Much depends on assumptions about whether more of the elderly will choose to work. But Mr Maki points to a sharp rise in workers receiving Social Security and to the numbers aged 55-plus who are not in the labour force and say they do not want a job.

David Greenlaw of Morgan Stanley adds another element: he estimates that 0.3 percentage points of the decline in participation is because unemployed workers have moved on to disability benefits. It is hard to become certified as disabled and, once on the benefit, few workers go back. “There has been a large increase in the number of long-term unemployed and many of these people will have a difficult time reattaching to the labour market,” says Mr Greenlaw. “It seems that many of them are shifting from unemployment benefits to disability insurance benefits.”

That is all from Robin Harding.

Outcome Unbiased Journals

Chris Said, a neuroscientist, prods the NIH to support outcome-unbiased journals:

The growing problems with scientific research are by now well known: Many results in the top journals are cherry picked, methodological weaknesses and other important caveats are often swept under the rug, and a large fraction of findings cannot be replicated. In some rare cases, there is even outright fraud. This waste of resources is unfair to the general public that pays for most of the research.

The Times article places the blame for this trend on the sharp competition for grant money and on the increasing pressure to publish in high impact journals. While both of these factors certainly play contributing roles…the cause is not simply that the competition is too steep. The cause is that the competition points scientists in the wrong direction.

…scientific journals favor surprising, interesting, and statistically significant experimental results. When journal editors give preferences to these types of results, it is obvious that more false positives will be published by simple selection effects, and it is obvious that unscrupulous scientists will manipulate their data to show these types of results. These manipulations include selection from multiple analyses, selection from multiple experiments (the “file drawer” problem), and the formulation of ‘a priori’ hypotheses after the results are known.

…the agencies should favor journals that devote special sections to replications, including failures to replicate. More directly, the agencies should devote more grant money to submissions that specifically propose replications….I would [also] like to see some preference given to fully “outcome-unbiased” journals that make decisions based on the quality of the experimental design and the importance of the scientific question, not the outcome of the experiment. This type of policy naturally eliminates the temptation to manipulate data towards desired outcomes.

*Land of Promise*

The author is Michael Lind and the subtitle is An Economic History of the United States.  I am just beginning to browse my copy, here is one bit:

In 1947, twice as many Americans worked in industrial-research centers as in 1940.  Among the breakthroughs that resulted from wartime research, in addition to nuclear energy, were jet engines, radar, computers, synthetic rubber, and a range of new drugs: penicillin, synthetic quinine, and sulfa drugs.

A massive government R&D and production effort was devoted to penicillin.  in 1928, Alexander Fleming had discovered that penicillin could kill bacteria.  During World War II, the US government coordinated efforts by universities, the Department of Agriculture, and nearly two dozen pharmaceutical companies to devise technologies for the mass production of the drug.

Deregulate green carts!

Food trucks are not the only battle:

“Green carts are a quick and nimble approach that can get fresh food out there relatively quickly,” says Rick Luftglass, executive director of the Laurie M. Tisch Illumination Fund, which has provided $2 million to support green carts in New York. “And because they are mobile, you can follow the need. If sales aren’t good on one block, you can move a few blocks away. It allows the market to build around the customers.”

…Generations of immigrants to New York got their start selling on the street. In the 19th century, the Lower East Side was full of pushcarts hawking pickles, flowers, buttons and hats. But today’s arrivals are limited by strict rules for sidewalk vending. There are multiyear waits to sell those New York hot dogs and a thriving black market for permits.

That is from the excellent Jane Black.  Many green carts are starting to take food stamps.

Two tweets from Dani Rodrik

The first is:

Josef Joffe is precisely wrong: Europe’s crisis IS about macroeconomics — not microeconomics:

I would say it is about the connection between microeconomics and macroeconomics.  I understand full well that Sweden is doing fine (despite a very recent slowdown), but I do not get why so many Keynesian economists are so reluctant to condemn the legal and regulatory policies, and rent-seeking practices, of the eurozone periphery.  Stronger nominal aggregate demand is called for but it cannot make everything there fine.

The second is:

Unfortunately Argentina’s government has been giving unorthodox policy a bad name by associating thuggish behavior with it.

I would say this correlation is no accident, and that there are credibility reasons why many economically small countries are so reluctant to break with consensus approaches and international agreements.  An Ireland trying to mimic Iceland would have had a very tough time of it, and it remains to be seen which country has the stronger long-run prospects.  Moisés Naim put it well:

Argentina suffers from high inflation, slowing economic growth, ballooning subsidies, price controls, capital flight, decaying infrastructure and a less than welcoming environment for foreign investors.

Perhaps the good news is this:

It has had limited access to the international financial system since defaulting on its debts in 2001.

We should expect unorthodox approaches and thuggish behavior to be correlated, even if there is no causal connection between the two.  If you then think of the choice variable as “political culture,” rather than “policy today,” that suggests unorthodox approaches are not nearly as good as they may seem upon first glance.

*Bad Religion*

The author is Ross Douthat and the subtitle is How We Became a Nation of Heretics.  It is a very good and very serious book arguing that America needs better religious thinking and practice, excerpt:

The entire media-entertainment complex, meanwhile, was almost shamelessly pro-Catholic.  If a stranger to American life had only the movies, television, and popular journalism from which to draw inferences, he probably would have concluded  that midcentury America was a Catholic-majority country — its military populated by the sturdy Irishmen of The Fighting 69th (1948) and The Fighting Sullivans (1944); its children educated and its orphans rescued by the heroic priests and nuns celebrated in Boys Town (1938), The Bells of Saint Mary’s (1945), and Fighting Father Dunne (1948); its civic life dominated by urban potentates like Francis Cardinal Spellman of New York and Denis Dougherty of Philadelphia; its everyday life infused with Catholic kitsch, from the 1950s hit single “Our Lady of Fatima” to the “win one for the Gipper” cult of Notre Dame football.

My main question is what could have become of most organized religion in an era of newly found television penetration — a competing source of ideas about right and wrong — and the birth control pill and sexual liberation of women?  Not to mention gay rights.  The recent evolution of American religion may not be optimal, but it is endogenous to some fairly fundamental forces.  Non-religious thinking seems to offer especially high returns to successful people these days, and while American religion certainly has survived that impact (unlike in the UK?), what is left will seem quite alienating to much of the intelligentsia, Ross included.

For most mainstream religions, for most urban and suburban intellectuals circa 2012, it is hard to live a religiously observant life during the ages of say 17-25.  American religion is left with late convert intellectuals and proponents of various enthusiasms, all filtered through the lens of America’s rural-tinged mass culture.  Where is the indigenous and recent highbrow Christian culture of the United States?

Ross’s close comes off as voluntarist (“That quest begins with a single step…”), but in an economic model which change might nudge the United States back toward a more intellectual Christianity?  Your suggestions are welcome.

Debtor’s Prison for Failure to Pay for Your Own Trial

Debtor’s prisons are supposed to be illegal in the United States but today poor people who fail to pay even small criminal justice fees are routinely being imprisoned. The problem has gotten worse recently because strapped states have dramatically increased the number of criminal justice fees. In Pennsylvania, for example, the criminal court charges for police transport, sheriff costs, state court costs, postage, and “judgment.” Many of these charges are not for any direct costs imposed by the criminal but have been added as revenue enhancers. A $5 fee, for example, supports the County Probation Officers’ Firearms Training Fund, an $8 fee supports the Judicial Computer Project, a $250 fee goes to the DNA Detection Fund. Convicted criminals may face dozens of fees (not including fines and restitution) totaling a substantial burden for people of limited means. Fees do not end outside the courtroom. Jailed criminals can be charged for room and board and for telephone use, haircuts, drug tests, transportation, booking, and medical co-pays. In Arizona, visitors to a prison are now charged a $25 maintenance fee. In PA in order to get parole there is a mandatory charge of $60. While on parole, defendants may be further assessed counseling, testing and other fees. Interest builds unpaid fees larger and larger. In Washington state unpaid legal debt accrues at an interest rate of 12%. As a result, the median person convicted in WA sees their criminal justice debt grow larger over time.

Many states are now even charging the accused to apply for and use a public defender! As a result, some defendants are discouraged from exercising their rights to an attorney.

Most outrageously, in some states public defender, pre-trial jail and other court fees can be assessed on individuals even when they are not convicted of any crime. Failure to pay criminal justice fees can result in revocation of an individual’s drivers license, arrest and imprisonment. Individuals with revoked licenses who drive (say to work to earn money to pay their fees) and are apprehended can be further fined and imprisoned. Unpaid criminal justice debt also results in damaged credit reports and reduced housing and employment prospects. Furthermore, failure to pay fees can mean a violation of probation and parole terms which makes an individual ineligible for Federal programs such as food stamps, Temporary Assistance to Needy Family funds and Social Security Income for the elderly and disabled.

It’s difficult to argue against criminal justice fees for those who can pay, but for those who cannot– and most criminal defendants are poor–such fees can be a personal and public policy disaster. Criminal justice debt drags people further away from reintegration with civil society. A person’s life can spiral out of their control when interest, late fees, revocation of a driver’s license and ineligibility for public assistance, mean that unpaid criminal justice debt snowballs. You can’t get blood from a stone but if you try, you can break the stone.

Optimal punishment is swift and sure but also has a defined endpoint. As with bankruptcy, punishment must end, leaving both hope and opportunity. We used to release criminals without a nickel or a nail but with an understanding that their debt to society had been paid. Today, we release criminals with a ball of debt that chains them to the criminal justice system and which can pull them back into prison long after their sentences have been served. Releasing people with little hope or opportunity for reintegration with civil society is good for neither the releasees nor society.

The idea of the “food desert” is fading

Poor neighborhoods, Dr. Lee found, had nearly twice as many fast food restaurants and convenience stores as wealthier ones, and they had more than three times as many corner stores per square mile. But they also had nearly twice as many supermarkets and large-scale grocers per square mile. Her study, financed by the institute, was published in the March issue of Social Science and Medicine.

From another paper:

Dr. Sturm found no relationship between what type of food students said they ate, what they weighed, and the type of food within a mile and a half of their homes.

Here is much more.

The Matt Yglesias take on restaurant decline

Matt writes:

Imagine some diners are, by temperament, venturesome while others are regulars. Over the long term, the best business strategy is to appeal to regulars since they offer a stable client base. But when a restaurant is new, it by definition lacks regulars and needs to appeal to venturesome diners both to get an initial wave of customers and also to attract “buzz” and get the temperamental regulars in the door. Over time, a successful restaurant will attempt to switch and become more a place for regulars, which means that venturesome diners will come to like it less. At the same time, alienating venturesome foodies is very low cost because being venturesome they would perceive their own growing familiarity with the food as declining quality one way or the other.

This is not at all far from my basic theory, though Matt seems to imply it is.  In An Economist Gets Lunch I stress how the cycle of “ceasing to appeal to the informed diners” has very much accelerated with the internet.  Good reviews arrive rapidly, perhaps too rapidly.  If there is a new place you quite like — especially if it is trendy — go many times now, because it will decline in quality more rapidly than such places used to.  Once the place is established, it can get by more on momentum and on its value as a focal venue for socializing.  You can take the presence of a lot of beautiful women as one sign that a place has crossed into this territory.

Don’t think of the model as “what happens to a restaurant when there is an exogenous increase in the beauty of its women” (recall Scott Sumner — “don’t reason from a beautiful women [price] change!” ).  Think of the model as “what does lots of beautiful women predict about the place of a restaurant in its product life cycle?”

Restaurants with beautiful women are still better than average, relative to the population of restaurants as a whole, for obvious reasons related to wealth and demographics.  They’re just not likely to be the very best of the good restaurants, especially for the price.

Arguably it is a different case when a restaurant has beautiful women, but most mainstream male patrons would regard those women as “ineligible,” or “unapproachable,” perhaps for reason of a different religion or ethnicity.  At those restaurants you can enjoy both great food for the price and beautiful women, though perhaps your enjoyment of the latter will remain at some distance.

Assorted links

1. The hug a Coca-Cola vending machine advertising campaign that is Singapore.

2. U. Michigan economics Ph.d student running for Congress, web site here.

3. Annie Lowrey profile of Piketty and Saez, and here is a list of French economists supporting Hollande, Piketty is on the list, via CFM.

4. Walrasian bar pricing.

5. Via Chris F. Masse, “The revolutionary calculator that shows the answer only when you also enter a suitable mental estimate.”

Relative to baseline forecasts, ACA and otherwise

Ruritania is fighting a war, and the status quo setting is that 90,000 lives will be lost each year.  General Blythe comes up with a plan that increases the chance of winning the war, but is likely to cost 120,000 lives a year.  He claims his plan costs only 30,000 lives a year, relative to baseline.  General Smythe has a war plan which on net costs only 80,000 lives a year, so he argues that his plan saves 10,000 lives a year.

In comparative terms these claims are not incorrect, and there are obvious reasons why bureaucracies should draw up such estimates.  Yet an anti-war group, SDS, argues that the real cost of the war is 90,000 lives each year, and that the one alternative plan costs 120,000 lives a year and the other 80,000 lives a year.  If you are rethinking the entire war, the SDS estimates are relevant.

If we are going to keep at the war no matter what, the estimates of the Generals may be more useful.  In the meantime, the generals get upset that SDS is stepping out of the framework of policy discourse and refusing to offer or accept numbers “relative to baseline.”  Discourse fractures and names are flung.

To translate that into 2012, the “war” is the joint view — extremely common in America — that a) tax revenues are on an acceptable track, and b) we should spend more and more on health care each year at high rates, including in per capita terms.

If you think that dual project is sustainable, you may be relatively interested in estimates relative to baseline.  If, like me, you think that project is like a failed and failing war, a success “relative to baseline” won’t much impress you.  In fact it may scare you all the more to hear about success relative to baseline, as that can be taken as a signal that there is no really good plan behind the scenes.  Here are a few factors which could radically upset current mainstream baselines:

1. Rates of growth stay in the range of 1 to 1.5 percent, see the work of Stock and Watson, top macro econometricians.  Try redoing budget projections with those numbers.

2. Real rates of growth are higher than that, but they take the form of non-taxable pecuniary benefits.

3. Growth rates are acceptable, but more and more of economic growth is captured by private capital, which is difficult to tax for either mobility or political economy reasons.

4. The United States may need to fight a major war, or prepare to do so.  (I do favor cutting the defense budget now, but we can’t be sure that cuts can last.)

5. The political economy of revenue hikes and/or spending cuts becomes or remains intractable.  Buchanan and Wagner have been stressing this point for decades.  A decision to borrow forty cents of a dollar spent, right now, may end up as more or less permanent, at least for as long as markets allow.  Ezra’s excellent posts about how far “right” the Democratic Party has moved on taxes are along these lines.

6. Another major recession may arrive, perhaps from abroad.

7. Life expectancy goes up a few more years than we had thought, yet productivity for the elderly doesn’t rise in lockstep.  You don’t have to think of that as “bad news,” but it still would be a major fiscal problem.

Maybe none of those are modal forecasts, but add them all up and I say the probability of being way off baseline is greater than 0.5, and possibly more than one of those problems will kick in.  In expected value terms, the costs of those possible fiscal scenarios loom very, very large (yet suddenly the modern liberal desire to think in terms of “worst case scenarios” has diminished).

Imagine people sitting around in Spain, in 2006, debating various scenarios relative to the “baseline budget.”  Maybe that’s America today, though we do not face the same particular problems or timing that Spain did.

Now enter Chuck Blahous, who wrote an article charging that ACA is likely to prove very costly, and that we are spending our cost savings on Medicare and other programs in advance, when we in fact need those cost savings to restore fiscal sanity.  You will find responses here from Ezra Klein, Kevin Drum, Paul Krugman and there were many others, accessible through Google, Blahous counters here.

I have reread the Blahous article carefully, with an eye toward judging whether Blahous is simply playing “baseline games,” as some of the critics allege.  I do not see that he is.  He stresses that he is making economic, practical, causal, and public choice arguments, and that those trump baseline games in importance.  He is trying to get us out of an obsessive focus on the baseline game, not play it in some misleading way.

To be sure, my view, or at least my emphasis, is different from that of Blahous in at least two ways.  First, he is more worried about the political economy of Congressional responses when the trust funds are exhausted, whereas I am more worried about the list immediately above (that said, Blahous very clearly does discuss several other major concerns besides double-counting and he may well agree with these broader worries too).  Second, my inclination is to focus on the entire budget, as a unified entity, and not so much stand-alone ACA (or Social Security, as in other debates) per se.  I suspect Blahous may well agree with me, but as a more active budget analyst/specialist than I am he is forced into debates on stand-alone analyses, whereas I can play the role of aloof blogger.  In any case, “fixing” this difference of emphasis would strengthen rather than weaken the overall thrust of his argument.

At the end of the day, I agree with the basic point of Blahous, which is that ACA, should it stand, is spending potentially available budget savings which we will need for other purposes.  I also would argue, though I do not have space to do so here, that this has become standard practice in American politics, with Democrats too.

Here are some choice words from Steven Rattner, who worked at Treasury under Obama:

Given that context, the government’s accounting practice — counting $748 billion of cost savings and $259 billion of revenue increases toward both Medicare and the cost of the Obama plan — is particularly troubling. Moreover, this problem is largely hidden from public view.

Under Washington’s delusional rules, budget crunchers in both the White House and Congress credit this $1 trillion twice: once in calculating that the care law will generate more revenues than costs, and again in concluding that the Obama plan will chip away at the Medicare problem.

You can argue that Rattner isn’t quite correctly describing CBO procedures in his piece, but on the economic and causal arguments he, like Blahous, is essentially correct.

At the end of the day, economic models do not use a “relative to baseline” framework.  The effect of “Delta G,” “Delta T,” or any other variable, depends on realized and expected values of that variable and others, and not that the size of that variable relative to what other people are proposing.  As I mentioned above, “relative to baseline” does have legitimate bureaucratic and accounting uses.  But we should not let it blind us to a) the divorce of that mode of reasoning from traditional economics, b) the likely unsustainability of our current fiscal path, and c) that the actual reality of ACA and other policies that we are spending “cost savings” as soon as we create them or even sooner.

Addendum: I am happy to call out the various Ryan budget proposals as unworkable fiscal disasters, most of all on the revenue side.  I also refused to endorse the 43 Bush “tax cuts” at the time, though I was sent one of those pieces of paper to sign.  No point in throwing the “Team Republican” charge, which in any case disrupts discourse rather than advancing it.

The Internet in Estonia

Free Wi-Fi is everywhere, and has been for a decade.

Viik says you could walk 100 miles – from the pastel-coloured turrets here in medieval Tallinn to the university spires of Tartu – and never lose internet connection.

…Last year, 94% of tax returns were made online, usually within five minutes. You can vote on your laptop (at the last election, Ilves did it from Macedonia) and sign legal documents on a smartphone. Cabinet meetings have been paperless since 2000.

Doctors only issue prescriptions electronically, while in the main cities you can pay by text for bus tickets, parking, and – in some cases – a pint of beer. Not bad for country where, two decades ago, half the population had no phone line.

Estonia is also at the forefront of privacy issues. Everyone in Estonia has a national ID card, which might frighten some Americans–although we already have essentially the same thing, but everyone in Estonia also knows who else has accessed their records. Thus, compared to the United States, Estonia is in many ways a more transparent society. Estonia is also on the forefront of dealing with cyber-terrorism with their own national “electronic” guard.

More at The Guardian.

Economic themes in *Girls*, the new HBO show

The comic timing is very good, and the show also explains:

1. Why the “Rotten Kid theorem” fails and why theories of strategic bequest are unlikely to work,

2. The longer-term consequences of a slow job market for youth, and

3. What life is like when your IQ is high but the shadow value of your labor is low.

The first episode is now on YouTube.