Month: April 2013
One further thought on the Reinhart and Rogoff fracas
There is a genuine tension between becoming (and staying) “famous” and expressing all the appropriate levels of agnosticism on issues, which fairly often ought deserve quite an extreme agnosticism (see Mark Thoma on this). It is hard to do both, and you can see this tension in the writings of most if not all well-known economists, at least in their more public pronouncements. In the “good old days” that tension could be elided. Academic discourse took place at relatively closed seminars, no quick responses were required, word traveled slowly, back and forth was much less rapid, and in general transparency was lower all around.
I’ve seen the Reinhart and Rogoff book in airports around the world, even though it is to most people unreadable or at best boring. Could they have still made a splash if they had changed the title to This Time is Different: Why Inference from Macroeconomic Data is Really, Really Hard? I don’t think so.
Enter the internet and the blogosphere. Someone criticizes your work, in this case a body of work which has become very famous and made you very famous. Do you respond by trying to defend the “fameworthiness” of the work, in which case a gross “rightness” might suffice, or at the very least you will try to outline the defensibility of your position. Or do you respond by spelling out all of the reasons why one might be agnostic about a difficult issue?
I predict that most famous people will respond by trying to defend the fameworthiness of their work.
We as readers then respond by taking media which produce both fame and transparency — the internet and the economics blogosphere and Twitter — and suddenly wielding them as a weapon for transparency alone. Obviously something won’t look right. I don’t want to conclude “the fault is ours,” but it is still worth noting the tension between the mediums we patronize and what they are, to the broader world, actually good for. It’s as if you showed up to Justin Bieber’s birthday party and started complaining that not everyone in the room deserves to be there. They probably don’t, and their presence at the party should not cause you to overlook their shortcomings. Still, it’s also good to be self-aware about one’s own role in uttering such a complaint about the quality of the party.
If you are receiving any public recognition at all, choosing how to present your material is one of the most difficult decisions.
Justin Fox has very good related comments.
A more complete response from Reinhart and Rogoff
You can read it here, it is too long and the formatting is too complicated to reproduce in full on MR (which is what I ideally would like to do), so please do read it.
Absurd pitches (pull out the Hayek and Polanyi lesson)
- Facebook – the world needs yet another Myspace or Friendster except several years late. We’ll only open it up to a few thousand overworked, anti-social, Ivy Leaguers. Everyone else will then join since Harvard students are so cool.
- Dropbox – we are going to build a file sharing and syncing solution when the market has a dozen of them that no one uses, supported by big companies like Microsoft. It will only do one thing well, and you’ll have to move all of your content to use it.
- Amazon – we’ll sell books online, even though users are still scared to use credit cards on the web. Their shipping costs will eat up any money they save. They’ll do it for the convenience, even though they have to wait a week for the book.
- Virgin Atlantic – airlines are cool. Let’s start one. How hard could it be? We’ll differentiate with a funny safety video and by not being a**holes.
- Mint – give us all of your bank, brokerage, and credit card information. We’ll give it back to you with nice fonts. To make you feel richer, we’ll make them green.
- Palantir – we’ll build arcane analytics software, put the company in California, hire a bunch of new college grad engineers, many of them immigrants, hire no sales reps, and close giant deals with D.C.-based defense and intelligence agencies!
- Craigslist – it will be ugly. It will be free. Except for the hookers.
- iOS – a brand new operating system that doesn’t run a single one of the millions of applications that have been developed for Mac OS, Windows, or Linux. Only Apple can build apps for it. It won’t have cut and paste.
- Google – we are building the world’s 20th search engine at a time when most of the others have been abandoned as being commoditized money losers. We’ll strip out all of the ad-supported news and portal features so you won’t be distracted from using the free search stuff.
- Github – software engineers will pay monthly fees for the rest of their lives in order to create free software out of other free software!
- PayPal – people will use their insecure AOL and Yahoo email addresses to pay each other real money, backed by a non-bank with a cute name run by 20-somethings.
- Paperless Post – we are like Evite, except you pay us. All of your friends will know that you are an idiot.
- Instagram – filters! That’s right, we got filters!
- LinkedIn – how about a professional social network, aimed at busy 30- and 40-somethings. They will use it once every 5 years when they go job searching.
- Tesla – instead of just building batteries and selling them to Detroit, we are going to build our own cars from scratch plus own the distribution network. During a recession and a cleantech backlash.
- SpaceX – if NASA can do it, so can we! It ain’t rocket science.
- Firefox – we are going to build a better web browser, even though 90% of the world’s computers already have a free one built in. One guy will do most of the work.
- Twitter – it is like email, SMS, or RSS. Except it does a lot less. It will be used mostly by geeks at first, followed by Britney Spears and Charlie Sheen.
That is all from Quora, hat tip goes to James Crabtree.
What I’ve been reading
1. Gianni Toniolo (editor), The Oxford Handbook of The Italian Economy Since Unification. If you want a 742-page, $142.50 volume on the Italian economy, written by highly intelligent and well-informed experts, but with some repetition, this is indeed the place to go. And that was exactly what I wanted.
2. Michael Suk-Young Chwe, Jane Austen, Game Theorist. I remain a Chwe fan, even though I appreciate Jane Austen less than do most other readers of intelligent fiction.
3. Toni Strubell, editor, What Catalans Want: Could Catalonia be Europe’s Next State? I loved this book. First, it is full of information about what Catalans want. Second, no one person is allowed to go on for too long. The book offers fascinating data — in the Hansonian manner — about “the logic of complaint,” namely what many people consider to be legitimate grievances and also about how people frame some of the emotional deficits in their public lives. The photos of the contributors reflect something common, though I can’t quite put my finger on it. I’m going to keep this one and reread many parts of it.
4. Willy Hendriks, Move First, Think Later: Sense and Nonsense in Improving Your Chess. To me, more interesting as behavioral economics and as epistemology than as a chess book. The author claims that most chess advice is bad, and that we figure out positional strategies only by trying concrete moves, not by applying general principles. You do need chess knowledge to profit from the book, but if you can manage it, it is one of the best books on how to think that I know.
5. Rebecca Miller, Jacob’s Folly. Finally a fiction book this year I am truly excited about, lots of fun but deep too. Here is a Bookslut interview with the author.
In the last week, the quality of my reading has been above average. I’ve also been enjoying the Feenstra and Taylor international trade text. This book is very well-written, as are the contributions of Krugman, but overall that field has some of the worst writing in all of economics and also many of the most pointless (yet still well-cited) theory pieces.
Reinhart and Rogoff respond
I knew something would come quickly, though this is quicker than I had expected. Via Matt Yglesias:
We literally just received this draft comment, and will review it in due course. On a cursory look, it seems that that Herndon Ash and Pollen also find lower growth when debt is over 90% (they find 0-30 debt/GDP, 4.2% growth; 30-60, 3.1 %; 60-90, 3.2%,; 90-120, 2.4% and over 120, 1.6%). These results are, in fact, of a similar order of magnitude to the detailed country by country results we present in table 1 of the AER paper, and to the median results in Figure 2. And they are similar to estimates in much of the large and growing literature, including our own attached August 2012 Journal of Economic Perspectives paper (joint with Vincent Reinhart) . However, these strong similarities are not what these authors choose to emphasize.
2012 JEP paper largely anticipates and addresses any concerns about aggregation (the main bone of conention here), The JEP paper not only provides individual country averages (as we already featured in Table 1 of the 2010 AER paper) but it goes further and provide episode by episode averages. Not surprisingly, the results are broadly similar to our original 2010 AER table 1 averages and to the median results that also figure prominently. It is hard to see how one can interpret these tables and individual country results as showing that public debt overhang over 90% is clearly benign.
The JEP paper with Vincent Reinhart looks at all public debt overhang episodes for advanced countries in our database, dating back to 1800. The overall average result shows that public debt overhang episodes (over 90% GDP for five years or more) are associated with 1.2% lower growth as compared to growth when debt is under 90%. (We also include in our tables the small number of shorter episodes.) Note that because the historical public debt overhang episodes last an average of over 20 years, the cumulative effects of small growth differences are potentially quite large. It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small.
By the way, we are very careful in all our papers to speak of “association” and not “causality” since of course our 2009 book THIS TIME IS DIFFERENT showed that debt explodes in the immediate aftermath of financial crises. This is why we restrict attention to longer debt overhang periods in the JEP paper., though as noted there are only a very limited number of short ones. Moreover, we have generally emphasized the 1% differential median result in all our discussions and subsequent writing, precisely to be understated and cautious , and also in recognition of the results in our core Table 1 (AER paper).
Lastly, our 2012 JEP paper cites papers from the BIS, IMF and OECD (among others) which virtually all find very similar conclusions to original findings, albeit with slight differences in threshold, and many nuances of alternative interpretation.. These later papers, by they way, use a variety of methodologies for dealing with non-linearity and also for trying to determine causation. Of course much further research is needed as the data we developed and is being used in these studies is new. Nevertheless, the weight of the evidence to date -including this latest comment — seems entirely consistent with our original interpretation of the data in our 2010 AER paper.
Carmen Reinhart and Kenneth Rogoff
April 16, 2013
Addendum: Paul Krugman comments.
An update on the Reinhart and Rogoff critique and some observations
My previous post presented this:
Rortybomb summarizes it here, Matt Yglesias here, and the original paper is here (pdf), by Thomas Herndon, Michael Ash, and Robert Pollin. I will read the paper soon.
I’ve now had some time to look at the paper, and here are a few observations:
1. I am of course open to publishing a rebuttal from R&R, but on a first read the authors make a strong case for their claim that the core Reinhart-Rogoff result — concerning the growth slowdown at debt at 90% of gdp — is based on a coding error and some data exclusion issues. Please reread my earlier post on “the smell test.”
2. That said, as Ray Lopez mentions, including in the data the postwar bouncebacks of some Anglo countries (NZ, Australia, and Canada), as recommended by the critics, is not obviously going to improve the quality of the answer. For instance the Kiwis have postwar growth rates of 7.7, 11.9, -9.9, and 10.8 percent, across the late 1940s. Are those numbers — which were combined with high postwar levels of debt — relevant to current fiscal policy issues? I say no, while admitting this may lead us to throw out other data points as well. I don’t know what is the non-cherry-pick answer here or if there even is one.
3. It is perhaps unfortunate in this age of the internet that rebuttals must be presented so quickly, but so be it. It will be interesting to hear from R&R.
4. Not too long ago I reread R&R to ascertain whether they actually present the 90% level as an emergency cliff of sorts. I concluded they did not, although there were some sentences that a reader could take out of context toward confirming such an interpretation.
5. In the paper by the critics, the pp.7-9 discussion of “weighting by country” vs. “weighting by country-year” is very interesting, but the fact that it matters as much as it does makes me more skeptical about the entire enterprise. Whether you should weight by population is important too.
6. I am seeing a large number of tweets which both misrepresent R&R or misrepresent their influence on current policies of “austerity.”
7. My own view, as you can read in The Great Stagnation, is that the primary mechanism is slow growth causing high debt/gdp ratios, not vice versa. In any case this is by far the most important issue, whether or not you agree with my take on it.
8. The “case for austerity” didn’t rest much on R&R in the first place, rather on the notion that the bills have to be paid, dawdling on adjustment is not always so easy, and the feasible sum of international redistribution is quite low. For this reason the UK should be relatively uninterested in immediate austerity and many nations in the eurozone periphery more interested.
9. In the blogosphere, the ratio of blog posts “attacking austerity” to “proposing constructive alternatives to austerity” is at least ten to one. That too tells you something. Many of the alternatives proposed would indeed pass a Benthamite cost-benefit test, at least if implemented as desired, but they are simply inconsistent with incentives and the relatively selfish nature of individual behavior.
10. The most interesting question to me is a rather squirrelly and subjective one: how should this episode change the relative ratios of what I read? Should I in fact read fewer quantitative economics papers, instead (at the margin, of course) preferring more narrative history? This is not the first time that an extremely influential major empirical result has been overturned or at least thrown into serious doubt.
Addendum: FT Alphaville weighs in. And Annie Lowrey is tweeting some responses from R&R.
All you can read?
E-books are getting the Spotify subscription model.
Books have long been the last holdout as music, movies, games and even TV shows and magazines have embraced the subscription model. Pay a single monthly fee and you can gorge on all the content you can cram into your eyes and ears. But on Tuesday, Tim Waterstone, the founder of the UK bookstore Waterstones, announced Read Petite, a subscription streaming service for short fiction. It’s a baby step toward a new model that could shake up an industry that has seen traditional books losing ground to e-books, which comprised 22.5 percent of the book market in 2012.
Here is more. I say it will fail because people like the sense of finishing a work or set of works and having it behind them. This will make them feel all the more overwhelmed.
A critique of Reinhart and Rogoff
Rortybomb summarizes it here, Matt Yglesias here, and the original paper is here (pdf), by Thomas Herndon, Michael Ash, and Robert Pollin. I will read the paper soon.
Assorted links
Online Education Trumps the Cost Disease
In a large, randomized experiment Bowen et al. found that students enrolled in an online/hybrid statistics course learned just as much as those taking a traditional class (noted earlier by Tyler). Perhaps even more importantly, Bowen et al. found that the online model was significantly less costly than the traditional model, some 36% to 57% less costly to produce than a course using a traditional lecture format. In other words, since outcomes were the same, online education increased productivity by 56% to 133%! Online education trumps the cost disease!
Bowen et al. caution that their results on cost savings are speculative and it is true that they do not include the fixed costs of creating the course (either the online course or the traditional course) so these cost savings should be thought of as annual savings in steady-state equilibrium. The main reason these results are speculative, however, is that Bowen et al. only considered cost savings from faculty compensation. Long-run cost reductions from space savings may be even more significant, as the authors acknowledge.
Bowen et al. also do not count cost savings to students. Based on my work with Tyler at MRUniversity, I argued in Why Online Education Works that students in online course can learn the same material in less time. Consistent with this, Bowen et al. found:
…that hybrid-format students took about one-quarter less time to achieve essentially the same learning outcomes as traditional-format students.
A 25% time-savings is significant. Moreover, the 25% time-savings figure is in itself an underestimate of savings since it does not include the time savings from not having to drive to class, for example.
Online education even in its earliest stages appears to be generating large improvements in educational productivity.
The Golden Dilemma
I’ve been meaning to link to this NBER paper by Claude B. Erb and Campbell R. Harvey:
While gold objects have existed for thousands of years, gold’s role in diversified portfolios is not well understood. We critically examine popular stories such as ‘gold is an inflation hedge’. We show that gold may be an effective hedge if the investment horizon is measured in centuries. Over practical investment horizons, gold is an unreliable inflation hedge. We also explore valuation. The real price of gold is currently high compared to history. In the past, when the real price of gold was above average, subsequent real gold returns have been below average consistent with mean reversion. On the demand side, we focus on the official gold holdings of many countries. If prominent emerging markets increase their gold holdings to average per capita or per GDP holdings of developed countries, the real price of gold may rise even further from today’s elevated levels. In the end, investors face a golden dilemma: 1) embrace a view that ‘those who cannot remember the past are condemned to repeat it’ and the purchasing power of gold is likely to revert to its mean or 2) embrace a view that the emergence of new markets represent a structural change and ‘this time is different’.
There is a non-gated version of the paper here.
The idea of wealth taxes is only getting started
Two top advisers to German Chancellor Angela Merkel have called for a tax on private wealth and property in eurozone debtor states to force the rich to fund rescue costs, marking a radical new departure for EMU crisis strategy.
Here is more. I tell you again, this will be a major issue for the next twenty years and not just in the eurozone. Take a look at all those state and local U.S. pension funds expecting seven percent rates of return.
Notice of the article is from @LindaYueh.
Companies won’t even look at the resumes of the long-term unemployed
Read this post by Brad Plumer, here is an excerpt:
Matthew O’Brien reports on a striking new paper by Rand Ghayad…The researchers sent out 4,800 fake résumés at random for 600 job openings. What they found is that employers would rather call back someone with no relevant experience who’s only been out of work for a few months than someone with lots of relevant experience who’s been out of work for longer than six months.
In other words, it doesn’t matter how much experience you have. It doesn’t matter why you lost your previous job — it could have been bad luck. If you’ve been out of work for more than six months, you’re essentially unemployable.
…This jibes with earlier research (pdf) by Ghayad and Dickens showing that the long-term unemployed are struggling to find work no matter how many job openings pop up. And it dovetails with anecdotes that workers and human resource managers have been recounting for years now. Many firms often post job notices that explicitly exclude the unemployed.
I think of this as further illustration of what I have called ZMP workers, a once maligned concept which now is rather obviously relevant and which has plenty of evidence on its side. It’s fine if you wish to label them “perceived by employers as ZMP workers but not really ZMP,” or “unjustly oppressed and only thus ZMP workers.” The basic idea remains and of course “stimulus” will reemploy them only by boosting the real economy, such as by raising output and productivity and reeducating, and not by recalibrating nominal variables per se. For these workers it is not about wage stickiness. Most by the way would not be ZMP if the U.S. economy were growing regularly at four percent in real terms, but of course that is not easy to achieve, not from where we stand today.
I’ve sometimes seen it hinted that calling them “ZMP workers” lacks compassion, but the compassionate thing to do is to try to identify the actual problem. A year or two ago I thought ZMP workers accounted for about 1% of potential U.S. workers (hardly all of the unemployment problem, I would stress), but if anything I am moving that estimate upwards.
Assorted links
1. MIE: but I fear enforcement of repayment will be too hard.
2. Mark Tushnet reviews Richard Epstein and Epstein responds.
3. Public choice and subprime lending.
4. Who are some famous people internationally of Bangladeshi origin? And can Bengali sweets go global?
5. On wealth disparities in the rupeezone.
6. Japan, etc.
A new economics blog (self-recommending)
As reported from Kids Prefer Cheese:
Me and Mrs. Angus have decided to get bloggy about development, growth & macro over at a new site, Cherokee Gothic. You can read about why it’s called that here. While it will mostly be us, we hope to enlist other OU faculty to contribute to the site as well.
I’ll still be blogging here with Mungo at KPC, bringing the crazy like nobody’s business, but please check us out, follow us, put us in your blogroll, and just generally show us some mad blogosphere love.