Month: January 2015

Questions that are rarely asked

Here are some staggering statistics: Since 2006, state and local real investment in highways and streets has fallen by 22%.  Their spending on sewer systems, in real terms, is also down by 22%. And real investment by state and local governments in water systems has fallen by a stunning 34% (chart below).

Meanwhile, over the same period, private real investment by telecommunications and broadcasting companies is up by 13%, according to statistics from the Bureau of Economic Analysis.

Why, then, does President Obama want to load yet another spending burden–muni broadband–on localities that are already stretched too thin to cover their existing obligations?

That is from Michael Mandel.

Bad optics, bad PR, the culture that is Germany

a public outcry has arisen over a town council plan to house refugees in a building that once served as a Nazi command post at the Buchenwald concentration camp.

Schwerte, a community of 50,000 south of Dortmund, has decided to move 21 refugees into the camp’s only remaining building on the outskirts of the town.

The move comes, town officials say, because all the refugee housing in the town’s jurisdiction is already filled with 200 asylum seekers, and the town doesn’t have the money to purchase temporary structures. According to the town council’s spokeswoman, “The solution is a practical one.”

The full story is here, via the excellent Mark Thorson.

Arrived in my pile

1. Lives of the Laureates: Twenty-three Nobel Economists, edited by Roger W. Spencer and David A. Macpherson.  I know an earlier edition of this book, my favorite piece is the essay by Thomas Schelling but it is a good book throughout.

2. Eric Topol, The Patient Will See You Now: The Future of Medicine is in Your Hands.  I don’t have the time to read a book on medicine just now, but it looks quite interesting, a rebuttal to the claim that consumers are helpless in the world of medicine.

Assorted links

1. How Amazon tricks you into thinking it always has the lowest prices.

2. Most neoclassical economists don’t understand most of these.  I think not one in fifty actually understands the Heckscher-Ohlin theorem, for instance.

3. In one restaurant in China, beautiful people eat for free.

4. The blockchainiacs?

5. 3-D printed drones.

6. British markets in everything: fish and chips chips.

7. In praise of Piketty’s translator.

Alesina and co-authors respond on European fiscal austerity

They have a new NBER working paper on this topic, here is one key part of the abstract:

Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large. Our results, however, are mute on the question whether the countries we have studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13.

They also consider, and cannot reject, the possibility that the output declines of recent times were due to additional negative variables, such as credit crunches, rather than higher values for the fiscal multiplier.

I predict this paper will be ignored rather than responded to.  For a while now it has been the practice to criticize “austerity” rather than to disaggregate the policies, or describe them with greater specificity, even though that is easy to do.  And it is incorrect to describe this paper as defending austerity, rather I read it as being anti-tax hike, and suggesting that “austerity” is not a very useful concept.

There is an ungated version of the paper here.

*Japan and the Shackles of the Past*

What a strange pattern to find in a book.  The first 264 pp. are good enough but not exceptional and at times boring through being overly familiar.  The last two chapters I found to be a brilliant treatment of recent Japanese politics through the lens of public choice models, probably the best since Karel von Wolferen’s The Enigma of Japanese Power.

Have you wondered what distinguishes the regime of one Japanese prime minister from another?  Which are the different interest groups for and against the consumption tax hike and why?  What accounts for the initial failure and then later resurgence of Abe?  What role does Okinawa play in broader Japanese politics?  Which kinds of regular struggles are played out between the elected officials and the bureaucrats?  What does a sentence like this mean?: “The people around Abe wanted, finally, to stamp out forever the ghost of Tanaka Kakuei.”

How many other books rise to “superb” status but only through their last two chapters?

Here is a review of the book from The Economist, positive but not along the lines I offer above.  Here is a Literary Saloon review.  Here is an FT review by the excellent David Piling.

You can order the book here.  It came out in December 2014 but will make my best books of 2015 list for sure.  For the initial pointer to this book I wish to thank Jim Olds.

How judges, loan officers, and baseball umpires overcompensate for past decisions

The actual title is “Decision-Making under the Gambler’s Fallacy” (pdf) and the authors are daniel Chen, Tobias J. Moskowitz, and Kelly Shue.  Here is one short bit from what is more generally a very interesting paper:

We test our hypothesis in three high-stakes settings: refugee court asylum decisions in the US, a field experiment by Cole et al. (2013) in which experienced loan officers in India review real small-business loan applications in an experimentally controlled environment, and umpire calls of pitches in Major League Baseball games. In each setting, we show that the ordering of cases is likely to be conditionally random. However, decisions are significantly negatively autocorrelated. We estimate that up to 5 percent of decisions are reversed due to the gambler’s fallacy.

To make that more concrete, if a baseball umpire first calls a ball, the next pitch he is more likely to then call a strike.  Of course this may plague your paper refereeing decisions, whether or not you finish your next book, and your dating life.

The original pointer was from Cass Sunstein on Twitter.

Austrian business cycle theory continues to make a comeback

Just read the abstract from the latest NBER working paper by Òscar Jordà, Moritz HP. Schularick, and Alan M. Taylor:

Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.

The piece is called “Betting the House,” and you will find some non-gated copies here.  And to my Austrian-oriented readers, please don’t let this evidence push you away from more synthetic accounts of what is going on…

Here is FTAlphaville coverage of the paper.  And here is an interesting paper on interest rates and equity extraction.

Scott Sumner’s new career

…involves working with me!  Here is Scott:

I have spent the past 6 years trying to do two jobs at once, my teaching job at Bentley and lots of blogging/writing/speaking on monetary reform.  I am pleased to announce that from now on I’ll be able to focus on monetary policy. Through a very generous donation of Kenneth Duda (a Silicon Valley entrepreneur who is supportive of market monetarism), the Mercatus Center has created a new program on monetary policy, and appointed me as director.  I’m sure people will have some questions about this, so let me provide a bit more detail.

A few months back I began raising money to set up a NGDP futures market.  At the time, Ken Duda offered to support the project with a large donation.  He also expressed an interest in supporting my NGDP targeting in any way he could. Initially he suggested setting up a foundation to promote monetary reform, and having me direct the foundation.  I thought it might make more sense to work within an institution such as a university or a think tank, where I could get managerial support.  We eventually decided to embed the project within the Mercatus Center.

There is more at the link.  Of course at George Mason and Mercatus we are all very excited about this.

The Effect of Police Body Cameras

The first randomized controlled trial of police body cameras shows that cameras sharply reduce the use of force by police and the number of citizen complaints.

We conducted a randomized controlled trial, where nearly 1,000 officer shifts were randomized
over a 12-month period to treatment and control conditions. During ‘‘treatment shifts’’
officers were required to wear and use body-worn-cameras when interacting with members
of the public, while during ‘‘control shifts’’ officers were instructed not to carry or use the
devices in any way. We observed the number of complaints, incidents of use-of-force, and
the number of contacts between police officers and the public, in the years and months
preceding the trial (in order to establish a baseline) and during the 12 months of the

The results were that police use of force reports halved on shifts when police wore cameras. In addition, the use of force during the entire treatment period (on shifts both using and not using cameras) was about half the rate as during pre-treatment periods. In other words, the camera wearing shifts appear to have caused police to change their behavior on all shifts in a way that reduced the use of force. A treatment that bleeds over to the control group is bad for experimental design but suggests that the effect was powerful in changing the norms of interaction. (By the way, the authors say that they can’t be certain whether the cameras primarily influenced the police or the citizens but the fact that the effect occurred even on non-camera shifts suggests that the effect is primarily driven by police behavior since the citizens would not have been particularly aware of the experiment, especially as there would have been relatively few repeat interactions for citizens.)

It is possible that the police shaded their reports down during the treatment period but complaints by citizens also fell dramatically during the treatment period from about 25-50 per year to just 3 per year.

Here’s a graph of use of force reports before and during the treatment period.


Police cameras will have some negative effects. When a police officer is accused of something will lawyers have the right to subpoena years of camera footage looking for anything problematic? Think about the OJ case. Perhaps tape should be erased after one year.

Nevertheless, the results of the study are impressive. More generally, I worry that there is no solution to the problem of government mass surveillance but at the very least we can turn the cameras around and even the playing field.

Can the inflationary erosion of G lead to austerity?

In response to my earlier post, Kevin Drum attempts to identify the problem of austerity by graphing real, per capita government spending in the United States.  But choosing real government spending can be a misleading way of measuring the contribution of fiscal policy to aggregate demand.  (The per capita decision also can be partially disputed on the grounds that government is producing some national public goods.)

Real cuts in government spending, when due to inflationary erosion of G, will not in general be identifying a problem of aggregate demand.  And aggregate demand is what we are considering here, not potential problems with supply provision (e.g., how many children are getting vaccines?), which are well identified by looking at the real variables.

Take two societies, each with flat nominal government spending.  One society has price inflation of five percent, the other ten percent.  In the latter case real government spending is falling by ten percent, a bigger decline than for the first society.  But can we properly conclude that the second society will be having a bigger problem of aggregate demand?  No, the price level is going up ten percent!  The erosion itself is being caused by higher nominal demand.

If real government spending is declining because of price inflation, that fact, taken alone, is unlikely to be associated with an aggregate demand problem.  After all, we are not talking about inflation induced by oil price hikes.  We are talking about inflation pushed along by…demand.

One of the trickiest problems in economics is knowing when the “real” variable can be a misleading metric.

More generally, consider this Marcus Nunes post: “For the whole period depicted in the chart the correlation between real output growth and real G growth is significantly NEGATIVE!”  That is of course in part the result of an identification problem (fiscal policy often becomes more active in bad times), but look at the last few years of the chart only.  What you will see is a murky story that, no matter what machinations and Ptomelaic epicycles you may get from some of the more polemic Keynesians, is not well illuminated by Keynesian economics in the traditional sense.

Here are some other chart comparisons.

It is fine to say it is murky.  It is murky.  Murky, murky, murky.  But from that we should not conclude that fiscal policy is extremely effective, as it probably is not in most cases.  That is part of what murky implies.

Here is Scott Sumner with questions for Keynesians, all of them on the mark, read the whole thing.

NB: If you read this post as arguing “there was no aggregate demand problem in years ????”, go to community college!

Or if you read this post as saying “Cowen thinks nominal government spending is the correct measure of austerity…and that is wrong…”, well, go back to high school!  There is no “correct measure,” it depends on the question you are asking and even then more than one measure may be relevant.

Kevin Drum on Charter Schools

Kevin Drum reports two factlets.

First: Neerav Kingsland says that SAT scores of new teachers are rising and that most of them are staying in teaching for at least five years. He comments: “If I was going to bet on whether American education will improver, flatline, or get worse — I would look very hard at the academic performance of teachers entering the profession, as well as how long these better qualified teachers stayed in the classroom. The aforementioned data makes me more bullish on American education.”

Second: Adam Ozimek says we’re selling charter schools short when we say that on average they do about as well as public schools. That’s true, but there’s more to it:

I would like to propose a better conventional wisdom: “some charter schools appear to do very well, and on average charters do better at educating poor students and black students”. If the same evidence existed for some policy other than charter schools, I believe this would be the conventional wisdom.

….The charter sectors’ ability to do better for poor students and black students is important given that they disproportionately serve them….53% of charter students are in poverty compared 48% for public schools. Charters also serve more minority students than public schools: charters are 29% black, while public schools are 16%. So not only do they serve more poor students and black students, but for this group they relatively consistently outperform public schools.

How much do subsidies to community college attendance matter?

That is a new NBER Working Paper by Angrist, Autor, Hudson, and Pallais.  Here is the sentence of interest for the recent community college initiative:

Awards offered to prospective community college students had little effect on college enrollment or the type of college attended.

Do note that some other kinds of awards appeared to be more effective, so this is not an anti-subsidy result per se.  And here is a new Bulman and Hoxby paper on federal tax credits and the demand for higher education (not just community colleges):

We assess several explanations why the credits appear to have negligible causal effects.

Making these programs work is not so easy.  Reihan Salam offers good points, so does Arnold Kling.