Month: October 2016

New issue of Econ Journal Watch

In this issue (.pdf):

Instrument found flat: Stan Liebowitz criticizes an influential Journal of Political Economy article about music piracy’s impact on the sound recording industry.

You get what you measure: Daniel Schwekendiek explainshow South Korea followed a proven template of incentivizing exports to boost Web of Science publications and raise the rankings of its academic institutions.

Now entering a Republican-free zone: Mitchell Langbert, Anthony J. Quain, and Daniel Klein report on the voter registration of faculty at 40 leading U.S. universities in Economics, History, Journalism, Law, and Psychology.

Whither science in gender sociology? Charlotta Stern investigates whether gender sociologists blinker themselves from scientific findings about sex differences.

Carl Menger on classical political economy in relation to the politics of his day: A first-ever English translation of Menger’s 1891 article calling for a recovery of the Smithian tradition, with an introduction by the translators Erwin Dekker and Stefan Kolev.

How to Do Well by Doing Good! In this 1984 essay,Gordon Tullock counsels young economists that doing well and doing good go together. Some elements of the essay, if accurate once, are dated now, but others are timeless.

EJW Audio

Erwin Dekker on Carl Menger on Adam Smith

Frank Machovec on Perfect Competition

Call for papers

EJW fosters open exchange. We welcome proposals and submissions of diverse viewpoints, and also submissions ‘beyond Econ,’ from contiguous social sciences.

Download entire September 2016 issue (.pdf)

How much energy do building codes save?

Not that much, or so it seems from the latest study of California, just published by Arik Levinson in the AER.  This seems to be the bottom line:

1. In 1978 California started to enact some of the world’s most ambitious residential building energy codes.  These building codes have been updated 13 times since.

2. The promise was for 80% savings for new buildings constructed after 1990.  These assumptions assumed everything would go according to plan and there would be no behavioral adjustments.

3. The actual results?: “For electricity, post-1978 houses in California may be using up to 15 percent less than pre-1978 houses, but do not use less per degree-day when the weather gets hot, and do not use relatively less than similar post-1978 houses in other states with less strict building codes.”  For natural gas there is a 25% savings, noting that this trend and the electricity trend both predate the 1978 legislation.

4. Levinson conjectures that most of the savings are coming from natural turnover in the housing stock disfavoring the least energy efficient units.

Here are earlier versions of the paper.   Of course most regulations never receive a study anything near this thorough.

Trump and the stock market: what was the debate about?

The two people (Wolfers and Ozimek) who did the empirical work did a great job, but much of the rest of the exchange from other commentators has missed the point.

If you approach the debate as an emotional referendum on how good or bad Trump (Clinton) would be, you’re probably going to get it wrong.  You will view yesterday’s exchange as being about choosing the Wolfers estimation or the Ozimek one, the latter showing that increases in Trump’s odds didn’t seem to hurt the stock market up through a particular date.  If then you sided with Wolfers, you could keep a very negative view of what Trump would be like, or if you sided with Adam’s investigation you could still wonder to a greater extent.

The better way to think about the exchange is that Adam (and I) raised a puzzle.  Given that economists as a whole don’t like Trump (look at endorsements), why haven’t the regular fluctuations in his odds had more of an impact on the stock market?

Now comes the Justin Wolfers study, showing the stock market went up a lot as Hillary Clinton was winning the debate.  That makes the puzzle bigger not smaller.  It adds to the preexisting prior about what correlations we should find in those earlier data points.  Why for instance didn’t Trump’s fairly rapid pneumonia-inspired, pre-debate rise from 30 to 36 spook the markets in a big way?  Why didn’t Trump’s longer-term rise from near zero to 36 bring a lot of market turmoil?  And since a strong economy should help the incumbent Party, the puzzle is all the stronger; you can’t expect a strong economy to boost both the stock market and Trump’s odds as a confounding third factor.  And note of course that Justin himself, in other contexts including on Twitter, will assign weight to the churning movements in the prediction markets, even if he doesn’t consider them any kind of decisive test.

A few of the options on the table are to say gridlock is stronger than we had thought, prediction markets less reliable, other candidates less reliable, or that Trump cutting taxes on capital relative to HRC will for the stock market outweigh some of the costs of his presidency.  I’m not pushing any one of those, I am suggesting that at least one from this and a broader list ought to be true.

Many many of you have responded to such conundrums with answers starting with but not ending with the concept of noise and low-powered tests.  That is a perfectly fine set of responses but then you must apply the resulting beliefs consistently to all other spheres.  You could say for instance: “So much noise comes along in our economy.  I do prefer Clinton to Trump, but because of all this noise I’m really not so sure Clinton will work out better for the economy.  All of the other intervening economic events is what the prediction market and stock market data were picking up and that is why Adam’s test was imperfect.  My judgments are imperfect too.”

That is an entirely permissible answer, if you really believe it and embrace it.  The error is to segment your belief space.  If you say “Wolfers beats Ozimek because Ozimek doesn’t consider noise enough, therefore I stick with my belief that Trump is really bad for the economy,” well that kind of mistake belongs in a Jonathan Haidt novel.  I find few people are willing to embrace the more consistent statistical preference plus agnosticism, rather they play the game of “statistical noise for thee but not for me.”

Plenty of statistical tests have low power, including, believe it or not, the ones you run with your political intuitions.

Most generally, don’t look to throw out information, or see one study as trumping another, rather seek to use and interpret all of the information available.

By the way, one possible answer that fully reconciles the data of both Wolfers and Ozimek is to suggest stock markets started seeing Trump as “incurably terrible” only during the debate itself.  That is hardly a confirmed hypothesis (we’ll see going forward), but it is another way of recognizing why Wolfers and Ozimek have not produced competing hypotheses, rather two pieces of information for revising a broader Bayesian mosaic.