What are these people really up to?
No wonder they don’t have a clear sense of what “austerity” means:
Mrs Brooks told the Leveson Inquiry earlier this year that Mr Cameron signed some of his missives to her “LOL” – mistakenly thinking it meant “lots of love” rather than “laugh Out loud”.
Here is more. The article is puzzling throughout.
Political sorting in social dating relationships
Gregory Huber and Neil Malhotra have a new research paper Political Sorting in Social Relationships: Evidence from an Online Dating Community (pdf). Here is one useful bit:
Relative to the average standard deviation by respondent for each outcome…shared ideology increases interest in responding by 12% of that amount, interest in long-term dating by 16%, and assessments of shared values by 20%. By the same comparison, shared lack of political interest increases assessments of likelihood of responding by a statistically significant 18%, but has more modest…effects on interest in long-term dating and assessments of shared values, respectively.
There is much more data in this paper, including a discussion of which issues matter to people the most. Here is one upshot:
…online dating pairings where communication takes place display greater political homogeneity than the population as a whole.
When the hoarding equilibrium sets in
There were no laws against price gouging. But the petrol stations knew that every single customer would hate them if they were the only station to let prices rise such that supply and demand came back into equilibrium. And so because the stations didn’t gouge, we were in a terrible equilibrium where everyone’s rational response to the below-clearing price was to hoard, because there was real risk that the stations would run out of fuel. And there was real risk of running out of fuel because of the hoarding. Breaking the hoarding equilibrium would have required a coordinated price hike that both allocated fuel to its highest valued uses and told everyone that there would be fuel available for them in an emergency if they really really needed it. That latter part is crucial – it kills the incentive to hoard.
That is from Eric Crampton. Eric makes a further point. Even in the absence of laws against price gouging, individual stations may be reluctant to raise prices and incur the wrath of customers. Yet if all stations would raise prices, and markets would clear, consumers would know they could get emergency gasoline if they had to. That would help break the hoarding equilibrium, if done collectively. The real market failure may be the unwillingness to raise prices.
Addendum: Here is what we are getting: “He also said the Defense Department was sending in 12 million gallons of fuel to be pumped from five mobile stations. “They’ll have a 10-gallon limit,” the governor said. “The good news is, it’s going to be free.”
Enable talk gloves
Four Ukrainian students have created gloves that allow speech- and hearing-impaired people to communicate with those who don’t use or understand sign language. The gloves are equipped with sensors that recognize sign language and translate it into text on a smart phone, which then converts the text to spoken words.
That is from Time’s list of the notable inventions of 2012, the link to that item is here, the entire series starts here. For the pointer I thank Matthew Petersen.
Assorted links
1. How fast are driverless cars on the race track?
2. The Vatican newspaper runs five articles about the new James Bond film.
3. Renders the Taco-Copter totally obsolete.
4. BusinessWeek profile of Scott Sumner.
5. Biafra was also not a good idea.
6. Acemoglu and Robinson respond to Subramanian, and good Flickr photostream of North Korea, and is this guy, a possible defector from the West, tweeting from North Korea?
From Nick Rowe
“Cyclically-adjusted deficit” is not a macroeconomic concept
It shouldn’t be, anyway.
Tyler Cowen says: “These cyclically adjusted measures are useful information and should not be discarded, but I don’t wish to use them as the sole or main or dominant source of information about the stance of fiscal policy.”
I’m going to make a stronger claim. One I have made before.
Consider two countries. Both countries are identical, except:
Country A has an activist government, which likes to be seen as “doing something” when there’s a recession. It rushes around passing new laws increasing government spending and cutting taxes whenever there’s a recession.
Country B has a lazy government, which likes the idea of “fire-and-forget” fiscal policy. It passes a law before the recession, which ensures that government spending automatically rises and taxes automatically fall whenever there’s a recession. Then it goes back to sleep.
Both countries have exactly the same levels of government spending and taxes during a recession (and during a boom too).
A recession hits both countries. The accountants measure the “cyclically-adjusted deficits” (“structural deficits”) in both countries. They ask “under existing tax laws and spending laws, what would the deficit be if there were no recession?” They conclude that country A has a big cyclically-adjusted deficit, and country B has none.
But there is no macroeconomic difference between the two countries.
You cannot say that country A had a good “countercyclical fiscal policy”, and country B didn’t. They had exactly the same fiscal policy. They just implemented it in different ways.
A second example. Country C has a strong system of automatic stabilisers, including a steeply progressive tax system, but increases tax rates in a recession. Country D has a flat tax system, but fails to cut taxes in a recession. They end up with exactly the same taxes in a recession. C has imposed “austerity”, and created a ‘cyclically-adjusted surplus”, and D has not. But there is no macroeconomic difference between the two countries’ fiscal policies. C has sinned by commission; D has sinned by omission.
“Cyclically-adjusted deficit” is a political/legal concept. It is not a macroeconomic concept.
(There might be some important macroeconomic differences between those two ways of implementing fiscal policy: maybe automatic stabilisers work more quickly than activist policies; maybe automatic stabilisers give more certainty about the future and help stabilise expectations better. But you won’t see those differences captured in the cyclically-adjusted deficit number.)
Update: what should replace it? Maybe deficit/GDPgap? Or percentage deviation from a cross-country regression of deficit on GDPgap? Crude, but simple. Still vulnerable to Tyler’s objection that the gap between actual and “potential” GDP is a judgement call. But better than “cyclically-adjusted deficit”, which makes the same judgement call about potential GDP, and then adds a lot of legal/political noise.
The link is here.
Assorted links
1. The pulled report on taxes and the economy.
2. There is no great stagnation: texting while skiing.
3. Some economics articles on natural disasters.
4. Does this elephant speak Korean? Another story here, and video here.
MOOC cheating (model this)
From an email from Coursera:
Several students have contacted me about cases of cheating on the Final Exam. Frankly, why anyone who do this in a course that focuses on learning and offers no credentials, beats me. Students who cheat are really cheating themselves. If you are sure an answer is plagiarized from somewhere else (often easy to determine with a quick web search), you could simply award 1’s everywhere, which amounts to a score of 0. Whether you do that for one question or the whole exam is up to you. If there is any doubt that the student has broken the honor code, you have to give the student the benefit of that doubt. 0 on the whole exam is more significant than on one question. Though again, the stakes here are essentially zero; it’s mostly about self esteem, surely. For truly egregious cases, send me the details (your login id and the Student number (1, 2, or 3) and I can take it from there. Violation of the honor code is cause for expulsion from the class. Expulsion has occurred, in this class and others, I’m sad to say.
Meanwhile, if you want to know how evaluation training and peer grading looked from our side (the instruction team and the folks at Coursera who were making sure the ship stayed afloat), check out my latest post at MOOCtalk.org to see what was going on behind the scenes. Enjoy! 🙂
I thank AA for the pointer.
Retractions
That is a new paper by Pierre Azoulay, Jeffrey Furman, Joshua Krieger, and Fiona Murray, and here is the abstract:
To what extent does “false science” impact the rate and direction of scientific change? We examine the impact of more than 1,100 scientific retractions on the citation trajectories of articles that are close neighbors of retracted articles in intellectual space but were published prior to the retraction event. Our results indicate that following retraction and relative to carefully selected controls, related articles experience a lasting five to ten percent decline in the rate at which they are cited. We probe the mechanisms that might underlie these negative spillovers over intellectual space. One view holds that adjacent fields atrophy post-retraction because the shoulders they offer to follow-on researchers have been proven to be shaky or absent. An alternative view holds that scientists avoid the “infected” fields lest their own status suffers through mere association. Two pieces of evidence are consistent with the latter view. First, for-profit citers are much less responsive to the retraction event than are academic citers. Second, the penalty suffered by related articles is much more severe when the associated retracted article includes fraud or misconduct, relative to cases where the retraction occurred because of honest mistakes.
This of course may suggest one reason why some scientists are not so keen to force retractions from other researchers in their field.
Very good points on FEMA
We’ve nationalized so many of the events over the last few decades that the federal government is involved in virtually every disaster that happens. And that’s not the way it’s supposed to be. It stresses FEMA unnecessarily. And it allows states to shift costs from themselves to other states, while defunding their own emergency management because Uncle Sam is going to pay. That’s not good for anyone.
When FEMA’s operational tempo is 100-plus disasters a year, it’s always having to do stuff. There’s not enough time to truly prepare for a catastrophic event. Time is a finite quantity. And when you’re spending time and money on 100-plus declarations, or over 200 last year, that taxes the system. It takes away time you could be spending getting ready for the big stuff.
Nobody is taking the position, that I know of, saying get rid of FEMA, the federal government should have no role responding to disasters. The position is, no no, we need to save FEMA and the Federal Government for the big stuff: Sandy, Katrina, Northridge. But states should be charged to take care of the other, more routine stuff that happens every year. There are always going to be Tornadoes in Oklahoma and Arkansas. There are always going to be floods in northwest Ohio and Iowa. There are always to be snowstorms in the Northeast. There are always going to be rain storms, fires in Colorado. They happen every year. There’s no surprise here. And they don’t have national or regional implications, economically or otherwise. If they do, that’s a different question.
Read the whole thing.
Measuring Baumol and Bowen Effects in Public Research Universities
That is a new paper by Robert E. Martin and R. Carter Hill:
We estimate three models of cost per student using data from Carnegie I and II public research universities. There are 841 usable observations covering the period from 1987 to 2008. We find that staffing ratios are individually and collectively significant in each model. Further, we find evidence that shared governance lowers cost and that the optimal staffing ratio is approximately three tenure track faculty members for every one full time administrator. Costs are higher if the ratio is higher or lower than three to one. As of 2008 the number of full time administrators is almost double the number of tenure track faculty. Using the differential method and the coefficients estimated in the three models, we deconstruct the real cost changes per student between 1987 and 2008 into Baumol and Bowen effects. This analysis reveals that for every $1 in Baumol cost effects there are over $2 in Bowen cost effects. Taken together, these results suggest two thirds of the real cost changes between 1987 and 2008 are due to weak shared governance and serious agency problems among administrators and boards.
For the pointer I thank Michael Tamada (who does not necessarily endorse the argument).
Markets in everything the culture that is Chicago
At Mayor Rahm Emanuel’s request, Walgreen Co. has agreed to provide $25 gift cards to parents who pick up their students’ report cards and participate in parent-teacher conferences during report card pickup days.
Here is more, courtesy of Peter Metrinko.
Assorted links
3. Discussion of Proposition 35, from California, on settling the penalties for child trafficking.
Cyclically adjusted measures of the stance of fiscal policy
These cyclically adjusted measures are useful information and should not be discarded, but I don’t wish to use them as the sole or main or dominant source of information about the stance of fiscal policy. Here are a few reasons why:
1. The cyclically adjusted measure relies on a measure of potential output. That is not a big problem when potential output is clear, but in a lot of today’s cases the very debate is over the size of the output gap.
Let’s take the current UK. If the output problems all resulted from supply and productivity failures (not the case, just a hypothetical), the numbers would indicate that the current fiscal policy stance is quite expansionary with high budget deficits.
Alternatively, if you take a more Keynesian view, the potential output gap is much larger and, cyclically adjusted, the stance of fiscal policy looks much more contractionary by the cyclically adjusted measure.
Very often the key question is something like the following: how much are the current UK problems demand-side and how much supply-side? I see economists addressing this question by invoking cyclically-adjusted measures of the stance of fiscal policy.
This is has a significant element of circularity. If you assumed a big output gap to begin with, the demand-side crunch is measured as very large. If you assumed a very small output gap to begin with, the measure gives you a very small demand-side crunch in this case.
Maybe you have seven other reasons for believing it was a large demand-side crunch, but that doesn’t make this a good measure. Your results depend very much on the assumption — about potential output and thus demand — which you put into it.
Furthermore this point is far from transparent yet I don’t exactly see proponents of the cyclically adjusted measure tripping over themselves to remind us of it.
(As an aside, the IMF, before this issue became so politicized, expressed precisely this reservation about cyclically adjusted measures and in fact did not appear to favor them as a general approach, while admitting they do provide some interesting information.)
2. There is a big difference between two cases: “the government drove an AD collapse by massive net spending cuts” and “big problems happened and government didn’t fill the gap nearly enough.” These cases have different economic and political causes, may involve different remedies, and very likely will yield different multipliers, both for initial effects and when it comes to potential remedies. I want my metrics for the stance of fiscal policy, and my commentators on fiscal policy, to disaggregate them, rather than to blur them together. Cyclically adjusted measures blur them together. There simply is not one big multiplier for “austerity” as a general concept.
3.The cyclically adjusted measures are an abstraction, and furthermore an abstraction based on estimating a modal quantity, namely potential output.
To give an analogy, I get uneasy when I read sentences such as “inequality caused X.” “Inequality” didn’t cause anything. Inequality is a statistical residue of some other actual processes. It is better to say what caused X (say “the rage and poverty of inner city residents”) and, if relevant, connect this to inequality as well. Except that the cyclically adjusted deficit is an even more problematic causal concept than “inequality” because it relies on measurement of a modal, namely potential output.
The word “austerity” is a political concept and it does not belong in rigorous economics. Let’s just say what happened. Note the simple causal language in my point #2.
4. The mainstream literature on fiscal policy, starting at least with Blinder and Solow (1973), slots “G” and “Gdot” into the model as the measure of fiscal policy. Paul Krugman pieces do this too, as do hundreds of other economists. Models are there to give us some discipline, so let’s use that discipline. Why is it that so few of these classic models used the cyclically adjusted deficit measure to express the stance of fiscal policy? Because many of those economists know that, in the causal sense, that is a whacky measure and best used with caution. It simply is not “the standard measure of the stance of fiscal policy.”
5. These days there is a sudden near-moratorium on citing open economy models of fiscal policy in smallish open economies with floating exchange rates (it may not matter nearly as much as you think for AD). This should be incorporated into the discussion more, yet oddly it suffers from relative neglect. Note also that a) the UK hasn’t the whole time been at the zero bound, and b) you still can depreciate your currency at the zero bound.
6. Let me sum up where we (at least many of us) agree. British policy should have been much more countercyclical than it was and indeed I have thought this from the beginning. But I still see many commentators, writing on British fiscal policy, giving us an exaggerated sense of its potency, an exaggerated sense of the causes of the British downturn in the AD/fiscal policy direction, and cloaking all of this under non-transparent terminology, while keeping the various important qualifications rather silent.
I have further points to make about UK austerity in particular, and the Wren-Lewis blog post, but I’ll save those up for another day. On some details of the UK economy, Matt’s simple treatment makes a lot of sense and he is also (correctly) a major proponent of the relevance of AD analysis.
Andreu Mas-Collel calls for Catalonian secession
The article, in Spanish, is here. He refers to staying in Spain as “el camino de la decadencia.” By the way, he is now the finance minister of Catalonia.
He taught me Ph.d Micro I at Harvard, so it’s too bad he wants to wreck both Spain and Europe, and for so little in return. Didn’t one of his theorems suggest this was a bad idea? It’s not as if Catalonia is treated like Tibet. (Haven’t I spent a few nice days walking around Barcelona in my time? Didn’t Air Genius Gary Leff get a decent meal at El Bulli? Didn’t they once make a young people’s movie about the place in which no one has to do any work?) Don’t we have bigger problems to worry about? How easily does he think negotiations for separation can go, especially with entire eurozone deals at stake and a Spanish history of sending in troops? He mentions that the territory is subjected to «humillación constante» de España. Maybe he’s been misquoted, but from what I see I take this as a paradigm example of how a really smart person can be taken in by rather primitive tribal arguments.
The only way to defend this move is a kind of Leninist “things must get worse before they get better” approach to the eurozone. Even if that is true, this hardly seems like the smoothest way of traversing that path.
For the pointer I thank @AlexFont.