Eight empirical propositions I used to think were correct

Just below I claimed that economics is a science. If that is so, we should expect to see empirical progress. Here are a few issues where I (and many others) have been swayed by the data; I will state these in the form of untrue claims which I no longer believe:

1. We can both control the price level and keep interest rates stable by targeting the monetary base. Twenty years ago I believed this, but even the Swiss have not stuck with monetary targeting. A better solution is to broadly target the price level but allow for mild inflation.

2. Minimum wage boosts will generally put many low-skilled workers out of work. I covered this one a few days ago.

3. Investment is highly elastic with respect to observed changes in real interest rates. I’ve seen a few good studies that generate significant elasticities, typically using taxes as an exogenous instrument. But more often than not you can’t get this result. Short-term cash flow is often a better predictor of business investment.

4. Free capital movements for developing countries should usher in macroeconomic stability. Ask Argentina, Thailand, and Indonesia. Sometimes this proposition will be true, it is simply not as true as we once thought. If you don’t do all your reforms to perfection, and perhaps even if you do, international capital markets may put you through the wringer. But note, I am not endorsing capital controls, which have problems as well, most of all corruption.

5. Immediate privatization is more important than establishing the rule of law. Arguably the jury is still out on this one. We haven’t observed the other sequencing in many cases (when has rule of law come first?) and thus we do not have the relevant counterfactual. But privatization alone is less effective than we used to think, pick almost any ex-Communist country as an example.

6. It is relatively easy for a disinflation to be credible, provided the government sticks to its guns. So expect some nominal wages to remain sticky and some unemployment to result. People simply won’t believe a government, can you blame them? Of course the disinflation may still be worth doing, but the costs are higher than we used to think.

7. Fairness perceptions, envy, and a stubborn attachment to the status quo have little to do with nominal wage stickiness. OK, this one remains up for grabs. But the evidence is mounting in favor of the importance of fairness perceptions; furthermore this is strongly consistent with my real world experience. We used to look more toward long-term contracts and efficiency wage theories to explain sticky wages.

8. Human beings maximize expected utility in the same way, regardless of context. But now, alas, I despair as to how general a science economics can ever become. The non-economist may not be shocked here. Still we now have a wide body of knowledge about the importance and specifics of framing effects.

Remarks:

All these results share some common features. All have real world policy implications. All spring from a variety of economic methods, but most prominently from direct observation and economic history, informed by fairly straightforward theories and simple approaches to data. Rarely have fancy-schmancy empirical methods, on their own, led a radical reshaping of our understanding.

Is economics a science?

Yes, says the Royal Society, the most prestigious scientific body in the world; no, says Cambridge, the UK’s leading science university which still considers it part of the arts.

What might appear an arcane academic argument has suddenly assumed huge significance following the election of Sir Partha Sarathi Dasgupta, an economics professor at Cambridge, as a fellow of the Royal Society which was founded in 1660.

From Venice, where he has been attending a gathering of the European Association for Economists, a delighted Dasgupta told The Telegraph: “This is a bigger honour for me than my knighthood. I believe I am the first economist in 350 years of the Royal Society to be made a fellow.”

He added: “Until now, economists have been considered social scientists eligible for membership of the British Academy, of which I am a fellow, but not the Royal Society, which was only for scientists and mathematicians.”

Each year, the Royal Society can elect 44 new members, which this year includes Dasgupta.

An official statement from Cambridge University proudly declared: “He is the first economist elected to the Royal Society.”

Here is the full story. Here is a press release. Here is Dasgupta’s home page. I’ve long been an admirer of how he blends microeconomic technique and philosophic reasoning about welfare economics. I would have voted for him without reservation. That being said, he is an odd pick in the sense of being less “scientistic” than most traditional empirical economists. He is not an ideal test case to broach the precedent.

And in my view economics is surely a science. We produce empirical knowledge which is subject to process of testing, broadly interpreted, and feedback; see my post above. We even now have controlled experiments. And look at some of our competitors. String theory is not yet empirical. Environmental science and ecology are rife with ideology. Astronomy doesn’t have controlled experiments. And isn’t chemistry just plain outright boring? There is plenty of empirical economics I don’t trust, but usually it is for quite hackneyed reasons (e.g., data mining), rather than for “intrinsic to economics” reasons.

Addendum: Here is a neat description of economic historian Niall Ferguson.

Markets in everything

Spring water with fluoride.

But hey, when you buy bottled water isn’t fluoride what you’re trying to avoid?

Imagine a whole string of products along these lines:

“Organic produce with pesticides

“Large print books, we fit more on the page than anyone else!”

Remember the old joke about the Soviet Union producing “The world’s largest microchip”?

I discovered the strange water on my second visit to Wegmans. By the way, I need to revise my last post about this super-supermarket. Upon further scrutiny, I can report that the prices are much lower than you will find in the competitors. It is truly a marvel of the modern world.

Foundation grants for everything

In the abandoned Burchardi church in the German town of Halberstadt, the world’s longest concert moved two notes closer to its end Monday: Three years down, 636 to go.

The addition of an E and E-sharp complement the G-sharp, B and G-sharp that have been playing since February 2003 in composer John Cage’s ”Organ2/ASLSP” — or ”Organ squared/As slow as possible.”

The five notes are the initial sounds played on a specially built organ — one in which keys are held down by weights, and new organ pipes will be added as needed as the piece is stretched out to last generations.

The concert is more than just an avant-garde riff on Cage’s already avant-garde oeuvre. ”It has a philosophical background: in the hectic times in which we live, to find calm through this slowness,” said Georg Bandarau, a businessman who helps run the private foundation behind the concert. ”In 639 years, maybe they will only have peace.”

The concert began Sept. 5, 2001 — the day Cage would have turned 89. The composition, originally written to last 20 minutes, starts with a silence, and the only sound for a first 1-1/2 years was air. The first notes were played in February 2003. The two new notes rang out Monday.

After debates in Germany about what ”as slow as possible” could mean — anywhere from a day to stretching on infinitely — the group of German music experts and organ builder behind the project chose the concert’s 639-year running time to commemorate the creation of the city’s historic Blockwerk organ in 1361.

About 10,000 tourists visited the city last year to hear the first three notes, Bandarau said.

Just imagine a German debate over what “as slow as possible” could mean. Here is the link to the story, the previous link also brings you to an audio version of the piece, just fight your way through the German instructions.

Does anyone listen to XTC anymore?

I’ve had satellite radio for over a year now, and even they don’t play XTC. Once seen as one of the UK most vital independent pop bands, XTC first rose to popularity and now seems to have fallen out of both indie and pop markets.

To be sure, the group had its problems. They don’t have a single album you can listen to straight through without wincing at least occasionally [Black Sea comes closest, though English Settlement has their highest peaks], the fey Britishisms can be offputting, and the vocals are sometimes monotonous [have I sold you on them yet?]. Plus they don’t have a truly convincing greatest hits collection. But their very best songs are among the most significant achievements of rock and roll. Andy Partridge’s songwriting, polyrhythms and studio sense have given me some of my most treasured musical moments. Let’s hope they stand the test of time.

I don’t do iPod (I can’t stand the poor sound quality), but buy the following if you can: 1) No Language in our Lungs [Partridge’s favorite song from the group], 2) Helicopter, 3) Ladybird, 4) Snowman [my favorite], 5) No Thugs in Our House, 6) Senses Working Overtime, 7) I’d Like That, 8) Crocodile, 9) Rocket from a Bottle, 10) Yacht Dance, 11) Brainiac’s Daughter [technically by the “Dukes of Stratosphere”], and 12) Holly up on Poppy, just to name a few. Those songs are my nomination for what belongs in the canon but isn’t yet there.

Addendum: Economist Dan Klein, who first turned me on to XTC, adds the following:

“I liked Tyler’s post on the British rock band XTC. But there is something about XTC he didn’t mention. Not sure how to describe it. Something like the soul wrenching sound of focus and determination. In Led Zeppelin and NWA you also get a pure sense of masculine being, but there’s something special about it in XTC. The self as a team of men in a boiler room making a machine serve an over-riding purpose. I think of songs like “Paper and Iron,” “Travels in Nihilon,” “Heaven is Paved with Broken Glass,” “Tissue Tigers,” and, above all, “Roads Girdle the Globe.” I’d say the peaks come on the albums Go 2, Drums and Wires, and Black Sea.”

“Hail mother motor!
Hail piston rotor!
Hail wheel!””

Does the minimum wage put people out of work?

Steve Landsburg imparts much wisdom on the minimum wage; read Brad DeLong as well. Steve writes:

How do we know what was in all the unpublished research about the minimum wage? Of course we don’t know for sure, but here’s what we do know: First, the big published studies were no more statistically significant than the small ones. Second, this shouldn’t happen if the published results fairly represent all the results. Third, that means there must be some important difference between the published and the unpublished work. And fourth, that means we should be very skeptical of what we see in the published papers.

Now that we’ve re-evaluated the evidence with all this in mind, here’s what most labor economists believe: The minimum wage kills very few jobs, and the jobs it kills were lousy jobs anyway. It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers.

The work of Card and Krueger has emphasized the puzzle of why minimum wage boosts don’t cause a big downturn in employment. They offer up a complicated story about labor market monopsony.

My take:

On this issue (and many others) I’ve been much influenced by my colleague Gordon Tullock. Gordon notes that the government can make an employer raise nominal money wages, but can’t stop him from turning off the air conditioner. [A more optimistic scenario is that the employer invests in creating a higher-productivity job.] Surely just about every job out there can be made worse, one way or another, in a way that saves the employer money.

So the scenario is now simple. The government boosts the minimum wage. Low-wage workers earn more. Few lose their jobs. Workers sweat more too, one way or another. Few are much better off.

Addendum: There is a neat twist on this argument, drawing on the idea of an intra-family externality. Let’s say you hold the “traditionalist” view that the poor don’t work hard enough for their families. If Tullock’s mechanism is operative, you might then favor increasing the minimum wage. The end result would be more sweat at a higher money wage.

Kerry v. Bush on fiscal policy

Tyler’s earlier post (below), making the point that we should look to winning coalitions not promises to predict a candidate’s fiscal policy, is characteristically cogent (i.e. I agree!). Tyler is too easy on Bush, however, when he says “The high domestic spending of Bush I take as a sign of perceived political weakness (“we need to buy more allies”), rather than a reflection of Bush’s ideology.”

True, Bush did not seem to have much of a mandate in 2000, but he was quickly accepted by the American public, his popularity skyrocketed after 9/11 and he faced a Republican House and Senate. In fact, the Bush administration has been successful at promoting it’s agenda including the big tax shift, the Iraq war and the prescription drug plan. Remember that the drug plan was not something that Bush simply failed to veto, he actively bent Republican arms to get that bill passed. The issue has not been too little power but how the administration’s considerable power has been exercised.

Would Kerry be more fiscally irresponsible than Bush?

Virginia Postrel says yes; read more here. Paul Krugman suggests Kerry will repeal the tax cut [tax shift, more accurately] to spend more on health care, rather than trying to restore a balanced budget (my words, not his). Can these two luminaries, not always in total agreement, be wrong?

No doubt, if you look at what Kerry says, it sounds like he will spend more than Bush. But the ever-perceptive Jane Galt reminds us that, well…politicians are liars! (Just don’t let on you heard it here…)

I look less at what politicians say, and more at what kind of coalition they would have to build to rule. The high domestic spending of Bush I take as a sign of perceived political weakness (“we need to buy more allies”), rather than a reflection of Bush’s ideology. So in part it depends on what a Kerry victory would look like. But here are a few reasons to think Kerry might be more fiscally responsible:

1. The Republicans will still probably control the House and maybe the Senate too, check out the odds. The political benefits from spending are less, the less you control the content of that spending.

2. The Republicans become more fiscally conservative in opposition.

3. Kerry’s supporters hate Bush, most of all, for what is perceived to be his “Texan-evangelical-grammatically challenged-frat boy” symbolism [just for the record, I don’t buy this picture]. Kerry can appease his base on these symbols fairly easily, just by showing up for work. I doubt if many Kerry supporters are expecting or requiring that a Kerry candidacy would bring a significant movement toward the left on economic policy, above and beyond repealing some of the tax cuts. The left hates Bush so much they would become captives of the center, if Kerry held the presidency. The left would have nowhere else to go (advice to the left: be careful how much Bush hatred you show!)

4. Kerry would be under constant pressure to show that he is “tough” on foreign policy. This will limit his ability to make domestic spending commitments. And if he does well on foreign policy, and appears suitably in charge, he could get reelected without much using spending to buy domestic support. If he is weak on foreign policy, will lots of spending really help him?

5. If Bush is re-elected, it affirms that a Republican can get away with jacking up domestic spending. Such a precedent is worrying for the longer run, not just for Bush’s second term.

6. Have many Presidents moved closer toward their original ideological base in their second terms?

That’s enough raw unfounded speculation for one day. But no, it is not obvious to me that Kerry would be less fiscally responsible than Bush. It’s a judgment call, but let’s not obsess over what candidates say when campaigning. Don’t forget, it was Bush who campaigned on a platform of fiscal responsibility and no nation-building.

The continuing earthquake in Germany?

There is an old and not quite historically accurate joke:

Question: Why don’t they have a revolution in Germany?

Answer: Someone would have to step on the grass.

Well, the Germans are continuing to reform their welfare state, albeit in baby steps. The latest step is to cut jobless benefits. Under the old regime, a German who hadn’t worked for a year would receive 53 percent of his or her old salary, forever. Oh, plus supplements as well. Under the new law they will get $426 per month plus supplements, basically the same as the minimum relief offered to the poor. And the forever word will no longer hold. Recipients can lose some of their benefits if they turn down possible jobs. And they also can take low-paying jobs without losing the benefits. This is a better policy all around.

Here is another recent MR post on German reforms. And did you know that they are cutting taxes by 6.5 billion Euros next year? That paltry sum is hardly Arthur Laffer’s dream, but any movements out of Germany’s previous policy gridlock are welcome. By the way, are you surprised to learn that most German trade unions oppose the change in benefits policy?

Some of the information in the post is taken from The Wall Street Journal, 8 July, p.12.

Addendum: Here is a New York Times article about how Europeans are moving away from their ideal of a leisure society.

So you think you know game theory?

Who is Julia Hall Bowman Robinson?

In fact she is the mother of evolutionary game theory. (No, that is not like being The Mother of All Wars.)

Who is Emile Borel?

Some easier questions are available too, including biograhies of the top game theorists and a good introductory guide to game theory concepts. I’ll be happier with game theory when Tom Schelling wins the Nobel Prize; in the meantime I use game-theoretic mechanisms in my thinking just about every day. It is hard to believe that game theory was a fringe topic as recently as the 1970s.

Why our world is not efficient

Dear Prudie,
I recently attended a bridal shower for a young lady who’s engaged to my cousin. I had never met the bride before and was looking forward to meeting her and her family at the shower. When we were all there, the hostess handed out envelopes to all of the guests and asked each person to address the envelope to herself, in order to receive her thank you note. As I had received my invitation in the mail, I could only assume that she already had my address. I was shocked at this rude gesture, which said to me that the bride couldn’t be bothered to write a thank you note after I had found the time to attend her event and purchase a gift. Is this a normal event at bridal showers, or am I just being picky?

–Wondering

“Why didn’t we do that?” was all I could think. But alas, here is Prudie’s response, and no she doesn’t cite the Coase Theorem or the notion of who is the least cost avoider.

Addendum: Hey you linkers, I was joking.

Why are some young boys myopic?

Contrary to popular belief, people in east Asia are no more genetically susceptible to short-sightedness than any other population group, according to researchers who have analysed past studies of the problem.

The epidemics of myopia in countries such as Singapore and Japan are due solely to changes in lifestyle, they say, and similar levels could soon be seen in many western countries as lifestyles there continue to change…

Myopia is on the increase in most places, but in countries such as Singapore it has reached extraordinary levels. There, 80 per cent of 18-year-old male army recruits are myopic, up from 25 per cent just 30 years ago.

Or how about these examples?

70 per cent of 18-year-old men of Indian origin living in Singapore have myopia, while in India itself the rate is roughly 10 per cent.

Another study found myopia rates of 80 per cent in 14 to 18-year-old boys studying in schools in Israel that emphasise reading religious texts. The rate for boys in state schools was just 30 per cent.

Here is the full story, and I will vouch that blogging has made me more myopic.

What is the most expensive substance?

Antimatter. According to one estimate (Discover magazine, August, p.68), it costs $1,750 trillion per ounce to produce; here is another cost estimate. Gold looks absolutely cheap by comparison, and who cares if a possibly fake Vermeer just sold for $30 million?

Here are some people who think antimatter will become cheaper. So perhaps you should sell your stockpile now…!

I have seen the future…

…and it is Wegmans. Natasha and I drove there last night. Here is one description. Quite simply, it makes your typical Whole Foods look like a dilapidated 7-11. It has a dozen ethnic food markets rolled into one, not to mention basic groceries, superb and varied produce, the best seafood around, various snack bars, and a cheese selection to die for. I would guess it is twice as large as a large Giant store and much prettier to boot; the atmosphere leaves you in the kind of glorious stupified daze that makes the Frankfurt School sound occasionally plausible. The fine things are not cheap but they are not overpriced relative to competitors.

Not surprisingly, there is already an anti-Wegmans movement afoot; the typical branch takes up around 15 to 18 acres; Giant and Safeway (!) are complaining about the “environmental impact” of the stores. Not that they’re afraid of the competition, or anything like that.

Given all this choice, why you can’t buy a healthy apple at the concession stands of most movie theaters? On the brighter side, they are starting to put healthy food into vending machines.

Is New Zealand backsliding?

Re the railways, the government has actually bought up only the track, while new private sector owners now own and run the operating company. It is probably a little unfair to suggest that the purchase was the (direct) result of widespread voter dissatisfaction – Tranzrail, the previous private sector owner, had almost ended up in liquidation. Without that trigger, this government would have had no great appetite for getting back into ownership of railways. Also, there is at least a case that the lines should always have been separated from the operating business.

As for whether rail should exist in New Zealand, I think that is still an open question (although, like everyone, I was surprised at what the original bidders paid at privatisation in 1993). The issue is not about passenger services, except, maybe commuter lines in Wellington – the population is too sparse for economic inter-city services – but about a limited network for freight needs (mainly bulk dairy and forestry). The very sparseness of the population, and the rugged terrain, also makes good quality roads a challenge to justify/maintain.

As for Air New Zealand, perhaps one can say only two things for the defence. First, late 2001 was the worst time to be relying on new operators to provide longhaul airline services (recession and 9/11) and, sensibly or not, almost any government in the world would have done the same thing at that time. And second, at least so far it looks to have been a good deal financially – Air NZ was sold for more than the government bought it back in 2001, and its market value is now above the latter price. As for the Qantas deal, the curent NZ government has actually been quite supportive of it, but the transaction was blocked by competition authorities on both sides of the Tasman (concerned about extreme market dominance on NZ domestic routes and most (non-auckland) trans-tasman routes.