Sunday, April 20, 2014

Making predictions is difficult, particularly about the future

Bob Murphy has an interesting comment on the last post:
"...But you're acting like it's totally crazy? Don't you see that there is a very real sense in which the terms conservative and liberal have come to mean almost exactly the opposite of what they did in the 1800s, at least in several key respects? If Bastiat came back today, I am not saying he would call himself an anarcho-capitalist, but I'm pretty sure he would not be a "liberal" in the way Rush Limbaugh and Rachel Maddow use the term."
So "conservative" is tricky because as society moves the goal-posts move for conservatives. But I don't think the discussion is really about conservatives so much as liberalism, left-liberals, and libertarians (I would put many conservatives under "liberalism" too but that isn't the main point here - Ryan in the comments suggests many are Straussians and that's as good a word as any for others in the conservative movement).

I am of course not claiming that libertarians don't have a claim to the word "liberal". They clearly do. They are clearly in the liberal tradition, and Bastiat - a liberal in his own time - would be a libertarian today in all likelihood and of course in the liberal tradition. I have no dispute with Bob about that.

But Adam Smith? John Locke? Thomas Jefferson? Thomas Paine? That's a whole lot trickier. I could see anyone of them being solid left-liberals if they were transported to the future. I could also see them being libertarians. Keynes remarked in his 1925 essay "Am I A Liberal?" (referencing the Liberal Party but talking a lot about ideology as well) that he would have been what he called a "Conservative Free Trader" if he were around in the 18th century (basically the Bastiat crew is what he had in mind).

But that's kind of the whole point here. Unlike Bob I would not say anything has flipped here. I would say the liberal tradition is an active and progressive intellectual community that has sub-divided over time and there are a lot of genuinely liberal ways to be a classical liberal today.

Before closing this I'd also point out that many of us have in mind economic questions and liberal political economists when we talk about liberalism. Not everyone knows economics, though. I think we need to go a little bit deeper today than seeing whether someone gets worked up about trade with China to determine whether they are liberal. That's just one issue that can easily be remedied by some remedial economics education, and deep down they may still very much be a liberal at heart even if they get some things wrong. I think economists have this tendency to look at things through an economist's eyes too strictly.

Saturday, April 19, 2014

Some libertarians are bothered by the fact that there are lots of non-libertarians in the liberal tradition

This is an... intriguing... effort. "Liberalism unrelinquished", organized by Kevin Frei and Daniel Klein.

"Political language -- and with variations this is true of all political parties, from Conservatives to Anarchists -- is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind." - Orwell, 1946

I know it can be tacky to use this essay of Orwell's to criticize people. But what else are we really to make of this? It is an effort to manipulate language to purge political opponents out of respectability (if they are not liberals presumably they have an illiberal perspective?) and to obscure the liberal tradition in order to align it with more specific political ends of the signatories. I don't think it's particularly dangerous (or that it will be effective) but it's not encouraging to see either.

Friday, April 18, 2014

An INET grant idea that I am not equipped to submit but someone should (and when they do they should include me in some kind of management/editorial role)

I've been involved recently in some discussions about whether INET has really fulfilled its mission of generating "new thinking". A major stumbling block I see here is how to think about established views and personalities. My view is that it's not the "Institute for New Economics Commentators", it's the "Institute for New Economic Thinking" and some of that new thinking might be within the context of existing paradigms, some may not. I also think it's important to remember that "new" isn't good for its own sake. INET is pursuing new thinking because we all agree there are things that are wrong with the old thinking. But that's not the same as saying all the old ideas are rubbish or that new is good for its own sake.

Much of the arguments have been framed in terms of replacing one family of ideas with another. Generally this consists of left heterodox people saying "mainstream" economics should be replaced with left heterodox economics and right heterodox economics people saying that it should be replaced with right heterodox economics. An alternative view is that each theoretical tradition is hitting on something (not necessarily of equal value of course) and each - insofar as it is really scientific - is a progressive intellectual endeavor. This view would imply that "new thinking" after the crisis should come from changes within theoretical traditions, and not exclusively from between them. This brings me to the idea.

I think it would be useful to fund a volume essentially of literature reviews across the various theoretical traditions that INET has some association with. This would be quite pluralistic. The volume would evolve across at least two workshops. Here's how it would work:

Stage 1: Well regarded people in each theoretical tradition would write a literature review of the major insights of their respective traditions, but only using material published in 2008 or earlier. Instructions on this point will be very strict - the editor of the project will ensure that all citations after 2008 are struck from the papers, even post-2008 treatments of pre-2008 work and ideas.

Stage 2: A workshop on the pre-crisis consensus in each of these theoretical traditions to get people broadly familiar with a wide spectrum of work and also of course to hammer things out and make sure nothing is missing.

Stage 3: After the first workshop another author is tasked with writing a literature review of work done since 2009, each comprising of two main sections (1.) work done continuing in the consensus view, and (2.) "new thinking". The emphasis here is on justification of each section. Is continuing in the consensus view warranted or not? Does the new thinking give us reason to reassess the tradition? What work still needs to be done post-2009, and what are the obstacles to getting it done? Citation instructions must of course be less strict here, but the author will be encouraged to principally cite to the pre-2008 literature review so that we are working with a coherent narrative.

Stage 4: A second workshop where this is considered and the author of the post-2009 chapter is challenged on his or her justifications.

At all of these stages, discussion of which tradition is better will be kept to a minimum and only mentioned in the interest of providing context. That is not so much because anyone thinks all traditions are equal, but because it's not the point of the exercise. The point of the exercise is in effect to police cases of shoring up old ideas or trying to gain undue market share for old ideas that is posing as "new thinking" and to highlight where new thinking is really going on and what the verdict is.

Plenty of people are doing the inter-tradition infighting and the justification of old ideas. This is intended to do something different.

Tuesday, April 15, 2014

HAPPY BAAAABY!!!!


The possibility of economic calculation under capitalism

I picked up several books at the local AAUW's book sale last Friday, including Lange and Taylor's "On the Economic Theory of Socialism".  I was flipping through it and found a great passage on economic calculation. I think Lange understands a point that is a stumbling block for many people grappling with "mainstream" economic models. If you get frustrated by the beginning, please note the frequent and deliberate use of scare quotes and hold on until the end:
"The only 'equations' which would have to be 'solved' [under socialism] would be those of the consumers and the managers of production. These are exactly the same 'equations' which are 'solved' in the present economic system and the persons who do the 'solving' are the same also. Consumers 'solve' them by spending their income so as to get out of it the maximum total utility; and the managers of production 'solve' them by finding the combination of factors that minimizes average cost and the scale of output that equalizes marginal cost and the price of the product. They 'solve' them by a method of trial and error, making (or imagining) small variations at the margin, as Marshall used to say, and watching what effect those variations have either on the total utility or on the cost of production. And only a few of them have been graduated in higher mathematics. Professor Hayek and Professor Robbins themselves 'solve' at least hundreds of equations daily, for instance, in buying a newspaper or in deciding to take a meal in a restaurant, and presumably they do not use determinants or Jacobians for that purpose." (page 88).
The title of this post is meant to highlight that I find more to agree with with Lange on capitalism here than I have to agree with him about socialism, but I've conveniently cut off the quote before he got into socialism.

This is an issue I posed to my students in my history of economic thought class when we went over Walras, Jevons, and Menger (and it is perhaps easiest to see with Jevons and Menger precisely because they are not presenting the problem so formally as Walras). Do you need to know and use calculus to make decisions for the theory of the marginalists to be useful? If not, why not?

Well if you do then surely marginalism is not useful, because even those of us proficient in calculus don't use it in the vast majority of our decision making. My view is that you don't need calculus and marginalism is nevertheless very useful for modeling human decision making (and "modeling" here is the key). In the end, all the constrained optimization framework says is "keep doing X until doing more X makes you worse off". It requires very little behaviorally. The greatest burden imposed by marginalism is not in the area of behavior, it's in assumptions about the structure of preferences. We usually impose a few rules here. I've argued elsewhere that they are not very burdensome and fine as an approximation in the absence of anything better. Furthermore, there's no indication that loosening these assumptions qualitatively changes the results. Its only apparent effect is to make the math harder.

As Lange points out, we don't care about the math in everyday life. The purpose of the math is to generate models to study.

Friday, April 11, 2014

My very strong impression on the public perceptions of the gender pay gap is that...

The population that thinks there is no discrimination against women in the labor market [UPDATE:] is not a major factor is far bigger than the share that thinks the raw pay gap is entirely due to discrimination.

I think this differential widens when you talk to a broadly defined set of informed commenters (people with degrees in economics, that read a lot, etc.). In other words I think there are a whole lot more Steve Horwitz's and Mark Perry's that are willing to say discrimination is not a major factor and they are sure about that than there are informed feminists walking around saying the raw differential is all discrimination.

If you have a different impression, then please don't tell me I've "missed the point", understand that we have different senses of the discourse from each other and that you appear to "miss the point" from my perspective, except for the fact that I recognize we have different impressions on this.

UPDATE: A commenter on Bob Murphy's blog wrote this recently in defense of what I contend are extremely misleading claims about the wage gap:

"In casual conversation, it’s much easier to say to someone “the male/female wage gap is a myth” than it is to say “well technically that’s true but if you control for hours worked, marital status, and age, the gap vanishes to a statistically insignificant and trivial amount.”

This is precisely what I mean when I say that this is a problem in how people like Steve Horwitz are framing it. If you think that what matters in assessing gender disparities is the conditional difference in means in a straight wage equation you are really missing the point,

Strong and Weak Forms of Gender Pay Gap Skepticism - and why both have problems

I have gotten some feedback on my last post on the gender pay gap, and I want to clarify a few things. First, as is often the case, there is disagreement on what we're even talking about. Critics assert for one thing that invocation of the gender pay gap is usually of the form "the entire 23% gap is discrimination by employers". Rarely is any evidence offered that this is what most people claim, and it's not my experience that most people claim this. Several outspoken left feminists I know that I often disagree with on things suggested they agreed with my post and don't think that the entire gap is employer discrimination. You can of course dig up a politician saying this every once in a while, but I think we all agree that politicians do not make good economists and are rarely nuanced. That is hardly proof that the view is commonplace (would you like me to assign everything that comes out of Ron Paul's mouth to libertarians?). So we appear to disagree on that in many cases.

There's also disagreement on what the skeptics are claiming, and of course you run across stronger and weaker claims. I was responding to an especially strong claim (Perry and Biggs). Some have pointed out to me a weaker (and I think more defensible) skeptical claim from Steve Horwitz. I think both have important problems, but it's worth separating the two to explore those problems. So let's flesh this out a little:
Strong claim: The conditional difference in means is the amount of discrimination between men and women in pay and therefore there is little discrimination because women choose different occupations, majors, etc.

Weak claim: The conditional difference in means is the amount of discrimination between men and women in pay and therefore there is little discrimination but there might be other social problems we don't like driving the differences in occupations, majors, etc.
Both claims have been associated with the idea that the pay gap is a "myth" (Steve uses precisely that language in his video) so in that sense they are making the same over-arching claim, just interpreting it a little differently.

The strong claim was addressed in the last post, and not many people seem willing to defend that claim, instead defending the weak claim and insisting I've misunderstood something. Well I didn't misunderstand Steve - I wrote up and sent in the response to Perry and Biggs even before Steve's post went up and of course it wasn't even a reaction to him.

So what are the issues with Steve's post? One is analytic and one is more of a framing concern I have.

1. The analytic problem

I think what I haven't highlighted as much on here (although I have on Facebook) is the issue of the joint determination of wages and every other decision men and women make associated with the labor market. You can't simply control for occupation and major and call it a day because people select into occupations and majors based on expected wages, and that selection process influences the observed wage distribution. If any of you are familiar with it, this is the basic point of the Roy model, and it has a variety of applications in labor economics. It is also analogous to the Lucas Critique and the need for some understanding and identification of the structural model in macroeconomics. A stripped down set-up to this joint determination problem is:

w0 = b0 + b1X + e | F = 0
w1 = a0 + a1X + u | F = 1
F = 1 if z0X + z1(w1hat-w0hat) + v > 0

The first two equations are wage equations. w0 is the wage in a male-dominated occupation and w1 is the wage in a female-dominated occupation. F is a dummy variable for employment in a female-dominated occupation, so the third equation is an occupational choice model. X are a set of characteristics of the worker and each equation has an error term. The important thing to notice here is that occupational choice is a function of the relative gains of entering a given field for an individual.

The short point here that anyone who's gone through an econometrics class should get right away is that occupational choice is endogenous in the wage regression. Controlling for it also controls away part of the wage differential. Think about how this plays out. Let's say there is a big gender differential in w0, the wage in male-dominated occupations. Men can expect to earn a lot more in these occupations than similarly qualified women. What would you expect to see, given equation 3? First, you'd expect to see only the women best suited to those occupations entering those occupations because they are the only women for whom w0 > w1. The corollary here is that the less qualified women for that sort of job will not enter that job. And the opposite is true of men. Men have an advantage in those fields so less qualified men will enter it because their w0 > w1 calculation is rigged. We can control for observed differences, but of course there are a lot of unobserved (to the econometrician - many of these are likely observed by the employer) differences and talents that will make a difference in pushing high ability women into male jobs and attract low ability men into those jobs. What you'd get out of a regression, though, is women that seem to be doing really well (because they're high ability) and a weakening or even elimination of the underlying wage discrimination.

This is not some crazy leftist invention to focus on discrimination, by the way. It's just Ricardo.

What should we do? We should:

1. Model selection explicitly, or
2. Take the naïve regressions as a first-cut sense of what forces matter in driving the disparity.

One thing you definitely, definitely don't want to do is decide that discrimination doesn't matter because the unexplained variation in a wage regression is small. Selection models are harder to explain to the public and it's more of an undertaking than an OLS, so I don't think that needs to be done every single time. We needn't throw out the baby with the bathwater here. But work along these lines should be done, and I imagine it is, to inform us about how at the very least occupational choice and wages are jointly determined.

You can expand the above to the joint determination of anything else that people tend to throw into kitchen sink wage regressions, but occupations and occupational segregation is a big one.

2. The framing problem

So the other problem I have with Steve's post is not so much that anything is wrong per se, but that I don't like how he's framed it. As I understand it Steve uses "discrimination" to refer to discrimination in the salary determination and "sexism" to refer to everything else. With these definitions in hand he starts off his video by telling people (like Perry and Biggs did) that the pay gap is an economic "myth", and that "it's 'mostly' not discrimination". I just think this muddies the waters. It focuses on a very narrow claim about pay determination and then uses it to make what sounds to most people like a very broad claim. It's an improvement on Perry and Biggs for sure in that it highlights other problems that they attribute to choice and preference. But it still follows the unexplained variation equals discrimination and explained variation equals something else (maybe sexism, but not employer discrimination) formula and I think both are wrong.

Discrimination is both potentially bigger and potentially smaller than this sort of formula suggests. It's potentially bigger for the reasons that I stated above - all of this is jointly determined so wage discrimination is absorbed into the other variables on the right hand side. It may also be smaller than the unexplained variation. There is a natural variability in talents, after all. There are natural variabilities in preferences. We don't know from the regression how much of that residual is discrimination and how much isn't. The only way to really get at it is what's called an "audit study", where you send out two otherwise identical resumes and see what happens. Now there are criticisms of these sorts of studies too (see several articles in the Spring 1998 JEP), but it's probably the best we've got. This is more of a treatment effect approach rather than the structural approach I described above.

So how do I like to talk about this if I don't like Steve's approach?

I generally don't talk about "discrimination" much. You'll see in the work I've done on this for the Urban Institute (usually with respect to race rather than gender), I usually use the word "disparity". This is very common, and people do it for the reasons I've raised here. Discrimination is a very strong claim and it's hard to pin down exactly what and where it is. People also tend to think only in terms of overt discrimination, and if you understand that structural discrimination is important you want to shy away from pointing to a coefficient or residual and calling it "discrimination", because many of the natural disparities that emerge are of concern too and you don't want to rule that out.

Wednesday, April 9, 2014

Botched economics of gender in the WSJ

Mark Perry and Andrew Biggs have a really unfortunate op-ed in the Wall Street Journal yesterday perpetuating the idea that the gender pay gap is a "myth" (I know that's the title they were probably given but the column itself makes much the same point).

Why would they claim that? Because surprise, surprise the conditional difference in means is smaller than the unconditional difference in means!

I sent this letter to the editor in. It has not been published at this point:
"Mark Perry and Andrew Biggs (April 7th, 2014, "The '77 Cents on the Dollar' Myth About Women's Pay") seem to confuse our ability to attribute the gender pay gap to various factors with the idea that the gap itself is a "myth". Far from demon...strating that the gap is "economically illogical", by highlighting the various determinants of pay disparities Perry and Biggs are actually confirming the existence of the gap and presenting evidence on where it originates.

Economists have been studying female labor market participation and performance for decades. This research does not stop at the question of pay disparities. We know, for example, that many occupations are highly segregated by gender, and that large gender disparities exist in the amount of time dedicated to household work. Young women may be nominally free to major in whatever they choose, as Perry and Biggs suggest, but these choices are heavily conditioned by earlier experiences in the home and in primary and secondary school.

All of these disparities are closely related to each other and to the pay gap, and they pose a real problem for those of us that value gender equity. Dismissing the gender pay disparity because it is deeply embedded with other disparities does not clarify the issue at all; it confuses the issue.

Daniel Kuehn
Doctoral student, American University Department of Economics
Specializing in labor economics and gender economics"
Mark Perry's next column: The black unemployment rate is a myth because if you control for unequal education, terrible treatment by the justice system, and differences in a family structure a whole lot of it seems to go away! Also must not be caused by discrimination.

If anyone is interested in studying the economics of gender and the family, you should look into American University. It was the first U.S. university to have a field specialization in gender economics, it offers courses in both gender macro and micro, and a lot of the faculty are working on these issues.

Simon Kuznets at Econlog - an agreement and a disagreement

Bryan Caplan and David Henderson have two interesting posts up (here and here, respectively) on Simon Kuznets, who was responsible for building the national accounts in the United States (along with many other important contributions).

I agree strongly with David's praise of something Kuznets pushed for in the national accounts and disagree strongly with Bryan's praise.

Let's start with David. He notes that very early on Kuznets advocated including household production in the national accounts. He was overruled at the time. This is a major oversight, given how much production occurs in the household, and the relationship between household production and market production. One guess I have as to why he was overruled at the time was that not many people were talking about household production yet and those that were were principally labor economists (it's relevant for labor supply decisions and at the time especially female labor force participation). Macroeconomists didn't really start getting interested until several decades later when RBC and other theorists were trying to explain some unusual labor market and consumption behavior over the business cycle. I review much of this in a paper that I am revising and resubmitting to the Journal of Family and Economic Issues on household production over the business cycle and its relationship to home price fluctuations.

One last point on this is that the Commerce Department is beginning to make amends. There have been working groups on the subject and people are generally positive about developing these data, perhaps in a separate module like they do for research and development. This is for the best, I think. Household production impacts macroeconomics obviously, but a lot of macroeconomics turns on income-expenditure identities and the idea of an aggregate output market. Importing non-market behavior into theories of the market is possible, but you cannot confuse exchanged output with non-exchanged output (unless you want to scrap the theories that we currently have about human exchange). So I think the BEA is well placed to measure (really, to estimate) this, and they should but I would keep it as a distinct series.

Kuznets is not to be praised, I think, for something that Bryan discusses - his advocacy of using GDP as a measure of welfare and excluding things like armaments spending that he sees as reducing welfare. There are two enormous problems with this position, both grounded in what ought to be non-controversial welfare theory.

The first and most obvious is that welfare is not a measurable quantity (unless we get some way of measuring utils - perhaps in units of dopamine? - and adding them up across individuals). This is the standard interpersonal utility comparison issue. You cannot get an aggregate welfare measure because you cannot measure welfare in a way that can be summed across a population. Even if you could (and admittedly it would be fantastic if you could), the concept has nothing to do with the national accounts and has no business in the national accounts. The national accounts measure p*q, price times quantity of goods and services. Any given p*q could be associated with a wide range of welfare levels depending on the shapes of the supply and demand curves. Sure they're related in that you get both concepts from a supply and demand model, but they are related like apples and oranges are related because they're both fruit that grows on trees. So it's not a very plausible goal to begin with, and even if it were plausible it's not something that should be mixed into the national accounts.

However, the interpersonal utility comparison problem rears its head in another way. Exactly who gets to decide what is really welfare enhancing and what isn't? I think a lot of armaments funding is welfare enhancing. Why is Kuznets and Caplan's view privileged over mine? Caplan calls this proposal "impolitic wisdom". Maybe it's impolitic, maybe it's not. I don't think it's wisdom. A better term for it is "objective value theory," and that doesn't have any business in economics. Why stop at armaments? Why not guns held by private households. Sure, many privately held guns are used for recreation but a lot of them are also used for precisely the same purpose that larger armaments are used. Should we subtract out gun production? What about home security system? Should police uniforms be subtracted out of the textile industry and police cars be subtracted out of the automobile industry? I really only have a lock on my door for security reasons too - should locks be subtracted out of output? Or do we have to somehow distinguish between legitimate and illegitimate security spending - and again who gets to decide what's legitimate?

Security is just the tip of the iceberg of course. What about alcohol and tobacco? What about trans fats? What about Jersey Shore (the show, not the location)? What about the house of the guy that lives behind me. It's an eyesore and I'm glad at least that I don't have to look at it out of my front window.

You get the picture.

It's a bad idea, and it's a good thing Kuznets was overruled on that one.

Monday, March 31, 2014

Good thoughts from Nick Rowe on some old fashiony stuff

Here.

I've always had a tough time understanding a couple things. First, I've never understood the outrage at the money multiplier/endogenous money stuff. At best it's a semantic difference (this is largely true of "endogenous money" I think, where it boils down to whether the FOMC is "accommodating" banks or whether you want to think about its bond market activities as more pro-active - it's a sin of omission vs. sin of commission argument). On the money multiplier I think Nick makes the right point that the multiplier is the same no matter where the injections occur. Noting that central banks sometimes inject money (the pro-active view of the FOMC) certainly doesn't rule out the idea that "loans create deposits". Whether loans create deposits or deposits create loans depends on one thing: at which step in the Macro 101 exercise you start tuning in.

This segues nicely into the equally odd treatment of the Keynesian multiplier. This one I think is even more right-there-in-front-of-you than the money stuff. Whether you're reading it in the Keynesian original (where the chapter on the multiplier doesn't even HAVE a G and everything is talked about in terms of I!), or in modern textbooks (where neither I nor G are functions of income and enter the equations in the exact same ways). When I TAed for our big intro macro lecture and I did my review lectures I made them work through both and show that they got the same answer, so that they understood why the model works the way it does: the income/expenditure equation and the consumption function, not some magical powers of the government.

Finally, I've never understood the tendency to treat Old Keynesians like troglodytes and New Keynesians as sophisticates when it comes to the main components of the model. All of the important elements of the Old Keynesian model are in the New Keynesian model. That's why it's a called "Keynesian". What the New Keynesian model adds is some dotting of the i's and crossing of the t's: more realistic price formation, expectation formation, etc. Some things drop out, too. You're better served going to Nick's post for that.