I woke up today dreading having to write part 2 of my liberalism and utilitarianism post, and then decided to just blow it off. I suppose a blog should be more like jazz improv, rather than the laborious construction of a symphony in parts. So tonight I’ll do shorter pieces on the following 4 questions:
1. Are macroeconomists just a bunch of astrologers?
2. Are Democrats just a bunch of socialists?
3. Do soaps promote liberal values?
4. How many Tyler Cowens are there?
1. Are macroeconomists just a bunch of astrologers?
In a recent bloggingheads.tv episode, Mark Thoma made an interesting observation about modern macroeconometrics:
We have one set of [U.S.] data. . . . We know what that data says. . . . It’s hard to build a model that doesn’t fit.
That got me thinking about my skepticism regarding macroeconomists who try to build structural models of the economy. Let me say right up front that I don’t know a lot about these models, and it’s really dangerous to summarily dismiss a whole line of research that one isn’t very well-informed about, but . . . you know what’s coming next.
It seems to me that structural models of the economy probably have some ability to extrapolate into the future, but don’t seem to be able to predict the things that we’d really like them to be able to predict—sharp changes in AS or AD. I think about that failure in terms of efficient markets theory. Almost all the really interesting macro events that I have lived through or studied have been accompanied by dramatic swings in either stock, commodity or bond prices. Unless these swings are predictable, and I’ve never seen any convincing evidence that they are, then I don’t see how structural models can be of much use in stabilization policy.
Whenever I read opinion pieces by almost any macroeconomist— Keynesian, monetarist, new Classical, Austrian, etc, there is almost invariably a point where alarm bells go off. At some point the economist will make an assertion that seems to me to be in conflict with the EMH. And after that point I have trouble taking anything they say seriously. I keep thinking “If you’re so smart . . . ”
If you read through all my posts you will have trouble finding a single assertion that is at variance with the EMH. In contrast, pick up almost any other economist’s take on the current crisis and you will almost invariable find at least one assertion that conflicts with the EMH. It’s always something like “the root cause of the crisis occurred years earlier when . . .”
1. The Fed set interest rates too low
2. Regulators let banks make excessively risky loans (or if you’re a right winger–encouraged them to make risky loans.)
3. Americans didn’t save enough
And so on. In contrast, I believe that the depression was caused by events that took place in September and October, when the markets actually crashed. Which depression? All of them—1929, 1937, 2008, etc. And as far as I know I am the only economist who believes that all of these depressions were caused by events that occurred in those two fateful months. (Although I know that Earl Thompson has a similar view of at least the current crisis, as do a few readers of this blog.)
When I talk to people who believe in astrology I sometimes get the mischievous urge to provoke them with questions. OK, if one’s sign determines one’s personality, wouldn’t that be easy to test? In any large group of type A personalities (say the 535 Congressman) shouldn’t a disproportionate number have been born in certain months? I see a flicker of uncertainty in their eye, before I invariably get a reply along the lines of “well, it’s more complicated than that. There are a number of factors.” OK, fair enough. But then why bother asking people “what’s your sign?”
When I talk to other economists about their theory of the 1929 crash, the 1987 crash, the 2000 crash, the 2008 crash, etc, I also try to provoke them with questions about efficient markets. If Fed policy was obviously far off base, and if the policy was inevitably going to lead to a crash, why did so many smart investors ignore those signs? Why couldn’t anyone using your model have gotten rich? “Well, it’s hard to predict the exact peak.” But why do you need to predict the peak? Asset markets are incredibly volatile, why not simply buy when markets are more than 20% undervalued and sell when they are more than 20% overvalued?
I have strongly argued that only the first, very mild part of the crisis was attributable to the sub-prime fiasco. But many commenters argue with me, asserting the entire crash, even the past year, is a relapse from an easy money-induced speculative orgy into real estate. I can’t imagine why anyone who believed that wouldn’t be rich by now. I know the Feds cracked down on shorting bank stocks late last year, but surely there must have been other ways to short the market. I can’t believe those regulations would have thwarted a determined bear.
My criticism applies to everyone. It applies to the Ivy league-types who arrogantly think their computer models can predict better than asset markets. But it also applies to Austrian economists who have contempt for those mathematical models of the economy. It even applies to people who should know better, new classical economists like Robert Lucas.
How could a new classical economist think that they know better than asset markets? I don’t know, perhaps they are not aware that their policy views conflict with the EMH. A recent opinion piece by Robert Lucas started off promisingly, seeming to get all the big issue right. Unlike like many right wingers, Lucas realized that we faced a severe problem of falling AD. Unlike many left wingers Lucas realized that liquidity traps don’t preclude aggressive monetary stimulus. I was all primed for Lucas to agree with my views, when he suddenly announced that Bernanke was doing the right thing. This was a big disappointment to me (as Lucas was my advisor at Chicago.)
Why did Lucas think policy was on target? He ignored all the information packed into asset prices. He ignored the clear signs that inflation and NGDP are expected to come in far below target. Instead he simply looked at what Bernanke had done (a big increase in the monetary base) and assumed that in time this policy would work its magic. We will get a recovery someday, perhaps soon. But we have known at least since last October that asset markets view the actions of the Fed as being woefully inadequate (for reasons that are not hard to figure out.) So even the vanishingly small group of economists who share my view of the potency of monetary policy, the insufficiency of AD in late 2008, and the rationality of expectations, even they (he?) departed from my policy critique.
When I point out to someone that their explanation of the crash has obvious investment implications, and that if true they should be rich, they tell me that it’s much more complicated than I make it out to be. Believe me; I do believe the root causes are extremely complicated—far too complicated to be explained by highly technical structural models developed at MIT, or highly subtle non-technical models from the Austrian school. So what’s my explanation? Don’t I have a model? Well, there are models and there are models. I am criticizing models that attempt to find root causes for the recent crash, which should have allowed investors to anticipate a crash. I deny there are any models that can predict sharp breaks in AD, in NGDP.
On the other hand we have a very good model of what happens when NGDP does fall sharply. That model was developed by David Hume, and came through this crisis (like the crises of 1929 and 1937) with flying colors. That model predicts that if NGDP falls sharply, RGDP will also fall sharply. As Friedman once said, in 200 years all we’ve done is go one derivative beyond Hume.
It’s hard to overcome our deep-seated instinct that it ought to be possible to look at these crises, which look like a sort of morality play, and discern useful patterns. One commenter argued that bursting bubbles cause recessions, not tight money (as I argue.) When I pointed out that the 1987 crash was followed by a nearly three year boom, he continually insisted that it was followed by a recession, not a boom. We debated this issue back and forth. He must have been a Taurus.
2. Are Democrats just a bunch of socialists?
I don’t have much interest in talk radio anymore, but I gather there has been some recent controversy about people like Rush Limbaugh calling liberal Democrats “socialists.” Democrats seem offended by this charge.
A recent post by Schrivener.net showed some interesting poll results. It seems that Republicans favor capitalism over socialism by an 11-1 margin, whereas Dems favor capitalism by only a 39-30 margin.
I should say right up front that such polls are not very meaningful, as terms like ‘capitalism’ and ‘socialism’ mean very different things to different people. Even so, are you as surprised as I am that 3 million Republicans say they favor socialism? (There was obviously a “neither” choice offered as well.) Regarding the 30% of Dems who favor socialism, I suppose it might be the case that they are simply referring to a social-welfare state like Denmark (and perhaps they didn’t read my blog post pointing out Denmark is the most free market economy on Earth.) I suppose that would be the explanation of liberal pundits offended by conservatives who charge that the Democratic Party is infested with socialists.
Anyone who reads the blogosphere, however, knows how liberal Democrats regard terms like ‘deregulation’ and ‘privatization.’ I think it’s fair to say that their goal is not to make America the most free market economy on Earth. On the other hand, they clearly don’t want a Soviet-style economy either. So what do they want? The only constant that I have been able to ascertain is that they want more government in areas where there are problems. So after Great Depression we added the FDIC, and the SEC, and many other regulatory agencies. After the S&L debacle of the 1980s, regulation of the banking industry was tightened. After Enron it was tightened again. You might assume that the current banking crisis, the worst ever in terms of the way banks actually behaved (although not as bad as the 1930s in terms of bank failures) has led liberals to re-evaluate their faith in regulatory fixes. You would be wrong. Once again we are told that we need much more regulation.
I’m obviously not the first to notice that this procedural method, regulate more after each market failure, even if it is actually a regulatory failure; is a one-way ticket to socialism. Fortunately things aren’t nearly as bad as they seem (although they are plenty bad right now.) There are two forces tending to check the tendency toward ever greater regulation; liberal Democratic economists, and conservative Republican voters.
Although the common sense perspective of most liberals is that socialism offers answers to many of our problems, liberal economists (sometimes) know better. Thus in the 1970s they did not respond to excessively high air fares by urging tighter price controls, but rather they convinced President Carter to abolish the CAB. They did not respond to the failures of AFDC by supporting more welfare spending, but rather convinced President Clinton to “end welfare as we know it.” Yes, I know things are going the other way right now, but just wait ten years. (The only op-ed article I ever published predicted (in early 1993) that Clinton would soon run into trouble, and then turn to the right.)
The other group restraining liberal Democrats is conservative Republican voters. Is it possible that (contra J.S. Mill) conservatives are actually smarter than liberals? I should probably stay away from a direct answer, as I would offend just about everyone. Let me put it this way. From my perspective (a right wing liberal) conservative voters often seem right about economics, but not always for the right reason. I assume they have the same sort of commonsense view of the world that many Democrats have, but a different value system. In particular, they put less emphasis on purely utilitarian considerations, and more on religion, tradition, and getting one’s just deserts. Of course both parties contain a whole lot of people motivated by self-interest—low income Democrats or public employees who favor bigger government, and Republicans who resent paying taxes. But self-interest doesn’t explain why people vote.
Is there any connection between this essay and the previous one? Maybe that people have trouble seeing things clearly when the issues are highly emotional. Even uninformed non-economists have incredibly strong views on the causes of economic crises like the current one. It is hard for people to look dispassionately at these sorts of traumatic events. Politics seems the same. People think those on the other side are either fools or knaves (or both.) Many people (on both sides) are fools or knaves, but as long as you look at things that way you won’t really understand politics.
3. Do soaps promote liberal values?
The Economist magazine says yes:
The soaps blossomed under Brazil’s military regime of 1964-85. . . . Their scriptwriters and directors, many of whom were on the left, saw them as a tool with which to reach the masses. Their plots often tilt in a progressive direction: AIDS is discussed, condoms are promoted and social mobility exemplified.
How much impact do the soaps have on real life? As recounted in papers from the Inter-American Development Bank, researchers tracked Globo’s expansion across the country and compared this to data on fertility and divorce.*
The results are most striking for the total fertility rate, which dropped from 6.3 children per woman in 1960 to 2.3 in 2000, despite contraception being officially discouraged for some of that time. . . . Controlling for other factors, the arrival of Globo was associated with a decline of 0.6 percentage points in the probability of a woman giving birth in a given year. . . .
The effect on divorce was smaller, but noticeable. The researchers found that between 1975, when divorce was first mooted, and 1984 about one in five of the main characters in Globo soaps were divorced or separated, a higher percentage than in the real Brazil. These break-ups were not just a result of machismo: from the mid-1960s to the mid-1980s about 30% of female lead characters in novelas were unfaithful to their partners. The researchers find that the arrival of Globo in an area was associated with a rise of 0.1-0.2 percentage points in the share of women aged 15-49 who were divorced or separated. The authors reckon that watching “empowered” women having fun in Rio made other women (a few of them anyway) more independent.
Other research shows that divorce and lower fertility are linked to less domestic violence. So the influence of soaps may be far more positive than critics of their vapidity claim. If Globo could now come up with a seductive novela about tax reform its transformation of Brazil would be complete.
That last line pretty much summarizes my earlier post on political art; cultural values—yes, tax reform . . . not so much. The “vapidity claim” reminds me of G.K. Chesterton’s “A Defense of Penny Dreadfuls”:
One of the strangest examples of the degree to which ordinary life is undervalued is the example of popular literature, the vast mass of which we contentedly describe as vulgar. The boy’s novelette may be ignorant in a literary sense, which is only like saying that a modern novel is ignorant in the chemical sense, or the economic sense, or the astronomical sense; but it is not vulgar intrinsically—it is the actual centre of a million flaming imaginations.
By the way, Chesterton and I could not be farther apart politically, but he was ruthlessly effective at exposing the prejudices of intellectuals. Although I despise soaps, I see no reason to deny their obvious benefits to society. You might ask whether this study is to be believed, after all, correlation doesn’t prove causation. But this type of study is the gold standard of social science research. The soaps were rolled out across Brazil one area at a time. So one couldn’t argue the correlations represented more liberal women choosing to watch soaps.
What’s the relationship with the previous two essays? Stubbornness. I saw a similar study that looked at the effect of TV on school performance in America. TV was also rolled out city by city across the U.S., and thus any sociological effects should be easy to identify in the data. In fact, TV does not hurt school performance. But when I tell this to people they simply don’t believe it. Perhaps they rely on crude correlations they have observed during their lives (kids who don’t like reading presumably watch more TV.) Perhaps introspection. However I doubt that even introspection can explain this. I find that while people feel the media are very powerful, they see themselves as somehow immune to its mysterious influence. It is always “those other people” who are swayed by the media.
So people put great faith in their own gut instincts, even if based on methodologically worthless techniques, but summarily discount a study that identifies exogenous shocks more effectively than just about any other social science research.
4. How many Tyler Cowens are there?
For those who don’t know, Tyler and Alex Tabarrok run the number two economics blog, MarginalRevolution.com. Tyler has far more posts than I do. Yes, his are much shorter, but look at the research behind each one. You might think the title question here is metaphorical, referring to Tyler’s expertise in what seems like virtually every area of intellectual life, not to mention all sorts of pop culture trivia. But I meant the question literally. Does he have a little helper like George Will has? How about a quantum machine, allow him 96 hours a day reading in 4 parallel universes? Clones? Your guess is as good as mine.
My blog takes up about 6 hours a day. As a result I have cut out large parts of my former life. I am a big film buff, and yet have only seen one new film this year (Kore-eda’s newest.) Recently I have become very depressed as I read Tyler’s blog each day. Almost everyday he seems to produce a list of new books he has read. The last novel I read was finished a few days before I started this blog—the 900 page tome just stares at me reproachfully from the nightstand. I feel as though my former life was acquiring knowledge, and now I am just disseminating old ideas. I have resorted to strip-mining old unpublished papers, while I do no new research. I am getting dumber.
When I started this blog I had an ideal reader in mind (as I suppose all authors do.) I knew that it was going to be impossible to convince macroeconomists of my extremely counter-intuitive views of the crisis. Nobody who has expertise in macro can be impartial to an event so traumatic. By now views have hardened. Even the uninformed have strong opinions. So I needed someone outside of economics, someone with an open mind.
At the same time I knew that I needed a reader that was bright enough to understand very subtle, counter-intuitive economic arguments. Thus I needed someone who had at least an amateur’s interest in macro, who was also a very skilled economist. I also needed someone who wasn’t overly impressed with a lot of technical mumbo-jumbo that doesn’t really mean anything. Someone who thought short (or not so short) blog posts could convey interesting economic ideas.
In the first three or four weeks (when almost no one was reading my blog) I deliberately tried to make my writing more appealing to this ideal reader. So it looks like my well thought out strategy paid off. At least I thought so until today, when I listen to the last part of an old bloggingheads.tv that I hadn’t had time to finish earlier. In a chapter entitled Has fame made Tyler boring?, Tyler was responding to Robin Hanson’s observation that he had become more conventional, when he suddenly announced:
“I would rather read weirdos.”
And I thought it was my brilliant arguments. Seriously, I do think that it is easier to have unconventional views when you are isolated. When I talked to Mark Thoma I probably (subconsciously) thought it would be impolite to just throw out a bunch of wild generalizations (“all mainstream macroeconomics is bankrupt”—that sort of thing.) If I was giving a seminar at the Fed Board of Governors tomorrow, I would tone down the rhetoric a bit. At the same time I find counter-intuitive arguments very appealing—and I suspect this is true of Tyler as well.
I think one reason that Tyler may now seem more conventional is that age brings wisdom, which brings a more detached view of life. You start to see things from many different angles. You see life in less Manichaen terms. (To understand all is to forgive all.)
So how does this relate to the earlier essays? Tyler is surely one of the most open-minded intellectuals around today. (And even that is probably an understatement.) He would not simply dismiss the Brazilian soap study because it conflicted with his pre-existing prejudices.
Most intellectuals have very big egos, and that can inhibit forming a clear-eyed view of the world. I’m no exception, far too sure I that am right than I should be from any sort of dispassionate perspective. I understand that even in the unlikely event that I have stumbled onto the “truth,” I won’t be able to “persuade my peers” with this blog. Instead, I would refer back to what Keynes said about Gesell, who he initially viewed as a monetary crank:
“their significance only became apparent after I had reached my own conclusions in my own way.”
Update (4/27/09): In part one I should have mentioned a paper that I did with Aaron Jackson entitled “Velocity Futures Markets: Can They Eliminate the Need for Structural Models?” (Economic Inquiry, 2006.) Unlike me, Aaron does understand structural models, so I wasn’t just shooting from the hip.