Tag Archives: Economics

The amorality of economics

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In an easily-digestible piece for The New York Review of Books, Paul Krugman explains why economic austerity became so mainstream so fast:

Everyone loves a morality play. “For the wages of sin is death” is a much more satisfying message than “Shit happens.” We all want events to have meaning.

When applied to macroeconomics, this urge to find moral meaning creates in all of us a predisposition toward believing stories that attribute the pain of a slump to the excesses of the boom that precedes it—and, perhaps, also makes it natural to see the pain as necessary, part of an inevitable cleansing process. When Andrew Mellon told Herbert Hoover to let the Depression run its course, so as to “purge the rottenness” from the system, he was offering advice that, however bad it was as economics, resonated psychologically with many people (and still does).

By contrast, Keynesian economics rests fundamentally on the proposition that macroeconomics isn’t a morality play—that depressions are essentially a technical malfunction. As the Great Depression deepened, Keynes famously declared that “we have magneto trouble”—i.e., the economy’s troubles were like those of a car with a small but critical problem in its electrical system, and the job of the economist is to figure out how to repair that technical problem.

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A Big Data divide at the Times

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David Brooks says Big Data matters, but perhaps not as much as people think:

Big data has trouble with big problems. If you are trying to figure out which e-mail produces the most campaign contributions, you can do a randomized control experiment. But let’s say you are trying to stimulate an economy in a recession. You don’t have an alternate society to use as a control group. For example, we’ve had huge debates over the best economic stimulus, with mountains of data, and as far as I know not a single major player in this debate has been persuaded by data to switch sides.

Paul Krugman takes a look and says, “Waittt a minute here:”

It would be lovely to live in a world in which the failure of interest rates to soar as predicted would lead Brian Riedl of Heritage and Niall Ferguson to concede that their anti-stimulus critiques of 2009 were based on a completely wrong model; in which the economic downturns that have followed austerity policies almost everywhere they have been applied would lead Alberto Alesina to concede that his work on expansionary austerity was probably flawed, and lead George Osborne to proclaim publicly that he led Britain down the wrong path. But such things very rarely happen, and the fact that they don’t happen has nothing to do with the limitations of data…

So yes, it has been disappointing to see so many people sticking to their positions on fiscal policy despite overwhelming evidence that those positions are wrong. But the fault lies not in our data, but in ourselves.

It’s a good point from Krugman, who’s also been quite busy dealing with other knuckleheads.

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Bill Clinton’s worrisome economics

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Note from Jay Pinho: Below is the second guest post (as well as the second guest contributor) on The First Casualty.

Bill Clinton’s speech at the Democratic National Convention nearly three weeks ago was hailed as one of the great speeches of our time. Chris Matthews was in rare form describing Mr Clinton’s speech as “one of the greatest in convention history.” Indeed, Mr. Matthews was so impressed by the former President’s rhetoric that he not only felt confident asserting 42’s ability to reproduce on Mars, but reproducing with actual Martians. (Unfortunately, it is not yet clear whether a speech evoking the possibility of Clintonian-Martian reproduction tops a speech resulting in thrills up one’s leg.)

Jon Stewart, arguably the most powerful man in American news, lauded the President for his “amazing display of actually saying stuff.”

And it was to Stewart’s Daily Show that Mr. Clinton–a frequent guest–returned on Thursday night, doubling down on the economic principles he had espoused in Charlotte. Paramount among his economic principles is the belief that government and business should partner and work together in determining economic policy.

Mr. Clinton’s argument, of course, is nothing new. In fact, it was on the same show just last year that he provided a concrete example of a good partnership between government and business, namely Germany’s government support for the solar energy industry. Mr. Clinton proudly asserted that a country where the sun hardly ever shines–on that he’s right!–was a global leader in the production of solar energy.

Yet it should come as no surprise that Mr. Clinton no longer uses that example when advocating for partnerships between the public and private sectors. Why? Since Mr. Clinton was on the Daily Show in November 2011, four German solar companies have filed for bankruptcy–in spite of government subsidies in the industry in excess of €100 billion.

In pursuing industrial policy, governments support particular goals they deem worthwhile. But therein lies the problem. For when domestic producers cannot compete with foreign competition–as is the case with Germany’s solar industry–or when there is too little demand for products from subsidized industries, the socialization of monetary losses is finalized.

Even when support for particular industries does not fail in the ordinary sense, however, government support for particular industries distorts the market. (The nature of the market, unfortunately, is too often poorly understood, as evidenced by Mr. Stewart’s mocking of the non-existent “market fairy.” The market does not have an independent mind or will in the way a fairy might; rather, the market is merely an aggregation of individuals’ valuations about goods in society. To attack the market is to attack individuals’ valuations.)

Following, government subsidies are meant to change consumer behavior by pretending to lower the cost of goods which are not valued highly enough by individuals to be self-sustaining. (They do not lower actual costs, however, as subsidies must be paid for through tax revenues.) Or subsidies are put in place to protect national industry from competition from abroad. It goes without saying that this alleged protection also “protects” consumers from cheaper imports.

Now, steadfast opposition to market interventions–i.e. to influencing prices–does not imply that government does not have a role in creating the market framework. In fact, a capitalist economy can only function with a proper economic constitution. On the one hand, this may imply government provision of public goods, i.e. goods wherein one’s consumption neither reduces another’s consumption, nor where it is possible to exclude individuals from consuming goods. On the other hand, this also includes a functioning legal system, antitrust laws, and even state regulation. As ordoliberals like to point out: government should set up the rules for the game, it should not actively play the game.

If this were what Mr. Clinton was talking about when he advocated on behalf of a partnership between the public and private sectors, all would be well. Unfortunately, his view of public-private partnership implies government actively playing the game of the market. Indeed, America would do well to reject 42’s economic philosophy.

Mark McAdam is a football guru. When he’s not writing about the Bundesliga, he advocates on behalf of free societies. He has a Master’s degree in “Politics, Economics & Philosophy” and studied at the University of Hamburg’s Institute for Economic Systems, the History of Economic Thought and the History of Ideas.

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#1: SuperFreakonomics

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So, the front cover of my first conquest of 2010 already almost broke the only rule I’d set for myself. It’s a shiny white cover with the authors’ names in slightly raised lettering. However, it’s also hardcover and doesn’t have any glossy color photos (unless that’s a real picture of an exploding fruit on the bottom of the cover, but I’m 84% certain it’s not), so I think I’m safe.

On the other hand, it has a laughably long subtitle: Global Cooling, Patriotic Prostitutes and Why Suicide Bombers Should Buy Life Insurance. Hmm, a shiny hardcover with an exploding fruit, long subtitle, and raised lettering. Not exactly a recipe for success, right? Well, I suppose this is why one should never judge a book by its cover, because this is going into the record as a Recommended Reading.

Actually, let me take that back. You can judge a book by its cover, somewhat. As if the graphic design doesn’t scream “Please Pay Attention” loudly enough, the content itself immediately continues the theme. The first two sentences of the book proclaim, “The time has come to admit that in our first book [Freakonomics], we lied. Twice.” Pages later, we read that “as you leave your friend’s party [in an intoxicated state], the decision should be clear: driving is safer than walking.” (One wonders if that last line will eventually provoke a second admission of lying in the next installment, which must inevitably be titled SuperDuperFreakonomics: Funny Wars, Political PMS, and Why Rapists Make the Best Babysitters.)

But don’t let the hyperbole fool you: authors Steven Levitt (a professor at the University of Chicago) and Stephen Dubner (a former editor for The New York Times Magazine) are no lightweights, and they pack plenty of legitimate punches to keep readers scratching their heads for a considerably long time. (I’m still scratching mine.) For example, did you know that a Chicago prostitute is statistically more likely to have sex with a police officer than to be arrested by one? (The undercover beat is just brutal.) Or that many hospital infections could be prevented by doctors washing their hands? Alright, alright, so you already knew that one. But what you probably didn’t know — unless you happen to work at a hospital — is that, amidst a sea of failed attempts to compel doctors to comply with basic hygienic standards, simply installing a computer screensaver at one hospital depicting the swarms of bacteria on a human hand brought health compliance up to an almost perfect score.

As does its predecessor, SuperFreakonomics deals in human behavior and how various incentives, executed intelligently, can pretty much get human beings to do anything. Hence, the 1961 Milgram Experiment — except that Levitt and Dubner wave breezily at this landmark psychological study, deeming it a prime exemplar in the crowded field of How to Make Any Experiment Confirm Your Findings by Conducting it in a Lab. And somehow, this actually makes sense (the experiment’s mild repudiation, not the study itself). You see, the authors gently intone, human beings are little more than self-interested machines; remove the carrot and stick, and you’ve got yourself a rabbit with nowhere to go.

This pleasantly short 216-page book is replete with observations, projections, and muses that will gnaw at you. They will make you wonder how you didn’t think of these ideas first, even while mentally flogging yourself for allowing a modicum of gullibility to seep into your otherwise cynical worldview. Combating hurricanes with a small army of large rings centered around pipes leading into the depths? Kissing global warming goodbye by shooting sulfur dioxide eighteen miles into the air? Yes, Levitt and Dubner respond gleely, yes, we can.

What was perhaps most fascinating in this book were the many ways in which data was collected on unpredictable and uncontrollable events. In economics, as well as in politics and other social science fields, it is quite difficult to achieve exactness in the same sense as the other, “hard” sciences (i.e. chemistry, physics, etc.). This is primarily because, unlike those other areas of study, economists and political scientists are not able to conduct controlled experiments comparing one set to another.

However, these limitations can be mitigated to near-miraculous degrees at times. For example, in a section on global warming, Dubner and Levitt note that in the first several days following September 11th in the U.S. (when all civilian flights were grounded), the ground temperature increased fairly dramatically due to less sun shielding from aircraft exhaust trails. Using the aftermath of a domestic tragedy to produce quantifiable research that would never have been available via testing, the authors make it quite clear that virtually anything can be studied scientifically if you dig deeply enough.

Of course, the digging of Dubner and Levitt is accompanied by their own giggling soundtrack, as the machinations of their own nerdiness are readily translated into annoyingly cute barbs at fellow economists and so forth. And now that I’m a little older and wiser than when I’d read the prequel, I’m more than a little shocked that I had never before caught on to Levitt and Dubner’s obvious ideological leanings bubbling beneath these pages’ surfaces. (Hint: Chicago school of economics.) That said, readers from both sides of the aisle will have no problem enjoying this idiosyncratic tour through the intersection of the human mind and the free market.