In a recent blog posting on the popular "Freakonomics" website (which I say for fear Dubner might humiliate me on his blog too), Stephen Dubner decides to call out Karl Smith. Beyond the fact that its slighly childish and egotistical to spend an entire post DEFENDING your blog popularity - I personally felt Mr. Dubner violated an unspoken blogging ethic - don't pick on the little people. Here is my response to Mr. Dubner:
"I'm gonna go ahead and assume that Dubner doesn't follow econ blogs enough to know that Karl Smith is quite active in the econ blog community (from what I've seen) and is a regular and thoughtful contributor to Mankiw's site, as well as hosting his own blog.
In any case I thought your post was more attacking than necessary - and I think you assume (perhaps falsely) that Karl Smith meant his statement to be falacious. Perhaps he just made a mistake? Oh wait - that NEVER happens at the NY Times! Sure....
Beyond that, you have a modicum of fame (rightfully so, "Freakonomics" was a well-written book), but with that fame comes the responsibility that you don't pick on lesser known people unless they do or say something really disparaging. Otherwise, you come off as a jerk (which you did to me). Implying that Karl is attempting to spread conspiracy theories or that he states "mistruths" (or, "Lie" to us non-journalists), is just wrong of you.
PS - note that it doesn't work the other way around - which is why I can call you out all I want, Mr. Famous Guy. "
UPDATE:
After I posted my response I realized that Karl Smith had already noticed Dubner's post and responded to defend himself:
"Woah . . .
I didn’t know I was starting all of that. Yes, my real name is Karl Smith and you may remember that Steven linked to me as a “Strong Defender” of his work.
At the time I noticed that I also got a link from a Spanish blog that simply repeated the post and what looked liked others from freakonomics. It may not have even been Spanish by the way, that was just what it seemed at the moment. I didn’t spend anytime there.
I attempted to qualify my statement with the term “believe” but perhaps that was not strong enough. In no way was I attempting to start a conspiracy theory against the blog. I think its a great blog and I used the book as the only text book in my Intro to Economics class despite my regular appearance at Greg’s site.
If anyone has been “dissing” your blog based on my comment then I apologize.
— Posted by Karl Smith"
---Good for you Karl. Though I think you were far too easy on him.....
Friday, August 31, 2007
Wednesday, August 29, 2007
Katrina
For all the solemn things we learned in the Katrina aftermath, we also learned a less profound thing - that supply and demand is a powerful force. Everyone talked about escalating gas prices post-Katrina throughout the US. But almost no one mentioned the fact that, in New Orleans, gas prices did NOT start rising for 6 weeks or more after Katrina - largely due to the decrease in demand due to the deaths and displacement to other parts of the country:
Notice the increased New Orleans volatility as well....
Notice the increased New Orleans volatility as well....
SAT scores in Indiana fall!!! (by six points)
The news in my state is going crazy (2) over the fact that SAT score average fell from 1493 to 1487 for this graduating class. I'm gonna go off on a limb here and say that a drop of .4% (.00402) is likely statistically insignifcant folks.
In fact, "Wayne Camara, vice president for research and analysis at the College Board, described the declines from 2006 to 2007 as statistically insignificant."
So, yes, the fact that Indiana lags behind the nation and is not closing that gap is a big issue, but a year-to-year change of such a small magnitude is not necessarily anything special. In fact, if SAT scores consistently rose every year without fail, assuming no major policy changes from year X to year X+1, that would tend to indicate that the class in year X+1 are always somewhat smarter than the class in year X, which of course is ridiculous - that should be pretty random year-to-year.
Hence, we would expect, holding policy and other shocks constant, SAT scores to go up and down and fluctuate ever so slightly over a number of years. And as policy changes, or tastes for education increase, etc, or real income rises.... we would hope to expect a gradual rise over the long-run ... somewhat akin to economic growth with recessions and booms (though not as dramatic). But the limits to SAT scores are much greater than for economic growth.
IE, we can't expect the average to keep climbing indefinately until it gets to a perfect score - that would be a waste of resources that could be devoted to healthcare, or defense or consumer spending other than education.
UPDATED to include total SAT score as opposed to just the reading portion.
In fact, "Wayne Camara, vice president for research and analysis at the College Board, described the declines from 2006 to 2007 as statistically insignificant."
So, yes, the fact that Indiana lags behind the nation and is not closing that gap is a big issue, but a year-to-year change of such a small magnitude is not necessarily anything special. In fact, if SAT scores consistently rose every year without fail, assuming no major policy changes from year X to year X+1, that would tend to indicate that the class in year X+1 are always somewhat smarter than the class in year X, which of course is ridiculous - that should be pretty random year-to-year.
Hence, we would expect, holding policy and other shocks constant, SAT scores to go up and down and fluctuate ever so slightly over a number of years. And as policy changes, or tastes for education increase, etc, or real income rises.... we would hope to expect a gradual rise over the long-run ... somewhat akin to economic growth with recessions and booms (though not as dramatic). But the limits to SAT scores are much greater than for economic growth.
IE, we can't expect the average to keep climbing indefinately until it gets to a perfect score - that would be a waste of resources that could be devoted to healthcare, or defense or consumer spending other than education.
UPDATED to include total SAT score as opposed to just the reading portion.
Tuesday, August 28, 2007
I agree - mostly
Mises.org on State Economic Development.
Since I work in economic development, I see the costs and benefits of it up-close - and I think I can see this more clearly than most having training in economics.
I agree that it isn't the greatest possible solution. I further agree that there exists a prisoner's dilemma that largely is the reason that many State's pursue economic development and incentives. What I disagree about is that I don't necessarily think there is a better solution - ie, ED is a 2nd best option given that states face the prisoner's dillemma. The only other option is the feds stepping in to make such incentives illegal. And that ain't happening anytime soon (Cuno v. Daimler Chrysler anyone?)
I don't believe providing incentives to firms is a net negative - I do think it is useful, especially in the real world of market frictions and imperfect information. Further, while I am certain that governments overestimate the number of jobs created that wouldn't have already have been created abscent the incentive, I also think there is good reason to believe incentives do create jobs - if not for the sole reason of reducing startup costs and making the transition of an expansion or new site go smoother. So, while incentives may be a bit inefficient - they are likely a useful form of reduced taxation given the nature of the constraints faced by the government.
Since I work in economic development, I see the costs and benefits of it up-close - and I think I can see this more clearly than most having training in economics.
I agree that it isn't the greatest possible solution. I further agree that there exists a prisoner's dilemma that largely is the reason that many State's pursue economic development and incentives. What I disagree about is that I don't necessarily think there is a better solution - ie, ED is a 2nd best option given that states face the prisoner's dillemma. The only other option is the feds stepping in to make such incentives illegal. And that ain't happening anytime soon (Cuno v. Daimler Chrysler anyone?)
I don't believe providing incentives to firms is a net negative - I do think it is useful, especially in the real world of market frictions and imperfect information. Further, while I am certain that governments overestimate the number of jobs created that wouldn't have already have been created abscent the incentive, I also think there is good reason to believe incentives do create jobs - if not for the sole reason of reducing startup costs and making the transition of an expansion or new site go smoother. So, while incentives may be a bit inefficient - they are likely a useful form of reduced taxation given the nature of the constraints faced by the government.
How much to replace property taxes?
Indiana estimates that property taxes could be eliminated altogether by:
"increase the state sales tax from 6 percent to 13.2 percent
or
the state income tax from 3.4 percent to 9 percent to eliminate property taxes.
To replace property tax revenue using a 50-50 split, the state sales tax would have to be raised to 9.5 percent and the state income tax to 6 percent, Powers said."
I don't know if those numbers sound accurate or not. I have not read the legislative report (nor can I find it at the moment)
Either way, a point raised by this is that if such an increase drastically increases the disparity in terms of types of taxes levied between Indiana and neighboring States, that could really distort markets and firms' decisions, etc. Really, a Fair Tax-like proposal needs to be implemented at the national level before the incentive for States to enact similar measures can really materialize.
At most, as I've advocated in a previous post, a good mix of income and sales tax hikes combined with the elimination of property taxes (combined still with a complete reorg of local governemnt and how schools etc are funded) may (or may not) seem to be the best bet since then the disparity in terms of sales and income tax is lessened, and property taxes (deemed to be unfair) are still eliminated.
Of course...I'm still waiting for those pesky numbers...
THIS POST WILL BE UPDATED
"increase the state sales tax from 6 percent to 13.2 percent
or
the state income tax from 3.4 percent to 9 percent to eliminate property taxes.
To replace property tax revenue using a 50-50 split, the state sales tax would have to be raised to 9.5 percent and the state income tax to 6 percent, Powers said."
I don't know if those numbers sound accurate or not. I have not read the legislative report (nor can I find it at the moment)
Either way, a point raised by this is that if such an increase drastically increases the disparity in terms of types of taxes levied between Indiana and neighboring States, that could really distort markets and firms' decisions, etc. Really, a Fair Tax-like proposal needs to be implemented at the national level before the incentive for States to enact similar measures can really materialize.
At most, as I've advocated in a previous post, a good mix of income and sales tax hikes combined with the elimination of property taxes (combined still with a complete reorg of local governemnt and how schools etc are funded) may (or may not) seem to be the best bet since then the disparity in terms of sales and income tax is lessened, and property taxes (deemed to be unfair) are still eliminated.
Of course...I'm still waiting for those pesky numbers...
THIS POST WILL BE UPDATED
Saturday, August 25, 2007
This endless game of whack-a-mole
It's like I'm 11 again and playing whack-a-mole at a roller skating rink. When we aren't going round in circles, we are playing the game.....
This is from Whitehouse.gov - so you know it's fair and balanced ;)
How is this related to economics? Because if we continue as we are in Iraq, there won't be much of an economy left to speak of.
This is from Whitehouse.gov - so you know it's fair and balanced ;)
"3. MYTH: The U.S. is playing “whack-a-mole” in Iraq.
- FACT: U.S. and Iraqi forces are conducting offensive operations against terrorists while simultaneously providing security in neighborhoods with joint security stations and patrols.
- FACT: General Petraeus’s counterinsurgency strategy is a population-centric one that is different from what has been done before. The concept is for U.S. troops to work with Iraqi forces and secure safe havens, then maintain that security by staying in neighborhoods and building trust with the locals.
- FACT: The primary reason for the “surge” in troops was to give U.S. and Iraqi forces the ability and flexibility to conduct such offensive operations in and outside of Baghdad without having to shift troops out of so many areas where they were needed for security. This is why commanders held off on many of them until the brigades were in place – to avoid the problems of past offensives."
How is this related to economics? Because if we continue as we are in Iraq, there won't be much of an economy left to speak of.
Friday, August 24, 2007
Union Power at its worst---est
This morning, the entire city of Indianapolis had its public transporation (bus system) shut down during the morning rush hour due to a dispute the Union has(d) with management.
Was the dispute about low wages, or poor working conditions?
No.
It was about having to wear proper badge identification on the job.
(Granted, management's action was pretty ridiculous as well... maybe I should have 'headed' this post "City Bureacracy at its worst---est")
Give me a frickin' break.
Why did I move back to Indy again???
Was the dispute about low wages, or poor working conditions?
No.
It was about having to wear proper badge identification on the job.
(Granted, management's action was pretty ridiculous as well... maybe I should have 'headed' this post "City Bureacracy at its worst---est")
Give me a frickin' break.
Why did I move back to Indy again???
Tuesday, August 21, 2007
99!
Big hat tip and thanks to Mike Moffatt (whose blog is deservedly in the top 30 of all econ blogs on the net) for mentioning my blog. Subsequently, "Reviving Economics" was included in the rankings and pulls in a respectable #99. Thanks also to economist Aaron Schiff for starting the ranking.
I think 99 is pretty good since this blog has only been in existence for less than a year now. It's good to know also that I'm not just writing this for myself and that at least one person actually reads my blog occasionally ;).
I think 99 is pretty good since this blog has only been in existence for less than a year now. It's good to know also that I'm not just writing this for myself and that at least one person actually reads my blog occasionally ;).
Union Power at its Worst
I just read a news report that Indiana ranks #2 in foreclosure inventory rate. The article makes mention that since Indiana is heavy in manufacturing, and manufacturing jobs have been hit hard the last 5 years, this has added to home losses. I think that’s obvious but it’s not just about that.
Union power in the manufacturing industry in Indiana, especially in the automotive manufacturing sector, is extreme and is beyond what I think even the most liberal economists would say is a ‘good’ kind of union power. Over the last number of decades, UAW and other major unions have pushed up the wages and retirement benefits of workers so high that it was only a matter of time before the sector imploded – and started killing jobs.
Delphi Automotive is a great example of this. In the last 2 years, they have tried to take steps to cut their labor costs from the ridiculous rates of $30 some-odd dollars an hour for an assembly line worker.
For a more concrete example, Bloomberg cites:
"...for example, the $25 hourly rate, plus benefits, paid to union workers who trim grass around its buildings. Delphi's union contract... bars hiring an outside lawn-cutting service. "
I work at a nice desk job and I don’t make near what low/mid skilled union auto labor employees do.
So, the foreclosure rates can be explained more by the fact that these low educated workers were paid a huge premium, and they took that premium to buy big houses, often with no money down and often at a variable interest rate. So, when their employers imploded they were left with this huge house, ballooning interest rates, large monthly payments, and no steady income (anymore).
Union power in the manufacturing industry in Indiana, especially in the automotive manufacturing sector, is extreme and is beyond what I think even the most liberal economists would say is a ‘good’ kind of union power. Over the last number of decades, UAW and other major unions have pushed up the wages and retirement benefits of workers so high that it was only a matter of time before the sector imploded – and started killing jobs.
Delphi Automotive is a great example of this. In the last 2 years, they have tried to take steps to cut their labor costs from the ridiculous rates of $30 some-odd dollars an hour for an assembly line worker.
For a more concrete example, Bloomberg cites:
"...for example, the $25 hourly rate, plus benefits, paid to union workers who trim grass around its buildings. Delphi's union contract... bars hiring an outside lawn-cutting service. "
I work at a nice desk job and I don’t make near what low/mid skilled union auto labor employees do.
So, the foreclosure rates can be explained more by the fact that these low educated workers were paid a huge premium, and they took that premium to buy big houses, often with no money down and often at a variable interest rate. So, when their employers imploded they were left with this huge house, ballooning interest rates, large monthly payments, and no steady income (anymore).
Monday, August 20, 2007
Online Textbook vs. College Bookstore
It's back to school time, which has had me thinking of a puzzle to which I just don't know the answer. In hopes of help, I emailed my blog-friend Mike Fladdigan of "Mikeroeconomics":
"Mike, Hope all is well. I have been wondering about something that i was hoping you could do a post on, or maybe point me to a good paper about.... I don't understand why the price differential is so massive between so many bookstore texts and (those very same) texts that can be bought online on amazon.com or half.com or ebay.com, etc. For example, a coworker of mine saw that her micro econ text bundle (including study guide etc) would have cost $140 if she had bought it at the bookstore. She found the exact same thing (slightly used) for well under $40. New books were also quite affordable. Assuming that students don't really care about the condition of their texts (which I think is a reasonable assumption), the only thing I can think of why the market hasn't tended to draw this gap closer is issues of assymetric information or misunderstanding about the non-pecuniary transaction 'costs' involved with text purchasing online....."
He responded thusly:
"I have concluded that students buy textbooks from the campus store because of1) asymmetrical info 2) they ignore opportunity costs 3) the value the book more now and heavily discount the future 4) instructors change the elasticity of demand by "demanding" that students start reading now 5) students have different values for money at different times depending upon how they "earned" the money 6) think that they can resell the book and actually rent the book at the same price as amazon.com price 7) want to build a professional library and paying so much for a book will make them value the book more...."
The more I think about it, I wonder how much a professor's propensity to bundle his/her text with supplemental items that maybe can not be found easily online is to blame for why still so many students buy their text at the college bookstore - and thus for why the price differential stays so large. But I don't think that is everything.
Thoughts anyone?
"Mike, Hope all is well. I have been wondering about something that i was hoping you could do a post on, or maybe point me to a good paper about.... I don't understand why the price differential is so massive between so many bookstore texts and (those very same) texts that can be bought online on amazon.com or half.com or ebay.com, etc. For example, a coworker of mine saw that her micro econ text bundle (including study guide etc) would have cost $140 if she had bought it at the bookstore. She found the exact same thing (slightly used) for well under $40. New books were also quite affordable. Assuming that students don't really care about the condition of their texts (which I think is a reasonable assumption), the only thing I can think of why the market hasn't tended to draw this gap closer is issues of assymetric information or misunderstanding about the non-pecuniary transaction 'costs' involved with text purchasing online....."
He responded thusly:
"I have concluded that students buy textbooks from the campus store because of1) asymmetrical info 2) they ignore opportunity costs 3) the value the book more now and heavily discount the future 4) instructors change the elasticity of demand by "demanding" that students start reading now 5) students have different values for money at different times depending upon how they "earned" the money 6) think that they can resell the book and actually rent the book at the same price as amazon.com price 7) want to build a professional library and paying so much for a book will make them value the book more...."
The more I think about it, I wonder how much a professor's propensity to bundle his/her text with supplemental items that maybe can not be found easily online is to blame for why still so many students buy their text at the college bookstore - and thus for why the price differential stays so large. But I don't think that is everything.
Thoughts anyone?
Thursday, August 16, 2007
My Thoughts on Peak Oil
Mike Moffatt continues to try and hammer some sense into the doomsayers that are predicting sharp oil production declines in the next couple decades due to limits on resources. His points are excellent:
1.If the peak is just around the corner and exceedingly high prices ($200 dollars a barrel? $300? $400?) are coming our way, then why are the prices for oil futures and oil call options so low?
2. Are you buying oil futures or oil call options? If not, why not?
3. Why did peak oil supporters in the 1970s tell us that the oil supply would run out in the 1980s and 1990s? Why were they wrong then? Why are you right now? What's changed?
Nevertheless, I do think Peak Oilers and economists can find some middle-ground. The general idea of Peak Oil is after all not that controversial (for most people) – at some point oil production must reach a peak and start declining due to limits on how much oil there is left on Earth. Short of technology one day being able to replicate oil and its energy chemically, or of Earth’s population finding oil on Mars etc, peak oil WILL occur.
I also think the Peak Oilers are correct when they say that this, unless anticipated, can cause some catastrophic events. Economists are quick to point out that as resources decline, the price of oil will rise to increase the incentive for alternative energy. The problem is that alternative energy doesn’t just appear at our doorstep, and the change from an oil-driven economy to some other energy-driven economy doesn’t just happen overnight. There could be decades of hardships both for businesses and for consumers who currently rely on oil and its outputs. I wonder if some pro gas-taxers may tend to overlook this point (For the record, I don’t think Mike is one of those) for the same reason they overlook any potential hardships caused by a gas tax. As I’ve said before, oil and gas are not like other commodities such as bubblegum and shrinkwrap: I don’t drive a stick of gum to work….
The point is that it is likely worthwhile to start the transition now, well before the peak happens than to be reactionary to the price mechanism. This is something the pro gas-taxers are right on – they want to deal with this now and they have a plan (which is more than I can say for the doomsayers who just want to spout off about the end of the world as we know it).
I view hardline cornocopian economists, whose only answer is to “let technology solve any perceived ‘constraint’ on resources,” as incredibly naïve. Technology can help ‘extend the date’ for resource depletion, that’s for sure. But the idea that economic growth can create a condition of nearly limitless natural resources is illogical by definition of a limited natural resources (again, barring some Star Trek-like ability to replicate things at will).
Having said all that, I don't think anyone is suggesting that the world will eventually 'run out' of oil. It will approach a limit near zero [as prices keep rising] (I believe that is what the original Hubbert curve looks like). In that sense though, "useable" oil will probably reach zero as the price will eventually reach a point where few if any would either need to buy oil, or could afford to if they did. This will likely take a LOT longer than Peak Oilers might think though, since, as our economy substitutes away from oil to other infrastructures etc, the demand for oil (the curve) will fall, tempering any rise in prices. By that time, oil would likely (hopefully) have little to no use anyway.
This actually illustrates my earlier point - if supply falls exponentially before people's overall demand (curve) falls as well due to changing infrastructure and tastes - hardships will be great, prices will be high, until the transition ends. (There are I think plenty of institutional and political reasons to think that demand would not be able to keep up with supply). If, however, we start slowly reducing our demand on oil NOW we can get ahead of the game BEFORE the supply starts dwindling.
1.If the peak is just around the corner and exceedingly high prices ($200 dollars a barrel? $300? $400?) are coming our way, then why are the prices for oil futures and oil call options so low?
2. Are you buying oil futures or oil call options? If not, why not?
3. Why did peak oil supporters in the 1970s tell us that the oil supply would run out in the 1980s and 1990s? Why were they wrong then? Why are you right now? What's changed?
Nevertheless, I do think Peak Oilers and economists can find some middle-ground. The general idea of Peak Oil is after all not that controversial (for most people) – at some point oil production must reach a peak and start declining due to limits on how much oil there is left on Earth. Short of technology one day being able to replicate oil and its energy chemically, or of Earth’s population finding oil on Mars etc, peak oil WILL occur.
I also think the Peak Oilers are correct when they say that this, unless anticipated, can cause some catastrophic events. Economists are quick to point out that as resources decline, the price of oil will rise to increase the incentive for alternative energy. The problem is that alternative energy doesn’t just appear at our doorstep, and the change from an oil-driven economy to some other energy-driven economy doesn’t just happen overnight. There could be decades of hardships both for businesses and for consumers who currently rely on oil and its outputs. I wonder if some pro gas-taxers may tend to overlook this point (For the record, I don’t think Mike is one of those) for the same reason they overlook any potential hardships caused by a gas tax. As I’ve said before, oil and gas are not like other commodities such as bubblegum and shrinkwrap: I don’t drive a stick of gum to work….
The point is that it is likely worthwhile to start the transition now, well before the peak happens than to be reactionary to the price mechanism. This is something the pro gas-taxers are right on – they want to deal with this now and they have a plan (which is more than I can say for the doomsayers who just want to spout off about the end of the world as we know it).
I view hardline cornocopian economists, whose only answer is to “let technology solve any perceived ‘constraint’ on resources,” as incredibly naïve. Technology can help ‘extend the date’ for resource depletion, that’s for sure. But the idea that economic growth can create a condition of nearly limitless natural resources is illogical by definition of a limited natural resources (again, barring some Star Trek-like ability to replicate things at will).
Having said all that, I don't think anyone is suggesting that the world will eventually 'run out' of oil. It will approach a limit near zero [as prices keep rising] (I believe that is what the original Hubbert curve looks like). In that sense though, "useable" oil will probably reach zero as the price will eventually reach a point where few if any would either need to buy oil, or could afford to if they did. This will likely take a LOT longer than Peak Oilers might think though, since, as our economy substitutes away from oil to other infrastructures etc, the demand for oil (the curve) will fall, tempering any rise in prices. By that time, oil would likely (hopefully) have little to no use anyway.
This actually illustrates my earlier point - if supply falls exponentially before people's overall demand (curve) falls as well due to changing infrastructure and tastes - hardships will be great, prices will be high, until the transition ends. (There are I think plenty of institutional and political reasons to think that demand would not be able to keep up with supply). If, however, we start slowly reducing our demand on oil NOW we can get ahead of the game BEFORE the supply starts dwindling.
Wednesday, August 15, 2007
"Reintroducing Macroeconomics": A Review
As promised, here is my review of Steven Cohn's book: "Reintroducting Macroeconomics, A Critical Approach."
So that you my reader can understand any biases I may have, I offer up a brief background of my thinking as a student of Economics:
As an undergrad, the textbooks for my classes were largely Classical-Keynesian Synthesis in nature, while most of my professors had a very obvious laissez-faire, classical, bent to them. I remember noting to myself early on that there appeared to be a direct correlation to how much math was used in the class to how 'classical' the professor seemed. As it was my game theory professor was the most hardline: every sentence he spoke had the word "rational" in it - and whenever he said the word "irrational" his lips would curl and nostrils would tighten as if he were smelling a skunk.
Here is a quote from my professor, as best as I can recall, from the very first econ class I ever took:
"Economics is about how selfish individuals make decisions under conditions of scarcity. Selfishness is not a bad thing - being selfish makes everyone better off..."
Even in those days I can remember thinking that my professors all had severe bias issues and whenever 'gains from trade' or perfect markets etc. were discussed I remember spending hours and hours later at home trying to rationalize what I had learned with reality. By the time I graduated, I had chosen a personal middle-ground - not quite classical and not quite Keynesian (at the time, those were the only choices I thought I had). When debating with friends though I would always defend the classical position - because it was the one that I knew the best - it was the one I paid to learn - so I felt in defending it, I was defending my decision to learn Economics.
In grad school, most of my macro classes were from a New Classical bent, with real business cycles and dynamic theory based on intergenerational models of perfectly rational agents. Assumptions were just that - and were never discussed. My grad schooling taught me alot about econometrics, simulation economics, and in-depth classical thought, but it also only served to justify my growing opinion that Economics is a growing failure as an authentic science.
Over the last few years I have drifted more and more away from classical ideas taught me throughout my economics education. I still believe much can be learned from neoclassical economics, but ever since that first undergrad class, I've found true scientific rigor to be lacking. Economics classes always seemed like a secret society of conservatives - an indoctrination built on assumptions more than on inquiry and open debate. Certain other fields never seemed any better (the political science department was filled with die-hard liberals that never bothered to see the other side as well), but I had always hoped that Economics would grow to be more holist: to include thoughts of politics, psychology, sociology, etc. But it seems to have grown more and more sheltered since I started my schooling.
As my longing for more holist ideas have grown, so has my thirst to learn more of these ideas. As such, I've been paying closer attention to thoughts espoused by the post-autistics, the post-keynesians, and the behavioral economists.... I purchased Steven Cohn's book so that my students might not have to deal with the same internal struggle I dealt with regarding economic thought. With that, here is my short review:
As an introductory textbook (which is what it espouses to be - either as a supplement to a mainstream book, or as a book for independent study), it fails. First, the book spends too much time denigrating mainstream texts, and not enough time being mainstream's alternative. As such, the text mentions how market failures or group-think can prevent nice long-run market outcomes, or how AD-AS models are often inadequate, but it spends little time presenting a coherant and detailed counterargument. Instead it presents a hodgepodge of arguments from different divisions of heterodox economics: Marxism, feminism, post-keynesian, institutionalist.... Ordinarily that would be good (afterall the whole point of the book is to present economics more holistically), but the problem is, due to space constraints, it makes the book's arguments seem weak, the feeling of being 'all over the place, and more argumentative. Perhaps a more narrow focus on a handful of macrotopics would have been better....
Another dissapointing feature are the endnotes. Chapters end with pages and pages of endnotes(footnotes) - often time more interesting than the text itself. This again is an obvious example of how the author wrote too broadly and felt the need to condense his thought on many topics. I hate endnotes - especially when they belong in the body of the text.
The final reason this fails as a textbook is the lack of visual interest - there are only a couple graphs and they are poor quality. The book is written in book/novel format and would and should be an instant turnoff to most introductory undergrads.
Having said that, some more interested and thoughtful students will find this book insightful. It does a great job of singling out mainstream assumptions and showing how those assumptions can and often fail - and (as mentioned, too briefly) discusses the results of how the macroeconomy differs as those assumptions fail.
Also, the author picks up on what I feel is the major problem with mainstream texts - the tendency to "note but ignore" issues with their assumptions, and markets. In the end, the point of the book works, and that point is that mainstream economics fails to offer a truly holist attitude to economics, and it fails to have an open dialogue with its students, preferring to offer a skewed picture of the world for the sake of simplicity. I view this, however, as a hastily put-together, though useful, working document of heterodoxy. Hopefully one day a more appealing text will arrive on scene.
So that you my reader can understand any biases I may have, I offer up a brief background of my thinking as a student of Economics:
As an undergrad, the textbooks for my classes were largely Classical-Keynesian Synthesis in nature, while most of my professors had a very obvious laissez-faire, classical, bent to them. I remember noting to myself early on that there appeared to be a direct correlation to how much math was used in the class to how 'classical' the professor seemed. As it was my game theory professor was the most hardline: every sentence he spoke had the word "rational" in it - and whenever he said the word "irrational" his lips would curl and nostrils would tighten as if he were smelling a skunk.
Here is a quote from my professor, as best as I can recall, from the very first econ class I ever took:
"Economics is about how selfish individuals make decisions under conditions of scarcity. Selfishness is not a bad thing - being selfish makes everyone better off..."
Even in those days I can remember thinking that my professors all had severe bias issues and whenever 'gains from trade' or perfect markets etc. were discussed I remember spending hours and hours later at home trying to rationalize what I had learned with reality. By the time I graduated, I had chosen a personal middle-ground - not quite classical and not quite Keynesian (at the time, those were the only choices I thought I had). When debating with friends though I would always defend the classical position - because it was the one that I knew the best - it was the one I paid to learn - so I felt in defending it, I was defending my decision to learn Economics.
In grad school, most of my macro classes were from a New Classical bent, with real business cycles and dynamic theory based on intergenerational models of perfectly rational agents. Assumptions were just that - and were never discussed. My grad schooling taught me alot about econometrics, simulation economics, and in-depth classical thought, but it also only served to justify my growing opinion that Economics is a growing failure as an authentic science.
Over the last few years I have drifted more and more away from classical ideas taught me throughout my economics education. I still believe much can be learned from neoclassical economics, but ever since that first undergrad class, I've found true scientific rigor to be lacking. Economics classes always seemed like a secret society of conservatives - an indoctrination built on assumptions more than on inquiry and open debate. Certain other fields never seemed any better (the political science department was filled with die-hard liberals that never bothered to see the other side as well), but I had always hoped that Economics would grow to be more holist: to include thoughts of politics, psychology, sociology, etc. But it seems to have grown more and more sheltered since I started my schooling.
As my longing for more holist ideas have grown, so has my thirst to learn more of these ideas. As such, I've been paying closer attention to thoughts espoused by the post-autistics, the post-keynesians, and the behavioral economists.... I purchased Steven Cohn's book so that my students might not have to deal with the same internal struggle I dealt with regarding economic thought. With that, here is my short review:
As an introductory textbook (which is what it espouses to be - either as a supplement to a mainstream book, or as a book for independent study), it fails. First, the book spends too much time denigrating mainstream texts, and not enough time being mainstream's alternative. As such, the text mentions how market failures or group-think can prevent nice long-run market outcomes, or how AD-AS models are often inadequate, but it spends little time presenting a coherant and detailed counterargument. Instead it presents a hodgepodge of arguments from different divisions of heterodox economics: Marxism, feminism, post-keynesian, institutionalist.... Ordinarily that would be good (afterall the whole point of the book is to present economics more holistically), but the problem is, due to space constraints, it makes the book's arguments seem weak, the feeling of being 'all over the place, and more argumentative. Perhaps a more narrow focus on a handful of macrotopics would have been better....
Another dissapointing feature are the endnotes. Chapters end with pages and pages of endnotes(footnotes) - often time more interesting than the text itself. This again is an obvious example of how the author wrote too broadly and felt the need to condense his thought on many topics. I hate endnotes - especially when they belong in the body of the text.
The final reason this fails as a textbook is the lack of visual interest - there are only a couple graphs and they are poor quality. The book is written in book/novel format and would and should be an instant turnoff to most introductory undergrads.
Having said that, some more interested and thoughtful students will find this book insightful. It does a great job of singling out mainstream assumptions and showing how those assumptions can and often fail - and (as mentioned, too briefly) discusses the results of how the macroeconomy differs as those assumptions fail.
Also, the author picks up on what I feel is the major problem with mainstream texts - the tendency to "note but ignore" issues with their assumptions, and markets. In the end, the point of the book works, and that point is that mainstream economics fails to offer a truly holist attitude to economics, and it fails to have an open dialogue with its students, preferring to offer a skewed picture of the world for the sake of simplicity. I view this, however, as a hastily put-together, though useful, working document of heterodoxy. Hopefully one day a more appealing text will arrive on scene.
Tuesday, August 14, 2007
Stock Market Ups and Downs
Mises Institute has an interesting blog on last week's stock market volatility and dump.
My only concern is that the title of the blog is "The one question you must never ask an economist." However, I don't believe he ever lets the reader in on the question he has in mind.
So I thought I'd offer up my own suggestion:
"How do your assumptions affect the results and forecasts of your model?"
Most economists (IMOP) would likely respond one of two ways:
1. "they wouldn't change a thing - they are just simplifying assumptions."
(if an economist answers thusly you can be sure he/she hasn't given the question much
thought outside of their own box)
2. "What assumptions - this is how things work"
(if an economist answers thusly, you should be scared for your life since the person is obviously posessed by their mathematical formulae and are liable to go all John Nash on you at any moment)
My only concern is that the title of the blog is "The one question you must never ask an economist." However, I don't believe he ever lets the reader in on the question he has in mind.
So I thought I'd offer up my own suggestion:
"How do your assumptions affect the results and forecasts of your model?"
Most economists (IMOP) would likely respond one of two ways:
1. "they wouldn't change a thing - they are just simplifying assumptions."
(if an economist answers thusly you can be sure he/she hasn't given the question much
thought outside of their own box)
2. "What assumptions - this is how things work"
(if an economist answers thusly, you should be scared for your life since the person is obviously posessed by their mathematical formulae and are liable to go all John Nash on you at any moment)
Monday, August 13, 2007
Thursday, August 9, 2007
Bush disses gas tax hike idea
Bush apparently is no pigovian in terms of the gas tax idea....
Granted the idea wouldn't have been revenue neutral (but still, assuming people place good value on bridge safety - it's in a sense giving back to the people...).
Granted the idea wouldn't have been revenue neutral (but still, assuming people place good value on bridge safety - it's in a sense giving back to the people...).
Wednesday, August 8, 2007
US releases Economics Education Report Card
The study conducted by the US. Dept. of Education is the first ever National Assessment of Educational Progress - and is a measure of national knowledge of economics by 12th graders in the US. I saw the Fed Reserve Chair from Minneapolis comment on the results...his assessment is rosier than mine. He says the fact that 42% of the sample were 'proficient' in economics is a "good base." I tend to look at the glass being half empty on this - there's a lot of room for improvement.
About 79% of students scored at the "basic" level - having a rudementary knowlege of some econ concepts. I don't think that is too bad, but again, still a lot of room for growth.
One of the more interesting findings is that males tend to only slightly outperform females in econ. I would expect that to be true given the more mathematical/logical nature of the way econ is often taught. But it's surprising to me how close the genders performed. I would have thought the gap to be much higher. I do think it is meaningful that the gap widens at the higher levels of proficiency - and I would expect this is a foreshadow of college results - as more math is applied to econ in advanced levels, males should tend to increasingly dominate.
The basic "scores" are as follows (discussing micro, macro, and international econ topics):
Download the whole report here.
About 79% of students scored at the "basic" level - having a rudementary knowlege of some econ concepts. I don't think that is too bad, but again, still a lot of room for growth.
One of the more interesting findings is that males tend to only slightly outperform females in econ. I would expect that to be true given the more mathematical/logical nature of the way econ is often taught. But it's surprising to me how close the genders performed. I would have thought the gap to be much higher. I do think it is meaningful that the gap widens at the higher levels of proficiency - and I would expect this is a foreshadow of college results - as more math is applied to econ in advanced levels, males should tend to increasingly dominate.
The basic "scores" are as follows (discussing micro, macro, and international econ topics):
| Market Economy |
| 72% described a benefit and a risk of leaving a full-time job to further one’s education |
| 52% identified how commercial banks use money deposited into customers’ checking accounts |
| 46% interpreted a supply and demand graph to determine the effect of establishing a price control |
| 36% used marginal analysis to determine how a business could maximize its profits |
| National Economy |
| 60% identified factors that lead to an increase in the national debt |
| 36% identified the federal government’s primary source of revenue |
| 33% explained the effect of an increase in real interest rates on consumers’ borrowing |
| 11% analyzed how a change in the unemployment rate affects income, spending, and production |
| International Economy |
| 63% determined the impact of a decrease in oil production on oil-importing countries |
| 51% determined a result of removing trade barriers between two countries |
| 40% determined why industries can successfully lobby for tariff protection |
| 32% identified how investment in education can impact economic growth |
Download the whole report here.
Are there significant externalities to marijuana smoking?
I comment on this at Mike Moffat's blog (about.com).
I think it's pretty obvious that there are some negative and positive externalities...the question is, which is dominant, and is that dominance substantial? I'd love to hear your thoughts on that....
In general though, Mike is right - people who don't support the carbon tax should either help contribute to a solution to our environmental issues, dependency on gas (to live basically), etc...or, just keep silent. Saying the pigou club is wrong without offering an alternative to our current policies (which doesn't appear to be working) is not particularly useful.
This also though points to a general problem with Pigovian taxation (despite its benefits to efficiency) and that is, we almost never know what the social costs or benefits are to an externality - and often our studies can be biased one way or the other, or grossly miscalculating the benefits or cost...this makes using pigovian taxation tricky.
If you under-tax - you may be adding little benefit to reducing a negative externality at the expense of a higher tax that may or may not be passed back to consumers.
If you over-tax, you are likely doing more harm than good.
I think it's pretty obvious that there are some negative and positive externalities...the question is, which is dominant, and is that dominance substantial? I'd love to hear your thoughts on that....
In general though, Mike is right - people who don't support the carbon tax should either help contribute to a solution to our environmental issues, dependency on gas (to live basically), etc...or, just keep silent. Saying the pigou club is wrong without offering an alternative to our current policies (which doesn't appear to be working) is not particularly useful.
This also though points to a general problem with Pigovian taxation (despite its benefits to efficiency) and that is, we almost never know what the social costs or benefits are to an externality - and often our studies can be biased one way or the other, or grossly miscalculating the benefits or cost...this makes using pigovian taxation tricky.
If you under-tax - you may be adding little benefit to reducing a negative externality at the expense of a higher tax that may or may not be passed back to consumers.
If you over-tax, you are likely doing more harm than good.
Monday, August 6, 2007
Book Review Pending
I am currently reading Steven Cohn's: "Reintroducing Macroeconomics: A Critical Approach."
The book is a heterodox economic critique of mainstream macro thought that is taught in today's classes. I hope to use the book along with Mankiw's mainstream text to help with a point-counterpoint way of teaching this fall.
I can imagine that will be difficult as I tried somewhat last year to broaden the discussion beyond the mainstream (to include some post-keynesinan ideas, contributions of psychology, ran some class experiments...) to some success, but also some confusion by the students.
I still don't know how best to broaden the scope while simultaneously cover all the necessary mainstream topics for the common final exam. It may be impossible; I don't know. Anybody with any thoughts please let me know. Look for my review of Cohn's book in a week or two.
The book is a heterodox economic critique of mainstream macro thought that is taught in today's classes. I hope to use the book along with Mankiw's mainstream text to help with a point-counterpoint way of teaching this fall.
I can imagine that will be difficult as I tried somewhat last year to broaden the discussion beyond the mainstream (to include some post-keynesinan ideas, contributions of psychology, ran some class experiments...) to some success, but also some confusion by the students.
I still don't know how best to broaden the scope while simultaneously cover all the necessary mainstream topics for the common final exam. It may be impossible; I don't know. Anybody with any thoughts please let me know. Look for my review of Cohn's book in a week or two.
Thursday, August 2, 2007
Another example of economics stumbling over itself
As a follow-up to my most recent post, I came across this which talks about when it is rational to vote in elections. This is just something I came across, and I'm sure there are others. This has been a hot topic in economics and game theory for more than a decade now.
In fact, I remember one of my econ profs during my undergrad days talking about this talking and talking about how he was completely dumbfounded by the idea that people voted - he just didn't understand why they would. Afterall, "rational" people think at the margin, and voting is hardly an excercise where one vote counts for much.
And I remember thinking at the time, "uhh, what's so hard to understand? Do economists really think people really go to vote JUST for the purpose of hoping to help enact X legislation or install Y governor? How ridiculous.
People of course vote for numerous reasons including: something to do, feelings of patriotism, feelings of community, an excuse to take off work and not feel guilty... ie, the additional costs of transport, lost wage, and/or time are exceeded by the benefits of all the mentioned items plus I'm sure others. Of course voters are rational --- just not confined to the small space that some economists want to put them in. This is just a typical case of an economist's assumption (that a person votes only for reason X) being, well, just plain silly. But notice feelings of community etc are not things easily modeled by math, hence the reason economists tend to ignore that and the like.
In fact, I remember one of my econ profs during my undergrad days talking about this talking and talking about how he was completely dumbfounded by the idea that people voted - he just didn't understand why they would. Afterall, "rational" people think at the margin, and voting is hardly an excercise where one vote counts for much.
And I remember thinking at the time, "uhh, what's so hard to understand? Do economists really think people really go to vote JUST for the purpose of hoping to help enact X legislation or install Y governor? How ridiculous.
People of course vote for numerous reasons including: something to do, feelings of patriotism, feelings of community, an excuse to take off work and not feel guilty... ie, the additional costs of transport, lost wage, and/or time are exceeded by the benefits of all the mentioned items plus I'm sure others. Of course voters are rational --- just not confined to the small space that some economists want to put them in. This is just a typical case of an economist's assumption (that a person votes only for reason X) being, well, just plain silly. But notice feelings of community etc are not things easily modeled by math, hence the reason economists tend to ignore that and the like.
Wednesday, August 1, 2007
Why Can't We All Just Get Along (and learn from each other)
To show the inappropriateness of accusing an entire social science of poor science while ignoring your own science’s shortcomings (…without sin cast the first stone…), I would like to sarcasstically point out the following:
Would a psychologist reduce human market behavior to marginal cost and benefit? Would a psychologist reduce most research to rigid mathematical models while avoiding social situational issues? Would a psychologist look down from their Ivory Tower and bemoan economists as being inferior and less rigourous in their analysis?
Maybe, maybe not...but economists don't seem to have problem doing the same to psychology.
My question - Why can't an economist be more like a psychologist? Why can't economists be more like that.
Would a psychologist reduce human market behavior to marginal cost and benefit? Would a psychologist reduce most research to rigid mathematical models while avoiding social situational issues? Would a psychologist look down from their Ivory Tower and bemoan economists as being inferior and less rigourous in their analysis?
Maybe, maybe not...but economists don't seem to have problem doing the same to psychology.
My question - Why can't an economist be more like a psychologist? Why can't economists be more like that.
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