Monday, November 10, 2014

Some nonfiction books I really like

My last post was a mainly negative review of David Graeber's Debt: The First 5,000 Years, and a while before that I posted a decidedly mixed review of Kartik Athreya's Big Ideas in Macroeconomics. So commenters are justified in pestering me to list my favorite books (other than sci-fi). Here's a short list. If your favorite book isn't on here, it's either because (in order of decreasing likeliness): A) I haven't read it, B) I read it a while back, C) I didn't happen to think of it off the top of my head, or D) I didn't like it that much.

Big Theory-of-History Books

1. Guns, Germs, and Steel, by Jared Diamond
An obvious choice. The most original and compelling "big arc of history" thesis I've ever read. And contains pages and pages of details about domesticable plants, which I love reading about, because hey - domesticable plants.

2. The Better Angels of Our Nature, by Steven Pinker
This reads like the anti-Graeber. So on point, so forceful, so focused. Such clarity and readability. There is the occasional howler, as in Graeber, but far fewer, and sources are cited. Pinker successfully makes the case that we live in a much more peaceful world than ever before.

3. Why the West Rules - For Now, by Ian Morris
This one didn't really have as clear a thesis about the big arc of history, but the important thing here is the data - the first hard data I've ever seen on which civilizations were the most developed at which point in time.

Economics and Finance

1. The Myth of the Rational Market, by Justin Fox
The single best pop econ book ever written - a complete history of financial economics. It made me want to join the field.

2. The Undercover Economist, by Tim Harford
This is a managerial econ course in a book - no equations, but read it and you will understand all the concepts. Professors, you could assign this to your class instead of a textbook.

3. When Genius Failed, by Roger Lowenstein
The best history book about the financial industry that I've ever read.

4. The Wisdom of Crowds, by James Surowiecki
Lots of cool facts about finance, economic theory, complex systems, and behavioral econ. Impossible to summarize, but that's fine. Probably the best pop book about complex systems.

5. The Big Short, by Michael Lewis
This book is great at conveying what the modern finance industry is really like. Of course, everything by Michael Lewis is worth reading. Liar's Poker is the most fun, of course.

6. The Occupy Handbook by various authors, edited by Janet Byrne
A wonderful collection of essays about the financial crisis, the recession, and problems in our economy today. I even loved David Graeber's chapter!

7. The Second Machine Age, by Erik Brynjolfsson ad Andrew McAfee
The single best book on the "rise of the robots" question. Doesn't have a strong conclusion about what to do about automation and the economy, but that's because humanity just doesn't quite know what to do yet! Jam-packed with information.

8. Time to Start Thinking, by Edward Luce
The case for economic nationalism and institutional renewal.

9. A Random Walk Down Wall Street, by Burton Malkiel
The best personal finance book. Just reading this book will save the average person thousands of dollars.

10. Zombie Economics, by John Quiggin
Someone had to write this one. Quiggin did it exceptionally well, IMHO.

11. 13 Bankers, by Simon Johnson and James Kwak
Great expose of regulatory capture in the pre-2008 finance industry.

12. My Life as a Quant, by Emanuel Derman
An excellent memoir by a very smart and cool dude.


1. Nightwork, by Anne Allison
Why Japanese companies are killing Japanese families. Actually, that should have been the subtitle.

2. Can Japan Compete?, by Michael Porter and Hirotaka Takeuchi
A bit dated, but a great look at some of the micro reasons why Japan's economy petered out in the early 1990s. Not intended as a defense of neoliberalism at all, but this is the book that first made me think that neoliberalism might be good for Japan (and might have been good for us, back in the day).

3. Democracy Without Competition in Japan, by Ethan Scheiner
Read this to understand Japanese politics, at least through the early 2000s.

4. The Making of Modern Japan, by Marius Jansen
The best history of Japan, period.

5. The Rising Sun, by John Toland
A great history of WW2 from the Japanese perspective. It will permanently shatter any stereotype of Japanese people as conformist, obedient, etc.

Assorted Other Nonfiction

1. The Pleasure of Finding Things Out, by Richard Feynman
Everything by Feynman is good; this is the best.

2. The Trouble With Physics, by Lee Smolin
Captures both the beauty and fun of doing fundamental physics theory, and the frustration of seeing a field of science hobbled by bad sociology. I wonder what other fields are hobbled by bad sociology? Hmm...

3. Autumn in the Heavenly Kingdom, by Stephen Platt
An eye-opening account of the Taiping Rebellion, the Chinese version of Armageddon.

4. Genghis Khan and the Making of the Modern World, by Jack Weatherford
The story of a boy who came from nowhere to conquer the world, who tried to singlehandedly yank the middle ages toward liberalism, and who of course failed.

5. A World Undone, by G.J. Meyer
An eye-opening account of World War I, the European version of Armageddon.

6. Destiny Disrupted, by Tamim Ansary
An informal history of the world from a Muslim perspective.

7. Lost Enlightenment, by S. Frederick Starr
The amazing history of Central Asian science and technology before horse nomads and religious fanatics wrecked the region forever.

8. Empires of the Sea, by Roger Crowley
A gripping account of the desperate dirty battles between Spain and Turkey in the 16th Century.

9. Delivering Happiness, by Tony Hsieh
I don't read many autobiographies, but this one is great. It made me a Hsieh groupie, and I've never even met the man.

10. Mindset, by Carol Dweck
The only self-help book you'll ever need.

11. The Clockwork Universe, by Edward Dolnick
The history of how Descartes, Copernicus, Kepler, Galileo, Boyle, Hooke, and Newton destroyed the old world of magic and superstition and made it safe for science and rationality - the most important thing that has ever happened to humankind.

12. How the Scots Invented the Modern World, by Arthur Herman
Just one reason Scotland is awesome. Well, many reasons, actually.

13. Coming Apart, by Charles Murray
The sad but apparently true story of America's growing class divide.

(Reminder: Most books not on this list are simply books I haven't read, or read so long ago that I can't remember them clearly. My list of books to read is very long indeed...)

Tuesday, November 04, 2014

Book review: Debt: The First 5000 Years

A while ago, I wrote a rather acerbic critique of one of David Graeber's magazine articles, in which I mentioned his book, Debt: The First 5000 Years - which, at the time, I hadn't read. This angered a bunch of Graeberites, not to mention Graeber himself. And to be fair, I do have a bad habit of passing judgment on books before I read them. So, in keeping with my new philosophy of fairness and open-mindedness, I read the whole thing.

Now, from interacting with David Graeber on Twitter, I have a sneaking suspicion that he is a certain type of Public Intellectual - the type who bristles with anger at the mildest criticism. This type of Intellectual will view any paraphrase of his ideas by a critic to be a total and utter misreading and misrepresentation of what he intended to say, no matter how close the paraphrase is to the original - deviate one word from exact quotation, and you're a Vile, Intellectually Dishonest Boor (V.I.D.B.) who obviously couldn't be bothered to read what the author actually wrote. As for exact quotations, those are certain to be out of context. Just as there is no physically exact model of the Universe except for the Universe itself, there is no representation of the Touchy Intellectual's thought that is accurate except for the Intellectual's own complete and unabridged oeuvre. (Paraphrasing by supporters and fans, of course, is perfectly legit, as long as their support and fandom is unqualified.)

Now if I'm right, and if Graeber is this sort of fellow, then this review is in trouble before it gets started, because the main problem with Debt: The First 5000 Years is that after slogging through all 560 pages, I can't for the life of me tell what point it's trying to make about the phenomenon of debt. This means that in order to say anything about what I think this book might be saying, I will have to paraphrase heavily, which means that Graeber and the Graeberians will undoubtedly conclude (quite vociferously) that I am either lying about having read the book, or am simply a village idiot, and Tweet-spam me accordingly.

OK, so now that we've dispensed with the pleasantries...

Debt is a sprawling, rambling, confused book, mostly about economic history, mixed with some political and moral philosophy. It begins with a discussion of the "textbook" economic history about the transition from barter to money economies, and debunks this with historical evidence. Barter was actually never common. Graeber thinks this will come as a big shock to economists, and indeed it might to some, though monetary economists are well aware that before the advent of currency, credit arrangements were the standard form of payment, and were usually denominated in units of real commodities. Graeber discusses why this kind of payment, which doesn't have a standardized unit of account, is technologically difficult and clunky. He mentions some intermediate solutions, such as using fictitious units of account with fixed prices in bilateral credit arrangements (e.g. one goat = 5 "doubloons"), or using ingots of metal as a rough-and-ready unit of account. He also discusses how currency came into use primarily as a result of war (much of this point is actually sprinkled throughout the later sections).

This was the most interesting part of the book, and I learned some very interesting things from it. However, it would have been nice if Graeber had sat down and talked with an actual monetary economist before writing this section, instead of just reading Econ 101 textbooks. An hour or two of conversation with Miles Kimball, David Andolfatto or Steve Williamson - to name three people I've chatted with about these ideas - would stimulate many interesting thoughts and crystallize others, greatly enriching these sections of the book. Graeber shows keen economic intuition, actually, and I'm sure he could publish papers in monetary economics if he set his mind to it, but of course he has bigger fish to fry.

Most of the book, however, is not about the mechanics of debt, but about its connection to moral issues. If Debt can be said to have a basic thesis, it's that debt has a moral dimension, and that this moral dimension enables people to do bad things to other people. (Yes, I paraphrased; cue brickbats from Graeberians!)

Graeber advances this thesis indirectly. The bulk of the book describes a long sequence of bad things that have been done to people in the past - mostly some form of slavery or another. The upshot of this long litany, though it is never explicitly stated, seems to be that commerce - exchange, markets, capitalism, pick your preferred term - is fundamentally exploitative, and is fundamentally about turning free people into slaves. This is a pretty standard leftist idea. But by always reminding the reader that these arrangements of commerce/exchange/capitalism are carried out via the mechanism of debt, Graeber pours this old wine into a new glass. Capitalism is bad, and debt is the mechanism of capitalism, therefore it is upon the idea of debt that we must turn our disapprobation.

Many times throughout the book, Graeber rails against the fact that the morality of "paying one's debts" functions as a mechanism for keeping debtors in bondage to creditors. But a few times, Graeber actually reverses the equation, and laments the power that debtors can sometimes exercise over creditors, quoting the old saw that "if you owe the bank a hundred thousand dollars, the bank owns you; if you owe the bank a hundred million dollars, you own the bank." In other words, whether debt gives power to creditors or debtors, power is the bad thing, and debt is merely the mechanism by which power is expressed.

Now, this may sound a little silly - if someone wrote a book called "Metal: The First 5,000 Years," and then filled that book with stories of war and bloodshed, never failing to remind us after each anecdote that metal was involved in some way, we might be left scratching our heads as to why the author was so fixated on metal instead of on war itself. And in fact, that is indeed how I felt for much of the time I was reading Graeber's book. The problem was exacerbated by the fact that Graeber continually talks around the idea of debt in other ways, mentioning debt crises (without reflecting deeply on why these happen), the periodic use and disuse of coinage (which apparently is just as bad as debt in terms of enabling the capitalism monster), and any other phenomenon related to debt, without weaving these observations into a coherent whole. 

In other words, I am now angry at myself for paraphrasing the book, and trying to put theses into Graeber's mouth, because this is such a rambling, confused, scattershot book that I am doing you a disservice by making it seem more coherent than it really is.

The problem of extreme disorganization is dramatically worsened by the way that Graeber skips merrily back and forth from things he appears to know quite a lot about to things he obviously knows nothing about. One sentence he'll be talking about blood debts and "human economies" in African tribes (cool!), and the next he'll be telling us that Apple Computer was started by dropouts from IBM (false!). There are a number of glaring instances of this. The worst is not when Graeber delivers incorrect facts (who cares where Apple's founders had worked?), it's when he uncritically and blithely makes assertions that one could only accept if one has extremely strong leftist mood affiliation. The most egregious example of this occurs in the book's conclusion, when Graeber writes:
I would like to end, then, by putting in a word for the non-industrious poor. At least they aren't hurting anyone.
Both the declaration that the non-industrious poor aren't hurting anyone and the implication that being "industrious" probably is hurting someone are obviously false. But Graeber delivers absurdist sentences like this with the same calm assurance with which he tells us about when coinage first became popular in the Mediterranean.

Not only does this have the effect of diminishing Graeber's credibility as a narrator (what if he's wrong about the blood debts too?), but it makes a careful, critical reading of the book nigh impossible.

Now if you have strong leftist mood affiliation - i.e., if you've already bought into most of the background ideology that suffuses Graeber's book - then you will probably nod your head as you read this rambling mess of a book, and come away with the feeling that debt, in some way or another, is another star in the constellation of nasty concepts that you associate with the capitalist machine. But if you don't, you might walk away thinking "What was I supposed to take away from that? That debt is, like, bad, or something?"

Or at least you would if you had read Debt in 2007. But Debt was published in 2011, when legions of middle-class and poor Americans had just seen their wealth wiped out by a housing crash, and yet who were still on the hook for the money they had borrowed to buy those houses. With Americans drowning in debt, the message of a debt jubilee - a general bailout, not just for the big banks that started the whole mess - seemed very attractive (I, for one, would definitely have supported it!). So I'm sure it resonated with a lot of people when Graeber wrote:
It seems to me that we are long overdue for some kind of Biblical-style Jubilee: one that would affect both international debt and consumer debt. It would be salutary not just because it would relieve so much genuine human suffering, but also because it would be our way of reminding ourselves that...paying one’s debts is not the essence of morality, that all these things are human arrangements and that if democracy is to mean anything, it is the ability to all agree to arrange things in a different way.
That sounds like something we should have done more of in the years following the bursting of the housing bubble. But - and here I just want to editorialize a bit, since I deserve it after reading 560 pages of Graeber - as a general, regular thing it sounds like a bad idea. It smacks of the idea that wealth redistribution should be opportunistic rather than systematic - that the government should use debt cancellation in place of regular systems of welfare, thus replacing redistribution to those most in need with redistribution to those who are boldest in asking for "loans."

Anyway, now I'm rambling. To wrap up the review, Debt: The First 5,000 Years is not a book I recommend. It contains some interesting tidbits, but these are not worth the cost of the slog. Perhaps capitalism is a rotten, inhumane system that kills relationships, rewards violence and trickery, and enslaves us all to the brutal logic of the market before inevitably destroying the planet. Or perhaps not. But either way, there's little insight to be gained by reframing the issue in terms of debt. Or if there is, I'm damned if I can find that insight in this book. Perhaps the next 5,000 years will prove more enlightening.

Sunday, November 02, 2014

Preview: Trillion Dollar Economists, by Robert Litan

In the tradition of passing judgment on books I haven't read, let me say that Trillion Dollar Economists, by Robert Litan, looks like it mostly agrees with my priors. From the inside flap:
A trillion dollars, and most likely more – that’s how much economists contribute to the U.S. economy. But you’d never know it by reading the jokes and criticisms (some of it fair) about economists in the media and in the blogosphere. 
In Trillion Dollar Economists, one of the nation’s leading policy analysts, Robert Litan, explains with lucidity and precision how the insights of many economists, mainly over the past fifty years, have helped to revolutionize business, resulting in huge benefits for companies and consumers. 
Economists and their ideas are embedded throughout the economy, Internet-based companies (even on-line dating sites), and increasingly in sports. Whether they know it or not, Internet retailers owe their existence to economists who in earlier decades helped convince policy makers to remove limits on prices and entry into the transportation business, while providing much of the intellectual impetus for breaking up the telephone monopoly that otherwise most likely would have inhibited the growth of the Internet. 
The widespread use of auctions in on-line commerce and search has its origins in economic research. 
Consumers and businesses that have benefited from the oil and gas boom have economists to thank for convincing policy makers to remove energy price controls. Investors in indexed mutual funds and other financial products are in debt to entrepreneurs who got their ideas or inspiration from financial economists.
This sounds a lot like what I wrote here, except without the macro-bashing.

Anyway, it looks like Litan divides the benefits of econ into two categories: 1) engineering applications, and 2) policy advice. That sounds right to me. I would have added a third: 3) ideas.

Economists helped prepare the public psychologically for the advent of neoliberalism in the 80s and 90s. Neoliberalism has had its costs and its benefits, but overall I'm glad we went down that road, since I've seen the alternative (Japan). Economists eased this transition by basically being priests of the free market. That often meant ignoring things like externalities and public goods, which was bad, but it might have been necessary in order to convey a simple message to the public: Don't be afraid of economic liberalization. Economists assured Americans that although liberalization would destroy many jobs, more would be created in their place. That turned out to be pretty much true. But anyway, now that the gains from neoliberalism have been mostly reaped in the U.S. (though not in Japan, Korea, or some European countries), economists may have to shed the role of "priests of the free market," and start talking about how to fix the market failures that they glossed over in the 80s.

So I'm interested to see if Litan deals with this idea.

I'm also interested to see what he thinks will be economists' most important role going forward. My guess has always been that micro theory would become more and more important, as tech companies find more ways to exploit things like auction theory, search and matching theory, etc., and that policy advice would become a bit less important now that the big liberalization boom is over. So I want to see if Litan agrees. I also want to see if he thinks that economists' policy advice will continue to shift from simple deregulation to designing "smart" regulation (a shift I think has already occurred to some degree with things like pollution permits).

Anyway, looks like a cool and interesting book. I'll of course write a review after I've read it.

Friday, October 31, 2014

Thursday Roundup, 10/30/2014

I'm running out of cowgirl pictures that aren't family-friendly...

Me on BV

1. Perhaps you have forgotten that China is big. If so, I am here to remind you.

2. Why I'm not worried about all the papers about data mining and p-hacking.

3. Niall Ferguson continues not to be a serious or trustworthy public intellectual on matters of monetary economics.

From Around the Econ Blogosphere

1. Scott Sumner lavishes praise on Matt Yglesias. Sumner is a passionate man - he loves as he hates, without reservation.

2. Paul Krugman says important and necessary things about the ideological war against infrastructure investment, but fails to mention America's huge cost problem.

3. Here's why we use log returns, courtesy of Ren & Stimpy.

4. Alex "The Rock" Tabarrok has good news on the U.S. patent[ly f***ed up] system.

5. The left-right political axis is actually just a made-up piece of B.S.! Astonishing. But you're still all a bunch of right-wing nutjobs, FYI.

6. Cool Campbell Harvey paper about backtesting trading strategies. God, I hope there aren't people out there trading on strategies with a backtest t-statistic of 2.01...OK I'm kidding, no amount of silliness in the finance industry would ever surprise me.

7. Tony Yates reminds us that all of the models where we assume some simple passive behavior for (fiscal, monetary) policy and then examine the effects of (monetary, fiscal) policy are basically missing the point.

8. Jim Hamilton says that Saudi Arabia isn't likely to cut oil production to boost prices.

9. John Cochrane has taken up the Neo-Fisherian banner! Low interest rates cause deflation!

Wednesday, October 29, 2014

That which is not dead doth sleeping lie (RBC edition)

The other day I had dinner with two prominent New Keynesian macroeconomists (whose names shall not herein be revealed). Both of them told me that the idea of technology shocks as the main driver of business cycles is effectively dead. At the same time, a number of Twitter people (Josh Hendrickson, Tony Yates, Ryan Decker, and Pedro Serodio) asserted that NK is the dominant school of macro. Other macroeconomists, like Chris House, have made the same claim.

I just don't think this is true at all.

Now, it is true - to my knowledge, anyway - that central banks use NK-style models (like Smets-Wouters), and don't use models where tech shocks are the main driver.

Also, I've recently seen people like Patrick Kehoe, Mark Bils and Peter Klenow - who had been known for their skepticism of the sticky-price mechanism - writing some papers giving more credence to the idea of sticky prices.

But in terms of academic publishing, the hot areas in macro seem to be A) labor search models, and B) financial-friction models. In both of those, you often see tech shocks as being the main driver.

The Diamond-Mortensen-Pissarides model, when it includes business cycles, includes them by adding TFP shocks. In other words, once you leave the steady state, DMP is just RBC with a matching friction. By my count, that makes two Nobel Prizes for RBC models and zero for NK. Actually, the vast majority of labor-search models I've seen, if they try to match business cycle facts, use the RBC mechanism to produce the cycles. The big exception I've seen is Christiano, Eichenbaum and Trabandt.

For financial-friction macro it's more even, as you definitely do have models that augment New Keynesian models with financial frictions - e.g. this one by Christiano et al., or this one by Curdia and Woodford. And of course there is Bernanke-Gertler, one of the original financial-friction models. But Kiyotaki-Moore, the other canonical financial-friction macro model I know of, uses RBC-style tech shocks as the single shock. And Brunnermeier-Sannikov uses what is basically a TFP-news-shock model. So here, the literature is pretty split, but RBC is alive and well.

But there are other macro-ish areas of research besides macro! There's international finance, where the models I've seen are all RBC-type models (caveat: my teacher for the international finance field class in grad school did her PhD at Minnesota). And when macro-finance asset pricing models bother to model production, they usually - though not always - use RBC-style tech shocks to make dividends and consumption move around.

So it seems pretty clear to me that RBC - defined loosely as "models where fluctuating TFP is the main driver of the business cycle" - ain't dead by any means. What's more, it seems unlikely that it will die for a good long while. Why? At least two reasons - A) ease of use, and B) familiarity.

First of all, productivity fluctuations are just plain easy to use. You can have constant returns to scale. You don't have to think about money or the aggregate price level. If you want to focus on other hard stuff, like labor search or banks, the easiest thing to do is just to use the simplest possible mechanism for the aggregate shock.

Second of all, everyone is really familiar with RBC, because everyone learns it before they learn any other type of shock mechanism (like NK). This is because RBC came first historically, because it's relatively easy to learn and understand, and maybe because of the enormous respect still given to the original RBC guys. So everyone knows how to use tech shocks, so they're the first go-to mechanism for many people.

So I think that all the people who pronounce RBC dead should think again. And NK's dominance is far from complete. If you don't believe me, just ask the Nobel committee!

Tuesday, October 21, 2014

Who Said It? (safe asset shortages edition)

OK, econ blogomaniacs, time for a quick little pop quiz. Here are two quotes from prominent economics bloggers. See if you can guess which blogger said which quote. No cheating!

Quote 1

"Though there are things that central banks can do in the face of safe asset shortages...a safe asset shortage is basically a fiscal problem. The safe asset shortage is reflected in binding financial constraints that imply the economy is non-Ricardian. Government debt matters, and an expansion in the stock of government debt can be welfare improving. Presumably this also implies a lower net cost of financing government projects, meaning that a safe asset shortage provides an opportunity for the government to finance education and infrastructure on the cheap."

Quote 2

"When the excess demand is for longer-term assets – bonds to serve as vehicles for savings that move purchasing power from the present into the future – the natural response is… induce businesses to borrow more and build more capacity, and encourage the government to borrow and spend…When excess demand is for high-quality assets – places where you can park your wealth and be assured that it will still be there when you come back – the natural response is to have credit-worthy governments guarantee some private assets and buy up others, swapping them out for their own liabilities and thus diminishing the supply of risky assets and increasing the supply of safe assets."

...If you got both right without Googling, then you're way too addicted to econ blogs.

Sunday, October 19, 2014

The Omega Man

Time to write about a very uncomfortable subject that is also not anywhere close to my own area of expertise. A lot of people will be inclined to give this post an un-charitable reading, which is inevitable, so before you explode with rage, realize that A) I know I'm not any kind of an expert, and B) I might be saying something more nuanced than you think I'm saying. You'll probably explode in rage anyway, and I preemptively apologize for raising your blood pressure. I also apologize for the blatant heteronormativity of this post.


It seems to me that a big problem in the world consists of angry young men doing aggressive things. One example of this is terrorism. Another is online intimidation and harassment of women, like we've seen with #GamerGate. Another is random outbursts of violent crime. I don't know why young men are so much more prone to aggression than other groups - most people just wave their hands and say "testosterone", while I tend to just shrug and say "whatever". But anyway, it's a fact, and pretty much everyone knows it.

One thing I have sort of noticed, however - and here we leave the realm of well-established fact and enter the realm of Noah Talking Out of His Digestive Tract - is that when young men feel like they can't get sex, they tend to feel angry and resentful toward the world. Actually, I've noticed that women, when they feel like they can't get sex, also seem to feel unhappy and grumpy. But since young men tend to be more aggressive than their female counterparts (see previous paragraph), the frustration that comes from feeling like one isn't able to get sex seems often to translate into aggression in men, but far more rarely in women.

Note that I say "feel like they can't get sex" instead of "can't get sex", because from what I've seen, nearly anyone is able to get sex if they want. They may not be able to easily get sex with a partner whose quality - attractiveness, purity, status, hair color, whatever - they deem acceptable. But pretty much anyone can get sex. (As a half-crazed drug-addled hippie once told me in a Stanford co-op, "There's all this sex out there, and we don't even realize it!")

But basically, there are a whole lot of young guys out there who feel like they just can't get laid. They're wrong - totally, ludicrously wrong. But they really do feel that way. In current internet slang, these people are called "incels", which is short for "involuntary celibates." Whether this is an apt descriptor depends heavily on your definition of "voluntary," since incorrect beliefs still have power.

Why do these young men feel like they're incapable of getting laid? I have a conjecture - and here we wander dangerously into the realm of pseudoscience, but still, I have a conjecture. My guess is that these men feel that they have low social status, and that this makes them either 1) not attractive, or 2) not deserving of sex. In fact, this could be unconscious - some men seem to tacitly think of themselves as low-status men, and this gives them a general pessimism about their ability to succeed in any social interaction, be it friendship, sex, or business. These beliefs might have been solidified by being bullied as kids - I don't know.

Anyway, these men seem to fit into a social niche that is well-observed in some primate societies - the omega male. Of course, this term has already been incorporated into internet slang (sometimes confused with "beta male"), but like any scientific concept, it has been mutated, misapplied, overapplied, etc. Still, I think the concept is a useful one. In a college course (HAHAHAHAHA...OK now that we've got that out of our system), I learned that in some primate societies, gangs of omega males engage in violence toward females, while the big tough alpha males and their beta male lieutenants try to protect the females and chase off the attacking omegas. I don't know about you, but that image sort of reminds me of #GamerGate.

One interesting question is whether the angry young omega-males are angry because they are sexually frustrated, or whether their lack of sex is simply a signal that seems to remind them that they are low-status. I'm not sure about this - probably both.

So to sum up: There seem to be a lot of young men out there who are angry because they think they can't get laid, and who think they can't get laid because they think of themselves as low-status. And because of this, these men sometimes do aggressive things, alone or in groups, toward women.

Next question: What do we, as a society, do about this problem?

One idea I've seen some of these angry young men suggest - including in long, unsolicited emails to Yours Truly - is to turn women back into pieces of property, and then distribute them evenly to men via a restored norm of traditional patriarchy, possibly enforced by church-state cooperation and mass shaming. Needless to say, I think this idea is total and utter shit, and would be total and utter shit even if it had a hope in Hell of working, which incidentally it would not. In fact, when I hear this idea, I sort of have the urge to take whoever suggested it and pitch him off a cliff into a tar pit, but I guess that just shows that I, myself, still have traces of angry-young-man-itude.

A better solution, I think, is the elephant seal solution.

When I discussed the issue of omega males with Brad DeLong on Twitter the other day, he pointed out that "ω-bull elephant seals hang out at edge of beach & try 2 look attractive—don’t hate on elephant seal cows & chase them off". I don't know if elephant seals actually do this, but I also don't care that much, because everything I've seen in life tells me that this is a good solution for human omegas.

In other words, the resentful, angry, frustrated young men simply need to realize that they are plenty attractive, and that getting sex is really not that much of a problem once you actually go out and try to do it.

In theory, this is what PUA culture is supposed to do - turn "incels" into ladies' men. At first blush, this seems like the perfect solution - teach men how to be attractive to women! Just imagine a world in which all the lonely, under-confident dorky guys suddenly become confident, socially adept men who knew how to be the object of women's desires!

Unfortunately, the PUA movement doesn't seem to have accomplished this societal transformation. Why? Well, one reason is that although many PUA movement leaders, like Erik von Markovik, try to spread the (good) message that any man can be attractive if he just tries - an example of what Carol Dweck would call a "growth mindset" - other members of the subculture propagate the idea that only natural "alpha" males can ever succeed at the attraction game. In other words, these people (no, I'm not going to name names) have reinforced the omegas' insecurity about their own social status and sexual prospects, instead of alleviating it.

Other reasons include A) the fact that practicing being attractive goes against many people's religious and/or traditional values, and B) the fact that even well-intentioned PUA gurus like von Markovik are speaking mainly from their own experience, which - though impressive in scope - simply doesn't work for everyone. As a result of all these factors, many of the omegas resent the PUA subculture just as much as they resent women.

So basically, what I think we need is some new way of getting omegas to stop worrying about their supposedly low social status and learn how to go out and attract women instead of harassing and attacking them. We should teach the angry young human males to take a page from the book of the (alleged) sexy young elephant seal males. The goal is not just for them to get laid (though that's an important human activity), but for them to feel more confident, more worthwhile as mates, and less obsessed with social status.

Of course, I don't know how to accomplish that. But I think this is where our society needs to go. Angry young have to learn how to be attractive, but more than that, they have to learn that they're worthy of being attractive - that their low social status is a self-inflicted figment of their imagination.

Because the alternative method of dealing with the angry omegas is to keep having the alphas - i.e., the cops - continue throwing them off cliffs into tar pits when they get too violent. That solution works, but I wish there were a better way.

Anyway, once again, let me remind you that I don't claim to have any sort of expertise or special insight on this matter.

Friday, October 17, 2014

U.S. vs. China+Russia - the Tale of the Tape

About 70 years ago, there was a big battle for supremacy among all of the big countries on Earth, called "World War 2." The countries that came out on top of that battle were the United States, Russia, and China. Following the end of that war, there was a protracted low-intensity power struggle (the Cold War) between those three winners, which Russia lost, and the United States and China - who started out as enemies, but became de facto allies in the 1970s - won. 

People in the U.S. seem to tacitly assume that because we won those two big power struggles, we'll win the next one - if there even is one at all. 

During the 1990s, this seemed to be predicated on the idea that the U.S. would win the ideological battle - that democracy, capitalism, and human rights were such an attractive and potent combination that everyone would settle on these systems, and then there would be no need for further power struggles among nations. This was the "End of History" idea. It may still work out that way, but it hasn't yet - about 40% of the world has resolutely refused to adopt U.S.-like systems, and democracy has actually been in retreat since slightly after the turn of the millennium, if you believe Freedom House.

In the last few years, it has finally sunk in that the "End of History" idea is not right (at least, for now). People are waking up to the possibility that the spread of democracy and human rights from 1945 to 2000 might have been partially a byproduct of U.S. power.

But there is still the notion that the U.S.' economy and military are both so strong that we are guaranteed to retain preeminence over any foe or combination of foes. 

But now consider the combination of China and Russia, the other two victors of World War 2. These countries are each poorer than us on a per capita basis, which reflects the inferiority of their economic and political systems in terms of creating human welfare. But their draconian systems have, so far, allowed them to retain control over vast territories (17% of the world's land area) and huge populations (21% of humanity).

What's more, these countries are now both clearly opposed to American power and influence - Russia more so than China, given the war in Ukraine. The two countries have resolved the enmity and territorial disputes that existed between them in the Cold War, and are now de facto allies. 

So I thought it would be useful to compare the "tale of the tape" - the basic resources that the U.S. possesses, compared to the emerging alliance of Russia and China. Here is a table I whipped up:

All data are from 2012 or 2013. The source is Wikipedia.

Notice how in all categories except for nominal GDP, the U.S. is outclassed by the combination of the other two powers - sometimes by an enormous margin.

There are some caveats, of course, including but not limited to the following:

* Given China's greater growth rate, the GDP and Manufacturing disparities will continue to move in the direction of China+Russia.

* The nuclear warhead number is the sum of both tactical and strategic warheads, though the strategic-only numbers are similar.

* Proven fossil fuel reserves are not equal to economically recoverable reserves; the U.S. has more advanced extraction technologies.

* Active military personnel are not the same as total military personnel; the total number favors China+Russia even more.

* I did not include specific weapons systems, since I am not sure about the strategic relevance of any of these. For example, Russia has many more tanks and mobile ICBMs than the U.S., while the U.S. has many more aircraft carriers. I am simply not sure how useful tanks, mobile ICBMs, and aircraft carriers really are at this point. Nor do I know about differences in weapon quality. But it's worth noting that in both WW2 and the Cold War, GDP ended up mattering more than initial levels of military tech in determining the eventual victor.

* Some argue that China and Russia are not true allies. However, this was also true of the U.S. and China in the latter part of the Cold War - and, for that matter, the U.S. and USSR in WW2. Predictions that Russia and China will come into conflict over Russia's Far East have so far proven to be total fantasy, and the two countries have moved ever closer together.

* The U.S. might be able to count on allies in an actual war - Britain, France, and/or Germany in a European war against Russia, and Japan and/or India in an East Asian war against China. So this might not be an appropriate comparison; indeed, I think that building strong alliances is our best hope of countering a China-Russia alliance. Note also that China+Russia might be able to draw on some allies as well, such as Pakistan (against India) or North Korea (against Japan).

Anyway, I think that the numbers should demonstrate to all but the most blinkered observers that the U.S. is not facing an opponent whose resources are far less than ours, as we did in both WW2 and the Cold War. For the first time since the early days of our country, our rivals have more resources than we do - and the disparity is getting larger every day. Despite the obvious superiority of our governmental and economic systems, we are not guaranteed to prevail in a power struggle against a Russia-China axis. Henry Kissinger knew this, which is why he always warned that we should be closer to either China or Russia than those two countries were to each other. But in recent years that has proven to be impossible.

Now hopefully, this blog post, and others that point out the same facts, won't matter at all. Hopefully, there will be no new Cold War or anything like it. But just in case this is where things are headed, it pays to be honest with ourselves about the facts.

Thursday, October 16, 2014

Thursday Roundup, 10/16/2014

You know what? There is NO WAY the An Lushan rebellion killed 30 million people. What a hoax. OK, time for econ links and semi-crazed raving.

Me on BV

1. Energy limits won't hold back growth. Reason: We've been growing while using less energy for decades now.

2. Why I'm not too worried about the China slowdown (warning: contains macrobullshitting).

3. Why Jean Tirole is like Charles Barkley. Hint: It's not the hair.

4. Why the EMH is right. And also wrong. But mostly right.

5. I'm disappointed that Tony Hsieh has not yet managed to turn Las Vegas into a hipster techtopia. Next time, he should try more communism.

From Around the Econ Blogosphere

1. In which SMBC sums up about half of the experimental economics literature to date, in a single mildly funny comic. On a more serious note:

2. Roger Farmer says that the NAIRU is a myth. That Farmer, what a card. Next thing you know, he'll be telling us that the accelerationist Phillips curve has no out-of-sample predictive power! (slaps knee and hyuks)

3. Elizabeth Bruenig is against affirmative consent. Cacao to cacao.

4. Zachary David writes about agent-based models and macroeconomics. Rajiv Sethi and co. are not going to be happy with Mr. David.

5. Arnold Kling doesn't like the ideas of Olivier Blanchard. Paul Krugman doesn't like the ideas of Arnold Kling. I don't like walnut bread.

6. Mark Thoma provides your one-stop shop for coverage of Jean Tirole's Nobel prize. You can Tirole around to your heart's content. GET IT?? Heh. Heh.

7. A deep and thoughtful Matt Yglesias meditation on the philosophy of forecasting. I plan to say something along these lines when I take down the 2010 Inflation Derpers for claiming now that they were only "warning about risks".

8. Alex "Ragnarok" Tabarrok catches a great article about the boondoggle of U.S. pension funds. Alex's new nickname comes from the fact that he is actually an incarnation of Surtur, the fire-demon who will eventually burn this world so that a better one may be created in its place.

9. Jim Hamilton breaks down the factors behind higher oil prices. Sadly, reptoids - which we all know are the real cause - are not listed. Get out your orgone pendants, Hamilton's one of Them!

10. Economist battles streakers in the classroom. This is part of a fetish known as CENA, or "Clothed Economist Nude Activist", that has been gaining in popularity on Reddit.

Tuesday, October 14, 2014

Three ways of understanding the world

P-E Gobry has a narrow view of what science is:
[L]et me explain what science actually is. Science is the process through which we derive reliable predictive rules through controlled experimentation. That's the science that gives us airplanes and flu vaccines and the Internet... 
Countless academic disciplines have been wrecked by professors' urges to look "more scientific" by, like a cargo cult, adopting the externals of Baconian science (math, impenetrable jargon, peer-reviewed journals) without the substance and hoping it will produce better knowledge.
Predictably, one thing this leads to is the conclusion that economics isn't a science:
Since most people think math and lab coats equal science, people call economics a science, even though almost nothing in economics is actually derived from controlled experiments. Then people get angry at economists when they don't predict impending financial crises, as if having tenure at a university endowed you with magical powers.
If you want a rebuttal to the "econ isn't a science" thing, Adam Ozimek has one here.

But I want to make a different point. I think Gobry is right that there's something special about controlled experiments, whether or not you want to restrict the word "science" to mean only that. But there are other ways of systematically understanding the world. In fact, I think there are 3 big ones:

Method 1: History

One way of systematically understanding the world is just to watch it and write down what happens. "Today I saw this bird eat this fish." "This year the harvest was destroyed by frost." "The Mongols conquered the Sung Dynasty." And so on. All you really need for this is the ability to write things down.

This may sound like a weak, inadequate way of understanding the world, but actually it's incredibly important and powerful, since it allows you to establish precedents. What happened once can happen again. Maybe you don't know why, or how likely it is, but you know a bad harvest or a Mongol invasion isn't out of the realm of possibility, and that is valuable knowledge.

Method 2: Empirics

A second way of systematically understanding the world is repeated observation. This is where you try to make a large number of observations that are in some way similar or the same, and then use statistics to identify relationships between them. This is most (though not all) of how economists understand the world.

The first big limitation of empirics is omitted variable bias. You can never be sure you haven't left out something important. The second is the fact that you're always measuring correlation, but without a natural experiment, you can't isolate causation.

Still, correlation is an incredibly powerful and important thing to know.

Method 3: Experiments

Experiments are just like empirics, except you try to control the observational environment in order to eliminate omitted variables and isolate causality. You don't always succeed, of course. And even when you do succeed, you may lose external validity - in other words, your experiment might find a causal mechanism that always works in the lab, but is just not that important in the real world. This is a big big problem for psychology, including prospect theory. 

Experiments give you information about mechanisms. When these mechanisms have external validity - for example, when the same process that moved balls down ramps on Galileo's desk happened to be the one that moves the planets in their orbits - then experimental science (what Gobry just calls "science") is incredibly powerful, more powerful than either of the other techniques. But it doesn't always work.

You may be thinking: Where does theory fit in with all this? My answer is that theory is part of all three of these. Theory is needed to understand causal mechanisms found in experiments, to explain correlations found with empirics, or to isolate the important features of a historical event. Sometimes the theory comes before the observations, sometimes afterward.

You may also be thinking: Where do natural experiments fit in with all of this? Well, they're kind of Method 2.5. The boundaries between these methods aren't always perfectly clear, in any case.

So what we've got here is a sort of hierarchy of ways of understanding the world. There's a tradeoff between general applicability and the amount of knowledge you get. Experiments rarely work, but when they do you get a lot of understanding. History works any time, but you rarely understand why things happen. Empirics is (are?) in the middle.

But what I see is a lot of people dissing empirics as somehow inferior to experiments. That's what's really behind the "econ isn't a science" trope. Why does this happen? Don't people get that empirics, though less powerful than experiments, can be applied in a much wider range of situations? 

My guess is that it's all because empirics came out of order. History is cheap, and experiments are also (sometimes) very cheap - think of Mendel growing peas in his garden. But empirics usually requires Big Data, which is expensive. And even the simplest empirics requires statistics. So while we got written history over 8000 years ago, and experiments almost 1000 years ago, we didn't get modern statistical empirical methods until maybe 100 or 200 years ago. And only recently, with the rise in information technology, have empirics really exploded.

To a lot of people, the empirics revolution must seem like a step backward. We look back to the huge successes of chemistry and physics and medicine in the last few centuries, and the rock-solid theories they generated, and we compare it to the regressions economists are running nowadays, and we say "Ugh, this isn't science!" We look at the progression from history to experiment, and we think that new methods (if they exist) should go the same way - i.e., they should lead us to deeper understanding. But empirics, instead, goes in the direction of wider applicability with less-deep understanding, and that rankles some people.

I don't think they should be rankled. Empirics is an innovation that allows us to know some things about big phenomena that previously we could only understand through written history. It's not a substitute for experiments, it's a complement. It's a valuable addition to humanity's toolkit, whether you want to call it "science" or not.

Sunday, October 12, 2014

Casey Mulligan's thoughts on the Great Recession

At the St. Louis Fed's Fall Conference, it was my great fortune to see a presentation this week by Casey Mulligan, UChicago economist, NYT columnist, and book author Casey Mulligan. Casey's presentation was of a paper entitled "The New Full-time Employment Taxes," which is all about the implicit taxes on full-time work relative to part-time work that have been imposed or (presumably) will be imposed by Obamacare.

During that talk, Casey mentioned his book, "The Redistribution Recession," and made some other remarks that I interpreted as meaning that Casey thinks that efforts at redistributive policy were the primary cause of the Great Recession. However, it appears I was not quite right, as Casey was quick to point out in an email. Here is an excerpt that he allowed me to post:
I see a couple of possibilities:

(1) Redistribution did not cause the recession (by which I mean reductions over time in national average labor hours per capita), but it “thwarted the recovery.”  This has been the WSJ’s interpretation on a couple of occasions.  It means that, but for redistribution, the labor market would have hit bottom at essentially the same level (-10 percent for labor hours per capita) but would have returned to baseline significantly (i.e., years) more quickly.

(2) Redistribution made the recession, say, twice as deep as it would have been without (changes in) redistribution.  Under this possible interpretation, labor hours per capita would never have fallen 10 percent even “for five minutes.”  Instead, the recession would have bottomed out at, say, –5 percent.

(3) I do not have a pinpoint estimate of the relevant elasticities, which means that the –5 percent cannot be taken as a pinpoint-accurate estimate.  A reasonable person could believe that the behavioral elasticities are larger than I take them to be, in which case they could reasonably believe that labor hours per capita would have hardly fallen at all but for the enhanced redistribution.  I could not be sure that large-elasticity opinion is wrong, but I would tell that person that he is in danger of exaggerating the effects of redistribution.  The same applies to a reasonable person who thinks that the redistribution was depressing the labor market somewhat less. 
I confess that I had interpreted Casey's position as ascribing more explanatory power to redistribution than he does. I may have been influenced by recollection of Casey's New York Times articles, which attributed a substantial amount of the recession to redistribution-incentivized drops in labor supply as early as December, 2008.

In any case, I apologize for over-interpreting Casey's statements, and I hope this post will make clear the nuance of his view of the Great Recession.

Friday, October 03, 2014

On "Asian Values"

The protests in Hong Kong make me want to write about something that's bothered me for longer than I can remember.

There’s a strain of thinking called “Asian Values,” which basically says that human rights and democracy are things that the West either A) needs or B) is capable of handling, but which does not suit East Asian countries. This idea was heavily promoted by Lee Kuan Yew, who forged Singapore into a durable oligarchy. More recently, Xi and other Chinese leaders have declared that human rights and democracy are foreign ideas that must be rejected. Perhaps the starkest expression of the idea came from film star Jackie Chan in 2009:
"I'm not sure if it is good to have freedom or not," [Chan] said. "I'm really confused now. If you are too free, you are like the way Hong Kong is now. It's very chaotic. Taiwan is also chaotic." 
He added: "I'm gradually beginning to feel that we Chinese need to be controlled. If we are not being controlled, we'll just do what we want."

Of course, this is all B.S. Autocrats are always telling us why their autocracy is necessary. Faced with the success of democratic countries in the 20th Century, their only option is to claim that their countries are somehow different – that what worked for others won’t work for them. A few in the West may be tricked into believing this hogwash, motivated by outdated racial stereotypes that paint East Asians as collectivist, Russians as responding only to authority, Arabs as religious fanatics, etc. I’ve seen a number of pundits claim that Hong Kong’s protests aren’t really about democracy, but about anti-mainland elitist snobbery.

This idea is absurd, offensive, and obviously wrong. Studies show that Asian values place just as much weight on freedom and rights and democracy as Western values. The experience of Korea, and Taiwan shows that “Confucianist” East Asian countries want democracy, and that when they get it, they continue to thrive. All the “chaos” that Jackie Chan blabbers about didn’t stop Samsung and Foxconn from conquering global markets.

Personally, I’ve lived in Japan, and I work at a university with a huge Chinese presence. All my graduate students are from China. And I have seen no evidence that East Asians desire any different kind of relationship with their governments than the one Americans enjoy. Distrust of autocrats, desire for free speech and other rights, and a desire to kick out bad leaders appear to be universal.

But don’t take it from me. For a lengthier, more thorough rebuttal of the myth of authoritarian Asian values, read the 1994 essay in Foreign Affairs by former South Korean president Kim Dae Jung.

After the misadventure in Iraq, Americans are understandably soured on the idea of promoting democracy abroad through force. But that makes the idea of “Asian values” dangerously tempting. We want to believe that Asians don’t want or need the rights and freedoms we enjoy, because this gives us a convenient reason not to invade their countries.

We should resist this motivated reasoning. Invading countries is indeed a terrible idea almost all of the time, but that doesn’t mean we should stop ourselves from offering moral support to people like the Hong Kong protestors, who simply want to enjoy the same respect from their societies that we enjoy from ours.

The fact is, autocratic rule is causing real problems for people in East Asia, especially in China, but also in Vietnam, Cambodia and Laos – and of course, North Korea. Meanwhile, in South Korea, Japan, Taiwan, and Indonesia, East Asians are proving the “Asian values” idea to be a self-serving canard.     

Thursday, October 02, 2014

Thursday Roundup, 10/2/2014

Thursday Roundup is a bit more sedate today, since I'm temporarily laying off cocaine suppositories and peyote milk tea.

Me in Bloomberg View

1. It's a good bet that Japan will have to monetize its debt. That will be an interesting an unprecedented macroeconomic experiment.

2. John Cochrane shouldn't be so quick to dismiss concerns over income inequality.

3. It's possible that high Wall St. pay is due in part to compensating differentials.

From Around the Econ Blogosphere

1. Brad DeLong is absolutely on fire this week. In one epic post he explains why Bill Gross got 2011-2013 so very wrong. In another, he calls out and chastises a remarkable number of inflation-derping economists who have refused to admit they were wrong in 2011. Ahh, 2011, the year that the 1970s died.

2. Paul Krugman says that the reason he seems mean is that he only gets involved in debates that justify being mean.

3. Economists rediscover the endowment effect.

4. Matt Yglesias politely smacks down Scott Winship, who has made a career of downplaying trends he knows perfectly well are real.

5. Joe Stiglitz says that macroeconomics uses crappy microfoundations. Technically an NBER working paper instead of a blog post, but whatev.

6. Tony Yates has more gripes with John Cochrane's talk on inequality.

7. Cardiff Garcia reports on deflationary pressures around the world.

8. Scott Sumner vs. Matt Bruenig is a blog battle for the ages.

9. In case you wanted to read another debate about whether economics is a science, here is a debate between Adam Ozimek and a troll named Pascal-Emanuel Gobry.

10. Robert Waldmann claims that 1960s macro equations perform well out of sample to this very day. I'd be interested to see some quantitative evidence of that bold claim.

11. Stan Veuger's reflexive, hand-waving dismissal of Michael Strain's excellent column on infrastructure shows that some conservative derponomists just refuse to believe that public goods exist.

12. Josh Brown has written a magisterial epitaph for Bill Gross' tenure at PIMCO.

Friday, September 26, 2014

Macrocomplaining vs. macrosplaining

I don't blog much about macroeconomics methodology debates that much anymore, but every once in a while it's still fun to wade back in.

Mark Thoma wrote a column in the Fiscal Times in which he explained where he thought macroeconomics went wrong before the 2008 crisis. Some key excerpts:
There are good reasons to be critical of the rational expectations, dynamically optimizing, representative agent approach that underlies modern macroeconomic models. For example, the representative agent approach makes it difficult to study financial markets. At least two agents with different views about the future price of a financial asset are needed before we can even begin to model markets for financial assets, financial intermediation, and other key elements of the financial sector... 
[M]acroeconomists, for the most part, did not think questions about financial meltdowns were worth asking, so why bother with those theoretical complications? The financial collapse problem had been overcome, or so some macroeconomists thought. 
Nobel prize winning economist Robert Lucas, for example, in his 2003 presidential address to the American Economic Association famously claimed that the “central problem of depression-prevention has been solved.”
Josh Hendrickson, whose blog is called "The Everyday Economist" but whose Twitter handle is @RebelEconProf, decided not to be a rebel every day, and came to the defense of pre-crisis macro, Lucas, etc. Josh makes some good points and some unconvincing points.

Here is a really good point:
Suppose there is some exogenous shock to the economy. There are two possible scenarios. In Scenario 1, macroeconomists have models that describe how the shock will affect the economy and the proper policy response. In Scenario 2, macroeconomists have no such models. 
In Scenario 1, we avoid a severe recession. In Scenario 2, we could possibly have a severe recession...Given [macro critics'] logic, the only time that we would have a severe recession is when macroeconomists are ill-prepared to explain what is likely to happen and to provide a policy response.
In other words, our perceptions of the failures of macroeconomics are hugely influenced by selection bias. True! How many more crises would we have had without the models we have developed? Maybe none, or maybe some. How useless macro has or hasn't been depends on the crises we avoided, not just the ones we failed to avoid.

Here is a point that is somewhat less convincing:
Thoma argues that the reason that we lacked a proper policy response to severe recessions was because people like Robert Lucas thought we didn’t need to study such things. However, this is a very uncharitable view of what Lucas stated in his lecture (read it here)...when Lucas says that the depression-preventing policy problem has been solved, he actually provides examples of what he means by depression-prevention policies. According to Lucas preventing severe recessions occurs when policymakers stabilize the monetary aggregates and nominal spending. This is essentially the same depression-prevention policies advocated by Friedman and Schwartz. Given that view, he doesn’t think that trying to mitigate cyclical fluctuations will have as large of an effect on welfare as supply-side policies.
Lucas' speech, in other words, is a sort of old-monetarist variant of the Great Moderation hypothesis, which was very common among macroeconomists at the time. But the Great Moderation turned out to be illusionary, and that's Thoma's whole point. It may be unfair to single out Lucas for an idea that most macroeconomists shared at the time, but he is a very famous and influential guy, after all.

Josh then makes the odd point that since we didn't actually adopt the policy that Lucas claims we did adopt (stabilization of monetary aggregates), Lucas wasn't wrong. That's just too weird of a point, so I'll skip it.

Josh then makes another good point:
Thoma argues...that economists spent far too little time trying to explain the Great Moderation. This simply isn’t true. John Taylor, Richard Clarida, Mark Gertler, Jordi Gali, Ben Bernanke, and myself all argued that it was a change in monetary policy that caused the Great Moderation.
This is true. I think Mark probably misspoke; what he probably meant was not that economists didn't try to explain the Great Moderation, but that they didn't question the Moderation's stability as suspiciously as they might have.

Josh then makes another unconvincing point:
Similarly, his criticism that economists simply didn’t care enough about financial markets is unfounded. Townsend’s work on costly state verification and the follow-up work by Steve Williamson, Tim Fuerst, Charles Carlstrom, Ben Bernanke, Mark Gertler, Simon Gilchrist, and others represents a long line of research on the role of financial markets. Carlstrom and Fuerst and well as Bernanke, Gertler, and Gilchrist found that financial markets can serve as a propagation mechanism for other exogenous shocks. These frameworks were so important in the profession that if you pick up Carl Walsh’s textbook on monetary economics there is an entire chapter dedicated to this sort of thing. It is therefore hard to argue the profession didn’t take financial markets seriously.
This is the idea that "there exist papers on X" means "the profession took X seriously". But that doesn't seem right to me. After all, there is nothing limiting the topics on which macroeconomists write papers, and there is every incentive for them to write papers imagining any and every conceivable phenomenon. So there will, in general, be a macro paper on any topic. But it is impossible for the profession to simultaneously take every topic seriously, so we need a better criterion than the existence of papers.

In particular, the claim that macroeconomists thought enough about financial shocks and frictions before the crisis seems to conflict with the huge outpouring of work on financial shocks and frictions since the crisis. If macroeconomists were clued in to the dangers of financial stuff before the crisis, why all the new models?

Josh then misunderstands one of Thoma's criticisms:
The same thing can be said about representative agent models. Like Thoma, I share the opinion that progress means moving away from representative agents. However, the profession began this process long ago. While the basic real business cycle model and the New Keynesian model still have representative agents, there has been considerable attention paid to heterogeneous agent models.
But Thoma was talking about heterogeneous beliefs. The models Josh is talking about incorporate heterogeneous wealth, productivity, etc., but not heterogeneous beliefs. There are lots of heterogeneous-belief models in the finance literature (see here for some of them). But macro models mostly continue to adhere to the rational-expectations framework advocated by Lucas, or occasionally a representative-agent version of a learning model, neither of which incorporates heterogeneous beliefs. I say "mostly" because I haven't seen any recent macro models that include heterogeneous beliefs, but Rule 1 of macro is "There is a macro paper on any topic."

Anyway, Josh makes some good points, but he also goes pretty soft on the profession and its leading thinkers regarding the pre-crisis consensus, which really did downplay the importance of finance, and really did avoid thinking about heterogeneous beliefs.

Tuesday, September 23, 2014

Will lack of tax hikes crash the Japanese economy?

Adam Posen thinks that if Abe fails to follow through on his pledge to hike taxes, the Japanese stock market will crash:
Posen’s fear, outlined in an interview in his office last week, is that Abe reneges on a plan to raise Japan’s consumption tax to 10 percent, from the 8 percent level it was boosted to in April. If that happens, prepare for international investors to dump Japanese stocks and the yen, says the former U.K. central banker. 
“If Prime Minister Abe decides to postpone, let alone cancel, he runs a real risk of crashing the stock market,” said Posen... 
To Posen, delaying the tax measure would test the patience of international investors who have backed Abe’s efforts to both propel his economy from 15 years of deflation and restore fiscal order to a nation where government debt now tops 240 percent of gross domestic product.
This is interesting, because most people are saying the exact opposite. Most people are blaming the recent Japanese sales tax hike (from 5% to 8%) for the severe contraction of GDP in the second quarter.

I always thought that was a little weird. Why should a 3% tax hike crush Japanese GDP when a similar-sized tax hike in America a year earlier failed to put much of a dent in growth? Why is the Japanese economy so fragile to tax hikes? Neither Econ 101 theories of deadweight loss nor Econ 102 Keynesian theories have much insight, and the calibrated DSGE models I've seen don't predict an effect nearly so big.

OK, but now let's take Posen's totally opposite contention. Will delays in tax hikes really cause a collapse in investor confidence that crashes the Nikkei? It seems possible, certainly. After all, Japan can get rid of its debt in three ways - default, monetize, or consolidate. The more it starts to appear that consolidation is politically impossible, the more it starts to look like monetization is inevitable.

That could cause the marginal Nikkei investor (who is probably not Japanese) to bolt. But will monetization be bad for stocks? As interest rates go to zero, the present discounted value of stocks explodes. As long as inflation remains subdued, monetization is good for stocks, not bad.

So what Posen is saying is essentially that debt monetization will lead international investors to fear hyperinflation - which really does kill stocks. I'm very, very suspicious of this, because I think it's just a fact that no one really knows why or when hyperinflation happens. It's always possible that investors could get scared of hyperinflation and bolt.

But suppose Japan's debt were half of what it is. Wouldn't it still be the case that investors could get scared of monetization-induced hyperinflation and bolt at any moment? What level of debt and monetization is reassuring to investors, and what level is scary? Posen has no evidence to support his contention that Japan is near a tipping point. But does anyone have evidence? Can anyone?

Thursday, September 18, 2014

Thursday Roundup, 9/18/2014

Do a Google Image search for "cowgirl", and you will learn something interesting about American culture. Anyway, here's Thursday Roundup:

Me on BV:

1. Lots of people use the word "Keynesian" as a synonym for "socialist" or "liberal". They should quit.

2. Sometimes you have to be a dick. But if you don't have to, don't.

3. What does "credit-fueled growth" even mean?

4. Government is an indispensable input into innovation.

From Around the Econ Blogosphere:

1. Matt Yglesias discusses Barack Obama's inscrutable, odd ideas about monetary policy. I keep telling people Obama is an Austrian, and no one listens.

2. If, like me, you are a really boring person, you can take a break from work by reading blog debates between New Keynesian mainstream people and Post-Keynesian heterodox people. Like this one. I mean, what else are you going to do with your free time? Tinder?

3. Matt Bruenig responds to my post about capitalist principles. He doesn't seem to quite get the idea of an ex ante reward or state-contingent assets, but overall, he's right - theories about what people "deserve" are utterly arbitrary. I'd like to see Bruenig debate Mankiw.

4. Ryan Avent, who always makes sure to write a post about anything I write a post about, on the exact same day, attempts to rebut Peter Thiel's techno-pessimism. I think Ryan is right.

5. People around the world are apparently much more pro-trade than we usually think.

6. Tim Taylor writes that we should have empathy for the poor, saying:
One could look across swathes of modern America and still write: "Whole sections of the working class who have been plundered of all they really need are being compensated, in part, by cheap luxuries which mitigate the surface of life." It is a failure of basic human empathy to blame the poor for behaviors that offer a way of mitigating the surface of difficult life circumstances.
What a commie. Go back to Cuba, you commie hippie. Greg Mankiw just flicked a gold doubloon into Tim Taylor's ear from the back of the class.

7. Christian Slater David Andolfatto interviews a scientician Mike Woodford about his views on Quantitative Easing.

8. Dean Baker has compressed his entire consciousness into a single blog post. There is no Great Stagnation.

9. In our age there seem to be very few truly original economic thinkers, going off the reservation the way that, say, Minsky did. But there is Michael Pettis.

10. Brad DeLong, Nick Rowe, and David Glasner ask: "What is a recession?"

11. I knew that eventually, someone would perceive a discrepancy between my endorsement of civility and my labeling of Austrian ideas as "brain worms", and would call me out on said discrepancy. I did not, however, expect that it would be Paul Krugman.

12. Speaking of Austrianism, it turns out that the Great Recession did not have a "cleansing" effect on the productivity of American businesses. It's almost as's almost as if...things in the economy happen that are not the simple sum of optimal decisions by far-sighted actors operating in frictionless markets...but no, to quote Henry P., this question would carry us too far away...

13. T.P. Carney, whose name sounds more like a 19th Century circus promoter than any other I have encountered, makes a good point: Inflation allows employers to cut workers' real wages by stealth, simply by letting nominal wages stagnate. Actually, that's one of the reasons economists usually think that 2%, not 0, is the "right" target rate for inflation - in other words, economists like businesses to be able to cut real wages, so to them this is a feature, not a bug.

14. Mark Thoma launches a fusillade of shoulder-mounted heat-seeking missiles at Bob Lucas. Lucas, he says, by telling us to ignore recessions, stopped macroeconomists from thinking about the possibility of another Depression-like event in the years before 2008.

15. Matt Levine, the most entertaining finance journalist of whose existence I am aware, has a good run-down of the case against hedge funds as an asset class. See also Barry Ritholtz, who is the most entertaining-in-person finance journalist of whose existence I am aware.