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What Would a Wonk’s Perfect Policy Platform Look Like?

August 30, 2013
the Economy: Home and the World
30 Comments

I write mostly single-issue posts. But since someone asked me, it might be worth summarizing what I think would be a “dream” legislation reforming everything from taxes and immigration to monetary policy and farm bills. This is by no means thorough or exhaustive – but just a sampler of what I think would put the United States well on the cutting edge of policy (an honor currently held by Scandinavian countries). I’ll also link to subjects about which I’ve written somewhat extensively before.

  1. Immigration permit markets. The Federal Government would implement a monthly quota on the number of immigrants it wants and auction those on the open market. This would ensure that the n immigrants that are selected are the best n in the pool of all immigrants. Individuals, firms, cities, and states may all participate in the auction.
  2. Eliminate corporate taxes. That doesn’t mean “cut taxes”. Tax revenue should be higher, but corporate taxation is a dumb way to get there. It’s not that I have a problem with “double taxation” per se, but it adds many layers of unnecessary complexity. 
  3. Get rid of the minimum wage for new labor market entrants. Within a immigrant permit market framework, the minimum wage unfairly hurts the young as well as poor and unskilled immigrants. This is a humanitarian issue. Labor market regulation should be deeply relaxed for five years after the first day of employment as a major in the United States.
  4. Replace it with a negative tax for the poor. I support expansion of the earned income tax credit, but it’s deceptive to speak of it as a substitute for the minimum wage. A good portion of the credit actually goes to employer, implying that it is complimentary with a minimum wage.
  5. Replace all levies on labor and capital income with taxes on land, carbon, and minerals. This is so self-evidently important that it’s hard to defend in a paragraph. There’s a good argument to be made that so-called “Georgist” taxes can’t fund our government. Fine – but at least we should “use it all up”, if you will, before we tax productive activities like working and investment. That’s doubly-true for carbon.
  6. Finance any shortfall thereof in revenue with a 10% tax on all income earned over 1 million dollars. Or 15%. Or 5 million. It doesn’t really matter. Most people hate income taxes not because they pay too much, but because they pay at all. The documentation is annoying, and April 15 is an understandably crappy day. The simple fix is to make sure that only a remarkably small number of people even pay. 
  7. Offset positional externalities by taxing luxuries. I’m normally not a fan of government bureaucracy and regulation, but perhaps the Federal Government should create a “Luxury Monitoring Board” that studies and publishes a yearly report of items whose value are mostly positional (that is to say zero sum). Institute a tax on said items. This has big public choice problems, but a lot less than other programs: plus it’s politically easier than raising sales taxes or something regressive like that.
  8. Stop subsidizing roads. We subsidize roads in all kinds of ways. Public lots underprice parking, roads are a shared good, etc. People who drive twice as much should pay twice as much. Therefore the government should extract itself from provision of urban road services and fund everything via toll.
  9. Don’t subsidize long-distance rail (unless it’s Hyperloop). I don’t, unlike many other progressive wonk types, have any passion for really nice, high-speed transport between urban hubs. That’s a lie I personally do, but I depart from liberal ideology that it’s a social benefit. Think about it, the people who most intensely travel the Northeast Corridor – or between San Francisco and Los Angeles – are affluent professionals that take many more flights than the average American, are more likely the fly in environmentally-shitty business class setups, and all around typify the East Coast Elite Liberal stereotype. That it’s treated as some sort of environmentalist’s dream is a joke. (In fact, a 100% tax on business class, 200% tax on first class, and 50% tax on all economy flights after your first two in a year is a great idea).
  10. Subsidize cheap and efficient local transport. America is a driver’s country, and we shouldn’t change that as there would be large, path-dependent externalities in doing so. Electric vehicles are still well out of reach for the average guy. Forget Tesla, even the Chevy Volt doesn’t come cheap. We should vastly increase tax credits for local efficiency. Oh, and, make space for buses.
  11. Have the central bank target nominal income. Here.
  12. Move to a much deeper rules-based fiscal policy. That means focusing on a lot more unemployment insurance and reemployment credits. That removes the political element of discretionary stimulus and molds expansionary expectations thereby dampening the initial effect of a demand shock.
  13. Get rid of the farm bill. Here.
  14. Get rid of the Department of Education and allocate every child into school by a random lottery. Public education is a bit (but not really) like the individual mandate. It works well if everyone uses it without segregation. There are big externalities in moving a rich kid from his bubble of a rich school to a poorer school because support from his parents will make everyone in the poorer school better of. For free! If you think about “parental positive influence” as a scarce good concentrated in the top 20% of the population, there is huge, huge inefficiency in having many rich kids go to the same school. In this case, redundancy is bad.
  15. End the war on drugs. I favor an all-out approach to this, but outline a somewhat original and more moderate, game-theoretic plan here. I don’t want my tax money to be wasted on a guy that smoked pot privately next door. There are not words to describe this illiberty and cruelty. It costs almost $100,000 to imprison someone, and the discounted present value of opportunity costs far exceeds that.
  16. Single payer medicine. Doctors are severely overpaid. The only way to break the healthcare-industrial complex is to neuter it with monopsony. 
  17. In similar vein, get rid of all occupational licensing. Because it’s dumb.
  18. Vastly increase spending in community colleges. Technical, applied education is where America’s middle-class future might be. Unfortunately, we can’t increase spending until we stop cutting it. Community college should be a public good.

Okay, so there it is. A (clearly progressive) wonk’s dream. This list also shows why I’ve lost a lot of faith in the Democratic Party. Can you identify even one of the above bullet-points that a single Democrat has supported? Maybe single-payer healthcare, but that’s all I can see. Even the talk on the drug war – which is the most important bullet on the list – is basically an argument about lowering mandatory minimums rather than getting rid of them. Like I’ve said before, democrats have poisoned themselves into believing compromise is the arithmetic mean of two dipshit ideas. This sentiment holds for almost every item on this list.

This looks like a liberal list, but there’s quite a bit of stuff on there that should appeal to a libertarian. In any case, nothing here is raw and radical – but logical and moderate. America is still probably the most innovative and efficient country in the world – even without the best policies and wonkish endeavors – but we can be a lot better with straightforward changes to the status quo.

If You Don’t Hate Parking Lots, You Should

August 29, 2013
the Economy: Home and the World
10 Comments

Really. As I was moving into college we, unfortunately, had to keep a car in Philadelphia for quite a few days. And the whole ordeal reminded me how much I hate private parking lots. This is just another Georgist rant, so if you’re not into land inequality and inefficiency feel free to ignore it.

First, profits owners earn from parking lots is the purest form of rent in the modern world – because it’s all land. At least some of the money you pay to lease an apartment is value added by the owner – the building, insurance, and basic upkeep come to mind. But the parking lot owner does absolutely nothing. Of course, most modern lots are nicely paved, but most people don’t care about that. Roadside lots are paved for cars to drive on – not to park on – and 99% of us wouldn’t pay a cent more for a lot that’s paved as opposed to one of grass, gravel, or dirt. Therefore the entirely arbitrary initial distribution of land determines all profit earned by a few lucky landowners that do absolutely nothing to take your money.

But private parking is also a socially inefficient good, as it is a de facto tax on public transportation. Their existence lowers the opportunity cost of driving, which itself requires more land. Path dependency and positive feedback between private driving and parking creates a deeply inefficient city promoting rents not only landowners, but wealthy citizens.

Since roads are usually a public good, it’s difficult to tease out who earns the rent. But we know that rents are earned any and all times the initially primary land isn’t distributed equitably, so the benefit from public roads accrues almost exclusively to those who drive the most.

Who drives in New York City? Well most people take the subway. But any firm on Wall Street provides its entry level analysts a driving service – or at least pays for cab fare. And surely you’ve seen at least one or two black limos. I’m going on a limb and guessing that like me, most of you and America can’t afford one of those. For this reason, public parking for which the price is undervalued can be just as bad: it disproportionately benefits those who already own cars.

And cabs are used by more affluent residents who for god knows what reason won’t take the subway, or tourists. Tourists are almost always affluent Americans or wealthy foreigners. Why on Earth do we want to subsidize their experience on American land?

All of this is to say, that even if we need parking lots, the government should nationalize them all, and progressively distribute all profits. Sure richer people will drive more, but that should be offset by extremely progressive distribution of profits. All urban streets should be converted into public toll roads – preferably with a monthly pass that is proportional with the exponential of car size.

In the long run, demand for paved roads and parking will fall which will allow efficient entrepreneurs to build office space and public entertainment. Something actually good for society.

This also frees space for buses, which are a sadly under appreciated form of public transportation.

It’s become vogue for us liberals to hate on Goldman Sachs. But at least these guys, ostensibly, add value and provide crucial services. That idiot who owns a parking garage does not. Rents exist: socialize them.

Externalities from Illiberty: Benefits of Socioeconomic Integration

August 29, 2013
the Economy: Home and the World
4 Comments

Edit: I just realized there’s a similar argument from earlier today arguing for public schools as a “moral adjustment”. I’ll have to think more about this, but it seems pretty unreasonable expecting parents to send their kids to the vastly worse public school without expecting that all other parents of their class will do the same. Law is the only way.

A lot of people on Twitter today are arguing about the merits of government policy that advances public education by taxing private schools. That’s a bad idea. We shouldn’t tax private secondary institutions – we should get rid of them.

I’ve discussed this idea before, but it’s worth considering in terms of externalities on the margin. Normal discussions of elite educational privilege juxtapose the yearly expenditure per pupil at a public school in Camden against Andover, or something.

This is not the best metric. While many failures at the local level may be traced to a lack of funding, institutional arrangements are far more important. By this I mean, kids of smart, working professionals ensure a good education for their students not only with a higher tax outlay, but by constantly demanding teachers to live up to their potential.

In fact, you’ll find teachers in affluent suburbia complain about the over involvement of affluent parents in their teaching process. I can remember both my parents dealing with pretty big problems at my pretty good public middle school and very good private (international) high school. (My parents are actually huge believers in public education. Except even they’re not nuts enough to send me to such in India).

That teachers are constantly held to a higher standard institutionally forces the administration (which was, granted, decidedly shitty at my high school) to bring in better teachers and provide a better curriculum.

Rich parents will stop at nothing to make their kids’ education world class. Now let’s say the government passed a law forcing me – and ten similar friends – to go to the crappy high school across the river. They also passed a law preventing us from using private educational services to bypass the public system.

Even if the school in question received no more public funding, our parents would do their best to make sure the education was of a higher quality. Not immediately, but eventually: through more conversation with the administration and perhaps even private charity. The presence of rich kids in a poor class room pays huge dividends to the disadvantaged kids in the classroom.

At a microscopic level, this experiment is almost bound to fail by bureaucratic paralysis. But, more broadly, if a new law required that all kids may be randomly assigned to any public school in the area, and private schools were banned, affluent parents would ensure all schools that their kid might end up at were the best possible. They would vote their own property tax rate up, and finance huge fundraisers. They would have no other choice, lest their dear little son end up at a bad school.

There is huge public gain for every marginal transfer to this effect. Banning private schools would be necessary to prevent the rich from opting out of the system altogether. It’s also unlikely this would hurt rich kids too much, since affluent parents, we might say, are completely price-inelastic when it comes to the quality of their kids education. It just means less money for a ski vacation. Boo hoo. (Actually, if you subscribe to the public good externality hypothesis that I do, even this would be pretty small. But rich white and asian parents also experience disutility when their kids interact with lots of blacks wearing hoodies, so who knows about the welfare loss there…)

This would eliminate any need for broader governmental subsidies, and might even make obsolete the Department of Education. This is illiberty, but so is taxation, and so is the minimum wage. I’m not appealing to the libertarians who want an end to all government but the liberals who think some forms of illiberty are better than others. This is no different.

The best way to help society is to align the private incentives of the rich with the public goals of the poor.

Philosophical Problems with Prediction

August 28, 2013
the Economy: Home and the World
9 Comments

Alex Rosenberg and Tyler Curtain recently wrote an essay criticizing the idea that economics is a science. While I am skeptical of any joint undertaking between Duke and UNC – where Rosenberg and Curtain teach, respectively – it’s important to dismiss, or severely injure, the notion that economics can – at a philosophical level – predict the business cycle.

An oft-lodged complaint of neoclassical macroeconomics was its inability to foresee the recent financial crisis and recession that followed. Many critics – left, right; idiotic, and lauded – complain that if economics wasn’t so tied up in senseless assumptions and adopted a “more scientific” approach to its methods its predictive capacity could be expanded.

Of course, critics admonish economists to become “more scientific” without explaining what exactly that means, but the vacuity of this claim is far deeper. The business cycle cannot be predicted by a credible model.

First, let’s distinguish logical predictions, from random frets of fury that are eventually vindicated. The former derive legitimacy from logical assumptions that are substantiated by reality, and hence are expected to hold true for the future. The latter comes from one man’s “intuition” (perhaps that credit booms will cause a crash) without  an accompanying model – and describes most “correct” predictions about the recent crash.

The only point of predicting a recession from a correct logical model is for it to remain credible among society. There’s no point in having a right model that no body believes (and if it’s right for long enough, people by definition of Bayesian revision, will come to believe this is true – so this distinction is an artifact).

Let’s say I’m a brilliant economist that finally got rid of those dumb assumptions. Agents are no longer rational, and I’ve even measured how irrational each of Earth’s seven billion inhabitants are so that I can fine tune heterogeneous tastes and preferences perfectly. And because, let’s say, P = NP I can tractably compute even the most complicated world’s to predict the economy. I have a perfect model founded on the most scientific and empirical of observations. Everyone has complete faith in my brilliance.

And let’s say one morning I forebodingly write in the Wall Street Journal that in six months it is 75% likely the United States economy will contract (YoY) by ten whopping percent. But until then it will continue to grow, or stagnate. Even my beautiful model is not invincible against what happens next.

Since my model can logically predict the recession, all firms expect consumer demand to crash in six months. To maximize expected profit, firms lay off workers and curtail all but the longest term of investments. (If I’m building something that is expected to generate profits in two hundred years, the near term horizon will not affect this decision).

Suddenly, regardless of what my model predicted would happen today, the economy tricks itself into a recession. This has nothing to do with the kind of model I write, the assumptions I make, the math I use, the abstractions I allow, the realities I ignore, or the ideology to which I subscribe. Any and every model, will definitionally fall prey to fickle human expectations. No amount of devotion to the scientific method can fix this.

At this point, maybe the critics retreat and say, but then why can’t economics tell us that fiscal expansion works (does not work). For one, there’s no conclusive proof that it doesn’t (does). But more importantly, let’s say a completely trustable model tells us that deficit spending in recessions is magical and brings the economy roaring back. When the government, following economists’ advice, expands its budget drastically, expectations will drive the economy into a boom. The model, its merits aside, becomes a self-fulfilling prophecy. 

A lot of this is common sense to anyone whose taken more than five seconds to think about what’s wrong with the economics profession. It’s foolish to expect models to be founded on the same, rigorously true assumptions – or adhere to the same scientific method – of physics and economics.

It is easy to appeal to human nature – to which economics is ultimately connected – as a cop out of the scientific method. But even in the most mundane of senses, an economist does not have the luxury of a model that is forever and always correct. Self observation produces confusing – even paradoxical results – which economists can never overcome. Sure, they can add frictions representing momentum of human expectations, but once we learn (formally) of this addition there will be yet another meta level expectational conflict.

This logic can be taken to an extreme. Not everyone believes a model and business decisions aren’t formed on economic theory. But ultimately it illustrates an important distinction between economics and every natural science.

Asking economists to follow the stylistic and epistemological guidelines of physicists and chemists is not the best way to improve the profession. In fact, it is impossible.

Lying is an Easy Way to Reflate

August 24, 2013
the Economy: Home and the World
1 Comment

The whole problem with monetary policy in a liquidity trap is the inability for a central bank to commit to a permanently expanded monetary base. Iterations of this dilemma are captured best by Paul Krugman’s quip that the Fed cannot “credibly commit to be irresponsible”.

Actually, it can. We have a Fed that cannot actually be irresponsible. Markets know the second inflation hits 3-5% the brakes are coming hard, which asphyxiates expansionary fire today. Nothing short of complete institutional change of a decentralized system like the Federal Reserve can change it’s limitation.

But the Fed doesn’t actually need to be irresponsible, it must only convince markets that it can be. I suggest Ben Bernanke release a statement – or, better, the FOMC as a whole in its minutes – that he is expecting 5% annual inflation, even if he is expecting far less. That way, the FOMC privately knows deflation exists and quantitative easing will not do anything, and continue the huge asset purchases. But the market will be confounded. The world’s most conservative institution is ignoring inflation at even 5% – surely that means the brakes won’t come down all too hard in the future.

This will immediately provide traction to monetary policy even at the zero lower bound and will prevent the complete sterilization of expanded base as we currently experience.

In fact, even a Federal Reserve of many inflation hawks can do this successfully. They personally know deflation is real, but they can hide that private knowledge. Of course the markets will know the real PCE and CPI, but the only metric that’s important is the Fed’s own expectation.

Or we could completely reform the Federal Reserve, but that’s the real #slatepitch here.

Is an Economics without Math like a Physics in Iambic Pentameter?

August 22, 2013
the Economy: Home and the World
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My question: since neoclassical economics atomizes the representative agent, wouldn’t a modern theory without hardcore math be like a particle physics in English?  There are a few posts about the (over) use of abstruse math in economics. I don’t want to comment too much: this conversation is well above my intellectual pay grade. I have a hard time getting through an economics paper (sometimes I manage, and I do actually try to go through the whole paper). I’m pretty good at math. Just not that good. (Disclaimer: I’m writing this for my own benefit, and have no deep understanding in this part of economics).

I sympathize both with both sides, and I think Paul Krugman is right in emphasizing math as a way of preventing sloppy thinking. This is especially true for a subject like economics where there are only relative, not absolute, microfoundations. Economists get to choose what’s endogenous and what is not in a way that illuminates a particular point. Caplan’s says math doesn’t reveal anything that’s not already obvious. That’s because economists, unlike any other scientists, create their own world. If I assume a world without gravity, than I won’t be surprised to mathematically prove my ability to fly.

Economics jumps several logical levels in its use of math. Normally, in a reductionist framework, the farther you get away from small microfoundations, the less mathematical a subject becomes. It is possible, a hypothetically extreme reductionist might say, to reduce macroeconomics to microeconomics to psychology to neurobiology to biochemistry to physical chemistry to atomic physics to quantum physics. As the level of abstraction increases, the use of math falls – to the point where psychologists use math almost solely for empirical examination. But economics is an outlier: the principal charge of neoclassical econ is atomizing the individual. But in doing so, we loose the foundations from “lower” disciplines, and hence must assume our own. Economists, in other words, may create the world.

In that sense, asking a neoclassical to get beyond the math is like asking a physicist to talk in English. Bryan Caplan – who genuinely believes in modern insights – cannot ignore the math any more than he can abandon the “neo” in “neoclassical”.

Math is important for the same reason it (can be) useless. Since economics starts from scratch in a way no other science other than physics does, math tells us precisely what assumptions are made to reach a certain conclusion. Normally we think assumptions first, conclusion later, but let’s say I make a statement like:

Deficit spending can never be expansionary.

By itself, this means nothing. It might be an axiom for all I know. But let’s say it’s not, and we’re talking about a model with representative, rational agents. With math, you can “fill in” all the “holes” (find all necessary assumptions) to reach this conclusion. In that sense, it helps us backward engineer what a model specifically dictates.

You know this conclusion is true when we consider immortal agents which maximize intertemporal consumption. And given a more complex setup, there are many ways in which this particular conclusion may be reached.

You can explain this in English after the fact. This is slightly different from Paul Krugman’s point, which is working from the assumptions to a conclusion. The importance of math comes in seeing all the assumptions necessary for a conclusion. I don’t see how English does this. It’s not all about explanation.

Perhaps my confusion is reconciling Caplan’s comments on math with his comments on neoclassical economics:

Here are a few of the best new ideas to come out of academic economics since 1949:

  1. Human capital theory
  2. Rational expectations macroeconomics
  3. The random walk view of financial markets
  4. Signaling models
  5. Public choice theory
  6. Natural rate models of unemployment
  7. Time consistency
  8. The Prisoners’ Dilemma, coordination games, and hawk-dove games
  9. The Ricardian equivalence argument for debt-neutrality
  10. Contestable markets

This can all easily be explained in English. But in the process of reaching a conclusion, we can trip over our own English, unless the world has no frictions. But once it does, math is like a gutter rail to crazy thinking.

In some ways, mathematics philosophically echoes rational agent economics itself: there are many ways one can be irrational (or wrong), but only one in which he can be rational (or right).

Caplan the blogger or teacher can be aghast with some of the math he sees. But Caplan the neoclassical surely agrees that an economics without math would be like physics written in Iambic Pentameter?

P.S. Caplan challenges Krugman to identify a subject in economics where the insights cannot be explained in English to someone not brainwashed by math-econ. I wonder if he can describe to me a full, neoclassical model with all the best things about modern economics, without any complicated math. I would be grateful, since I’m not good enough to understand some of the papers I’d like too.

A Very Silly Person’s Lament on American Democracy (Rantish)

August 21, 2013
the Economy: Home and the World
9 Comments

This might be the most positive and hopeful post about the Republican Party I ever write. Paul Krugman’s pet insult – “Very Serious Person” – is more important to understanding America’s policy failures than most people realize, and goes well beyond economic illiteracy. More than anything, without understanding VSPness (henceforth “vispy”) – one can never comprehend how the Democratic Party screwed up so much in the past five years.

When I say “screwed up”, I’m not talking about Larry Summers or Bob Rubin, easily the most visible anathema of the Party’s left wing. The Democrats are vertically infected with vispiness in a way the Republican party is not. While many often talk about the GOP as a more “hierarchal” party (considering the nature of their primary selection process) – Republicans are freer and more iconoclastic.

What the neoliberal wing of Rubin is to Democrats, the neoconservative wing of Wolfowitz is to Republicans. But the establishment neocons are dead. Or will be dead soon (have you seen Dick Cheney or John McCain recently?) They inspire no one within the Republican ranks and reek of responsibility for America’s most embarrassing decade.

Let me be clear, I’m not (necessarily) a radical left-wing critic of the Democrat party. I want Summers at the Fed and I think Rubin has suffered far more blame than he deserves. But I worry about what it takes to get to the top. Not for the clearly brilliant young hotshots like Summers (one of Harvard’s youngest tenured faculty) but for the dumber tools in the shed. The guys who went to all the top schools, did all the right things, are smarter than the average guy, but are still kind of dumb. These are the people that have no original ideas of their own, but move the party forward in their own minuscule way. They are the people reporting to the guy reporting to the guy (reporting to the guy) reporting to Tim Geithner. Maybe they held a policy job at a think tank or made it through lower positions at Goldman. Or something.

The only way for this bland hero to advance in the Democratic Party, is to tow the Very Serious Party line. This will never bring them to the top, but it will secure their position as a kinda-sorta-maybe top official within the Democratic Party. There is no room for iconoclastic ideas. Not if you want a safe path to the top. You can’t ever become an iconoclastic insider.

Ron Wyden is a great example (except he’s by no means dumb). He is hugely influential, if only by forcing the Party a tiny-weeny bit to the left, but will never ever play a role at the top echelons of the Democratic Party. Wyden’s influence starts and ends with his status as an elected representative of the State of Oregon. Elizabeth Warren: ditto. They influence ideas, and perhaps even inspire the left-leaning youngsters in the party, but will never emerge as serious players in the Executive Branch.

Republicans are nothing like that. There is no party line to tow. Sure they have profoundly idiotic ideas and their constituents have a donkey’s understanding of economics. (Not that Democrats are that much better). But the kicker is the only way to become a Republican champion is iconoclastic flair. Rand Paul, Ted Cruz, and even Sarah Palin are hardly “establishment” in the sense of representing prestigious ideas. Not good ideas, prestigious ideas. That is the definition of establishment.

John McCain was never the “maverick”. The Tea Party and Sarah Palin are. The Republican party demands a level of fresh thinking absent from the upper-middle ranking Democrats. A great example is the budget passed by the Senate Democrats (boring: a laughing matter, really) and the imaginatively forceful one passed by the House Progressives, which is comparable in magnitude to the Ryan Budget. The only difference is the House Progressives are a joke to Whig Democrats. The Ryan Budget is taken seriously among the Republicans.

A lot of people – liberals, wonks, “reformist” conservatives, whatever – treat the Ryan kind of nonsense as just a radical idea that has no hope. That is true, but only one side of the coin. On the other is proof that Republicans can pursue fresh and different ideas: ranging all the way from Chris Christie’s loud personality to Paul Ryan’s nutty-nutty budget.

That’s not to say any of the ideas are good, or that we’d be better off with a Ryan Budget than the not-here-not-there-blah Senate Budget (we wouldn’t). However, the Seriousness that plagues the Democrats has handcuffed them from embracing a single idea that the wonkish left deems to be smart. Land taxes. Single-payer healthcare (do you even hear them talk about it). Immigration permit markets. Oil nationalization. ENDING THE DRUG WAR. (Oh, no, let’s just wait seven years and when our approval ratings fall we should make some funny noises about those mandated minimums. Is there any reason the joker of a half-man that is Eric Holder still has a job).

Rather, the biggest debate of the day is whether a handful of people pay 35% or 39%. As if that matters. The Democrats are engaged in a hopeless match of maintaining the ’90s status-quo (which, granted, was quite good) not of policy, but of intellectual climate. At least the Republicans are redefining the debate.

My argument is hardly a call for more leftism in the party. I was hopeful about Elizabeth Warren but she’s been a real disappointment on monetary policy, which she clearly misunderstands. I want more rightism and leftism. The Democrats have poisoned themselves into believing compromise is the arithmetic mean of two dipshit ideas.

Paul Krugman, to my knowledge, has not said any of this, but has insinuated its implications in a way few other commenters acknowledge. His qualms go – almost 25 years after he won the John Bates Clark award – well beyond the economic. They are cultural and political.

I have never been inside the back rooms of Democratic policy action. But I can only imagine a few ex-think tank dudes sucking up to whatever they think Obama or Sperling or Geithner or Summers wants to hear.

In Rand Paul or Ted Cruz I see silliness. Mutated, confused, idiotic silliness. And that the Republican Party is tolerant to such makes me fearful for my own.

Gandhiback Grievances

August 20, 2013
the Economy: Home and the World
2 Comments

The interesting story of the day is definitely a rapidly “collapsing” Rupee haunted by abnormally high volatility over the past month. I scare quote “collapse” because it’s a term that reflects the Western bias of this conversation. If you’re an American who has invested in emerging market funds hoping for real gains intended for domestic consumption that beat an index well, then, you’ve been screwed. As far as India is concerned the depreciation is  of less concern. Still, Raghuram Rajan has his job cut for him, and I’ve discussed the Indian Rupee in this context before. However, since Paul Krugman blegs to learn what he is missing, I’ll offer a few things that worry me at the moment.

Primarily, like any other developing country with rentier bureaucrats, fuel subsidies are important to India twofold. First as a stimulant for middle class growth that demands transportation and electricity (generators are big); second as a key ingredient to important fertilizers without which the Indian farming model would fail.

Fuel subsidies pose an interesting problem for a country that will meet 90% of its oil needs through imports. (I mistakenly noted that 90% of oil is currently imported. That said, the greater the difference between the current figure and the future one, the worse one unit of depreciation will be). Basically all growth in India’s most important market will be financed from imports henceforth. On the one hand, the decisive role government plays in the energy market almost guarantees that deficits will face an upward pressure, in a time when yields are already rising. The sensible solution would unfortunately involve curtailing the provision of a good necessary for political success.

More importantly, as energy becomes the dominant theme in Indian trade – as it undoubtedly will – India looses the primary benefit of depreciation: exports. When trade structure is such that the cost effect (price of imports) of depreciation trumps the quantity effect (quantity of imports) the beneficial nature of depreciation is removed entirely. Known as the Marshall-Lerner condition, a country technically faces this dilemma when the summed price elasticity of imports and exports falls below one.

Usually, since goods tend to be price inelastic in the short-run, devaluations are not always immediately successful but work over time. Not so for dollar-priced oil. As the value of oil is already buoyed by demand from emerging markets, each point of depreciation for the Rupee is that much worse for its balance and budget. Using data from the International Financial Statistics and Direction of Trade Statistics from the IMF, Yu Hsing estimates that India may not significantly meet the Marshall-Lerner condition. Since the paper might be gated for some of you, I’ll copy the relevant result:

As the US real income declines due to the global financial crisis, the trade balance for Japan, Korea, Malaysia, Pakistan, Singapore, or Thailand will deteriorate whereas the trade balance for Hong Kong or India may or may not deteriorate depending upon whether the relative CPI or PPI is used in deriving the real exchange rate.

India – to my surprise – weathered a depreciation better than some of the other countries studied, but a statistically significant success was predicated on the deflator of choice to determine real interest rates.

While I am not confident that India fails to meet the condition, rising oil prices and domestic demand guarantees the cost and quantity effects may be a little too close for comfort.

That, of course, only considers the total trade balance. As mentioned, government is unlikely to weather the necessary inflation well, especially if Raghuram Rajan decreases liquidity reserve ratios (as he has wanted to do for a while) which would light an upward pressure on already rising yields. The feedback loops formed from a rising deficit, stalling growth, and decreased demand for Rupee bonds will result in unfortunately high interest payments.

A tangential point concerns rentiers like Reliance – owner of the world’s largest refinery – which benefit from rapidly rising prices in an inelastic-demand environment. Its influence in government, along with political concerns will make handling these ridiculously useless subsidies hell for any Democratic government predicated on shaky coalitions.

India has a lot going for it. A falling Rupee hardly highlights any structural problem insofar as its own domestic economy is concerned (but brings to bear important questions about international monetary systems, a discussion for another day). I am largely with Paul Krugman that this is nothing to fret about – we are still talking about a country where people cry about 5% growth – but am only cautiously optimistic regarding the political ramifications from such rapid depreciation. Krugman is right in principle, and sometimes that is not enough.

The Return of Demand and End of Depression Economics

August 19, 2013
the Economy: Home and the World
82 Comments

Macroeconomists have a big problem. There’s basically no way to quantitatively measure their most important metrics – aggregate demand and aggregate supply as a function. Most measurable quantities – like employment, labor force churn, or gross domestic product – fall under the influence of both, making it difficult to ascertain that important changes are dominated by one or the other. In practice, we know that the recent demand was most likely a result of a crash in demand, which (theoretically) governs the business cycle and is coincident with low inflation.

Since 2000, with the JOLTS dataset from the Bureau of Labor Statistics, we have a deeper insight into both aggregate demand and supply. With such, there is reason to believe demand – unlike supply – has benefitted from relatively rapid growth and recovery to pre-recession normals. I have discussed the importance of structural factors before, but feel the need to stress the return of demand.

My analysis is predicated on some logical assumptions backed up by sound data. It is still important to  accept the limitations of such “assumptions”. The JOLTS data set provides us, among many other things, the level of openings and the level of hires. Here’s a graph of both, with the 2007 business cycle peak as base year:

Image

It is not a stretch to suggest that openings (blue) are highly correlated with aggregate demand for labor, whereas hires (red) are modulated by a mix of both demand and supply. While this is crude in many ways, a job opening is the most literal example of labor “demand”. (Since a lot of commenters mention, I will reiterate, the recruiting intensity – while correlated with the business cycle – does not change substantially in a downturn and, in any case, has recovered since 2009. Therefore arguments like “these are all fake openings requiring unreasonable perfection” are fine, but irrelevant as we’re talking about the change).

What we see is a “V-type” recession for openings. That is, they rapidly crashed during the deeps of the recession, but recovered at a pace proportional to the fall. On the other hand, hires evince a more “L-type” recession which is characterized by a quick fall without a similar recovery.

Of course, “openings” do not map perfectly onto demand. The level of recovery must be adjusted for desire to fill an opening. The best way to measure this would be to ask employers the maximum wage rate they are willing to pay for each opening. Some openings are fake – America’s ridiculously moronic immigration laws require employers to place an ad in the newspaper to “prove” no American can satisfy said needs. (My mom’s sponsor placed an ad so specific to her that by design no one else in the country could fill the job. There is no reason to believe this is an isolated practice.)

However, most jobs aren’t meant for immigrants, and most openings are honest. More importantly, errors are systematic rather than random. That is, even if there is a degree of false openings, we care not about the absolute levels, but rate of change thereof. In fact, some conclusive evidence shows that while “recruiting intensity” does fall during a recession, it only vacillates between 80 and 120% of the average, and we’ve made up most of that loss at this point.

Hires represent a natural amalgam of supply and demand. Each position filled requires a need for services rendered (demand) and ability for a newly employed person to productively serve that need (supply). If we accept that growth in aggregate demand is healthy due to the V-shape of openings, then supply-side problems in the labor force are worse than the L-shaped recovery in hires suggests because the curve is governed by both supply and demand, which means the little recovery we do see derives from a recovering demand on already existing supply.

At this point, it becomes overwhelmingly clear that the standard AS-AD framework is woefully inadequate to understand the current economic dynamic. On the one hand, if we consider Price Level and Employment (as in the textbook models), positive inflation with any level of demand suggests a contraction in supply that’s too deep to reconcile with slow but steady gains in productivity. If nothing else it suggests we are at capacity, which most commenters dispute.

A better framework – one implicitly accepted by most commenters – would consider Inflation and Growth Rates. In this case, extremely low inflation by any standard suggests either a fall in demand  – which, as argued above, is no longer supported by the data – or expansion in supply. But the increase in supply predicted by this model, while explaining unemployment through a labor-mismatch hypothesis, is far too great to square with low growth rates in productivity and income unless demand is highly inelastic, which then contradicts well-established presence of nominally sticky wages.

If demand is at capacity, there is no general configuration of the AS-AD model that even broadly captures the current state. The one exception may be rapidly rising supply coincident with rapidly falling demand. Unless job openings are a complete mirage this is unlikely to be the case. We may, of course, backward engineer a particularly contrived model which would fail to have any insight into necessary fiscal or monetary policy.

As I’ve argued before, the labor-mismatch hypothesis of unemployment is very appealing. The idea that fiscalism is the province of “demand-side” policies is a dangerous idea. Paul Krugman has probably never read my blog, but if he read this post I would surely be accused of VSP-ism – mentioning the preponderance of “structural issues” and saying little else. But if supply has increased it suggests demand, while recovering faster than Krugman would accept, demand is still slack.

In this case, there is a deep role the Federal government can play in moderating the unemployment from mismatched skills while elevating aggregate demand. Low interest rates suggest the United States government can bear far more debt than current deficits imply and with an appallingly high child poverty rate, there’s no reason we can’t vastly improve children’s health, education, and comfort at a national level. Now is a better time than ever to cancel payroll taxes indefinitely and to test a basic income.

Demand could be higher, but it is not nearly as low as it was in the troughs of the recession – compare Europe and the United States, for example. The end of depression economics does not mean the role of government is over, nor does it harken sunnier days for America’s lower-middle. I’m very confident that large scale stimulus will not spark hyperinflation, but less sure the role pure stimulus can have on long-term employment prospects for the poor without a well-thought Federal job guarantee.

It was our responsibility to stimulate the economy far more than we did. It was our responsibility to engage in monetary easing far sooner than we did. The depression of demand lasted far longer than it ought to have under any half-smart policy. But now that we’ve crawled our way out of the hole, it is not clear that demand is lacking.

Perhaps the role of government is more important than it ever was.

A Capitalist’s Defense of Artificial Intelligence

August 18, 2013
the Economy: Home and the World
2 Comments

Tyler Cowen sends us to an essay by Gary Marcus arguing that modern artificial intelligence (AI) has failed. Not only because it has failed to live up to its goals, but also because it has the wrong goals. At the lowest common denominator – between computer scientists and everyone else – AI’s chief mandate is to pass the so-called “Turing Test” wherein a human “judge” has a natural language conversation with a machine, and cannot tell that it is not a human. Modern AI agents, like Siri, Watson or your neighborhood NSA, basically mine troves of data trolling for correlations to find something significant. Marcus argues this is not “intelligence” because even the smartest and most powerful machines cannot answer simple, common sensical questions like,

“Can an alligator run the hundred-metre hurdles?”

or

Joan made sure to thank Susan for all the help she had given. Who had given the help?

a) Joan
b) Susan

because billions of Google searches will not yield any patterns to this effect: since nobody has asked this question before. He also points out most machines that “pass” a Turing Test do so with misdirection and deception, not signs of innate brilliance.

At a theoretical and conceptual level maybe Marcus is right. There is something profoundly unintelligent about using “big data” to solve human problems. That is because, “theoretically” by definition , anything that fails to use theory derived from axiomatic laws is not intelligent. It is why mathematical economists – even after their time has come and perhaps gone (with apologies to Al Roth who is a mechanism designer that has used theory to profoundly improve our lives) – hold their nose high towards the empiricists. It is why theoretical computer scientists have mid-career forgotten how to actually program. 

Theory is brilliant for some things. Thank god that we are not using randomized experiments and inductive reasoning to conclude that for a right-angled triangle the sum of the squares of each side does indeed equal the length of the hypotenuse squared. But a practitioner, capitalist, or your average Joe would look at Marcus’ critique another way. Who really cares that computers cannot answer questions that nobody has asked. Computers that are deeply common sensical by definition are not targets for artificial intelligence.

I would normally not write about computer science. Contrary to my choice of major, I’m quite a bit more confident with my command of economics than abstract philosophy or computer science. But I do understand the Turing Test. And any computer witty enough to “trick” humans is smart enough for me. I do not recall Alan Turing issuing an exception for remarkably sarcastic computers.

I also know a bit about capitalism and why it works. We may experience any sort of “market failure”. Maybe it’s too cheap to pollute. Maybe money demand is too high in a liquidity trap. But, by and large, markets work. That means useless companies go out of business and good ones stay. It means Apple’s iPad brings in treasure chests of profit while Microsoft’s Surface does… I do not know what.

It means artificial intelligence answers questions people give a shit about. Private enterprise has done wonders for the tech world. And the tech world is busy fixing problems that substantially improve our lives. 

Marcus does not consider the flip side of his claim. He is embittered by an industry that attempts to “trick” humans (not in general, but only when they are specifically asked to), but is upset computers cannot answer heroically contrived questions similarly designed to trick insightful algorithms, with the failure of a non-formal language such as English. In fact, computers can understand basically every colloquially important part of English. It would take a computer scientist to design a question that computers cannot effectively answer. 

Markets work. Artificial intelligence may not change the world as once did steam engines or double-entry bookkeeping. But it is answering questions profound to our social existence. Some, like Marcus, are upset that the artificial intelligentsia is keen on making programs only to trick human readers. He believes this does not take Turing’s argument in good faith, for he surely could not have foreseen the preponderance of big, evil data! Yet, at a theoretical level, Turing’s very insight demanded that machines trick minds, for if an algorithm convincing a judge that it is a human is not a “trick”, I do not know what is. More importantly, passing a silly test hardly defines the profession any more. It is about answering questions that generate mass profit, and hence mass welfare.

Contemporary AI has “forgotten” about the question of philosophical intelligence because it is not a well-defined phenomenon. An essay in the New Yorker a definition of intelligence does not make; indeed there is a far more philosophically elegant beauty in the Turing Test than querying a computer about the habits of Alligators. And I have a theory for that.