I recently mentioned D-Squared's four-part review (evisceration?) of Freakonomics.

I had forgotten he wasn't finished.

Part Five is now posted. And the conceit of the pieces—"that there is something terribly, horribly wrong with the state of modern economics"—that dates back to 2003(!) is all the more validated.

John Quiggin should include all five parts as an Appendix to his forthcoming Zombie Economics book. Just sayin'.

Via Brad DeLong, Eric Falkenstein praises Macroeconomics with faint damns:

Macroeconomics is the triumph of hope over experience, and has been no more successful than sociology.

Insulting our betters will not put economists in good stead. As Paul Krugman frequently notes, "Economics is...not quite as hard as sociology."*

But Falkenstein makes up for this lapse, perhaps, with his conclusion:

Macroeconomists are demonstrably not helpful to those institutions that could use economic expertise. Macroeconomists know a lot of stuff, just not anything useful.

I'll still maintain, and am pleased to see John Quiggin appearing to concur, that The Problem with Macro is believing that it must be a subset of Micro in general and "rational expectations" in particular, leaving the question of what exactly Macro contributes as an exercise. So I'm less ready to make that declaration that Dr. Falkenstein is. But my previous following-the-Devil-in-the-desert comment (see the Update here) seems more and more the correct description of modern macro.

At least when physics looks for GUTs, they know when they haven't found one.


*It is left as an exercise to the reader whether the elided part of that quotation is true, a comparison of apples and oranges, or misses that physics includes people and matter.

Brad DeLong finds the quote that tells you everything you need to know about the origins of the Neoconservative Movement:

Among the core social scientists around The Public Interest there were no economists....The task...was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority...

L'Shana Tovah, Shabbat Shalom. May 5770 be better, saner, and more prosperous for all than 5769.

Title ref (and can you believe it's Op. 4??):

Other Reference of Interest:

Via the must-read Susan of Texas, Ezra Klein finally comes to some of his senses:

couldn't get an answer to a very simple question: What level of spending on health care was optimal for innovation? Should we double spending? Triple it? Cut it by 10 percent? Simply give a larger portion of it to drug and device manufacturers? I'd be interested in a proposal meant to maximize medical innovation. I've not yet seen one.

It turned out that concerns about innovation weren't really about innovation at all. They were just about attacking universal health care ideas of a certain sort. Which is why I stopped taking them seriously. As it is, I'm less worried about squeezing out medical innovation than I am about rising medical costs squeezing out innovation in every other sector of society.

The final point is a key one; if you're talking trade-offs and DSGE Models, you better not be looking at an area in isolation. (Or, as I noted earlier, if you're looking at an area in isolation, you need to be able to explain what "equilibrium" means in context: quadrupling the amount diverted from the alleged business does not count.

John Quiggin finally makes explicit What Everyone Knows: that the clusterfuck that has been made of Macroeconomics is due largely to an attempt to leverage (insufficiently robust) Microeconomic Theory:

the search for a macroeconomic theory founded on (roughly) neoclassical micro, which has been the main direction of macro research for 40 years or so, was a wrong turning, forcing us to retrace our steps and look for another route.

Think Lucas and Prescott as Mirror-Moses, leading gullible Macroites further and further from the Promised Land, themselves evermore unable to ask for directions.* Couldn't have said it better, or with so few expletives, myself. But then, that's why he has a book contract.

Read the Whole Thing.

UPDATE:*Or, probably more accurately, think the years Christ spends between "I have thirst" and realizing that his long, happy peaceful life was The Last Temptation, as per the movie and novel of that name.

by cactus

Norman Borlaug, Michael Jackson, and the Invisible Hand

When Adam Smith described the concept of laissez-faire capitalism, he argued that it was not just efficient but moral. As long as everyone acted in their own self-interest and the government did not interfere, the Invisible Hand would guide market forces toward the best possible outcome for society. Its generally accepted that this doesn't always work in the presence of externalities; someone (i.e., government) has to be there to ensure that people don't exercise their right to swing their fist beyond the start of other people's noses.

But there is another problem which seems to be less highly recognized, namely that the whole concept of the Invisible Hand itself is bull$#^&. As an example, I'm writing this a few minutes after reading about the death of Norman Borlaug. He was a Nobel Laureate who developed disease-resistant and fast growing crops. Depending on who you ask, his work saved the lives of somewhere between a quarter of a billion and a billion people. So far. If we don't all die in some sort of cataclysm in the next fifteen minutes, that number will only grow.

Now consider another person recently deceased - Michael Jackson. I believe Jackson was finally buried some time last week. Aside from being known the world over, Jackson was very wealthy, despite his clear incompetence with money. He probably made at least one dollar for every life saved by Norman Borlaug, so far. Norman Borlaug, on the other hand, to the best of my knowledge, did not. Furthermore, this discrepancy in income is very, very, very hard to attribute to government interference.

Which means, there are two possible alternatives:

1. Michael Jackson did more positive things for the world than Norman Borlaug.
2. Michael Jackson did less positive things for the world than Norman Borlaug.

There is no third option. None. Now, I think very, very few people, even die-hard Michael Jackson fans, when presented with numbers like "a quarter of a billion lives saved so far" would agree with option 1. Which leaves option 2. And if option 2, then the Invisible Hand is bull$#^&. Which means capitalism doesn't work or is immoral. That does not imply any other philosophical system would work better, mind you, but trusting the market to do its thing provides perverse results.
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by cactus

UPDATE by Ken:

I mentioned this in comments, but I think it's worth embedding here, too, as context for Norman Borlaug:

Ken Houghton is talkin' about his generation.

Pete Davis, Mark Thoma (who at least has the decency to phrase it in the form of a question), N. Gregory Mankiw, and Brad DeLong explain why there should not be any penalties against providers of West Virginia water (h/t Bitch).

Because fungible is fungible, even if it isn't.

At least Garth Brazelton at Reviving Economics gets it right, leaving hope that when we're all dead, the next generation will know how to teach economics so that they're not looked at as if they're insane.

It’s not my fault if nature never felt like evolving a system that obeys a simple little first order equation.

Source here

Ken Houghton remembers that Warren Buffett famously groused that he pays a lower percentage of his income in taxes than his secretary. Or the person who will come up with an actual cure for a cancer.

Mark Cuban takes this one step further, pointing out the obvious: if we want to promote investment, "we should tax the trader/speculator more heavily than the investor.[emphasis his]"

When you make the tax rate the same for short-term investment as long-term—and lower than that on income—you create the perverse incentive to taking profits in the short-term, making the "capital" investment equivalent to a Demand Deposit account. If you want to reward capital investment, it needs to be truly treated as capital. Cuban notes:

The government should raises taxes significantly on profits from short term capital gains on the sale of public stocks, indexes, commodities, futures held for 24 hours or less and extend the length of time required to qualify for Long Term capital gains and reduce the tax rate on Long Term gains.

It might be difficult to reduce the already-less-than-minimal tax rate on long-term gains. (Last time I checked, the capital gain on a five-year investment is taxed at 8%.) But it would be no problem at all raising the rate on short-term trades back to where it should be—above that of ordinary income tax rates. And even a budget-balancing approach would leave plenty of room to lower the rate for legitimately long-term holdings.

Cuban makes the connection: one of the reasons the tax incentives need to be moved is the perversion they have made of Corporate Governance:

[Raising taxes on short-term trades and lowering them on long-term investments] will also reward companies that act in the financial interests of long term holders and their employers. I think the impact on the economy would be far fewer layoffs as CEOs find themselves with more shareholders who think long term rather than short term. Believe it or not, there are shareholders who are fine with companies not beating their numbers if the company is making progress towards a clearly defined goal....Taxation can change the focus on public companies and stock trading. That would be a great thing for the economy.

Cuban notes that there is still the major problem of misaligned incentives in Executive Compensation (economist's version here [PDF, subscription required]):

CEOs...are so focused on marking to market their own personal stock portfolios, they emphasize stock performance over doing the right thing for the company.

Amazingly, this is exactly the problem that standard economic theory claims "professional" management solved. I hope this one makes it into John Quiggin's book.

Ken Houghton notes the obvious corollary to Bruce Webb's post on the 1st: if you don't "read the bill," the obstructionists will lie about it. UPDATE: And now corrects his misreading (see Bruce's update below, following on Mitt Shook's comment).

Milt Shook demonstrates in detail that, even if you do, people such as Alan Caruba of ChronWatch will lie about it anyway. That this post is even necessary is saddening. And that he has to point out fundamentals such as

[Annual Limitation] is on how much a patient will have to pay, not a limit on the health care the patient receives. Watch how many times these tools bring up the "rationing" canard. It's almost as often as they mention ACORN. (I kid you not. Just wait.)

or my favorite: that maintaining a market depends on people being able to make informed choices:

[Alan Caruba at ChronWatch] Page 72: All private healthcare plans must conform to government rules to participate in a Healthcare Exchange.

[CarubaShook] This is a phenomenally stupid complaint from a right wing ideological perspective, and it lays bare the moral bankruptcy in their arguments against universal health care. These are the same people who are always touting competition and choice as the most important aspects of capitalism. The point of the insurance exchange is to give people an obvious and transparent choice of health insurance options. A private insurance company can participate and offer their wares alongside the public option, if they so choose. If they don't want to participate, they're free to conduct business as usual, and they won't have to conform to any government rules. Well, except for the ones they must already conform with....They've always had to conform to government rules to participate in Medicare, and I don't see any of them dropping out of business for that. [italics mine; snark omitted]

Go Read the Whole Thing. And think about all the good things Alan Caruba could have been doing if he hadn't had to waste time dealing with deliberate misreading and outright lies.

(Update by BW: the second link actually goes to a web-site called Please Cut the Crap run by a blogger named Milt Shook. Milt in comments points out that it is he deconstructing Caruba and not the other way around. The lines in italics are Milt, the plain text is from Caruba. ChronWatch=Caruba, 'Caruba'=Shook for the full Caruba: http://www.chronwatch-america.com/articles/5297/1/Page-After-Page-of-Reasons-to-Hate-ObamaCare/Page1.html)

Nor is Cate Blachett playing me. (Nor, unfortunately, am I using this as an opportunity to post a picture of Ms. Blanchett in an attempt to troll for links. You want that, go to John Carney.)

Taxes are always fun, and there's a few other things going on. But, really, let me quote the Internet's best current stylist (meaning prose, not hair), Susan of Texas, in a post called, appropriately, "Tired":

The multitude of stupid out there in the health care discussion is beyond belief and utterly debilitating. This nation is simply too stupid to survive and I can't deal with any more today....reason and evidence don't matter any more--stupid will win the day.

I believe that the economy is far worse off than people want to admit and that we will be permanently poorer; at least, some of us will....I don't expect an apocalypse or a return to 1800s bucolic splendor; I think we'll just gradually get poorer and poorer, while telling ourselves that everyone else in the world has it much worse whether it is true or not.

Read the Whole Thing. Not just because she said it, but also because that's what the Canadians and Brits with whom I was speaking over the past few months are all expecting as well.

If the drugs I can't afford in the States kick in, maybe I'll explain to Scott how this post demonstrates that Dick Cheney is a better politician than BarryO and Rahm Emanuel combined. But you already know that, and Scott in his heart probably does to.

by cactus

For the last few decades, a many prominent conservatives and libertarians have been associated with the Hoover Institution. The Hoover of the Hoover Institution is Herbert Hoover, the guy who was president during the Crash of 1929 and under whom the Great Depression unfolded. Now, I've been thinking about how conservatives and libertarians demonize FDR and his economic policies. And we all know that anyone who cares to look up real GDP per capita figures can confirm that the fastest real economic growth in US history (as far as back as the BEA has data, at least) took place under FDR, and that remains true even if you remove 1941 to 1945. Hoover, of course, did the worst.

A while back I graphed all the presidents by growth here. Not only is the fastest growth produced under Democratic administrations, the best performing Democratic administrations were also the big social experiment-types. Obviously, that's a tough one for conservatives and libertarians to swallow, and I doubt if New Deal or Great Society policies would get much credit from that crowd under any circumstances.

But I wonder if less, perhaps a lot less, venom would be directed toward FDR, at least, if the Hoover Institution was not the Hoover Institution. Maybe folks whose paycheck came from the Gerald Ford Institution would be less aggressive. I'm also trying to think of what an equivalent would be for Democrats. Carter certainly gets the ridicule, but even his economic performance is pretty good compared to that of most Republicans. Even so, most conservatives and libertarians would probably not take seriously any economic work coming out of something called the Jimmy Carter Institute or Jimmy Carter Institution. You might find the lefty equivalent of a Thomas Sowell (oy, now I gotta go wash my hands) at a Jimmy Carter Institute, but would the counterpart of a Gary Becker, much less the equivalent of Milton Friedman on the left let their name be associated with such a place?

So what do you think? Would the world look different if the Hoover Institution was called something else?
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by cactus

rdan

A reader commented that market share statistics do not reflect whether competition occurs in a health insurance market. To stress a point he stated competition occurs when companies >1, and many states have competition of >2 major players, which makes for a more competitive market than a monopoly allows.

Competition to me means that at the least there is/are 'forces' in the market that somehow impact prices and quality of product or service, and in common usage implies lowering prices overall with some attention to quality. Many of us have cars in mind as a mental picture, and electronics.

Health Care for America Now has put together information compiled by the American Medical Association on market share enjoyed by insurers by state, and on the DOJ interest in the increasing concentration of ownership, again using AMA figures going from 33% highly concentrated in year 2000 to 51% in year 2007 as median % of market share nationally (Blue Cross/Blue Shield mainly). The trend for increasing consolidation within each state is clear.

The Department of Justice disagrees that anything less than a monopoly makes for effective competition in the health insurance market, as does economic theory in the form of an Herfindahl index. In fact, since 1982 anti trust law has used this measure along with a concentration ratio of an industry as an indicator of the relative size of firms in relation to the industry as a whole in evaluating 'competition'.

DOJ states that in the state-based system of health insurance currently practiced:

If one company holds more than a 42 percent share of a market the U.S. Justice Department would consider that market “highly concentrated.” This means that an insurer, with impunity, could raise premiums and/or reduce the variety of plans or quality of services offered to customers.7

(7. US Department of Justice, “The Herfindahl-Hirschman Index.” Accessed here; American Hospital Association, “The Case for Reinvigorating Antitrust Enforcement for Health Plan Mergers and Anticompetitive Conduct to Protect Consumers and Providers and Support Meaningful Reform,” May 11, 2009. Accessed here.
This report makes use of data published by the American Medical Association (AMA), which is not a member of the Health Care for America Now coalition. The AMA did not collaborate with HCAN on this report.)

Without necessarily getting into health insurance competition only, since the competition meme is invoked often in many places, what are market rules that demonstrate whether competition is working or not?

Several thoughts occur, to fit the meme:

1. Competition is defined as the way to lower prices and better product by many. Does this occur naturally, freely, when two companies share 75% of a market? Or if one company has 50% market share, with more players (as in MA)?

2. When prices double for a product in 8 years, how is competition working to control costs? How is this claim for competition proved?

I have in mind a different post on market share for health insurance companies, and the nature of health care for another. This could be a post to come to terms with readers notions of competition.

Chart below the fold.

To often, we talk about models as if they are reality, instead of reflecting a reality that was approximated. At least forty economists, including at least three 'Nobel' Prize winners, know that:

A rising tide lifts all boats only when labor and management bargain on relatively equal terms.

by cactus

Megan McArdle responds to a post I wrote:

So Obama doesn't count because he's not really a Democrat. But Bill Clinton was. But Richard Nixon--the chap who implemented price controls and massively expanded Social Security and Medicare--was definitely a Republican. Jimmy Carter, who deregulated like mad: definitely a Democrat.

What are these policies that neatly define Democrats to exclude only the ones who happen to have crappy growth? On what metric does Barack Obama register as farther to the right than Bill Clinton? Because from what I remember of the 1990s, I spent most of the decade listening to my genuinely left-wing friends weep that he'd betrayed them. Remember Edelman's resigning in protest of welfare reform?

I thought it was unnecessary at this point to explain the one thing I've pointed out time and again differentiates Republicans from Democrats. I think the first time was here. (I tend not to break out JFK from LBJ, or Nixon from Ford because JFK and Ford only served a short time, but the post that is attached is illustrative of behavior, not performance.)

The difference is the tax burden - that is, the percentage of people's income that gets collected in taxes. Not the marginal rate - the amount people actually pay divided by the amount they make. And there is a difference, a big difference. As an example: George Herbert Walker Bush famously raised marginal rates. It might have cost him an election. But GHW Bush also quietly lowered the tax burden. He did it through the people he appointed to the IRS, through the degree of compliance he sought, through the way his IRS interpreted existing rules and regulations and through how the body of tax rules and regulations changed while he was in office.

Going back to 1952 at least, every Democrat, every single one, has increased the tax burden. Every single Republican raised lowered [h/t Bruce Webb] them. The data in the attached post is from the IRS and goes back only to 1952, but one can wander over to the BEA's NIPA Table 2.1 and compute the tax burden ourselves with National Income data going back to 1929, and whaddaya know, the rule also works for Hoover, FDR, and Truman. Just barely for Truman... but then he is the exception on performance too, right?

Now, I doubt you could find a single person on the right of the political spectrum who would tell you that taxes don't affect economic growth. They all believe taxes affect growth. Of course, the story they tell is that cutting taxes produces faster economic growth. The fact is, however, the Presidents who cut tax burdens tended to produce slower economic growth than those who raised taxes. (I've discussed why in a number of other posts, and I don't feel like rehashing or looking for those posts now. I also note this isn't just true of Presidents. My fellow Angry Bear, Spencer, once pointed out that there are a lot of people out there who seem to think we'd all be better off if the country was Alabama than if it was Massachussetts.)

Unfortunately, tax burden data, like any other bit of real world data, fluctuates somewhat from year to year, so its really going to be a while before we know what direction they're really headed over O's administration. As in, several years. And most of us are impatient. So we'd like to have some leading indicators, so to speak, of what Obama is going to do, of where he's going to fall on the one R v. D divide that really matters. And right now, he's behaving like the folks who have cut tax burdens in the past. He's also talking like them. His bail-out is identical to GW's, and when he talks about taxes, it doesn't sound like Clinton, it sounds like GW. So its reasonable to wonder whether he's going to stick to the R v. D rule. And the next test coming up is healthcare; a D would be putting his political capital on the public option right now. An R wouldn't. What's it gonna be, we'll soon see.

More below the fold.

Now, in Megan's post, she refers to "Cactus and his merry band of madmen." I'm not sure the merry band of madmen over here truly have a leader, much less that I'm the one (Dan is the official grand poobah in charge of the blog, after all!!) but I'm guessing you aren't a part of that merry band of madmen if any of the following apply to you:

1. You do not believe that since 1929 at least, every single D has increased the tax burden and every single R has decreased the tax burden, despite the fact that the data shows precisely this, and despite the fact that it fits the caricature of Ds and Rs to a T, so to speak.
   
2. You do not believe that since 1929, Ds have generally outperformed Rs when it comes to real economic growth, despite the fact that the data shows precisely this.
   
3. You do not believe that administrations that cut the tax burden have also generally been the administrations that grew more rapidly, despite 1. and 2.
   
4. You do not believe that the tax burden could possibly have anything to do with growth.

If you do believe these things, if you believe what the data shows , I'm sorry to say but you're one of us, one of the merry band of madmen. On the other hand, if you fit these rules, there are a whole lot of folks out there, Megan McArdle included, who would consider you sane.

John Quiggin makes the broad case (link fixed).

If you are then stuck with trying to present a Grand Unified Field Theory, you will inevitably lose (or, at best, reduce) the importance of all the agglomerations that follow from the presumption that the Rational Actor is the mean performer—ignoring that no one, including the economists themselves, believes that to be true in their own lives, let alone the lives of others.

Micromotives and Macro Behavior indeed. But no molecular biologist (or even biologists) would try to build on the Phlogiston Theory.

Our findings do not provide much support for the usefulness of monetary aggregates in forecasting inflation.

See more at the St. Louis Fed.

Did building realistic macroeconomic models just get a touch more difficult?

Dear Barry:

The need for posts such as this one recurs because the large majority of economists are idiots. (Multiple exceptions noted—but not enough to change the truth of the initial statement.)

As the regulatory reform report notes (quoted by PK at the last link above):

In fact, enforcement of CRA was weakened during the boom and the worst abuses were made by firms not covered by CRA.

But the truth should never be allowed to get in the way of Economic Theory.

Via Eszter, there is one thing that is very clear from this graphic (duplicated below because I can't figure out how to embed it):

There is an excess of home-based internet capacity in the United States, for which people are definitionally paying too much.

The question is whether this is a problem. If you argue it is not—that the excess spending gets reinvested and used to develop new products and services that, on balance, benefit the economy—then please explain this in the context of any contemporary economic model.

Discuss in comments.

Come on, guys, somebody take it to the Next Step.

Matt Y comes closer than anyone else to getting to the truth of the problem with Macroeconomics. Following Justin FoxSteven Levitt's summary, Matt asks the next question:

So why should it be that "in the current regime, if [macro models] are not meticulously constructed from 'micro foundations,' they aren’t allowed to be considered"?

There's a hint in the title of this post.

Edited to fix attribution.