Why I hate the "skills shortage" debate

Few econ policy debates are as fraught, or as confused, as the debate over "skills shortages" in the labor market. This debate occasionally crops up in discussions of the labor market as a whole, i.e. interpreting shifts in the Beveridge Curve. But it mostly comes up in the context of high-skilled or STEM labor.

The main problem with this discussion, as I see it, is that no one really knows what a "shortage" of skilled or STEM labor is supposed to mean. Here are some possible alternative meanings:


1. The labor market for skilled/STEM workers is not clearing, due to government policy; demand is outstripping supply. (This is the classic "econ 101" definition of "shortage").

2. There has been an increase in demand for STEM workers in the U.S. not matched by an increase in supply, causing wages in those occupations to rise.

3. A policy-engineered increase in the supply of STEM workers would raise overall U.S. GDP per capita.

4. A policy-engineered increase in the supply of STEM workers would reduce income inequality in the U.S.

5. A policy-engineered increase in the supply of STEM workers would raise the relative power of the U.S. nation-state relative to rivals like China.

6. An increase in the amount or quality of STEM education in the U.S. would raise overall U.S. GDP per capita.

7. An increase in the amount or quality of STEM education in the U.S. would reduce income inequality in the U.S.

8. An increase in the amount or quality of STEM education in the U.S. would raise the relative power of the U.S. nation-state relative to rivals like China.


I'm sure I could think of more. But in addition to these multiple definitions, there is the question of time horizon. Are we talking about what has happened since 1980? Since 2000? Or since 2010?

There is also the question of the size of the posited effects in each case. Do we think that a bit more computer science education, on the margin, would be a good thing for American schools, or do we think that we should be training our workforce en masse to be knowledge workers?

Finally, there is the question of domain size. Who is a STEM worker? Are we just talking about software engineers in Silicon Valley? Are we talking about anyone who majored in a STEM field? Are we talking about anyone who works with a computer on a daily basis?

This huge proliferation of hypotheses pretty predictably leads to a massively muddled debate. Some pieces focus on one definition of the "shortage" hypothesis to the exclusion of others. Others lump many versions together and treat them as if they're the same thing.

But despite the hopeless confusion, people get very passionate about this debate. To many on the left, emphasis on STEM education must seem like an attempt at a "third way" substitute for redistributionary policy, or an attempt by employers to make employees shoulder more of the financial burden of training. It also might seem like an attempt by anti-interventionists to substitute "structural" explanations for the Great Recession for explanations based on aggregate demand. To those on the neoliberal right, denial of the importance of STEM must seem like a minimization of the importance of productivity in national wealth, or even a refusal to focus on total national wealth at all. Supporters of high-skilled immigration (including Yours Truly!) see the denial of "STEM shortages" as the beginning of an attempt to restrict high-skilled immigration in order to boost the incomes of the upper middle class.

So there are definitely some Robertsian effects at work here. That's going to make the debate even more difficult to conduct in a reasonable, rational manner.

So is there a STEM skills shortage in the U.S.? The answer is that I don't know. I've looked into a few of these sub-hypotheses, but there are just too many. In my opinion, we should be focusing on the marginal policy effects of A) an increase in high-skilled immigration, and B) a tilting of school curricula toward math and engineering. I will search the literature for quasi-experimental evidence on these policy effects, and report back what I find. But whatever I find is unlikely to satisfy most of the people involved in this argument.

Cultural appropriation is great!

"You'll wear a Japanese kimono, babe/There'll be Italian shoes for me" - Randy Newman, Political Science


A lot of people are talking about this story from Oberlin. Apparently some kids are complaining because certain kinds of Asian-themed food served in dining halls is crappy and non-authentic, and therefore constitutes "cultural appropriation."

Now, on one hand, this is just a story about rich kids complaining about bad food. Nothing much to see here. But it gives me an opportunity to say something that has been rattling around in my head for a while: Cultural appropriation is actually a great thing!

Wikipedia defines cultural appropriation as "the adoption or use of elements of one culture by members of a different culture." This is a good thing, for several reasons.


Reason 1: Product diversity.

This is the simple, "Econ 101" reason, if you will. Suppose Japanese people open a bunch of Italian restaurants in Tokyo. The "Italian food" is not quite what you'd get in Italy, and it's made by Japanese people rather than Italians. There's mentaiko in some of the pasta dishes. This is cultural appropriation, pure and simple. But the existence of these "Italian" restaurants increases the number of dining options available in Tokyo. More dining choices = more fun city = better life for people.

In fact, pasta itself is probably the most famous example of this sort of cultural appropriation. It was originally a failed Italian attempt to copy Chinese noodles (as is Japanese ramen, actually). Aren't you glad we have pasta? Aren't you glad we have ramen? You can thank cultural appropriation.


Reason 2: Beneficial mutation.

Pasta isn't just a crappy dining-hall imitation of Chinese noodles. It's a new, wonderful dish in its own right. The same is true of ramen. If Italy and Japan had insisted on only eating real, authentic Chinese noodles, pasta and ramen wouldn't even exist! In other words, cultural appropriation creates mutations by trying and failing to copy other cultures. The good mutations survive - we still have pasta and ramen - while the bad ones mostly die out. Cultural appropriation thus leads to innovation.

This happens a LOT in music. Almost every modern genre of popular music is influenced by either blues, jazz, or hip-hop - three genres invented by black Americans. Sometimes that influence just leads to something lame (Iggy Azalea). But often, appropriators have gone in interesting new directions with the elements they take from black American music - think of the Beatles, Led Zeppelin, Sublime, or Daft Punk. And often, that mutation and experimentation travels back and affects black American music in return. A larger ecosystem of people bouncing ideas off of each other is a recipe for creativity, even if it sometimes creates boring crap.

If you don't like cultural appropriation, you shouldn't watch Star Wars. Not only does the first movie appropriate much of its plot from Kurosawa Akira's movie "Hidden Fortress" (which itself appropriated elements of Shakespeare), but many of the elements of the Star Wars universe are appropriated from Japanese culture. Lightsaber fighting is based on kendo, Yoda is a sennin, and Darth Vader wears Muromachi period armor.


Reason 3: Technological diffusion.

In the long run, diffusion of technology between cultures is one of the main forces that helps poor countries get richer. Cultural appropriation seems like it can help this process, since many technologies are invented to fill culture-specific needs.

For example, take electric kettles. You use these to make tea. They are wonderfully efficient and labor-saving. But they would not exist if the British had not appropriated tea-drinking from Asia. Another example is rice-cookers. These are just great. But you don't need a rice cooker unless you eat dishes with rice. And often the first dishes that introduce American white people to rice are sugary, fatty, crappy imitation Chinese dishes. But so be it. Now those white folks have rice cookers! And now they can make much better rice dishes.

Now, I don't know how big a factor this can be, and those are some pretty small examples. But in general, it seems like product diffusion can boost technological diffusion, and technological diffusion is usually a good thing.


OK, you say, but these are all benefits to the appropriators. What about the appropriated? Is this one of those cases where the majority benefits from free exchange at the expense of a dispossessed minority? Actually, I think it's quite the opposite. Here are some reasons cultural appropriation helps its supposed "victims":


Reason 4: Consumer Demand Spillover

Suppose that imitation Italian restaurants flood Japanese cities (as they have actually done). Many Japanese people will be content to eat only at these, but some Japanese people will go looking for more authentic fare. They will go looking for food cooked by actual Italians, which will offer job opportunities for Italian chefs. The supposed victims of appropriation - Italians - reap economic benefit.

Hip hop is another example. How many white kids in the late 90s and early 00s got into rap and hip-hop because of Eminem? I am willing to bet that many of those kids went on to listen to black rappers and hip-hop artists (especially because Eminem did his best to promote these artists). I also bet that Elvis' popularity caused some money to flow to black artists like Chuck Berry. Sure, these artists probably deserved to get popular before their white appropriators did. That would be the ideal. But since most consumers need some kind of "gateway" music, appropriators can help funnel money to more authentic artists who would otherwise be completely ignored.

In fact, cultural appropriation can be the first step toward real cultural diversity. First, American stores start serving crappy sushi. Eventually, people eat good sushi somewhere and realize that most of the stuff in their stores is crappy. They complain. Stores then make an effort to get real, good, authentic sushi. And thus true cultural diversity is achieved.


Reason 5: Immigrant Opportunity

Americans were introduced to Chinese food via crappy faux-Chinese restaurants like Panda Express. But by helping develop a general taste for "Chinese food", those culturally appropriated restaurants helped create business for Chinese restaurants owned and staffed by Chinese immigrants. Chinese restaurants are now a huge source of employment for immigrants in the U.S. If you move from China to the U.S. with poor English skills and little formal education, you can work in a Chinese restaurant. That increased opportunity for immigrants is a huge boon to the supposed "victims" of cultural appropriation.


Reason 6: Cultural Empathy

Many of the American white kids who listen to black music - or faux-black music - will never interface with, or have any sympathy for, black culture. Some will drive around in SUVs their parents bought for them, blasting rap music even as they spout racist crap and condone policies that keep black Americans disadvantaged. Seeing this kind of thing is frustrating, and the fact that these kids listen to rap can seem like adding insult to injury.

But a few of those kids will go beyond a superficial adoption of memes from black culture. They will like the hip-hop they hear, and they will go to hip-hop shows (or at least watch them on TV). They will see black people in a context other than the conservative media narrative of "welfare queens" and "black-on-black crime". Black people will start to seem like human beings to them, and they will begin to have sympathy for movements fighting for better lives for black Americans.

This seems to have happened to my own father and a number of other white kids at his school in the 1950s and 1960s. They got into rock music - cultural appropriation of black music by whites - and this led them to get into blues music. That led them to go to clubs and stores in the black part of town, and make friends with black people. That in turn led them to be sympathetic to - and even participate in - demonstrations and sit-ins staged by black students over civil rights issues. Without that cultural appropriation, they might have simply bought the conservative line that black protesters were thugs and criminals.

Another example is how anime, cosplay, and other elements of Japanese pop culture are leading Westerners to travel to Japan and discover what that country is really like - which will probably benefit cultural, economic, and even national ties between the two nations.


So there you go: Six reasons why cultural appropriation is great. Sure, this is not always true - nothing is great 100 percent of the time. Naming a football team the "Redskins" will not have any benefit for anyone, and simply mocks the victims of ethnic cleansing. There are some bad examples of cultural appropriation, and we should get rid of them. Other examples are neither harmful nor beneficial. But most cultural appropriation seems like a very good thing - a first step and gateway to a more diverse, more interesting, more empathetic world.

Macro theory vs. string theory

After reading this cool article about the debates surrounding string theory, someone on Twitter asked me to do a post comparing it to macro theory. Well, I did that a long time ago back when I was a snarky young lad, but as someone at Bloomberg once said to me, "If you know a good story, tell it from time to time," so here goes.

String theory and macro (business cycle and growth theory) have one big problem in common: They're not easily testable. They are not untestable. There's a big difference. With string theory, if you could build a really really really huge powerful particle collider, you could probe particles down to the Planck scale, and you could establish whether or not particles are shaped like tiny strings. With macro, if you could observe a whole bunch of planets with no mutual trade between them, or if you could establish a world government and get it to do random policy experiments, you could definitely test growth and business cycle theories.

The problem is, we can't do any of these things. String theory deals with ultra high-energy phenomena, and macro deals with aggregate time series, and those are just very difficult things to observe. In both cases, one big problem is the lack of experimental controls. High-energy phenomena can sometimes be indirectly observed by looking at black holes or the echoes of the Big Bang, and the effects of time-series macro phenomena can be observed every quarter. But you can't really put these things in a lab (well, not real versions of them, anyway), so you can't poke and prod them and explore counterfactuals and deduce the underlying structure, etc.

(Update: This was a little confusing. Yes, you can test theories by looking at non-controllable phenomena. If a macroeconomic theory says "There will be a huge recession next year" and there is no recession, the theory has major problems. But because you can't do controlled experiments, you often have to deal with multiple competing theories that fit the same data. Did they U.S. economy recover from the Great Recession because of easy monetary policy, or in spite of it? And so on. In physics, this is especially problematic when looking at data from the Big Bang, of which there is only one. As you might expect, there are tons of theories floating around about how the Universe began, some of which incorporate string theory.)

So that's one similarity. A second is that studying both has led to useful spinoffs. Studying macro has led to time-series techniques like GARCH models, and arguably to much of microeconomics itself. Studying string theory has led to some cool mathematics, and to some other useful modeling techniques that have been applied in other areas of physics.

Now for the big difference. String theory is not really relevant to the real world. Although string theory techniques have found real-world applications, the theory itself has not and probably never will. No one in our lifetimes or our posthuman grandchildren's lifetimes is likely to build a machine that runs on string theory. Even if the theory - in all its myriad offshoots - turns out to be total crap, it doesn't really matter whether anyone believes in it or not. You might complain that we're wasting our society's brightest minds by paying them to study an untestable theory, but you'd then have to make the same complaint about much of mathematics itself.

In that sense, string theory is "safe" for the world. Macro theory might not be. If we pick the wrong macro theories, we could enact policies that cause real human disasters for millions. In fact, this probably happens quite often.

When data don't give you a guide to policy, major policy failures are inevitable. But what if macro is not totally untestable, but just mostly untestable? What if the evidence gives us a very weak but nonzero signal about which theories are good and which are bad?

This is the danger. If macro policy is hugely important and the signal from data is very weak, then small sociological phenomena within the econ profession - conformity, political bias, etc. - might cause great harm to real people. And bad scientific techniques - ignoring data entirely while placing too much faith in plausibility - might also cause cause real-world harm.

To sum up: If string theory happens to be complete B.S., there is essentially no loss to society. If prevailing macro theory (New Keynesian models now, RBC in the 80s, etc.) is complete B.S., there might be no loss, but there might very well be a big loss. This is probably why the public gets a lot madder about macro debates than about high-energy physics debates.

Academic B.S. as artificial barriers to entry

"Stratos has never sampled the full terror stalking the stars." - David Brin, Glory Season


Paul Romer complains of "mathiness" in macroeconomics. Paul Pfleiderer talks about "chameleon" models. Ricardo Caballero says macroeconomists encourage the "pretense of knowledge". Everywhere, people complain about economists' fetish for pointless model-making. And of course, some folks accuse the economics profession of being a front for laissez-faire ideology.

But we should remember that compared to other disciplines, econ is in great shape. A friend just sent me a paper by Ananya Roy, a professor of urban planning at UCLA, entitled "What is urban about critical urban theory?" Here is an excerpt from the abstract:

This essay discusses how the “urban” is currently being conceptualized in various worlds of urban studies and what this might mean for the urban question of the current historical conjuncture. Launched from places on the map that are forms of urban government but that have distinctive agrarian histories and rural presents, the essay foregrounds the undecidability of the urban, be it geographies of urbanization or urban politics. What is at stake is a critical urban theory attentive to historical difference as a fundamental constituting process of global political economy and deconstruction as a methodology of generalization and theorization.

And here is the spectacular final paragraph:

I conclude then with the invitation to read the urban from the standpoint of absence, absence not as negation or even antonym but as the undecidable. I conclude too with the provocation that theory, including a theory of the urban, can be made from the tealcolored building at the edge of the world that is the Dankuni municipality, a panchayat office repurposed for urban government. But in a gesture befitting the task of provincializing the urban, I note that the dedication plaque for the panchayat building references a fin de siècle poet, Jibanananda Das and his writings on “rupasi bangla,” or beautiful Bengal, envisioned as rural and verdant. But Das is also the first urban poet of Bengal, with a set of starkly neo-urban poems that are now etched into the region’s self-imagination of urban modernity. The plaque can thus be read as a serendipitous anticipation and premonition of the urban yet to come but its rurality cannot be effaced or erased (Figure 4). The sign of a constitutionally demarcated urban local body, it is the undecidability of the urban.

To many readers not steeped in critical theory, this may sound like a broken fire hydrant of nonsense. One may be tempted to reach for a copy of Pennycook et al.'s paper, "On the reception and detection of pseudo-profound bullshit."

But I don't think critical theory is simply the academic equivalent of meaningless auto-generated guru wisdom. My guess is that it's actually something else: Obscurantism.

Here's what I kind of suspect is going on.

For a given level of demand, supply restrictions generally push up price. You don't want to have any old dork walk in off the street and get a full professorship in urban studies. That would send salaries crashing, and prestige as well.

But what if urban studies is just inherently a really easy field? (I'm not saying this is true, I'm just being hypothetical!) What if all the remaining big truths could be uncovered by running a few regressions in Stata? In that case, the supply of potential urban studies profs would be really big. Danger!

If existing urban studies profs can form a cartel, they can artificially raise the barriers to entry and bring supply back down again. Cartelization in academia doesn't seem that hard, since admissions, hiring, and tenure committees are already cartels, and since the barriers to creating new universities and new top journals are very high.

The barriers to entry will probably be some combination of A) a psychometric test, and B) an ideological loyalty test. These tests are relatively easy to administer. They also take advantage of natural supply restrictions - very high-ability people (along whatever dimension you want to measure) are relatively rare, and ideological buy-in is limited by the diversity of ideas in society. For example, there are just not that many people who are both A) really good at parsing dense paragraphs of text, and B) deeply committed to a quasi-Marxist lefty ideology.

Artificial entry barriers provide a tidy explanation for the rise of "critical theory" in humanities, urban planning, anthropology, and sociology departments. Critical theory is basically just the practice of taking lefty social criticism - of the type you might find in any college dorm - and dressing it up with a bunch of neologisms and excess verbiage. Stephen Katz of Trent University explains this in an essay entitled "How to Speak and Write Postmodern". He gives some hypothetical examples:

For example, let’s imagine you want to say something like, “We should listen to the views of people outside of Western society in order to learn about the cultural biases that affect us”. This is honest but dull...[Instead]  say, “We should listen to the intertextual, multivocalities of postcolonial others outside of Western culture in order to learn about the phallogocentric biases that mediate our identities”... 

You want to say or write something like, “Contemporary buildings are alienating”. This is a good thought, but, of course, a non-starter. You wouldn’t even get offered a second round of crackers and cheese at a conference reception with such a line. In fact, after saying this, you might get asked to stay and clean up the crackers and cheese after the reception...[Instead, say] “Pre/post/spacialities of counter-architectural hyper-contemporaneity (re)commits us to an ambivalent recurrentiality of antisociality/seductivity, one enunciated in a de/gendered-Baudrillardian discourse of granulated subjectivity”.

As multivocalities on the internet say: LOL.

The supply of super-lefty people who are able to parse artificially dense text is limited, but not so limited that it's hard to find people who are willing to do it for $70,000 a year. Meanwhile, student demand for humanities, anthropology, urban studies, and sociology majors is probably pretty inelastic, so university demand for professors in these areas is probably inelastic. Hence, for departments and journals in these fields to make "critical theory" a soft requirement for professors is probably an effective way of keeping their salaries (and job perks) as high as they are.

It seems pretty obvious that humanities departments have been almost entirely consumed by this sort of thing. Any semblance of objectivity (whatever that would even mean in the humanities!) is gone, replaced by pervasive quasi-Marxist doofiness. And humanities scholars' research work now appears to largely consist of parsing and writing artificially dense text. As for the social sciences, anthro seems to have taken some big steps in this direction, and sociology more modest steps.

How about economics?

The econ profession as a whole is shifting toward empirics, and possibly even toward reduced-form empirics. Since the flood of data is a recent thing, most of the new insights in the field over the next decade or two will probably be gained from doing this kind of work - as John Cochrane says, "The stars in their 30s are scraping data off the internet."

Scraping data off the internet is cognitively demanding work, but not that demanding. Without artificial entry barriers, the data flood would probably increase the supply of people qualified to be economics professors. To preserve their high salaries and high levels of intellectual prestige, it therefore behooves the economics profession to create some artificial barriers.

Econ isn't going for ideological tests - or at least, not very much. There's too much pressure from the world at large to stay objective. So the entry barriers rely mostly on psychometric tests. Mathematical theory, of the type economists do, is hard to do - much harder, for most people, than parsing dense paragraphs of woo-woo "critical theory".

This could explain the pressure on empirical economists to include a structural theory section that has little relation to the reduced-form empirical analysis that forms the core of a paper. It also might explain why even though the economics literature is more and more filled with reduced-form empirical studies, theory papers are still very common on the job market.


Updates

Brad DeLong is annoyed with me for picking on Ananya Roy, and links to an essay of hers that he implies is much better than the paper I cited (and which is written in more-or-less plain English). But I didn't quote one of Roy's papers because I think she's a bad urban studies researcher (how would I even know if that were true?). My conjecture was that many successful urban studies profs will have written at least one or two papers like this - much like almost any top macroeconomist will have at least one or two theory papers with unrealistic assumptions and complex math that can't really be tested against data. I'm not trying to single out any individual for criticism.

Some commenters have been suggesting that critical theory is actually on the wane in the humanities. That is interesting; I don't know many humanities people, so I'm pretty uninformed about recent trends. I knew a bunch of Michigan humanities PhD students back in grad school, and they were all very into critical theory. I also met an incoming literature prof at Stony Brook who said she does "theory", and when I asked her "What kind of theory?", she blinked in surprise and asked "Are there multiple kinds?". So anecdotes suggest it ain't dead yet...

A commenter points out that, as usual, Feynman did this snark way before I did.

Efficiency in growth's clothing? (reply to John Cochrane)

In response to a John Cochrane policy paper on growth policies, I wrote a post chiding Cochrane for selling efficiency policies as long-term growth policies. Cochrane now has a long and rather testy reply to Yours Truly. The basic message of the reply is: "If level effects are really, really big, they tend to look like long-term growth effects."

Yep. That's right.

Cochrane's original paper described the impact of growth policies by drawing an analogy with the period from 1950-2000:

If the US economy had grown at 2% rather than 3.5% since 1950, income per person by 2000 would have been $23,000 not $50,000. That’s a huge difference. Nowhere in economic policy are we even talking about events that will double, or halve, the average American’s living standards in the next generation. 

To get a policy change that had that effect, we'd need:

A) A doubling of the level of detrended steady-state GDP, and

B) Frictions in the economy and/or the policy-making process that smoothed that change over 50 years.

Cochrane, in his new post, asserts that (A) is possible (I'll get to that later). He doesn't mention (B). How much of the growth we enjoyed from 1950 to 2000 a result of policy improvement? Cochrane certainly believes strongly that Reagan's policies caused a lot of the growth in the 80s and 90s, but how about the equally impressive growth from 1950-1980?

When I look at U.S. history I see a pretty smooth growth trend (I'll use a David Andolfatto tweet instead of just grabbing FRED data, because it's funnier!):




See the big growth takeoffs from policy liberalization? Neither do I.

Of course, at any time we could have chosen to become North Korea, at which point the line would have crashed and burned, so in some sense the whole upward trend was due to policy. But I think that it's hard to look at this steady upward march and see anything other than the steady improvement of technology. If you look at other countries, you see that they did just about as well as us (or better) over this time period, and that our growth and theirs was highly correlated. To me, that says that it was technology (and trade), not policy changes, that drove most of the global growth trend.

But OK, OK, if we DID engineer policy changes that doubled our income, would it matter to us if it was abrupt or spread out over decades? No, it would not. So Cochrane is right - a "level effect" that huge really would be party time.

So maybe my Bloomberg piece didn't really manage to express what actually annoyed me about Cochrane's paper. I guess it wasn't just about "growth effects" vs. "level effects". It was about proof versus conjecture.

Cochrane, by citing the growth we enjoyed from 1950-2000, and then telling us that we can enjoy similar growth if we do his preferred policies, seems to imply that this is something we've done before and therefore something we can do again. To me, that doesn't seem to fit the facts, even if you give Reagan as much credit as Cochrane gives him. To me, it seems pretty obvious that liberalizing policy changes produced, in the past, at best small bumps in the trend of steady technological progress.

But OK, OK, John obviously really believes that his preferred policies would engineer a HUGE change - a doubling or tripling - of our potential GDP. I may disagree with that prediction, but I guess I shouldn't dismiss it out of hand. I definitely think that pointing to the growth from 1950-2000 as an example of what we could achieve with deregulation is misleading. But ultimately that springs from the fact that my priors about how the world works are just very different from John's.

Anyway, on to John's other points:


Cochrane Point 1: If China did it, why not us?

Because China started off very far away from the technological frontier. If you liberalize your economy in ways that allow you to start importing and applying foreign technology, you will be able to grow fast. Some of China's growth is simple Solow capital catch-up, but some of it is a sudden and dramatic influx of foreign technology.

The U.S. is at or near the technological frontier, so I assume it would be a lot harder for us to do what China did. I think this again illustrates a difference in the way John and I think about productivity - he seems to instinctively think of policy, I always instinctively think of technology.


Cochrane Point 2: We could triple or octuple our GDP by making it easier to do business!

I was pretty skeptical of this argument. Reverse causation is a much bigger problem than Cochrane seems to think; he dismisses it with some anecdotes, but I don't think it can be dismissed. Another problem is the poor fit of the regression line Cochrane shows - see Kevin Grier for more on this point.

A third problem is that the World Bank's "Ease of Doing Business" indicators are constructed from surveys, which have all kinds of huge methodological issues (which Cochrane himself has pointed out in other contexts). They are not objective measures of the ease of doing business.

What this means is that A) the hypothetical "frontier" that the World Bank and Cochrane construct may not exist, and B) attempts to reach that frontier might actually hurt rather than help growth/efficiency. Alternatively, engineering improvements in the rankings might help a lot for poor countries but not help much for rich countries.

If we look at real-world examples, only one single country - Singapore - has both A) substantially higher GDP than the U.S., and B) better performance on the World Bank rankings. Singapore's GDP is about 60% higher than ours in PPP terms, so if we could reach that level it would indeed be great. They are #1 in the World Bank's rankings. The U.S. is #7. Countries #2-#6 are actually all a bit poorer than the U.S.

But maybe we can emulate Singapore.


Cochrane Point 3: Permanent growth effects might not actually exist.

Yep, true. Cochrane points to a Chad Jones paper showing this, which I actually already knew. It's a good paper. In fact, if you just use a simple Solow-type exogenous growth model you get a similar conclusion - there's nothing you can do to boost growth in the very long run.

Whether or not this is true, it is orthogonal to my point. I was talking about the overselling of efficiency-based policies by appealing to the history of long-term growth. I did not intend to claim that there are other clearly identifiable policies we could take to boost the growth trend for 50 years.


Cochrane Point 4: I should not have used the word "conservative".

I think this word was appropriate. First of all, it's one that the public intuitively understands. Second of all, it accurately communicates Cochrane's apparent love for Republican politicians, especially Reagan. In an earlier post (also a rebuttal to Yours Truly), Cochrane wrote:

In 1980 Ronald Reagan announced some pretty radical growth-oriented policies, at least by the standards of the time. (Not much new since Adam Smith, of course.) The standard liberal commentators made the standard objections: voodoo economics, numbers don't add up, it will take generations of unemployment to lower inflation, the debt will explode, and so forth. (Plus, the Soviet Union will be there forever, we might as well get along.)  Reagan offered optimism; won, malaise ended, we won the cold war, and there was an economic boom.

I would note that:

A)  John uses the word "liberal" to describe people who disagree with his desired policies, and most people use "conservative" to mean the opposite of "liberal".

B) Reagan's policies included more tax cuts, while the big deregulations came under Carter. Deregulation is the centerpiece of Cochrane's current growth proposals, so it's interesting that he credits Reagan 100% and Carter 0%. If the World Bank's Ease of Doing Business rankings had been around at the time, I think Carter's reforms would have resulted in a lot more improvement than Reagan's, but Cochrane gives Reagan all the credit. That sort of feels like a politically "conservative" view of things.

So I don't think that any harm was done by the use of "conservative".

Why teach kids macro at the intro level?

I've been writing some posts about Econ 101 (post 1, post 2, post 3). The basic theme is that kids need to learn a lot more evidence at the intro level, including methods. One response has been that it's actually very hard to teach kids even the simplest methods like OLS. At best, it would take a lot of time, and a one-semester intro course is just not long enough.

That got me thinking: What are the kids doing in the second semester of a year of intro economics? At a lot of schools, they're taking intro macro, often called Econ 102. I used to teach that class at Michigan, actually. And to be honest, I'm starting to think that this class is not really necessary. I think econ departments should think seriously about turning 102 from a macro class into a data/econometrics class.

Why should undergrads learn macro in their first year of econ? If they go on to be econ majors they can easily start out with intermediate macro and not miss anything important. If they just take the first-year econ sequence and then go into the business world, what do they really need to know?

In terms of growth theory, they might as well know the Solow model, so they can understand that capital accumulation by itself won't be a sustainable source of economic growth. Really, the Solow model is just a convenient way of teaching growth accounting, introducing ideas like capital, labor, human capital, and total factor productivity. And it's the one time in intro econ where you use a differential equation, so that could be useful for general math skill. Other than that, there's not really much growth theory an intro student needs.

How about business cycle theory? When kids go into the business world, it will probably help to know the standard Milton Friedman, New Keynesian, AD-AS, accelerationist Phillips Curve theory of monetary policy. That doesn't mean the standard theory is right (maybe Neo-Fisherian theory is better!), but since most people in the business world and at central banks sort of think it's right, kids will benefit from knowing it. It's easy and quick to teach to 101 students, since AD-AS fits right into the supply-and-demand graph stuff they're doing anyway. And if you want to mention RBC, you can just take the AD-AS graph and draw a vertical AS curve.

That's all I can really think of, and it's only about two weeks of material.

We have a lot of macro theories, but none that really work well unless you pick your data set very carefully and squint very hard. We have some methods for gathering evidence, but none that are very satisfying, and none that are simple enough for most intro level kids to understand.

And to make it worse, most of the macro theories that economists take halfway seriously are too hard for intro kids, so they end up learning silly stuff like Mundell-Fleming and Keynesian Cross that no one even halfway believes. Do we want kids going out in the business world and making deals as if interest rates will eventually equalize across all countries? God, I hope not.

So devoting 50% of the first-year econ sequence to macro just seems like a giant waste to me. We tend to think of macro and micro as symmetric things, but really "micro" is a lot bigger and more general than "macro". It affects a lot more policy questions, it has a lot more abundant and reliable evidence, it has a lot more interesting theoretical methodologies (game theory!), and it is more directly relevant to what students will eventually encounter in the business world.

So here's my new proposal for the first-year intro econ sequence. Replace useless macro with useful micro empirics. Either:

A) make 101 about theory and 102 about micro evidence, and stick Solow and AD-AS into 101, or

B) make 101 and 102 both predominantly micro (with Solow and AD-AS thrown in), and intersperse theory and evidence while stretching the sequence over 2 semesters.

And just kill the all-macro 102 course. It's not really doing anyone any good. It's kind of a barbarous relic.


Updates

1. On Twitter, Matt Yglesias says that econ probably has too much prestige tied up in macro to ditch the intro macro class. Maybe that's true. But I wonder if intro macro might now be generating negative prestige for the profession. Since the crisis there have been millions of words written in the media about how macro is bunk, macroeconomists don't know anything, etc. Killing intro macro might actually be saving the field some embarrassment, because a lot of those 102 theories really are obvious bunk, and most of the rest have taken a beating since 2008.

2. Some people (in the comments and on Twitter) have suggested that simply teaching kids the meaning of GDP, inflation, etc., and how these things are measured, could fill a whole semester. My response is: Maybe, but why go looking for ways to fill a whole semester? It sounds to me like status quo bias - because we've always taught an intro semester called "macro", we had better go find some "macro"-y stuff to teach. Sure, learning about growth accounting and NIPA calculations and whatever is cool. But there's a whole bunch more super duper useful stuff they could be learning instead: data analysis! Data analysis is becoming more and more important in econ, and more and more important in the business world. We're doing students a disservice by not teaching it in intro classes, and if we're going to correct that, something will have to make way. And I think the best "something" is macro.

Econ 101 and data (reply to David Henderson)

I wrote a post for Bloomberg View about how Econ 101 needs more empirics (a favorite hobbyhorse of mine). They titled it "Most of What You Learned in Econ 101 is Wrong", which was a catchy but inaccurate title, since the word "wrong" is often unhelpful in describing scientific theories. For example, in the post, when writing about minimum wages, I wrote:

That doesn't mean the [Econ 101] theory is wrong, of course. It probably only describes a small piece of what is really going on in the labor market.

Sometimes you test a theory by looking at policy experiments, and what you find is that the treatment effect is in the direction the theory predicts, but the fit is poor - the percent of the variance explained is small. Does that mean the theory is "right", because the treatment effect is in the expected direction? Or does it mean the theory is "wrong", because the fit is poor? 

The answer, of course, is that "right" and "wrong" are not very descriptive, helpful adjectives in this situation. 

Anyway, there's the question of what to teach kids. Personally, I think that you should teach kids empirics no matter how good your theories are. High school physics and chem classes teach simple theories that are amazingly good at explaining a lot of real phenomena, but they also make sure to include lab experiments, so that kids can see for themselves that the theories work. And those are high school kids; college kids will be even more capable. There's no reason a college econ student shouldn't learn how to run regressions in 101.

But I think this becomes even more important when Econ 101 theories have poor fit. People tend to confuse treatment effects with goodness of fit, so if you teach kids a bunch of theories with poor fit but which get the sign of the treatment effect right, the kids will leave class thinking that these theories explain a lot more of the world than they really do.

This distinction is what some critics of my Bloomberg View post don't seem to get. For example, David Henderson writes:

In other words, in most cases there is a small, presumably negative, effect on employment. And presumably in the other cases there is a large effect. How, exactly, does this contradict the claims that Mankiw makes and that many of us teach in our equivalents of Econ 101? It doesn't.

In this case, the theories that Econ 101 books (like Mankiw's) teach tend to get treatment effects of the right sign - minimum wage hikes of the typical size probably do have a (very small) negative effect on employment. When Henderson says that the evidence doesn't "contradict" the theory, he means that the theory gets the sign of the treatment effect right.

The problem is that by emphasizing theory so much, and by relegating evidence to some brief asides, Econ 101 textbooks (and classes) will tend to trick kids into thinking that the theories have better fit than they do. When you make people learn a theory in detail, I think they naturally tend to believe that the theory has strong empirical fit unless they see evidence to the contrary. 

My other example was welfare. Studies show that the effects of the implicit tax rates in welfare programs like the EITC are very small. That's consistent with the relatively small Frisch elasticity of labor supply found in most micro studies. Even when you get welfare programs with very large implicit tax rates (100%!), the effect is generally not as big as you might expect (with 100% implicit tax rates, you'd expect AFDC to leave income unchanged, when in fact it does boost it somewhat). That implies that welfare affects labor supply through channels other than implicit tax rates and lump-sum payments. For example, Moffitt's survey of theory and evidence on traditional (TANF and AFDC) welfare programs discusses the idea of "welfare stigma". That's an idea that is difficult to explain with an Econ 101 type theory. But it may be important in practice. Thus, it is an idea that can only really be presented by looking at the evidence. (Note that this is a reason welfare programs are probably worse than the labor supply effects would imply!)

Now Mankiw doesn't disregard evidence, and Henderson gives an example of the way that Mankiw presents it:

Although there is some debate about how much the minimum wage affects unemployment, the typical study finds that a 10 percent increase in the minimum wage depresses teenage employment [by] between 1 and 3 percent.

Evidence is given, but it is relegated to a brief aside. The kids don't see the data for themselves. They don't learn how to work with it. They don't learn how the studies tested what they tested. They don't learn how to go verify for themselves how useful econ theories are.

To these kids, econ theories must seem like received wisdom. Even evidence, when presented only as a brief aside with no understanding of methodology, must also seem like received wisdom. Again and again, I talk to econ students who complain that they are expected simply to swallow what they are taught - unlike in their science classes. College kids are smart, and many of them are skeptical. They grow up learning that "science is the belief in the ignorance of experts." That doesn't tend to sit well with the kind of "received wisdom" approach that almost every intro econ textbook takes. Nor should it.

So while I definitely don't want to pick on Mankiw - his books really are excellent, my personal favorites - I think that most intro econ textbooks use this "received wisdom" style of theory-centric education with only brief references to empirical findings. That tends to result in students who either A) believe too much in the power of the theories they learn, or B) disbelieve and distrust econ in general. I see a lot of examples of both (A) and (B). Both of those outcomes do a disservice to the world.

A big sweeping theory of modern history

Here's a Big Sweeping Theory that I've been toying with. There are lots of theories of the cycle of rise and decline of empires in the agricultural, premodern world. I'd like to create a parallel theory of low-frequency cycles (or, more accurately, long-term impulse responses to stochastic technology shocks) in the modern, industrialized world.

It's possible to see the convulsions of the World Wars and the Great Depression as a one-time event - part of the growing pains of the industrial revolution, not to be repeated. But what if some of the core features of those events are actually part of a cycle? Here's a sketch of how that cycle might work:

Phase 1: Technological Change. A huge burst of new stuff gets invented. Growth accelerates. 

Phase 2: Globalization. New tech and growth create new global supply chains. Trade and migration accelerate.  

Phase 3a: Inequality. New tech and globalization offer lots of opportunity for rich people to deploy their capital. New supply chains, products, and markets allow entrepreneurs to evade incumbents, vested interests, and governments. First movers make fortunes. Rich people deploy their wealth to restrain government attempts at regulation and redistribution, to keep the party going. Meanwhile, workers are forced to compete with foreigners and immigrants, and are also forced to pay the costs of reskilling in response to tech changes and globalization. Widespread inequality results.

Phase 3b: Cultural Change. New economic opportunities allow previously disempowered groups to gain power and status. Tech disrupts traditional family structures. Culture changes rapidly.

Phase 3c: Financialization. The need to finance new tech industries and new global supply chains expand the size of the finance sector. This results in large asset bubbles.

Phase 3d: Geopolitical Shifts. New supply chains and new tech mean some previously poor countries are now able to become rich. With wealth comes power. New great powers destabilize the geopolitical order.

Phase 4: Rise of Extremism. Economic inequality precipitates the rise of "leveling" (leftist) movements. Anger at cultural change and fear of competition with immigrants, mixed with displaced anger over inequality, precipitate the rise of reactionary (rightist) movements. Rightists and leftists feed off of each other, each portraying the other as an existential threat in order to frighten the populace into turning to the opposite extreme. Extremist politicians abuse veto points in political systems to paralyze governments and make countries effectively ungovernable.

Phase 5: Economic Slowdown. The collapse of a global bubble (from 3c) begins a protracted worldwide economic slowdown. For whatever reason - overhang of debt? extrapolative expectations? hysteresis? secular stagnation? some weird disruption to trade networks? - the economy does not recover quickly to previous growth rates. Because of extremist control of veto points, policy is unable to respond to the slowdown. Centrists on both the left and right are discredited and toppled. 

Phase 6: War. Extremists may fight each other in civil wars. Alternatively, geopolitical disruptions may lead to international conflict between new and incumbent powers. Extremists push their governments toward fighting external enemies, assassinating or toppling moderate leaders who refuse to fight. If a country is too weak to fight external enemies, or if no such enemies are close by, civil war results instead.

Phase 7: New Order. Out of the chaos and destruction of the wars emerges a new stable geopolitical order. Left-right extremist conflicts cause society to be exhausted by violence, and moderates slowly return to power. The exigencies of war cause governments to reestablish control over their economies, creating a new set of vested interests and protected incumbents. Inequality is dramatically reduced by destruction of wealth in wars. New incumbents provide a new "social model" that creates economic security for the masses.

This is basically a description of what happened in the late 19th and early 20th century, along with a number of assumptions about why it happened. Obviously there will never be enough data to confirm or refute this complex, slow, and sweeping of a theory - not in our lifetime, anyway. 

But it's interesting to think about recent events as possibly corresponding to this sort of cycle. Here's how the modern world fits into the pattern:

Phase 1: Technological Change. The IT revolution, computers, the internet, automation, mobile communication.

Phase 2: Globalization. The huge wave of global growth between 1990 and 2008. Globalized supply chains. A huge Latin American immigration flow into the U.S., and a huge Middle Eastern immigrant flow into Europe.

Phase 3a: Inequality. Rising income and wealth inequality everywhere. Stagnating wages in rich countries. An explosion in the number of billionaires. Soaring college tuition as workers desperately try to get skills. 

Phase 3b: Cultural Change. Greater economic opportunity and equality for women, due to the service economy. A rise in divorce and single parenthood, and a drop in marriage. Sex culture spreading via the Internet. The decline of religion.

Phase 3c: Financialization: The explosion of financial profits and output as percentages of the total.

Phase 3d: Geopolitical Shift: The rise of China and the recovery of Russia, and (most importantly) the de facto alliance between the two.

Phase 4: Rise of Extremism. The steady polarization of American politics. Skyrocketing use of the filibuster. The Tea Party. The debt ceiling crisis. Trump. Sanders. Fox vs. MSNBC. Le Pen. The British National Party. Syriza and Golden Dawn. The Zaitokukai. Campus anti-speech movements. Online wars between leftist "SJWs" and rightists (GamerGate, etc.). The normalization of the terms "fascist" and "socialist". Illiberalism on both sides of the political spectrum.

Phase 5: Economic Slowdown: The 2008 crisis and the Great Recession, the Euro crisis and the China slowdown and the emerging markets slowdown. 

Phase 6: War. Let's hope not...

I know this big sweeping theory, like all such theories, is untestable hand-waving and blatant overfitting. But it's kind of interesting, isn't it? And also disturbing.

Japanese promises (a reply to John Cochrane)

John Cochrane comments on a recent Bloomberg post of mine. In that post I wrote:

[I]nflation reduces the burden of debt. Japan’s enormous government debt represents the government’s promise to transfer resources from young people (who work and pay taxes) to old people (who own government bonds). Since Japan is an aging society, there are more old people than young people. That makes the burden especially difficult to bear. Young people also tend to have mortgages, the repayment of which is another burden. 

Sustained higher inflation would represent a net transfer of resources from the old to the young. That would increase optimism, and hopefully raise the fertility rate, helping with demographic stabilization.

John agrees that (unexpected) inflation is a partial debt default that has (among many other effects) the net effect of transferring real resources from the old to the young. But he believes this to be unfair, and also cruel:

[L]et us remember where debt actually comes from. The Japanese government borrowed a lot of money from people who are now old, when they were young. Those people consumed less -- they lived in small houses, made do with fewer and smaller cars, ate simply, lived frugally -- to give the government this money. The promise they received was that their money would be returned, with interest, to fund their retirements, and to fund their estates which young people will inherit. 

Noah is advocating nothing more or less than a massive government default on this promise, engineered by inflation. The words "default,"  "theft," "seizure of life savings," apply as well as the anodyne "transfer." I guess Stalin just "transferred resources." 

Yes, Japanese Baby Boomers did make real sacrifices in exchange for the promise of future transfers. Yes, inflation (or cutting pensions, or cutting health care spending) does represent a partial default on those promises. It does indeed represent seizure of life's savings. As for "theft", that's a legal term, but if you want, then sure.

Sorry.

Economics involves tradeoffs. I wish it didn't. I wish resources were infinite, but they're not. And sometimes promises can't be kept as easily as you thought they could be when you made the promise. Imagine - as a limiting case - that an entire generation of fifty million produces only one hundred children. The older generation made real sacrifices when they were young, in exchange for government bonds (and suppose the real resources they gave up were spent on useless bridges to nowhere). In order to keep its promise of resource transfer, the government must now pay back those bonds by taxing just one hundred people.

It's not going to happen, no matter how much people want it to happen. One hundred cannot pay back fifty million. Inflation or default will happen.

In Japan's case, the situation is not so extreme, but the principle is similar. The Boomers, who sacrificed real resources (much of which was indeed spent on bridges to nowhere) in exchange for government bonds, had very few children. Japan's population is shrinking by hundreds of thousands per year, and the rate of decrease is set to accelerate. Paying back the older generation will be very, very hard for those less numerous young people. And forcing the young people to make those payments may well cause them to have fewer kids, helping to perpetuate the problem.

Therefore, hard choices must be made. Resources must be allocated - not the way that Stalin did it, thank God, but in a way that will undoubtedly earn the resentment and disappointment of many honest hard-working citizens, and which will undoubtedly cause hardship for many who do not deserve it.

But if you feel the desire to moralize against this "theft", remember that when the promises were made, the younger generation was not yet able to vote. The seizure of the fruits of their labor, in the form of taxes, goes to pay for expenditures that were made without their consent.

In other words, one way or another, some cruel unfairness is going to happen in Japan. And I think our job is to minimize the cruelty and unfairness as best we can - to "spread the pain" as much as possible while minimizing the pain's overall size.

Some more Cochrane points:

Amazingly, to Noah (and the views he ably summarizes here) this "transfer" will "increase optimism." Hmm. Let's look at the evidence for that. We have seen many large inflations, which wiped out middle-class savings along with government debts. Those events have generally been regarded as economically, politically, and psychologically destabilizing tragedies, not FDR-fireside-chat "optimism"-raising sessions. No surprise that few societies have voluntarily signed up for such treatment as Noah recommends. I would be curious to hear of a single happy historical antecedent. (I mean that. Perhaps I am mistaken in my understanding of Noah's proposal. A successful example might correct me.)

The historical example I had in mind was the sustained high inflation between 1945 and 1955, which substantially reduced the debt that the U.S. had incurred during WW2.

How does a government default benefit young people anyway? It does so if a large amount of tax revenue is being used to pay interest or principal on the debt, and the default is accompanied by a large tax cut for young families. Not by the same level of taxes and increased government spending on more railway-to-nowhere stimulus projects.  Without tax cut, there is no transfer. Noah is strangely silent on the essential big tax cut aspect of his plan.

Let me be silent no more! Yes, tax cuts are the plan! Taxes are crushing the youth!!

Of course, given the large tax hikes that will be required to balance the Japanese budget if transfer payments to old people are not cut, even keeping taxes at their current level would constitute a tax cut. But yes, it's about tax cuts.

Quiz: Find in Japanese (or American) government finances the actual "promise to transfer resources from young people (who work and pay taxes) to old people." If you say "government bonds," you (like Noah) got the wrong answer. The right answer is Social Security, Medicare, and public employee pensions. If Noah wishes to reduce the "burden" of intergenerational transfers, no matter that governments have promised to make those transfers and people have planned their lives around them, the silence on these promises is deafening.

I think Japan should absolutely cut transfer payments to the elderly (I said so in this other post, and will say it again, and said it to the Ministry of Finance people when I met them the other day). The problem is that transfer payments are politically hard to cut, while monetary policy is (probably) much more out of the public eye.

But note that government bonds are another promise to transfer resources from young to old. It's not the wrong answer, it's just part of the total answer.

If the purpose is default, why not just advocate default? 

It's one option. But it's an incredibly extreme option, since it would cause lots of business failures, which would cause massive economic disruption. That would put the country in danger of a coup. Sovereign default is a last-ditch option, but I think it would be better than hyperinflation.

So, according to Noah, a self-induced hyperinflation to generate an economy-wide debt default is necessary

No! Hyperinflation is the worst sort of default, since it causes business failures. What I want is sustained moderate inflation of 4-6 percent.

Anyway, that should answer most of John's points. He describes me as having an "insouciant willingness" to upend the lives of millions. I think I'm anything but insouciant. The lives of millions are going to get upended one way or another - Japan's government has made promises that it can't keep. That's not my choice or my doing. I just want to help figure out ways to minimize the overall suffering and spread it around as fairly as possible.

Hopefully that does not make me Stalin.

Unlearning economics

"Just then the floating disembodied head of Colonel Sanders started yelling

Everything you know is wrong"

- Weird Al Yankovic

The problem with discovering how the world works by intuition alone is that the model space is just enormous. Humans are really really smart, but very rarely are we smart enough to just sit down and think about how the world might work and actually get it right. Our most spectacularly successful leaps of theoretical insight - Newton's Principia, Einstein's relativity stuff, Mendel's theory of inheritance - were all very closely guided by data. The general pattern was that some new measurement technology would be invented - telescopes, plant hybridization experiments, etc. - that would provide some new unexplained data. Then some smart theorists would come up with a new theoretical framework (paradigm?) to explain it, and the new framework would then also explain a bunch of other stuff besides, and so people would switch to the new theory.

How about econ, though? Auction theory - a big empirical success - seems like it came out of pure intuition (though that could just be my ignorance of history). But if econ is like natural sciences, then we should expect that sort of success to be very rare. Usually, theories developed from armchair intuition - no matter how mathematical - will be wrong, just because wrong theories outnumber right theories by such a huge margin.

Right now we're in the middle of an empirical revolution in econ, and - unsurprisingly - a ton of standard, common theories are just not matching reality very well. For example:

1. If you slap some quick supply-and-demand graphs on the board, it looks like minimum wages should harm employment in the short term. But the data shows that they probably don't. 

2. If there's any sort of limits to mobility, then simple labor demand theory says that a big influx of immigrants should depress the wages of native-born workers of comparable skill. But the data shows that in many cases, especially in the U.S., the effect is very small. 

3. A simple theory of labor-leisure choice predicts that welfare should make recipients work less. But a raft of new studies shows that in countries around the world, welfare programs barely reduce observable work effort.

4. Most standard econ theory doesn't assume the existence of social norms. But experiments consistently show that social norms (or morals, broadly conceived) matter to people. 

Again and again, standard ideas - the stuff that most of the undergrad kiddos learn in their Econ 101 classes - are being smacked down by the heavy hand of new data. We're slowly unlearning economics.

Of course, much of the new empirical literature will eventually prove to be non-replicable or poorly designed, but much of it will prove to be solid and reliable; generations of empirical economists will carefully replicate findings and try to extend them to other contexts to see how well they hold up. And the good results will hold up, and theories will be killed as a result.

(Ultimately, that's good for econ theory, since the usual pattern is for better data to produce better theories. And it means more work for econ theorists, since simple theories will be killed first, and the better newer theories will take a lot of effort to make - so there will be jobs and money for theorists. Still, I expect some theorists to complain, because making simple theories is easy and making useful theories is hard.)

But anyway, what this means is that Econ 101 courses around the country probably need an overhaul. New data is rapidly producing a raft of new theoretical facts that students should be learning. Teachers should still teach the simple, classic theories that the new facts are beginning to kill...but mainly as a way to show how data can tell us when we're wrong.


Update: Here's a follow-up Bloomberg post. Maybe Angrist and Mankiw should team up to write the Econ 101 textbook of the future!

Gelman vs. Case-Deaton: academics vs. blogs, again

Case and Deaton, welcome to the blogs.

Prominent academics are often astonished at the rapidity with which the blogosphere occasionally pounces on and dissects their research findings. In this case, it happened to Case and Deaton, authors of a recent much-publicized study entitled "Rising morbidity and mortality in midlife among white non-Hispanic Americans in the 21st century." The pounce was done by Phil Cohen, and - most prominently - by Andrew Gelman. 

The TL;DR version is that rising mortality in some of the subgroups spotlighted by Case and Deaton was increased by a composition effect - the average age within the subgroups increased over the observation period, which pushed up death rates for the aggregated subgroups. If you remove the composition effect, the mortality increase among these groups was considerably less.

Anne Case responded with the consternation typical of researchers first encountering blog attacks:

Case said that she didn’t buy this argument. “We spent a year working on this paper, sweating out every number, sweating out over what we were doing, and then to see people blogging about it in real time — that's not the way science really gets done,” she said. “And so it’s a little hard for us to respond to all of the blog posts that are coming out.”

Academics are used to the cozy, staid world of academia. Responses are slow, polite, and vetted by third parties. Arguments happen in seminars, in office discussions, and at dinners. Disputes are resolved over a matter of years - when they are resolved at all. And never do intellectual adversaries take their case to the general public!

But academics are going to have to get used to blogs. The technological advances of the web have simply made it easier for crowds of outsiders to evaluate research in real time. How often that process produces the "wisdom of crowds", and how often it merely adds unhelpful noise, remains to be seen. Certainly we've seen the internet do both of those things at different times. But blog criticism of research looks like something that's here to stay, and academics whose work appears in the popular press will have to get used to it!

Blog discourse has some distinct advantages - above all, the speed of responses and the diversity of people who get involved in discussions. How often do you see two economists arguing with a sociologist and a political scientist/statistician? That's pretty cool! There is, however, a tendency for blog debates to become too antagonistic. 

I think Andrew Gelman's latest salvo against Case and Deaton falls into this category a bit. He is put out that Case and Deaton have, so far, refused to issue a public mea culpa about what he sees as a major gotcha. Gelman writes up what he thinks such a mea culpa should say, and includes these bits of snark:

Had it not been for bloggers, we’d still be in the awkward situation of people trying to trying to explain an increase in death rates which isn’t actually happening...We count ourselves lucky to live in an era in which mistakes can be corrected rapidly[.]

Gelman is dramatically overstating the importance of what he found! To say that the increase in death rates "isn't actually happening", first of all, is not quite right - Gelman's rough-and-ready composition adjustment removes all of the increase, but more careful examination shows that some portion of the increase remains.

Second, Gelman is kind of assuming that zero is the important benchmark for what constitutes an "increase". He makes sure to point out that the paper's main finding - that American white mortality increased a lot relative to various comparison groups - is not changed by the composition adjustment. But when he claims that the increase "didn't really happen", Gelman is saying that "increase" is an absolute rather than a relative term.

Andrew, you're a stats guy. You know full well that people analyzing time-series data detrend stuff all the time. Measuring increases relative to a trend is totally standard practice! 

So like many blog debates, this one ends up making a mountain out of a molehill. The composition effect was a useful and instructive observation, but it doesn't really change anything about the paper's result. And publicly demanding that the authors engage in an equally public mea culpa over such a non-issue is a little unrealistic. If it leads to rancor in the long term, that will be a shame.

I like what blogs have done for research, but I think we should work to make those discussions less about point-scoring and more about a cooperative, crowdsourced search for truth.

Black immigrants are upwardly mobile

The other day, I noticed something disturbing in a graph from a Brookings report on immigrant mobility:

We see that Hispanics are strongly upwardly mobile from the first to the second generation. Asians are slightly upwardly mobile, but from a pretty high base. Those are both good news. But black immigrants, on average, appear to show downward mobility.

Why would black immigrants be downwardly mobile? I posed the question on Twitter. A smart person called Abraham Bloodshack immediately tweeted this to me:

generational effects? i.e., recent increase in African migration could mean second gen are all quite early in careers

That was smart. We'll follow up on that later. But first, let's review some possible explanations for the mobility disparity:

1. Household size decrease. 1st gen. African immigrant families are probably really big, since Africa is a super-high-fertility place in general, while 2nd gen. families probably have drastically lower fertility.

2. Cohort effect. Recent changes in immigration composition might account for the effect. The average age difference that Abraham Bloodshack mentioned is also a kind of cohort effect. Age differences would affect the black immigrant average much more than the Hispanic or Asian immigrant average if African immigrant families, like the typical African family, are extremely large.

3. Downward assimilation. With many immigrant groups we see the 2nd generation picking up a lot of "bad" behaviors - or at least "bad" for earning power - from their decadent rich-world peers. These include things like not getting married, sponging off parents, and getting involved in the underground economy. 2nd-generation black Americans might be especially susceptible to this sort of thing. (And yes, I know "downward" might be a loaded word; if you want to sponge off your parents and play League of Legends, more power to you.*)

4. Racism. Negative attitudes toward African-Americans might not apply to people with African or Carribean accents, but might be applied toward their more American-sounding kids. (Update: See this excellent comment for more.)

I did a bit of digging on the ol' internet, and turned up this Tyler Cowen post on the subject, from two years ago. Cowen links to two papers (paper 1, paper 2) by Alison Rauh, a Chicago econ PhD, now a research associate at Cornerstone. 

The papers look at personal income, so we don't have to worry about the household size issue. They find broadly the same average income decrease as the Brookings graph, though to a lesser extent. Rauh's first paper attributes the difference to "idleness", her word for "being out of the labor force". Conditional on having a job, 2nd-generation black Americans earn a lot more than 1st-generation - for men, 29 percent more. That's roughly comparable to the average Hispanic increase from the Brookings graph, but from a much higher base. But so many 2nd-generation black Americans are out of the labor force that the overall average income goes down!

That would seem to point to the "downward assimilation" story, perhaps with some racism mixed in. Tyler goes for downward assimilation:

I take this to be a “peer effects are really really important” paper, namely that many of the virtues of immigrant culture are swallowed as the second generation assimilates.  

But this isn't the whole story. In her second paper, Rauh looks at what happens when the generations are adjusted for age, as Abraham Bloodshack might have suggested doing. Here is what she finds:

Note, however, that the average second generation black is more than 8 years younger than the first generation immigrant. Since earnings increase steeply until the mid forties, column 5 uses inverse probability weighting to equalize the age distribution of the first and second generation. Now sons of black immigrants earn $3000 or 8% more than the average first generation black immigrant. The fraction of second generation blacks with a college degree is 35% and therefore 4 percentage point higher than those of the first generation...For women both of these trends seem to be even more pronounced (Panel B). The second generation, once adjusted to have the same age distribution as the first generation, has an earnings premium of $8,600 over native blacks, $6,700 over first generation, and $3,600 over whites.

Lesson: Always read through the papers, don't just skim the Abstract/Intro/Conclusion! 

So if we adjust for age, we see that black immigrants are upwardly mobile, in terms of both income and education. And that upward mobility is from a decently high base for income and a very high base for education. 

In other words, the Brookings graph tells us the wrong story! A lot of those 2nd generation black Americans are either in college, or just starting at the bottom of the career ladder. They will eventually make a lot more money. This is great news.

But although black immigrants are upwardly mobile, they are not as upwardly mobile as they should be. Rauh observes that high incarceration rates play a large part in the fraction of 2nd-generation black Americans not in the labor force. Marriage rates are also much lower. 2nd-generation men are also much less upwardly mobile than 2nd-generation women.

These facts all point to a cultural effect - societal racism and/or downward assimilation, in some combination. Black immigrants are thriving in our society overall, but it's in spite of some headwinds.

Anyway, let this be a lesson: Before you go looking for theories to explain a fact, make sure you've gotten the fact right in the first place!


* Haha, I'm kidding of course. League of Legends sucks.

Case-Deaton and the human capital debate

Everyone is talking about the Case-Deaton paper that shows an increase in mortality among American white people. Most people have noted that the increase is concentrated among less-educated whites. Here is the relevant excerpt from the paper:

The three numbered rows of Table 1 show that the turnaround in mortality for white non-Hispanics was driven primarily by increasing death rates for those with a high school degree or less. All-cause mortality for this group increased by 134 per 100,000 between 1999 and 2013. Those with college education less than a BA saw little change in all-cause mortality over this period; those with a BA or more education saw death rates fall by 57 per 100,000. Although all three educational groups saw increases in mortality from suicide and poisonings, and an overall increase in external cause mortality, increases were largest for those with the least education... 

The final two rows of the table show increasing educational gradients from 1999 and 2013; the ratio of midlife all-cause mortality of the lowest to the highest educational group rose from 2.6 in 1999 to 4.1 in 2013.

And here is the table:

This paper provides some hard data to corroborate a story we have been seeing elsewhere: College-educated Americans are significantly healthier in their personal, family, and social lives. To me this indicates that education has acted to partially innoculate Americans against the overall negative changes that are affecting our society.

This is interesting for the debate on whether education - particularly college - creates human capital or not. Evidence is mounting that college transforms people's lives in ways that are not directly related to natural ability. I suspect that more detailed regressions would find that the difference in social and personal health persists after controlling for income, SAT scores, etc.

Here is an NBER paper by David Cutler and Adriana Lleras-Muney that supports my conjecture. I didn't find any other good-looking recent papers on the topic with a quick Google Scholar search. From the abstract:

There is a large and persistent association between education and health...The education ‘gradient’ is found for both health behaviors and health status, though the former does not fully explain the latter. The effect of education increases with increasing years of education, with no evidence of a sheepskin effect. Nor are there differences between blacks and whites, or men and women...We then consider differing reasons why education might be related to health. The obvious economic explanations – education is related to income or occupational choice – explain only a part of the education effect. We suggest that increasing levels of education lead to different thinking and decision-making patterns. The monetary value of the return to education in terms of health is perhaps half of the return to education on earnings[.]

The Cutler and Lleras-Muney paper also reviews some natural-experiment studies indicating that the effect is causal for pre-college education (though here's one paper they didn't cite, showing no effect). The authors also attempt to control for a large number of personal characteristics that might cause people to be both healthier and more likely to go to college, but find that this only marginally attenuates the relationship. They conclude that it is highly likely that the effect of education on health is, in fact, causal. (If they're right, that's in addition to whatever effect college has on income.)

A tendency toward healthy behavior is a powerful and important form of human capital. It is not at all clear that this kind of human capital can (or will) be created by MOOCs, self-study, or other forms of online learning that are being touted as replacements for college. In fact, right now it looks like the health-related human capital boost from college is all that is holding it together for our upper middle class.