David Sloan Wilson's econ critique

There's a new website called Evonomics devoted to critiquing the economics discipline. They've got quite a lot of interesting writers and advisors, including (but not limited to) Paul Krugman, Joe Stiglitz, George Akerlof, Robert Shiller, David Colander, Jonathan Haidt, Yanis Varoufakis, David Sloan Wilson, and many more. The site appears to be attracting a ton of traffic - there's a large appetite out there for critiques of economics.

In any case, I noticed David Sloan Wilson is writing a series of posts criticizing econ as a whole, and I thought I'd go through one of them and see what I thought was right, and what I thought was wrong. Wilson can get a little grandiose, likening the econ profession to the orcs of Mordor and himself to Frodo. But let's look past that and talk about the substance. Here are a few points in Wilson's essay that I don't completely agree with.

Wilson:

Economists were very smart, very powerful, and they spoke a language that I didn’t understand. They won Nobel Prizes...Nevertheless, I had faith that evolution could say something important about the regulatory systems that economists preside over, even if I did not yet know the details. After all, financial markets and other regulatory systems are products of cultural evolution, based on psychological processes that evolved by genetic evolution. 

Like I said a while ago, I'm not as confident that evolution is the key to economics. Wilson has spend his career thinking about evolution, and when you have a hammer, everything looks like a nail. But the analogy between cultural evolution and biological evolution is only a loose one -  nobody yet knows how cultural traits get passed on, or even how to define those traits. And there's no guarantee that the principles involved are similar to those that hold in biology. As for genetic evolution being important for economics, that's possible, but I think the overreach of evolutionary psychology - a field that gets criticized as much as econ itself - should give people pause. So I'd be cautious with the cross-disciplinary analogies. But hey, it's surely worth a shot. I don't want to be a naysayer. Give it a try!

Wilson:

Like the land of Mordor, [econ] is dominated by a single theoretical edifice...The edifice is based upon a conception of human nature that is profoundly false, defying the dictates of common sense, before we even get to the more refined dictates of psychology and evolutionary theory. Yet, efforts to move the theory in the direction of common sense are stubbornly resisted.

I'm not so sure I like the emphasis on common sense.. Science usually places a premium on counterintuitive results, and "counterintuitive" is the opposite of "common sense". If common sense was a good guide to reality, scientists wouldn't be nearly so useful, would they? The list of amazing science facts that seem to defy common sense is long - How can matter be both a particle and a wave? Etc. etc.

In econ, common sense might that when two countries trade, one wins and one loses, but the theory of comparative advantage shows that it's very easy for that not to be true. I'm not saying that comparative advantage is always a good theory of trade, but it certainly shows that demanding that all econ theories conform to common sense is overly restrictive.

Wilson:

There is plenty of dissent among economists, and some of the best are working the hardest for change. The folks who award the Nobel Prize in economics don’t like the edifice that much either, and often add their weight by awarding the prize to the contrarians.

The first sentence is definitely true. But I'm not sure Wilson is right about the Nobel a force for rebellion. The Nobel has gone to quite a lot of people whose work forms the very foundation of the "edifice" that Wilson talks about. In fact, the vast majority of the prize winners from the past three decades have worked within the rational, individual-choice framework that Wilson doesn't like. In fact, people like Thomas Sargent, Ed Prescott, and Bob Lucas built the very modern macroeconomics that Wilson recoils at...and they got Nobels for it.

Wilson:

Economists were much more closely attuned to common sense and evolutionary theory before the volcano erupted. Adam Smith observed that people following their narrow concerns somehow combine to make the economy work well, as if guided by an invisible hand. Today we use terms such as emergence and self organization to describe this phenomenon. It is spectacularly demonstrated by social insect colonies.

I also think this isn't really right. Smith was certainly not inspired by modern evolutionary ideas, since On the Origin of Species was published almost a century after The Wealth of Nations. It's not at all clear that Smith believed the "invisible hand" worked analogously to an insect colony; he didn't really specify the mechanism. (Not that insect colony self-organization is a good example of evolution in action, anyway - though ants certainly evolved the biological means to self-organize, the process by which they do so on short time scales is not really very similar to biological evolution in most respects.) In fact, the general equilibrium economics that Wilson doesn't like is supposed to represent Smith's invisible hand.

Wilson:

The people who inhabit the economic models, often referred to as Homo economicus, are driven purely by self-regarding preferences. Mathematically, this means that they care only about maximizing their own interests without reference to anyone else’s interests. What I want cannot depend upon what you want.

Actually, that's not right. When externalities are present, people's utility can depend on other people's consumption. Externalities are very common in mainstream economics, and the concept is taught in every (good) econ undergrad course.

Wilson:

Next, people who inhabit the mathematical kingdom are infinitely wise in pursuit of their self-regarding preferences.

This is, sadly, true. Economists have played around with a number of ways to drop this assumption, but they haven't reached a consensus yet, and - in my opinion - still have far too much trepidation about modeling incompletely-rational behavior.

Wilson:

Once again, these absurd assumptions were driven not by ideological bias but by the tyranny of mathematical tractability. The theory couldn’t be pushed in the direction of common sense because it would become impossible to grind through the equations.

This is partly true. Ideological bias probably does play some part in economists' unwillingness to allow irrationality, or things like social preferences, into their models. Tractability concerns can play a role too. But there's also the underlying problem that it's just very hard to make a general mathematical model of human behavior.

Anyway, I like that Wilson is thinking about economics, and saying provocative, challenging things. There's really very little downside to saying provocative, challenging things, as long as you're not saying them into the ear of a credulous policymaker. At the very least, Wilson will provoke some fun arguments with economists. At best, he'll inspire some to start tinkering around with models based on evolutionary principles. Who knows - that might even get some good results someday!

But in the meantime, I'll keep trying to help nudge Wilson toward an accurate picture of what's going on in the econ world. After all, if you want to be Frodo and sneak into Mordor, you should make sure you have a good map - otherwise you might just end up in New Jersey.


Updates

David has a response up at Evonomics. He writes:

What stands out in Noah’s critique of my piece is its complacency. It’s like he’s discussing the arrangement of deck chairs aboard the Titanic. There is no sense of urgency about the failure of orthodox economics theory and the need to place it on a new foundation... 

Noah misses the point when he observes that evolutionary psychology, the study of cultural evolution, and their applications to economics are nascent enterprises. He seems to think that they can be ignored until they have reached some undefined state of maturity. He doesn’t get that when your ship is sinking, you need to build a new ship and move onto it as soon as you possibly can...

I wouldn't say I'm complacent at all. Macroeconomics obviously needs some big changes - the crisis and Great Recession showed that, though it should have been apparent long before. The "boat" of macro definitely has substantial holes in its hull.

OK, so suppose you decide that the boat can't be patched up or repaired, and it's time to abandon ship - to completely change the way we do macroeconomics. How do you know which boat to jump to? If you jump into a non-seaworthy boat, you could be in even bigger trouble than before.

David assumes that evolutionary thinking is a seaworthy boat for macroeconomists to jump into. The basic argument seems to be that evolutionary thinking has been successfully applied in many other areas - or at least, that David has made a career out of claiming that it can be so applied. He writes:

My life’s work gives me a panoramic view of the human-related disciplines such as religion, sociology, the humanities, and the philosophical tradition of pragmatism, to list a small sample. The very fact that I and like-minded colleagues can do this (it is a perspective, not an individual talent) suggests that evolutionary theory has a generality that orthodox economics aspired to and failed to achieve.

Well first of all, just because David has made a bunch of similar claims about how evolutionary thinking can be applied to a bunch of other disciplines doesn't mean those other claims were right. In fact, not knowing much about religion, sociology, or the humanities, I'm not in a position to evaluate them - nor, I suspect, are most of David's readers. But if there's a general consensus that evolutionary thinking has successfully improved and transformed most fields of humanities and social science, I'm not aware of it. I should probably read more.

But more importantly, there's just no reason to think that a conceptual framework that works in one discipline should work in another. Why should ideas that work for religion -- whatever that even means -- also work for economics?? It just doesn't make sense. There's no grand theory-of-theories that tells us that all disciplines and all phenomena must act according to some basic universal underlying principles. Physics methods don't usually work for biology. Why should we think that biology methods work for economics?

Yes, mainstream economic models weren't a lot of help in the crisis or the recession. But how confident can we be that making economic policy based on evolutionary analogies would be any better? Before I believe that, I'll want to see some good hard evidence.

Freedom of speech in the digital age

I noticed today that the user "Ricky Vaughn" has been kicked off of Twitter. "Ricky" was a key figure in the alt-right on Twitter, which means that he was a proponent of white-nationalism. He thought that nonwhite immigration is ruining America, that it should be stopped, that there are all kinds of natural differences between races, etc. etc. I had a long and pretty civil discussion with Ricky about a year ago, about immigration, etc. I eventually blocked him, not because of anything he did, but because when he replied to or retweeted me it would result in my mentions getting flooded by a hundred screeching Nazis yelling "get in my oven", etc. I just don't have time for that stuff.

Anyway, Ricky has been booted, just as Milo Yiannopolous was booted. The moves echo a general move by conversation platforms to crack down on alt-right harassment - Reddit's banning of the "gas the kikes" subreddit and 4chan's crackdown on GamerGate are other examples.

Obviously this has upset the alt-right a great deal (though with those guys it's hard to tell). The bannings of Ricky and Milo have been met with frantic cries for Twitter and other platforms to uphold "free speech." Many on the left respond that "freedom of speech" only applies to the government, and that private companies can and should do as they please. (This is an interesting reversal of the traditional position, which saw conservatives take a more libertarian stance. It reflects how our culture's dominant values are in the process of switching from traditionalist to modernist.)

In the old days, the liberals would easily win this argument. Newspapers and other traditional media platforms don't just censor, they also edit. They present a very carefully curated set of voices - letters to the editor, op-eds, and articles. No one would argue that the New York Times has a moral obligation to publish op-eds or letters saying "Gas the kikes". The presumption has always been that if you didn't like what the Times was serving up, you could go read a different newspaper, or start your own. In fact, many many people did exactly that. As long as the government didn't send its jack-booted thugs to shut down your paper, freedom of speech was upheld.

However, new media technologies have changed the game. Should our ideal of "freedom of speech" be different in the age of Twitter and Reddit than in the age of the New York Times and the New York Post?

Some say yes. Scott Alexander brings up the important point that many tech platforms are natural monopolies. This applies especially to Twitter and Facebook (though not as much to Reddit). There's only one Twitter, and there's only one Facebook, for a reason - each of these things has a strong global network effect. That's not true of newspapers. Scott sums the dilemma up nicely: 

So instead of “let a thousand nations bloom”, it ended up more like “let five or six big nations bloom that we can never get rid of”.

This argument says Twitter is really more like a public space than a private one. If there can only be one Twitter, then does the company have a moral responsibility to protect unrestricted speech on its platform, above and beyond the responsibility of the New York Times?

I'm naturally sympathetic to this argument. I've always thought that hardcore libertarians take a much too limited view of what constitutes "liberty." Not all power is government power, so local entities like companies do have a moral responsibility to uphold liberty in addition to the government. 

BUT, that's not the end of the story. Remember that in the real world, different freedoms conflict with each other. My freedom to speak my mind on a street corner is compromised if 5 people stand in my face screeching at me at the top of their lungs. But face-screeching is also a form of speech, so if you ban it, those 5 people are having their freedom of speech curbed. 

Traditionally, we usually came down against the face-screechers, with laws against public harassment. Why? I think it's because we recognized that speech that disseminates ideas is more valuable than speech whose purpose is to intimidate others. When forced to choose between two mutually exclusive types of speech, we usually chose to protect the one we deemed less intrinsically harmful to others.

Twitter, as a technology, is unusually conducive to face-screeching. The first reason is that anyone can talk to anyone else. In the real physical world, a mob will find it hard to find you; on Twitter, they always know right where you are. People don't need to get up in your face; they're already there, all the time.

The second reason is that it's very easy to coordinate mobs on Twitter. In the real world, to create a mob, you have to get a bunch of people out of their houses and across town, and you can only recruit the mob from people nearby, and the cops might disperse you while you're forming. On Twitter all you need to create a mob is a hashtag or a call-to-arms by a well-followed leader - the mob forms instantly and can't be dispersed. The sheer volume of harassment on Twitter comes from the fact that there are roving mobs of harassers who spend all day going from target to target. One minute you're talking to your friends and colleagues, the next minute there are a hundred pseudonymous accounts screeching at you. Two hours later they're screeching at someone else, but now you know, if you say the wrong thing, the mob will be back in a heartbeat. 

If you're a really unlucky high-profile person like Leslie Jones (who committed the unpardonable sin of being a black woman and being alive), you become a perennial target, and the mob never goes away until you quit Twitter.

So Twitter, by the nature of its technology, facilitates the kind of speech whose main purpose is the shutting down of other people's speech. It automatically empowers a very small number of harassers - I'm guessing the Twitter Nazis' total population, for example, to be only a couple thousand or so - to intimidate and silence enormous numbers of people who only wanted to say their ideas out loud (or, in Jones' case, just wanted to be there, period).

Twitter knows it has these problems - user growth has flatlined and a number of high-profile users are leaving - and it is finally starting to address them. Human moderation and banning is obviously their first approach. Future strategies might include algorithmic blocking, which Google is already working hard on. But it's possible none of these will work, and the screechers will simply always overpower the non-screechers. That could lead to Twitter becoming a ghost-town, inhabited only by 4chan types, unable to make much money off of advertising. It might be that a technology like Twitter, fun and useful as it is, might not be something that works out in the long run.

But more broadly, internet technologies are forcing us to face a sharper conflict between freedom of idea-expression and freedom of targeted disapproval. The tradeoff faced by Twitter is just an acute version of the tradeoffs faced by Facebook, Google, and any other communication technology with a global network effect. The nature of "speech" changes with the advent of new technology, and our intuitive notion of "freedom of speech" will eventually have to change along with it.  

So what do I think about the banning of Milo, Ricky, and other prominent alt-righters? I'm not at all upset about it. I think it's arbitrary and unfair, and unlikely to bring an end to harassment. But I also think it's probably inevitable. Technologically, banning and corporate censorship seem to be the only way (so far) to create an online world where people who mainly value freedom of idea-expression can coexist with people who mainly value the freedom to yell mean things at other people. That's probably going to lead to a "two-tiered" internet, as Scott Alexander calls it - a "top layer" where everyone plays nice, and a "bottom layer" where genocide jokes and death threats are the order of the day. But maybe that's the only possible long-term equilibrium.

Hunting the Rational Expectations whale

1. Why is Rational Expectations still around, anyway? 

Rational Expectations is (are?) one of the key features of almost every macro model in existence today, and has been for decades. Why? One reason is that it's easy to work with, mathematically - just stick an "E" in front of things, and voila, that's what the agents in your model believe! Another reason is that RE is appealing to folks who think that the government shouldn't be able to trick people consistently. A third reason is that there's just no obvious alternative way of modeling expectations. Classic alternatives like adaptive expectations are rigid, simplistic, and just generally very weak. And more sophisticated alternatives, besides being unwieldy to model, also tend to be hyper-specific - if there are actually a number of different ways that RE fails, each of these models will only catch one of them.

But the real reason is that it's hard to test people's expectations directly. Instead, what macroeconomists do is to just throw the expectations assumption into the model along with a million other things like Euler equations, transversality conditions, industry structure, etc., and then test the model against macro facts. If the model fails to match enough macro facts, or the "right" macro facts, to garner interest, the problem is assumed not to lie with the expectations, but with some other assumption of the model. So RE survives. In Lakatos' jargon, it's part of the "hard core" of modern macro.

2. Observing expectations directly

But in recent years, a few brave souls have started to hunt the great Rational Expectations whale. These intrepid hunters are doing the simple and obvious thing that economists previously didn't dare to do: Just ask people what they expect.

Duh, right? Actually, tons of people have collected and analyzed survey measures of expectations. But there's a reason macroeconomists haven't relied on these surveys much in the past (and it's not just fear of getting yelled at by Bob Lucas). First of all, it's not clear that people's stated expectations have anything to do with their functional expectations. I might say that I think inflation is going to rise, and I might even feel deep in my bones that this is truthy, but does that mean I'm buying TIPS and shorting Treasuries? Not recently, it doesn't. What we care about isn't what people "believe", whatever that means, but what they act as if they believe. 

So the RE-hunters have to take an extra step - they have to show that stated expectations explain actual behavior. And explaining actual behavior requires assumptions, about all the other stuff that might be affecting behavior. And unless you want to be a "heterodox" person shouting in the wilderness, those assumptions are going to have to come from currently respected theory. So that's what the RE-hunters are now doing - showing that stated expectations, e.g. from surveys, explain behavior well when you stick them into popular theories.

3. The RE-hunters

One of the RE-hunters is Andrei Shleifer, who along with coauthors like Robin Greenwood, Yueran Ma and Nicola Gennaioli has started working with survey expectations in finance. Finance is relatively easy to work with because a lot of the popular models are partial equilibrium. Examples of Shleifer's work include this paper on investor expectations and this paper on CFO surveys and investment. He's also made a general equilibrium asset-pricing model, along with some other co-authors, using extrapolative expectations (which surveys seem to show some evidence for). 

In macro it's a bit harder, since most top people now agree that you need general equilibrium for anything important. So the burden of proof is on the RE-hunters - they have to show that an alternative model of expectations, together with some other fairly standard model elements, can explain macro facts in a general equilibrium type model.

One of the most popular non-RE models is the "sticky information" model of Mankiw and Reis, which says that people update their information with a time lag. Along with Justin Wolfers, Mankiw and Reis showed over a decade ago that survey expectations line up with this model in many ways (though as the comments at the bottom of the paper show, they had difficulty persuading certain folks).

Another popular model is Chris Sims' "rational inattention" model. This says that people only get imperfect information because it's costly to filter out noise. Mike Woodford has also worked with models like this.


4. Coibion and Gorodnichenko

Now there is a powerful new team hunting the Rational Expectations whale: Olivier Coibion and Yuriy Gorodnichenko. In 2012, they showed that survey expectations of macreconomic stuff match many of the predictions of sticky information and noisy information models, using a method that's largely agnostic between the two. In other words, they show that stated expectations look like real expectations no matter which of the two models you believe in.

Then in 2015, Coibion and Gorodnichenko came out with a new paper out that's even more general. Their old approach required them to specify the shocks in the economy, but they figured out a way to avoid having to do this. It's really neat. 

Here's the idea. Forecasters make forecasts of things many years in the future. I might forecast the 2020 inflation rate in 2015. But they also update their forecasts - in 2016 I'll make another forecast of 2020 inflation. In general the 2016 forecast will be different from the 2015 forecast. Under RE, the differerence - called the "forecast update" - should have no relation to the eventual forecast miss. In other words, under RE, if my 2015 forecast for 2020 inflation is 2.5% and my 2016 forecast is 2%, that shouldn't mean that my 2016 forecast is more likely to overshoot than undershoot.

But it does. That's what Coibion and Gorodnichenko show. Forecast updates predict forecast misses. That's consistent with a model where information is "sticky" and one where it's "noisy".

That's the paper's central insight, but it has lots more in it than that. The authors test whether the result could come from forecasters intentionally "smoothing" their forecasts, i.e. giving intentionally stale forecasts in order to cater to some clients. But they don't find evidence for this. 

They also find that the degree of "noisiness" or "stickiness" of information varies depending on what's happening in the economy. After big shocks like 9/11, the amount of apparent stickiness/noisiness goes down. But in the Great Moderation, it went up. So when macroeconomic stuff is more important, people either pay more attention, or spend more effort making accurate projections, or whatever. That reassuring.

So Coibion and Gorodnichenko's new method shows that professional forecasts behave like true expectations for a very wide class of models. Not for all models, obviously, but for two of the mainstream alternatives to RE. And this is independent of all kinds of other things, like consumption behavior, industrial structure, or the nature of the shocks that drive the economy. In other words, it's getting harder and harder to dismiss direct measurements of expectations - maybe you really just can ask people what they believe, and get a useful result!

5. So what?

Interesting note: There are both "behavioral" and "non-behavioral" explanations for this failure of Rational Expectations. Information could be "sticky" or "noisy" because information is costly to acquire and process, or because people are just slow to believe or accept new information. (I call this "Smith's Principle": Any behavioral explanation will have an observationally equivalent explanation based on information structure and/or costs. I can name stuff after myself because this is my blog, hehehe. And because I'm too lazy to find out if anyone else has made this claim.) As the authors point out, it's perfectly possible that a bunch of individually rational but information-constrained agents can produce an aggregate forecast that does not take into account all of the available information in the economy:

This predictability of the average forecast error across agents from forecast revisions is an emergent property in both models, i.e. a property which arises only from the aggregation process and not at the individual level. 

Nice to see economists using the term "emergent property"! In other words, it's perfectly possible to have rational agents without Rational Expectations.

But anyway, if you believe this result, it means two things: 1. that forecasts are good measures of expectations, and that 2. sticky/noisy information should be a much more standard feature of macro models. If on the other hand you disbelieve the result, you must believe that A) forecasts don't represent true expectations, and B) sticky/noisy information models aren't good models, and also C) forecasts fail to reveal true expectations in precisely a way that makes it look like sticky/noisy information models are good!

Now, RE defenders may shrug and say "So what? No one expects RE to be exactly right, it's just a useful approximation." But as Coibion and Gorodnichenko point out, that's not true in this case. Sticky/noisy information models differ in very important ways from RE models. Ways that are very important for policymaking. In other words, by linking their test of RE to a model that we already know has economically significant implications, Coibion and Gorodnichenko's claimed failure of RE must be economically significant too. This isn't just a wrinkle on a largely successful theory; it's a claim that the theory fails in big, critical ways.

Nothing is for certain, especially in macro, but this is another harpoon tossed into the side of the Rational Expectations hypothesis.

(No whales were harmed in the making of this blog post. Noahpinion condemns the practice of whaling, and also believes that whale meat tastes like stale hamachi.)

The new heavyweight macro critics

I got tired of lambasting macroeconomics a while ago, and the "macro wars" mostly died down in the blogosphere around when the recovery from the Great Recession kicked in. But recently, there have been a number of respected macroeconomists posting big, comprehensive criticisms of the way academic macro gets done. Some of these criticisms are more forceful than anything we bloggers blogged about back in the day! Anyway, I thought I'd link to a couple here.

First, there's Paul Romer's latest, "The Trouble With Macroeconomics". The title is an analogy to Lee Smolin's book "The Trouble With Physics". Romer basically says that macro (meaning business-cycle theory) has become like the critics' harshest depictions of string theory - a community of believers, dogmatically following the ideas of revered elders and ignoring the data. The elders he singles out are Bob Lucas, Ed Prescott, and Tom Sargent.

Romer says that it's obvious that monetary policy affects the real economy, because of the Volcker recessions in the early 80s, but that macro theorists have largely ignored this fact and continued to make models in which monetary policy is ineffectual. He says that modern DSGE models are no better than old pre-Lucas Critique simultaneous-equation models, because they still take lots of assumptions to identify the models, only now the assumptions are hidden instead of explicit. Romer points to distributional assumptions, calibration, and tight Bayesian priors as ways of hiding assumptions in modern DSGE models. He cites an interesting 2009 paper by Canova and Sala that tries to take DSGE model estimation seriously and finds (unsurprisingly) that identification is pretty difficult.

As a solution, Romer suggests chucking formal modeling entirely and going with more general, vague but flexible ideas about policy and the macroeconomy, supported by simple natural experiments and economic history. 

Romer's harshest zinger (and we all love harsh zingers) is this:

In response to the observation that the shocks [in DSGE models] are imaginary, a standard defense invokes Milton Friedman’s (1953) methodological assertion from unnamed authority that "the more significant the theory, the more unrealistic the assumptions (p.14)." More recently, "all models are false" seems to have become the universal hand-wave for dismissing any fact that does not conform to the model that is the current favorite.  

The noncommittal relationship with the truth revealed by these methodological evasions...goes so far beyond post-modern irony that it deserves its own label. I suggest "post-real."

Ouch. He also calls various typical DSGE model elements names like "phlogiston", "aether", and "caloric". Fun stuff. (Though I do think he's too harsh on string theory, which often is just a kind of math that physicists do to keep themselves busy, and has no danger of hurting anyone, unlike macro theory.)

Meanwhile, a few weeks earlier, Narayana Kocherlakota wrote a post called "On the Puzzling Prevalence of Puzzles". The basic point was that since macro data is fairly sparse, macroeconomists should have lots of competing models that all do an equally good job of matching the data. But instead, macroeconomists pick a single model they like, and if data fails to fit the model they call it a "puzzle". He writes:

To an outsider or newcomer, macroeconomics would seem like a field that is haunted by its lack of data...In the absence of that data, it would seem like we would be hard put to distinguish among a host of theories...[I]t would seem like macroeconomists should be plagued by underidentification... 

But, in fact, expert macroeconomists know that the field is actually plagued by failures to fit the data – that is, by overidentification. 

Why is the novice so wrong? The answer is the role of a priori restrictions in macroeconomic theory... 

The mistake that the novice made is to think that the macroeconomist would rely on data alone to build up his/her theory or model.  The expert knows how to build up theory from a priori restrictions that are accepted by a large number of scholars...[I]t’s a little disturbing how little empirical work underlies some of those agreed-upon theory-driven restrictions – see p. 711 of Lucas (JMCB, 1980) for a highly influential example of what I mean.

In fact, Kocherlakota and Romer are complaining about much the same thing: the overuse of unrealistic assumptions. Basically, they say that macroeconomists, as a group, have gotten into the habit of assuming stuff that just isn't true. In fact, this is what the Canova and Sala paper says too, in a much more technical and polite way:

Observational equivalence, partial and weak identification problems are widespread and typically produced by an ill-behaved mapping between the structural parameters and the coefficients of the solution.

That just means that the model elements aren't actually real things.

(This critique resonates with me. From day 1, the thing that always annoyed me about macro was how people made excuses for assumptions that were either unverifiable or just flatly contradictory to micro data. The usual excuse was the "pool player analogy" - the idea that the pieces of a model don't have to match micro data as long as the resulting model matches macro data. I'm not sure that's how Milton Friedman wanted his metaphor to be used, but that seems to be the way it does get used. And when the models didn't match macro data either, the excuse was "all models are wrong," which really just seems to be a way of saying "the modeler gets to choose which macro facts are used to validate his theory". It seemed that to a large extent, macro modelers were just allowed to do whatever they wanted, as long as their papers won some kind of behind-the-scenes popularity contest. But I digress.)

So what seems to unite the new heavyweight macro critics is an emphasis on realism. Basically, these people are challenging the idea, very common in econ theory, that models shouldn't worry about being realistic. (Paul Pfleiderer is another economist who has recently made a similar complaint, though not in the context of macro.) They're not saying that economists need 100% perfect realism - that's the kind of thing you only get in physics, if anywhere. As Paul Krugman and Dani Rodrik have emphasized, even the people advocating for more realism acknowledge that there's some ideal middle ground. But if Romer, Kocherlakota, etc. are to be believed, macroeconomists aren't currently close to that optimal interior solution.


Updates

Olivier Blanchard is a bet less forceful, but he's definitely also one of the new heavyweight critics. Among his problems with DSGE models, at least as they're currently done, are 1. "unappealing" assumptions that are "at odds with what we know about consumers and firms", and 2. "unconvincing" estimation methods, including calibration and tight Bayesian priors. Sounds pretty similar to Romer.

Meanwhile, Kocherlakota responds to Romer. He agrees with Romer's criticism of unrealistic macro assumptions, but he dismisses the idea that Lucas, Prescott, and Sargent are personally responsible for the problems. Instead, he says it's about the incentives in the research community. He writes:

We [macroeconomists] tend to view research as being the process of posing a question and delivering a pretty precise answer to that question...The research agenda that I believe we need is very different. It’s hugely messy work.  We need...to build a more evidence-based modeling of financial institutions.  We need...to learn more about how people actually form expectations.  We need [to use] firm-based information about residual demand functions to learn more about product market structure.  At the same time, we need to be a lot more flexible in our thinking about models and theory, so that they can be firmly grounded in this improved empirical understanding.

Kocherlakota says that this isn't a "sociological" issue, but I think most people would call it that. Since journals and top researchers get to decide what constitutes "good" research, it seems to me that to get the changes in focus Kocherlakota wants, a sociological change is exactly what would be required.

Kocherlakota now has another post describing how he thinks macro ought to be done. Basically, he thinks researchers - as a whole, not just on their own! - should start with toy models to facilitate thinking, then gather data based on what the toy models say is important, then build formal "serious" models from the ground up to match that data. He contrasts this with the current approach of tweaking existing models.

My question is: Who is going to enforce this change? If a few established researchers start doing things the way Kocherlakota wants, they'll certainly still get published (because they're famous old people), but will the young folks follow? How likely is it that established researchers en masse are going to switch to doing things this way, and demanding that young researchers do the same, and using their leverage as reviewers, editors, and PhD advisers to make that happen? This doesn't seem like the kind of change that can be brought about by a few young smart rebels forcing everyone else to recognize the value of their approach - the existing approach, which Kocherlakota dislikes, already succeeds in getting publication and prestige, so the rebels would simply coexist alongside the old approach, rather than overthrowing it. How could this cultural change be put into effect?

Also: Romer now has a follow-up to his original post, defending his original post against the critics. This part stood out to me as particularly persuasive:

The whine I hear regularly from the post-real crowd is that “it is really, really hard to do research on macro so you shouldn’t criticize any of our models unless you can produce one that is better.” 

This is just post-real Calvinball used as a shield from criticism. Imagine someone saying to a mathematician who finds an error in a theorem that is false,  “you can’t criticize the proof until you come up with valid proof.” Or try this one on and see how it feels: “You can’t criticize the claim that vaccines cause autism unless you can come up with a better explanation for autism.”

Sounds right to me. The old like that "it takes a theory to kill a theory" just seems wrong to me. Sometimes all it takes is evidence.

Books to help you understand Japan

So you want to understand the real Japan. You have a sense that the typical stereotypes are wrong and outdated and full of derp, and you want to go deeper than anime or "crazy Japan" blogs will take you. So you decide to ask your friendly neighborhood Noah: "What books can I read that will help me understand the real Japan at a deep level?"

Unfortunately Noah hasn't had his requisite 3 daily cups of oversteeped black tea, so he grouchily responds: "How about instead of reading a book, you learn the language fluently, live there for a few years, talk to a bunch of people, and learn for yourself?" But then Noah gets his caffeine fix, and the norepinephrine flows freely through his brain, and he says "Oh, BOOKS? Sure, I got books." And walking over to his lovely fake mahogany Wayfair bookshelf, he proceeds to make you the following list:


Culture and Daily Life

1. New Japan, by David Matsumoto

This book, which you can read in an hour or less, basically summarizes a bunch of social psych studies to prove that Japanese culture changed dramatically in the 1980s. Most of the old stereotypes - conformity, group orientation, etc. - used to be pretty true, but now are totally false. Japan used to rate as more conformist, group-oriented, etc. on most measures than the U.S., but now rates as individualistic and independent as the U.S., or more. Feel the power of data destroying your preconceived notions!


2. Nightwork, by Anne Allison

Also from the 90s, but also still relevant. Nightwork is about two things: corporate culture and sex culture. Japan's corporate culture is, without a doubt, the biggest difference between the West and Japan - although Don Draper might find it a little less alien. Sex culture is different too, mostly because most kinds of prostitution are both legal and well-accepted in Japan. This book is about the convergence of the two - about how Japanese companies solidify their corporate cultures by paying for employees to go to pseudo-prostitutes (actually, more like in-house escorts) called "hostesses." Anne Allison, who is one of the best English-language anthropologists who studies Japan, actually lived and worked as a hostess for years to do research for this book. It's really pretty amazing.

See also: Office Ladies and Salaried Men, by Yuko Ogasawara


3. Capturing Contemporary Japan, ed. by Satsuki Kawano

This is just a bunch of vignettes of modern Japanese people's lives. Kind of dry, but pretty wide-ranging.

See also: Bending Adversity, by David Pilling, Goodbye Madame Butterfly, by Sumie Kawakami


4. Fruits, by Shoichi Aoki

This is a picture book of Japanese street fashion from the 1990s. It's mostly just photos, but it also has mini-interviews of colorful kids at the bottom of each page. These are actually excerpted from a magazine of the same name that was popular back then.

See also: Tokyo: A Certain Style, by Kyoichi Tsuzuki


Economics and Business

1. Can Japan Compete?, by Michael Porter, Hirotaka Takeuchi, and Mariko Sakakibara

This is basically a history book about Japan's industrial policy - what it was, where it seems to have worked, where it went wrong (spoiler: almost everywhere, after the 1970s). It also contains Michael Porter's theories about competition, but you really don't need to believe those in order to appreciate the history here.


2. The Japanese Economy, by David Flath

This is an overview for people who have studied econ. The author, David Flath, is a friend of mine (we met on the streets of Tokyo, where he recognized me from my blog photo), and also happens to be the PhD advisor of Karl Smith, the former econ blogger and prof.

See also: Reviving Japan's Economy, ed. by Takatoshi Ito, Hugh Patrick, and David E. Weinstein


3. Reimagining Japan, ed. by Brian Salsberg, Clay Chandler, and Heang Chhor

This is a bunch of articles written write before the big 2011 earthquake, mostly about Japanese business, but also a little about the economy and culture. The authors are a collection of business leaders, writers, consultants, etc.

See also: The Power to Compete, by Hiroshi and Ryoichi Mikitani, Saying Yes to Japan, by Tim Clark and Carl Kay


History and Politics

1. Democracy Without Competition in Japan, by Ethan Scheiner

This book explains a lot about Japanese politics - most importantly, why one party has ruled Japan for most of the postwar period, despite strong democratic norms and a free and fair election system. The reason, according to Scheiner, is that the Japanese fiscal system and electoral system combine to make it easy to basically just buy votes. But you don't have to accept this thesis in order to appreciate the political history here.


2. Japan at War, by Haruko Taya Cook and Theodore F. Cook

Modern Japan's institutions were partially shaped by a big war that almost no one now remembers. This book consists of a bunch of first-hand accounts of Japanese people from that war period. Just remember that these old people's way of thinking is just as alien to that of modern young Japanese people as your grandparents are to you.

See also: The Rising Sun, by John Toland, Dear General MacArthur, by Sodei Rinjiro


3. Japanese Destroyer Captain, by Tameichi Hara

The war memoir of Japan's (probably) best naval captain, this book gives great insight into Japanese military culture. It also shows how traditional samurai culture (the author is from a samurai family) clashed with the modern militaristic culture of WW2-era Japan. Finally, it displays some interesting Japanese cultural quirks - women hitting on men! - that seem to have survived through the ages.

See also: Zero, by Masatake Okumiya, Jiro Horikoshi, and Martin Caidin


On my list to read: Ametora: How Japan Saved American Style, by W. David Marx, Embracing Defeat, by John Dower, Tokyo Vice, by Jake Adelstein

So there you go. Happy reading. If you know of any other books along these lines, send them my way. And remember, even the best books will only scratch the surface of any culture...

Free-market ideology: a reply to some replies

I recently wrote a Bloomberg View post about political-economic ideologies, and how society is quicker to change than individual human beings. The upshot was that free-market ideology seems - to many Americans, and also incidentally to me - to have mostly hit a wall in terms of its ability to improve our lives, and so society will inevitably embrace an alternative, despite the protests of diehard free-marketers.

Bryan Caplan is flabbergasted at the notion that free-market ideology (aka "neoliberalism") has actually been tried in the U.S.:

The claim that "free-market dogma" is the "reigning economic policy" of the United States or any major country seems so absurd, so contrary to big blatant facts (like government spending as a share of GDP, for starters), that I'm dumb-founded.  

This is pretty much exactly the attitude I described in my post! "Of course neoliberalism hasn't failed; we just never really tried it."

David Henderson has a longer and more measured response. He challenges the idea that free-market ideology has demonstrated any failures at all.

Now I could simply make a weak claim - i.e., that free-market ideology seems to have hit a wall, and that in the end, that general perception is much more important than what I personally think. But instead, I'll make the much stronger claim - I'll defend the idea that free-market ideology has, in fact, really hit a wall in terms of its effectiveness.

Exhibit A: Tax cuts. Tax cuts, one of free-marketers' flagship policies, appear to have given our economy a boost in the 1960s, and a smaller boost in the 1980s. But any economic boost from the Bush tax cuts of 2001 and 2003 was so small as to be invisible to all but (possibly) the most careful econometricians. Notably, a number of attempts to encourage savings - capital gains tax cuts, estate tax cuts, and the like - have not halted the steady decline in personal savings rates.

Exhibit B: Financial deregulation and light-touch regulation. It seems clear to me that under-regulation of derivatives markets and mortgage lending played a big role in the financial crisis. The counter-narrative, that government intervention caused the crisis, has never held much water, and has been debunked by many papers. This was a private-sector blowup.

Exhibit C: Light-touch regulation of monopoly. The evidence is mounting that industrial concentration is an increasing problem for the U.S. economy. Some of this might be due to intellectual property, but much is simply due to naturally increasing returns to scale.

Exhibit D: The China shock. While most trade booms seem to lead to widely shared gains, the China trade boom in the 2000s - which free marketers consistently championed and hailed - probably did not. High transaction costs (retraining costs, moving costs, and others) lead to a very large number of American workers being deeply and permanently hurt by the shock, as evidenced by recent work by Autor, Dorn, and Hanson.

Exhibit E: Faux-privatization. True privatization is when the government halts a nationalized industry and auctions off its assets. Faux-privatization is when the government outsources an activity to contractors, often without even competitive bidding. Faux-privatization has been a notable bust in the prison industry, and school voucher programs have also been extremely underwhelming. Charter schools have fared a bit better, but even there the gains have been modest at best.

Exhibit F: Welfare reform. Clinton's welfare reform saved the taxpayer very little money, and appears to have had little if any effect on poverty in the U.S.

Exhibit G: Research funding cuts. The impact of these is hard to measure, but cuts in government funding of research appear to have saved the taxpayer very little money, while dramatically increasing the time that scientists have to devote to writing grant proposals, and increasing risk aversion in scientists' choice of research topics.

Exhibit H: Health care. The U.S. health care system is a hybrid private-public system, but includes a proportionally much larger private component than any other developed nation's system. Free-marketers have fought doggedly to prevent the government from playing a larger role. Our hybrid system delivers basically the same results as every other developed country's system, at about twice the cost. Private health care cost growth has been much faster than cost growth for Medicare and other government-provided programs, indicating that much of our excess cost has been due to the private component of our system, not the public part.

I could go on, but these are the big ones I can think of. In some of these cases, free-market policies seem to have produced some gains in the late 20th century, but by the 21st century all appeared to be either having no effect, or actively harming the economy.

No, this is nowhere near as big a failure as that of communism (though in some ways, notably health care and financial deregulation, we've done worse than the somewhat-socialist nations of Europe). The analogy with communism was a way of illustrating a certain mindset, not to draw an equivalence between the results of neoliberalism and communism.

Also, I personally think there is still scope for many neoliberal policies to improve our economy. Reduced occupational licensing, urban land-use deregulation, simplification of the tax code, and various other kinds of deregulation all seem to show promise. If free-market policies have hit a wall, it's a porous wall - in real life, nothing is as cut-and-dry as in our ideological debates.

But overall, I think the last decade and a half have shown clearly diminishing returns, and sometimes negative returns, from neoliberal reforms. So our society is right to be looking for alternative policy packages. Though that doesn't necessarily mean we'll choose a good alternative - I think Sanders-style socialism would probably be a mistake.

Is Firefly overrated?

The whole world is in need of a break from the madness, and someone on Twitter asked me to do a blog post about whether Firefly is overrated. So instead of econ or politics or serious stuff, let's talk about a television show that got canceled 13 years ago! :-)

The answer to the question in the blog post title is: "Of course not." In the strictest sense, no sci-fi show is overrated, because people in general ought to watch more sci-fi and less of whatever they're watching now. Science fiction has taken over movies, but not TV. Fortunately, with great programs like Black Mirror, Stranger Things, etc., there's still lots of good stuff out there.

But Firefly, more than probably any other show, holds a special place in the heart of my generation of geek-Americans. And it really is a great show. It's consistently at the top of user-generated lists of the best sci-fi shows ever. It's the subject of countless...OK, I'm not even going to finish this paragraph, because we all know that all geeks love Firefly like economists love envelope theorems.

Well, maybe not all geeks. A few have been known to write grumpy Tumblr posts about how the show is racist and/or sexist. But aggrieved identity-politics driven Tumblr rants are like death and taxes, except that Peter Thiel can escape the latter two. 

But buried deep within those overdone rants, I see the seeds of something that really did make Firefly different from other sci-fi TV shows - besides the snappier dialogue and Western motif, I mean. It has to do with the culture the series drew on for its mythos. Firefly was, at its root, a Southern show.

First of all, there's the well-known connection of the Firefly backstory to the Confederacy - Joss Whedon has said that the show was inspired by a Civil War novel. The Browncoats are the Rebs, and the Alliance is the U.S. Mal is the outlaw/pioneer/cowboy who went West after the Lost Cause was lost. Everyone knows that. But Firefly's connections to the South are more cultural than political. Almost every character on the show is some sort of traditional Southern stereotype.

Mal is the classic ideal of the Southern gentleman. He's brave, rigidly honorable, quick to violence...gallant, protective, and respectful toward women. He's sharp and clever but no intellectual. I imagine him as a planter's son from Virginia, who can trace his ancestors back to the Cavaliers in the English Civil War.

Jayne is the poor white Southern guy. He's the overseer, the patroller, the farm hand. He's tough, mean, not too bright, selfish, opportunistic, uneducated, and a bully. He's often the villain of the show, barely kept in check by Mal's aristocratic alpha-male dominance. He's shown improving a bit as the show goes on, though of course it was canceled before this could get very far.

Inara is the fallen Southern belle - the kind of woman who once ruled a plantation, then was forced to prostitute herself to make ends meet after the war, but who still maintains some kind of honor and dignity. An R-rated Scarlett O'Hara. 

Wash and Zoe are the Yankees (despite the fact that Zoe fought for the Browncoats, which is something I suspect Whedon threw in to muddy the parallels a bit). Wash is a geek, effeminate, playing with his dinosaur toys - Jayne calls him "little man." He's somewhat dominated by his wife, who is strong, independent, and sexually uninhibited. They're also a mixed-race couple, which of course was a Southern stereotype of the North. Shepherd Book is a black man whose violent past has been tamed by the civilizing power of Christianity. Kaylee is a simple backwoods country girl. The doctor and River are also Yankees, though they are external plot drivers and hence less stereotypical. 

And as a Southern show, Firefly is notably devoid of intellectual characters. There are no scientists on Serenity - Simon the doctor is the closest thing, and his uppity smarty-pants attitude earns him repeated face-punches from the dashing Mal. Kaylee, the engineer, works by intuition alone.

So the characters are mostly from Southern culture, but so is the theme of the show - it's all about honor. Mal's honor is central to his decent, noble conduct, and is the reason the Serenity crew is sympathetic instead of being a bunch of rascally piratical n'er-do-wells (which they probably would be if the show were Japanese or British). Serenity's captain is an upright man in a lawless, dirty world.

But honor is also the reason why Serenity is out there in space in the first place. Mal and the rest could presumably go live as Alliance citizens - it's not clear how repressive the Alliance government is, but the people seem to be pretty wealthy. We don't know what cause the Browncoats were fighting for. But it's pretty clear that Mal went to space to become an outlaw because his sense of honor makes him refuse to knuckle under to his conqueror. "You can't take the sky from me," as the theme song's lyrics go.

And this, really, is why I was always a little dissatisfied with Firefly. In most space opera shows, the cosmos is vast, exciting, full of wonders - the final frontier. Humans go to space because it's our destiny. We go in search of our better selves - to learn new science, to meet aliens, to teach others about our culture and learn about theirs, and to bring a better, more just order to the Universe. In Star Trek (The Original Series and The Next Generation) we go just to go. In Babylon 5 and Deep Space 9 we go to make the galaxy safe for liberal values. In Robotech and Farscape we go to fall in love with aliens (hey, why the hell not). Battlestar Galactica and Space Battleship Yamato are darker shows about survival, but also depict a struggle to preserve liberal values in the face of overwhelming existential threats. Now you know I've watched way too much space opera in my life.

But in Firefly, why do we - meaning the crew of Serenity - go to space? It's not for a higher purpose. There's no science being done, no galaxy being saved. The show's theme song may be about freedom, but unlike many of the people around them, Mal and his crew aren't colonists. They aren't going to found a new, more liberal republic on the virgin soil of a distant world. They aren't going to build a city on a hill. They have no quest, they seek no knowledge, they fight for no cause, they meet no aliens. Their existence is simply a big fat middle finger to the government in the distance.

And that's fine. It's fun, it's exciting, it makes for some great gunfights. But it doesn't resonate with me. I grew up in Texas, but I don't really have the Southern honor culture, and even if the Civil War hadn't been about slavery the Lost Cause would have little or no romance for me.

That's why Firefly, as fun and as well-written and as adorable as it was, can never quite be the Greatest of All Time as far as I'm concerned. I mean, guys - you're in space. You're on a spaceship. You're flying around from planet to planet, and instead of looking out the window at the incredible sweep of the unknown, you're thinking about your honor, and how you lost a war, and how to earn your next dollar. There's nothing wrong with that, but it's not the stuff of inspiration. I don't know about y'all, but when I gaze up at the night sky, I hope my first thought isn't "Damn...somewhere out there is a place where I could evade some federal regulation."

No, U.S. elections are not "rigged"

Tyler Cowen, my esteemed Bloomberg View colleague, has a post about Donald Trump's comments predicting a "rigged" election. Though Tyler states explicitly that he is not defending Trump's comments, the post certainly reads like a defense. Tyler's main points seem to be:

1. Elections really are "rigged" in some sense, and

2. Accusations of election "rigging" often come from the Left.

I don't want to put words in Tyler's mouth, though, so I'll repost much of his post:

[O]ver the last few years or indeed decades I also have seen the following: 

1. Numerous arguments insist that money buys elections and campaign finance reform is imperative... 

2. Numerous arguments that Republican-backed voter registration requirements are keeping significant numbers of voters, most of all minority voters, away from the polls... 

4. Do we not all teach the Gibbard-Sattherthwaite theorem to our Principles classes on week three?  In case you forget, the theorem shows that under some fairly general assumptions elections processes are manipulable in a rigorous sense... 

5. A related branch of social choice theory, stemming from Dick McKelvey’s work in 1979, suggests that when the policy space has more than one dimension, the agenda setter in Congress has a great deal of power and typically can shape the final outcome... 

6. Major political scientists from schools such as Princeton tell us that elites determine policy and ordinary voters have very little say in what happens... 

7. The American electoral system is designed to give the two major parties a huge initial advantage... 

How many Democrats have alleged that the 2000 Presidential election was rigged?  Or that today most Americans want some form of tougher gun control, but that the system is rigged against that outcome happening?

Many people are not a big fan of this post. I would count myself among that number. Here are my points in response to Tyler:


Point 1: Let's not muddy the definition of "rigged". 

When most people hear the word "rigged" in the context of an election, they probably think that means the results have been falsified - that the numbers of votes recorded for each candidate differ meaningfully from the number actually cast.

To most people, a "rigged" election probably does not mean that the franchise ought to have been extended to disenfranchised groups. For example, in 19th century America, women could not vote. That was bad. But were all 19th century American elections therefore "rigged"? Most people would say no. Similarly, there is a good argument for extending the franchise to 17-year-olds in America right now. If we eventually do that, would that mean that all elections in the 20th century were "rigged"? Again, most people would say no.

Similarly, I've never heard of anyone who says that tactical voting is a form of election-rigging. Since tactical voting is universal (that's what Gibbard-Satterthwaite is about!), it also doesn't seem very helpful to label this a form of "rigging".

How about campaign finance? There are certainly a few people on the Left in America who would define this as election-rigging. I personally think that's silly. First of all, most evidence shows that money doesn't really give that much of an electoral advantage. Second of all, stringent campaign finance laws - such as those found in Japan - will still result in some groups and individuals having disproportionate power over election outcomes. Again, it seems worse than useless to define something that is inevitable and universal in a democracy as "rigging".

The only item Tyler mentions that seems to me like it could significantly count as vote-rigging is intentional disenfranchisement of voters who are officially afforded the franchise. For example, if eligible voters are intentionally and systematically purged from voter rolls to produce a certain outcome, that probably counts as "rigging". There is at least an outside possibility that this sort of manipulation made a difference in Florida in the 2000 election, thus throwing the election to Bush.

But when Trump says that the election will be "rigged", he doesn't mean any of these things - he's suggesting that vote totals will be falsified.


Point 2: Watering down the definition of "rigging" gives aid and comfort to those who would deligitimize our democracy.

If politicians like Trump consistently claim that election results are falsified, it erodes confidence in the electoral process itself - the people on the losing side will distrust the results of any election. That seems like it could eventually lead to a lot of bad outcomes. Election losers, convinced they actually won the vote, could become more intransigent and refuse to work with winners. Polarization could increase, eventually leading to outright civil conflict and the disintegration of the nation. Support could increase for military coups to depose election winners on the grounds that these winners were not elected legitimately. In other words, false claims of election-rigging seem pretty clearly to lead to the breakdown of our institutions, our democracy, and our country itself.

Now, I think those are bad things. Maybe Tyler disagrees. Though he has affirmed his support for democracy in the past, his mind might have changed since 2008. Certainly not all of his colleagues at GMU support democracy as the best system. Similarly, Tyler might believe that the United States of America ought to be split up, along regional, economic, or ethnic lines - or that nation-states themselves shouldn't exist. Certainly, there are others who do believe this.

But I believe that countries where democracy has lost its popular legitimacy, like Russia, Turkey, and Thailand, have not seen good outcomes over the past couple of decades. I also pretty strongly believe in nation-states, and in the United States nation-state in particular. So I think that when Tyler claims that U.S. elections are "rigged" in any substantial sense, it is probably a bad thing.

Of course, I support calls for ensuring that the franchise be extended as broadly as possible, and I'm interested in improving our campaign finance laws, but - see Point 1 - I don't think that calling for these reforms is anything even remotely similar to making allegations of election-rigging.


Point 3: Just because some on the Left do this doesn't make it OK for Trump to do it, nor is there an equivalence between the two.

Yes, there are some people on the Left in America who claim from time to time that elections, especially Democratic primaries, are "rigged". These claims are very rare, but I have heard them, especially from diehard Sanders-then-Stein supporters in the current election. Here is a Salon column alleging "rigging", but defining rigging down much as Tyler does. Here is an Inquisitr article alleging true election-rigging, i.e. vote-falsifying.

I see these allegations as obviously false, reprehensible, and dangerous in much the same way Trump's are. But to point out that "the Left does it too!" only reinforces the need to fight back against delegitimization of our democracy. It does not merit a shrug or a "Hey, dude, both sides do it".

Also, there is an asymmetry here. Diehard Sanders-then-Stein supporters are a fringe, and there will always be a fringe in politics. Trump is the nominee of one of the two major parties. Al Gore certainly never alleged vote-rigging in 2000, even after everything that happened in Florida. There is no equivalence at all here, and to try to draw one is a de facto defense and excusal of Trump's dangerous, unacceptable behavior.


So for these reasons, I am not a big fan of Tyler's post. American elections are not perfect, but - unless there is major evidence that has not yet come to light - they're pretty darn good. And Trump's questioning of their legitimacy is truly unprecedented, and not a part of partisan business-as-usual.


Updates

On Twitter, Rajeev Ramachandran hits the nail on the head:

[T]here's a diff b/w "systematically favours X" and "result won't depend on votes actually cast". The first calls for reform. The second is a call to armed insurrection.

Yes. Exactly. I couldn't have said it better (as evidenced by the fact that I didn't!).

Here is some new evidence that Republicans, but probably not Democrats, are starting to question whether votes are counted accurately in American elections. I view Tyler's post as contributing to this very negative and asymmetric trend.

As Trump intensifies his campaign to preemptively delegitimize the election result, Tyler's post is looking more and more spectacularly ill-timed...

How are Milton Friedman's ideas holding up?

I recently wrote a Bloomberg View post about consumption Euler equations, and how these are increasingly being targeted as a broken piece of macroeconomics. I traced the idea back to Milton Friedman and the Permanent Income Hypothesis, and Bloomberg decided (wisely) to go with Friedman for the headline. "Economists Give Up on Milton Friedman's Biggest Idea" is probably going to get orders of magnitude more clicks than "Economists Search for Replacement for Infinitely Lived Perfectly Far-Sighted Model of Consumption Smoothing".

BUT, anyway, Emily Skarbek decided that Uncle Miltie needed some defending, and wrote a blog post praising his legacy. Most of the post discusses stuff that I didn't touch on in my Bloomberg post, since I was only talking about the PIH. So I decided to do a post about Milton Friedman's overall legacy - actually, much too big a topic to do justice to in one post, but hey, that never stopped anyone before, so what the heck! I pitched it to Bloomberg, and they said "But didn't you just do a Milton Friedman post??", so on the blog it goes.

For some reason, Friedman is treated a bit like a secular saint in policy discussions. If you criticize "Idea X", fine. We can have an argument. But if you criticize "Milton Friedman's Idea X", then WHO ARE YOU, LOWLY WORM, to criticize the great FRIEDMAN?? If you say government is a lot more useful and important than Reagan and Thatcher and Art Laffer and Friedrich Hayek and Ed Prescott and Greg Mankiw think, well, fine, that's your opinion. But if you say government is a lot more useful and important than Milton Friedman thought, then you're wrong wrong wrong and don't you know that Friedman proved government was bad in the 70s?? Etc.

OK, I might be exaggerating as an excuse to use lots of capital letters and italics, but Friedman is such a towering intellectual that criticizing him does feel a bit like tipping a sacred cow. Fortunately I'm from Texas, where cow-tipping is a way of life.

So I, a nobody, shall proceed to grade the multifarious ideas of the great Friedman. Let's start with his macroeconomic ideas, and leave the policy ones for a follow-up post. As of 2016, how is each of Friedman's ideas holding up?


PART 1 - MACRO IDEAS

1. Permanent Income Hypothesis

As I wrote for the Bloomberg post, economists figured out by the 90s that the PIH doesn't look strictly true - there are lots of hand-to-mouth consumers out there. And natural experiments tend to find that people consume windfalls to a fair degree. What we don't know is why some consumers smooth and some consume hand-to-mouth, or whether and how it's state-contingent. Yes, the idea of a mechanical hand-to-mouth consumption function is dead - many people obviously are forward-looking to some degree under many conditions. But the strong form of the PIH - perfectly forward-looking consumption smoothing - doesn't look like a good approximation to reality.

Oh, and here's Skarbek's defense of the concept:

It seems to me that the PIH is a useful way to understand personal investments decisions over one's lifetime. For example, why young people who expect (even if inaccurately in many cases) to have high earnings after college incur student loans instead of directly entering the workforce. Or why people take out 30 year mortgages to buy homes.

Sorry, but "I have seen instances of people borrowing large amounts of money" doesn't tell us much about consumption smoothing. But even if it did, these are not good examples. A mortgage doesn't entail taking on net debt, since the value of the loan is the same as the value of the asset you acquire. And education is generally regarded as investment, not consumption (though some might argue). So, no.

A more sophisticated defense of the PIH is that we can always find some utility function that makes it look like people are smoothing consumption. But this defense is also bad, because A) it makes the PIH totally vacuous, and B) utility-function-mining is just going to get you something that fails out of sample, and you'll have to go mine for a different function, etc.

But the most common defense is: "But the PIH doesn't say all consumers are perfect smoothers, only that people do some amount of consumption smoothing." Fair enough; β>0 is technically a hypothesis, right? But if your hypothesis is only about a sign and not a magnitude, it generally isn't that useful.

Grade: C


2. Money growth targeting/k-percent rule

This idea was adopted in the U.S. between 1979 and 1982. But as Bennett McCallum has documented, the Fed failed to hit its targets:

[T]he Fed did not succeed in improving its record of money stock control. Instead, the realized growth rates for the years ending in the fourth quarter of 1980, 1981, and 1982 were again outside the specified target range, as indicated in Table 1-3. And monthly values of the growth rate were highly variable, as can readily be seen from Figure 1-1. This is especially striking, of course, because the special operating procedures of 1979-1982 were designed precisely for the purpose of improving money stock control so as better to achieve the monetary growth targets!

As it turns out, central banks just aren't very good at controlling the money supply. McCallum also speculates on what effects the failed attempt to target money growth rates might have had:

What, then, were the results of this experiment? In one respect the Fed's attempts were successful: by September 1982 the U.S. inflation rate had been reduced from around 11 or 12 percent (per year) to a magnitude in the vicinity of 4 or 5 percent. Other aspects of the outcome were not as planned, however, and were highly unpopular with the public and with most commentators. Of these undesirable side effects, four will be mentioned. First, short-term interest rates rose to levels unprecedented in U.S. history. Over the month of May 1981, for example, the 90-day Treasury bill rate averaged 16.3 percent. Second, the extent of month-to-month variability of interest rates was greater than ever before. Third, in 1981 a recession began that was the most severe since the Great Depression of the 1930s; the nation's overall unemployment rate climbed over 10 percent in the second half of 1982. So while the economy was relieved -- at least temporarily -- of the inflationary pressures that it had been experiencing for about a decade, this relief was apparently obtained at the cost of an unwelcome recession and the associated loss in output.

In any case, the failure of money supply targeting caused central banks to switch to a mix of interest-rate targeting and inflation targeting. 

Grade: D-


3. Quantity Theory of Money

This is probably Friedman's most famous idea - the notion that "inflation is always and everywhere a monetary phenomenon." Unfortunately, it's hard to tell if it's right, because it's a vague idea. First, you have to define the money supply (Are bonds money? Etc.). Next, you have to specify the lag of the effect - if money has a long and variable lag on inflation, as Friedman thought, it'll be hard to pin it down empirically. But anyway, tests appear to be generally in favor of the hypothesis. Here's an abstract from a 2001 discussion paper by Paul DeGrauwe and Magdalena Polan:

Using a sample of about 160 countries over the last thirty years we test for the quantity theory relationship between money and inflation. When analysing the full sample of countries we find a strong positive relation between the long-run inflation and money growth rate. The relation is not, however, proportional. The strong link between inflation and money growth is almost wholly due to the presence of high (or hyper-) inflation countries in the sample. The relationship between inflation and money growth for low inflation countries (on average less than 10% per annum over the last 30 years) is weak. We find that the long-run average inflation and country-specific factors have a significant influence on the strength of the relationship. We also confirm that money growth and output growth are orthogonal in the long-run; i.e. higher growth rates of money do not lead to higher growth rates of output.

And here is a table from their literature review:

So, generally pretty good support for Friedman's idea in high inflation countries (which are probably the main cases Friedman and everyone else cared about), though not so much when inflation itself is low. In particular, at the Zero Lower Bound (or maybe just more generally in a long disinflationary stagnation after a financial crisis), velocity seems to fall off substantially:

So although high inflation appears to coincide with high money supply growth, the correlation does seem to break down for economies like ours and Japan's.

Also, studies like these can't isolate causality, so there's always the possibility that high inflation itself boosts the money supply, by increasing bank lending and/or politically forcing the central bank to print more money. To my knowledge, this is not well-known.

Grade: B


4. Friedman Rule

This is the idea that nominal interest rates should be set at zero. It generally contradicts the k-percent money growth rule, unless setting rates at zero just happens to make the money supply grow at a constant rate (how much of a PR badass are you if you can get your name on two mutually contradictory rules?). Interestingly, the Friedman Rule is based on Neo-Fisherism - it says that rates should be at zero because in the long run, low interest rates are deflationary and mild deflation is what we want.

The idea that deflation is good has probably not stood the test of time, as most people agree that it has been damaging to Japan's economy. People have generally agreed on inflation targets of 2 percent, rather than negative inflation targets. But interestingly, zero or near-zero nominal interest rates have now become the global norm, at least in the developed world:

So it seems to me that no one really knows what to make of the Friedman Rule. Everyone is doing it, but for essentially the opposite of the reason than Friedman envisioned. It's a weird world out there, folks.

Grade: C+


5. Rejection of Fiscal Stabilization Policy

This appears to have been a big bust. Whatever monetary policy has or hasn't done, it has proven incapable, by itself, of pulling economies out of long slumps. Meanwhile, most of the evidence we have - which is weak evidence, because it's macro, but nevertheless is all we have - seems to indicate that fiscal policy works, even if we don't understand exactly why it works (see here, here, and here for example). Moreover, there is a growing recognition that what often matters is the combination of fiscal and monetary policy, and that fiscal policy can cancel out the effects of monetary policy. This may be why governments around the world still engage in fiscal stimulus when times get rough.

The poor quality of macro data saves Friedman from getting an F on this one.

Grade: D


6. Floating Exchange Rates

Lots of countries have certainly gotten into trouble trying to peg their exchange rate too high - this generally leads to a devaluation, capital flight, and a "sudden stop." But some countries (China) seem to have gotten some good results by pegging their exchange rates low during their catch-up growth phase, while using capital controls to prevent inflation. Also, a lot of countries have "managed floats", where they pretend to float their currencies but don't really do it. Anyway, to my knowledge, the data is just too poor and sketchy here to know which kind of exchange rate regime is really optimal, or whether this depends on the situation. Basically, I think we don't know much more about this now than we did in Friedman's day. Though I could be wrong.

Grade: Incomplete


7. Natural Rate of Unemployment

Basically, this is just the idea that unemployment is mean-reverting to some slow-moving number. Looks pretty true for the U.S., less so for other developed countries:

Of course, you can claim that in the other developed countries, big structural shifts happened that changed the natural rate. Unfortunately, that's just a fudge factor, and attempts to explain these changes with easily observable structural changes (e.g. taxes) haven't gone so well.

One one level, it's pretty obvious that there's some floor to unemployment - there will always be people between jobs, and people who don't want to work but who claim they do. The presence of a natural floor means that if a country keeps trying to put everyone to work, but keeps suffering negative shocks, unemployment will appear to oscillate. You can then draw an average line through that bouncy time series and call it the "natural rate". But in this case, the real things would be the unemployment rate floor and the average size of recessions - not the "natural rate".

So it's just not clear how useful this concept is, without some way to anticipate what the "natural rate" should be.

Grade: C+


8. Adaptive Expectations

This is the idea that people's expectations of future inflation (or other economic variables) is basically just some moving average of recent past inflation.

In fact, we do see that people's past inflation experiences tend to influence their expectations, but at a very very long time lag - basically, people's entire life. And it might be a lifetime average rather than a moving average.

Anyway, it seems to me that if you write down models with a simple, precisely specified model for adaptive expectations, with fixed lags etc. etc., it won't fit the data very well. But things like Bayesian priors and inattention will create learning effects that make expectations look like they have an adaptive component. People don't use Friedman-style adaptive expectations in models anymore, but A) it's unclear whether what they do use works well, and B) more sophisticated learning-based models seem to be popular. So this seems like a case where a simple Friedman idea contains an important principle that shouldn't be taken too far, and inspired a line of work that is interesting and still in progress.

Grade: B


9. Friedman-Savage Utility Function

Most decision theory researchers now realize that risk aversion can be positive or negative depending on the size of the gamble. Friedman's specific form for the utility of consumption is probably not that useful, but the basic idea - which has persisted into theories like prospect theory, salience theory, and others - is sound. People definitely do seem to buy both life insurance and lottery tickets.

Grade: B


10. Friedman Test

Sure, looks legit.

Grade: A


Overall Grade: C+

Friedman's macro ideas were enormously influential, and probably made very crucial points at the time they were introduced. However, they suffer from one fatal flaw: They are macro ideas. Macreconomics does not easily yield its truths to the probing mind, given uninformative data and the complexity of the thing. Plus, it's likely that big structural changes make it such that the discipline has few eternal verities - what describes the economy well in 1976 might have little to do with the events of 2016. So while "C+" looks like a harsh grade, I'm not sure what other macroeconomic thinker has done better. My favorite macroeconomists, like Bob Hall or Chris Sims, tend to be much more cautious and circumspect than Friedman - the smartest researchers seem to have realized that big, Friedman-style ideas will almost always fail to a substantial degree.

Coming up next: Friedman's policy ideas!