Archive for the ‘Economics’ Category.

Computer Modeling as "Evidence"

The BBC has decided not to every talk to climate skeptics again, in part based on the "evidence" of computer modelling

Climate change skeptics are being banned from BBC News, according to a new report, for fear of misinforming people and to create more of a "balance" when discussing man-made climate change.

The latest casualty is Nigel Lawson, former London chancellor and climate change skeptic, who has just recently been barred from appearing on BBC. Lord Lawson, who has written about climate change, said the corporation is silencing the debate on global warming since he discussed the topic on its Radio 4 Today program in February.

This skeptic accuses "Stalinist" BBC of succumbing to pressure from those with renewable energy interests, like the Green Party, in an editorial for the Daily Mail.

He appeared on February 13 debating with scientist Sir Brian Hoskins, chairman of the Grantham Institute for Climate Change at Imperial College, London, to discuss recent flooding that supposedly was linked to man-made climate change.

Despite the fact that the two intellectuals had a "thoroughly civilized discussion," BBC was "overwhelmed by a well-organized deluge of complaints" following the program. Naysayers harped on the fact that Lawson was not a scientist and said he had no business voicing his opinion on the subject.


Among the objections, including one from Green Party politician Chit Chong, were that Lawson's views were not supported by evidence from computer modeling.

I see this all the time.  A lot of things astound me in the climate debate, but perhaps the most astounding has been to be accused of being "anti-science" by people who have such a poor grasp of the scientific process.

Computer models and their output are not evidence of anything.  Computer models are extremely useful when we have hypotheses about complex, multi-variable systems.  It may not be immediately obvious how to test these hypotheses, so computer models can take these hypothesized formulas and generate predicted values of measurable variables that can then be used to compare to actual physical observations.

This is no different (except in speed and scale) from a person in the 18th century sitting down with Newton's gravitational equations and grinding out five years of predicted positions for Venus (in fact, the original meaning of the word "computer" was a human being who ground out numbers in just his way).  That person and his calculations are the exact equivalent of today's computer models.  We wouldn't say that those lists of predictions for Venus were "evidence" that Newton was correct.  We would use these predictions and compare them to actual measurements of Venus's position over the next five years.  If they matched, we would consider that match to be the real evidence that Newton may be correct.

So it is not the existence of the models or their output that are evidence that catastrophic man-made global warming theory is correct.  It would be evidence that the output of these predictive models actually match what plays out in reality.  Which is why skeptics think the fact that the divergence between climate model temperature forecasts and actual temperatures is important, but we will leave that topic for other days.

The other problem with models

The other problem with computer models, besides the fact that they are not and cannot constitute evidence in and of themselves, is that their results are often sensitive to small changes in tuning or setting of variables, and that these decisions about tuning are often totally opaque to outsiders.

I did computer modelling for years, though of markets and economics rather than climate.  But the techniques are substantially the same.  And the pitfalls.

Confession time.  In my very early days as a consultant, I did something I am not proud of.  I was responsible for a complex market model based on a lot of market research and customer service data.  Less than a day before the big presentation, and with all the charts and conclusions made, I found a mistake that skewed the results.  In later years I would have the moral courage and confidence to cry foul and halt the process, but at the time I ended up tweaking a few key variables to make the model continue to spit out results consistent with our conclusion.  It is embarrassing enough I have trouble writing this for public consumption 25 years later.

But it was so easy.  A few tweaks to assumptions and I could get the answer I wanted.  And no one would ever know.  Someone could stare at the model for an hour and not recognize the tuning.

Robert Caprara has similar thoughts in the WSJ (probably behind a paywall)  Hat tip to a reader

The computer model was huge—it analyzed every river, sewer treatment plant and drinking-water intake (the places in rivers where municipalities draw their water) in the country. I'll spare you the details, but the model showed huge gains from the program as water quality improved dramatically. By the late 1980s, however, any gains from upgrading sewer treatments would be offset by the additional pollution load coming from people who moved from on-site septic tanks to public sewers, which dump the waste into rivers. Basically the model said we had hit the point of diminishing returns.

When I presented the results to the EPA official in charge, he said that I should go back and "sharpen my pencil." I did. I reviewed assumptions, tweaked coefficients and recalibrated data. But when I reran everything the numbers didn't change much. At our next meeting he told me to run the numbers again.

After three iterations I finally blurted out, "What number are you looking for?" He didn't miss a beat: He told me that he needed to show $2 billion of benefits to get the program renewed. I finally turned enough knobs to get the answer he wanted, and everyone was happy...

I realized that my work for the EPA wasn't that of a scientist, at least in the popular imagination of what a scientist does. It was more like that of a lawyer. My job, as a modeler, was to build the best case for my client's position. The opposition will build its best case for the counter argument and ultimately the truth should prevail.

If opponents don't like what I did with the coefficients, then they should challenge them. And during my decade as an environmental consultant, I was often hired to do just that to someone else's model. But there is no denying that anyone who makes a living building computer models likely does so for the cause of advocacy, not the search for truth.

Our Maturing Economy -- The Value of Labor vs. Other Resources

I was reading Stephen Ambose's Band of Brothers the other day, and there was a story in there that really struck me.  One of the paratroopers was hauling his reserve parachute, something usually ditched right at landing, all over Europe with him.  When asked why,  he said he was getting married and he wanted the silk (what parachutes were made of at the time) for his wife's wedding dress.

For some reason this struck me as odd and economically irrational.  It took me a while to figure it out.  I was applying my intuition to the situation based on modern price levels, where the value of the silk would be just a minor part of a wedding dress -- the larger part of the value is in the design and cutting and sewing, ie the labor.  We live in a time where skilled labor is far more dear than basic materials, which are relatively cheap.  The hard part of making a wedding dress would not be getting the silk, but finding someone skilled enough to manufacture the dress.

This soldier grew up in the 1930's, where exactly the opposite conditions obtained.  Skilled labor was cheap.  In fact, unlike today, most every household likely had someone who could sew a dress in their spare time, labor that might well be donated for free to the wedding dress cause.  It was raw materials that were expensive, particularly those like silk that had to be imported at great expense from afar.

Why We Are Seeing Long Waits And Shortages of Doctors and Basic Medicines in Health Care

This is a re-post of an article I wrote in 2012.  I am re-posting it to demonstrate that recent stories about doctor shortages and wait times are absolutely inevitable results of government interventions in the health care economy.

My son is in Freshman econ 101, and so I have been posting him some supply and demand curve examples.  Here is one for health care.  The question at hand:  Does government regulation including Obamacare increase access to health care?  Certainly it increases access to health care insurance, but does it increase access to actual doctors?   We will look at three major interventions.

The first and oldest is the imposition of strong, time-consuming, and costly professional licensing requirements for doctors.  At this point we are not arguing whether this is a good or bad thing, just portraying its inevitable effects on the supply and demand for doctors.

I don't think this requires much discussion. For any given price for doctor services, the quantity of doctor hours available is certainly going to increase as the barriers to entry to the profession are raised.

The second intervention is actually a set of interventions, the range of interventions that have encouraged single-payer low-deductible health insurance and have provided subsidies for this insurance.  These interventions include historic tax preferences for employer-paid employee health insurance, Medicare, Medicaid, the subsidies in Obamacare as well as the rules in Obamacare that discourage high-deductible policies and require that everyone buy insurance rather than pay as they go.  The result is a shift in the demand curve to the right, along with a shift to a more vertical demand curve (meaning people are more price-insensitive, since a third-party is paying).

The result is a substantial rise in prices, as we have seen over the last 30 years as health care prices have risen far faster than inflation

As the government pays more and more of the health care bills, this price rise leads to unsustainably high spending levels, so the government institutes price controls.  Medicare has price controls (the famous "doc fix" is related to these) and Obamacare promises many more.  This leads to huge doctor shortages, queues, waiting lists, etc.  Exactly what we see in other state-run health care systems.  The graph below posits a price cap that forces prices back to the free market rate.

So, is this better access to health care?

I know that Obamacare proponents claim that top-down government operation is going to reap all kinds of savings, thus shifting the supply curve to the right.  Since this has pretty much never happened in the whole history of government operations, I discount the claim.  When pressed for specifics, the ideas typically boil down to price or demand controls.  Price controls we discussed.  Demand controls are of the sort like "you can't get a transplant if you are over 70" or "we won't approve cancer treatments that only promise a year more life."

Most of these do not affect the chart above, since it is for doctor services and most of these cost control ideas are usually doctor intensive - more doctor time to have fewer tests, operations, drugs.  But even if we expanded the viewpoint to be for all health care, it is yet to be demonstrated that the American public will even accept these restrictions.  The very first one out of the box, a proposal to have fewer mamographies for women under a certain age, was abandoned in a firestorm of opposition from women's groups.  In all likelihood, there will be some mish-mash of demand restrictions, determined less by science and by who (users and providers) have the best lobbying organizations.

My longer series of three Forbes articles on this and other economic issues with Obamacare begin here:  Part 1 InformationPart 2 IncentivesPart 3 Rent-Seeking

Update:  Pondering on this, it may be that professional licensing also makes the supply curve steeper.  It depends on how doctors think about sunk cost.


Root Cause

Arnold Kling argues that the root cause of mortgage and student debt problems is not the structure of mortgage and student debt contracts

What these forms of bad debt have in common, in my view, is that they reflect clumsy social engineering. Public policy was based on the idea that getting as many people into home “ownership” with as little money down as possible was a great idea. It was based on the idea of getting as many people into college with student loans as possible.

The problem, therefore, is not that debt contracts are too rigid. The problem is that the social engineers are trying to make too many people into home “owners” and to send too many people to college. Home ownership is meaningful only when people put equity into the homes that they purchase. College is meaningful only if students graduate and do so having learned something (or a least enjoyed the party, but not with taxpayers footing the bill).

The Effect of the Black Death on Labor and Grain Prices

Long time readers will know that if I were asked to relive my life doing something entirely different, I would like to try studying economic history.  Today, in a bit of a coincidence, my son called me with a question about the effect of the Black Death in Europe on labor and grain prices ... just days after I had been learning about the exact same part of history in Professor Daileader's awesome Teaching Company course on the Middle Ages (actually he has three courses - early, high, late - which are all excellent).

From the beginning of the 14th century, Europe suffered a series of demographic disasters.  Climate change in the form of the end of the Medieval warm period led to failed crops and several years of famine early in the century.  Then, later in the century, the Black Death came... over and over, perhaps made worse by the fact that Europeans were weakened already from famine.  As a result, the population of Europe dropped by something like half.

It is not entirely obvious to me what such a demographic disaster would do to prices.  Panic and uncertainty usually drive them up in the near term, but what about after that?  Both the supply and demand curves for most everything will be dropping in tandem.  So what happens to prices?

In the case of the 14th century, we know the answer:  the price of labor rose dramatically, while the price of grain dropped.  The combination tended to bankrupt the landholding aristocracy, who went so far as to try to reimpose serfdom to get their finances back in balance (some things never change).  The nobility pretty much failed at this in the West (England, France) and were met with a series of peasant revolts.  They generally succeeded in the East (Germany, Poland, Russia) which is why a quasi-feudal agricultural system persisted so long in those countries.

But why?  Why did grain price go down rather than up?  Why did labor go in the opposite direction?  I could look it up, but that is no fun.

A first answer, which does not satisfy

People who think of all of the middle ages as "the dark ages" miss the boom that occurred between 1000-1300.  Population increased, and technology advanced (just because this technology seems pedestrian to us, like the plow harness for horses or the stirrup, does not make it any less so).  It was the only time between about 300 and 1500 when the population was growing (a fact we climate skeptics will note coincided with the Medieval warm period).

But even without the setbacks of the 1300's, historians probably would argue that Europe was headed for a Malthusian collapse no matter what in the 14th century.   An enormous amount of forest had been cleared and new farmland created, such that by 1300 some pretty marginal land was being farmed just so Europe could barely keep up with demand.  At the margin, really low productivity land was being farmed.

So if there is a sudden 50% population cut, then that means that all that marginal farm land will be abandoned first.  While the number of farmers would be cut in half, production would be reduced by less than half because presumably the least productive farms would be abandoned first.  With demand cut by half and production cut by less than half, prices would fall for grain.

But this doesn't work for labor.  The same argument should apply.  To get everyone fed, we would actually need less than half the prior labor force because they would concentrate on the best land.  Labor prices should fall in this model as well, but in fact they went up.  A lot.  In fact, they went up not by a few percent but by multiples, enough to cause enormous social problems across Europe.

A second answer, that makes more sense

After thinking about this for a while, I came to realize that I had the wrong model for the economy in my head.  I was thinking about our modern economy.   If suddenly, say, online retailing reduces demand for physical stores dramatically, people close stores and redeploy capital and labor and assets to other investments in other industries.  That is how I was thinking about the Middle Ages.

But it may be more correct to see the Middle Ages as a one product economy.  There was agriculture, period.  Everything else was a rounding error.

So now let's think about the "farmers" in the Middle Ages.  They are primarily all the 1%, the titled nobility, who either farm big estates with peasant labor or lease large parts of their estates to peasants for farming.

OK, half the population is suddenly gone.  The Noble's family has lots of death but someone is still around to inherit.  They have a big estate where growing grain supports their lifestyle as well as any military obligations they may have to their lord (though this style of fighting with knights on horseback supported by grants of land is having its last hurrah in the 100 years war).

Then grain prices collapse.  That is a clear pricing signal.  In the modern economy, that would tell us to get out and find a new place for our capital.  So, as Lord Coyote of the Castle Aaaaargh, I am going to do what, exactly?  How can I redeploy my capital, when it is essentially illiquid?  I can't sell the family land.  And if I did, land prices, along with grain prices and the demographic collapse, are falling through the floor.  And even if I could sell for cash, what would I do for a living?  What would I reinvest the money in?  Running an estate is all I know.  It's all anyone knows.  I have to support myself and my 3 mistresses and my squires and my string of warhorses.

All I can do is try to farm the land I have always farmed.  And everyone else does the same.  The result is far more grain than anyone needs with the reduced population, so prices fall.   But I still need the same number of people to grow the food, irregardless of the price it fetches, but there are now half as many workers available so the price of labor goes through the roof.  When grain demand collapsed, there was no way to clear the excess capacity.  It turns out everyone had a nearly vertical supply curve, because irregardless of price, they had nothing else they could do with their time and money.  You can see now why they tried to solve their problem by reimposing serfdom (combined with price controls, a bad idea for Diocletian and for Nixon and everyone in between).

Of course, nothing is stuck forever.   One way capacity cleared was through the growth of the bureaucratic state over the next 2 centuries.  Nobles eventually had to find some new way to support themselves, and did so by taking jobs in growing state bureaucracies.  They became salaried ministers rather than feudal knights supported by agriculture.  At the same time, rising wealth among the 99% non-nobility allowed kings to support themselves through taxes rather than the granting of fiefs, which in turn paid for the nobility to take jobs in the bureaucracy and paid for peasant armies with guns and bows that replaced the lords fighting on horseback.  So in the long term, the price signal was inordinately powerful -- so powerful it helped reshape much of European government and society.

By the way, if you are reading this expecting some point about modern politics, sorry.  Just something I was thinking about and it helped to write it down.  Comments are appreciated.  I still have not cribbed the answer from the history texts yet.

A Slightly Different Take on High Frequency Trading (HFT)

My guess is that HFT will soon become one of those bogeyman words that people automatically associate with "bad stuff" without ever actually understanding what it means.  But it is worth understanding the underlying problem, and that problem is not high speed or frequency per se.

As I understand it, when an order to buy, say, 10,000 shares of Exxon gets placed, the purchase will get pieced together by searching across multiple servers where offers are listed and putting together the 10,000 shares in bits and pieces from these various servers.  What HFT's are doing (and I am sure this is grossly oversimplified) is that once it sees this order pinging  a server, it runs ahead at high speed to other servers and buys up blocks of Exxon at price A and then offers it up to the pokey buying search when it finally arrives at those servers at A+a bit more.  That "a bit more" may be less than a penny, but the pennies add up and if done right, there is almost no trading risk.

This is bad, though generally not for us small investors but for our mutual fund companies.  For my little trade of 100 shares that might be cleared on the first server, HFT's have no opportunity to play.  Moreover, I may not even notice a penny or two difference in the price I get.  This is a much bigger deal for mutual fund companies and large investors clearing larger trades, where a few pennies can add up to a lot of money.

An exchange always has to be really careful to maintain its image of fairness, and systematically allowing such behavior, called front-running, is not good for the health of the market.   Which is why you are hearing a lot about this.

Here is what you are not hearing, and I will admit that it is all a hypothesis of mine.  But it may well be possible that HFT's actually reduce the total cost of front-running to investors.  It may be that HFT's real crime is that what they are doing is more transparent and visible than what market makers were doing in the past -- ie they are not increasing the volume of front-running, they are just making it more obvious.   I would not be at all surprised if such front-running always existed in market-making (certainly Goldman Sachs has been accused of it) and that HFT's are actually the Wal-Mart or Amazon of front-running -- not doing anything new but doing it cheaper on tighter margins.   Kind of ironically, I suppose this is what efficient markets theory would predict for the market in front-running.

If this is the case, while we would rather see front-running eliminated entirely, HFT's may actually be reducing the cost of front-running and making things more rather than less efficient.

Ideological Turing Tests, Climate, and Minimum Wage

Yesterday I was interviewed for a student radio show, I believe from the USC Annenberg school.  I have no quarrel with the staff I worked with, they were all friendly and intelligent.

What depressed me though, as I went through my usual bullet points describing the "lukewarmer" position that is increasingly common among skeptics, was that most of what I said seemed to be new to the interviewer.   It was amazing to see that someone presumably well-exposed to the climate debate would actually not have any real idea what one of the two positions really entailed (see here and here for what I outlined).  This gets me back to the notion I wrote about a while ago about people relying on their allies to tell them everything they need to know about their opponent's position, without ever actually listening to the opponents.

This topic comes up in the blogosphere from time to time, often framed as being able to pass an ideological Touring test.  Can, say, a Republican write a defense of the minimum wage that a reader of the Daily Kos would accept, or will it just come out sounding like a straw man?  I feel like I could do it pretty well, despite being a libertarian opposed to the minimum wage.  For example:

There is a substantial power imbalance between minimum wage workers and employers, such that employers are able to pay such workers far less than their labor is worth, and far less than they would be willing to pay if they had to.  The minimum wage corrects this power imbalance and prevents employers from unfairly exploiting this power imbalance.  It forces employers to pay employees something closer to a living wage, though at $7.25 an hour the minimum wage is still too low to be humane and needs to be raised.  When companies pay below a living wage, they not only exploit workers but taxpayers as well, since they are accepting a form of corporate welfare when taxpayers (through food stamps and Medicare and the like) help sustain their underpaid workers.

Opponents of the minimum wage will sometimes argue that higher minimum wages reduce employment.  However, since in most cases employers of low-skilled workers are paying workers less than they are willing and able to pay, raising the minimum wage has little effect on employment.  Studies of the fast food industry by Card and Walker demonstrated that raising the minimum wage had little effect on employment levels.  And any loss of employment from higher minimum wages would be more than offset by the Keynesian stimulative effect to the economy as a whole of increasing wages among lower income workers, who tend to consume nearly 100% of incremental income.

Despite the fact that I disagree with this position, I feel I understand it pretty well -- far better, I would say, than most global warming alarmists or even media members bother to try to understand the skeptic position.  (I must say that looking back over my argument, it strikes me as more cogent and persuasive than most of the stuff on Daily Kos, so to pass a true Turing test I might have to make it a bit more incoherent).

Back in my consulting days at McKinsey & Company, we had this tradition (in hindsight I would call it almost an affectation) of giving interviewees business cases** to discuss and solve in our job interviews.  If I were running a news outlet, I would require interviewees to take an ideological Touring test - take an issue and give me the argument for each side in the way that each side would present it.

This, by the way, is probably why Paul Krugman is my least favorite person in journalism.  He knows very well that his opponents have a fairly thoughtful and (to them) well intention-ed argument but pretends to his readers that no such position exists.  Which is ironic because in some sense Krugman started the dialog on ideological Turing tests, arguing that liberals can do it easily for conservative positions but conservatives fail at it for liberal positions.


** Want an example?  Many of these cases were just strategic choices in some of our consulting work.  But some were more generic, meant to test how one might break down and attack a problem.  One I used from time to time was, "what is the size of the window glass market in Mexico?"  Most applicants were ready for this kind of BS, but I do treasure the look on a few faces of students who had not been warned about such questions.  The point of course was to think it through out loud, ie "well there are different sectors, like buildings and autos.  Each would have both a new and replacement market. Within buildings there is residential and commercial.  Taking one of these, the new residential market would be driven by new home construction times some factor representing windows per house.  One might need to understand if Mexican houses used pre-manufactured windows or constructed them from components on the building site."  etc. etc.

A Question I Have Been Asking For Years -- Effect of Passthrough Entities on Income Equality Numbers

Greg Mankiw wonders how much the growth of pass-through corporations like sub-chapter S corps are skewing income trends, particularly for the highest earners.   With a C-corp, an owner only recognizes corporate income when it is passed through as dividends or when they sell the company.  With an S-Corp or LLC, there are no corporate taxes and corporate income is declared in that year, in full, on one's individual 1040.  I asked about this as far back as 2006 and 2007.

cbo pass through entities

This is a Really Good Inflation Chart -- Wish It Would Be Used More Often

Inflation statistics are always kind of hard to read -- what is driving the rise?  Is it across the board or a glitch in one sectors?  The media tries to deal with it by presenting a second number which is the number without the more volatile food and energy number.  The combination of the two gives a bit more information.

But this simple chart is way better.  It shows inflation by component at the same time while showing how much that component is weighted in the overall metric.  Via zero hedge.

click to enlarge

Krugman the Hack vs. Krugman the Economist

I am simply exhausted with Paul Krugman calling people anti-science neanderthals for staking out fairly mainstream economic positions that he himself has held in the past.  It would be one thing to say, "well, I used to believe the same thing but I changed my mind because x, y, z".  That would be a statement to respect.  Instead Krugman 1) pretends he never said any such thing and 2) acts like his opponent's position is so out of the mainstream that they are some sort of terrorist for even suggesting it.

I had an example just the other day.

Here is another, from Ben Domenech:

Yesterday, New York Times columnist and CUNY economics professor Paul Krugman had some very strong words about the position in Republican Congressman Paul Ryan’s new poverty report that American welfare programs discourage work and “actually reduce opportunity, creating a poverty trap.”  In fact, after contrasting the Ryan report’s view on poverty traps with some data on inequality and welfare states, Krugman resoundingly concluded that Ryan’s ideas were a total sham:

So the whole poverty trap line is a falsehood wrapped in a fallacy; the alleged facts about incentive effects are mostly wrong, and in any case the entire premise that work effort = social mobility is wrong.

Despite Krugman’s strong conclusions, however, Ryan’s views about US welfare policies and poverty traps are actually pretty mainstream – cited by people across the political spectrum as a big reason to reform state federal poverty programs.  In fact, a New York Times columnist and Princeton economics professor expressed these widely-held views on the Old Grey Lady’s pages a mere two months ago:

But our patchwork, uncoordinated system of antipoverty programs does have the effect of penalizing efforts by lower-income households to improve their position: the more they earn, the fewer benefits they can collect. In effect, these households face very high marginal tax rates. A large fraction, in some cases 80 cents or more, of each additional dollar they earn is clawed back by the government.”

Even more, the Ryan report’s “poverty trap” analysis is based on the work of the Urban Institute’s Gene Steuerle’s (see p. 7 of the Ryan report), on whom the very same Princeton professor once wrote:

[I]t’s actually a well-documented fact that effective marginal rates are highest, not on the superrich, but on workers toward the lower end of the scale. Why? Partly because of the payroll tax, but largely because of means-tested benefits that fade out as your income rises. Here’s a recent discussion by Eugene Steuerle

That professor, if you haven’t already guessed, was none other than Paul Krugman. 

By the way, can I say how happy the first sentance of this quote makes me, to no longer see my alma mater mentioned in the same breath as Krguman at every turn?

Uhhh, So?

Apparently it is some kind of amazing new insight or quasi-scandal that the Fed seems to care more about inflation than unemployment, at least as measured by the language of its meeting notes.

Call me crazy, but the Fed's job is to manage the currency and money supply, not to manage employment or the broader economy.  I have always assumed that it was understood by all that keeping the value of money stable (ie fighting inflation) was the Fed's priority ahead of other economic issues.  What am I missing here?

Is Occupational Licensing Meant to Block Competition from Ethnic Minorities?

Looking at this map of state licensing regimes (darker is more onerous, with AZ being the worst), it is hard to correlate with states being Republican or Democrat.  That doesn't surprise me, because I have always thought the urge to restrict competition and protect incumbents has always been a bipartisan enterprise.

click to enlarge


So I sat and thought for a minute about my home state of AZ.  Why is it the worst?  We have a pretty good libertarian history here, from Goldwater onwards.  We have at least one fairly libertarian Senator (Jeff Flake).  So what is the deal?

My hypothesis is that it is related to immigration.  The same majority Republican legislators who are generally open to free markets simultaneously have an incredible fear and loathing of immigration.  Perhaps our onerous business licensing regime is driven by nativists wanting to protect themselves from competition by new immigrants, immigrants who would struggle to compete onerous licensing requirements?

So what does this map look like vs. immigrant population density?  Via Wikipedia, here are the states on density of Hispanics

click to enlarge


Hmm, we might be getting somewhere, but its not a perfect fit.  So instead, let's hypothesize that business licensing is aimed at non-white, non-hispanic groups in general (similar to early justifications for the minimum wage as a way to keep black workers migrating from the south out of traditionally "white" jobs).  I cannot get it by state, but the map below by county looks pretty dang similar to the licensing map.  Areas in blue have above average percent of non-whites, red is below average.

Not a perfect fit certainly (one would expect Texas to be more onerous), but perhaps close enough to treat the hypothesis seriously.  I had always thought that I would be the last one to play the race card in a policy analysis, but business licensing tends to have an inherently base motive (protect one group from competition from another group) that is pretty easy to square with racial and ethnic fear.


Want to Make Your Reputation in Academia? Here is an Important Class of Problem For Which We Have No Solution Approach

Here is the problem:  There exists a highly dynamic, multi- multi- variable system.  One input is changed.  How much, and in what ways, did that change affect the system?

Here are two examples:

  • The government makes a trillion dollars in deficit spending to try to boost the economy.  Did it do so?  By how much? (This Reason article got me thinking about it)
  • Man's actions increase the amount of CO2 in the atmosphere.  We are fairly confident that this has some warming effect, but how how much?  There are big policy differences between the response to a lot and a little.

The difficulty, of course, is that there is no way to do a controlled study, and while one's studied variable is changing, so are thousands, even millions of others.  These two examples have a number of things in common:

  • We know feedbacks play a large role in the answer, but the system is so hard to pin down that we are not even sure of the sign, much less the magnitude, of the feedback.  Do positive feedbacks such as ice melting and cloud formation multiply CO2 warming many times, or is warming offset by negative feedback from things like cloud formation?  Similarly in the economy, does deficit spending get multiplied many times as the money gets respent over and over, or is it offset by declines in other categories of spending like business investment?
  • In both examples, we have recent cases where the system has not behaved as expected (at least by some).  The economy remained at best flat after the recent stimulus.  We have not seen global temperatures increase for 15-20 years despite a lot of CO2 prodcution.  Are these evidence that the hypothesized relationship between cause and effect does not exist (or is small), or simply evidence that other effects independently drove the system in the opposite direction such that, for example, the economy would have been even worse without the stimulus or the world would have cooled without CO2 additions.
  • In both examples, we use computer models not only to predict the future, but to explain the past.  When the government said that the stimulus had worked, they did so based on a computer model whose core assumptions were that stimulus works.  In both fields, we get this sort of circular proof, with the output of computer models that assume a causal relationship being used to prove the causal relationship

So, for those of you who may think that we are at the end of math (or science), here is a class of problem that is clearly, just from these two examples, enormously important.  And we cannot solve it -- we can't even come close, despite the hubris of Paul Krugman or Michael Mann who may argue differently.    We are explaining fire with Phlogiston.

I have no idea where the solution lies.  Perhaps all we can hope for is a Goedel to tell us the problem is impossible to solve so stop trying.  Perhaps the seeds of a solution exist but they are buried in another discipline (God knows the climate science field often lacks even the most basic connection to math and statistics knowledge).

Maybe I am missing something, but who is even working on this?  By "working on it" I do not mean trying to build incrementally "better" economics or climate models.  Plenty of folks doing that.  But who is working on new approaches to tease out relationships in complex multi-variable systems?

Krugman vs. Krugman 3 Days Earlier (A New Record For Self-Contradiction)

People like to compare what Krugman writes today in his political hack era with what he wrote in his real economist era.  But this time I do not have to look that far back.

On February 5 and On February 6, Krugman essentially agrees with the OMB review of Obamacare effects on employment, saying that the health care subsidies for lower-income workers would cause millions to work less by reducing the incentive to work, which he called "a good thing."  More here.

On February 9, Krugman returns to a theme he has been hitting on for some weeks now, calling the Republicans anti-science, mean-spririted, etc. for actually believing that unemployment benefits might reduce employment by reducing the incentive to work.  And here is what he wrote on the topic on December 8:

The view of most labor economists now is that unemployment benefits have only a modest negative effect on job search — and in today’s economy have no negative effect at all on overall employment. On the contrary, unemployment benefits help create jobs, and cutting those benefits would depress the economy as a whole.

Yes I understand the shape of the subsidy patterns with income are different, but good God man you cannot reasonably argue that the labor supply curve is sensitive to means-tested government subsidies for one program but not at all for another without a heroic analysis that I cannot imagine and Krugman has not supplied.


Minimum Wage and Teen Unemployment

The other day, when criticizing an incredibly facile minimum wage analysis in the Arizona Republic, I had meant to observe that since minimum wage jobs are such a tiny (1.5% if include jobs that work for tips) portion of the workforce, one should look at more targeted metrics to assess the effect of minimum wage hikes, such as teen employment.

Kevin Erdmann has such an analysis.  He observes, "Is there any other issue where the data conforms so strongly to basic economic intuition, and yet is widely written off as a coincidence?"

Note that there is still some danger, as I wrote before, in measuring employment effects from the implementation date. Businesses plan ahead an many job losses may be occurring between the announcement and the implementation date.  I know we have made all the job cuts we plan to make in response to California minimum wage increases six months ahead of the actual date the wage takes effect.

Update:  The charts are obviously far from a smoking gun.  That is the nature of economic analysis.  In complex and chaotic multi-multi-variable systems, controlled studies are almost impossible and direct correlations are hard to find, and even when found may be coincidence.  As an employer who hires a lot of summer seasonal employees in parks, I would obviously be a natural employer of teens.  But I no longer do so, and it is important to understand that wages are only a part of the equation.  Another major issue is one of liability.  Increasingly, the legal system makes the employer liable for any action of their employees, no matter how boneheaded or how much the action is against all policy and training.   I have enough trouble with employees that have years of good work history -- I am not really excited about taking a chance on an unproven 17-year-old.

This Just In -- Demand Curves Slope Down

Apparently when prices for things are arbitrarily doubled, the demand for them goes down.  Via the New York Times:

On Monday, about 175 employees of the buffet restaurant in the slot-machine and electronic gambling casino in Ozone Park learned that the restaurant had been closed and that their jobs no longer existed. The casino had received plaudits when, in late October, a labor arbitrator issued a ruling that doubled the average pay of workers.


“Everything is done,” said Mariano Cano, 45, a server at the buffet for the past two years. “They just threw us out like dogs. They just gave us a couple of dollars to shut up, and that’s it.”

In October, Mr. Cano’s pay went from just over $5 an hour, plus tips for the drinks he delivered to the tables and dishes he cleared, to around $12, because of the living wage agreement.

This is one of those regulatory overreach paired with corporate cronyism stories, so I won't express any sympathy for the business involved -- it is earning huge rents from insider political deals it cut, and though the NYT does not explain it very well, my sense is that the arbitration requirement on wages was part of that political deal.

But it is amazing to me how much the Left has simply hypnotized itself into believing that minimum wage increases don't affect employment.  If we go back a number of months and look at the article where the NYT announced the arbitration decision, there is not one single mention that there might be some job security issues with forcing a doubling of wages.

Jeannine Nixon looked as if she had hit the jackpot. Ms. Nixon, a customer relations representative at Resorts World Casino in Queens, had just learned that she would be making $40,000 a year, up from $22,300.

“It’s life-changing,” Ms. Nixon, her voice cracking, said on Thursday. “I can finally feel relieved.”

It is amazing to me that it did not even occur to any at the NYT to think that a doubling of worker pay might be anything but a pure bonanza.  I suppose they were blinded by a sense that casino margins were so high (though I find that the public consistently overestimates margins of many businesses, confusing revenues with profits).  Even if the casino is wildly profitable, one had to consider that all activities in the casino were not equally profitable.   Restaurants often have thin margins and 20-30% labor costs.  There is simply no room for doubling them in a business that typically has single digit margins at best (in fact, most restaurants lose money).

There are a number of reasons why people can fool themselves into thinking that minimum wage increases have no effect on employment

  1. The biggest reason is that only about 3% of American workers earn the minimum wage.  So even a large drop in minimum wage job prospects, say by 10%, might only affect total US employment by a few tenths of a percent, a number that might not be seen in the general economic noise.
  2. Minimum wage increases are typically implemented in small steps and announced well in advance.  Looking at employment the day after vs. the day before the actual date of change likely misses most of the effect.  For example, California announced almost a year in advance that minimum wages were going up by 25% in July of 2014.  Our company closed one operation and made substantial reductions in our work force in response, but we made these changes in December 2013, months before the change actually took effect.

Which makes this article in the Arizona Republic by Ronald Hansen one of the worst, most facile bits of economic analysis I have ever seen.

But, at the most basic level, there is good reason to think the minimum wage doesn’t kill jobs.

The minimum wage has gone up 22 times since it was instituted in 1938. There is complete seasonally adjusted data from the U.S. Bureau of Labor Statistics available for 21 of those hikes.

In 15 of those 21 cases, the U.S. economy added jobs in the year after the minimum wage went up.

On 11 occasions, it added more jobs after the hike than it did in the year before the raise went into effect.

This alone suggests that raising the minimum wage isn’t an automatic drag on employment growth.

This is simply absurd for all the reasons I listed above.   I understand how I might find this kind of "analysis" in the comments section of the Daily Kos, but how does one get this past an editor?

Ugh -- Krugman Bringing Climate-Style Argument by Marginalization to Economics

Climate alarmists have mastered the trick of portraying opposition to their theories as not just being wrong, but being anti-science.  For years many scientists who have not looked into climate science at all have reflexively signed petitions supporting the alarmists, in the belief they were supporting science against anti-science. (By the way, time and again when these physicists and Earth scientists have actually later looked at the quality of climate science work, they have been astounded at the really poor quality garbage they were implicitly supporting -- I know, I am in that camp myself).

It looks like Paul Krugman, the most politicized economist ever(TM), is trying to bring the same style argumentation to economics.  If you don't agree with him, you are not just wrong, you are anti-science.  He is Galileo, and you are the ill-informed mystic.

So let me summarize: we had a scientific revolution in economics, one that dramatically increased our comprehension of the world and also gave us crucial practical guidance about what to do in the face of depressions. The broad outlines of the theory devised during that revolution have held up extremely well in the face of experience, while those rejecting the theory because it doesn’t correspond to their notion of common sense have been wrong every step of the way.

Yet a large part of both the political establishment and the economics establishment rejects the whole thing out of hand, because they don’t like the conclusions.

Galileo wept.

There are two other similarities between economics and climate that support this kind of blind (but unwarranted) certainty:

  1. There are few if any opportunities for controlled experiments to truly test cause and effect
  2. There are near infinite numbers of moving parts and variables, such that one can almost always find an analysis that shows your favored variable correlated to something good or bad -- as long, of course, as you are willing to pretend that a zillion other variables weren't changing at the same time which could have equally likely been part of the causation.

Presented with Many Questions, But No Comment

Inequality Metrics Exclude Effects of Government Actions to Reduce Inequality

I have seen this fact a number of times and am always amazed when I read it, since poverty figures are never, ever presented with this bit of context

LBJ promised that the war on poverty would be an "investment" that would "return its cost manifold to the entire economy." But the country has invested $20.7 trillion in 2011 dollars over the past 50 years. What does America have to show for its investment? Apparently, almost nothing: The official poverty rate persists with little improvement.

That is in part because the government's poverty figures are misleading. Census defines a family as poor based on income level but doesn't count welfare benefits as a form of income. Thus, government means-tested spending can grow infinitely while the poverty rate remains stagnant.

Rector argues that poor today is very different than poor in  Johnson's day, and that perhaps we might celebrate a bit

Not even government, though, can spend $9,000 per recipient a year and have no impact on living standards. And it shows: Current poverty has little resemblance to poverty 50 years ago. According to a variety of government sources, including census data and surveys by federal agencies, the typical American living below the poverty level in 2013 lives in a house or apartment that is in good repair, equipped with air conditioning and cable TV. His home is larger than the home of the average nonpoor French, German or English man. He has a car, multiple color TVs and a DVD player. More than half the poor have computers and a third have wide, flat-screen TVs. The overwhelming majority of poor Americans are not undernourished and did not suffer from hunger for even one day of the previous year.

Remember what I presented a while back.  This is what the Left thinks, or wants us to think, American income inequality looks like -- our rich are richer than comparable European welfare states because our poor are poorer.

click to enlarge

And this is what income inequality in the US actually looks like -- our rich and middle class are richer, but our poor are not poorer.  A less redistributionist approach floats all boats.  I compared the US to many European welfare states, using the Left's own data source.  Here is an example, but hit the link to see it all.

click to enlarge

Laissez Faire and the Potato Famine

Via Cafe Hayek

As explained by historian Stephen Davies, after defeating James II in 1690, protestants subjected Irish Catholics to harsh restrictions on land ownership and leasing.  Most of Ireland’s people were thus forced to farm plots of land that were inefficiently small and on which they had no incentives to make long-term improvements.  As a consequence, Irish agricultural productivity stagnated, and, in turn, the high-yield, highly nutritious, and labor-intensive potato became the dominant crop.  In combination with interventions that obstructed Catholics from engaging in modern commercial activities – interventions that kept large numbers of Irish practicing subsistence agriculture well into the 19th century – this over-dependence on the potato spelled doom when in 1845 that crop became infected with the fungus Phytophthora infestans.

To make matters worse, Britain’s high-tariff “corn laws” discouraged the importation of grains that would have lessened the starvation.  Indeed, one of Britain’s most famous moves toward laissez faire – the 1846 repeal of the corn laws – was partly a response to the famine in Ireland.

Had laissez faire in fact reigned in Ireland in the mid-19th century, the potato famine almost certainly would never had happened.

Arnold Kling Provides An Interesting Framework for Economic Growth

I thought this was a useful simple picture from Arnold Kling, vis a vis countries and their economies:

Low Creation High Creation
Low Destruction Corporatist Stagnation Schumpeterian Boom
High Destruction Minsky Recession Rising Dynamism

He suggests the US may currently be in the lower-left quadrant.  Europe and Japan in the upper left.   My sense is that China is in the upper right, not the lower right (too much of the economy is controlled by the politicians in power for any real destruction to occur).

Once a government gains powerful tools for economic intervention, it becomes politically almost impossible to allow destruction to occur, no matter how long-term beneficial it can be.  The US is one of the few countries in the world that has ever allowed such destruction to occur over an extended period.  The reason it is hard is that successful incumbents are able to wield political power to prevent upstart competition that might threaten their position and business model (see here for example).

It takes a lot of discipline to have government not intervene in favor of such incumbents.  Since politicians lack this discipline, the only way to prevent such intervention is by castrating the government, by eliminating its power to intervene in the first place.  Feckless politicians cannot wield power that does not exist (though don't tell Obama that because he seems to be wielding a lot of power to modify legislation that is not written into my copy of the Constitution.).

Wealth and China Through History

The media tends to talk about the growth of the Chinese economy as if it is something new and different.   In fact, there probably have been only about 200 years in the history of civilization when China was not the largest economy on Earth.  China still held this title into the early 18th century, and will get it back early in this century.

This map from the Economist (via Mark Perry) illustrates the point.

economic map


Of course there is a problem with this map.  It is easy to do a center of gravity for a country, but for the whole Earth?  The center in this case (unless one rightly puts it somewhere in the depths of the planet itself) depends on arbitrary decisions about where one puts the edges of the map. I presume this is from a map with North America on the far left side and Japan on the far right.  If one redid the map, say, with North America in the center, Asia on the left and Europe on the right, the center of gravity would roam around North America through history.

Triangle Trade and Physics

You have heard of the Atlantic triangle trade in school.  It is always discussed in terms of its economic logic (e.g. English rum to African slaves to New World sugar).  But the trade has a physical logic as well in the sailing ship era.  Current wind patterns:



Real time version here.  Via Flowing data.

Seriously, click on the real time link.  Even if you are jaded, probably the coolest thing you will see today.  One interesting thing to look at -- there is a low point in the spine of the mountains of Mexico west of Yucatan.  Look at the wind pour through it like air out of a balloon.

Do We Care About Income Inequality, or Absolute Well-Being?

I have a new column up at, and it addresses an issue that has bothered me for a while, specifically:

Do we really care about income inequality, or do we care about absolute well-being of our citizens?  Because as I will show today, these are not necessarily the same thing.

What has always frustrated me about income inequality arguments is that no one ever seems to compare the actual income numbers of the poor between countries.  Sure, the US is more unequal, and I suppose from this we are supposed to infer that the poor in the US are worse off than in “more equal” countries, but is this so?  Why do we almost never see a comparison across countries of absolute well-being?

I have never been able to find a good data source to do this analysis, though I must admit I probably did not look that hard.  But then Kevin Drum (in a post titled “America is the stingiest rich country in the world”) and John Cassidy in the New Yorker pointed me to something called the LIS database, which has cross-country income and demographic data.  I can't vouch for the data quality, but it has the income distribution data and it struck me as appropriate to respond to Drum and Cassidy with their own data.

In short, Cassidy made the point that the Gini coefficient (a statistical measure of income inequality) was higher in the US than for most other wealthy western countries.  Drum made the further point that the US is "stingy" because we do the least to coercively alter this pattern through forced redistribution.

But all we ever see are Gini's are ratios.  We never, ever see a direct comparison of income levels between countries.  So I did that with the data.  I won't reiterate the whole article here, but here is a sample of the analysis, in this case for Sweden which has one of the lowest Gini ratios of western nations and which Drum ranks as among the least "stingy".  This is the model to which the Left wants us to aspire:

click to enlarge


I argue that the purchasing power parity(ppp) numbers are the right way to look at this since we are comparing well-being, and on this basis Sweden may be more equal, but more than 90% of the people in the US are better off.  Sweden does not have a lower Gini because their poor are better off (in fact, if you consider the bottom quartile, the poor are better off in the US).

We are going to see months of obsession by the Left and Obama over income inequality -- but which country would you rather live in, even if you were poor?

Read the whole thing, there are lots of other interesting charts.

Wal-Mart and GINI

I am working on some posts on income inequality, especially as compared between nations.  One thing I have been thinking about is whether the US GINI (a measure of income inequality) is overstated because the US has a tiered retail system that gives lower income people access to lower prices (though for sometimes lower quality goods).  We have Wal-Mart and Family Dollar, discount retail concepts that are rare, and often illegal (due to limitations on retail discounting) in European countries.

On a sort of purchasing power parity basis, I wonder if this has any impact in narrowing the US effective GINI.  Of course, this mitigating factor is somewhat mitigated itself by the fact that a number of urban areas with some of the poorest families (e.g. Washington DC) restrict entry of these low-cost retail establishments.