Zombie economics gets a mulligan: or, how Obamacare caused the Global Financial Crisis

Freakonomics is like a zombie club med. You should trawl through the archives, John. So much! One of my own favorite moments is Levitt’s link to an interview in which Gary Becker, of all people, explained that his whole project in economics is to help poor people – which surely is up there with the supposed statement of the captain in Vietnam, we had to destroy the village in order to save it.

Levitt will be remembered primarily as the subject of one of the better polemics of our time, written by another member of the U of C faculty. For those who haven’t read it:
http://www.realclimate.org/index.php/archives/2009/10/an-open-letter-to-steve-levitt/#more-1488
The Comments section of this post is notable for Levitt’s whining about the exposure of his slipshod arguments.

I’m not sure why there are strike out marks in that comment. Oh well.

Which are you tackling for the (mandatory) sequel – vampire ideas in economics or werewolf ideas in economics? The first is a little more obvious but the fad may have peaked by the time it hit the shelves. Plus you could use the subhed “theories that put hair on their chests (or maybe palms)”

Thanks, Kieran.

Personally I would say if global financial markets are so fragile that the possibility of a Democrat victory in the US nearly destroys them, this is an argument for the complete dismantling of existing financial institutions, probably to be replaced by something with far more government intervention/control to keep it stable.

If an idea cannot be refuted in any possible way, that means it is a worthless idea, as it can be true in any future circumstances, and therefore has no predictive power.

Huh? Newton’s laws are subject to empirical test.

@Zamfir, what Stuart said.

Even if we take Mulligan’s stupid ‘theory’ as true, it would be an argument for dismantling the financial markets. It does not transfer blame for the crash, it does not even create additional blame. It would not be the fault of the Beetles if the markets had crashed because of the release of the Beetles song Helter-Skelter.

Like many US political statements, it is an absurd statement that is only intended to be believed by the people who listen to Limbaugh or watch Glenn Beck. It can be a very profitable type of theory for the person peddling it. Certain types of politician are always on the lookout for court augurs who can be relied on to provide an ingenious and superficially credible justification for whatever requires explanation.

Tim Worstall: If you cannot refute an idea that is appropriately formulated doesn’t that mean that, since the refutation is not possible, the idea as formulated is correct?

Suppose my “idea” is this two-equation FX market model.
One-month forward FX rate now = Actual spot rate one month hence + risk premium

Risk premium = Actual spot rate one month hence – One-month forward FX rate now.

Obviously my “idea” is correct in your sense and also vacuous. Some versions of the EMH are really not much better.

Even if we take Mulligan’s stupid ‘theory’ as true, it would be an argument for dismantling the financial markets.
But these markets have excellent predictive power. They collapse long before the real economy collapses.

We should this feature as a bell-weather. Let’s say we wonder whether the moon supports life.

We take a piece of efficient market, preferably from Wall Street. We send them to the moon. If they perish, we know efficiently that the moon doesn’t support life. If they survive, they’re far away on the moon, so it’s win-win for us.

It’s ‘bell-wether’; this is important because a ‘wether’ is a castrated ram, and it’s always good to mention castration in the same sentence as Wall Street.

I read (briefly) through Mulligan’s paper, and I did not see a claim that anticipation of the policies you mentioned caused real investment to decline. Obviously I don’t think you intentionally misread the paper, and I could easily be wrong. The sentence you quote actually refers to a separate argument, which runs: If I plug labor market distortions into my model, I get results that closely approximate what has actually happened thus far this recession; therefore one can expect added labor market distortions (the policies put in place during the recession) to have a similar effect going forward.

He does claim that a labor market distortion explanation can account for a large part of the recession, and somewhat over half the decline in real investment (though he notes that it declined more sharply, and much earlier, than the model predicts); real investment is reacting, in this story, to effects of existing distortions becoming apparent. The basis for this argument is the degree to which, he claims, that a model incorporating such a distortion fits with the data. It’s perfectly legitimate to argue with this point, but I think we should be careful to state his arguments clearly before we attack them.

(side-note to a comment above: that post on realclimate.org is a particularly egregious example of someone inaccurately describing an argument. The post characterizes the argument: “Mr. Myhrvold claimed, in effect, that it was pointless to try to solve global warming by building solar cells, because they are black and absorb all the solar energy that hits them, but convert only some 12% to electricity while radiating the rest as heat, warming the planet.” And this is wrong; Myhrvold does mention heat radiation from the cells (perhaps wrongly) but for the most part bases his contention on the enormous costs of building solar energy plants–and even then he agrees that, after a few decades, we would see overall better emissions.)

I wonder why you bother to note fringe madness and then have commenters debunking it? Sort of like asking rational voters for Obama to prove that Obama is legally a citizen.
Not our need to minister to the insane.

Mini quibble: Barry, multiply RHS of second equation by -1.

We do not have Adam Smith capitalism in America. We do not any type of capitalism in the country. The top economists are those who are able to best justify with the term capitalism what the wealthy and influential are doing in America. Those economists who are able to disguise and obfuscate with the respect of the academic and business community are rewarded with recognition and status. We have an arbitrary financial system that is not based on sound accounting practices and principled economic behavior, but is based on the story the top economists sell to the public. This is one of the reasons that our economy has not recovered. Nobody with any sense of reality wants to continue lending, (OPM,) because foreign nations and institutional investors realize that our system is nothing more than a giant Ponzi scheme and large and smart investors want to have nothing to do with us until the recognize real change taking place. Instead what they see is the same irresponsible criminals running the show and only a complete sucker would continue to lend to a dead beat nation of con men. The jig is up and everyone important to our continued economic growth understands that our entire econmony is based on how long our financial wizards can continue to rip off the majority of Americans. Realizing that this is the current American financial strategy they know that the economy is much too fragile to justify lending. The days of OPM are over and everyone realizes it except those who continue using the same game plan. Our financial gurus and political leaders are committing the ultimate capitalist sin – they are believing their own con game – worse is that they rely on it entirely. Only when they realize that although the world is still populated with abundant suckers, there are also more people who are hip to the game as well will they be able to turn the economy around.

The financial market’s members did not panic; they had a temper tantrum. The Bush/Cheney lollipop was pulled out of their mouth.

@roger – about the NYT – I agree that’s a bit of a weird column – with Mulligan, Cowen, and Mankiw they have three right-wing economists writing there – I’m actually not sure Mulligan qualifies as a libertarian, I find him mainly bizarre – I think Cowen is closer to a “real” liberatrian. But on the other hand David Leonhardt’s comments are left of center by US standards, they have Uwe Reinhardt (I’d say probably a social democrat) writing most of the health care posts on Economix and the awesome Nancy Folbres (I think I’d put her as a Socialst, broadly speaking) on a whole range of issues – and although that’s sad, I’d guess that her views are no less on the “fringe” of the spectrum of American public opinion than Mulligans.

I don’t know if this is Zombie Economics so much as just plain stupid.

It’s pure astrology disguised by some equations.

Whatever happens in the markets, it gets explained as a rational reaction to the past, present, potential future or ex post as perfect prediction of the future.

That’s how Nostradamus’ centuries get fitted to the data.

HA in #16: So Myrhvold was misrepresented by Pierrehumbert over solar cells?
Superfreakonomics quoted him thus:

“A lot of the things that people say would be good things probably aren’t,” Myrhvold says. As an example he points to solar power. “The problem with solar cells is that they’re black, because they are designed to absorb light from the sun. But only about 12% gets turned into electricity, and the rest is reradiated as heat — which contributed to global warming.”

Pierrehumbert´s takedown was clearly aimed at Levitt, who is fully responsible for his representation and endorsement of Myhrvold´s bizarre views. The cap fits. I don´t personally care one way or the other whether Levitt was fair to Myhrvold.

HA – the problem is that Myrhvold is wrong even in the extended version. He points out, correctly, that constructing lots of solar power stations over the next 30-50 years would be very costly, both in financial and GHG terms.

But what’s the alternative? It certainly isn’t “not building any more fossil fuel power stations and using the ones that already exist”. The lifespan of a fossil fuel station is around 30 years. So in the next 30 years or so, whatever policy choices we make, we will have to replace the entire current generator fleet, plus building enough new capacity to cope with increased demand. The question is “what do we replace it with?” And I don’t know a convincing argument that it will be much more costly in GHG terms to build 15 TW of renewables over the next 30 years than to build 15 TW of fossil fuel stations.

ajay – I like your response, but I don’t have enough information to contribute anything to the underlying issue. While your response IS a good counterargument to Myrhvold’s argument, though, Pierrehumbert’s is not. I admit that I hadn’t even heard of this controversy until I saw the link in these comments, but upon reading Pierrehumbert’s post, and then finding the actual quotation from the book, I was a bit disappointed that Pierrehumbert did not at least acknowledge the mischaracterization. I understand that on reading an item one finds critical of views to which one is emotionally committed, and which one finds incorrect, it can be difficult to state the objectionable argument precisely. I don’t mean to impugn Pierrehumbert personally, and for all I know this is just an example of him making a mistake that we all sometimes make.

Incidentally, I glanced over Mulligan’s paper again yesterday, and I still do not see where he claims that the financial crisis was caused by anticipation of Democratic policies. I could very well be wrong, but I don’t see it. Perhaps our expectation of another zombie movie has led us to see ghosts in unfamiliar homes?