Before engaging in another round with Casey Mulligan, I’d like to say that, while I find most of his arguments implausible, I don’t think he’s silly for making them. Given the position he’s trying to defend, these are the best arguments available. And that position is widely shared, not only by economists much more famous than Mulligan but by lots of governments and policymakers. Most mainstream opponents of Keynesianism are committed, one way or another, to the view that persistent high unemployment must be caused by problems in labour markets. But it’s much easier to talk in vague general terms about rigidities and structural imbalances than to present an operational explanation for the sustained high US unemployment of the last four years. Mulligan at least makes the attempt, which is more than most of the New Classical/Chicago/Real Business Cycle school have done, and necessary if there is to be any progress in the debate.

Replying to my criticism of his NY Times column, Mulligan suggests that I should have read his book. Perhaps so, but the column is presented as a critique of Krugman’s book, not a plug for Mulligan’s, and I responded in that light. His latest post mentions a couple of points where he draws on the book, but for the moment I’m going to continue to rely on data published elsewhere.

Mulligan responds to my points in reverse order, which makes sense, because his response to my central point is by far his weakest. The big difficulty for an explanation of post-2008 unemployment based on US welfare policies (unemployment insurance and food stamps) is that many other countries with radically different labor markets and policy responses experienced a big and sustained increase in unemployment at exactly the same time, following the global financial crisis of late 2008. In particular, lots of countries introduced austerity policies involving sharp cuts in the kinds of benefits Mulligan is criticising. Mulligan’s response to this evidence is handwaving. First he says that I haven’t calculated the implied changes in marginal tax rates, although its pretty obvious that most of them will be reductions. Then he resorts to US exceptionalism, saying

Finally, if marginal tax rates were found to be constant in Estonia (the only specific country that Professor Quiggin points to), does that mean that marginal tax rates do not matter in the U.S.? Please let me know so I can notify American economists that Estonia is our ideal laboratory, and notify policymakers that they can safety hike marginal tax rates to 100 percent without noticeable consequences.

That’s pretty startling for someone representing a school of thought which usually treats economic laws as having the same universal applicability as those of physics.

To try and make sense of an argument like Mulligan’s you’d have to start with the financial crisis as a global shock, then claim that, if only governments had sat on their hands, recovery would have been rapid. Instead, the argument would run, governments acted to alleviate the lot of the unemployed and thereby made things worse. That would be a coherent explanation for simultaneous and sustained increases in unemployment – the only difficulty is that it’s directly contrary to the facts.

It’s worth making the distinction here between changes and levels. Lots of European countries have high marginal tax rates and generous unemployment benefits, relative to the US. But, in many of the worst hit countries, benefits have been greatly reduced. By contrast in the US, benefits are very low but at least some have been increased. If, like Mulligan, you want to argue in terms of changes, then Europe should have seen reductions in unemployment (which was previously higher than the US). In reality, there is very little correlation between labor market policies and changes in unemployment. What has mattered has been exposure to the initial financial sector shock and/or subsequent austerity policies, exactly as Keynesian analysis would predict.

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Clive Dunn is dead. The BBC obit is here. The only man to serve 4 years in a prisoner of war camp but 10 in the Home Guard.
Update: I told my 11 year old girl, after posting this, that Corporal Jones was dead. She was horrified — these guys are as live for her as Katy Perry is, and without the suspicion she has the Katy Perry is a fictional character. I assured her he was very old and lived well to the end, and that he was a lifelong socialist, all of which matter to the midwestern sisters. After looking generally sad she suddenly looked up with a grin said “maybe I should be allowed to listen to Dad’s Army in bed tonight” (usually forbidden on a schoolnight). Sure, I said, and wondered whether, whether, despite my unbelief he is in a position to watch. Because hearing that interaction would remove any doubt he may have had about the worth of his career.This weekend will be All Dad’s Army All Weekend in our house. Just in time for poppy day.

Sooooooo, this is a thing that happened …

And the moral is that if you’re in a mood where you’re likely to insult your favourite authors on Twitter, don’t count on them not finding out about it in this modern and interconnected world. I was clearly in an unusually difficult mood that day, as I also managed to piss of Steve Randy Waldman by describing his latest thesis on macroresilience as “occasionally letting a city block burn down in order to clear out the undergrowth”. As with the Taleb quip, I kind of stand behind the underlying point, but almost certainly wouldn’t have said the same thing to the guy’s face, so sorry Steve. In any case, by way of penance I will now write a few things about resilience and unpredictability. Starting with the point that I found “incredibly insightful” in the Taleb extract most recently posted.

The point I really liked was on p454 of the technical appendix (p8 of the .pdf file), which is something I ought to have realised myself during a couple of debates a few years ago about exactly what went wrong with the CDO structure. Translating from the mathematical language, I would characterise Taleb’s point as being that the problem with “fat tails” is not that they’re fat; it’s that they’re tails. Even when you’re dealing with a perfectly Gaussian or normal distribution, it’s difficult to say anything with any real confidence about the tails of the distribution, because you have much less data about the shape of the tails (because they’re tails) than about the centre and the region around the mean. So you end up estimating the parameters of your favourite probability distribution based on the mean (central tendency) and variance (spread) of the data you have, and hoping that the tails are going to be roughly in the right place.

But any little errors you make in estimation of the central tendency are going to get blown up to a significant extent when you start trying to use your estimate to try to say something about the 99th percentile of the same distribution. Which is kind of a problem since we have a whole financial regulatory infrastructure built up on “value at risk”, which is a term effectively meaning “trying to say something about the 99th percentile of an empirically estimated distribution.”

The deep point I see here is that it’s not worth getting worked up about “fat tails” specifically, or holding out much hope of being able to model financial (and other risks) better by changing one’s distribution assumptions. A little bit of model uncertainty in a normal context will do all the same damage as a massively fat-tailed underlying distribution. And the thing about model uncertainty is that it’s even more toxic to the estimation of correlations and joint probability distributions than it is to the higher percentiles of a single distribution. Even at this late stage, it really isn’t obvious whether the large movements in CDO values in 2007-9 were caused by a sudden shift in default correlation[1], a correlation that had been misestimated in the first place, or by an episode of model failure that looked correlated because it was the same model failing in every case.

The basic problem here is that in a wide variety of important cases, you just don’t know what size or shape the space of possible outcomes might have. At the root of it, this is the basis of my disagreement with SRW too – because we have so little reason to be confident at all in our ability to anticipate the kind of shocks that might arrive, I always tend to regard the project of designing a “resilient” financial system that can shrug off the slings and arrows as being more or less a waste of time. So, should we give up on any sort of planning?
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Californians gave their 55 electoral votes to Barack Obama – of course; the networks called it the instant the Golden State’s polls closed. But more importantly, the state routinely derided as ungovernable¹ has got its best chance of governance in generations. [click to continue…]

I don’t have a vote in the US election and, even if I had taken the necessary steps, I would be unlikely to live anywhere my vote counted, with the possible exception of northern Virginia. On the other hand, as someone who lives on the same planet as 300 million or so Americans, I do have a stake in the outcome.

If I had a vote that might be decisive, I would vote for Obama. Despite having failed to mention climate change in the campaign, or to push at all hard for the Waxman-Markey bill for an emissions trading, he has put in place regulations that will significantly reduce US emissions, to the point where the announced target of a 17 per cent reduction between 2005 and 2020 looks achievable. Regulation isn’t the most efficient means of reducing emissions, but I’m happy to leave that choice to the US political system.

If Obama wins, fuel efficiency regulations for cars and emissions limits for power stations will be locked in, and there will be hope for more in the future. If Romney wins, they will be repealed or not enforced. That’s enough reason for me to hope that Nate Silver’s odds are right.

I’m thinking about getting a “Samsung Chromebook”:http://www.amazon.com/gp/product/B009LL9VDG/ref=as_li_ss_tl?ie=UTF8&camp=1789&creative=390957&creativeASIN=B009LL9VDG&linkCode=as2&tag=henryfarrell-20 as a replacement laptop (primarily for light text editing and web browsing). The con appears to be a not very widely used operating system (although I use Google products a lot), the pro is that it looks to be both adequate for purpose and relatively very cheap. Before buying though, I wanted to see whether the hivemind has any useful information on how well ChromeOS stacks up etc. Opinions and information gratefully received …

Following up my higher ed posts, I ought at least to link to the NY Times piece on MOOCS – Massive Open Online Courses. Obviously this is the ultimate inexpensive option for higher education, and it is likely to be the bleeding edge of some disruptive wedge, I don’t know which one – several probably. This will change things. [click to continue…]

Chicago is about as close to the American heartland as you can get and still be in a major city (the infamous Heartland Institute is located there, for example), but even so, I’d expect a professor at the University of Chicago to be aware that the USA is not the only country in the world. That’s not true, apparently, of Casey Mulligan, who claims that the continued weakness of employment in the US is due to policies introduced in 2008 and 2009, which ” greatly enhanced the help given to the poor and unemployed — from expansion of food-stamp eligibility to enlargement of food-stamp benefits to payment of unemployment bonuses — sharply eroding (and, in some cases, fully eliminating) the incentives for workers to seek and retain jobs, and for employers to create jobs or avoid layoffs.”

Mulligan’s claims about US policy are dubious at best (see over fold), but there’s a much more critical problem with his argument. If US unemployment is caused, not by a demand shock but by the mistaken policies of the Obama Administration, why did unemployment move in the same way, and at the same time, in many different countries? Did Iceland expand its food stamp program? Does Estonia pay unemployment bonuses? Sadly, no. And while many countries adopted Keynesian policies in the immediate aftermath of the Wall Street meltdown, others did not, and most have now switched to the disastrous policy of austerity. An even clearer demonstration is given by the Great Depression, where nearly all governments pursued austerity policies after 1929 (Mark Blyth’s soon-to-appear Austerity: The History of a Dangerous Idea tells the story)>

This isn’t just a problem for Mulligan. The simultaneous occurrence of a sustained increase in unemployment in many countries, with different institutions and policies undermines any explanation of unemployment that works at the national level. That includes all forms of New Classical Economics, in which unemployment arises from labor market “distortions”, as well as Real Business Cycle theories (except if you stretch the idea of a technology shock to the point where “technology” effectively means “aggregate demand”).

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“Paul Krugman”:http://krugman.blogs.nytimes.com/2012/10/30/scoop-dupes/ writes about journalists’ obsession with the quest for insider knowledge.

bq. A lot of political journalism, and even reporting on policy issues, is dominated by the search for the “secret sauce”, as Martin puts it: the insider who knows What’s Really Going On. Background interviews with top officials are regarded as gold, and the desire to get those interviews often induces reporters to spin on demand. But such inside scoops are rarely — I won’t say never, but rarely — worth a thing. My experience has been that careful analysis of publicly available information almost always trumps the insider approach.

I’ve meant to blog for ages about a similar illusion – the remarkably widespread belief that policy forums in DC (think tanks like the Council on Foreign Relations) provide insiders with a lot of information that is unavailable to outsiders. As a political science professor here, it’s not hard to get to go to all sorts of off-the-record discussions on foreign policy questions; indeed, the more vexing problem is refusing invitations so that you can get your work done, without annoying people. However, I’ve almost never learned any _new_ information about questions that interest me from these kinds of events. Sometimes, people are slightly less discreet than they are in public. But only sometimes, and usually not very much. Likely, there are more important events and workshops that I’m not invited to (after all, from the point of view of the organizers of such events, I’m usually a warm body with vaguely relevant sounding professional qualifications; good to swell a progress, but not much else), but I suspect that there aren’t very many of them that aren’t mostly vaguely disappointing in this sense.

This actually isn’t surprising, when you think about it. Most of the people who work on foreign affairs in Washington DC and who make up the potential audience for such events, are generalists, because they have a variety of briefs. They’re not necessarily looking for exciting new information – they’re looking for digestible summaries of issues that they vaguely know are important, but don’t have time to form educated opinions on themselves. And, even more importantly, they’re looking for opportunities to stay in the loop by talking to other people in the same world about who has gotten which new job, who is on the way up, and who is on the way down. This is the insider information that actually _counts_ for the people going to these events – and it’s at best of anthropological interest to the rest of us. These meetings and briefings serve much the same professional role as do the annual meetings of academic associations, where most of the people attending are sort-of-interested in going to a few panels, but definitely-very-interested in catching up on the latest disciplinary gossip. Going to the former serves as a necessary justification for finding out about the latter.

Which is a longwinded way of agreeing with Krugman – most of the time, you can learn as much or more from intelligently consuming publicly available information as you can from attending purportedly insider briefings. And, as a secondary matter, if you graze free-range from a variety of sources, rather than re-masticating a pre-chewed monocrop diet of selected facts and opinion, you are likely to end up with a _less biased_ understanding. Communities of generalists relying on a very limited set of information sources are peculiarly vulnerable to self-reinforcing illusion. I wasn’t in DC during the run-up to the Iraq war, but from what I’ve been able to piece together in the aftermath, the reasons for the apparent near-unanimity among foreign policy specialists that going into Iraq was a good idea was a combination of bad sources (reliance on people like Ken Pollack, who had a patina of apparent credibility), careerism (the general sense that you would do your career no favors by publicly dissenting from senior Republicans and Democrats), and substantial dollops of intellectual (and indeed non-intellectual, more or less flat-out) dishonesty.

Remember when I posted about my friend Susi, the 90-year old former New York gag cartoonist refugee from Nazi Germany? Good! I’m glad you remember. Because I’ve got a long follow up at Hilo.com. Sort of an interview, sort of a jumble of pictures and the sorts of facts I find interesting. A little window on history, I hope. Plus comics. (And if you’re in Eugene, OR, you can go see her gallery show. It’s open until Friday.)

Gary E. MacDougal (The Wrong Way to Help the Poor, 10/10/12) claims that the Federal government currently spends an average of $87000 a year on the typical family of four living in poverty. MacDougall’s calculation is out by a factor of at least four and probably more.

MacDougal’s source, Michael Tanner of Cato, treats all means-tested programs as anti-poverty programs. This includes the Earned Income Tax Credit, Family Tax credit and other programs for the middle and working classes. As Tanner admits, these programs have at least 100 million recipients, and probably many more. So, the average payment is less than $10 000, not the $20, 610 Tanner estimates.

It gets worse. The number of recipients doesn’t include children or adult dependents, but MacDougal’s calculation does. His family of four would include at most two benefit recipients, and would therefore receive less than the poverty line income of $23 050.

You can download the first issue for free here. You can buy the rest somewhere like Comixology (I’m going to!) or get it from Amazon (although they appear to be out of stock). [click to continue…]

In the New York Times today you can read about the newly available transcripts from the Bretton Woods conference of 1944, as edited by Kurt Schuler and Andrew Rosenberg. I have a few things to say about them in the NYT – and why not a few more here?

Historians of Bretton Woods might well have said, eh, a transcript – no big deal; what happened at the conference was largely theater, and the real business was done before and afterward. There is some truth in this – and the transcript amusingly shows that – but it also shows some of the ways in which it is not true. [click to continue…]

I was reading a postgraduate dissertation on decision theory today (a field where I’m very far from expert) and it suddenly occurred to me that Max Weber’s Protestant Ethic has exactly the structure of a Newcomb problem.

Consider: in the classic Newcomb problem a being, which always guesses right, offers you a choice involving either taking a box (A) containing $1,000,000 or nothing OR taking that box plus another one (B) which certainly contains $1000. The being guesses what you will do and, if you are disposed to take both boxes (A+B) always puts nothing in A, but if you are disposed to leave B alone and just open A, puts the million dollars in A. But by the time you make the choice, the money is there or it is not.

One apparently compelling argument says you should open both boxes (since A+B > A), another persuasive argument says that you want to be in a state of the world such that the being has put the million in box A. A sign that you are in that state of the world is that you are disposed to open just the one box, so this is what you should in fact do. You thereby maximize the expected payoff.
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