…with Michael Norton about the American public’s perception of wealth distribution in the United States. They asked a nationally representative sample (N= 5,221) what they considered to be the ideal wealth distribution in the U.S. and what they estimated it actually was. They then contrasted these numbers with the actual distribution. The results are rather jarring. Although the sample expressed a preference for a relatively equitable distribution, in reality the top 20% of Americans have around 85% of the wealth and the bottom two quintiles don’t even register on the scale.
Must-Read: Paul Romer: Protecting the Norms of Science in Economics
Must-Read: : Protecting the Norms of Science in Economics: “For the history of the Stigler-Friedman attack on monopolistic competition…
…see… Craig Freedman’s…Chicago Fundamentalism. Or go back and read Stigler’s… Monopolistic Competition in Retrospect. Publishing a book in 1949, with a title that suggests a post-mortem, is pure Stigler…. [While] monopolistic competition has all corners of the profession that the University of Chicago does not control… Stigler has the last laugh, because for him it was not about economic theory… [but] saving the free world…. This attack served the political purposes he intended it to have; and that what economic theorist think today hardly matters at all…. Stigler and Friedman undertook because they honestly believed that the future of individual freedom was threatened by the call for a more active government that followed in the wake of the Great Depression…. They singled out Keynesian and Chamberlinian theory as the two types of theory that had to be destroyed, so that Marshallian theory could be restored to its dominant position…. With this motivation in mind, it is worth re-reading Friedman’s chapter on methodology…
The Theory of Growth and Inequality: Piketty, Zucman, Krusell, Smith, and “Mathiness”
Paul Romer inquired why I did not endorse his following Krusell and Smith (2014) in characterizing Piketty and Piketty and Zucman as a canonical example of what Romer calls “mathiness”. Indeed, I think that, instead, it is Krusell and Smith (2014) that suffers from “mathiness”–people not in control of their models deploying algebra untethered to the real world in a manner that approaches gibberish.
I wrote about this last summer, several times: Department of “Huh?!”–I Don’t Understand More and More of Piketty’s Critics: Per Krusell and Tony Smith; The Daily Piketty: Ryan Avent on Housing in the Twenty-First Century: Wednesday Focus for June 18, 2014; In Which I Continue to Fail to Understand Why Critics of Piketty Say What They Say: (Late) Friday Focus for June 6, 2014 – Washington Center for Equitable Growth; Depreciation Rates on Wealth in Thomas Piketty’s Database: Monday Focus: June 9, 2014 (Brad DeLong’s Grasping Reality…);
This time, I replied to Paul Romer’s question with a Tweetstorm. Here it is, collected, with paragraphs added and redundancy deleted:
.@paulmromer My objection to Krusell and Smith (2014) was that it seemed to me to suffer much more from what you call “mathiness” than does Piketty or Piketty and Zucman.
Recall that Krusell and Smith began by saying that they:
do not quite recognize… k/y=s/g”…
But k/y=s/g is Harrod (1939) and Domar (1946). How can they fail to recognize it?
And then their calibration–n+g=.02, δ=.10–not only fails to acknowledge Piketty’s estimates of economy-wide depreciation rate as between .01 and .02, but leads to absolutely absurd results:
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For a country with a k/y=4, δ=.10 -> depreciation is 40% of gross output.
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For a country like Belle Époque France with a k/y=7, δ=.10 -> depreciation is 70% of gross output.
It seemed to me that Krusell and Smith had no control whatsoever over the calibration of their model at all.
Note that I am working from notes here, because http://aida.wss.yale.edu/smith/piketty1.pdf no longer points to Krusell and Smith (2014). It points, instead, to Krusell and Smith (2015), a revised version.
In the revised version, the calibration differs. It differs in:
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raising (n+g) from .02 to .03,
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lowering δ from .10 or .05 (still more than twice Piketty’s historical estimates), and
- changing the claim that as n+g->0 k/y increases “only very marginally” to “only modestly”
(The right thing to do would be to take economy-wide δ=.02 and say that k/y increases “substantially”.)
If Krusell and Smith (2015) offers any reference to Piketty’s historical depreciation efforts, I missed it.
If it offers any explanation of why they decided to raise their calibration of n+g when they lowered their δ, I missed that too.
Piketty has flaws, but it does not seem to me that working in a net rather than a gross production function framework is one of them. And Krusell and Smith’s continued attempts to demonstrate otherwise seem to me to suffer from “mathiness” to a high degree…
Must-Read: Nick Bunker: Shifting Implications of the Beveridge Curve
Must-Read: : Shifting Implications of the Beveridge Curve: “Sketching out the Beveridge Curve… confirms this notion that most of the shift…
…is driven by long-term unemployment…. Kory Kroft [et al.]… posits… [this] is because many unemployed workers who otherwise would drop out of the labor force have stayed in due to extended unemployment insurance…. There’s also evidence that the job-openings rate portrays employers’ search for workers as higher than it actually is…. Davis… Faberman… Haltiwanger… finds a decline in ‘recruiting intensity.’… But… the JOLTS database only goes back to December 2000…. If we think there might be a structural shift in the labor market, then we should look at data that covers a much longer period…. Diamond… and… Şahin of the Federal Reserve Bank of New York did. They constructed a data set that spans back to 1951. They show that the Beveridge Curve has shifted out several times over the past six decades, but these shifts weren’t indicative of major structural changes in the labor market or a rise in structural unemployment…. Shifts in the Beveridge Curve should be interpreted with caution…
Is finance doing what it’s supposed to?
Seven years after the financial crisis and five years into the Dodd-Frank era of better supervision of the financial services industry, why is finance still controversial? Despite significant progress in reducing large financial institutions’ risk of failure and some financial abuses reined in around the edges, there’s ample evidence that much of finance is still detracting from rather than contributing to economic wellbeing.
How do we know? Because even as the global supply of capital soars to new heights, thanks to both expansionary monetary policy and excess private saving, corporate profits, particularly in finance, hit record levels, while average people are still paying a high price for borrowing. This paradoxical confluence of abundant capital for the well-connected and high corporate profits implies that corporations face little competition, because in theory abundant capital would make it easy for competitors or incumbents to expand their profitable operations, driving margins down. These same facts also suggest that what economists sometimes call the “real economy” hasn’t been cut in on the sweet deal available to banks, quasi-banks, and others with access to the privilege of cheap money. The result is a profusion of economic rents—unearned resource extraction by economic actors in a lucky position to profit from their advantage.
These were some of the conclusions from events held by the Roosevelt Institute last Wednesday to release a report called “Rewriting the Rules,” and by the Institute for New Economic Thinking on “Finance and Society” the week before. Both offered alternative interpretations of what the financial sector does, why it has become so large, powerful, and profitable, and what can or should be done to reform it without harming the economy as a whole.
Everyone from Federal Reserve Board chair Janet Yellen and International Monetary Fund managing director Christine Lagarde to Nobel Prize-winning economists Joseph Stiglitz and Robert Solow (as well as random ranters in the audience) noted that finance is a necessary feature of the economy. The sector provides liquidity and channels capital from savers to borrowers. So why were two major conferences held on the premise that something is wrong with a sector whose existence benefits us all?
Because, as most of both events’ participants argued, finance isn’t doing that job. The process of moving capital from savers to borrowers is inefficient and funds are actually flowing in the opposite direction—out of corporations and the real economy and into the hands of the wealthy, providing them with a healthy return on their savings at the expense of everyone paying high prices for loans, for telecommunications, housing, education, and other important products and services. Finance may even be shrinking the pie by redirecting human resources away from productive activities and toward strategizing new ways to divert the flow of cash to narrow private benefit.
That entire structural re-engineering of the economy is the fundamental driver of rising inequality at the top of the wealth and income ladder while everyone else is struggling to make a living in a slack labor market.
At the Institute for New Economic Thinking event, both Esther George, the President of the Federal Reserve Bank of Kansas City, and Claudia Buch, the Deputy President of the German Bundesbank, agreed that by supplying so much liquidity, central banks had in effect done all they could for society. But the rules of the economy, both written and unwritten, don’t automatically translate abundant, low-cost capital for financial institutions into gains for the real economy.
The idea that abundant capital would automatically benefit the rest of the economy is a part of the economics mythology of the “invisible hand”—that the free market will allocate resources–in this case capital–most productively, benefiting everyone. It’s a useful theory when it comes to defeating any challenge to the status quo, but it isn’t actually true. As Robert Solow said at the Roosevelt Institute’s event, we have enough evidence at this point to add a fifth universal element to the classical Greek four: “Bullshit.”
The Roosevelt Institute’s report is a good place to start when it comes to reforming the financial sector and the economy as a whole. But important as individual proposals are, a new narrative is emerging that rejects the false promise of a self-regulating, naturally welfare-promoting economy, with its gears greased by a large and powerful financial sector. There’s nothing natural or foreordained about the economy we inhabit, and past experience shows that meaningful progressive policies do not destroy the foundations of economic wellbeing, but rather create them. That doesn’t mean such reforms are easy to enact, but it does mean that it’s time the ideological walls protecting ever-increasing inequality were breached.
Things to Read on the Morning of May 18, 2015
Must- and Should-Reads:
- Must-Read: : Obama’s Real Problem on Trade Is Way Bigger than Elizabeth Warren
- Must-Read: : The Political Is Personal
- : This Billionaire [Harold Hamm] Tried To Get [Oklahoma] University Scientists Fired For Doing Their Job
- : Ray Dalio’s Bridgewater: This is not a bubble
- : Do not underestimate the power of microfoundations
- (2014): Chameleons: The Misuse of Theoretical Models in Finance and Economics
- : Mathiness in the Theory of Economic Growth
- The Interest Rate That Did Not Bark in the Night: The Surge in U.S. Treasury Debt and the Non-Reaction of Rates (2011)
- : Paul Romer and Microfoundations
Might Like to Be Aware of:
- Pink Chai
- (1998): Racism and Science Fiction
- : [Karl Taro Greenfield’s] The Subprimes: A Novel of the Piketty/Klein Apocalypse
- : “My own hypothesis has to do with bullet-dodgers versus bullet-swallowers…”
- Ten Easy Morel Recipes
- MisterWives
- : Any P-Value Distinguishable from Zero is Insufficiently Informative
Must-Read: Matthew Yglesias: Obama’s Real Problem on Trade Is Way Bigger than Elizabeth Warren
Must-Read: The real problem that Barack Obama has with the Trans-Pacific Partnership is that the intellectual property interests–Hollywood, Silicon Valley, and Pharma–are for it only to the extent that it strengthens their property rights, that the Democratic caucus is against it unless it contains meaningful steps to reduce inequality and increase positive-sum regulatory oversight, and that the Republican caucus is against it if it contains meaningful steps to reduce inequality and increase positive-sum regulatory oversight. Thus from a perspective that is technocrat-utilitarian, legislative-process, and coalition-assembly oriented, the obvious path is to appoint a senior free-trade Republican–a Romney figure–to negotiate TPP, and then to withhold presidential approval of its implementing legislation unless inequality-reducing Democratic legislative priorities are attached to the bill. Yet, once again, this kind of Legislative Process 101 move–to make the situation not “I’m in here with you” but “you’re in here with me”–was not undertaken by the Obama White House…
: Obama’s Real Problem on Trade Is Way Bigger than Elizabeth Warren: “The coalition against TPP is very broad…
…The Sierra Club and the Natural Resources Defense Council both say the deal would be bad for the environment. Doctors Without Borders says it’s bad for global public health. The AIDS research group amFAR agrees. Consumers Union says it will raise prescription drug prices. The Electronic Frontier Foundation says TPP ‘raises significant concerns about citizens’ freedom of expression, due process, innovation, the future of the Internet’s global infrastructure, and the right of sovereign nations to develop policies and laws that best meet their domestic priorities.’ The Alliance for Justice… released a letter signed by 100 legal scholars arguing against Investor State Dispute Settlement provisions. When Vox asked a development expert if TPP’s opening of US markets to more imports from Vietnam would help fight global poverty, she told us no.
Must-Read: John Quiggin: The Political Is Personal
Must-Read: I have often wondered and never manage to get completely straight in my mind how economics lost its utilitarian roots–how it went from saying “this is a good policy because it advances the greater good of the greater number” to “competitive free-market allocations are good because they are Pareto-optimal, and we do not prefer any particular Pareto-optimal allocation because that would be a question not of science but of values and politics, and non-Pareto-optimal allocations are bad.” It has puzzled me particularly because the claim that we cannot say X is better than Y because they are not Pareto-ranked is not, in general, raised when the policy at issue issue is a GDP-increasing and either distributionally-neutral or inequality-increasing policy like tariff reductions or cuts in capital taxation…
: The Political Is Personal: “Pareto’s larger body of anti-democratic and anti-egalitarian thought… culminated…
…at the end of his life, in his embrace of Mussolini’s fascism. This led me to… Renato Cirillo, in 1983, defending Pareto against the charge of being a precursor of fascism… [because] Pareto:
manifested consistently a strong attachment to a type of liberalism not dissimilar to the one later attributed to Mises and Hayek…
These are rather unfortunate examples, in view of Mises writings in praise of fascism and work for the Dollfuss regime, and (even more), Hayek’s embrace of Pinochet, at the very time Cirillo was writing…. I’ve come to two conclusions…. First, for serious writers on political theory, political engagement is and ought to be the rule rather than the exception…. Someone whose political theory doesn’t lead them to have and express views on the great political issues of their day probably doesn’t much of interest to say about theory either…. Second, it makes no sense to look at the theoretical writings and ignore the political commitments…. It is easy to construct readings of Pareto, Mises and Hayek in ways that make them appear either as friends or as enemies of political liberalism. Their (remarkably similar) actions make it clear which reading is correct…. Their brand of liberalism is hostile to democracy and indifferent to political liberty, making them natural allies of any fascist regime which adheres to free-market orthodoxy in economics.
Eventually, of course, ideas outgrow their creators to the point where original intentions…. But… as long as a writer is regarded as having any personal authority, the weight of that authority must be assessed in the light of their actions as well as their words.
Nicholas Gruen: “Nice post John…
…As an admirer of Hayek’s basic insight… his lack of sympathy for the weak and powerless has always saddened me. The opposite is true of Adam Smith….
John Quiggin: “Read Hayek, but with Chile in mind at all times. That’s where his ideas ended up…
…so, whatever merit they may have, either (a) they were wrong in crucial respects; or (b) he didn’t understand and act on his own ideas. I think (a) is clearly correct. Everything he wrote, from Road to Serfdom onwards presents socialism and social democracy as an existential threat, to which a man on horseback is preferable. And his version of liberalism is one in which political liberalism is subordinated to the preservation of property rights. Applied to Chile, this implies support for Pinochet.
Shifting through the implications of the Beveridge Curve
The U.S. Bureau of Labor Statistics last week released new data from its Job Openings and Labor Turnover Survey, better known as JOLTS. The data set gives us information on the amount of movement in the labor market: how many workers left a job, how many were hired, and how many jobs are employers offering. One way to digest this data is by charting a relationship known as the Beveridge Curve.
Named after British economist William Beveridge, the curve shows the relationship between the unemployment rate and the jobs vacancy rate, or the number of job openings as a share of the labor force. If the curve shifts right and upwards, like we’ve seen during the economic recovery in the wake of the Great Recession of 2007-2009 (See Figure 1), most conclude that employers are posting more job openings but don’t like what they see among possible new employees.
Figure 1
But is that interpretation of the shift correct? Well, the increase in unemployment during and the high levels after the Great Recession is uniquely affected by high levels of long-term unemployment, so that might have something to do with the shift. The Heritage Foundation’s Salim Furth points out that may indeed be the case. And sketching out the Beveridge Curve with the long-term unemployment rate– instead of the overall rate—confirms this notion that most of the shift is driven by long-term unemployment (See Figure 2.)
What might be behind this somewhat surprising relationship? A working paper by economists Kory Kroft of the University of Toronto, Fabian Lange of Yale University, Matthew Notowidigdo of Northwestern University, and Lawrence Katz of Harvard University posits that most of the increase in the long-term unemployed is because many unemployed workers who otherwise would drop out of the labor force have stayed in due to extended unemployment insurance. As a result, the unemployment rate remains high because workers keep looking for jobs.
There’s also evidence that the job-openings rate portrays employers’ search for workers as higher than it actually is. A paper by economists Steven J. Davis and R. Jason Faberman at the University of Chicago, alongside John C. Haltiwanger at the University of Maryland looks at the jobs opening rate and finds a decline in “recruiting intensity.” This means that employers are increasing postings but that they aren’t super interested in hiring yet. So again, the shift might be overstated.
But let’s pull back a bit here and look at the historical record. The JOLTS database only goes back to December 2000. Looking at the shift of a curve with 15 year-old data can be problematic. If we think there might be a structural shift in the labor market, then we should look at data that covers a much longer period.
That’s just what a report published last year by Peter Diamond, a Massachusetts Institute of Technology economist and a Nobel laureate, and Ayşegül Şahin of the Federal Reserve Bank of New York did. They constructed a data set that spans back to 1951. They show that the Beveridge Curve has shifted out several times over the past six decades, but these shifts weren’t indicative of major structural changes in the labor market or a rise in structural unemployment.
What’s the lesson here? Shifts in the Beveridge Curve should be interpreted with caution. A shift out of the curve isn’t necessarily a sign of a rise in structural unemployment. Simple curves and graphs can be clarifying and instructive, but they aren’t the end of the analysis—particularly when the underlying data is constrained to a narrow time frame. Taking the time to dig in more is a worthwhile investment.
Must-Read: Simon Wren-Lewis: Paul Romer and Microfoundations
Must-Read: There are, I think, six things that Paul Romer is objecting to, all gathered together under the portmanteau of “mathiness”:
- Claiming that, as a matter of methodology, “good science” requires assumptions that bake my politics into the cake.
- Claiming that a theory is in some sense “confirmed” when in fact it makes no claims about anything observable.
- Hiding your reasoning in a blizzard of irrelevant algebra.
- Uncritically applying to the real world conclusions based on dubious assumptions.
- Focusing on internal consistency rather than external relevance.
- Foundations that are fake–that assume agents and markets that are not in the appropriate sense like the real agents and markets.
The problem with his paper, I think, is that while these six are correlated things, they are six different an distinct things.
: Paul Romer and Microfoundations: “A distinction between scientific consensus and political discourse…
…a divide… between… perfect competition and… imperfect competition… the distinction between appropriate mathematical theory and what he calls ‘mathiness’…. Theory is denigrated… because of the policy implications that may follow…. The microfoundations methodology… can place… a low weight on… evidence…. (Ask not whether price stickiness has empirical support, but whether it has solid microfoundations.)… Paul Pfleiderer… ‘A model becomes a chameleon when it is built on assumptions with dubious connections to the real world but nevertheless has conclusions that are uncritically (or not critically enough) applied to understanding our economy’… defending a particular political view or sectional interest…