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I figured this was appropriate for the occasion…
Earlier this year, the Massachusetts Council for Economic Education hosted its annual High School Economics Challenge, which brought students from all over the state to the Federal Reserve of Boston to compete to see which students are the biggest ner…er, which students know the most economics. The two main divisions- the David Ricardo division for regular economics students and the Adam Smith division for advanced placement economics students (apparently the council likes its economists to be of a certain age)- consist of an individual exam and then a quiz bowl round where the two top-scoring schools on the exam go head to head to decide a winner. The winner in each division is then eligible for the National Economics Challenge sponsored by the Council for Economic Education and to be held this weekend in New York. This year, Lexington High School, the Massachusetts winner in the David Ricardo division, scored high enough to qualify for the finals, so I will be watching the livestream of the finals on Sunday at 3pm on the Council for Economic Education Facebook page. I watched last year and Belmont High School won in the Adam Smith division, so clearly I am a good-luck charm. (See also: correlation versus causation.)
In addition to the quiz bowl rounds, the Massachusetts Economics Challenge introduced a new round this year, named the (continuing the trend) Alfred Marshall round, where students consider a case study and then make and defend policy recommendations based on the scenario described. The inaugural case was about the recent economic troubles in Ireland, and I had the pleasure of not only judging the written proposals (ever see high-school students try to use the word sequester properly?) but also asking follow-up questions to the two teams that we chose as finalists and then choosing a winner. (Just know that I have ALL the power.) The President of the council was nice enough to send along some pictures from the judging:
(Guess who knew the camera was there? Me and the guy in the bow tie, apparently.)
(The other judge is the economics department head at UMass Lowell. I swear that we were both taking our jobs equally seriously. Also, for the record, it was really hard to pick a winner because both of the finalist teams were pretty impressive.)
If you are a high-school student or teacher, I highly recommend looking into having your school participate in your state’s economics challenge. (You can see a list of state coordinators here.) I also recommend checking out my study materials to help you prepare.
Given how the most widely cited unemployment rate is calculated, the cartoon is technically correct. On one hand, not counting people who are not in the labor force as unemployed makes sense- we generally see unemployment as a problem to be fixed, yet I doubt that the stay-at-home mom or the lottery winner sitting on a pile of cash rather than working is anyone’s policy target, so it makes sense to leave such people out of the discussion. That said, the way that unemployment statisticians ask the labor force question (“Have you looked for a job in the last four weeks?”) causes them to catch people who would want to work but have given up on finding a job in their out-of-the-labor-force net.
In order to overcome some of the misleading features of the typical unemployment rate, the Bureau of Labor Statistics also publishes a few other statistics that pertain to working versus not working. One is the labor force participation rate, which shows what percentage of people are either employed or looking for a job:
(Note that the scale of the vertical axis is a little misleading.) With these numbers, we can better understand whether changes in the unemployment rate were more due to people getting and losing jobs or people entering and exiting the labor force. (The labor force participation numbers also explain how we can see increases in both employment and unemployment or vice versa.) This historical data shows that labor-force participation has been declining a bit since recession hit in 2007 or so, which is consistent with the notion that people get discouraged and drop out of the labor force if they can’t find work for a long time.
A close cousin to the unemployment rate and labor force participation rate is the employment to population ratio (it’s exactly what its name implies), which the Bureau of Labor Statistics is also kind enough to publish:
Unlike the labor-force participation numbers, the employment to population ratio shows a sharp decline during the recession rather than a steady decrease over a number of years. Therefore, while it is true that the U.S. unemployment rate is rebounding, it appears to be settling at a place were a smaller portion of the U.S. population is working than before.
But wait- this is the part where I totally blow your mind…as it turns out, the Bureau of Labor statistics publishes a whole smorgasbord of unemployment rates in addition to the typical one. Check out the options:
(I am obviously wrong, but I would like to believe that this is what Bono was thinking of when he named his band.) No one of these measures of unemployment is perfect on its on, but, taken together, they paint a pretty decent picture of what the labor market landscape looks like.
I’ve been hesitant to write about this, since every time I try I just end up with phrases like “AN EXCEL ERROR ROFL!!!!” on the page, and I don’t feel like that entirely embodies what I would like to convey regarding the Reinhart-Rogoff situation. So I gave it the old college try on About.com instead. Some highlights:
(Sidenote: I know hindsight is 20-20 and all, but wouldn’t you at least be a little suspicious about the presence of a calculation error when you get a result that is that different from the others?)
Hold up…I’ll pause here because Stephen Colbert tells is so much better:
Colbert even invited Herndon on the show, which not only made me incredibly jealous but also caused me to send a “neener-neener” email to my students for not taking me up on my paper advice:
Okay, so let’s continue…
Brad Plumer at the Washington Post was kind enough to put the disagreement into handy graph form:
To be fair, the difference between the numbers is the result of all of Herndon et al’s criticisms, not just the spreadsheet error. That said, the spreadsheet error is the difference between negative and positive growth for the 90 percent and over group.
So what do we take from this? I guess it’s a matter of opinion whether the amended result (together with the causality issues) is an argument for austerity. Therefore, I feel that the takeaways from this debacle are a bit more general:
On the up side, no one really thinks that Reinhart and Rogoff had any sort of nefarious intent, so at least they aren’t having as bad of a time as this guy.
Update: Reinhart and Rogoff have put out an official errata report for their paper. Fun fact: it’s almost twice as long as the original paper.
You may have noticed that I post a decent number of comics from Saturday Morning Breakfast Cereal. While I do know Zach, it wasn’t until recently that I started meddling in the cartoon-generating process. In general, it’s more amusing to see what non-economists come up with on their own, but sometimes I just can’t help myself. So here goes…
The original question:
Econ question: If I wrote a program wherein I and another person constantly traded $1 for nothing, back and forth, does GDP go to infinity?
(For the record, Scott Adams, the creator of Dilbert, actually has a degree in economics, yet I am far more impressed by the issues posed by thoughtful non-economist cartoonists.) Of course this sounds absurd, but there are plenty of things in macroeconomics that sound absurd, so I figured this was worth thinking about for a second. Or an hour. Here’s what I came up with:
So here’s some general information on GDP:
I think the part that is most relevant to the question at hand is the notion of “produced.” So, used goods don’t count in GDP unless there is some value-added service associated with selling them, and even then it’s only the value-added part that counts in GDP. If I modified your scenario slightly so say that two people kept paying each other a dollar for a widget of some sort, that widget would only count in GDP the first time it was sold to an end user consumer. Your scenario is a bit more complicated I think, however (perhaps unintentionally). If the dollar going back and forth is exchanged just because, then it would be considered a repeated gift or transfer and not included in GDP because nothing was actually produced. If, on the other hand, the dollar is each time exchanged for some intangible service (a smile, wink, nod, etc.), then there is in fact a dollar of GDP generated with every transaction, since the service is new each time rather then the reselling of a used service. (I’m not even sure what a used service would be exactly, but it sounds kind of dirty.)
Your twitter commenter is right that digging a hole and then filling the hole back in would add to GDP with no net change in the state of the world, and one could make two arguments about this. One argument is that this is a shortcoming in the notion of GDP, similar to the broken window fallacy, which you can read about here:
Another argument is that, because people were willing to pay both to have the hole dug and filled in, that both activities must have had worth to people. Unfortunately, there is likely also a negative externality imposed on the guy who wanted the hole dug when the hole is filled back in and vice versa, which would counteract the value that is counted in GDP to some degree.
I read a thing a few days ago that I can’t seem to find but is very relevant to this situation. Suppose guy 1 pays $50 to punch guy 2 in the face. Suppose further that guy 2 pays guy 1 $50 to then punch him in the face. The article or whatever’s conclusion was that both guys had no more money than before but had black eyes, so they were worse off but $100 of GDP was created. It’s a cute example, but it isn’t quite correct because it ignores the warm fuzzies or whatever that the guys got from doing the punching, which they had to have gotten since they were willing to pay $50 to do it. When this is taken into account, each guy got a service that they valued at at least $50 plus a black eye. Because both men were willing to accept $50 to get punched, it must be the case that the cost of getting punched was less than $50 to both men. Therefore, both men were made better off on net by this set of transactions, but not by the full $100 of GDP that was created. The reason is that GDP doesn’t take into account wealth destruction, whether it be black eyes or loss of buildings due to earthquakes and the like.
In other words, GDP calculations can be a little absurd on the surface but aren’t totally absurd once you think a little. So apparently this is why Zach was asking his question:
He had actually shared the storyline with me earlier, and I made the following point:
I suppose that the motion of electrons counts as a different service each time, and the nerds are willingly giving the money each time, so as much as I want to say that this doesn’t count as GDP, I’m leaning towards allowing it. You could also just have the computer make a trivial beeping noise or something to count as the service rendered. The important part is that it has to be clear that nerd 2 is actually providing the service worth $1 to nerd 1 and vice versa, otherwise you’re just describing paypal with a zero commission, and it’s the paypal fees that count in GDP, not the money transferred itself. Perhaps describe the scenario as nerd 1 and nerd 2 each installing a program on the machine to accept the dollar in return for a beep?
After this exchange, I sent Zach a copy of Greg Mankiw’s favorite textbook, though I’m not sure how much it helped, since this is well outside of textbook and into thought exercise territory. In other words, it would make a great exam question if you want to give your students ulcers.
One common feature of those who proclaim themselves to be aligned with the Austrian School of Economics is the opposition to most forms of government intervention in markets. It follows logically, then, that Austrians are generally opposed to minimum wage legislation. I think I’m beginning to understand why:
Pretty much all economists can agree that people respond to incentives, so it’s worth remembering (in this case and others) that incentives can affect beliefs too.
Update: Justin Wolfers has a less charitable but more amusing analysis of the data:
Also, people, just relax and take a joke. It’s fun, I promise, and maybe even productive if it gets someone to respond to the ad. If you want to see real criticism based on this ad, check out the article that the screen shot originally came from.
Soooo…this video requires a bit of explanation. A few weeks ago, I gave a talk at TEDxPublicStreet, and the theme of the event was how people in different fields are working to make the world a better place. Pretty easy, right? Too bad I had what I will generously refer to as a flash of inspiration the day before the event, updated all my slides, and then made file names on my USB drive confusing enough that the slides for my old TEDxBoston presentation got loaded instead. So I get on stage, click forward in the slides, and see this:
Seriously, screw you guys and your smiling faces. Unfortunately, there wasn’t a way to fix the problem without keeping people waiting too much, so I had the honor of speaking extemporaneously for 15 or so minutes, and this is the output:
In case you’re curious, the visuals (some for informative purposes, some for humorous effect) went like this. (Just don’t expect them to line up with what I talked about perfectly, since, well, I’m not that well rehearsed. I’ll work on it.)
At least now you know more than you likely ever wanted to about the nerdy inner workings of Radiohead, Mozart, and Van Halen.
One thing that is suboptimal about teaching Principles of Microeconomics rather than a more specialized course is that the “what my students have been learning” anecdotes seem a bit simplistic to me. That said, this one took a bit of a funny turn, so I thought I would share. (Also, those of you who teach can use the example with your students.)
So I was trying to think of relevant and not too boring comparative statics (really just a fancy way to say “analyzing changes in supply and demand”) scenarios to use with my students when I came upon the following from The Consumerist:
Super Bowl Partiers Lament: Last Year’s Drought Is This Year’s Uptick In Chicken Wing Prices
According to the U.S. Department of Agriculture (via NBC News) chicken prices were up 6% in December, which is more than triple how much overall food prices rose in a year. Yikes.
This isn’t a huge surprise, as during last summer’s drought experts warned that meats and dairy would probably cost more as the feed needed to sustain animals was in short supply.
If it costs more to feed the chickens, it’s going to cost more to eat them. But in the case of chicken wings there are other factors pushing up the price, says one economist who spoke with NBC, including a glut of chickens last year.
Farmers subsequently cut down on how many they raised, which means fewer chickens around for me (and fine, you) to eat.
So this actually gives us a nice chain of comparative statics to think about. First, there’s the impact of the drought on the market for chicken feed. The bad weather reduces the amount of feed that farmers can make out of a given amount of inputs, so the drought raises the costs of producing chicken feed and reduces the amount that farmers want to produce at any given price. In other words, this:
The increase in price happens because otherwise there would be a shortage of chicken feed (i.e. more demand than supply) and market forces operate to bid up prices until the shortage goes away. (Anyone who has ever used StubHub for concert or sports tickets knows roughly how this process works.)
But wait, there’s more…the increase in the price of chicken feed raises the price of (quite literally) an input to making chickens. When the prices of the stuff used to make a good increases, it’s less attractive to produce that good (since costs increase) and producers don’t want to make as much of it. So we see similar behavior in the market for chicken wings to what we saw in the market for chicken feed:
Therefore, it’s not surprising that this drought issue in and of itself raises the price of chicken wings, but, for those of you who pay attention to the outside world, there may be another factor that is compounding the price increase. I don’t know if you’ve noticed, but this sunday is Superbowl Sunday, and, from what I’ve heard, chicken wings and sport ball games are economic complements (i.e. people tend to consume them together). Therefore, the demand for chicken wings likely increases in the days running up to Superbowl Sunday, which could drive up prices even more:
Notice that, in this case, I said “could” rather than “will.” The reason is that, in practice, producers are often times hesitant to raise prices in the face of increases in demand (even when not doing so would cause a shortage) because consumers tend to see the practice as unfair and get upset, making the short-term increase in profit potentially not worth it in the long run. Instead, producers are probably more likely to anticipate the demand increase around Superbowl Sunday and hole back some of their output at other times so that they can get more chicken wings into the stores for the big game. (Notice that this practice would essentially raise prices for non-superbowl times, but people don’t appear to complain about that.)
So these are the typical economic incentives that get discussed when talking about supply and demand, whether it be the supply and demand of chicken wings or anything else. What I didn’t think to discuss initially was the impact that prices have on the incentives for those who operate in illegitimate markets (i.e. criminals). Again, from The Consumerist:
Pair Arrested For Stealing $65K Worth Of Tyson Chicken Wings
According to the Atlanta Journal-Constitution, the two men were both employed at the storage company when 10 pallets — $65,000 worth — of Tyson chicken wings went missing on Jan. 12. This was before the Atlanta Falcons were eliminated from the playoffs, so perhaps the men were hoping they could cash in if the hometown team made the Super Bowl? Police say the alleged thieves used a forklift to put their purloined party snacks into the back of a rented truck.
The whereabouts of the wings are unknown.
I suppose that economics would suggest that an increase in price also makes stealing a good and trying to resell it more attractive. Again, as an exercise in economic complements, I would start looking for the wings in wherever I might find a bunch of stolen refrigerators.
Just kidding- this is the real reason that economics is called the dismal science, but just go with me here.
Economists are quick to point out that the true cost of something, whether it be a physical good, an activity, etc., is what one has to give up in order to get that thing. This cost includes both explicit costs, which are costs than involve an actual outlay of money or credit card or whatever, and implicit costs, which are the values of the other opportunities that have to be passed over in order to consume a good or perform an activity. One common implicit cost is the value of one’s time, since, by definition, time spent on one activity can’t be spent on other activities.
Economists use this concept of implicit cost (or opportunity cost, though the term “opportunity cost” is sometimes used to refer to the total of explicit and implicit cost) to make predictions about how many hours of labor people will supply. The logic is that, since every hour spent sitting on the couch and eating Cheetos (“leisure” in economic terms) is an hour not spent working, the implicit cost of sitting on said couch is an individual’s wage, since the wage is what the person would have earned by working for an hour instead. Over most normal ranges of wages, this would mean that, as sitting on the couch gets more expensive, people sit on the couch less and work more, which gives a positive relationship between a person’s wage and the number of hours that the person is willing to work.
I’ve taught this concept to my principles students for a number of years now, and I somehow never stopped to think about its depressing implications. Luckily, others have got my back on this:
Like a lot of people, the woman in the cartoon is good at thinking about explicit costs but not so good at thinking about implicit costs. I generally argue that not thinking about implicit costs is suboptimal because it leads to irrational decision making, but, after staring at this for a while, I’m beginning to think that ignorance might be bliss. I guess I can understand why that last graph doesn’t end up in college brochures very often.
I have yet to give a complete rundown of Economic-Con in San Diego a couple of weeks ago (pro tip: don’t pick an exhibit booth that no one can find), but I can safely say that the humor session was one of the highlights. Here is Yoram Bauman, the Stand-Up Economist, talking about “Hyperinflation in Hell”:
Yoram asked me afterward what I thought of the new bit, and I pointed out that I really like getting to feel like I learned something…in this case, not so much about inflation and monetary policy (one would hope that I have the hang of those by now), but about cultural traditions and the use of joss paper and such. I guess that’s my nerdy version of the “it’s funny because it’s true” scenario.
Update” Another one for the “it’s funny because it’s true” category:
Uh oh, looks like this is becoming a theme…
Another Update: Because the world thinks it’s funny, an article about an agency for ugly models came up in my news feed shortly after the above Twitter conversation. Also, said Twitter convo devolved into puns involving Slutsky and “endogenous zones.” You people are sick. =P
One of the most fundamental concepts in finance is the efficient markets hypothesis. In case you are unfamiliar with the concept, here’s a bit of background:
The efficient markets hypothesis has historically been one of the main cornerstones of academic finance research. Proposed by the University of Chicago’s Eugene Fama in the 1960′s, the general concept of the efficient markets hypothesis is that financial markets are “informationally efficient”- in other words, that asset prices in financial markets reflect all relevant information about an asset. One implication of this hypothesis is that, since there is no persistent mispricing of assets, it is virtually impossible to consistently predict asset prices in order to “beat the market”- i.e. generate returns that are higher than the overall market on average without incurring more risk than the market.
You can see more about the efficient markets hypothesis (the EMH to those of us in the know) here. One important implication of the efficient markets hypothesis is that, if financial markets are in fact efficient, finance professionals wouldn’t be able to consistently (or an average) achieve higher returns in the stock market than, as is often said, a monkey with a dart board covered in ticker symbols. (This reference technically comes from Burton Malkiel’s A Random Walk Down Wall Street, in which he postulated that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”)
In general, there seems to be a decent amount of support for this implication, as, for example, it is often reported that actively managed mutual funds don’t outperform index funds enough in general to make their higher fees worth it, and, in an given year, roughly half of mutual fund managers manage to beat the market (as would half of dart-throwing monkeys, on average). In other words, Warren Buffett is very much the exception rather than the rule:
As one who likes both data and animal humor, I am of course curious as to what, if any, controlled experiments have been conducted with mutual fund managers and dart-throwing monkeys. (Keith Chen, I’m counting on you on the monkey front.) In addition, I would like to know whether the findings of said experiments would generalize to other species and/or modes of stock picking. I mean, would Gizmo with a Ouija board be a match for a guy at Fidelity?
On the monkey front, the closest approximation is probably the Wall Street Journal’s long-running but sadly discontinued dartboard contest. In this sample (N=100), the professionals beat the “monkeys” 61 percent of the time, but they beat the Dow almost exactly half of the time. (This would suggest on some level that the “monkeys” were systematically poor dart throwers.) My beef with this study is that the “monkeys” were WSJ staffers and not actual monkeys (the publication claims that this was for liability reasons, which is, unfortunately, probably a wise decision).
Luckily, there are other people out there who are at least as sick and twisted as I am, so we can bring Orlando the stick-picking cat into the conversation. Orlando, ingeniously enough, picks stocks from a set of 5 companies listed on the FTSE All-Share Index by throwing his toy mouse onto a grid of numbers that map to the companies. In this manner, Orlando competed against both investment professionals and school children in a year-long competition run by the Observer, where participants were allowed to change their picks every quarter. So how did Orlando do?
By the end of September the professionals had generated £497 of profit compared with £292 managed by Orlando. But an unexpected turnaround in the final quarter has resulted in the cat’s portfolio increasing by an average of 4.2% to end the year at £5,542.60, compared with the professionals’ £5,176.60.
Wow, that’s gotta sting a little…but at least the professionals managed to beat the school children, who ended up losing money on their portfolio over the course of the year. (Corollary: Don’t let the E*Trade baby handle your investments.)
It seems like the evidence on beating the market is pretty firmly entrenched in the “you can’t” region…and even Warren Buffett acknowledges that the best plan for an individual investor is to go with a passive index fund. This is good though, right? At the very least, economists (and assorted animal enthusiasts) have gone to the trouble of amassing data that should help people avoid having false beliefs and expectations regarding financial markets, and this should help people make better investment decisions.
Well, not so fast- in order for the knowledge to have an impact, people have to actually believe it. On this point, I refer you back to a document that I talked about last week. From Paola Sapienza and Luigi Zingales:
Or perhaps this:
The public actually grew more confident in its ability to pick stocks successfully after learning that economists think it is close to impossible.
Seriously people? I get that there could be some sort of cognitive dissonance that won’t allow people psychologically to acknowledge that they can’t outwit a cat in all cases, but I can’t help but be offended that economists seem to have been placed in a category of wisdom below that of Orlando the stock-picking cat. I would be okay with this if there were some way to profit off of the public’s lack of respect, but that would require that people systematically underperform the market, which is also mostly ruled out by the efficient markets hypothesis. (This is somewhat akin to the notion that it’s almost as hard to get every question wrong on the SAT as it is to get every question right.) Although, come to think of it, I could just take a “well, if you believe that, I have a bridge to sell you” approach and start a investment company where I hire Orlando as a fund manager. (It’d at least keep my labor costs down, since Fancy Feast and catnip are cheaper than Porterhouse steaks and cocaine.) Are there SEC rules against this???
If you, like me, are an economist who is somewhat depressed by the cat comparisons, this will probably make you feel both better and worse:
All I know is that right after I hire Orlando as my fund manager I will be hiring this guy to run my trading desk.
I’m guessing that Jon Stewart doesn’t respond to everyone who calls him lazy or uninformed, but he did respond to Paul Krugman:
|The Daily Show with Jon Stewart||Mon – Thurs 11p / 10c|
|Paul Krugman & the Trillion Dollar Coin|
I was really hoping for Stewart to be like “fine, you want me to stop messing around? Here’s the deal with the platinum coin.” and then bust out some economics, or at least bust out a rant against the morons at Fox News who probably still think it take a trillion dollars worth of platinum to make the coin. A such, I can’t help but be a little disappointed. Paul Krugman is still not impressed either.
Either in fairness or in contrast (I can’t decide which), Stewart follows up the Krugman debacle with a pretty good piece on the supposed lack of women and minorities surrounding Obama that pretty much echoes what I’ve been ranting about for the last week.
So people didn’t seem to care for Jon Stewart’s coverage of the trillion dollar coin. First, the case in question:
|The Daily Show with Jon Stewart||Mon – Thurs 11p / 10c|
|The Trillion-Dollar Coin|
So, Ryan Cooper thought “it really sucked,” and Paul Krugman agreed, saying that “if we want this kind of intellectual laziness, we can just tune in to Fox.” Ouch. (Also, there’s a Krugman joke in there somewhere, but, like Stewart, I am intellectually lazy sometimes.) Granted, Cooper and Krugman are bellyaching about a comedy program, but I think they have a point when they argue that in virtually all other cases The Daily Show is good enough with the facts that people take them seriously on that dimension. Myself, I just remember going “ehhhhhhh” when watching the segment since I thought it could have been so much better. For starters, there were in fact some factual errors:
Despite this, my biggest beef is not with the factual shortcomings. Instead, I am peeved that Stewart took something as absurd as a trillion-dollar platinum coin and resorted to inane jokes about blowjobs and penis signatures. Seriously? This is comedy, well, platinum, here. (This is why I don’t write the jokes.) Did he not see any of the absurd media coverage on this? I know that the staffers at least watch Fox News closely, and so they must have seen this bit of fairly comical misinformation. To put it in terms that Stewart can understand, this bit is not exactly an R.A. Dickey knuckleball, it’s a pitch right down the center of the plate that you see in the all-star home run derby. Come on Stewart, you’re better than this.
For the record, Stephen Colbert does better on the platinum coin front, though even he kind of screws the pooch at the end. (See point 3 above.) It’s interesting to note that both Stewart and Colbert rely heavily on outside footage in their segments, almost as though they don’t feel comfortable trying to explain the platinum coin thing themselves. I guess they don’t know that both Paul Krugman and I are more than happy to provide our services.
Sometimes I feel like the comics I come across are written just for me…
…especially since this came out as I was putting together my lecture slides for the first day of Econ 101. I really want to point out how this comic is inaccurate, but the only counterargument I have is that Adam Smith is generally regarded as the father of modern economics because of his work The Wealth of Nations, but that work doesn’t really have any math in it. So really I only have a counterargument on a technicality. (In related news, if you’ve ever wanted to read the Wealth of Nations but worried that it was too difficult or dry, you should check out P.J. O’Rourke’s On The Wealth of Nations: Books That Changed the World.)
My principled objection to the joke in the comic (I know, I ruin everything), is that one could easily replace economics with physics without any loss of validity, so why do people pick on the mathematization of economics so much? Yes, the models that economists use are obviously simplified views of reality, but it’s not like you hear physicists say “gravity causes items to fall at an acceleration of 9.8 meters per second per second in a vacuum” and then get repeated responses of “yeah, but we have air resistance in the real world, so your field is crap.” (Though I am curious as to how physicists would respond to that.)
Obviously, a big part of the difference is that physicists and other “real” scientists can conduct carefully controlled experiments in order to verify or disprove their theories. In contrast, economists often can’t do this, either because it’s not socially palatable or because it’s difficult bordering on impossible. Nick Rowe gives some good insight:
Let’s suppose you wanted to design an experiment to test the effects of monetary and fiscal policy. And suppose you had the power to do whatever you wanted, and couldn’t care less about getting clearance from the Research Ethics Board. What experiment would you design?
Probably something like: get 100 countries, then for each country toss two dice, one for monetary policy, the other for fiscal policy, then watch what happens for a couple of decades. That should settle the question.
Now, just for a laugh, imagine you wanted the worst possible experiment design. An experiment design so bad that no researcher would ever be able to figure out the effects of monetary and fiscal policy by looking at the data. What would you do?
Probably something like: make monetary policy negatively correlated with fiscal policy, and negatively correlated with any other shocks you observed hitting the economy. So it would be impossible for the researcher to disentangle the effects of monetary policy, fiscal policy, and any other observed shocks. If you were feeling really mean, you would do your best to try to set monetary policy and/or fiscal policy so that nothing ever did happen to the economy. So all the researcher would ever observe would be a few small fluctuations in the economy due to shocks you didn’t observe (and he probably can’t observe either), plus a few small fluctuations because you over-compensated or under-compensated for the shocks you did observe, and even here the researcher won’t be able to figure out even the sign of the effect of monetary policy because he won’t know whether tight money caused inflation or whether you just didn’t tighten monetary policy enough in response to an inflationary shock.
That’s the world we live in. We live in something very close to the worst possible experiment design for testing macroeconomics. We live in a house controlled by Milton Friedman’s Thermostat. It’s sometimes a wonky thermostat, that under- or over-compensates for the shocks it can see, but it’s still a thermostat. For all its faults, it does not play dice with the amount of oil going into the furnace. Even if it did play dice, you could never be sure that it was playing dice, or just responding as best it could to some shock it sees that you don’t see.
You want us macroeconomists to figure stuff out better? Sure. No problem. Just lend us 100 countries for a couple of decades, and let us play dice with monetary and fiscal policy.
I suppose a corollary to this would be “look, most (macro)economists are doing their best with what they have, and sometimes they are asked to give advice on matters that the field doesn’t have definitive answers to.” I’m at least pretty confident in saying that such advice wouldn’t be systematically wrong…
…but apparently the world doesn’t share my perception, as evidenced by Ryan Avent’s summary of two key findings from work by Paola Sapienza and Luigi Zingales. First, people, even people with similar demographics to economists, don’t agree with economists:
Second, knowing what economists think on these matters doesn’t get people to agree with economists and can sometimes even cause them to disagree more:
Economists might conclude from this that they just need to shout their views more loudly. But communication is only part of the problem. Ms Sapienza and Mr Zingales note that when Americans are told what economists believe before answering a question, their view scarcely budges. Told that economists favoured a carbon tax, the share of the public supporting the tax rose only marginally, from 23% to 26%. The public actually grew more confident in its ability to pick stocks successfully after learning that economists think it is close to impossible. Americans seem to believe that economists operate in a fact-free environment, a bit like Buddhists, commented Robert Hall of Stanford University.
In other words, economists know that they’re no better than monkeys with dart boards when it comes to picking stocks (see the first survey question), and the general public thinks that they are either in line with or worse than the monkeys with regard to everything else. I guess at least that part of the comic is spot on. =P
Twitter tells me that I’m behind on this platinum coin thing:
Personally, I would like to know whether the economists seemed appalled by the idea of the platinum coin or the idea of blogging. Anyway, in case you’re been in a cave for the last couple of weeks, there is apparently legislation on the books that, on a technicality, would allow President Obama to fulfill the government’s debt obligations without needing to get congressional approval to raise the debt ceiling. The debt ceiling arguments are pretty absurd in the first place, since a vote to raise the debt ceiling is just a vote to actually pay out the money that you voted to spend at an earlier point in time. (It’s like voting to pay an AmEx bill or something.) So the bypass should be a nice, reasonable thing, right? Well the joke’s on you (and the government, apparently), since the proposed bypass involves the minting of a trillion-dollar platinum coin. (If you don’t believe me, you can read an excellent summary here, or you can read it straight from the likes of Paul Krugman here. And I’m pretty sure that this time, unlike with his theory of interstellar trade, he is in fact serious.)
At first, much of the debate was around whether this trillion-dollar coin thing was a good idea from either a political or economic perspective, but soon the logistical debate over this coin got way more interesting. It started off with a conversation I had with a friend that went like this:
Friend: So, dumb question. How can the gov’t produce a coin and just say it’s worth $1 trillion?
Me: Well, how can the gov’t produce a piece of paper and say it’s worth a dollar?
I was a bit taken aback by the fact that my friend seemed to have momentarily forgotten how money works. After all, I thought that we had cleared up this issue around the time that we were told that zinc prices were such that is costs well over a penny to make a penny. Unfortunately, my friend is not alone:
Or perhaps you would prefer the economic (and historical) wisdom of the National Republican Congressional Committee:
(HT to Steve Benen) Yeah, sooo…*facepalm* is really the only reaction I have to all of this. First, I’m pretty sure that the Titanic is already sunk, so technically any amount of platinum would sink it. Second, did we go back to a system of commodity money and everyone forgot to tell me? If not, here’s a handy reminder:
Commodity money is money that would have value even if it were not being used as money. (This is usually referred to as having intrinsic value.) Many people cite gold as an example of commodity money, since they assert that gold has intrinsic value aside from its monetary properties. While this is true to some degree- gold does in fact have a number of uses, it’s worth noting that the most often-cited uses of gold are for making money and jewelry rather than for making non-ornamental items.
Commodity-backed money is a slight variation on commodity money. While commodity money uses the commodity itself as currency directly, commodity-backed money is money that can be exchanged on demand for a specific commodity. The gold standard is a good example of the use of commodity-backed money- under the gold standard, people were not literally carrying around gold as cash and trading gold directly for goods and services, but the system worked such that currency holders could trade in their currency for a specified amount of gold.
Fiat money is money that has no intrinsic value but that has value as money because a government decreed that it has value for that purpose. While somewhat unintuitive, a monetary system using fiat money is certainly feasible and is, in fact, used by most countries today. Fiat money is possible because the three functions of money- a medium of exchange, a unit of account, an a store of value- are fulfilled as long as all people in a society acknowledge that the fiat money is a valid form of currency.
I guess my answer to my friend should have been “it’s worth a trillion dollars because the government will exchange it for a trillion of those dollar-looking thingies.” Technically the fiat currency creation being tossed around can only be legally implemented with a platinum coin, which is why platinum is the metal of the moment.
And hence my teachable moment- instructors, this is a prime opportunity to teach your kids about how money works and the concept of seigniorage. Seigniorage, simply put, is the revenue that a government generates from minting currency, and it’s equal to the value of the currency produced minus the cost to produce it. (In the world of the two giant platinum coins above, seigniorage would, by definition, always be negative.) It’s also a great opportunity to get people to think about the logistical challenges of using commodity or commodity-backed money…after all, it’s not impossible to increase the money supply (and cause inflation) when using commodity money, it just takes a lot more digging.
Update: Apparently there’s no shortage of humor (unintentional or otherwise) on this topic. Some highlights:
Via Brad Plumer:
And finally MSNBC’s tweet of the day (or morning, or something), from @pourmecoffee:
Last year was in Chicago, but this year the annual meeting of the American Economic Association is being held in San Diego, so I feel much more justified referring to it as Economic-Con. In case you weren’t aware, the conference runs this Friday through Sunday and features a large variety of interesting/random/obscure talks and about 10,000 or so nerdy economists.
For those of you who are going, I will be camped out in a booth in the exhibit hall, strategically placed near the coffee area. The booth will likely look something like this:
Who am I kidding…the space will have as little in it as possible since I have to schlep everything all the way across the country and back. But I will have stickers and maybe even t-shirts, and we can chat about all of the random stuff that passes through this site, mkay?
Update: For those of you in the San Diego area, I recommend this. It’s on Saturday night and is open to the public.
As with last year, I will try to stream the session for those of you who are not local, but it’s a bit of a crap shoot whether that works out well, so stay tuned for logistics.
P.S. Some people have asked me where they can find me if they aren’t registered for the conference. The factual answer is “probably drinking at the hotel bar,” but I will try to be more specific via the Twitter feed on the right-hand side of this page. (Also, @jodiecongirl.)
More Updates: If you are looking for something less academic but still intellectual, Matt Yglesias is giving a talk on Thursday night. Also, Tyler Cowen wants to know what to eat in San Diego.
It’s New Year’s Eve, so why don’t we take a little break from learning nothing about the plan to avoid the fiscal cliff and concentrate on what’s really important? From my mother, who I would imagine had to have known that this would end up on the Internet:
So is raising the price of champagne by $2 on New Year’s Eve over yesterday’s price supply and demand or is it price gouging? Dad wants to know.
Well Mom, I’m glad you asked, and I’m particularly glad that you phrased the question in this way. First, I would like to know what retail outlet instituted this policy so that I can send them an economics gold star for efficient pricing behavior- they are essentially price discriminating based on the hypothesis that people who wait until the last minute to buy their champagne (or “sparkling wine,” since, well, let’s call a spade a spade here) are less price sensitive than those who planned ahead. This hypothesis is probably correct, if for no other reason than people who wait until the last minute don’t have time to comparison shop.
Second, it’s apparently a little-known fact that what people refer to as “price gouging” *is* in fact just supply and demand at work. Consider two supply and demand scenarios:
(In each of the graphs, P represents the price of a thing and Q represents the quantity of a thing. Also, D is for demand and S is for supply, in case that wasn’t obvious.) The point of this set of graphs is that there are two ways that the forces of supply and demand (as opposed to some nefarious evil price-increasing monster, I suppose) can cause an increase in the market price of an item. On the left is a price increase caused by a reduction in supply, which is often caused by an increase in production costs. On the right is a price increase caused by an increase in demand, which is apparently often caused by people wanting to get drunk on New Year’s Eve. From a legal perspective, letting supply and demand do its thing in the left scenario is a-ok, whereas letting supply and demand do its thing in the right scenario is price gouging. (Note that this sort of price gouging, pretty much by definition, has to be a result of supply and demand forces, since producers would have no profit motive to raise prices otherwise.)
From a legal perspective, “price gouging” is usually defined to apply specifically to crisis situations, and is, in some states, defined vaguely enough to even incorporate cost-driven price increases. My parents live in Florida, and Wikipedia is helpful enough to provide some specific information on that state:
As a criminal offense, Florida’s law is an example. Price gouging may be charged when a supplier of essential goods or services sharply raises the prices asked in anticipation of or during a civil emergency, or when it cancels or dishonors contracts in order to take advantage of an increase in prices related to such an emergency. The model case is a retailer who increases the price of existing stocks of milk and bread when a hurricane is imminent. It is a defense to show that the price increase mostly reflects increased costs, such as running an emergency generator, or hazard pay for workers.
So I suppose whether or not the champagne situation counts as price gouging depends on whether New Year’s Eve is considered a crisis. Personally, I’m going with yes. Mom, call the authorities.
(For the record, I purposely avoided a discussion here about the fairness of price gouging, since that is pretty well-traveled territory around here. As such, I will simply ask you if you would rather pay $2 more for your champagne or have the champagne sell out before you get to the store.)
From The Fluffington Post:
This has got to be the cutest instance of the overchoice problem I’ve ever seen. I just hope that the multitude of choices didn’t actually prevent the little guy from choosing a tennis ball.
It’s the holiday season, so it’s obviously that time of year when Econ 101 instructors start preparing their syllabi for spring semester. (Oh yeah, and something about Christmas.) For those who teach the course every semester or every year, most of this is pretty routine, but good instructors know how important it is to update examples and include topics that are being covered in the news and such. Ideally, this material would be presented in a way that (usually freshman) college students can relate to or find entertaining.
On that note, I would like to present a few items that macroeconomics instructors might find helpful (and others might find interesting) when talking about the Eurozone Crisis. (I preemptively offer up some combination of “you’re welcome” and “I’m sorry.” Also, I would advise brushing up a bit on the Eurozone stuff in order to make the parodies make a bit more sense. Here is a pretty good place to start.) First up is a Greece/Germany breakup video, of course:
Not to be outdone by it’s holiday-themed sequel:
So that’s a good start with the economics and the humor, but we need to add in some pop-culture references in order to have a proper nerd trifecta. Luckily, economic journalists are not going to leave us hanging. First up is Matt Yglesias over at Slate.com, who is convinced that Taylor Swift is a savant when it comes to currency and debt crises:
Mario Draghi and Taylor Swift are two of Business Insider’s most impressive people of 2012, but few recognize that there are important linkages between them that go beyond the fact that Joe Weisenthal wrote the blurbs.
In hindsight, I guess that Taylor made Matt’s job quite easy by collaborating with Swedish songwriters on songs with titles such as “I Knew You Were Trouble.” (Keep in mind that Sweden made the, in hindsight, probably wise decision to not move to the Euro.) Interestingly enough, however, Ms. Swift isn’t the only example of economic relevance in pop culture lyrics. After all, we’ve known since June how much Carly Rae Jepsen has to say about the Eurozone crisis:
Hey, she’s a popstar, and this is crazy, but is Carly Rae Jepsen a euro crisis genius, maybe?
I know, I know. The only thing more maddening than “Call Me Maybe” is the euro crisis. One is a banal string of saccharine statements, punctuated by swift choruses of action. The other is a pop song. And neither will go away.
Some of the analysis is a bit farfetched, but even I will admit that these articles kept my attention for longer than most other writing on the Eurozone crisis has.
Hey, remember a few years back when Bono was supposedly on the short list to head the World Bank? Doesn’t seem so farfetched now, does it…
So the last time this happened, the article was in Italian, so I didn’t feel too silly that I couldn’t read it. This time it’s in Spanish, so I have much less of an excuse. I am told that Google translate works pretty well for things like this, but that humor doesn’t come across very well. (It probably doesn’t help that the “do it” phrasing is fair English-specific.) Nonetheless, I thought it would be better to give you the original interview transcript. (Note that the interviewers’ English is far better than my Spanish)
First, we would like to know What was the prime motivation to start your blog?
I started writing online because I was teaching an introductory economics course and my students had a number of questions related to economics (but not necessarily related to the course) that I didn’t have time to address in class. I figured that a blog was a better solution than just sending emails to my students.
Is still this motivation?
Luckily, I now feel like I have more time for discussion in my course meetings, so now I write for a more general audience because I like sharing a subject that I feel is very interesting and important. In fact, I now sometimes bring topics that I’ve written about online into the classroom rather than the other way around.
What are the topics you write? And why these?
The topics that I write about on my site are a bit random. (I write for another site- About.com- where I am more organized about covering topics that are usually part of an introductory economics course or current events discussion.) The randomness arises because I really like to use a cartoon, video clip, or other funny or entertaining medium to motivate my discussion, and I can’t really control when I come across such things. That said, I do try to make sure that I cover timely subjects that I think are my important for my readers to understand, such as the fiscal cliff, chained CPI, and so on.
What is the effect you want to have on the people who read your blog?
Ideally, I want people to learn economic concepts that will help them be better citizens, consumers, and voters without even realizing that that is what they are doing. I will settle for being able to lead people to what they need to know (either by writing myself or via social media) in order to feel confident that they can follow and participate in economic discussions that take place in the media, in business, and in politics. I feature pop economics topics every once in a while, but my overall goal is for what I talk about to give people more than just fun things to talk about at cocktail parties.
Who is the economist who has most influenced your work?
It’s too hard to pick just one! I think my favorite economists fall into a number of categories:
1. The behavioral economics crowd, since that is my main area of focus- Dan Kahneman, Richard Thaler, Dan Ariely
2. Economists who are using their tools to solve real-world problems- Al Roth, Esther Duflo, and Roland Fryer
3. Economists that I know personally (albeit peripherally in some cases) who have similar ideologies regarding teaching and learning economics – Greg Mankiw and Steve Levitt
I think that the economists that most specifically influence my work are those who are actively interested in bringing economics to a non-academic audience, and most of those that I’ve listed above count in that category, which is probably not a coincidence.
Which is your favorite economy blog (after yours)?
Because I want to always know what is happening in the economics community, I follow a large number of economics blogs, many of which are quite good. That said, if I was going to recommend a single source for someone looking to better understand what they hear and read in the news, it would be Wonkblog at the Washington Post. Ezra Klein and his colleagues do a great job of keeping readers abreast of policy-related current events and explaining things for people who don’t have a lot of background knowledge.
Have you receive some institutional support?
I’m not exactly sure what you mean- I don’t get direct support for my site from my university, but my teaching schedule gives me the time to work on other projects, and my department is supportive of what I do. My department head even comments on my site every once in a while!
How many visitor do you have each day or month?
I’m not sure, actually- I installed some site analytics tools a while ago but I don’t really look at them. I’m generally more interested in the level of engagement that I observe than simply the number of readers or page views, and I definitely observe that that engagement is growing. I’m constantly pleasantly surprised by the introductions and inquiries that I get from people that I would never have expected to meet, and it’s really fun to think about all of the different states and countries that I’ve sent t-shirts and stickers to.
What can you tell us about t-shirts and EDIWM merchandise? The money raised has a particular purpose?
I got a lot of positive feedback about the site’s title and logo, so I figured that t-shirts and other merchandise would be something that people would want. I don’t have the resources to deal with a lot of inventory and such, so I do the fulfillment for the t-shirts and stickers myself but outsource everything else to print-on-demand vendors. (The upside of that is that I can offer a wide variety of products to suit most people’s tastes.) The money raised goes to dray the costs of the web site and the office where I film the videos that you see on YouTube.
Who design the logo ? how many hours did you take?
The inspiration for the logo was sent to me by a former coworker of mine, and I hired a graphic designer to work out a version that would be appropriate for me. I’m not sure how long it took her, but it certainly took her less time than it would have taken me.
What you do not like of the economists? There is an event, blog, interview or something else that has caused more rejection in the economic community?
I think that criticism is an inevitable result of having a public persona, and it’s something that I (or any other economist) am certainly not immune to. That said, the criticism and inappropriate comments that I have encountered seem to come mainly from the grad student community rather than people I am trying to do business with directly, and it often has little to do with my actual work, so it’s not something that I think about a lot. The people who I look up to in the economics world have been pretty universally supportive, and I am very grateful for that- I even caught Steve Levitt checking out my site on his phone once!
Finally, we´re thinking in ours students, what to do to understand the economy?
In order to get the most out of what economics has to offer, I think it’s really important to combine what is taught in the classroom with knowledge of the economic concepts that are discussed in the news. Often times, these two categories don’t overlap as much as they probably should, and both are necessary in order to speak intelligently on the subject. In addition, it’s crucial to continue reading and learning about economics even when school is over, since it’s far too easy for knowledge to get forgotten or become out of date.
Feel free to translate “economists do it with models” into other languages in the comments.