Tyler Cowen's Blog, page 359

Can we imagine a world in which “expansionary” open market operations are in fact contractionary?

John Cochrane discusses Andy Kessler:

The usual thinking is that bank reserves are “special.” They are connected to GDP in a way that Treasuries are not.  In the conventional monetary view, MV = PY.  Bank reserves, through a multiplier, control M. The bank or credit channel view says that bank reserves control lending and lending affects PY. The red M&Ms, though superficially identical, have more calories.

In Andy’s view (my interpretation), that is turned around now. Now, Treasuries supply more “liquidity” needs than bank reserves, and (more importantly) the supply of treasuries is more connected to nominal GDP than is the supply of bank reserves.

Part of this inversion of roles is supply. In place of the usual $50 billion, we have $3 trillion or so bank reserves. Bank reserves can only be used by banks, so they don’t do much good for the rest of us. Now, they just sit as bank assets in place of mortgages or treasuries and don’t make a difference to anything. More treasuries, according to Andy, we can do something with.

More deeply, constraints only go one way. Normally, the banking system is up against a constraint. Reserves pay less interest than other assets, so banks use as little as possible. Now, they are awash in liquidity. You can’t push on a string, as the saying goes. Much “constraint” economics forgets that once the constraint is off, the relationship doesn’t hold any more.

Andy describes the repo market and the sense in which Treasuries are “special” in providing low-haircut collateral. Lots of academic research is now viewing Treasuries as special or liquidity-providing in the shadow banking system.

The Kessler piece is here.

The Battle over Junk DNA

Last year the ENCODE Consortium, a big-data project involving 440 scientists from 32 laboratories around the world, announced with great fanfare that 80% of the human genome was functional or as the NYTimes put it less accurately but more memorably ”at least 80 percent of this DNA is active and needed.” What the NYTimes didn’t say was that this claim was highly controversial to the point of implausibility. A fascinating, sharply-worded critique, On the immortality of television sets: “function” in the human genome according to the evolution-free gospel of ENCODE has recently been published by Graur et al. Here is some of the flavor:

This absurd conclusion was reached through various means, chiefly (1)

by employing the seldom used “causal role” definition of biological function and

then applying it inconsistently to different biochemical properties, (2) by committing

a logical fallacy known as “affirming the consequent,” (3) by failing to appreciate

the crucial difference between “junk DNA” and “garbage DNA,” (4) by using

analytical methods that yield biased errors and inflate estimates of functionality, (5)

by favoring statistical sensitivity over specificity, and (6) by emphasizing statistical

significance rather than the magnitude of the effect. Here, we detail the many logical

and methodological transgressions involved in assigning functionality to almost

every nucleotide in the human genome. The ENCODE results were predicted by one

of its authors to necessitate the rewriting of textbooks. We agree, many textbooks

dealing with marketing, mass-media hype, and public relations may well have to be

rewritten.

Graur et al. make a number of key points. ENCODE essentially defined “functional” as sometimes involved in a specified set of biochemical reactions (I am simplifying!). But every microbiological system is stochastic and sooner or later everything is involved in some kind of biochemical reaction even if that reaction goes nowhere and does nothing. In contrast, Graur et al. argue that “biological sense can only be derived from evolutionary context” which in this case means that functional is defined as actively protected by selection.

There are a variety of ways of identifying whether a sequence is actively protected by selection. One method, for example, looks for sequences that are highly similar (conserved) across species. Once evolution has hit on the recipe for hemoglobin, for example, it doesn’t want that recipe messed with–thus the chimp and human DNA that blueprints hemoglobin is very similar and not that different from that of dogs. In other areas of the genome, however, even closely related species have different sequences which suggests that that portion of the DNA isn’t being selected for, it’s randomly mutating because there is no value to its conservation. When functional is defined using selection, most human DNA does not look functional.

It’s also interesting to note that the size of the genome varies significantly across species but in ways that appear to have little to do with complexity. The human genome, for example, is about 3GB, quite a  bit more than the fruit fly at 170MB, But the onion is 17GB! (One of the reasons that onions are used in a lot of science labs, by the way, is that the onion genome is so big it makes onion nuclei large enough so that you can easily see them with low-powered microscopes.) Now one could argue that this lack of correlation between genome size and complexity is simply a result of an anthropocentric definition of complexity. Maybe an onion really is complex. Two points counter this view, however. First, similar species can have very different genome sizes. Second, we know why the genome of some species is really large. It’s filled with transposons, so-called jumping genes, sometimes analogized to viruses, that cut and paste themselves into the genome. Some of these transposons, like Alu in humans, are short sequences that repeat themselves millions of times. It’s very difficult to believe that these boring repetitions are functional (n.b. this is not to say that they don’t have an effect.) The fact that it’s this kind of repetitious, not-conserved DNA that accounts for a large fraction of the differences in genome size is highly suggestive of non-functionality.

Why discuss such an esoteric (for economists) paper on a (nominally!) economics blog? The Graur et al. paper is highly readable, even for non-experts. It’s even funny, although I laughed somewhat sheepishly since some of the comments are unnecessarily harsh. Many of the critiques, such as the confusion between statistical and substantive significance, arise in economics and many other fields. The Graur paper also makes some points which are going to be important in economics. For example they write:

“High-throughput genomics and the centralization of science funding have enabled Big Science to generate “high-impact false positives” by the truckload…”

Exactly right. Big data is coming to economics but data is not knowledge and big data is not wisdom.

Finally, the Graur paper tells us something about disputes in economics. Economists are sometimes chided for disagreeing about the importance of such basic questions as the relative role of aggregate demand and aggregate supply but physicists can’t even find most of the universe and microbiologists don’t agree on whether the human genome is 80% functional or 80% junk. Is disagreement a result of knaves and fools? Sometimes, but more often disagreement is just the way the invisible hand of science works.

Hat tip: Monique van Hoek.

Questions that are rarely asked

In my email, from Eric Crampton:

Imagine the following deal, which is entirely not on any PPF so it’s not really a deal anyway. But imagine it. Genie offers a button. Push the button, and it burns the last n years of every journal in economics, along with all knowledge that those results ever existed, though they can be rediscovered. At the same time, every potential voter is brought up to a thorough Econ 101 level of understanding of Economics. At what value of n is the deal no longer worthwhile? A decade? Two?

Here is a related blog post by Eric.  And here is Eric in praise of New Zealand health care institutions.

What did I learn from (another) re-read of Adam Smith?

Here is my MRU video on precisely that topic.

By the way, Brandon Dupont has done for us this excellent video on John Law.

From the comments

Hazel Meade wrote:

The banning of catastrophic-only plans infuriates me the most. Those are the only plans that are actually financially sensible for a healthy individual to purchase. Everything else on the market is a perverse by-product of the employer-based insurance system.

Worst case scenario with a catastrophic-only plan is you end up with $10,000 in debt. That’s a debt load many times smaller than what the Federal government thinks students should take out to get a college degree. We’ll let you borrow $100,000 to get a sociology degree but, we think that $10,000 is an unconscionable amount to pay for medical expenses? So unconscionable that we have to FORCE YOU to buy a plan with more extensive coverage?

Of course, we all know the real reason for this. it’s meant to force healthy young people to subsidize healthcare for older sicker people. Just force them to pay more for insurance than they ought to, and force them to buy more extensive coverage than is rational.

Assorted links

1. Honeybees trained to find land mines.

2. Felix Salmon on bubbles, and Alen Mattich on bubbles, more from him here.  And here is Krugman on the Japanese stock market plunge.

3. Ross Douthat, on the relationship between social and economic inequality.

4. Is this what an interview with a very smart person looks like?

5. On the origins of Paul Scott’s masterpiece.

6. www.thecorner.eu, new English-language site on EU economics, from Spain.

7. Can we improve on the egg carton?

The economy that is Dubai (a different kind of driverless car)

Thousands of the finest automobiles ever made are now being abandoned every year since Dubai’s financial meltdown, left by expatriates and locals alike who flee in a hurry because they face crippling debts. With big loans to repay to the banks (unpaid debt or even bouncing a cheque is a criminal offence in Dubai), the panicked car owners make their way to the airport at top speeds and leave their vehicles in the car park, hopping on the next flight out of there, never to return…

Ferraris, Porsches, BMWs, Mercedes are regularly abandoned at the car park of Dubai International Airport, some with loan documents and apology notes simply left on the windscreen and in some cases with the keys still in the ignition.

…Residents complain about the unsightly vehicles hogging parking spaces at the airport and sitting slumped outside their fancy yacht clubs– it’s like, so not a good look.

There is more here, hat tip goes @jscarantino.  By the way, a 19-year-old in Romania may have just made driverless cars significantly cheaper.

Arrived in my pile

Edmund Burke: The First Conservative, by Jesse Norman.

Charles Moore, Margaret Thatcher: The Authorized Biography.  I’ve browsed some of it, it looks really quite good, noting that in general authorized biographies bore me.

Sheila Miyoshi Jager, Brothers at War: The Unending Conflict in Korea, the Korean conflicts in broader global perspective.  Good advance reviews, looks interesting on a browse.

Economic Theory of Greed, Love, Groups, and Networks, by Paul Frijters with Gigi Foster.

When will most universities teach in English?

Higher Education Minister Genevieve Fioraso this past week introduced a bill that would allow French universities to teach more courses in English, even when English is not the subject. The goal, she explained, is to attract more students from such countries as Brazil, China and India, where English is widely taught, but French is reserved largely for literature lovers.

“Ten years ago, we were third in welcoming foreign students, but today we are fifth,” she said in a Q&A in the magazine Nouvel Observateur. “Why have we lost so much attraction? Because Germany has put in place an English program that has passed us by. We must make up the gap.”

The reaction?

Yet it has sparked cultural and nationalist outrage — not only from Paris intellectuals but also from several dozen members of Parliament, opposition as well as Socialist, who insist that learning French should be part of any foreign student’s experience in France.

From Jacques Attali:

“Not only would such a reform be contrary to the Constitution (which provides in its Article 2 ‘the language of the Republic is French’), but you cannot image an idea that is stupider, more counterproductive, more dangerous and more contrary to the interest of France,” he intoned in a blog.

There is more here.  On one hand, on-line education makes fluency in English more important for plugging into dominant networks.  On the other hand, technologies of easier subtitling and dubbing may keep other languages in contention.  Still, I predict the former effect will win out, just as the internet has boosted English more generally, with or without Google Translate.  The internet has indeed done a good deal to preserve, record, and ultimately transmit true minority languages, Nahuatl being one example of many, but it has not elevated them into general media of instruction.

The most provocative, fascinating, and bizarre piece I read today

The author is Ron Unz, and the topic is what the media chooses to cover or not.  His thoughts run in directions very different than mine (I favor invisible hand mechanisms to a much greater degree, for one thing), but here is the essay.

It is entitled “Our American Pravda.”  It is difficult to summarize.  Maybe some parts of this essay are totally, completely wrong, so I urge you to read it with caution.  But still I thought it was worth passing along; if nothing else you can read it as a study in how a situation can look “very guilty” even if perhaps it is not.

One excerpt is this:

These three stories—the anthrax evidence, the McCain/POW revelations, and the Sibel Edmonds charges—are the sort of major exposés that would surely be dominating the headlines of any country with a properly-functioning media. But almost no American has ever heard of them. Before the Internet broke the chokehold of our centralized flow of information, I would have remained just as ignorant myself, despite all the major newspapers and magazines I regularly read.

Am I absolutely sure that any or all of these stories are true? Certainly not, though I think they probably are, given their overwhelming weight of supporting evidence. But absent any willingness of our government or major media to properly investigate them, I cannot say more.

However, this material does conclusively establish something else, which has even greater significance. These dramatic, well-documented accounts have been ignored by our national media, rather than widely publicized. Whether this silence has been deliberate or is merely due to incompetence remains unclear, but the silence itself is proven fact.

The original pointer came from @GarethIdeas, who describes the piece as “totally fascinating.”