Tyler Cowen's Blog, page 377

An update on the Reinhart and Rogoff critique and some observations

My previous post presented this:

Rortybomb summarizes it here, Matt Yglesias here, and the original paper is here (pdf), by Thomas Herndon�, Michael Ash, and Robert Pollin.  I will read the paper soon.

I’ve now had some time to look at the paper, and here are a few observations:

1. I am of course open to publishing a rebuttal from R&R, but on a first read the authors make a strong case for their claim that the core Reinhart-Rogoff result — concerning the growth slowdown at debt at 90% of gdp — is based on a coding error and some data exclusion issues.  Please reread my earlier post on “the smell test.”

2. That said, as Ray Lopez mentions, including in the data the postwar bouncebacks of some Anglo countries (NZ, Australia, and Canada), as recommended by the critics, is not obviously going to improve the quality of the answer.  For instance the Kiwis have postwar growth rates of 7.7, 11.9, -9.9, and 10.8 percent, across the late 1940s.  Are those numbers — which were combined with high postwar levels of debt — relevant to current fiscal policy issues?  I say no, while admitting this may lead us to throw out other data points as well.  I don’t know what is the non-cherry-pick answer here or if there even is one.

3. It is perhaps unfortunate in this age of the internet that rebuttals must be presented so quickly, but so be it.  It will be interesting to hear from R&R.

4. Not too long ago I reread R&R to ascertain whether they actually present the 90% level as an emergency cliff of sorts.  I concluded they did not, although there were some sentences that a reader could take out of context toward confirming such an interpretation.

5. In the paper by the critics, the pp.7-9 discussion of “weighting by country” vs. “weighting by country-year” is very interesting, but the fact that it matters as much as it does makes me more skeptical about the entire enterprise.  Whether you should weight by population is important too.

6. I am seeing a large number of tweets which both misrepresent R&R or misrepresent their influence on current policies of “austerity.”

7. My own view, as you can read in The Great Stagnation, is that the primary mechanism is slow growth causing high debt/gdp ratios, not vice versa.  In any case this is by far the most important issue, whether or not you agree with my take on it.

8. The “case for austerity” didn’t rest much on R&R in the first place, rather on the notion that the bills have to be paid, dawdling on adjustment is not always so easy, and the feasible sum of international redistribution is quite low.  For this reason the UK should be relatively uninterested in immediate austerity and many nations in the eurozone periphery more interested.

9. In the blogosphere, the ratio of blog posts “attacking austerity” to “proposing constructive alternatives to austerity” is at least ten to one.  That too tells you something.  Many of the alternatives proposed would indeed pass a Benthamite cost-benefit test, at least if implemented as desired, but they are simply inconsistent with incentives and the relatively selfish nature of individual behavior.

10. The most interesting question to me is a rather squirrelly and subjective one: how should this episode change the relative ratios of what I read?  Should I in fact read fewer quantitative economics papers, instead (at the margin, of course) preferring more narrative history?  This is not the first time that an extremely influential major empirical result has been overturned or at least thrown into serious doubt.

Addendum: FT Alphaville weighs in.  And Annie Lowrey is tweeting some responses from R&R.

All you can read?

E-books are getting the Spotify subscription model.

Books have long been the last holdout as music, movies, games and even TV shows and magazines have embraced the subscription model. Pay a single monthly fee and you can gorge on all the content you can cram into your eyes and ears. But on Tuesday, Tim Waterstone, the founder of the UK bookstore Waterstones, announced Read Petite, a subscription streaming service for short fiction. It’s a baby step toward a new model that could shake up an industry that has seen traditional books losing ground to e-books, which comprised 22.5 percent of the book market in 2012.

Here is more.  I say it will fail because people like the sense of finishing a work or set of works and having it behind them.  This will make them feel all the more overwhelmed.

Online Education Trumps the Cost Disease

In a large, randomized experiment Bowen et al. found that students enrolled in an online/hybrid statistics course learned just as much as those taking a traditional class (noted earlier by Tyler). Perhaps even more importantly, Bowen et al. found that the online model was significantly less costly than the traditional model, some 36% to 57% less costly to produce than a course using a traditional lecture format. In other words, since outcomes were the same, online education increased productivity by 56% to 133%! Online education trumps the cost disease!

Bowen et al. caution that their results on cost savings are speculative and it is true that they do not include the fixed costs of creating the course (either the online course or the traditional course) so these cost savings should be thought of as annual savings in steady-state equilibrium. The main reason these results are speculative, however, is that Bowen et al. only considered cost savings from faculty compensation. Long-run cost reductions from space savings may be even more significant, as the authors acknowledge.

Bowen et al. also do not count cost savings to students. Based on my work with Tyler at MRUniversity, I argued in Why Online Education Works that students in online course can learn the same material in less time. Consistent with this, Bowen et al. found:

…that hybrid-format students took about one-quarter less time to achieve essentially the same learning outcomes as traditional-format students.

A 25% time-savings is significant. Moreover, the 25% time-savings figure is in itself an underestimate of savings since it does not include the time savings from not having to drive to class, for example.

Online education even in its earliest stages appears to be generating large improvements in educational productivity.

The Golden Dilemma

I’ve been meaning to link to this NBER paper by Claude B. Erb and Campbell R. Harvey:

While gold objects have existed for thousands of years, gold’s role in diversified portfolios is not well understood. We critically examine popular stories such as ‘gold is an inflation hedge’. We show that gold may be an effective hedge if the investment horizon is measured in centuries. Over practical investment horizons, gold is an unreliable inflation hedge. We also explore valuation. The real price of gold is currently high compared to history. In the past, when the real price of gold was above average, subsequent real gold returns have been below average consistent with mean reversion. On the demand side, we focus on the official gold holdings of many countries. If prominent emerging markets increase their gold holdings to average per capita or per GDP holdings of developed countries, the real price of gold may rise even further from today’s elevated levels. In the end, investors face a golden dilemma: 1) embrace a view that ‘those who cannot remember the past are condemned to repeat it’ and the purchasing power of gold is likely to revert to its mean or 2) embrace a view that the emergence of new markets represent a structural change and ‘this time is different’.

There is a non-gated version of the paper here.

The idea of wealth taxes is only getting started

Two top advisers to German Chancellor Angela Merkel have called for a tax on private wealth and property in eurozone debtor states to force the rich to fund rescue costs, marking a radical new departure for EMU crisis strategy.

Here is more.  I tell you again, this will be a major issue for the next twenty years and not just in the eurozone.  Take a look at all those state and local U.S. pension funds expecting seven percent rates of return.

Notice of the article is from @LindaYueh.

Companies won’t even look at the resumes of the long-term unemployed

Read this post by Brad Plumer, here is an excerpt:

Matthew O’Brien reports on a striking new paper by Rand Ghayad…The researchers sent out 4,800 fake résumés at random for 600 job openings. What they found is that employers would rather call back someone with no relevant experience who’s only been out of work for a few months than someone with lots of relevant experience who’s been out of work for longer than six months.

In other words, it doesn’t matter how much experience you have. It doesn’t matter why you lost your previous job — it could have been bad luck. If you’ve been out of work for more than six months, you’re essentially unemployable.

…This jibes with earlier research (pdf) by Ghayad and Dickens showing that the long-term unemployed are struggling to find work no matter how many job openings pop up. And it dovetails with anecdotes that workers and human resource managers have been recounting for years now. Many firms often post job notices that explicitly exclude the unemployed.

I think of this as further illustration of what I have called ZMP workers, a once maligned concept which now is rather obviously relevant and which has plenty of evidence on its side.  It’s fine if you wish to label them “perceived by employers as ZMP workers but not really ZMP,” or “unjustly oppressed and only thus ZMP workers.”  The basic idea remains and of course “stimulus” will reemploy them only by boosting the real economy, such as by raising output and productivity and reeducating, and not by recalibrating nominal variables per se.  For these workers it is not about wage stickiness.  Most by the way would not be ZMP if the U.S. economy were growing regularly at four percent in real terms, but of course that is not easy to achieve, not from where we stand today.

I’ve sometimes seen it hinted that calling them “ZMP workers” lacks compassion, but the compassionate thing to do is to try to identify the actual problem.  A year or two ago I thought ZMP workers accounted for about 1% of potential U.S. workers (hardly all of the unemployment problem, I would stress), but if anything I am moving that estimate upwards.

Assorted links

1. MIE: but I fear enforcement of repayment will be too hard.

2. Mark Tushnet reviews Richard Epstein and Epstein responds.

3. Public choice and subprime lending.

4. Who are some famous people internationally of Bangladeshi origin?  And can Bengali sweets go global?

5. On wealth disparities in the rupeezone.

6. Japan, etc.

7. Krugman summarizes his views on Europe.

A new economics blog (self-recommending)

As reported from Kids Prefer Cheese:

Me and Mrs. Angus have decided to get bloggy about development, growth & macro over at a new site, Cherokee Gothic. You can read about why it’s called that here. While it will mostly be us, we hope to enlist other OU faculty to contribute to the site as well.

I’ll still be blogging here with Mungo at KPC, bringing the crazy like nobody’s business, but please check us out, follow us, put us in your blogroll, and just generally show us some mad blogosphere love.

Wolfgang Münchau on wealth disparities in the eurozone

This highly stimulating column — one of the best of this year — may be gated for you (try googling “The riddle of Europe’s single currency with many values”), so let me redo my own version of the argument (modified a bit from his claims):

1. Wealth measures in the eurozone portray Germany as relatively poor.

2. Germany cannot be so poor and Spain and Cyprus cannot be so rich.

3. Therefore there must already be “more than one euro” in the eurozone.

4. Therefore the “value of a euro in Spain” must fall relative to the value of a euro in Germany, so that (eventually) Germany rightfully appears to be the wealthier country.  The single currency has to break up, and/or we need to see a mix of high inflation in Germany (unlikely) or extreme deflation in Spain, Cyprus and other locales.

TC: Now that is either somewhat false, or perhaps a new and Nobel-worthy theory of exchange rate movements, with added oomph for the wealth and perceived relative wealth variables.  Since I do think the euro is likely to split into pieces, I do not disagree with the conclusion, but I am less sure about this stated reason. Here is one excerpt from the article:

Since the start of the eurozone, wages and consumer prices have remained broadly constant in Germany. In southern Europe, the general level of wages and prices has increased year-in, year-out. Over the period, this persistent inflation gap has led to a large discrepancy in asset prices. This is why an apartment in Milan costs much more than one in Munich, the city with the highest property prices in Germany. A German euro buys more real estate in Munich than an Italian euro buys in Milan.

You will note, by the way, that this differs from the usual story of these economies being whacked over the head with the deficient aggregate demand hammer (thank goodness we are getting away from that distorting obsession, though let’s not throw out the bebe with the bathwater).

In any case, I would redo the argument with these:

5. The extent of labor migration from Spain to Germany will be high and is being underestimated, precisely because Germany is so cheap in some parts.

6. Spain, Cyprus and other countries are not as wealthy as is currently measured by market prices.  The world has (perhaps) not yet seen that those locales are due to lose a permanent 15% to 20% of wealth or more, relative to current measurements.  How does this sound: “We are not as wealthy as the ECB research department thought we were”?

6b. Average, marginal, total, private vs. social value, what do those home prices really mean? Keep in mind that varying home ownership rates are driving the varying wealth measures.  Recently I read this: “German house prices are actually lower in real terms than they were in 1970″ and thought it was a sign of German wealth and wisdom rather than poverty.  I thought it was a sign that in Germany the young are not merely in thrall to the elderly.  The correct metric here is lifetime consumption and by that measure I strongly suspect the Germans come ahead of most of the other European nations.  Still I find it a residual puzzle that the higher Mediterranean wealth measures do not get converted into higher lifetime consumption (if indeed they do not).

7. Most wealth is held in the form of human capital, and that is another unmeasured plus for Germany.  (By the way, there is a recent claim that the Irish are the most educated people in the EU.)  Let’s compare two societies.  In one you move to Stuttgart to learn how to become a Flugzeugmaschinenmechaniker.  In the other you hang around Genoa to rent-seek and make sure you inherit Daddy’s paid-off house.  The latter may produce higher measured net median wealth, but the resulting society will be less flexible and produce lower positive social externalities from such “labor market decisions.”

8. #5-7 together.

9. We badly need new theories of how Mediterranean Europe can have positive inflation (for the most part), nominally overinflated wealth levels, and yet be crushed by some kind of destructive economic process that we don’t yet have a good enough label for.

10. Wolfgang Münchau, despite his considerable plaudits, remains a remarkably underrated columnist.  There is no one better to read.

The Randall Collins theory of ritual

Much of it concerns the origins and application of violence, but this blog post on Randall Collins and his theory of ritual, by Xavier Marquez, is interesting throughout.  Here is one excerpt:

The (relative) insignificance of ideology. Taken in its strongest terms, Collins’ theory seems to suggest that ideology is generally unimportant. Whether a symbol acquires socially motivating value depends much less on its “generalized” meaning than on its place within chains of interaction rituals; we are not generally the dupes of rhetorical framings and persuasive strategies except in the context of successful ritual situations. (Collins notes, for example, that most advertisement seems to be unsuccessful at actually persuading people to buy products, and is mostly intended to preserve attention space against competitors). From this perspective, the decline of labor movements worldwide, for example, may owe less to any ideological changes (“persuasion” and “manipulation” taken in a very broad sense) than to (intentional or unintentional) changes in the conditions for the ritual production of solidarity. Chris Bertram recently mused on the occasion of Margaret Thatcher’s death that UK society used to be socially more class-differentiated (there were strong institutions where class solidarities and roles were produced) but is now less so (since these institutions have vanished), despite very low levels of economic mobility and higher levels of economic inequality; many people now “feel” that there is more equality. From the interaction ritual perspective, these changes are not the result of the working class becoming simply convinced of lies due to clever persuasive strategies by elites, but of the less central place of rituals and symbols reinforcing class solidarity in their lives. This is in turn due to any number of causes: laws that made labor unions more difficult to organize, structural changes in employment patterns, the decay of rituals of deference, the emergence of rituals focused on celebrities that cut across social class, etc.

Collins is one of the most important social scientists in the world today, though in many circles he remains underdiscussed.  You will find previous MR coverage of him here.  The pointer is from @HenryFarrell.