Tyler Cowen's Blog, page 513

Assorted links

1. Adam Davidson on Honduras and charter cities.

2. Should you give up stories?  What would others think of you?

The Growth of Justice

Justice is a key ingredient for economic growth. People will not invest if they fear that their life, liberty and property may be subject to arbitrary seizure and destruction. The rule of law and limited government provide a sphere of liberty within which individuals can make decisions with confidence that the fruits of their labor will not taken by the more powerful.

Justice is not just about legislation, however. Public and private discrimination diminish a person’s ability to individuate and develop, an ability that drives innovation and growth in the artistic, economic and scientific realms. In India the caste system binds many people to the lives of their ancestors regardless of desire, talent or will. In parts of the world half the population is subjugated and bound to a limited vision of their life, a vision which is not of their own making. Similar if less extreme forces have limited women and blacks in the United States.

In a pathbreaking paper, The Allocation of Talent and U.S. Economic Growth, Jones, Hsieh, Hurst, and Klenow connect a micro allocation model to a macro growth model to estimate that the lifting of much discrimination in the United States since 1960 has had a large effect on economic growth:

In 1960, 94 percent of doctors were white men, as were 96 percent of lawyers and 86 percent of managers. By 2008, these numbers had fallen to 63, 61, and 57 percent, respectively. Given that innate talent for these professions is unlikely to differ between men and women or between blacks and whites, the allocation of talent in 1960 suggests that a substantial pool of innately talented black men, black women, and white women were not pursuing their comparative advantage. This paper estimates the contribution to U.S. economic growth from the changing occupational allocation of white women, black men, and black women between 1960 and 2008. We find that the contribution is significant: 17 to 20 percent of growth over this period might be explained simply by the improved allocation of talent within the United States.

In other words, the United States has benefited greatly from the growth of justice.

An email from Philip Tetlock

Dear Tyler,

I wanted to thank you for encouraging your readers last year to volunteer for the Intelligence Advanced Research Projects Agency (IARPA) forecasting tournament. The Year 1 results are in–and they contained more than a few surprises. Most surprising was how well our forecasters performed. They collectively blew the lid off the performance expectations that IARPA had for the first year. Their original hope was that in Year 1 the best forecasting submissions might be able to outperform the unweighted average forecasts of the control group by 20%. When we created weighted-averaging algorithms that gave more weight to our most insightful and engaged forecasters, these algorithms beat that baseline by roughly 60% (exceeding IARPA’s expectations for Year 4).

Our forecasters did so well that some thoughtful observers now doubt it is possible to do much better — which is why we have taken the unusual step of skimming the best forecasters from our year 1 experimental conditions to create teams of “super forecasters.” These teams will be functioning more as research collaborators than as research participants (they will have access to our algorithms but the discretion to override the algorithms with their own judgment). In my view, these “super forecasters” are distinguished by three characteristics: (1) an intense curiosity about the workings of the political-economic world; (2) an intense curiosity about the workings of the human mind; (3) cognitive crunching power (“fluid intelligence” and a capacity for “timely self correction”).

Of course, the decision to skim off our best forecasters into elite teams — coupled with the inevitable attrition rate in a time-consuming exercise of this sort — means that we are in the market for new forecasters, ideally potential future “super-forecasters.” So we are launching a new recruiting drive.

My hope is that you might mention this project again to your readers and encourage them to visit the registration page at www.goodjudgmentproject.com/register.

If you would like more details about our project, please just ask (I didn’t want to inundate you with details and the Year 1 results are, of course, preliminary (distinguishing skill from luck is a perpetual challenge)).

Raghu Rajan polarizes with his essay

Greg Mankiw calls it wise, John Cochrane likes it, David Brooks likes it, and I liked it, but other people are upset or less impressed.  Karl Smith flips out.  Adam Ozimek points out one misunderstanding of the piece, not the only one I might add.  The essay itself is here.

Ezra Klein argues that Rajan should not have presented long-term vs. short-term thinking as either/or (for more on the “false choices” view, read here).  To be sure, some policies such as immigration reform help both the short and long-term problems.  Still, any given dollar must be spent somehow and “the stimulus model” and “the long-term investment model” are indeed competing visions for the allocation of resources.  Think of it as having to choose a rate of discount for evaluating expenditures.  I say choose the low discount rate, which of course still may justify those forms of stimulus with long-term payoffs.  Ezra also notes that long-term investments may require short-term sweeteners to pass, but I see that as an illustration of Rajan’s point, namely that we are not very interested in the long run for its own sake.

Once the problem is presented in sufficiently precise microeconomic language, we can see where the real choice has to be made, namely at the level of the discount rate.

Rajan wants to spend money as an investment model would suggest.  There is an “investment drought,” including from our government, and the growth-inducing parts of discretionary spending are coming under increasing pressure.  AD stimulus is/would be less effective with each passing day.  Raghu’s case on this point is strong, maybe you don’t agree but I don’t see that the critics have grasped it with sufficient depth.

In the past, in other contexts, Karl Smith and Matt Yglesias have defended “muddle through” and short-term thinking in policy.  I see the public choice literature — both theoretically and empirically — as suggesting political discount rates to be far too high.  Climate change is Exhibit A, but other examples are numerous.

Krugman is upset at Rajan, but where to begin?  He misunderstands Rajan on structural unemployment, for a start see Adam’s post of correction listed above.  (In general Krugman has written and rewritten more or less the same post against structural unemployment at least a dozen times without responding to, or even presenting, a strong version of the argument.  It’s an intellectual Turing test fail, and maybe I’ll cover this some other time.)

From Krugman, there is more:

Most important, as Karl Smith says, is the fact that Rajan’s injunction that we focus on long-run growth isn’t responsible — it’s deeply feckless. The truth is that we don’t know much about promoting long-run growth, whereas we know a lot about promoting short-run recovery — which is a very different problem. In practice, stroking your chin and talking about the long run is mainly an excuse for doing nothing.

I would find it more useful if Krugman simply stated his preferred discount rate, and whether he wishes to count highly uncertain results for nothing (I don’t think so).

In any case, Krugman gets it backwards.  Any Martian visiting the economics blogosphere, or for that matter Krugman’s blog, could tell you that most of micro is a more or less manageable topic, whereas macro induces economists to start thinking of each other as idiots and fools.

More substantively, we know a fair amount about promoting growth, for instance read Alex’s The Innovation Renaissance, much of which has been endorsed by left-wing thinkers too.  Read the new Acemoglu and Robinson book.  Even Robin Wells thinks we know how to promote long-run growth.

One might try to draw a distinction between “once and for all” changes in output and permanent boosts to the rate of economic growth, a’la Solow.  In this context, that won’t wash, even if it is otherwise a defensible distinction (debatable).  If we could get many “one time” gains today, for five or ten years running, that would be excellent and would boost growth and create jobs, whether or not we would be boosting the rate of innovation twenty years out.  Krugman in other contexts argues for such gains all the time and with great vehemence and certainty, not with the faux temporary agnosticism exhibited above.

Finally, Rajan is a case for testing Krugman’s oft-stated view that we should listen most seriously to those who have made good predictions in the past.  Rajan was probably the best, more accurate, most serious, most detailed, and most non-Chicken Little predictor of the financial crisis.  You might think that means he gets listened to today, or given the benefit of the doubt on interpretation, but apparently not.

The economics of geoengineering

“The odd thing here is that this is a democratizing technology,’’ Nathan Myhrvold told me. “Rich, powerful countries might have invented much of it, but it will be there for anyone to use. People get themselves all balled up into knots over whether this can be done unilaterally or by one group or one nation. Well, guess what. We decide to do much worse than this every day, and we decide unilaterally. We are polluting the earth unilaterally. Whether it’s life-taking decisions, like wars, or something like a trade embargo, the world is about people taking action, not agreeing to take action. And, frankly, the Maldives could say, ‘Fuck you all—we want to stay alive.’ Would you blame them? Wouldn’t any reasonable country do the same?”

That is from Michael Specter, here is much more.

Assorted links

1. The Hindenburg’s smoking lounge.

2. Marc Gunther on An Economist Gets Lunch.

3. “I can imagine a spoon being part of a dish.”, and patriotic kitchen skillet markets in everything.

4. An eleven-year-old boy takes a Stanford game theory class.

5. Markets in everything, evil child-stalking clowns, better teach your eleven-year-old some game theory.

6. Against chairs.

*The Moral Molecule*

That is the new book by Paul Zak, and the subtitle is The Source of Love and Prosperity, namely oxytocin.  Here is a recent article by Paul, related to the book.

Why they hate Santa (the culture that is Scotland?)

The poster, which features a slightly demonic looking Father Christmas looming over a small boy, is part of the art student’s campaign to put an end to the commercialisation of Christmas and to launch an attack on the advertising industry’s targeting of children. “Santa gives more to rich kids than poor kids,” declares the poster, which will be on Glasgow’s Balmore Road.

“Santa Claus is a lie that teaches kids that products will make them happy. Before they’re old enough to think for themselves, the story of Santa has already got them hooked on consumerism. I think that’s more immoral than this billboard,” said Mr Cullen, who spent four years studying advertising before becoming disenchanted with the industry and switching to Glasgow School of Art’s environmental art course.

Here is more, and for the pointer I thank Jeremy Davis.

First license for driverless cars

…on Monday, Nevada became the first to approve a license for “autonomous vehicles” — in other words, cars that cruise, twist and turn without the need for a driver — on its roads.

The license goes to Google, the Silicon Valley technology giant known more for its search engine and e-mail service that nonetheless has been known to dive into other big ideas such as space elevators to Internet-enabled glasses.

The story is here, and for the pointer I thank John Chilton.  I am curious to see how liability evolves.

How savage has European austerity (spending cuts) been?

To be sure, there are particular small countries which have made serious spending cuts, in the Baltics most of all.  But sometimes one hears it said that an anti-austerity strategy must be EU-wide as a whole, or that austerity is “a failed strategy for the eurozone,” or something similar.  So perhaps it is worth looking at some numbers for the larger picture.  Here is a graph which puts the matter in some perspective:

Veronique de Rugy, who compiled this data, writes:

First, I wish we would stop being surprised by what’s happening in Europe right now. Second, I wish anti-austerity critics would start acknowledging that taxes have gone up too–in most cases more than the spending has been cut. Third, I wish that we would stop assuming that gigantic “savage” cuts are the source of the EU’s problems. Some spending cuts have been implemented in a few countries. Also, if this data were adjusted for inflation (which I would prefer but the data isn’t available) it would possibly show a slight decrease and certainly a flatter line for all countries. However, the overwhelming take away from the European experience is that a majority of governments haven’t really implemented spending cuts, large or small, and some have even continued to grow.

There is further discussion at the link.  Via Pat Lynch, here you will find OECD data, no country is spending below its 2004 level.

Addendum: My response from the comments section:

The real question addressed by this post is how bad spending cuts have been in nominal terms, keeping in mind in the short run it is supposedly nominal which matters (that said, gdp and population [and inflation] are not skyrocketing in these countries for the most part).  It is fine to argue “due to automatic stabilizers, spending should have increased more than it did.”  That is not how people phrase it, rather they are complaining rather vociferously about “spending cuts,” many of which are either imaginary or extremely small.

From the shrillness of responses, and by the frequency of frame switching, one can see how this post and this data have hit a raw nerve.