Wednesday, June 30, 2010

Ricardian Equivalence, when 19th century economics strikes back

Jon Chait, over at The New Republic, has this nice little find from the always entertaining op-ed section of the Wall Street Journal. Today's entertainer is Allan Meltzer of the AEI. Prof. Meltzer seems to have his doubts on the effectiveness of the stimulus. Unlike some more nuanced criticisms, such as Mark Thoma's Stabalization versus Growth issue, Meltzer kicks it old school, using a favorite of conservative economists:
"Most of the earlier spending was a very short-term response to long-term problems. One piece financed temporary tax cuts. This was a mistake, and ignores the role of expectations in the economy. Economic theory predicts that temporary tax cuts have little effect on spending. Unless tax cuts are expected to last, consumers save the proceeds and pay down debt. Experience with past temporary tax reductions, as in the Carter and first Bush presidencies, confirms this outcome."
This notion that temporary tax cuts don't increase consumption because people will defer current consumption to pay for future taxes, whereas permanent tax cuts are good because people will not defer, but consume now, borrows from an idea Robert Barro, an economics professor at Harvard, calls Ricardian Equivalence. In this view, any tax cuts that are financed by adding to the deficit will cause consumers to save more now to offset increased taxes in the future. This relies on the belief that consumers have perfect information and are completely forward-looking, luckily a Noble Prize winner has already been handed out to someone for dismantling this view, Joseph Stiglitz from his new book Freefall, take it away:

Now the interesting thing about Meltzer's argument is that not only does it assume that consumer's are completely forward-looking, ignoring borrowing constraints people face, as well as, the uncertainty people feel towards the futuer, but it also tacks on the belief that consumer's can distinguish between tax cuts that will "pay" for themselves if they are permanent versus those that are temporary, and will be rescinded. This seems like quite a leap of faith to me, surveys show that barely 50% of Americans can accurately name a basic economic idea, the unemployment rate. Until surveys show a massive majority of people understand even these basic ideas, I will be highly skeptical of any claims that consumers can accurately predict the intricacies of economic policy.




Tuesday, June 29, 2010

Polling Fail

Damn.  I've been looking at Daily Kos' Research 2000 polling for over a year, because, well, I trusted their numbers, and often developed a sense of optimism from their conclusions.  


Kos:
While the investigation didn't look at all of Research 2000 polling conducted for us, fact is I no longer have any confidence in any of it, and neither should anyone else. I ask that all poll tracking sites remove any Research 2000 polls commissioned by us from their databases. I hereby renounce any post we've written based exclusively on Research 2000 polling.
Damn.  


Read the detailed report here from the scientists Markos hired to uncover Research 2000's fishy polling.  And of course, Nate Silver.

~Louis~


[Update] via Greg SargentThe lawsuit

Monday, June 28, 2010

Jindal Follow-Up

Seems there is some actual reporting going on in relation to the political tug-of-war going on between Jindal and the White House over the oil spill:

1. This report by Faiz Shakir at The Progress report seems to be the best summary of attacks made by the Jindal regime, and the steps not taken to try and address the spill. Seems the EPA and Army Corps have looked into the most promising of Jindal's ideas, the Sand Berms, and ruled them to be exorbitantly expensive and impossible to predict their long-term effectiveness due to wear and tear of environmental factors.

2. This next article in the NYT captures the heart of modern anti-government/free market sentiment. Even after the knowledge of that same EPA review which ruled the berms ineffective, at best, environmentally destructive, at worst, they were still allowed to be created. But once dredging was halted in an environmentally pristine area, Jindal went full Sarah Palin (the Thrilla from Wasilla, as Louis and I aptly call her) on the White House,

"But the public disagreements have not stopped. This week federal authorities halted the dredging of sand for the berms in a certain part of the Chandeleur Islands, saying it violated the state’s permit and could jeopardize the islands themselves. Mr. Jindal replied by urging the federal government to “get out of the way” of a necessary defense strategy."

This notion that all the federal government has to do is lower the barriers and let the invisible hand do its work, makes little to no sense in the context of disaster management. This is a moment where disequilibrium, not equilibrium, rules. As was shown in the financial crises, when incentives are not aligned to make sure someone actually takes responsibility not just for the mess they created (i.e. securitizing mortgages), but also for the cleanup (i.e. resolution authority/bailout funds) then people/firms/governments do not easily come to a consensus about what is the right course of action. Instead, when disaster strikes, everyone is caught off guard and equilibrium is shattered, causing chaos to reign, and no one to be at the helm of a ship that has been left to steer the "free waters" for years. The bailout was a good example. Though a necessary pain to prevent an outright depression, it still left many of the critical decisions (executive pay, creditor haircuts, future management choices etc.) up to the financial firms, believing that all the government had to do was provide the map and the market would steer everything back on course. It seems Jindal's response to this off-course ship, that is the oil spill cleanup, follows this same sort of chaos. Let anyone and everyone try their hand at righting the ship, and if enough people are in on it, then the ship will inevitably get back on course. Unfortunately, this type of response means that the costs of failed attempts at righting existing wrongs are ignored. The smartest people, who have navigation skills, only get their chance at the wheel once some people have steered the ship for hundreds of miles in the wrong direction. It's the inability to internalize those externalities that causes much clouded thinking by proponents of the powers of the invisible hand, when, instead, regulation is what's needed when the equilibrium is shattered.

Friday, June 25, 2010

Strategic Blunders and Bobby Jindal

Polarization seems an endemic part of our current political climate, but would people really think that it would go so far as to affect the state responses to the current disaster, in order to score easy points against the White House. Well, according to a CBS report, Governor Jindal may be playing the political game with disaster management:
"But nearly two months after the governor requested - and the Department of Defense approved the use of 6,000 Louisiana National Guard troops - only a fraction - 1,053 - have actually been deployed by Jindal to fight the spill... "Actually we asked the White House to approve the initial 6,000," Jindal said. "What they came back and said is the Coast Guard and BP had to authorize individual tasks."...Coast Guard Adm. Thad Allen...said Jindal is just flat wrong. "There is nothing standing in the governor's way from utilizing more National Guard troops," Allen said...In fact, the Coast Guard says every request to use the National Guard has been approved, usually within a day. Now Jindal's office acknowledged to CBS News the governor has not specifically asked for more Guard troops to be deployed."

Now this is speculation, but the backtracking by the Governors office does highlight an interesting disconnect between rhetoric and reality here. I understand some would say that this is just a politician being a politician, trying to rhetorically demonize the only other plausible option for voters, the democrats, while not really changing the substance of the situation. But it seems to go against the strategic interests of politicians in our representative system. Jonathan Bernstein, over at his Plain Blog about politics, has a series of posts, here and here, arguing about the nature of representation in a system that does not rely on direct governance. For Bernstein, representation does not mean that a politician follows in lock step with the public opinion polls within their given constituency, but instead they create a pseudo-contract between politicians and constituents, over campaign promises that are made:

"And, again, my point is that as long as a politician fulfills her promises, and explains what she's doing in a way that strengthens her constituents' trust in her, then she's a good representative."

Now this is what strikes me as interesting about Jindal's move. Though these rhetorical jabs may help to bolster him in relation to Obama, the politically strategic maneuver would be to bolster him in relation to the next person he sees challenging his governorship. Empty promises post this disaster seems to violate one of the fundamental tenets of his platform from the 2007 campaign, that Louisiana would not experience the sort of state level incompetence they experienced during Katrina under Governor Blanco. So what is Governor Jindal doing here? It seems, though, many counted his chances at national prominence over his now infamous response to Obama's State of the Union, he's playing like a politician who is responding to a base of constituents far beyond his home state. It's nice to see even the the fringe candidates gearing up for 2012.


Thursday, June 24, 2010

Identity Economics and Cartooning Around


Ho Internet,


To kick off this quaint little forum, I thought a post that blends three of my favorite subjects; economics, cartoons, and contrarianism, would be fitting. My friend/fellow blog cohort, Louis, stumbled across this article by Frances Woolley at Worthwhile Canadian Initiative comparing Spongebob and Canadian education/immigration policies to Akerlof and Kranton’s “Identity Economics,“ which I would say is a must read for anyone interested in sociology or economics.


Woolley boils down Akerlof and Kranton’s thesis to the notion that if a person’s place of work affirms their self-defined identity then they will be more productive. In the case of the show Spongebob, the character Squidward is the unproductive employee because he deems himself an intellectual and therefore over-qualified to be working as a cashier at the local burger shack, whereas Spongebob believes being a fry cook is his calling, so his job reaffirms his identity, causing him to work harder.


Woolley ties this over-qualification, under-performance problem to Canadian immigration policy:


“In Canada, the problem of over-qualification is exacerbated by our immigration system. Canada admits immigrants on a point system that gives preference to highly educated candidates. However research by Phil Oreopoulos suggests that Canadian employers place little to no weight on foreign credentials and experience, while Steven Wald and Tony Fang and others have found that immigrants are more likely to be over educated for the jobs they hold.”


The study by Oreopoulous concludes that outright discrimination, not the points system, is at the heart of immigrant’s inability to get the jobs that they are qualified for:


Regardless of what behavior underlies these results, deciding whether to interview an applicant based solely on his or her name is illegal under the Ontario Human Rights Act. …Previous research on why immigrants do not assimilate in the labor market has largely ignored this potential explanation, perhaps because of lack of data ... Discrimination causes immigrants to miss out on hiring opportunities in situations where they are most qualified for a job.”


This harkens back to a point of Akerlof and Kranton’s Identity-based method that Woolley misses. It is not that individual utility can only be increased by realizing some self-made ideal, but utility-maximization can occur by fitting into a group that the individual feels a part of, “The utility then derives from group processes (p. 24).“


In the case of Spongebob, there is an episode where another employer buys Spongebob’s contract and tries to force Spongebob to make food for his burger joint. This competitor, named Plankton, even goes so far as to make an exact replica of the kitchen that Spongebob worked in previously, but that doesn’t make Spongebob work anywhere near as hard as he did at his old job. Spongebob does not feel that the competitor’s culture maximizes his pleasure, even though he is doing his same ideal job. Group-created culture and atmosphere, not just individual ideals, create utility.


If one looks at the question of over-qualification and immigration from this standpoint, then company-based discrimination becomes important. The issue of responsibility is no longer on the numbers game of immigration policy, is the country letting in too many over-qualified immigrants, but instead becomes centered around policies used to incorporate immigrants into the economy, is the economy structured fairly to allow immigrants to feel like they are part of the in-group of the economy?


The productive benefits to inclusion of people into these in-group’s are numerous, as outlined in Akerlof and Kranton. They pull from Muzafer Sherif’s famous experiments on inter-group bias, which show how people are bias towards the groups they have been assigned to/pick themselves, and likely to work harder for them. Spongebob only can identify himself with the Krabby Shack, and not Plankton’s Chum Bucket, therefore working for the former, but not the latter. One example Akerlof and Kranton use is how the best schools garner consistent results. These "model" schools are constantly attempting to break down divisions within student groups, creating a more holistic group encompassing the entirety of the school. This sort of what’s good for the group is good for you, reminds me of a now famous New York Magazine article which focuses on Goldman Sachs. Goldman benefited from this sort of inclusive atmosphere compared to its competitors:


“The cult of the individual, which I think has been a disadvantage to so many of the firm’s competitors, really doesn’t exist here,” says Lucas van Praag, the British-born communications director. “The more you have acceptance, the easier it is to be effective.”


So what does all of this say about where to take immigration policies from here. One idea is to provide more social networking for incoming immigrants. Providing tax-breaks to employers at medium to small sized firms for hiring recently admitted immigrants. A stricter enforcement of anti-discrimination policies may also be an idea. Oreopoulous and his coauthors were able to deduce this discrimination from merely mailing in applications. I wonder if this could not be replicated by the appropriate governmental agencies?


Nevertheless, this focus on the notion that over-qualification is an inevitability allows easy scapegoating, when concrete solutions seem like a better point for discussion.