I recently got into a brief debate with someone over whether drugs, and in particular marijuana, should be legal or not (the discussion arose after I made the (somewhat) tongue-in-cheek comment that if Detroit wants to survive, it should become the next Sin City).
Anyways, this person said he was against legalizing marijuana because it is a gateway drug. Now the Gateway Drug Theory as I understand it, when it comes to marijuana, is more or less defunct as a legitimate scientific theory. At the very least, it has been acknowledged by most in the scientific community that tobacco and alcohol are much "stronger" gateway drugs than marijuana.
This gateway argument doesn't hold for two primary reasons. The first is the age old rule of statistics: correlation does not equal causation. In other words, substitute the word "milk" for "marijuana" and you have the same exact argument. I believe that substance use or abuse is much more a revealer of who someone is and the conditions that affect their life as oppossed to being causes of a "bad lifestyle." Of course drug use/abuse can contribute to a downward spiral, but I'm unconvinced it is primarily due to drug use or is a chicken/egg problem.
Secondly, I think this argument reveals a great deal of confirmation bias within the proponent. And that confirmation bias is that a lot of people, for whatever reason, hate and are freaked out by weed. Even though marijuana is far less dangerous than tobacco and alcohol, there is a bizarre taboo that surrounds marijuana that has only been perpetuated by decades of federal taxpayer-funded propoganda campaigns. Why people have such an irrational fear of marijuana relative to alcohol and tobacco is beyond me, but if you find yourself discussing this issue with someone and they refuse to acknowledge that tobacco and alcohol are just as gateway-relevant as marijuana and thus should be made illegal as well, than this is most likely the reason why.
If anyone is familiar with scientific papers that find marijuana a more potent gateway drug than alcohol and tobacco, please forward on to me. My searches have been futile so far.
Showing posts with label Methodology. Show all posts
Showing posts with label Methodology. Show all posts
Cochrane vs. Krugman
A couple of months old, but John Cochrane takes Paul Krugman to task in this essay.
(HT: The Big Questions)
(HT: The Big Questions)
Paul De Grauwe on the State of Macro
Via Taking Hayek Seriously, here is a link to Paul De Grauwe's new paper "Top Down versus Bottom Up Macroeconomics". The introduction to De Grauwe's paper:
In order to understand the nature of different macroeconomic models it is useful to make a distinction between top-down and bottom-up systems. In its most general definition a top-down system is one in which one or more agents fully understand the system. These agents are capable of representing the whole system in a blueprint that they can store in their mind. Depending on their position in the system they can use this blueprint to take over the command, or they can use it to optimize their own private welfare. These are systems in which there is a one to one mapping of the information embedded in the system and the information contained in the brain of one (or more) individuals. An example of such a top-down system is a building that can be represented by a blueprint and is fully understood by the architect.
Bottom-up systems are very different in nature. These are systems in which no individual understands the whole picture. Each individual understands only a very small part of the whole. These systems function as a result of the application of simple rules by the individuals populating the system. Most living systems follow this bottom-up logic (see the beautiful description of the growth of the embryo by Dawkins(2009)). The market system is also a bottom-up system. The best description made of this bottom-up system is still the one made by Hayek(1945). Hayek argued that no individual exists who is capable of understanding the full complexity of a market system. Instead individuals only understand small bits of the total information.
The main function of markets consists in aggregating this diverse information. If there were individuals capable of understanding the whole picture, we would not need markets. This was in fact Hayek’s criticism of the “socialist” economists who took the view that the central planner understood the whole picture, and would therefore be able to compute the whole set of optimal prices, making the market system superfluous.
My contention is that the rational expectations models are the intellectual heirs of these central planning models. Not in the sense that individuals in these rational expectations models aim at planning the whole, but in the sense that, as the central planner, they understand the whole picture. These individuals use this superior information to obtain the “optimum optimorum” for their own private welfare. In this sense they are top-down models.
In this paper I will contrast the rational expectations top-down model with a bottomup macroeconomic model. This will be a model in which agents have cognitive limitations and do not understand the whole picture (the underlying model). Instead they only understand small bits and pieces of the whole model and use simple rules to guide their behavior. I will introduce rationality in the model through a selection mechanism in which agents evaluate the performance of the rule they are following and decide to switch or to stick to the rule depending on how well the rule performs relative to other rules.
Mankiw vs Krugman
Greg Mankiw defends himself against (seemingly unjust) charges made by Paul Krugman.
Every Keynesian style defense I've read on the stimulus package, including the White House, confuses modeling with reality. Krugman, the central figure of this group, consistently determines the assumptions he makes about the economy are 100% true and infallible. This is an unbelievably arrogant and dishonest thing for someone as intelligent and influencial as Krugman to do. Mankiw writes:
I do not object to claims such as:
A: "Based on our models of the economy, we believe there would be X million fewer jobs today without the stimulus."
But it is absurd to suggest that you can say:
B: "We have measured how many jobs the stimulus has saved or created, and the number is X."
Economists are capable of making statements such as A, but it is beyond our ken to make statements such as B. Statement B is, of course, much stronger than statement A, as it purports to be based on data rather than on models. Unfortunately, we are hearing statements like B much too often from administration officials. A good example is here, where can you "learn" that 110,185.36 jobs have been created or saved in California alone.
Krugman is disguising politics as economics, and his pedigree is allowing him to get away with it. This is bad news for the discipline of economics.
UPDATE: Mario Rizzo weighs in over at Think Markets.
Every Keynesian style defense I've read on the stimulus package, including the White House, confuses modeling with reality. Krugman, the central figure of this group, consistently determines the assumptions he makes about the economy are 100% true and infallible. This is an unbelievably arrogant and dishonest thing for someone as intelligent and influencial as Krugman to do. Mankiw writes:
I do not object to claims such as:
A: "Based on our models of the economy, we believe there would be X million fewer jobs today without the stimulus."
But it is absurd to suggest that you can say:
B: "We have measured how many jobs the stimulus has saved or created, and the number is X."
Economists are capable of making statements such as A, but it is beyond our ken to make statements such as B. Statement B is, of course, much stronger than statement A, as it purports to be based on data rather than on models. Unfortunately, we are hearing statements like B much too often from administration officials. A good example is here, where can you "learn" that 110,185.36 jobs have been created or saved in California alone.
Krugman is disguising politics as economics, and his pedigree is allowing him to get away with it. This is bad news for the discipline of economics.
UPDATE: Mario Rizzo weighs in over at Think Markets.
Kling on the Stimulus Package and Macro
Arnold Kling, my go-to-guy anything macro-related, offers some thoughts on the stimulus package:
It would appear that the great claim to fame of the stimulus is that it kept state and local governments from having to reduce spending. If you combine that with wage stickiness at the state and local level (that is, if you believe that they would cut jobs rather than cut pay for government workers), then the stimulus saved jobs. From a Recalculation perspective, one might ask whether those are the jobs that you would want to save.
Here's an essay by Kling on why he lost faith in traditional macro. Some key snippets:
There are no controlled experiments in macroeconomics. We would like to observe what would happen to employment and output in the United States in 2010 under different stimulus proposals. Ideally, we could construct alternative universes with the exact same initial conditions and try different policies. In practice, this is not possible.
When researchers attempt macroeconometrics, they are attempting to turn different time periods into controlled experiments. In effect, we take the situation in 1980 and 2005 and identify the factors that cause them to be different. We are interested in the effects of particular factors, notably fiscal and monetary policy. This method is valid only if we have properly controlled for other factors. The way I see it, controlling for other factors is impossible, because structural change is too important, too multi-faceted, and too pervasive for any statistical methodology to overcome.
***
Because of the need to impose strong priors, the structural approach is nothing but a roundabout way of communicating the way you believe the economy works. The estimated equations are not being used to discover relationships. Instead, the equations are being used by the econometrician to communicate to others the econometrician's beliefs about how the economy ought to work. To a first approximation, using structural estimates is no different from creating a simulation model out of thin air by making up the parameters.
His concluding paragraph:
We badly want macroeconometrics to work. If it did, we could resolve bitter theoretical disputes with evidence. We could achieve better forecasting and control of the economy. Unfortunately, the world is not set up to enable macroeconometrics to work. Instead, all macroeconometric models are basically simulation models that use data for calibration purposes. People judge these models based on their priors for how the economy works. Imposing priors related to rational expectations does not change the fact that macroeconometrics provides no empirical information to anyone except those who happen to share all of the priors of the model-builder.
It would appear that the great claim to fame of the stimulus is that it kept state and local governments from having to reduce spending. If you combine that with wage stickiness at the state and local level (that is, if you believe that they would cut jobs rather than cut pay for government workers), then the stimulus saved jobs. From a Recalculation perspective, one might ask whether those are the jobs that you would want to save.
Here's an essay by Kling on why he lost faith in traditional macro. Some key snippets:
There are no controlled experiments in macroeconomics. We would like to observe what would happen to employment and output in the United States in 2010 under different stimulus proposals. Ideally, we could construct alternative universes with the exact same initial conditions and try different policies. In practice, this is not possible.
When researchers attempt macroeconometrics, they are attempting to turn different time periods into controlled experiments. In effect, we take the situation in 1980 and 2005 and identify the factors that cause them to be different. We are interested in the effects of particular factors, notably fiscal and monetary policy. This method is valid only if we have properly controlled for other factors. The way I see it, controlling for other factors is impossible, because structural change is too important, too multi-faceted, and too pervasive for any statistical methodology to overcome.
***
Because of the need to impose strong priors, the structural approach is nothing but a roundabout way of communicating the way you believe the economy works. The estimated equations are not being used to discover relationships. Instead, the equations are being used by the econometrician to communicate to others the econometrician's beliefs about how the economy ought to work. To a first approximation, using structural estimates is no different from creating a simulation model out of thin air by making up the parameters.
His concluding paragraph:
We badly want macroeconometrics to work. If it did, we could resolve bitter theoretical disputes with evidence. We could achieve better forecasting and control of the economy. Unfortunately, the world is not set up to enable macroeconometrics to work. Instead, all macroeconometric models are basically simulation models that use data for calibration purposes. People judge these models based on their priors for how the economy works. Imposing priors related to rational expectations does not change the fact that macroeconometrics provides no empirical information to anyone except those who happen to share all of the priors of the model-builder.
GDP and The Descendents of Keynes
Veronique de Rugy cuts through the nonsense of the recent GDP numbers. A snippet:
the way the GDP accounts for government spending is totally biased: It assumes that if the government is spending $200,000 on a contractor to repave a road in the middle of nowhere that it will create $200,000 of genuine economic value. By contrast, GDP measures are tougher on private-sector spending. As my George Mason university colleague Garett Jones explained to me recently “So if Exxon Mobil pays an engineer $200,000 per year, that only shows up in GDP if the engineer finds an extra $200,000 of oil to sell, or builds a new machine that sells for $200,000, something like that. So our GDP measures of “government spending” are awful–and when the government is in a race to spend money as quickly as possible, these measures are going to be even worse than usual.”
Mario Rizzo does an even better job examining the whole of the White House's and Congress' spending strategies. His concluding paragraph:
In sum, at least 2.5 percentage points of the 3.5 percent increase are suspect on their own terms. And then there are the future costs to bear. As long as the stimulus-spending persists the “stuff index” (GDP) will look okay. And as long as the costs are hidden either in the future or in some other way, the politics will look fine for the stimulators.
Keynesian types want to spend as much as quickly as possible because they believe Depression 2.0 will arrive if we don't. Supply siders want the market to reallocate resources on its own to achieve equilibrium. The Keynesian argument is markets are driven by fear and greed, as Rob has pointed out a few times, and will spiral into oblivion without proper government intervention. The consequences of spending nor the creation of value/utility related to said spending do not matter to the Keynesian (though he may claim they do). Supply siders believe a reallocation would be long, tough and painful for many, but ultimately more appropriate and healthier than attempting to manipulate the economy on a grand scale.
GDP is a wonderful tool for the neo-Keynesian to frame and promote his story. But when you seperate the recipe from the final product, I don't think there is a whole lot to trust or like.
the way the GDP accounts for government spending is totally biased: It assumes that if the government is spending $200,000 on a contractor to repave a road in the middle of nowhere that it will create $200,000 of genuine economic value. By contrast, GDP measures are tougher on private-sector spending. As my George Mason university colleague Garett Jones explained to me recently “So if Exxon Mobil pays an engineer $200,000 per year, that only shows up in GDP if the engineer finds an extra $200,000 of oil to sell, or builds a new machine that sells for $200,000, something like that. So our GDP measures of “government spending” are awful–and when the government is in a race to spend money as quickly as possible, these measures are going to be even worse than usual.”
Mario Rizzo does an even better job examining the whole of the White House's and Congress' spending strategies. His concluding paragraph:
In sum, at least 2.5 percentage points of the 3.5 percent increase are suspect on their own terms. And then there are the future costs to bear. As long as the stimulus-spending persists the “stuff index” (GDP) will look okay. And as long as the costs are hidden either in the future or in some other way, the politics will look fine for the stimulators.
Keynesian types want to spend as much as quickly as possible because they believe Depression 2.0 will arrive if we don't. Supply siders want the market to reallocate resources on its own to achieve equilibrium. The Keynesian argument is markets are driven by fear and greed, as Rob has pointed out a few times, and will spiral into oblivion without proper government intervention. The consequences of spending nor the creation of value/utility related to said spending do not matter to the Keynesian (though he may claim they do). Supply siders believe a reallocation would be long, tough and painful for many, but ultimately more appropriate and healthier than attempting to manipulate the economy on a grand scale.
GDP is a wonderful tool for the neo-Keynesian to frame and promote his story. But when you seperate the recipe from the final product, I don't think there is a whole lot to trust or like.
GDP Shortcomings
Via MR, Michael Mandel's article this week in BusinessWeek is a must read. The opening paragraphs:
the official [GDP] statistics are not designed to pick up cutbacks in "intangible investments" such as business spending on research and development, product design, and worker training. There's ample evidence to suggest that companies, to reduce costs and boost short-term profits, are slashing this kind of spending, which is essential for innovation. Without investment in intangibles, the U.S. can't compete in a knowledge-based global economy. Yet you won't see that plunge reflected in the GDP and productivity statistics, which are still too focused on more traditional sectors, such as motor vehicles and construction.
In effect, government statisticians are trying to track a 21st century bust with 20th century tools. Not only is that distorting the critical data that investors, policymakers, and corporate executives use to evaluate the economy, but it might also be creating a false sense of relief as Americans battle a brutal recession.
If increasing GDP is the ultimate goal, but measuring the ultimate goal is structurally flawed, how are policy makers expected to accomplish the ultimate goal in a beneficial and efficient manner?
More on the current state of macro in a bit.
the official [GDP] statistics are not designed to pick up cutbacks in "intangible investments" such as business spending on research and development, product design, and worker training. There's ample evidence to suggest that companies, to reduce costs and boost short-term profits, are slashing this kind of spending, which is essential for innovation. Without investment in intangibles, the U.S. can't compete in a knowledge-based global economy. Yet you won't see that plunge reflected in the GDP and productivity statistics, which are still too focused on more traditional sectors, such as motor vehicles and construction.
In effect, government statisticians are trying to track a 21st century bust with 20th century tools. Not only is that distorting the critical data that investors, policymakers, and corporate executives use to evaluate the economy, but it might also be creating a false sense of relief as Americans battle a brutal recession.
If increasing GDP is the ultimate goal, but measuring the ultimate goal is structurally flawed, how are policy makers expected to accomplish the ultimate goal in a beneficial and efficient manner?
More on the current state of macro in a bit.
I Still Don't "Get" It
Caroline Baum of Bloomberg summarizes my ideas of stimulus and government spending far better than I have. She also touches on the morality/consitutionality of this issue, something I hope to weigh in on tonight or later in the week.
Again, maybe I'm just an ignorant layman, but the arguments of Romer, Krugman and other neo-Keynesians strike me as ivory tower, academic economist-in-a-bubble wishful thinking. I'm very open-minded though, so I really want to try and "get" these arguments.
I'm trying to get at the heart of the matter, but every time I think I do, a new layer emerges. So here is where I stand now. The point of stimulus is to keep GDP and employment numbers up. And based on the way economists measure these aspects of the economy, they should go up.
Two problems. The first, as I've alluded to before, is methodology. If economists setup the model GDP = C + I + G + (X - M) and it is accepted as legitimate (whether it actually is legitimate as a measurement is a whole other matter), to counteract the fall in C and I is most easily done by increasing G. So this is done. Then economists measure it, and presto!, GDP is as it was before and G has saved the day. But this is asinine. It's like saying if my income falls dramatically I can just borrow and spend until I'm back on my feet. This isn't how the real world works.
Secondly, and more importantly, and accepting the whole spending/GDP argument to begin with (which I don't), so what? In other words, what are the real effects? What real value is being created? What is the opportunity cost of taking this money out of the private sector? What will the future costs of borrowing be?
The crux of my stance: A "job" is an action (not a thing) one private party pays another private party to perform with that party's own money because they deem the end result of that job more valuable than the price (wage) they are paying for it. When the paying party no longer feels the product of the labor is worth the wage, then the job no longer exists.
A job is not money coercively taken from some (private actors) by another (government) then paid to others (special interests) to perform arbritary tasks government deems worth paying said special interests to perform. This is not valuable. This is not productive. It is only legalized thievery and the redistribution of wealth under the subtle guise of "stimulus" and "helping the common man".
As Milton Friedman said, nobody spends money as wisely as the owner of that money when they spend it on themselves.
Rob, tell me where I'm wrong because I'm sure I'm missing something or am misrepresenting something.
Again, maybe I'm just an ignorant layman, but the arguments of Romer, Krugman and other neo-Keynesians strike me as ivory tower, academic economist-in-a-bubble wishful thinking. I'm very open-minded though, so I really want to try and "get" these arguments.
I'm trying to get at the heart of the matter, but every time I think I do, a new layer emerges. So here is where I stand now. The point of stimulus is to keep GDP and employment numbers up. And based on the way economists measure these aspects of the economy, they should go up.
Two problems. The first, as I've alluded to before, is methodology. If economists setup the model GDP = C + I + G + (X - M) and it is accepted as legitimate (whether it actually is legitimate as a measurement is a whole other matter), to counteract the fall in C and I is most easily done by increasing G. So this is done. Then economists measure it, and presto!, GDP is as it was before and G has saved the day. But this is asinine. It's like saying if my income falls dramatically I can just borrow and spend until I'm back on my feet. This isn't how the real world works.
Secondly, and more importantly, and accepting the whole spending/GDP argument to begin with (which I don't), so what? In other words, what are the real effects? What real value is being created? What is the opportunity cost of taking this money out of the private sector? What will the future costs of borrowing be?
The crux of my stance: A "job" is an action (not a thing) one private party pays another private party to perform with that party's own money because they deem the end result of that job more valuable than the price (wage) they are paying for it. When the paying party no longer feels the product of the labor is worth the wage, then the job no longer exists.
A job is not money coercively taken from some (private actors) by another (government) then paid to others (special interests) to perform arbritary tasks government deems worth paying said special interests to perform. This is not valuable. This is not productive. It is only legalized thievery and the redistribution of wealth under the subtle guise of "stimulus" and "helping the common man".
As Milton Friedman said, nobody spends money as wisely as the owner of that money when they spend it on themselves.
Rob, tell me where I'm wrong because I'm sure I'm missing something or am misrepresenting something.
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