My Supposed Hubris

I do macroeconometrics, if pushed to define one of my research areas. This is a classic area for criticism by those towards the right of the political spectrum, not least Arnold Kling. Kling has an essay entitled Science of Hubris, in which he carries out his usual attack on what he calls scientism, i.e. any attempt to put really precise numbers on things that we can't be precise about. In Kling's mind, we just can't be precise about any kind of economic aggregate, notably GDP, or investment, because there's just too much going into them, and these aggregates are made up of very different things too.

So essentially, he dismisses the entire field of applied macroeconomics because statistical agencies aren't able to add things up particularly well, and because, well, economists shouldn't be thinking in such broad terms; they should only be thinking at the microeconomic level. Those who practice is, apparently, are the very epitome of hubris; that is, to have "excessive pride or self confidence" as my Mac's Dashboard dictionary tells me.

Of course, anyone who puts their head up above the parapet is liable to accusations of hypocrisy, but folk like Kling at EconLog, and Boudreaux at Cafe Hayek are remarkable examples of precisely this. Kling and Boudreax (and others on their respective blogs) have remarkable confidence in one thing, and one thing only: The price mechanism in a fully free market. They are scornful and incredibly bitingly sarcastic (esp. Boudreaux) of those who dare to suggest anything otherwise, who dare to imagine that government intervention could possibly be a useful thing. To be that requires a heck of a lot of hubris, from what I can see.

And it's not limited to that; Russ Roberts and David Henderson at EconLog had a number of posts about Ideological Turing Tests, and how those on each side of a debate characterise the other, declaring (of course), that those on the right, those nearer to the libertarian school of thinking, were much better than those anywhere else on the spectrum at accurately describing the position of their opponents. Then just today, a post about confidence, where the application is not to Austrians with their remarkable over-confidence in the price mechanism in many inappropriate contexts but, yes, you guessed it, Keynesians (or at least, their crude caricature of them). Utterly stunning the amount of times I think about pot calling kettle when I read Hayekian/Austrians on their blogs.

But back to macroeconometric models. What I struggle to understand is this. If an econometric model is built that happens to include all the relevant explanatory variables for an aggregate variable (e.g. inflation) such that the residuals are white noise, then to all intents and purposes, that aggregate variable has been explained. A humble presentation of such a model would not make bold predictions about the future (forecasting is entirely different to macroeconometrics), but would instead make suggestions at what had been learnt from this exercise. But Kling and those in his camp would disregard it entirely.

Kling et al suggest that one of the most dangerous things about Keynes and his teaching was that he let loose governments and convinced the common man that there was intellectual rigour behind their own whims and desires. Equivalently though, via their scepticism of absolutely everything other than what they previously believed in, Kling et al promote an unhelpful atmosphere of scepticism through which genuine academic progress is hindered - all because of their ideology rather than any desire to be scientific in their pursuit of knowledge.

What is the point of Libertarian Economists?

What useful function to they perform? Economics is a practical discipline, studying the allocation of resources by (semi) rational agents in the context of conflicting interests. On of the agents that will always exist is the government - it's fair to say few examples of anarchy have succeeding, for whatever reason (man's desire for power and to control, probably mostly).

The mere existence of that government will mean that there will be an incentive for some to lobby it to further their interests - creating laws, tariffs, imposing taxes, whatever it may be.

So, what is more useful: Libertarians, who spend their entire time talking about how corrupt, inefficient and a pure waste of space government is, or other economists who attempt to study the nature of the beast for what is it, and try to devise the best possible solution given that government will always exist and hence incentives to manipulate government will always be there?

Libertarians, who essentially just sit on the side bleating on about how terrible things are, or other economists who actually try and understand the nature of these interactions in order that they may, in the future, reduce the problems of crony capitalism? In response to what I think the latter group of economists do, libertarians would provide some pithy quote from Hayek about how because of information constraints, it is silly of us to think we can design things better. How lame is that? This essentially lumps libertarians in with folk like Creationists who try to get in the way of learning more about the world around us.

I think you know where I stand. I think this is the aspect of libertarians that irritates me most of all - their lack of a constructive alternative that could constitute a stable equilibrium.

I should really stop....

...however, I do keep reading blogs by libertarians. Here's one, where Arnold Kling describes another economist as using the "stupidest argument for stimulus". Apparently, that argument is that teachers are being laid off, and it's stupid because schools could instead be reducing salaries for teachers instead, if they valued these teachers so highly.

Now, of course Kling is averse to just about any argument in favour of fiscal stimulus because he is averse to just about any argument for government intervention it would seem (because the market always performs better - despite unending amounts of economic theory and empirical evidence to the contrary).

However, I think most of all it's just inconsistent of him. He says it's stupid because in economics there's always another way. Yet I suspect that when faced with the assertion "the deficit needs cutting", he wouldn't describe statements like "we must cut spending if we're going to cut the deficit" as stupid, even though perfectly equally, we could raise taxes to cut the deficit.

Maybe I'm just stupid, but I don't see what the difference is, and why Kling is also not advocating the stupidest of arguments, just because there is another perfectly reasonable way to do the same thing.

The Beveridge Curve

Inspired by a few things, I had a little look into the Beveridge Curve recently.  As the links will show, in the US something curious has happened to the Beveridge Curve since around the middle of 2008.  It appears to have shifted right dramatically:

Some of the commentators in the links have asserted that the change happened after the US government extended the duration of unemployment benefits, although others have noted that even taking into account the theoretically most generous impact of this duration change would not explain all of the movement.

David Andolfatto appears to be on to something, comparing this shift in the Beveridge Curve to previous shifts in Beveridge Curves towards the end of recessions.

I've done a couple of things. First I've looked into the data.  If one wants to spin an unemployment benefits story, one can.  Simply put in dummy variables into a simple Beveridge curve regression; we get something like:

Here, Y is the vacancy rate, X is the unemployment rate.  Standard errors are in parentheses.  Clearly, if one wants to sell a structural break story, one can: Both the impact on the intercept (via dummy D_t) and the slopt (via the interaction of D and X) are strongly significant. The resulting regression lines look like:

Hence the intercept falls in size dramatically, as does the slop of the curve.  Had this happened, it would be really scary stuff: Much higher unemployment rates would be able to coexist with very small declines in the vacancy rate.

However, a regression such as that just run suffers from many, many econometric problems.  Not least both the unemployment rate and the vacancy rate bear all the hallmarks of non-stationary, unit-root time series, and hence a static regression of one on the other, as just carried out, could well be spurious. Additionally, there are many recognised factors that might shift the Beveridge Curve relationship, without affecting its slope.  Economically plausibly, things other than the duration of benefits may have contributed to the scatter plots observed for the Beveridge Curve.

To investigate these possibilities we must specify a model that includes a number of lags of the relevant variables, and also extends the set of relevant variables from just the unemployment rate to other variables capturing the efficiency of the matching process (the current hiring rate for example could be a proxy), the level of long-term unemployed (proxy by those unemployed over 27 weeks), the level of frictional unemployment (those unemployed less than 5 weeks), and the level of labour mobility as well as simply the level/duration of benefits and the level of productivity and labour costs.  This means a very large regression model.

However, one can employ an automatic model selection procedure called Autometrics (in OxMetrics 6) to help. This software is based on the General-to-specific methodology of Sir David F. Hendry and seeks to select the simplest possible model from an initially large model with many candidate explanatory variables.  Such a procedure of model selection would actually find that the 2008 US legislation change to extend unemployment benefits was entirely uninformative for explaining the evolution of the Beveridge Curve, and would actually find a curve with a slope somewhere in-between the two found above, but a curve that is shifting left and right with labour mobility, with long-term unemployment and other factors. I'll save you the details, but I'm writing it up currently, and just plot you the following to give you some idea what was found:

The black line is the Beveridge Curve found after the more detailed econometric investigation allowing for factors that shift the Beveridge Curve. Hence one can see that without these additional variables we have not necessarily identified the Beveridge Curve just by eye-balling the scatter plot. We need to do serious econometric analysis based on economic theory, helpfully augmented by Autometrics, if we are to understand more of what is going on.

However, if you are simply informed by plots and not complicated econometric analysis, an alternative consideration of a scatter plot of the vacancy level and unemployment level in the UK over roughly the same time period may be more persuasive of the idea that it is not unemployment benefits causing what we've seen recently (since there has been no similar increase in the duration of benefits):

All in all, I'm going for the "it's not a structural break caused by the duration of benefits" story, along the lines of that proposed by David Andolfatto.

Surprising and unsurprising

John B. Taylor has long been associated with monetary policy after his contributions to the field, most obviously encapsulated in the Taylor Rule.  However, it would sound like he's heading in the direction that Paul Krugman took of getting so mired in politics that one seriously has to call into question his academic integrity.  In this defence of a package to cut government spending, he says on the idea that cutting government spending might cause the economy to contract: "Nothing could be more contrary to basic economics, experience and facts"

Really?  The basic economics that people tend to make use of when making suggestions that cutting government spending might just have a negative effect on the economy is national accounting identities which say that part of aggregate spending is government spending.  The experience?  Well, most economies that have tried it when they haven't had some positive external shock to help them (so we're talking currently of the UK and Ireland at the minimum, and many more could be found I'm sure).  Facts?  Well we've just noted a basic economic model, and given a few experiences to counter Taylor.

But of course, according to Taylor, we're just wrong, plain wrong.  That's because he's basing what he says on some model that assumes immediate crowding in when governments reduce spending (in the absence of any evidence for such an effect - but Taylor says these models are more modern so that means they must be right!).  Well how about that.  A model which assumes that a fiscal contraction will be expansionary finds just that.  Mindblowing.  And to think people get disillusioned with economists.  So in the US, this bill will pass, and sure enough growth won't follow, just like we're seeing in the UK currently.  No wonder people like Krugman despair so much...

 

What Did They Expect?!

It seems both Nick Clegg and David Willetts are surprised and disappointed that universities are thinking about charging the full £9000 they are allowed to charge students for an education under the Coalition's reforms.

Duh!  You cut off university funding, and allow them to make it up by charging fees and then you're surprised they do that?!

Willetts's comments are bizarre - these universities may get caught out?  Well duh!  Of course they might, you're making it a marketplace!  Then they'll change when they realise, instead of being told what to do by government...

Nick Clegg's comments though take the biscuit - it's not up to the universities what fees they set?!  I thought that was the entire point of the reform? Seems like a very confused man these days Nick Clegg...

Blog Resurrection

So it turns out that the link in the previous post no longer works. I left Oxford University and now I am employed by the University of Birmingham - although they don't give me webspace so I have to buy my own.  Running a blog on my website though has turned out to be cumbersome, whereas these web based things are much more flexible and easy. And now I have a nice app from the Google Chrome Store to cumulate all my blogs into one window, well it's never been easier.

I probably have too many blogs, but I don't have one where I can simply write about anything, so that's what I think I'll resurrect this one for.  I'm an avid reader of many blogs via Google Reader, and hence I often feel the need to comment, but don't know whether I really have an appropriate blog on which to do that commenting, so here goes...