Tuesday, February 04, 2014

House effects

Noah Smith and Chris House are engaged in a stimulating blogospheric discussion. I am tempted to engage House in debate. I am not at all tempted to actually read his posts. Caveat Lector I will here dispute the part of an an essay up to the point where I stopped reading.

update: paragraph breaks

added.

Welcome ThomaTwitterTots. When I wrote this post, I honestly considered it a test of whether Mark Thoma links to everything I write about economics methodology macro and all that. Note above (and below) that I admit I am critiquing a post which I didn't read to the end. I honestly thought "if that doesn't keep Mark Thoma from linking nothing will". Also Matt Yglesias has a more interesting post responding to House. He notes that academic economists are to the left of the general public and explains the leftish implications of economics 101.

See new added bit *

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According to Smith and my semi reading, House argues that in economics the facts have a conservative bias.

The evidence is that the policy views of economists are to the right of those of other academics. I guess that House guesses that this is because economists know more of the relevant facts. Smith thinks the facts may have a non DFH bias, but not a conservative bias. I want to consider three examples listed by House (at the point I stopped reading I admit).

"it is quite common to hear faculty members emphasizing the benefits of limited regulation, the gains from trade, and the harm caused by market intrusions like minimum wages, capital taxation and import tariffs. I am quite sure that many of the economists in my department would be viewed as radical right-wing conservatives by members of other departments at Michigan. "

Let's deal with them. The minimum wage is a case in which the facts seem to have won a long struggle. But not with the DFH view that it has no effect on employment. Estimated effects of the minimum wage on employment are the number one top example of meta-analytic evidence of publication bias. Over time, estimates have become more and more precise. The null of no effect was rejected at about the same significance level in many papers over a long time. That is, as the estimates became more precise, the estimated effect became smaller.

Now people tend to try to be a bit polite in the literature, but ask yourself what would happen if economists had dredged the data trying sprecification after specification until they got a result pleasing to Republicans. I am not saying that happened (I am confident it didn't) but it is very consistent with the facts.

This is a question on which the views of economists have shifted. I will now drop a name. About 25 years ago Brad DeLong said that maybe the equity benefits of the minimum wage outweighed the efficiency costs. Then he corrected himself and said "reading data from disk" (this meant a long pause back when computers were made of flints and bear skins). To drop another name, I asked Larry Katz what he thought of raising the minimum wage. He refused to answer yes or no and just said that the EITC was a much better policy.

This is not the current state of play. I think it is a clear case where economists were prejudiced against the minimum wage and many have been convinced by the strong evidence of small (if any) negative effects on employment.

OK now about capital income taxation. Here the effect on growth efficiency and welfare is through consumption savings equations. The argument against capital income taxation is based on the Euler equation. This Euler equation "Eichenbaum said something that really caught my attention: 'Maybe next time [we update our model], we can finally get rid of the...Euler Equation.'" Eichenbaum is a very leading macroeconomist who went on to explain that the Euler equation receives less than no support from the data.

Now here on eonomists and the facts, I note that this has basically been known for decades (as in was known when I was a student). Yet it is right there at the heart of macro models and is used to assess the efficiency effects of capital income taxes. I think this is clearly a case in which economists have just dismissed the facts because of the facts' blatant bias.

I think it is clear that many economists have views on the minimum wage and capital income taxation which place them to the right of the median US adult (and well to the right of the median academic). But the idea that these beliefs have anything to do with the facts is absurd. Instead they show the incredible ability of many economists to resist the data.

I now have to ask myself, if it isn't the evidence, then what explains economists's views. At one level it is simple. The arguments are based on simple standard economics models -- the ones which are taught first. The current body of theory does not support either conclusion. It is possible to come up with models so that the minimum wage causes increased employment and the optimal tax on capital income is positive (even if the revnues are then thrown away). The models are very close to standard models (the assumptions are not extreme). Economists' strange views on the topics then seem to come in two steps.

First old simple models have pro laissez faire implications. Second, the fact that any result can come out of an economic model forces economists to decide if the exercise of theorizing without data is a total utter waste of time (it is) or to prefer the old models because they are old (which is what many do). Many economists are convinced by theoretical arguments even if they are based on models which have been massively rejected by the data. Also those economists are convinced by theoretical arguments even if later work in theory demonstrated that the conclusions are the result of assumptions made for convenience and never taken seriously (until they had to be to get a conclusion). I won't argue these claims, because I have many times before and, I think, all honest economists know they are true.

A question remains why do the simple old models provide support for laissez faire. Here I think a key point is that they weren't always old. The policies certainly weren't always conservative. There was a classical liberal movement. Leading classical liberals developed economic theory as it once was. They also defeated Tories aristocrats and so forth. There once new policies are the oldest policies which are even considered. So the first (and second) wave of liberals created a world and a theory which praised and justified it. Economists who don't want to do without theory cling to that ideology, because the alternative is to admit that a priori reasoning can lead us anywhere and so leads us nowhere.

-------------------------------------------------------------------appendix of snips not worth reading.

* update: new extra bit

I have a new story about why economists' views are to the right of those of other social sciences. The view in my original post was (I hate to admit it but see below that I can't deny it) Marxist -- economics 101 was part of the Whig/classical liberal/bourgeois movement support of which is now conservative because they long ago totally supplanted the older Tory/aristocratic conservatives. Sticking with Karl, I note that Marx had much more influence on other social sciences than on economics. To me, his economics seems very very similar to Smith's. In contrast, sociology seems to have begun with attempts to reply to critique and build on Marx (this is my conclusion based on looking at the reading lists of intro sociology courses and reading one (1) of the books "The Protestant Ethic and The Spirit of Capitalism").

But I recently re-thought of another reason for the relative non leftism of economists compared to other academics. For simplicity, we consider models in which agents are completely selfish (and also totally shameless liars). There is always an apology that this is just a simplifying assumption which we think might be a useful approximation when studying say consumption/savings decisions (who really worries about whether it would be better for the economy if they spend or if they save ? except my mom ?). The suggestion is that once we understand models with selfish liars we will get to models with not totally selfish people who don't like to lie but will if the incentive is strong enough. Even the naive student who believes we mean to get there before the first of never finds the assumptions off putting. I think it is an experimental fact that people cooperate in the prisoners dilemma except for economics graduate students.

I don't totally enjoy being rude, but I'm going to be rude. I think there is a kind of conservative who assumes people are selfish and basically thinks that is OK. This is not the only kind of conservative. But look basically a totally selfish US academic is not going to be a serious egalitarian because they are near the top of the world income distribution. So I think people comfortable with the assumption of selfishness are more likely to be economists than academics in other fields and more likely to be conservative than the average academic.

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Also, a simple standard model of the use of capital income taxation to redistribute from the rich to the poor does give the standard result that as time goes to infinity the optimal tax rate goes to zero. But it does this exactly because the optimal policy eliminated all inequality and the most rabid egalitarian won't redistribute when everyone has exactly the same income. I note that this is the standard mathematical result with the standard model. Yet somehow that simple math seems to be over looked by the economists with whom House discussed the issue.

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Finally free trade. I was sincerely amazed to learn that someone thought that pro-free trade was the right more position. At the time (and now) I hated protection by rich countries because I considered it an expression of nationalism and based on the view that citizens of rich countries are more important than citizens of poor countries. I promise this perception of left and right was sincere. I oppose restrictions on trade for the same reason I oppose restrictions on migration.

I stress that the logic is very similar. I note that the idea that people should be free to migrate to the USA is not strong on the US right (or center or even left). It is, however, to be found in House's department. This is a case in which the standard logic of economists puts mainstream economists on the left fringe of the current policy debate.

Now I don't know what Krugman thinks of restrictions on immigration, but I do know that he supports free trade because he thinks it is in the interest of third world workers and he is egalitarian enough to be most interested in the interest of the absolutely poor (I know that because he wrote exactly that). I am not sure that Krugman would be eager to repeat this. His view -- that he cares more about some non-Americans than about the affected Americans is so far left as to endanger his influence.

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On another topic, Smith and House seem strangely puzzled by the fact that academics' views are well to the left of those of the general public. I can't think of a less puzzling puzzle. It is a fact (even if over stressed in simple economic models) that people would rather be rich than non rich. It is another fact that it is generally believed that academic salaries are low (I don't think this is all that true in the USA any more). The decision to become an academic is, I think, very definitely perceived by most academics as a choice to say no to wealth. This obviously selects people who think that money is filthy and that greed is very very bad.

Basically, I think the simple story of the US highly-educated elite is that kids are choosing other and finance (maybe also law if one likes money and not math). This means that people from center to far left are over represented in other. So academics tend to be to the left of non-academics. Reporters to the left of non-reporters and politicians capable of framing arguments to the left of politicians who can't.

Now it hasn't always been this way. When I was in college, the idea was that the way to make money was to get an MD. The shift may have come close to destroying the world financial system, but I think it has been great for medicine. In any case, whether or not it is true anymore, the view is that the academy is for people who hate greed.

2 comments:

Thornton Hall said...

Is there a parallel to be drawn with the fact that doctors persist in believing that dietary fat and cholestoral are bad and that grains are good?

Wallfly said...

@Thorton, the parallel is that at times it is very hard to get good data in biomedical research (because of expense, ethical concerns etc).
That's where the parallel to economics comes in. And when you don't have good data, institutional, professional, cultural forces have an inordinate effect on what should be scientific debate. So yes, good call.