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Sunday, February 27, 2011

The New York Times Editorial Board Writes

In a recent report, economists at Goldman Sachs estimated that the House cuts would reduce economic growth by 1.5 percentage points to 2 percentage points in the second and third quarters of 2011. That would devastate employment. As a rule of thumb, each percentage point drop in growth means a loss of 1.2 million jobs.

They confuse "growth of" and "the annualized rate of growth of". Since the time interval is two quarters, this is a factor of two error. Also their Okun's law coefficient (the rule of thumb) is roughly 12/7 times the standard coefficient estimated with historical data. Thus an overall errof by a factor of 24/7. Not Sour Sixteen, but not a very good job for colleagues of Paul Krugman.

It is a good thing that the NY Times editorial board is trying to predict the effects the Republicans proposed cuts would have. But they didn't succeed.

The Goldman Sachs team forecast a decline in the annual growth rate of 1.5% over the next two quarters (not 1.5 % to 2% by the way). That means they forecast that third quarter 2011 GDP would be 0.75% lower if the Republicans get their way.

The employment level is related to the GDP level (via the rule of thumb called Okun's law) so related to a decline in the annual growth rate times the duration of that decline (in this case they only forecast out two quarters).

It isn't and can't be true that "each percentage point drop in [the annualised] growth [rate] means a loss of 1.2 million jobs" Also it isn't true that a 1% reduction of GDP means a loss of 1.2 million jobs. The rule of thumb is employment declines roughly 0.5 % of the labor force for every 1% decline in GDP. That means a 1% decline in GDP (not the growth rate the level) corresponds to a loss of around 700 thousand jobs not 1.2 million.

The forecast decline in employment if the Republicans get their way is around 350,000 jobs not 2.4 million as suggested by the New York Times.

The correct number shows that the Republicans are irresponsible and insane and must be stopped, but there is no reason to print arithmetic mistakes.

The editorial board should get on the phone to their colleague Paul Krugman who needs to give them a good talking to.

Thursday, February 24, 2011

Stever Pearlstein wrote a very good column about the struggles of governor Scott Walker of Wisconsin with Wisconsin public sector unions, Wisconsin Democratic state senators, tens of thousands of demonstrators, Wisconsin public opinion, national public opinion and the facts.

Money quote

... Walker overreached, refusing to give up his union-busting even after the unions agreed to his benefit-cutting demands. Now that he has allowed the unions to reframe the issue from one of greedy public servants to one of political revenge, Walker has single-handedly succeeded in bringing more attention, unity and sympathy to the union movement than it has had since . . . well, since Ronald Reagan took on the control tower. A mischievous columnist might even take this opportunity to speculate whether this is the beginning of the revival of labor's fortunes.

Ezra Klein complained that he revealed the secret to how to succeed at writing columns without really trying.

I have a different problem. Running low on article outlines but having some space to fill Pearlstein wrote the following nonsense

a country that for years had been living beyond its means. Now, even three years after reality came crashing down, we have only just begun to figure out how to bring about the reduction in living standards that will be necessary to create a sustainable balance. Will the pain come in the form of prolonged high unemployment? Or wage and salary cuts? Or reduction in the value of homes and financial assets? Or loss of ownership of American companies? Or price inflation? Or higher taxes? Or reductions in government services and benefits?

The right answer, of course, is "all of the above." The hole we dug for ourselves was so deep and so wide that we'll need all of them to get us out of it. The central political, economic and social challenge of the next decade will be to decide how we are going to apportion the adjustment among these various channels, and among the various classes and sectors and regions of the country, without tanking the economy or breaking the bonds that hold our society and our democracy together.

So we have been living beyond our means so we just have to roll up our sleaves, consume less and work less ?!? The assertion made with no doubt that we have to accept "prolonged unemployment" in order to "get out of" "The hole we dug for ourselves" is nonsensical neo-Austrian mumbo jumbo. It makes no logical sense. It never has made any logical sense. The effect of WWII on the US economy should have proven once and for all that it is nonsense. The only logic here is magical -- we have sinned, so someone must suffer, and unemployed workers who are scapegoats for the nation.

And why must we accept price inflation ? It sure seems that one of the effects of the hole we dug ourselves is dangerously low inflation. I am a modern macroeconomist. The first great triumph of modern macro was the discovery that the Phillips curve was all a statistical illusion. However it wasn't.

Pearlstein seems to consider the budget deficit part of living above our means so he says we must accept (among other things) reduced government services and benefits. Notably he did not write that we must accept increased taxes. Ohhhh noooo that would be sharing the sacrifice too widely.

Among those who work for major Newspapers, Pearlstein clearly understands economics more than almost anyone else (Krugman is obviously an ecception) but he casually tosses off nonsense as if it were all not only logically consistent but also true, known and obvious.

Tuesday, February 22, 2011

Matthew Yglesias does it again.

I think very highly of Matthew Yglesias, but I don't want this blog to consist entirely of comments on his blog. Also it is odd that so many of those comments are critical, since I think very highly of Matthew Yglesias.

I strongly advise him to avoid using quantitative terms when making qualitative arguments. In the post below, I note that he blithely asserts that a proposal which involves investing 60% of one's wealth in stock is just like social security. He is refering to a post which refers to an intertemporal budget constraint. Rates of return can't be ignored or brushed over when making or discussing such calculations. The post to which the post to which Yglesias linked included a calcuation, with various numbers, one of which is not at all relevant to social secutrity.

Now he's done it again. He considers a world without social security in which people are prudent and forward looking and save for retirement. He goes on

This will lead to a decline in the rate of economic growth, and therefore to the expected return on investment. Either workers will need to start increasing their savings rate, or else they’ll need to accept lower living standards when retired. In other words, they’ll face the exact same choice we currently face in the form of higher taxes or lower benefits.

Yglesias just asserted that all reductions in living standards are exactly the same. Read the quoted passage. That assumption is definitely made. The fact that different negative numbers might not be exactly the same is not considered.

Now I think the word "exact" is redundant and the claim would be false with "the same change," but why add the word "exact" to casual reflection without calculation ?
The statement would be correct if "the exact same" were replaced by "a similar".

I can quantify the changes and do so fairly easily if I only look at very long run effects and make standard assumptions about consumption/savings decisions.
I assume that prudent savers act according to the life cycle permanent income hypothesis -- this is almost redundant as I am assuming rationality and time consistency. I assume infinitely lived households the number of members of which grows over time. I assume that the total appetite of a household is proportional to the number of people in it. I am following David Romer's Advanced Macroeconomics (and anticipating the lecture I am supposed to give tomorrow). All the assumptions are there and are standard.

What is the effect of a reduction in the rate of growth of labor supply on the rate of growth of the wage bill and on the real rate of return on savings ? Note Yglesias says they are exactly identically the same. There are complicated dynamics for a while, but the model converges to a balanced growth path. I will discuss the long run effect (comparing balanced growth paths) of a permanent decline in the rate of growth of labor supply (presumably due to a decline in the rate of growth of population). This is the rate of return people can get on their contributions ot the social security system. In the long run, It's decline converges to the decline in the rate of growth of labor supply.

How about the real interest rate ? Well in the new balanced growth path it is exactly identically the same as it was before. As time goes on it goes back to the original real interest rate. There is a temporary decline in the real interest rate, but it gradually comes back up.

The effects are not exactly the same at all.

This conclusion really depends on the exact assumptions about consumption saving decisions which I did not explain (they are in the book).

I think this mathematical exercize was pointless. I typed it here exactly because of the word "exact."
Felix Salmon has a proposal

Pfau makes a very basic calculation that for someone on a constant real wage, saving for 30 years and then living for another 30 years on 50% of their final salary, saving about 16% of your salary each year into a portfolio of 60% stocks and 40% bonds will put you into safe territory.

Of course, real wages aren’t constant over time, and all the other figures are highly variable too. But the bigger message certainly resonates with me: spend less effort on trying to boost your annual returns, when you have very little reason to believe in your alpha-generation abilities, and spend more effort on maximizing your savings every year.

Matthew Yglesias comments

"They Could Call It “Social Security”"

I comment on Yglesias.

You ignored part of the quoted passage "a portfolio of 60% stocks and 40% bonds ". It wouldn't work so well if one invested only in bonds. Salmon's point is that people would be much better off buying and holding a diversified porfolio than trying to pick winners.

It would be like social security if the social security administration bought 60% stock 40% bonds not 100% treasuries. I think that would work out rather well frankly. Such an approach would elminate all future budget deficits in expected value. Of course the cost ist aht there would be surpluses in good times and deficits in recessions. We can't have that can we ? If the Federal government automatically ran a huge deficit during a recession,then we won't have recessions at all.

If there is a problem with this proposal, I haven't heard of it. It has been debated on the web for years.

Back to the quoted passage to explain more.

If an individual followed the rest of the proposal but bought only treasury securities, as the social security administration does, then that individual would be poor when old. This isn't like social security, because, constant population and wage growth, the SSA can pay proportional to the increase in total wages paid (due to both increased wages per worker and increased employment). This is a better return than the return on treasuries.

It also shows why a little issue like the baby boom creates such trouble. It is costly ex ante to the SSA, because for us boomers it has to build up a surplus and only gets the treasury rate on that surplus. Also the Republicans stole the money for tax cuts and wars but that's another issue.

Wednesday, February 16, 2011

Belusconi nei Guai con donne

No not the million or so who protested Sunday and not the one's he invited to his bunba bunga. The ones that will judge him:
Carmen D'Elia, Orsolina De Cristofaro e Giulia Turri

Turns out that various women have been making all sorts of trouble for Sivio.
There is the juvenile court magistrate who ordered the police to send Karmai Al Mahroug to a community making her release to the care of a dental hygenist regional councilor and a prostitute clearly the result of extortion (concussione).

Then, of course, Ilda Boccassini who handled the investigation and will handle the prosecution. And the GIP Judge Cristina Di Censo who just indicted him.

But the new news is that he will be tried by a panel of three women
"The trial is set to begin April 6 before a panel of three female judges."

This shows us how dangerous written exams are. The reason that so many magistrates are women is that entering magistrates are hired (typically right out of university) based on their score on a written exam on the law which is graded anonymously (with a serial number not a name on the exam paper). Therefore women are taking over the Italian Judiciary.

Monday, February 14, 2011

If the Republicans said the Earth was flat, what would Obama say ?

Obama: Opinions on the shape of the planet differ. Both sides have a point. The hypothesis that the earth is flat has served people well throughout the ages. I myself assume that the earth is flat when I try to find my way around Washington DC*. It is a remarkably useful model of reality and it worked perfectly up until roughly 1492. Those who expected to find China after a few days sailing into the Atlantic were sorely disappointed**.

However, the admirable flat earth hypothesis was not suited to the navigational challenges of the 15th century. There are notably advantages obtained by assuming that the earth is roughly spherical which are particularly important in the case of long distance navigation.

Why I was recall flying on a plane from ... Arizona***,****. They showed us the path the plane was taking on a map. I asked why it was taking a curved path instead of flying straight to Ronald Reagan Airport. A regular American sitting next to me explained that it was taking the shortest route. If I had insisted on sticking to the flat earth assumption, I wouldn't have been able to understand what he was talking about.

I was proud of my exceptional country when we landed on the moon. I was struck by the photographs of the Earth, which sure look like photographs of a roughly spherical object.

On the whole I conclude that it is usually best to make plans based on the assumption that the earth is roughly spherical, while I appreciate the contribution and insights of people who think it is best to assume it is flat.

*note other than complete frankness since he just goes where the secret service takes him.

** note other than perfect frankness since they existed about as much as "some in my party" who say crazy things.

*** note reluctance to admit he has been in California, let alone strange exotic places like Europe or Hawaii.

**** update: I thank reader "your reader" for pointing out that, in an earlier draft of this post, the *** was missing, so it was not not indicated which bone was connected to the third footnote bone.

Sunday, February 13, 2011

Matthew Yglesias writes

"I actually think this kind of question is better investigating initially through theory. If you’re thinking about Maryland, you can tell a very straightforward story about why lower taxes might lead to job growth."


"The tax competition issue is real, but limited, and the further you get from New Jersey the less real it becomes."

I throw a cow.

My comment.

You assume that their must be quite a bit to the argument about taxes and migration, because you hear it so often. I note that you also hear about the Laffer curve and how the US can't afford the ACA. Never assume that a common claim must be supported by significant evidence from anywhere.

You specifically write "The tax competition issue is real, but limited, and the further you get from New Jersey the less real it becomes." "Real" in this context must be some sort of quantitative qualifier* If so you contest the work of Cristobal Young and Charles Varner forthcoming in June 2011 in The National Tax Journal. (warning pdf)

They write

The New Jersey millionaire tax experiment offers a potent testing ground, given the magnitude of the policy change and the relative ease of relocating to a different state tax regime without leaving the New York or Philadelphia metropolitan areas. Using a difference-in-difference estimator, we find minimal effect of the new tax on the migration of millionaires.

What is less real than "minimal" ?

via Balloon Juice

I am not upset because you missed the article especially since it isn't, technically published yet. I wouldn't be surprised if other researchers vehemently contest the conclusions of Young and Varner. In fact, I have no doubt provided one counts Koch financed hacks as researchers.

I am distressed, because you wrote " I actually think this kind of question is better investigating initially through theory." I don't see how a question about the real world could be investigater through theory. I thought the idea that we could learn about the word through theory without evidence was proven to be nonsense in the 17th century. I think you mean to write "we should think about this issue before deciding which data to look at" but the theoretical work is the pre-investigation work, not another kind of investigation.

I am an economist and I know many economists who think that theory without evidence constitutes investigation. I frequently tell them otherwise.

I think that the fact that you have decided based on "theory" that this is a relatively real (evidently not "minimal") issue for New Jersey illustrates, and not for the first time, the sterility of theory without evidence.

I'm fairly sure you consider this post a criticism of those who claim that taxes have a large effect on migration. In passing you mention that their claims work for some places, notably New Jersey. I think you fell into a testable claim which is contradicted by forthcoming empirical research, because you were aiming for a moderate tone.

Friday, February 11, 2011

Eschatonblog sends me to this post by Avedon Carol and I am totally disgusted

Well Avedon Carol certainly writes well. In fact I think that "enough of a grain of truth with them to make them compelling to their audience even while they also carry enough crazy to make it easy for everyone from Katarina to Dancin' Dave to even Bill Kristol point at them and say they are going overboard" pefectly summarizes *and describes* the whole post.

I don't watch Glenn Beck, so I have no idea if his accusations against Obama and the Democrats are based on an even more thorough a mixture of denial of reality and bull Shit as Carol's. I admit I find that hard to imagine.

Carol asserts that the Obama adminstration keeps saying things (the economy) are fine. This assertion is not supported by a quotation of anyone on or off the record, because it can't be, because it is a totally false assertion.
Carol asserts (or seems to) that all they was " just pass a bill called health care reform" so, if words mean anything, it would have been about the same if they had renamed some post office naming bill "the patient protection and affordable care act." except, of course, words don't mean anything when one is bullshitting. Or how about "just change the names from "combat troops" to something else" so the decline in US deaths from 314 in 2008 to 60 in 2010 is merely verbal and no big deal. I'd like Carol to choose 254 deaths and tell the relatives of the deceased that nothing much has changed except a word. US forces in Iraq aren't fighting anymore. Kennedy called US soldiers fighting "military advisors." If words mean anything Carol suggests that Obama is lying as Kennedy did.
But words don't mean shit if you are bullshitting.

I suppose Beck is even worse. I don't want to find out. But the post by Avedon Carol is an offence against language truth and logic.

Wednesday, February 09, 2011

Clash of the Titans. The struggle for world domination begins.

Communists vs Capitalists passé. Jihadis vs everyone else never came close.

No the struggle is Facebook vs Google and the first battlefield is Egypt.

The attempted revolution began on Facebook, but Google isn't giving up.

In all seriouisness it looks as if the revolutionaries have their mojo back

"Hundreds of thousands gathered in what witnesses estimated was the largest crowd in the downtown Tahrir Square since protests began two weeks ago."

I am flipping back to optimism about getting rid of Mubarak and cronies.

Of course one could do worse than Mubarak, and I have no prediction about how it will all turn out in the long run.

Tuesday, February 08, 2011

By @robertwaldmann twitter-demand

I have a fan who refers to "your fans" in the apparent belief that he is not alone. He liked this comment on Brad's blog which I now make a post.

Will Wilkinson wrote

In my opinion, the seeming inevitability of Orszag-like migrations points to a potentially fatal tension within the progressive strand of liberal thought. Progressives laudably seek to oppose injustice by deploying government power as a countervailing force against the imagined opressive and exploitative tendencies of market institutions. Yet it seems that time and again market institutions find ways to use the government's regulatory and insurer-of-last-resort functions as countervailing forces against their competitors and, in the end, against the very public these functions were meant to protect.

We are constantly exploited by the tools meant to foil our exploitation. For a progressive to acknowledge as much is tantamount to abandoning progressivism. So it's no surprise that progressives would rather worry over trivialities such as campaign finance reform than dwell on the paradoxes of political power.

Jon Chait criticized Wilkinson

Will Wilkinson replied

JONATHAN CHAIT of the New Republic takes issue with some of the lessons I drew earlier this week in my post about Peter Orszag's trip through the Washington-Wall Street revolving door:

I don't think private capture of public functions represent a major, recurring problem with liberal governance. Does the minimum wage result in regulatory capture? Does Social Security? The Earned Income Tax Credit? Moreover, when such capture does occur, liberals can un-capture it, something that happened with student loans, Medicare Advantage, and so on. Libertarians are very interested in the phenomenon of regulations being turned into weapons of business power, but this phenomenon seems like the exception rather than the rule.

First, I should clarify that I did not mean to be pointing out a huge hole in the logic of liberal redistribution. Rather, I was pointing out a problem for the classical progressive idea of the regulatory state as a check on concentrated economic power. In any case, I must say I'm dazzled by the audacity of Mr Chait's claim that the "private capture of public functions" is rare.

Let me give two shorter excerpts of Wilkinson

"to acknowledge as much is tantamount to abandoning progressivism"

"I was pointing out a problem for the classical progressive idea"

Either admitting that an approach has any problems is tantamount to abandoning it, or Will Wilkonsin is lying about what he wrote.

My comment on Brad's blog follows.

Wilkinson and Chait are, among other things, arguing about the correct interpretation of something written by Wilkinson. I call that debate for Chait. Wilkinson's paraphrase of Wilkinson is innaccurate. Not to put too fine a point on it, Wilkinson has chosen to lie about what he wrote.

The key passage of Wilkinson's post is "For a progressive to acknowledge as much is tantamount to abandoning progressivism." Now he claims "Rather, I was pointing out a problem for the classical progressive idea "

BullSh*t. The fact that some approach must face some problems proves that we are on planet Earth. To aknowledge as much one does not need to abandone everything. Resistent bacteria are a problem for the physicians who rely on antibiotics. Is Wilkinson going to argue that we should abandone antibiotics ?

Wilkinson said that acknowledgement that regulatory capture is and always will be a problem implies abandonement of the classical progressive project. That's just as sane as my argument against antibiotics. If it has a problem abandone it is his implied logic.

He has conveniently forgotten about his stated conclusion.

Wilkinson also lied about what Chait wrote. Chait wrote "I don't think private capture of public functions represent a major, recurring problem with liberal governance." Wilkinson claims " Wilkinson wrote 'Mr Chait's claim that the "private capture of public functions' is rare."

Wilkinson is making it obvious. I'm sure there are cases in which an honest person has constructed a sentence partly by quoting and partly by rewriting. I can't think of any such case, but people have been writing for a long time. Wilkinson just decided to suppress the word "major". He must know that his use of quotation marks is fraudulent. He must understand that he is cheating. I don't think that he understands how gross this second lie is, because I don't think he is capable of grasping the concept "major." He shows no capability of understanding degrees, quantitative differences, anything between 0% and 100%.

Another point of contention is that Wilkinson was writing about "the classical progressive idea ..." that is thought from the progressive era. This is comprehensible from context, but Chait can't be blamed for assuming Wilkinson used "progressivism" the way everyone else has for decades.

Of course practically everyone who ever lived and breathed understands that regulatory capture is an inevitable problem with any regulation (including the regulations that establish the institution of private propertyvconclusion and pretends he just said that there is a problem. (Brad's implied claim that Marx's thought on the subject was original is absurd -- in this case, he like Wilkinson was pretended he had discovered something which was well known to all)).

Sane people do not therefore become anarchists or decide to eliminate private wealth completely. Insane people might become anarchists or, if they are insane and incapable of following their arguments to their conclusions libertarians or Christian Scientists or who knows what.

The worst problem with Wilkinson is not that he wrote something stupid (everyone does from time to time). It isn't even that, when challenged he lied about what he wrote. The problem is that he can't see any shade of grey.

His argument is that progressivism can't be perfect and that if progressives recognised this they would have to abandon progressivism. He can write such nonsense, because he thinks in false dichotomies. If money can be used to influence regulators, then regulators serve only money and all regulations become tools of concentrated interests. He does not recognise anything between no influence at all and total control.

This means that he doesn't notice that there is a difference between reducing the impact of a regulation and reversing the impact. Let's imagine a simple world with one variable x and a regulation which would cause x to increase by 10 if regulators were completely immune to any influence. But a few are bribed (not important) and many know about revolving doors and all that and as a result x increases only by 9. Wilkinson would claim that the proof of influence (such as Orszag's current employment) proves that the regulation caused x to decrease. Oh and that if he can think of 20 such cases then he can conclude that regulation always helps concentrated interests.

Of course people who control lots of money can influence other people (not quite all but many other people). This does not mean that regulations aiming to restrain business have the opposite of the intended effect.

Consider the example of financial regulation. Wilkinson is saying the classical progressives were wrong about regulation. If he really thought that, he would think that regulation should return to the way it was before the progressive era. His solution to the fact that Orszag's actions in office were problem influenced by the prospect of getting his current job if he didn't piss off Citibank managers is to eliminate financial regulation. We tried a little tiny bit of that and it didn't work.

He is almost completely indifferent to evidence and deeply profoundly innumerate (well that's shades of grey again).

Some of his claims about the freequency of regulatory capture --

"it seems that time and again ...."

"We are constantly exploited by the tools meant to foil our exploitation. "

A claim about what "seems" becomes an unqualified claim in the indicative. "Time and time again" becomes "constantly"

Now it becomes "... regulation is very, very, very often turned into (or originally fashioned) as a weapon of business power."

Wilkinson fails entirely to note that cases in which regulation is originally fashioned as a weapon of business power offer no him no support. That would be the law of intended effect. He is incapable of grasping the fact that progressives didn't create all regulations (he specifically cites regulation in the 1920s when progressives were all powerful as we know). But Wilkinson is a liberaltarian so he doesn't bother over the distinction between progressives, and Republicans. They all have something to do with government and Wilkinson imagines that, if he can prove that government is imperfect, he has proven that he is a genius and member of a tiny enlightened elite.

In the end, you can't be both a libertarian and a grownup.

Monday, February 07, 2011

Normally distributed asset returns and CARA utility make the mean variance approximation exact.

My correspondence

Dear Pro.Waldmann

I'm a [university name redacted] PhD student who is interested in your paper "Noise Trader Risk in Financial Markets" in 1990 (The journal of Political Economy,Vol98, No.4, P703-738). It's really a good early paper which theoreticaly brings noise traders' activities into the cause of price changes. However I was stopped at a simple beginning step when I tried to understand every detail of this paper. In page 708 there is a explanation for the utility maximization. "With normally distrituted returns to holding a unit of the risky asset, maximizing the expected value of (2) is equivalent to maximizing (3)".
I was stopped here, because I tried to prove this equivalence algebraically but failed to do so. I was wondering if there is a mathmetical method to prove that maximizing the exponential utility function equals to maximizing the function (3)?

Maybe it is a stupid question which is very simple to answer, but I will really appreciate your guidance. Thanks for your time and I'm sorry to trouble you.

Best wishes
Yours sincerely
[name redacted ]

I reply below. This is how I reply to correspondence about math. I don't know if that is a threat or a promise. Look below to decide for yourselves.

It is an intelligent question. I don't know a reference for the proof.
The mathematical result is that if x is normally distributed with mean m and variance s^2 ( s squared) then
E(-exp(lambda*x)) = -exp[-lambda*(m - (lambda/2)s^2)]

(* means times, exp() meand e to the () ^ means to the so ^2 means squared )

the function f(a) = -exp(-lambda*a) is monotonically increasing. Its derivative is lambda*exp(lambda*a) > 0 for any a. So maximizing
-exp[-lambda*(m - (lambda/2)s^2)] is just the same thing as maximizing m - (lambda/2)s^2.

The key step is
E(-exp(lambda*x)) = -exp[-lambda*(m - (lambda/2)s^2)]

This is just an integral (hard to type with plain ascii)

if x is normally distributed the expected value is
the integral from - infinity to infinity of
- exp(lambda*x) (1/(s*(2*pi)^0.5)) exp(-(x-m)^2/s^2)=

the integral from - infinity to infinity of
-(1/(s*(2*pi)^0.5)) exp(-lambda*x -(x-m)^2/(2s^2)) =

the integral from - infinity to infinity of -(1/(s*(2*pi)^0.5))exp(-lambda*x -(x^2-2mx + m^2)/(2s^2)) =

the integral from - infinity to infinity of -(1/(s*(2*pi)^0.5))exp(-lambda*x -(x^2-2mx + m^2)/s^2) =

the integral from - infinity to infinity of -(1/(s*(2*pi)^0.5))exp(-lambda*x +(-x^2 + 2mx - m^2)/(2s^2)) =

the integral from - infinity to infinity of -(1/(s*(2*pi)^0.5))exp((-x^2 + 2mx-2lambda*(s^2)x - m^2)/(2s^2))

OK now complete the square so =

the integral from - infinity to infinity of -(1/(s*(2*pi)^0.5))exp((-(x - (m-lambda*(s^2)))^2 + m^2 + 2m*lambda*s^2 - lambda^2(s^4) - m^2)/(2s^2))

Sorry about that but it is just algebra -- completing a square. If I typed correctly it works fine.

this equals

the integral from - infinity to infinity of (1/(s*(2*pi)^0.5))exp(-(x - (m-lambda*(s^2)))^2/(2s^2)) *
(-exp(-(2m*lambda*s^2 - lambda^2(s^4) )/(2s^2)))

OK the term exp(-(2m*lambda*s^2 - lambda^2(s^4) )/(2s^2)) is a constant and can be taken out of the integral so this =

-exp(-(2m*lambda*s^2 - lambda^2(s^4) )/(2s^2)) *
the integral from - infinity to infinity of (1/(s*(2*pi)^0.5))exp(-(x - (m-lambda*(s^2)))^2/(2s^2))

The integral is just the integral from - infinity to infinity of a normal density with mean m - lambda*(s^2) and variance s^2 so it equals one so the whole mess is eqaul to

-exp(-(2m*lambda*s^2 - lambda^2(s^4) )/(2s^2))

or dividing
-exp(-(lambda*m - (lambda^2/2)s^2)

-exp(-lambda(*m - (lambda/2)s^2))

as asserted.

Ok a lot of algebra but basically just an integral, complete the square, take a constant out of the integration -- hey that integral is the probability that a randome variable is greater than - infinity and less than infinity so it's one.

I had fun typing this.
I hope it is useful.
Matthew Yglesias writes

Ragu Rajan ... his explanation of why economists didn’t predict the crisis:

I would argue that three factors largely explain our collective failure: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.

Rajan glosses a leading alternative hypothesis thusly:

Finally, an answer that is gaining ground is that the system bribed economists to stay silent.

Obviously bribe-based theories of human behavior are crude and rarely capture reality. But how about translating this into economics? How about incentives? Rajan says it’s not individual corruption that led to a lack of insight, it’s structure features of the way the profession is organized. That makes a lot of sense to me. But what explains that structural organization? Is it really unrelated to the financial basis of the economics profession? Or are economists supposed to be immune from the factors that influence human behavior in other instances?

I comment.

I will try to guess if the system is bribed to stay silent. I am technically an economist, but not part of the system (that is not an elite economist). To start with my conclusion, I don't think that the blindness of elite economists can be explained as a rational or semi rational response to incentives. I think that Rajan happens to be right about what went wrong.

Very few economists saw it coming (and they might have just guessed right or strategically made an extreme prediction which is like buying a lottery ticket). I'd say two things blinded economists, the EMH and DSGE (acronyms explained below). Neither was paid for by firms or rich individuals.

First the Efficient Markets Hypothesis (EMH) which holds that all assets always sell for the same price they would have if everyone had rational expectations. Basically it says there are no bubbles even in housing *and* that if there is a housing bubble then mortgage bonds and CDOs of mortgage bonds and CDSs on CDOs of morgage bonds are all correctly prices. Clearly no advocate of the EMH could see it coming.

For some reason, the EMH remains the default position of many academic economists. Worse, one exception at a time is allowed, so people see if one asset is correctly priced assuming all other assets are correctly priced. There is no way this approach could lead to a prediction that the recent crisis was even possible.

Also, iit would be a total catastrophic disaster for the financial services industry if the general investing public believed the EMH. If anyone took it seriously when investing (as opposed to when writing academic articles) then the financial services industry couldn't make much money dealing with that person. If one believes in the EMH and doesn't have private information (not a strategy or algorithm or theory but knowledge of relevant facts which almost no one knows) then one should buy and hold the market portfolio. This means low trading volume and low fees. This means you buy equal amounts of all tranches of CDOs (except you already have the pool of underlying assets so you don't bother). This means you don't pay someone to manage your money unless that person has private information.

The Financial services Industry makes its huge profits at the expense of suckers who think they can beat the market. Partly by charging them fees and partly by betting against them (since the EMH is false financial professionals can make money with simple rules). Belief in the EMH would kill the goose that lays the golden eggs.

Yet academic economists have been promoting the EMH for decades. This just couldn't be the effect of being bribed *or* of some indirect influence of group interests on sincere beliefs or anything. The bought off hypothesis just doesn't fit the facts.

The use of DSGE (dynamic stochastic general equilibrium) models also guarantees failure to see it coming. It also has nothing to do with consulting. There is a sharp devision between academic macroeconomics and macroeconomic forecasting. It is done by different people. Some people are paid for forecasts. Clearly they have all sorts of interesting incentives which have been analysed at gruesome length by academic economists who, contra Yglesias, pay attention to incentives of forecasters. They don't use DSGE models. They missed it too, but they aren't the people Rajan was writing about. As far as I know, there is no rich or concentrated group which promotes DSGE models. People who pay macroeconomists pay completely different macroeconomists who do completely different things. They don't know or care what DSGE stands for.

I may be overstating my claim. It may be that DSGE models tweaked to give the same forecasts as atheoretic models are used. But no one has an interest in paying the middle man (the tweaked theory).

I'd say the way in which money has influence economics is by promoting in general a right wing slant (compared to view best supported by the evidence). Many prominent economists are very right wing. If asked, they advise people to vote for Republicans. Now I note that US economists are on average a bit to the left of the US center (the general academic thing beats the field specific thing). My view that the profession is slanted right compared to the evidence just means I am to the left of most of the profession.

In any case this has almost nothing to do with missing the warning signs.

Sunday, February 06, 2011

Matthew Yglesias Argues against Direct election of Presidents and for a Parliamentary system

The problem with a strong president, especially in a country that doesn’t have a stable tradition of political parties or peaceful transfers of power, is that there can only be one. The whole country is plunged into a winner-take-all political contest. If the winner turns out to be someone with a “one man, one vote, one time” concept of democracy, then that’s all she wrote.

I comment

I add the proviso that you want either some kind of proportional representation (with a cutoff at 5% or 10% not 20%) or, shudder, a senate.

The English are quite proud of the unwritten constitution (writing it down is sooooo nouveau riche). However, they admit that it pretty much amounts to an electoral dictatorship.

If you have a disciplined party with an absolute majority in the one real houes of Parliament, then you are most of the way there to a dictatorship.

I live in Italy. Silvio Berlusconi avoids conviction for his many crimes, because he can change the law so that his acts, which were crimes at the time, are no longer crimes. Makes me long for the filibuster. Well not really, but Italy doesn't effectively have the rule of law (it is really irritating when a lawyer makes an argument to a judge that the law should be interpreted one way, the judge says know then the lawyer puts on his other hat as chairman of the justice committee of the lower house and writes a law which says, in effect, the old law is to be interpreted the way I said and is not to be intrepreted the way the judge intepreted it -- I am describing actual events). This would not be possible in the USA.

In constrast if you have a unicameral congress with many parties, the President has to negotiate.

Looking at non dictatorships, Jamaica was in a bit of a spot both when the Jamaica Labour Party (obviously pro-market right) won all but seven seats in one election and then all of all of them the next because the PUP boycotted the election.

In contrast Lula da Silva has been in an Obamalike position of being no threat to anything (not that he would be anyway) because the Workers party has never had a working majority in parliament. So he has to deal. Which means deal with crooks. Which means pay bribes.

Egypt is not currently a failed Democracy. They never tried. It was a dictatorship with window dressing.

Interestingly Democratic forces in Brazil and S Korea insisted very hard for a Presidential system. A gradual transition from military rule makes it very easy for members of the show parliament who are friendly with the generals to win, because they have been bringing home the bacon.

Finally I might add that the terrible power of Dmitri Medvedev isn't the worst problem with Russian Democracy. That winner sure didn't take all. To me, Putin seems just as much a dictator as prime minister as he did as president.

Friday, February 04, 2011

What is Bing doing with Google ?

Shane Greenstein provides a very clear explanation and critique.

I comment.

I was interested in finding out what I am telling Microsoft. In options, I don't see an option to not send any information (why am I not surprised).

So I went to

which tells me that if I want to learn about privacy and specific applications, I should click on the list to the right of the page.

This works for Windows Update, Windows Media center and the tell them about errors (Internet explorer communicates with me in Italian). However when I click on the button labled "internet explorer" it sends me right back to

Odd that Microsoft isn't telling me about internet explorer and privacy just now no ?

Just for information, is it possible to use internet explorer without sending microsoft information or was I warned long long ago when I installed it that this was part of the game. Can I use internet explorer without sending them information by re-installing and checking a box that says no ?

I notice that if I turn on the anti-pishing filter then internet explorer warns me that I will send information to Microsoft, and when I turn it off, there is no message -- neither "Now you aren't sending us information" nor "You are still sending us information."

The reader will notice that I am not very web savvy and I am humbly asking for help.

Tuesday, February 01, 2011

Here's another one on utilitarianism and hypocrisy

Sometimes I am a utilitarian. Usually I am some sort of consequentialist with some belief in some sorts of rights which are trumps (I am a Utilitarian about as often as I bid no-trumps).

I never act according to my moral principles. I never have and I doubt I ever will.

I can accept sub-optimal Democratically enacted laws all I want, but I can't find anything in the laws of Italy (where I live) or the USA (where I was born) which forbids me to give all I can to the poor. I am quite sure that to maximize utils and to contribute the fullest flowering of the human condition, I ought to give away most of my income (not all -- a Robert who starved to death is no good for the poor). Oh and I should work real hard to maximise my income to give them more, unless I can think of anything more useful to do with my time (trying real hard and failing). I sure don't do that. I consume about 99% of my potential income in Leisure.

I guess Brad knows this as he switched his appeal to Jefferson after finding that Bentham provided no effective defence for Milton Friedman or uhm now that you mention it, Brad DeLong.
More from DeLong on Hypocrisy. Recall I will use his content fairly if and when his blog stops eating my comments.

Update: It didn't eat one which I thought was eaten so fair use is now a link.

In summary, Brad accused Karl Marx, Robert Nozick, Robert Bork and Ayn Rand of hypocisy but said that Milton Friedman was not a hypocrite. The new point is that if you accept Democracy you can benefit from priviledges you oppose (and voted against) without being a hypocrite.


In an attempted comment, I defended Nozick. IIRC Nozick didn't say anything about his moral beliefs in "Anarchy State and Utopia." He consistently ascribed the view that the free market distribution was the one and only just and fair distribution to Friedrich von Hayek and said no more than that it was logically consistent. He noted that egalitarianism requires continual governement intervention (eg an income tax) and that a one off land reform won't do the trick (knock me over with a wrecking ball). I think he played his cards so close to the chest that he ran no risk of ordinary hypocrisy -- he confessed no beliefs about right and wrong.

I now defend Rand. I haven't read anything she wrote and don't plan to do so. I understand that she advocated selfishness. Taking Medicare was selfish. She seems to have been true toer her principle. The observation that most people are parasites might be construed as an expression of disapproval. However, that means she had a confused moral doctrine with two aspects -- be selfish and not if you aren't John Galt. It seems to me that someone who's views of morality are so depraved just couldn't manage hypocrisy. She couldn't be worse than she claimed to be.

On Marx, see below. I think he managed to stick to the sham that he was a positive social scientist enough to hide his views on morality and avoid ordinary hypocrisy (via higher level hypocrisy of denying he ever perceived the moral laws that he perceived and disobeyed). Also, I don't recall anything in Marx which amounts to rejection of Democracy. IIRC Lenin was a different person who lived later.
Comments on Brad's comment eating horror of a blog

update: the comment below appears on Brad's blog. It hadn't appeared when I checked. I rend my garments (ok so I am wearing already torn garments to blog but I rend them further).

Sorry Brad. My mistake.

Title for this post is[ NOT] a quotation of eminent journalist Jonathan Weisman.

By the way Brad, if you invite me to DropBox then all will be forgiven.
update: I now have drop box

I am reproducing this from memory as I stupidly hit post on his stupid comment eating blog. I reproduce the post in full below my comment. I'll use content fairly when the blog stops eating my comments. Brief summary -- Isaac Hall explains clearly and without bitterness how "dropbox" kicked the ass of his competing product syncplicity.

The point of the explanations is that DropBox's extreme limitations are a feature not a bug. Most people aren't computer geeks. Giving us dozens of options just confuses us. We need focus, we need direction, we can't have it and play with the web, but at least each webService should help us focus while we are wasting time with it.

I add (not from memory) that with all the competing webproducts it is hubristic to try to be the only one people use by including all the other web services as features. We don't want more different ways to Skype or Facebook. There are already too many ways. Note the astonishing accomplishment of Microsoft achieved by applying their engulf and devour strategy to the web.

The example also shows that the struggle for clicks is fierce beyond Darwin's worst nightmare. Everyone uses what everyone uses (that's why modern English -- 946 years in developement and still full of bugs (I was tempted to type stil ful of bugs (or rather "tipe "stil ful of bugs" (the worst of which is that it doesn't accept nested parentheses))) and without a word wide standard causing much wasted labor AKA labour -- rules the world currently via

By the Way, Hall's RI (reader interface) would be improved if he used fewer acronyms. I figured out that UI doesn't stand for Un-necessary_strain_on_my Intelligence but user interface, but what the hell is RTFM ? I guess Real Time Frequency Modulation or maybe Really Torturous File Management.

You want to sell to the masses, then speak like the masses, in Inglish.

Fair use is a link to click to go to the post on Brad's comment presenting blog.

You can also see the comment which wasn't sent to cyberlivion and compare it to my effort to reproduce it from memory.
Attempted DeLong Smackdown

I can't stand it. streaming video (find the link yourself you competitor for band width) is overloaded. Brad DeLong's blog is still eating my comments. I am so desperate for something to do that I might actually do some work.

But first I will make this blog the Brad's blog devoured comments blog.

Also f**k fair use. I will start using your copy fairly when you stop eating my comments.

update: Some have appeared so I am fairusing. Quote becomes a link.

Brad says Marx was a hypocrite because he said workers were exploited and benefited from that exploitation. Dsquared says Marx did not believe in objective moral law and didn't say that exploitation was morally wrong.

I comment.

Minds think alike. I almost commented that the real hypocrisy was sponging off capitalist exploiter Friedrich Engels.

I now attempt to answer to your question of how can pseudo_Marx value neutral social scientist argue that they system must be changed. Pseudo_Marx simply asserted that the system, like it or not, was doomed. He said that change was inevitable. His normative claim was just that everyone would be better off if we made the inevitable transition to socialism sooner.

You object to Marx using the value laden term "exploitation" yet you sneak the value laden term "peaceful" into your proposed alternative approach. You present no argument that Marx new or could have known that the inevitable historical change could possibly be peaceful. What gave you the right to slip the word peaceful in ? You can't appeal to 20th century history without asserting that Marx was obviously precognitive.

Also, since when was Marx an opponent of peaceful change ? He pretty definitely said in so many words that the US constitution was fine (also I think the Swiss one and he admitted he knew too little about the Dutch constitution to judge).

He objected to limited suffrage (what a blood thirsty monster). He predicted that opponents of socialism would use violent means (to me,sitting in the outskirts of the Rome on which Mussolini marched, he seems to have had a point). He didn't advocate introducing violence to a democratic polity wiht universal suffrage (at least not in publications after the Address to the Communist League).

Of course the real live Marx morally condemned people for doing what he did. But his hypocrisy was of the form of claiming he was a value neutral social scientist. It was much deeper than confessing to his moral values and not behaving according to them.

However, he almost never let the mask slip. Look statisticians use the value laden term "bias" but that doesn't make them moralists. How about "fair market value" ? Sure seems to assert that capitalism can be fair. Jargon is often based on ordinary language, but technical terms don't prove that the person using them appeals to all the connotations of the term. Note the key word "proves." I have no doubt that the really existing Karl Marx was a moralist and a hypocrite. I just don't see the proof in your post.

I am not familiar with the writings of this Rand person of which you speak, but it seems to me that the founder of "objectivism" shared the deeper hypocrisy with Marx as well as the minor laps from the un-confessed views of morality.