Basic Econometrics: Tiptoe through the Type II Tulips

An ancient bit of American folk wit asks, "If you call a tail a leg, how many legs does a cow (dog, horse, pig) have?"

The answer is four. Calling a tail a leg doesn't make it one. No amount of regression analysis virtuosity is going to "predict" or "estimate" that phantom fifth leg at a statistically significant level.

So what I'm going to say about Munnell and Wu's analysis and Type II errors may seem redundant. And if it was just Munnell and Wu's report that was at stake, it would be. But, as I pointed out in my earlier post, I'm looking at a minor genre of do-older-workers-take-jobs-from-the-young lump-of-labor boilerplate. This crap proliferates like the heads of Hydra, cut one off and it grows two more. So think of what follows as "cauterizing the stumps."

Type I versus Type II errors

In hypothesis testing, a Type I error is made when the null hypothesis is rejected although it is true. A Type II error is made when the null hypothesis is accepted but is actually false. This gets rather convoluted in that the null hypothesis posits "no effect", rejecting the null hypothesis implies probably finding an effect and thus the Type I error would find an apparent effect that doesn't actually exist. A Type II error would find no effect even though there is one.

"Statistical significance" refers exclusively to a low probability of committing a Type I error. It has no bearing either on the size of the effect or on the probability of making a Type II error.

Munnell and Wu reported the following finding with regard to the "crowding out" effect:

If crowding out were occurring, an increase in older persons’ employment would increase youth unemployment. However, the coefficient is negative and statistically insignificant, that is the increase in the employment rate for older people has no impact on youth unemployment. The second column presents the results for youth employment. Again, no sign of crowd out is evident. Instead, a 1-percentage-point increase in the employment rate for older people is associated with a 0.07 percentage points increase in youth employment. This finding strongly contradicts the crowd-out hypothesis.

How "strongly" does this finding contradict the crowd-out hypothesis? That depends on the statistical power of the test, which Munnell and Wu didn't report on and perhaps didn't even consider. In The Cult of Statistical Significance, Stephen Ziliak and Deirdre McCloskey reported the findings from their surveys comparing how statistical significance testing was used in papers published in the American Economic Review in the 1980s and the 1990s. Only 4.4% of papers published in the 1980s considered the statistical power of the test. By the 1990s, practice had improved somewhat -- to 8%!

Baroudi and Orlikowski give a succinct summary of the relationship between statistical power, Type II error and the reporting of statistically non-significant results:

Statistical power becomes particularly crucial to the interpretation of results in those cases where the null hypothesis is false; that is, when the phenomenon being investigated does exist. If the test reveals non-significant results in these circumstances, the usual response is to accept the null hypothesis and conclude that the effect being examined does not exist. Such a conclusion, however, would not be appropriate if the phenomenon actually exists but was undetected because the statistical test was not powerful enough. In such a case, a conclusion of "no effect" would be misleading; we would be generating a spuriously negative result - committing a Type II error. 

Was Munnell and Wu's statistical test powerful enough to conclude, as they did, that their statistically insignificant finding "strongly contradicts the crowd-out hypothesis"? They don't say. But a cursory glance at a scatter-plot of the 55-64 year old employment rate and the 20-24 year old unemployment rate strongly suggests it wouldn't matter anyway. There's nothing to see there. As Thomas Pynchon wrote in Gravity's Rainbow, "'If they can get you asking the wrong questions, they don't have to worry about answers."

The crowding-out hypothesis is a red-herring. Plain and simple. This pseudo-econometric farce is about fabricating a rationale for raising the pension-eligibility age.

 

The Death of Communist Idealism

The deaths within a short time of two highly respected men in their mid-90s, who both were members of the Communist Parties of their nations, and only somewhat reluctantly abjured their past associations raises questions that must be more seriously considered.  It has been trivial since the fall of the Soviet Union and the end of the Cold War to dismiss orthodox Communism as a dead doctrine, only followed by lunatic oppressors in North Korea (although they officially went nationalist rather than Marxist/Communist some years ago), or those about to die, such as Castro in Cuba.  But it is a hard fact that both the most respected person on the planet, Nelson Mandela, and the freshly dead American folk music icon, Pete Seeger, were not only members of their respective national Communist parties, but maintained substantial elements of support for those even after they formally abjured their party memberships, that act itself a matter of some contention.

Not only that, but revelations of details of these facts has inspired various critics to denounce both of these widely admired figures for their apparent failures either to denounce their former associations (more for Seeger) or even to have joined the party in the first place (Mandela, whose membership was denied by him in his autobiography).  So, Bryan Caplan has denounced Mandela for his even joining the South African Communist Party (SACP, although in the old days they were the CPSA), with him having actually been a member of their Central Committee at the time of his arrest in 1962, with on them praising him for this on his death.

Regarding Pete Seeger, as a 17-year-old freshman at Harvard in the same class as JFK in 1936 he attended a few Communist Party meetings, joining the Young Communist League (YCL) and then the party itself in 1941, only to leave it in 1950.  Details of all this and other matters I shall refer to can be found at his Wikipedia entry, the New York Times obit for him, an article by David Graham at the Atlantic, while various sources have denounced him for his reluctance to denounce Joseph Stalin, although he would eventually do so in the 1990s, notably after the fall of the Soviet Union when he was given Kennedy Center Honors by Bill Clinton in 1994, when he apologized for having been slow to realize that Stalin was not just a "hard driver, but a brutal dictator."  He had in 1982 sung for the Polish Solidarity movment, which many take as a denunciation of Stalin, although it took until 2007 for him to write a song openly and clearly denouncing Stalin specifically, "Big Joe Blues."

So, before proceeding further I shall make observations on my own position.  In 2001, my Russian-born wife Marina, now in a plane over the Atlantic on the way to Moscow to visit her mother, and I took our then nearly 12-year old daughter, Sasha, to Moscow, and as a matter of history I took her to look at the corpse of Lenin in his Mausoleum on Red Square.  As one approaches this view, one passes the roughly 20 herms with busts just behind it (there being two further layers, mere tombs, and then those "in the Kremlin Wall," the US's John Reed in that first layer, and cosmonaut Yuri Gagarin in the latter).  Among those herms is the one above the corpse of Stalin, who had initially lain next to Lenin after his death, then moved to a secret grave after Khrushchev delivered his deStalinization speech in 1956, only to be moved back to his remaining location just behind the mausoleum after Brezhnev overthrew Khrushchev a half century ago (with Brezhnev's corpse now lying beneath a similar herm in that row now that nobody any longer seeks to join).  Anyway, ahead of us in line was an elderly man wearing many medals from his service in WW II, and Sasha got a serious lesson when we had to wait while this man stood for a long time and bowed very slowly and very deeply to the herm with Stalin's bust, even as she had been told that he was a mass murderer who killed millions and also personally had her much-respected great grandfather, Boris Mokhov, thrown in prison and profoundly tortured.  While at that time those men still walked the streets of Moscow with their medals clanking proudly, they do so no longer, only appearing in small numbers in wheelchairs on the May 9 anniversary celebration of VE Day, their numbers rapidly dwindling.

While I have just provided what is viewed in Russia and some other parts of the former USSR as the main reason why Stalin might be defended, that in alliance with the US and UK, he oversaw the main push that defeated Hitler, with 20-30 million Soviet citizens dying in this effort, which included the deadliest battle in world history that turned the war around, Stalingrad (now Volgagrad), and the world's largest tank battle at Kursk, which was the ultimate death knell for Hitler.  Needless to say some argue that Stalin killed more than Hitler, but if one counts Soviets who died in this war as a result of Hitler invading the USSR on June 22, 1941 with Operation Barbarossa as due to Hitler, it is  not close (although the Black Book of Communism's number for Mao of 65 million puts him way ahead of both of them).

So, Dave Graham argues that Seeger's communism was "all-American."  There is something to this, even if Seeger and many others naively followed the doctrine longer than could be justified by anyone paying close attention to what was going on. In the year Seeger joined the YCL, the party was in its Popular Front phase, allying itself with movements in other countries, with its publicly open national convention that year in the US looking like one would find today from the Dems or GOP more recently, lathered with flags and patriotic music and speeches.  Then CPUSA General Secretary Earl Browder declared that communism was "20th century Americanism," and Seeger believed him, even though Browder was a paid sycophant-toady for Stalin.

I personally think that what was going on with Seeger, whom I profoundly admire as the Grand Old Man of American Folk Music and the composer of  many songs that will be sung as long as Americans sing songs, was a Yankee stubbornness that did not like people telling him what to do.  His great grandfather had been a famous abolitionist, and his father had been a Conscientious Objector in WW I.  It is ironic given this that his most criticized act was producing a pacifist recording with the Almanac Singers in early June, 1941, in line with the then CPUSA and Stalin line of peace between Hitler and Stalin, broken weeks later with the Operation Barbarossa German invasion of the Soviet Union (with Seeger after this serving the war effort in the US), and during a period when the US itself was still neutral in the war.  In any case, I observe that even many libetarians, who are often strongly anti-Communist, admire his resistance in 1955 when he stood against the demands of the House Un-American Committee (HUAC), a body that in retrospect must be viewed as the epitome of unAmericanism itself, and unlike any other witness in the post-Hollywood-Ten era did not refuse to testify by invoking the Fifth Amendment, but forthrightly declared his right not to reply to certain questions on the basis of the First Amendment, free speech, as foundationally all-American as you can get.  They brought a conviction against him for his temerity in 1957 as "Contempt of Congress," (snort), which was overturned on a technicality in 1962.  I shall quote his most famous rejoinder to them in the hearing that no one has ever overturned:

      "I feel in my whole life I have never done anything of a conspiratorial nature.  I am not going to answer any question as to my association, my philosophical or religious beliefs [he was a practicing Unitarian Universalist at his death], or how I voted in any election, or any of these private affairs.  I think these are very improper questions for any American to be asked, especially under such compulsion as this."

     While he "drifted away from" the Communist Party after 1949, he declared that he remained a "communist with a small 'c'" for the rest of his life, even as he eventually mocked "socialists" for not noticing that no nation with a publicly-owned post office "produced a Federal Express."

     Although they are both greatly revered and were near the same age and died near the same time, Nelson Mandela's relationship with the Communist Party was quite different from that of the arguably naive Seeger.  I think that in the end Mandela's was also idealistic, but he operated at a much more difficult level and was as far from naivete as one can get.  It has long been known that his ANC, which he co-founded the Youth League of in 1944 prior to the introduction of official apartheid in South Africa, allied itself for practical reasons with the SACP at an early stage.  It was long known that many at the top of the ANC went further and joined the party in this alliance, including Mandela's successor, Thabo Mbeki (and Mbeki's father who went to jail in Robben Island with Mandela in the early 1960s).

      The SACP was a much more serious player in South Africa than was the CPUSA in the US, and after the Sharpeville massacre in 1960, was largely brought into play against the black nationalist Pan African Congress (PAC), the racist rival of the ANC, it was not ridiculous for those in the ANC who sought a non-racist solution to the problems in South Africa and were looking at severe repression from the then hardline apartheid government, would look to the SACP for support, which remained and continues to the present day, against the racisms of both whites and blacks, even if the ally was severely flawed as the CPSU most certainly was.  We can poke at Mandela for covering up for this link, but after 27 years in jail and his peace-making performance after his release, such griping looks pretty minor. That he was the most respected person on the planet at his death is not seriously challenged by this information in the grand scheme of things, my friend Bryan Caplan notwithstanding.

There is another player here who is not disconnected from the deeper issue I am aiming at here.  That is Martin Luther King, Jr.  J. Edgar Hoover attempted to discredit him with several presidents by whispering in their ears not only the tales of his marital infedelities, but his links with the Communist Party.  Now, unlike both Seeger and Mandela, he was never a member of the party.  However, he did have two senior advisers in the Sourthern Christian Leadership Conferenc (SCLC) who had been member of the CPUSA up to the moment in the late 1950s that they moved to advise him, Stanley Levison and Jack ["Hunter Pitts"] O'Neill, the former Jewish and the latter African-American.

So, this brings me to a bottom line that is not generally recognized but should be.  While the Communist Parties of the world were involved with deep and serious evils, certainly any of those who supported either the Soviet Union based on the Stalin model, or its rival in China led by the even bloodier Mao Zedong, not to mention such lesser bloody dictators as Kim Il Sung.  Nevertheless, in certain nations at certain points in time where they were not in power, they came to be the only poltical entity that stood for an important principle: civil rights for all irrespective of their racial or ethnic background.  We know that in the USSR Stalin did not follow this always, but he stood in sharp contrast on this matter to Hitler whose raison d'etre was to exterminate a particular group, the Jews. In the 1920s and 1930s the CPUSA was the only political body standing for racial civil rights in the US, and in South Africa in 1960-62 its South African counterpart was doing so likewise in conjunction with the African National Congress (ANC).  That Nelson Mandela resisted, advisers to Martin Luther King, Jr. had adhered, and particularly that the great grandson of a prominent abolitionist who would compose "If I Had a Hammer" and put together the universally sung version of the civil rights anthem "We Shall Overcome" would get his back up when pushed on the matter of his idealistic youthful party membership when pushed by HUAC and others of similar unAmerican ilk, must be considered in the light of this one great moral triumph and virtue of this party that otherwise must be viewed as covered in nauseating shame.

Barkley Rosser

Inaugural Issue of Review of Behavioral Economics (ROBE)

A post discussing in some detail some of the papers in the recently released inaugural issue of the Review of Behavioral Economics (ROBE), of which I am the founding Editor-in-Chief, is available at a site at James Madison University.

Barkley Rosser

Basic Econometrics: Robots Demand Shorter Hours!

"You don't need a weatherman to know which way the wind blows."

There are some facts that no amount of regression analysis can annul. For example, the following sentence appears in a report on the "Role of governments and social partners in keeping older workers in the labour market" from the so-called European Foundation for the Improvement of Living and Working Conditions:

Perceptions that early exit of older workers should be supported to help generate jobs for young people, linked to a view of the existence of a fixed supply of available jobs (the so-called 'lump of labour' fallacy), have been discredited (see Walker, 2000).

I, Sandwichman, am AKA the "Walker, 2000" cited above. And here is a sequel from the International Journal of Discrimination and the Law:

There is also a misconception that if older workers remain in employment, there are fewer jobs for younger people (Bisom-Rapp and Sargeant, 2013); which is often referred to as the ‘‘lump of labor fallacy’’ (European Foundation for the Improvement of Living and Working Conditions, 2013: 8; OECD, 2011: 76; Walker, 2000).

Zhang and Zhao cite Walker, 2007 in their paper on "The Relationship between Elderly Employment and Youth Employment: Evidence from China," as do Banks, Blundell, Bozio, and Emmerson in "Releasing Jobs for the Young? Early Retirement and Youth Unemployment in the United Kingdom." Only the latter authors, however, present evidence of actually having read the article by Walker they cited, "Walker (2007) expresses a sceptical view of the idea that economists have been able to prove the 'lump-of-labor' to be a fallacy indeed." Indeed. Thank you, Banks, Blundell, Bozio and Emmerson!

In a category all its own was the 2008 IMF working paper by Jousten, Lefèbvre, Perelman and Pestieau, which, although they didn't explicitly cite "Walker, 2005 (draft)", somehow managed to replicate almost verbatim two complete sentences of my draft without "any recollection of reading your article during the course of our research." A coincidence, no doubt. What are the odds?

The long and the short of it is: the Sandwichman has become, by way of citation (five, if you count plagiarism as de facto citation), somewhat of an authority on the relationship between retirement and youth employment. Also somewhat of a witness on standards of scholarship. But... econometrics?

As Bob Dylan said, or sang, "you don't need a weatherman," and certainly you don't need an econometrics textbook to know when someone's "model specification" blatantly violates ordinary common sense. But it can't hurt:

3. Dropping a variable(s) and specification bias. When faced with severe multicollinearity, one of the "simplest" things to do is to drop one of the collinear variables. Thus, in our consumption-income-wealth illustration, when we drop the wealth variable, we obtain regression (9.5.4), which shows that whereas in the original model the income variable was statistically insignificant, it is now "highly" significant. 

But in dropping a variable from the model we may be committing a specification bias, or specification error.  Specification bias arises from incorrect specification of the model used in the analysis. Thus, if economic theory says that income and wealth should both be included in the model explaining consumption expenditure, dropping the wealth variable could constitute specification bias. 

... [bunch of math omitted] 

From the preceding discussion, it is clear that dropping a variable from the model to alleviate the problem of multicollinearity may lead to the specification bias. Hence the remedy may be worse than the disease in some situations because while multicollinearity may prevent effective estimation of the parameters of the model, omitting a variable may seriously mislead us as to the true values of the parameters. (Gujarati, Basic Econometrics)

Note the phrase in the second paragraph, "if economic theory says..." This may lead even the avowed non-econometrician to conclude that omitting or not omitting a variable is a decision that should be guided by -- or at least in some way constrained by -- economic theory.

What theory? In the case of the retirement/youth employment literature -- of which the Sandwichman is an acknowledged authority (see above) -- the relevant theory would appear to be "the theory that the 'theory' of the lump of labor is a fallacy." I say "would appear" because such is the only explicit economic theory (loosely speaking) that appears in the articles' discussions.

It's an odd theory that boils down to "the amount of work is not fixed." What possible refinement could regression analysis add to the obvious conclusion, that the supply of available jobs is not "fixed", one could readily draw from a most cursory glance at the unembellished time-series data itself?

Does the technical term, "bullshit," ring a bell? Just look at the freakin' data, man! Munnell and Wu used data from the March supplement to the Current Population Survey spanning the years 1977 to 2011. You don't need an econometrician to show that when unemployment goes up, youth unemployment goes up, too. When the unemployment rate of older people goes up, the employment/population ratio of older people goes down. It's not rocket science. And, finally, the unemployment rate of older people is highly correlated with the overall unemployment rate.

Without putting too fine a point on it, something BIG pushes youth unemployment and the employment of older people in opposite directions. Even IF there were an association between retirement and youth employment, it stands to reason it would be SMALL in magnitude compared to the BIG thing that drives them apart. One doesn't have to be a weatherman, an econometrician or a rocket scientist to remain unsurprised when a relatively minor disturbance doesn't register as "statistically significant" in a regression analysis -- omitted variable or no omitted variable.

So what is really happening here? Why is this regression analysis elephant being belabored to give birth to this non-significant statistical mouse? It's about "keeping older workers in the labour market." Because, pensions. Or, to put it less delicately, it is about "improving living and working conditions" by cutting pensions. It is kind of hard to explain how taking things away from people will make them better off, which explains why one needs to do "regression analysis" that doesn't conform to the principles of Basic Econometrics.

The Mystery of Economic Identities

Dean Baker has a takedown of Robert Z. Lawrence on his website today.  RZL said that reduced US fossil fuel exports can’t have an effect on the current account, since the current account is determined by net national savings, and changes in energy sources don’t affect the determinants of net savings.  Dean showed how, step by step, changes in the destination of US purchases can alter savings.  He also showed how the value of the dollar doesn’t have to adjust to maintain a constant current account position.

I hate to take issue with Dean, a much nicer guy than his public pit bull profile would suggest, but both sides of this dispute are mired in confusion.  At issue is one version of the macroeconomic net savings and current account identity:

(S – I) + (T – G) ≡ CA

where S is a country’s total savings, I is investment, T tax revenue, G government purchases, and CA is the current account balance.  (I prefer the financial balances version of this, but they are equivalent.)

What RZL did was to say that changes in spending decisions can’t change the CA because it’s determined by decisions to save, invest, spend public money and tax, and these haven’t changed.  What Dean did was to say that, au contraire, changes in spending decisions that redirect money to domestic producers can create more domestic income, which alters S and T, thereby altering CA.

What I object to is treating this identity like an equation.  What’s the difference between = and ≡?  The thing on the left side of = is presented as equal in measure to the thing on the right side.  The left can determine the right or the right the left, or perhaps the equation fails and they end up not being equal this time.  When you see an ≡, however, the thing on the left is the same thing as the thing on the right.  One does not cause they other; they are two different ways of expressing one identical entity.

The ultimate basis for macroeconomic identities lies in individual identities: a purchase is identically a sale, non-consumption of income is identically saving, and a credit asset is identically a debt liability.  One doesn’t cause they other, and they can’t add up to different quantities, ever, even for a really, really short period of time.

The problem with Dean’s answer, then, is that it is couched in causation and sequence.  A happens, which then causes B and C.  This opens the door to needless disputes over what causes what and what happens first.  Of course, there are causal mechanisms at work, but they are operating in all directions and simultaneously.  And measured net saving is the consequence of all of them taken together, as is the current account balance—which is simply net saving using a different set of measurement categories.

Meanwhile, regarding the possibly offsetting role of exchange rates in response to expenditure switching, RZL is pledging allegiance to the venerable specie flow mechanism, according to which changes in the trade balance automatically engender a change in relative prices that restores the initial trade balance.  It didn’t work under the gold standard, however, and it doesn’t work under floating exchange rates either.  This is an empirical reality, universally agreed to by those who study such things.  One often gets the impression with RZL that the policy conclusions constitute the fixed point, and arguments are adduced as needed to support them.

UPDATE: OK, I was flip in the last paragraph.  Species flow is an internal adjustment, and offsetting exchange rate movements are an external adjustment.  You could believe in one and not the other.  The fact that they are both pollyana-ish is not material in analytical terms.  Nevertheless, it remains the case that there isn't an empirical tendency for exchange rate adjustments to automatically offset CA imbalances.

Robert Samuelson Dumps On Bernanake

Well, this title is a bit strong.  Robert J. Samuelson in a column yesterday in the Washington Post, "Why Bernanke fell short," does say many nice things about Fed Chair Ben Bernanke on the eve of his retirement.  He "helped quell an intensifying financial panic and, arguably, averted a second Great Depression." RJS also reasonably credits him with "competence, candor, decency, and dignity" during difficult times.  He is even kind enough to avoid mentioning what many other observers have faulted Bernanke with: failing to foresee what was coming prior to the crash and doing much to prevent it, or even to deal with the housing bubble as it peaked and went downhill, although most of its rise happened prior to his becoming Chairman.  For Dean Baker, this latter lacuna simply reflects RJS's ongoing failure to recognize that there was a housing bubble.  (Sorry, does not look like this link is going all the way through to Dean's post yesterday, just to cepr, phooey.)

Nevertheless, Samuelson proclaims that "Bernanke's ambition transcended calamity prevention. He sought to kickstart the economy by keeping interest rates low..."  On this he is declared a failure, only getting GDP to grow "an anemic annual rate of 2.4 percent. Payrolls are still below their 2007 peak..." and so on.  "Bernanke's weapons were less powerful than assumed or hoped."  His "massive exertions to improve the recovery have so far yielded paltry returns."  While the stock market "recovered," this failed to lead to real investment growth as "Some chief financial officers said they financed investment from internal funds, not borrowing; others said investment was tied more to demand than to interest rates," although both of these claims have been standard stuff for years long before the recent period.  Bernanke's "ultimate reputation" remains up in the air, and "He was hindered by the high expectations of set in the Greenspan years."

All right, so much of this must be granted, although noting that in 2007 "half of Americans expressed confidence in the Fed; by 2012, only 39 percent did," does not seem all that bad given how badly the economy has performed since 2007 relative to before it.  In any case, it seems to both Dean Baker and me that RJS overdoes all this, including putting too much blame on Bernanke for the failure to get the economy going more as all had hoped and ignoring various other headwinds operating to make it difficult to do so, many of them not under the control of the Fed, with some of them even noted by Bernanke himself at points in time.

What has Dean Baker most annoyed is Samuelson's ignoring of the role of the trade deficit.  The economy would have done better if that had been smaller.  However, I think  Dean misses the point a bit on this.  In fact one outcome of the quantitative easing (QE) policies was that the dollar depreciated somewhat against some currencies of major US trading partners, notably the Chinese yuan/rmb and the euro.  Indeed, when the second round of QE was announced, leading officials in both China and Germany complained loudly on this very point, arguing that the US led by the Fed was trying to engage in classic "beggar thy neighbor" policies through depreciation.

As it was, Samuelson (and Dean) completely ignore, that compared to Europe, the US economy has performed quite well.  That 2.4% growth rate may well be "anemic" by historic US standards, but it is much better than what has happened in both the Eurozone and the UK, where double dip recession has been widespread, if now ending in most parts.  The US has managed to avoid this, even as the previously expanding BRICS economies are decelerating, in some cases falling into recession or near to it recently.  There is no question that employment growth in the US has been anemic, but it looks a lot better than in many other nations around the world, with more than one observer assigning a revived global leading role to the US economy under the circumstances.  In the face of all this, Bernanke's performance does not look quite so bad, even if the US public is disappointed.

Finally, there is the matter of fiscal policy.  While that of the US has not been as austerely contractionary as what has gone down in most of Europe, it has not been all that expansionary since the initial stimulus in 2009, with the deficit falling sharply since then, even as most of the public remains unaware of this simple fact, along with the sharp declines in employment that emanated from the state and local sectors until last year.  Needless to say, this is a matter over which Bernanke had no control, although he occasionally did point out the need for more fiscal stimulus.  On this point, neither Samuelson nor Baker give him any credit nor mentioned its role in the proceedings.

So, I grant that Robert Samuelson says appropriately kind words and recognizes Bernanke's role during the worst of the crash.  I also note that he ignores Bernanke's failures prior to the crash.  But RJS is too stingy with credit in the aftermath, failing to note things he did that were stimulative and how the performance in the US looks better than in most other countries, not to mention his ignoring the role of failed fiscal policy both here and abroad.  More credit is due than has been granted.

Barkley Rosser

Arithmetic and Heritage Foundation’s Chief Economist

Heritage Foundation has a new “chief economist”?

That's why Heritage's most recent hire could mark a potential return to normalcy and respectability for the foundation. The new man is Stephen Moore, most recently of the Wall Street Journal's editorial page, who is joining Heritage as its chief economist. He has previously worked at Heritage in the 1980's, the Cato Institute, and Club for Growth before spending the last nine years at the Journal.

I’ve read some of what Stephen Moore has written in the past and I was shocked that anyone would call him an economist. But I hear he did receive an M.A. in economics over 30 years ago. But seriously. Paul Krugman notes:

Moore has adamantly denied that the demand side can ever matter, at all. And he has done so in flat-out know-nothing terms: hey, never mind “fancy theories” that conflict with “common sense”.

Never mind fancy theories – let’s talk about 3rd grade arithmetic. Several years ago, Moore tried to convince his National Review readers that corporate income was subject to a 73% effective tax rate by summing the 35% corporate tax rate with an 38% individual rate faced by high income households. Never mind that this calculation ignores the deferral benefits most corporate tax attorneys get – it is just incredibly bad math as was pointed out by Kevin Drum and Brad DeLong. Suppose your shares in IncrediblyBadTaxPlanning Corporation generated $100 in pretax income in 2013 and they actually paid you a $65 dividend immediately. You pay a 38% tax on the $65 – not the $100. That comes to $24.70 – not $38. Brad found another arithmetic error with his:

Wall Street Journal Total Fail: Stephen Moore Takes a Weighted Average of 2% and 48% and Gets 50

Stephen Moore really did write:

Federal workers on balance still receive much better benefits and pay packages than comparable private sector workers, the Congressional Budget Office reports. The report says that on average the compensation paid to federal workers is nearly 50% higher than in the private sector, though even that figure understates the premium paid to federal bureaucrats. CBO found that federal salaries were slightly higher (2%) on average, while benefits -- including health insurance, retirement and paid vacation -- are much more generous (48% higher) than what same-skilled private sector workers get.

Let’s generously assume that the weight for benefits should be 30%. Then the weighted average is less than 16%. I’m told that Stephen Moore is not trying to deceive his readers as he actually believes the nonsense he writes. But then my question is why would anyone call someone who is this challenged by simple arithmetic their “chief economist”?

The Wisdom of Robert Waldman

 At Angry Bear:

"The assumption of a unique exogenous long run growth path absolutely does not follow from the D, S, G or E parts of DSGE. It is a separate assumption –a methodological a priori not an implication of other standard
 assumptions."

Amen.

Fallacy vs. Fallacy

"It may be reading too much into recent experience, but one could also argue that under certain constraints the lump of labour fallacy is no fallacy at all." -- R.A., The Economist Free Exchange blog

So much for the lump of labor, then, but how about the fallacy of the null-hypothesis significance test? Although not quite as alliterative and comical as the lump of labor, the latter fallacy has the merit of referring to something economists actually do -- and frequently do wrong, as Stephen Ziliak and Deirdre McCloskey argued in their book, The Cult of Statistical Significance.

I want to call attention to a rare direct encounter between the fallacy of the lump of labor and the fallacy of the null-hypothesis significance test that was highlighted in an Associated Press story,"Will Surge of Older Workers Take Jobs From Young?"  at the beginning of the year. The AP story revolved around a research report from the Boston College Center for Retirement Research, "Will delayed retirement by the baby boomers lead to higher unemployment among younger workers?"

After trotting out the ersatz theory of the lump of labor as a red herring and/or stalking horse, the authors of the report, Alicia Munnell and April Wu, conducted a regression analysis to find out if there was any "crowding out" of youth by increased employment of older people. To make a long story short, Munnell and Wu didn't find any crowding out.

To be more precise, however, what they actually "found" was no statistically significant association between older workers' employment and young people's unemployment. Surprising as it may sound, the two finding are not identical. In this particular case, there may be grounds to suspect that the statistical result yields no credible information about whether or not there is an effect.

Explaining why gets a bit technical, so bear with me. Munnell and Wu point out, in a footnote, that their model has excluded the state unemployment rate "when outcome variables are age-specific unemployment/employment rates by state, due a to a high degree of collinearity." Superficially, that sounds like a reasonable thing to do because otherwise the said high degree of collinearity would confound the results of the analysis. But is it? You can take the collinearity out of the model but you can't take it out of the sample you are studying.

Here's what Kevin Arceneaux and Gregory A. Huber wrote about multicollinearity in 2007 (emphasis added):

First, where MC exists, it is a basic characteristic of a sample. No amount of statistical machinations, however clever or sophisticated, will allow a researcher to identify the independent effects of regressors that are obfuscated by MC. A simple way to diagnose MC is to calculate the pairwise correlations between potentially collinear independent variables or to calculate Variance Inflation Factor scores (Gujarati 1992). If MC obscures the independent effects of certain variables, a joint significance test will nonetheless allow the researcher to test whether the variables are statistically significant as a group. 

Second, omitting variables from a regression model in an effort to eliminate MC is a cure certainly worse than the disease. This method requires strong assumptions about values of parameters and potentially introduces bias into the remaining model coefficients. At the very least, researchers who drop variables in this way are making the assumption that an omitted variable, X, has no effect on Y, rather than demonstrating so. 

Third, especially in small samples, where even moderate MC can make finding statistically significant coefficients for individual covariates with a real effect on Y less likely, the lack of statistical significance of a coefficient estimate should not be taken as grounds for concluding that the variable has no effect. In small samples, MC can reduce statistical power dramatically, obscuring effects where they exist and leading researchers to make inferential errors if they decide to drop a seemingly extraneous variable.

To sum up: collinearity is a characteristic of the sample, omitting variables is a cure worse than the disease and lack of statistical significance should not be taken as evidence of no effect. At the very least, then, one would expect Munnell and Wu to cushion their reported results with academic qualifications and cautions. But no.

Let's take a look at how an earlier economist, using prose instead of regression analysis dealt with the same issue that Munnell and Wu study. Harold L. Sheppard,"The Issue of Mandatory Retirement," (1978)

In times of prosperity and worker scarcity, however, discrimination against older workers can still prevail, all of which suggests that the phenomenon cannot be strictly understood within narrow economic variables. But regardless of the economic environment, much of our thinking regarding mandatory retirement and its relationship to job opportunities may, in the opinion of some economists, reflect the time-honored and -worn doctrine of other economists of a fixed lump-of-labor theory, that regardless of economic policies, there are only so many jobs to be passed around, and that the only remaining issue is how to ration them among would-be workers of varying socioeconomic categories. 

In this connection, there are other aspects of the retirement issue that should be noted; for example, a special form of involuntary retirement just as compelling as a formal mandatory retirement age. In my own analysis of data from the Department of Labor's National Longitudinal Survey, it was determined that the level of area unemployment may influence the rate of early retirement. For instance, in areas with an unemployment rate of more than 6 percent in 1973, 31 percent of white males 60-64 were retired, compared to 28 percent in areas with 4.1-6.0 percent unemployment, and only 24 percent in areas with 4 percent or less unemployment. This is a type of involuntary retirement that is rarely noted. 

The other economic doctrine somewhat in contrast to the fixed-lump-of-labor one is that an increase in employment (or in this case, the retention of a given group of workers), through a variety of policies, produces sufficient purchasing power to stimulate the further hiring by employers of all, or many, of the remaining cohort of would-be workers. According to this purchasing power doctrine, then, it is possible to remove so many "older" workers from the labor force that total purchasing power declines, support costs go up, and the resources for hiring other cohorts thereby are diminished -- and few, if any, win. However, there has been no systematic and reliable testing of either of these doctrines.

Note that other economic doctrine! Might this be a case of fallacy vs, fallacy vs. fallacy? 

Labour Markets: "A crazy explanation for what is happening to workers"

Ryan Avent at the Economist:

"It may be reading too much into recent experience, but one could also argue that under certain constraints the lump of labour fallacy is no fallacy at all."

One could, couldn't one?

Origin of the Term "Econoblogosphere": An Egomaniacal Post

Oh, I cannot resist.  I am going to claim to be the original neologizer of the now widely used term, "econoblogosphere."  Miles Kimball has just posted a video on its .future , which has also been linked to by the intrepid Mark Thoma on his links for 01-17-2014.  I have also seen it increasingly used by, well, lots of widely read people, including Paul Krugman and many others.  So, I am going to lay out my claim to be the first to coin the term and use it in, well, the eonoblogosphere, indeed anywhere in cyberspace or any other space, :-).

I did so in my very first post on this blog, back on September 2, 2007, not in the title, but in the body of the message, when I introduced myself to readers of this blog.  It appears on line 5 of the second paragraph.  I cannot say for sure that it is the first such usage, however, I know that when I used it there, I had not seen it before and consciously made it up.  Now, I have done some checking, inspired by this missive by Miles, googling all sorts of combinations, names, years, dates, this and that, and it appears that shortly after my post on September 2, others started using it later that month, Andrew Samwick on Sept. 22 and Felix Salmon on Sept. 29, being the first two I could find, but none others prior to them.

I am not going to claim that they got it from me, although this is not out of the question as Tyler Cowen had posted about me posting at Econospeak just before my first post on his Marginal Revolution, so maybe they checked it out and got it from there.  However, more likely is that at least one if not both of them thought it up on their own.  The term "econobloggers" had been floating around for months, so it was an obvious neologism to make.  This is probably one of those cases of near simultaneous independent invention that often happens, such as with Newton and Leibniz for the calculus (obviously a much less important issue than this one, :-))., but I am going to stake my ground here and now as probably being the first to have done so, until someone proves otherwise, :-).

Barkley Rosser

Added and see first comment:  Have since found earlier use on November 13, 2006 by Mark Newmark of Newmark's door discussing the ranking of eocnomics blogs by Gongol.  Sic transit gloria, :-).

"The long-debunked fallacy known as Say’s Law..." -- a perplexing guide to the perplexed

"With this I buy bread?"

"You want bread? Bang a baker!"

Paul Krugman wonders why don't da bunk stay debunked? He should ask a falleontologist (rhymes with paleontologist). When I was at Cornell, many decades ago, I came across an article and then a doctoral dissertation by Daniel Ellsberg that demonstrated the difference between risk and ambiguity. More recently I encountered a lovely explanation by Jeff Gill of the invalidity of the "probabilistic modus tollens" ("Ho" signifies the null hypothesis):

The basis of the null hypothesis significance test rests on the logical argument of modus tollens (denying the consequent). The basic strategy is to make an assumption, observe some real-world event, and then check the consistency of the assumption given this observation. The syllogism works like this:  

If A then B | If Ho is true then the data will follow an expected pattern
Not B observed |The data do not follow the expected pattern
Therefore not A | Therefore Ho is false.  

The problem with the application of this logic to hypothesis testing is that the certainty statements above are replaced with probabilistic statements, causing the logic of modus tollens to fail. To see this, reword the logic above in the following way:  

If A then B is highly likely | If Ho is true then the data are highly likely to follow
an expected pattern
Not B observed |The data do not follow the expected pattern
Therefore A is highly unlikely |Therefore Ho is highly unlikely 

Initially, this logic seems plausible. However, it is a fallacy to assert that obtaining data that is atypical under a given assumption implies that the assumption is likely false: almost a contradiction of the null hypothesis does not imply that the null hypothesis is almost false (Falk and Greenbaum 1955). For example (Cohen 1994; Pollard and Richardson 1987):  

If A then B is highly likely | If a person is an American then it is highly unlikely
she is a member of Congress
Not B observed | The person is a member of Congress
Therefore A is highly unlikely | Therefore it is highly unlikely she is an American.  

From this simple little example and the resulting absurdity it is easy to see that if the P(CongresslAmerican) is low (the p-value), it does not imply that P(Americanl Congress) is also low.

The ambiguous subject matter of economic analysis is thus not once but twice removed from the logical syllogism of modus tollens. Is it any wonder that economists keep trying to shine their boots with poop? I repeat: risk is not ambiguity, lime is not coconut, probability is not logic, coconut is not hedgehog. Therefore, the hedgehog is not a lime.

What does this have to do with the lump of labor? Plenty. Dudley Dillard (1988) called Say's Law a corollary of the Wages-fund doctrine. John Wilson (1871) denounced a "trade unionists' version" of the by then discredited Wages-fund doctrine that latter came to be known as the "Theory of the Lump of Labour" (Alfred Marshall dubbed his version of the lump of labor fallacy, the fallacy of the fixed "work-fund" an obvious play on the old wages-fund notion). Raymond Bye, whose introductory economics textbooks were ubiquitous in the 1920s, 30s and 40s, denounced the lump of labor fallacy because it violated Say's Law. Jevons's Paradox... And so, on and on we go, round and round, where it stops nobody knows. Say's Law is/isn't Say's Law is/isn't the Wages-fund doctrine is/isn't the lump of labor fallacy is/isn't Say's Law.

Just remember: ambiguity is not risk, risk is not logic, ambiguity is not logic.

Penny Wise and Pound Foolish Cuts to the IRS Budget

Multinationals of the world rejoice:

The Senate, by a vote of 72–26 on Jan. 16, passed the omnibus appropriations bill (H.R. 3547) to fund the federal government through fiscal year 2014. The bill now moves to President Barack Obama's desk for his signature. The House passed the appropriations bill Jan. 15 by a vote of 359-67. The legislation allocates $11.3 billion to the Internal Revenue Service, a decrease of $526 million, or 4.4 percent compared to the previous year's enacted level.

[Source: BNA]. Reducing the IRS budget allows multinationals to abuse transfer pricing in order to source less income in the U.S. I guess multinationals might be upset that some of our trading partners are increasing their transfer pricing enforcement. But as long tax rates abroad are lower than ours – particularly in those tax havens – allocating less of their profits here means lower effective tax rates. Of course, U.S. based multinationals must defer the repatriation of their profits at least until Congress decides once again to take the bone head move of offering another tax holiday on such repatriated profits. OK – we argued back in the Bush years that the repatriated profits would lead to more investment but we know the vast bulk of repatriated profits were paid as dividends to shareholders.

Say against Say: lower wages won't clear labor markets (It's the law!)

L'offre crée sa propre demande (supply creates its own demand) does not mean the same thing as un produit terminé offre, dès cet instant, un débouché à d’autres produits pour tout le montant de sa valeur (the finished product offers, from that moment, an outlet for other products for the entire amount of its value). For starters, la loi des débouchés is an argument about heterogeneity, not simply about quantity. It is also an argument about proportion, with "the entire amount of its value" qualifying the extent to which any given finished product constitutes a demand for other products.

La loi is thus more robust than "supply creates its own demand" but also more ambiguous. Critics of Say's Law have faltered on its robustness while proponents have ignored its ambiguity. In an 1821 letter to Malthus, Say supplied ammunition to those who would champion a doctrinaire reading of the law. With the proviso, "supposing even they immediately find capitals to set them to work at a fresh business," Say sought to refute Sismondi's objections to machinery as a cause of unemployment. Say's reasoning may seem circular here but I think the error is more substantial even than a mere affirming of the consequent: a rigorous application of Say's law of markets would conclude the opposite of what Say assumes in his letter to Malthus!

How so? In assuming displaced workers "immediately" are set to work in a "fresh business," Say at once treats labor as a commodity in two incompatible ways. On one hand, Say treats labor as a differentiated "finished product" that can be displaced by a machine which substitutes for its speciality. On the other hand, though, labor (power) is assumed to be an undifferentiated general capacity that can readily be adapted to a new trade. The elixir for this fantastic transformation from leaden particularity to golden generalization is, presumably, the wage. Given a wage of zero in their former occupation and a positive wage, however low, in the fresh business, displaced workers can be counted on to make the transition. The only fly in this alchemical ointment is the stubborn aversion of workers to low wages.

Of course not every redundant blacksmith can make the leap to concert pianist, even given a low enough starting wage. But people are adaptable, so the thinking goes. For finished products, though, Say's law offers no such reprieve. There can be no general glut of overproduction, only overproduction of some products co-existing with underproduction of others. The "fresh business" idea would come in handy here. If there are too many overshoes produced, it is simply a matter of re-labeling them as flower pots, of which there happens to be a shortage!

Sarcasm aside, Say's segue from workers being displaced by machinery to workers set to work in fresh business, from the particular to the general, raises the spectre of a general glut in the labor market, which -- because all labor is treated as homogeneous -- is not amenable to "redirection" by wage signals from localized gluts to localized shortages. Furthermore, in some industries the substitution of machines for labor power would be irreversible other than, hypothetically, at a negative wage because of the sunk costs in machinery.

With regard to labor markets, the phrase "supply creates its own demand" is not only not Say's Law; it violates Say's Law!

Will The US Congress Choose To Go To War With Iran?

Unfortunately this looks like a serious possibility.  I know that the entire rest of the world, with the exception of the Israeli leadership and the leaders of the Saudi royal family, want the Congress not to pass the current bills to impose further economic sanctions on Iran, just as the Obama administration has succeeded in getting an interim nuclear agreement on nuclear weapons with them, with negotiations ongoing to achieve a final agreement, which would almost surely be ended by the Congress passing these bills.  While public opinion, including a solid majority of the US Jewish population, supports this agreement, we have a bipartisan group of Senators now approaching getting enough votes for this insane legislation to overcome a presidential veto.  This is a new low for a body that has already put on so many shows of mass stupidity in the past, although this time there are a bunch of Democrats on board rather than it being some circus put on by Tea Party dingbats.

Iran's leader, Ali Khamenei, has issued fatwas against nuclear weapons.  I have posted this point more times than I can count, but regularly when I tell people this, the reaction is, "Oh, he is just doing that to trick us."  Not likely. He is a religious leader issuing a religious proclamation, and it should be taken seriously.  Of course while Ahmadinejad was president it was easy to ignore that Khamenei was really in charge and to focus on all the crazy statements that Ahmadinejad would make on a regular basis.

Then there is the myth that if the US just presses hard enough, this will be like South Africa or the USSR and the system will collapse to be taken over by pro-US  reformers who will abjure nuclear weapons.  Well, first of all, US pressure on Iran, just like the sanctions on Cuba, simply allow hardliners in Iran to justify their repressions and general bad behaviors.  However, the part that most people really do not understand is that the vast majority of Iranians, including openly and clearly the Green Movement opposition, support Iran having a civilian nuclear program, which is what the government has always claimed is what they are pursuing.  If somehow a bunch of secular reformers were to overthrow the Islamic regime, they would continue the programs, although maybe then we would say it is OK.  After all, the Iranian nuclear program originally started back when the Shah was in power with US assistance.

While passing the sanctions would end this round of negotiations and put the hardliners back in charge over reformist President Rouhani, the Iranians probably would not move to obtain nuclear weapons immediately because of Khamenei's fatwas.  But he is old, and if it becomes clear that it is simply impossible to achieve any sort of agreement on the matter with the US, his successor as Vilayat-al-faqi might well overturn his anti-nuclear weapons fatwa, and war might well then be the result.

After all, two months after he became president, Bush ended the ongoing negotiations about nuclear weapons with North Korea, with advisers inspired by Nicholas Eberstadt's prophecies of the imminent collapse of the regime whispering in his ears.  Instead, the North Koreans moved to obtain nuclear weapons, and their noxious regime remains in place, possibly worse than ever under the rule of Kim Jong-Un.  A similar outcome in Iran would be highly likely if Congress passes this awful legislation.

Barkley Rosser