More on Teaching Intro

Peter started a discussion here. And Nick Rowe at Worthwhile Canadian Initiative, under the title "God and Man at Yale" has another one, with hundreds of comments. I'll add my two cents. This is a comment I sent to WCI actually.

I want an Intro. Course to show students "how to think like an economist," but I also want some time devoted to the limitations of such thinking. I used to teach the course with David Friedman's *Hidden Order* and Robert Frank's *Choosing the Right Pond*, so they could see how the same methodology - rationality plus equilibrium - could give you very different political-economic visions. But the methodology itself -whether wielded in support of libertarian or left-liberal politics - ought not to be accepted uncritically. So I would assign Dickens' *Hard Times*. The students hated the Dickens, so I dropped it and substituted Amartya Sen's "Rational Fools." I wanted them to understand how the phenomenon of "commitment", as Sen uses it, by which he means "counter-preferential choice" is a deep critique of the conception of rationality that economists use. Unlike the behavioral critique, which simply documents all the ways people make mistakes in maximizing, a Senian critique says that human beings are more than utility maximizers. As the late lamented David Foster Wallace puts the point in a discussion of Dostoevsky, "[Dostoevsky’s] concern was always with what it is to be a human being—that is, how to be an actual person, someone whose life is informed by values and principles, instead of just an especially shrewd kind of self-preserving animal." I don't think this deep critique cuts either right or left, but I think we do a disservice to our students by not exposing them to it. The fact is that most of them when they come to us are already "thinking like economists" in important and pernicious respects: they are cynical about the possibility of principled behavior, they are sure that behind every alleged "value" lies a preference, they are nihilistic about normative authority. The have been brought up, after all, in the age of "sophisters, calculators and economists."

At an AEA meeting one year long ago, there was a session on "Teaching the Principles Course" I attended, which was really just advertising for two new texts by the presenters, one of whom was Robert Frank. (The text he was introducing is the one I have used in the Micro split ever since - it's a great book.) Frank talked about how the book encouraged the students to be economic naturalists, and to apply the economic way of thinking to everything they came across. I asked a question: suppose a student comes to your office hours and thanks you for teaching him the EWT. He was in a long-term relationship and felt that he owed his partner loyalty, but that after learning that sunk costs shouldn't play any part in guiding one's choices, he decided - given that the net benefit of the relationship going forward was negative- that he owed his partner nothing, and consequently was dis-loyal. Frank seemed genuinely at a loss for a response and after the session sought me out to talk more about it.

John Taylor Clarifies His Summary

John Taylor is not happy with a critic from Paul Krugman. His most recent summary states:

Krugman says my conference summary suggested that “Bloom, Baker and Davis had showed that fear of Obama was holding the economy down.” No, my summary said or implied no such thing; there is no mention of Obama, Bush, or any politician in my summary. It simply says that these authors “presented their empirical measures of policy uncertainty and showed that they were negatively correlated with economic growth.” … As part of his presentation Bob said that now and going forward we should assume “no chance of conventional fiscal expansion; rather, possible cutbacks motivated by excessive federal debt.”

Contrast this to what Taylor originally wrote:

In sum there was considerable agreement that (1) policy uncertainty was a major problem in the slow recovery, (2) short run stimulus packages were not the answer going forward

Wow – I read (1) as saying a lot more than simply negatively correlated. I also read (2) as asserting fiscal policy was ineffective but now we know that Dr. Taylor meant fiscal stimulus was never tried and will not be tried. I’m so glad he cleared this up!

Climate Change Proposal

If a large number of countries wish to band together to limit climate change, could they impose a tariff on imports from countries that do not limit CO2 production, accusing the non-compliant of taking advantage of an unfair trade practice?

John Taylor May Have One Thing Right

Paul Krugman provides us with the summary of a conference at the Hoover Institute provided by John Taylor. Paul notes that Taylor’s summary misrepresented what Bob Hall said:

Taylor makes it seem as if Bob Hall showed that fiscal expansion is ineffective. Yet if you have actually been following Hall — which I have, carefully — you’d know that he has been producing extensive evidence that fiscal expansion does, indeed, work; he argues that the Obama stimulus made the slump considerably less severe. His complaint is that the stimulus wasn’t big enough — which is the same argument I made from the beginning.

For a more fair and balanced summary – see Noahpinion. But let’s also note the following from Taylor’s summary:

I presented research with John Cogan on fiscal policy showing that it had not been successful in raising government purchases and was ineffective regardless of the size of the multiplier.

In other words – we really did not try fiscal stimulus after all. Isn’t that also been what Paul has been saying for quite a while!

Eurologic

The word has come down from on high in Europe.  Merkozy have decided:

1. Henceforth, after Greece, there will be no more haircuts administered to creditors of sovereign debt.  All obligations will be paid in full, no matter what interest rate has to be paid or how onerous the debt service program has become.

2. Every country will be subjected to hard limits on its budget deficit and must even show progress toward reducing debt-to-GDP to 60% if it is now above that target.

There are problems with each of these taken alone, but has anyone noticed that, under predictable circumstances, they contradict each other?  You can explain this as a quid pro quo for the two main players in the Eurozone, but sometimes political agreements also have to make sense.

A Modest Tactic for Improving Teaching

Yesterday’s lesson plan was fulmination; today’s is incremental improvement.

We—those of us who teach economics and other subjects—use exams and quizzes to evaluate students and assess our own effectiveness at reaching educational goals.  Some questions are narrow and technical, others broad and open-ended.  I want to talk about the narrow ones.

Narrow, close-ended questions are usually written to find out if the student can supply the correct answer.  The information we draw from them is whether the student “gets it” or not.  If not, and if there is enough time for it, we will go back and see if more explanation can facilitate the getting.

I propose the opposite approach: design these questions to see whether students have fallen into certain predictable errors.  If they have, unteach them.  The underlying conception behind this strategy is that the process of learning is not mainly, or at least only, that of gaining mastery over items of skill and knowledge, but also casting off false habits and beliefs.  The mind is not a tabula rasa but a messy blackboard, and if you simply try to overwrite it you will often get more mess at the end.  The critical tool is an eraser.

This is especially a problem in economics.  Students are exposed to a vast amount of information about economic topics outside the classroom, and a lot of it is wrong.  This exposure began long before they had the ability to question it, so false beliefs are often deeply embedded.  Worse, there are powerful interests operating through politics and popular media who benefit from particular misconceptions and feed them incessantly.  (Think, for instance, about why it is that most students entering their first macroeconomics class believe that inflation, by raising prices, reduces consumers’ real income—unaware that wages are also prices.)

If you want to organize assessment and teaching around error reduction, the key step is empirical.  You have to spend a lot of time listening to your students, not to find out whether they are saying what you want them to say, but simply listening to what they are saying.  What are their actual beliefs?  How do they define for themselves the technical terms you are using in the classroom?  How do they read equations, and how do they go about trying to manipulate them?  Look for errors in clusters, common pathways that lead them away from the goal you are trying to reach.  Then build the narrow questions in your exams and quizzes around what you have found, and use the results to guide your teaching in a more fruitful deconstructive direction.

A Republican Who Doubts the Laffer Curve?

Congressman David Schweikert of Arizona suggests that the payroll tax holiday will increase the deficit:

The simple fact is that this sort of temporary tax stimulus has repeatedly shown that without offsets, they only stimulate bigger federal deficits.

OK – but Republicans also want us to believe that tax cuts for well to Americans pay for themselves. The original Laffer curve was a proposition that even in a full employment economy, tax rate cuts so increase economic activity that tax revenues go up. Laffer described this in terms of reducing the wedge between the demand for labor and the supply of labor, which a reduction in the payroll tax would accomplish.

But to be fair to the Congressman – I should mention two points: (1) few labor economists ever bought the assumption that the labor curve was that elastic; and (2) we are not currently in a full employment economy. Point (2) would have us think in terms of the Keynesian marginal propensities to consume for households receiving the tax cut. If the household were very well to do, one would think the marginal propensity to consume would be low, which would lead to the conclusion that “tax stimulus” would “only stimulate bigger federal deficits”. But tax cuts for the working poor – which is what this payroll tax holiday is designed to accomplish – could lead to an increase in economic activity.

Conclusion – by any economic model, the Congressman has this exactly backwards. But what else is new?

Mankiw’s Reply to the Walk-Out

Whatever my disagreements with Greg Mankiw’s op-ed self-defense today, I appreciate that he takes his dissident students seriously and refrains from slinging labels, pulling rank or other repressive tactics.  Protesters don’t always get this treatment.

That said, I think Mankiw fails to see two ways in which his introductory course, and other mainstream econ courses, impose a worldview that makes thinking constructively about economic problems less rather than more likely.

Occupy Chico State

On Thursday morning while riding to school, the main entrance was blocked with police tape. Supposedly someone had called in a bomb threat. Later during the day, my office building was evacuated because of some kind of mechanical malfunction. Finally, a fire drill set off alarms and forced us to leave the gym. All that seemed like a series of curious coincidences.

That night I was scheduled to give a talk at the Occupied Chico State teach-in, which was supposed to be followed by a take-over of the administration building. Because of the (phony?) bomb threat, the building was locked down early.

I had intended to discuss a sequence of the Bonus March, the GI Bill, which made higher education more accessible, then Reagan's 1966 institution of tuition for the previously tuition-free university system, culminating in the mess we have today. On Friday, I gave a brief overview of the talk on our local NPR station.

Here is our unedited conversation.

http://www.archive.org/details/OccupyChicoState

Quote of the Day, December 3, 2011

“If you have the 1 percent saying, ‘Tax the 99 percent’ and the 99 percent saying, ‘Tax the 1 percent,’ you have a standstill.”

—Joseph Zarelli, lead Republican budget negotiator in the Washington State Senate, as quoted in the New York Times.

American politics made easy.

Not the Best News on the Employment Situation

Before we get too giddy over the news that the unemployment rate fell from 9.0% to 8.6%, we should note that the employment to population ratio barely increased from 58.4% to 58.5%. The big news really is that the labor force participation rate fell from 64.2% to 64.0%. Only hacks like Lawrence Kudlow get giddy when the unemployment rate falls because folks are no longer officially in the labor force. Most of us consider the discouraged worker effect bad news.

Also mind you that the rise in the employment to population ratio is due to the reported rise in employment per the household survey which claimed employment rose by 278,000. The payroll survey claimed an increase of only 120,000, which was really disappointing given that ADP said private employment rose by 206,000. Private employment per the payroll survey did rise by 140,000 by government employment fell by 20,000 (4000 drop in Federal employment, 5000 drop in state employment, and 11,000 drop in local government employment). As noted in my previous post the Senate Republicans wants even less government employment. Go figure.

The Balanced Budget Multiplier is Not Negative

Senate Republicans have a condition for supporting the continued payroll tax holiday:

Senate Republican leaders introduced a bill that would keep the payroll tax rate at its current level for another year. The cost is roughly $120 billion. Senate Republicans would offset most of the cost by freezing the pay of federal employees through 2015 and gradually reducing the federal work force by 10 percent.

The marginal propensity to consume for reductions in payroll taxes maybe be high but it is still less than unity. So if we reduce government purchases by the same amount as reduce payroll taxes – this proposal would be contractionary. I guess the good news here is that some of the reduction in government purchases would be deferred.

I guess in a world of PAYGO, however, we should ask how the Democrats propose to offset the loss in payroll taxes revenues:

Senate Democratic leaders want a deeper temporary reduction in Social Security payroll taxes. They would provide payroll tax relief to employers as well as employees. And they would offset the cost with a 3.25 percent surtax on modified adjusted gross income in excess of $1 million.

In other words, raise taxes on households who are not liquidity constrained which means if there is anything left to Barro-Ricardian equivalence, perhaps the marginal propensity to consume for changes in taxes on the very well to do is less than the marginal propensity to consume for reductions in payroll taxes. So if the goal is to increase aggregate demand – then the Senate Republican idea is awful whereas the Senate Democrat idea makes sense.

Morality: The Ecological Inference Problem

One further word on the hazards of assessing the moral position of a country:


The moral culpability of a population is not evenly distributed among its members. This is true in issues of war and peace as well as debt service. If one talks of “punishing” miscreants, as Merkel has done, some attention should be given to whether those being punished are the ones who misbehaved.

Unfortunately, the entire point of the bailout process is to cushion the losses of financial institutions, many of which (and many of whose high-level officers) profited by assuming excessive risk: they got the returns in the boom and now the taxpayers are stuck with the losses in the bust. Moreover, the taxpayers are disproportionately those who did not prosper in the bubble economy; ordinary working people have their taxes withheld from their paychecks and skimmed off through the VAT. The fast-and-loose crowd are shielded by unreported income, legal and illegal tax dodges and the like. True, the line can be fuzzy – low income people pay under the table too – but the balance of the burden does not correspond to the balance of the benefit.

This unfairness is a moral issue. To ignore it à la Merkel is a moral problem.

It reminds me of a saying: When the budget cuts come, we hear that it is the fat that will be cut, not the bone. Unfortunately, it’s the fat that makes the cuts.

Success and Morality in a Market Economy

There has been a lot of talk about economic success and moral virtue recently: the Tyler Cowen encomium to the morality of Teutonic creditors I jumped on yesterday, the Zingales conflation of meritocracy and justice that Andrew Gelman skewers today, and, on the other side, the complaint one sometimes hears from the 99-percenters that we are being dragged down by the greed of the other 1%.  My favorite observation on all this comes from one of the most eminent of Victorians, John Ruskin.  (Incidentally, I first came across this quotation in P. S. Atiyah's magnificent The Rise and Fall of Freedom of Contract.)

In a community regulated by laws of demand and supply, but protected from open violence, the persons who become rich are, generally speaking, industrious, resolute, proud, covetous, prompt, methodical, sensible, unimaginative, insensitive, and ignorant.  The persons who remain poor are the entirely foolish, the entirely wise, the idle, the reckless, the humble, the thoughtful, the dull, the imaginative, the sensitive, the well-informed, the improvident, the irregularly and impulsively wicked, the clumsy knave, the open thief, and the entirely merciful, just, and godly person.

I Hope “The Moral Superiority of the Germans” Isn’t Translated Into German

Merkel et al. hardly need more encouragement. But if they must read this latest howler from Tyler Cowen, let them also bear in mind:


1. The entire premise of the argument is incoherent. On the one hand, TC says he is not comparing the morality of the German people to other Europeans—that would be “false and repugnant”—but rather the “system-wide” virtues of Germany versus those of the peripherals. On the other, he judges the peripherals to be morally inferior because they wish to default on their debt obligations. But the “they” who choose to default are not systems but individuals. So, yes, this is an argument about some people being more moral than others.

2. Saving and borrowing are partly matters of choice, but also matters of circumstance. Consider, for instance, the permanent income hypothesis, which tells us that when your income rises unexpectedly you save more, and when it falls you save less—even though your preferences for saving out of permanent income remain constant. This is where the trade surpluses and deficits come in. Without adhering to any particular model of savings behavior, it is clear that Germans have had more income because of their exports (half of German income is earned in the export sector), and countries with trade deficits have, for this reason, lower incomes. Of course, net savings and the current account are two measures of the same thing.

3. Even worse is the claim that default is simply a matter of choice—that those who propose defaulting on debts are less moral than their creditors. Except for Greece, loans taken out by public and private borrowers were generally in good faith. The economic catastrophe that decimated their finances was unanticipated. You could say they engaged in poor judgment by not taking the risk of such a catastrophe into account, and you would be right, but this verdict applies equally to the lenders. It is simply foolish, for instance, to say that, if interest rates remain at their current level, Italians are “choosing” to default. At 7% they have to pay 8.5% of GDP just to roll over, and the economic shrinkage this implies would raise that share year after year. Yes, Italians have assets, but if they sell them so that the state can tax the sales and redirect the revenues to debt service, then the returns on those assets will no longer accrue to Italians, and we are back, more or less, at the same point.

4. To sum up, the injunction to honor debts is like a lot of other obligations in this world. You should provide for the needs of your children. You should return your books to the library on time. If I lend you my car, you should avoid having it damaged in a collision. If you can do these things you should. If you can’t it depends on the reasons. Throwing poor parents into prison because they don’t give enough support to their children is neither good morality nor good economics. Same with people who get sick, can’t go out, and have overdue library books. Same with someone in a borrowed car who ends up in the middle of a giant crash. If the real estate market crashes in Spain, and the government is forced to step in to prevent a financial meltdown, what is the morality or economic sanity of demanding that the people of Spain be punished and forced to undergo a generation or more of austerity?