The Jilted and the Landless

Britain has gone to pot and its the fault of the baby boomer generation says two media journalists (Ed Howker from 'The Spectator' magazine and Shiv Malik from the 'Sunday Times' and 'Prospect' magazine).  If it wasn't for the short-term horizons and rampant consumerism of the British people from my generation then those young adults of today - those born from 1979 and later - would be enjoying a good supply of cheaper, better quality housing, as well as jobs that paid a reasonable remuneration and were also secure.  It is claimed that the denial of those things has led to their "postponement of adulthood" and a lifestyle of poverty and aimlessness. [1]

The crisis in Britain, as described in Malik and Howker's book 'Jilted Generation' is particularly relevant because it is also mirrored in most so-called 'first-world' nations today.  I have no real argument against their description of the predicament of the post 1979ers but a lot of the analysis of this book lacks depth and historical understanding.

It may be quite normal for young adults to pin the blame for things gone wrong on the generation who came before and I can relate to that.   Who would argue against the proposition that there aren't, indeed, huge numbers of baby boomers who should be accepting a great deal of responsibility for the dire situation that our offspring find themselves in now.  Many boomers have wielded high levels of decision-making power in our political and social institutions.

Howker and Malik, however, fail to describe the global trends and forces that acted upon the their parents' generation. In addition, they fail to acknowledge the extent to which many baby boomers very actively engaged in a rebellious backlash against the very unsustainable materialistic lifestyle and attitudes that these same authors rage against now.  There did exist, after all in the 1960s and 1970s, a notable counter-culture stratum of society, and it wasn't ever all about drugs and other politically naive distractions.  One of the most fundamental aspects of the youth counter-culture, for instance, was the 'Back to the Land Movement'. [2]  In the 1960s and 1970s young people flocked to rural areas with the aim of creating a simpler, better way of existing free from many of the constraints of what they saw as a dysfunctional and (ultimately) unsustainable mainstream society.  Though 'back to the land movements' have existed long in time

"...what made the later phenomenon of the 1960s and 1970s especially significant was that the rural-relocation trend was sizable enough that it was identified in the American demographic statistics..."[2]

A strong belief existed  in the 1970s that a movement onto rural land would result in lower housing costs, better living standards, improved health, and general wellbeing.  One would engage directly in organic agriculture and home building and, through these actions, earth-centred lifestyles and communities would become self-sustaining.  The hope existed that a new culture would emerge and spread quickly and widely enough to avoid a 'limits to growth' catastrophe in the new millennium.

Needless to say, that dream didn't pan out.

Time and opportunity constraints mean that the full explanation of political and social trends that begin to explain the failure of counter-culture (such as concentration of power, consumerisation of politics etc) cannot be explored here.  However, the issues that relate to the availability/cost of land are, perhaps, where it might be the most fruitful for an inquirer to explore reasons for the degeneration in civil life and the severe depletion of common wealth (in the 'rich' industrialised nations at least).

Land, the authors of 'Jilted Generation' acknowledge,  is "the major cost in the purchase of a home" [3].   Lack of land (in terms of decentralised ownership) may be the very reason why 93% of homes built in London between 2000 and 2010 have been "poky one and two-bedroom flats." [4]  The fact that less than one percent of Britain's population own it entire base of farmland [5] might explain why a 'back to the land movement' cannot exist there.

For surely land is the only form of genuine cultural escape when we find ourselves living out an empty materialism - expressed as 'consumerism' - in a deprived 'dollars-and-cents' reality.
Brenda Rosser

REFERENCES:
[1]  'Jilted Generation - How Britain has Bankrupted its Youth' by Ed Howker and Shiv Malik.  Icon Books Ltd, Omnibus Business Centre.  Published 2010.  ISBN: 978-184831-198-5

[2] Back-to-the-land movement, Wikipedia
 http://en.wikipedia.org/wiki/Back-to-the-land_movement

[3]  Page 41:   'Jilted Generation - How Britain has Bankrupted its Youth' by Ed Howker and Shiv Malik.  Icon Books Ltd, Omnibus Business Centre.  Published 2010.  ISBN: 978-184831-198-5

[4]  Page 213:   'Jilted Generation - How Britain has Bankrupted its Youth' by Ed Howker and Shiv Malik.  Icon Books Ltd, Omnibus Business Centre.  Published 2010.  ISBN: 978-184831-198-5

[5]  Reclaim the Fields
Ed Hamer discovers a European youth movement taking action on the issue of access to agricultural land.  http://www.thelandmagazine.org.uk/articles/reclaim-fields

Paul Krugman Incorrectly Claims Credit For Calling Worsening Income Distribution "Fractal"

Paul Krugman has just claimed primacy in identifying a lengthening upper tail in income distibution to mean that income distribution is "fractal."  He did so in 1994 in his book Peddling Prosperity.  I have just tried to make the link, but as so often seems to happen, it is not working. So, here is the url that any of you can go get at to check, http://krugman.blogs.nytimes.com/2014/02/11/me-and-me-blogging-inequality-metaphor-division . (Maybe it will work now)

Anyway, it may well be that he independently came up with this link.  But he certainly was not the first one to make the link.  That would be the person who coined the term "fractal," namely the late Benoit Mandelbrot in his 1982 book, The Fractal Geometry of Nature. Among other matters he discusses in that book is Pareto's power law distribution that was initially developed to model income distribution, with Pareto inaccurately arguing that he had found a universal law.  Such distributions are notable for their upper tails that are longer than such alternatives as the log-normal or Boltzmann-Gibbs.  As it was, Mandelbrot used the term "fractal" as applying to such power law distributions, so he did it first.

Barkley Rosser

Pseudonym 'Myrtle Blackwood'

I'm writing under a pseudonym 'Myrtle Blackwood' (the names of two of Tasmania's most popular trees) in order to avoid name confusion with another 'B Rosser' posting on Econospeak.
Brenda Rosser

Nelder: Peak Oil Isn't Dead

Chris Nelder's article: 'Peak oil isn't dead; it just smells that way' is a helpful and relatively recent update on the peak oil discussion.

Since at least 2005 there has been a massive increase in the financial investment to fund production in oil.  This has been paid for by higher prices for fuel.  The result, however, has been merely a rough global plateau of production in crude oil since that time.  Global demand keeps rising as population and expectations rise also.  So other forms of liquid fuel (such as ethanol) have been employed to supplement supply.  However the energy intensity and the energy return on energy invested (EROEI) of these alternative fuels is significantly lower than for crude oil.

The world, in summation, already has an energy-related transport crisis in the respect that the fuel we use to run our vehicles is now much, much more expensive than it was compared to a decade ago and the prices continue to rise at a faster rate than our incomes do.  The result can only be reflected in a lower general standard of living without changes in lifestyle.

Does Romneycare Tell US About What The New CBO Report Means For Employment?

Maybe, but not necessarily.

So, we have just had one of the worst outbreaks of misreporting of a careful study, followed up by a whole new political propaganda meme that we shall certainly hear at least through the fall election.  "Obamacare will cost 2.5 million jobs!"  Oh gag.  So, sure, most economists and at least some commentators caught that this was about labor supply rather than the far more unpleasant labor demand side of things.  Nevertheless, some economists and others have continued to argue that the labor supply side of things is still a big deal, a problem that we should all be shaking in our shoes about, indeed, yet again meaning we should be rushing out to repeal this awful socialist horror.

Prominent in this is a Wall Street Journal column yesterday by Joseph Rago, who praises the labor supply studies of Casey Mulligan, long one of the advocates of the "recession is due to lazy workers" meme [sorry, failed to make link work].  Rago has him "exposing Obamare" along with denunciations of both David Cutler and David Gruber for supposedly telling everybody pollyanna stories about jobs and Obamacare.  Shame on them!  They are now supposed to go hide their heads under covers and never comment anywhere ever again on this, now that Mulligan has shown them up.  Indeed, he estimates that the labor supply effects will be twice what the CBO says, those latter economists just too wimpy to face the Awful Facts.

However, even if these labor supply effects are as strong as claimed, whether by CBO or Mulligan, for quite some time to come there is little doubt that the employment problem we face is one of insufficient labor demand.  To the extent workers not fearing loss of health care cut back their labor supply, there will be plenty of unemployed ones willing to step forward to replace them.  Maybe there is a longer run problem of less potential output in the future, although personally I suspect that the reduction in capital investment we have been experiencing will reduce that future potential more than any reduction in labor supply due to these changed incentives related to health care availability.

Indeed, as Gruber and others have argued, I think that it is useful to look at what has happened in Massachusetts since Romneycare was adopted in 2006.  While a 2011 study from Suffolk University claimed there would be job losses due to higher health insurance costs, the experience there has simply not supported fears of impediments to job creation.  TalkingPointsMemo reported on an Urban Institute study that found MA job growth reasonably comparable to that of selected states and national averages [OK, another failed effort to link there, sorry].  Last year it was in line with national averages and greater than in any state northeast of Pennsylvania.  One can argue that MA has special advantages due to its high levels of human capital and excellent universities, but job creation simply has done very well and looks to continue to do so, eight years out from adopting Romneycare.

Now there are some complications here that must be noted when looking at Romneycare in comparison with ACA.  While I do not think this explains much because what is going on with observed employment is much more demand-side than supply-side determined, Mulligan has claimed as of last August that Romneycare has substantially fewer supply-side disincentives than ACA.  Maybe, but again, not a big deal, at least not anytime soon. 

The other matter actually tilts in the favor of ACA.  As noted in regard to the Suffolk U. study, the biggest criticism of Romneycare, also reflected in public polling, has been its failure to hold down insurance costs, despite it being in general popular.  However, on this matter, Jonathan Chait notes that it had no mechanisms that made any effort to hold down costs, whereas ACA does have such mechanisms, and whether or not the apparent bending down of the cost curve we have been seeing nationally is due to it or other factors, we seem to be seeing a different outcome than in MA.  Indeed, one of the less noted points in the CBO study is that it appears that the average premium on the new exchanges is coming in at 15% less than what was projected a few months ago, although obviously not all the data is in on that front.  Nevertheless, the main lesson from Massachusetts is that probably Cutler and Gruber are more right than Mulligan or the misdirecting headline screamers about the jobs impact of ACA.

Glad I managed to make one link work.  Sorry somehow not to get others to do so.

Barkley Rosser

Will Future Fed Policy Be Driven By Behavioral Macroeconomics?

Arguably it already is, although this has not been commented on particularly by many, but with the accession of Janet Yellen to be Fed Chair, the question becomes more pressing.  Yes, she will be surrounded by many who do not agree with her views on the FOMC and among those attending meetings of it not on it, but as Chair she will have more influence than in the past, and her husband George has declared that there is almost no difference in their views on macroeconomics.  While both of them have been labeled as "Keynesians," and some of their work has influenced the New Keynesian DSGE models now dominant in central bank research shops, increasingly Akerlof has identified himself as being  behavioral macroeconomist, with this even in the title of his Nobel Prize address published in the AER in 2002, "Behavioral Macroeconomics and Macroeconomic Behavior," reinforced a few years later when he argued that norms are the "The Missing Motivation in Macroeconomics" in his 2007 Presidential address to the AEA, these justifying a somewhat more Keynesian view of macroeconomic policy.

Of course, despite his claims about the closeness of their views, we must be careful not to impute too much from his views to hers, given that she will even more so be in an intense environment dealing with difficult situations and other decisionmakers who do not necessarily agree with her views, with the stock market decline on her first day in office and the apparent crises in foreign nations such as Turkey and Argentina putting her on the firing line immediately as she enters office. We should not expect her always to be following his line or views.  Nevertheless, looking particularly at their joint work, but also to some extent at his, may provide some orientation to her deeper views, whatever may come out when decisions must be made.  And, again, I suspect that the answer is that Fed policy already reflects behavioral macro views and arguments more than most realize, even if her moving to the top does not necessarily incease this by much.

Obviously foundational to all of this is his Nobel Prize winning paper on the market for lemons in 1970, formalizing the model of asymmetric information that had been batted around for some time by the likes of Hayek, Stigler,and Vickrey.  This would underpin some of his earliest and most important work with Yellen in such papers as theirs on efficiency wages in 1984 in the AER, and their famous "near rational" model of business cycles from the QJE in 1985.  Both of these would provide the underpinnings for sticky wage-price models, including "Calvo fairy" type gradual adjustment models that many hard core Minnesota type DSGEers ridicule for their lack of rigorous foundation.  However, in the original asymmetric information models the agents are rational, but boundedly so due to their imperfect asymmetric information.  But the key is that they know that they have such imperfectly asymmetric information.  Thus the buyer of a used car will pay less because s/he knows that s/he cannot know all the defects of the car, and employers will willingly pay current workers more than their MP so as to keep them because they know that they know more about the abilities (and lack thereof) of their current workers than they will of any new hires, at least up front.  The use of rules of thumb to deal with informational limits was shown to have first order effects on output with a monetary shock, even when such rules only have second order effects on the firms using them.

However, from a fairly early point, more behavioral aspects crept into their joint work, particularly as they recognized the role of norms and of how agents view each other, particularly in labor market settings.  One of the most important of these insights was in the paper on fairness and unemployment in 1988 in the AER.  This recognized what is going on with the widespread empirical phenomenon of the downward stickiness of nominal wages, with survey evidence gathered by Bewley and others that employers recognize that cutting nominal wages damages morale.  Workers considering what is "fair" implies application of worker norms, which reinforce both that downward stickiness and also the effiiciency wage argument.  Again, while these arguments can be seen feeding into NK DSGE modeling, they also implied further effects and policies.

The latter came about with the later paper by Akerlof, Dickens, and Perry at Brookings in 1996 when Yellen was on the Board of Governors, "The Macroeconomics of Low Inflation."  This paper must be seen as the origin of the nearly global adoption of a 2% target rate of inflation.  The argument derives from that strong tendency to downward stickiness of nominal wages with the microeconomic need for there to be real relative wage adjustments over time. So, these must come about from arguably "excessive" wage increases for some.  In the end it was a matter of judgment that said that a 2% inflation rate was the "Goldilocks" amount, not too much, not too little, that could bring about these efficiency labor market wage adjustments while keeping inflation low.  It is now well known that it was Yellen that year who convinced Alan Greenspan to switch to supporting the 2% inflation target from his previously desirved zero % target, with this later being taken up by Bernanke and many others around the world.  In this regard, behavioral macro is already profoundly influencing not just Fed policy, but macro policy around the world.

I shall conclude by simply listing some themes mentioned by Akerlof in his Nobel address and his AEA presidential address, which we should assume will be at least somewhat supported by the new Fed Chair, even if not necessarily all the time and fully vigorously when too strongly opposed.  So, in his his Nobel address he mostly recounted the points made above about efficiency wages and second order effects.  He exteneded these to question the solidity of the natural rate of unemployment argument, noting that deflation stopped after awhile in the Great Depression.  He also supported Shiller style arguments about asset markets being subject to irrational bubbles, something that may explain her being the first among top Fed policymakers to openly worry about the bubbly nature of the US housing market starting in 2005. Finally, he brought in the matter of undersaving, which reflected another behavioral argument of his from his 1991 Ely lecture on "Procrastination and Obedience.."  This made respectable the long ignored idea from Robert Strotz in 1956 about hyperbolic discounting, which has now become fully entrenched in respectability with such people as David Laibson at Harvard publishing on it in the AER, QJE, and other proper outlets.

Finally, in his presidential address he arguably became more openly behavioral with his emphasis on the role of norms, something that Yellen clearly agreed with him on in some of their joint work on labor markets.  He argued that this "missing motivation" underlay why five supposed "neutralities" of macroeconomics do not hold in reality.  These are the independence of consumption from current income, the independence of investment from fiancial decisions, that inflation stability can only hold at the natural rate of unemployment, that macro policy is ineffective due to rational expectations, and Ricardian equivalence.  Now, several of these were pushed to the side already by the NK DSGE modelers, but some others have continued to be used in such models, with the now-under-attack Euler equation that underlies the first point being an example.  My guess is that by now most of those participating in FOMC meetings have already absorbed that these five neutralities do not hold, even if they do not do so by reasoning from people following norms as Akerlof argues and Yellen may argue.  But, even as I have already said that current Fed policy to some extent already reflects the behavioral macro of Akerlof and Yellen, I suspect that we are likely to do so even more so, with this perhaps even becoming more openly so in the near future.

Barkley Rosser 

What the CBO Really Said About Obamacare and Future Employment

Did Dylan Scott really scoop economist bloggers as he refuted the latest GOP spin:

They had a new talking point: President Obama's hated health care reform law would cost more than 2 million American jobs. "Obamacare To Print Even More Pink Slips," read the subject of the Senate Republican conference email blasted out after the report's release. "Obamacare will cost our nation about 2.5 million jobs," tweeted Sen. Lindsey Graham

The CBO report can be found here. As Dylan succinctly noted:

Those lost hours will "almost entirely" be the result of people choosing to work fewer hours because of Obamacare -- not because they lost their jobs or can't find a full-time job.

If a Republican economist blogger has stepped up to the plate and been honest about what the CBO really said – I’d be impressed. I just checked the blogs of Greg Mankiw and John Taylor and nothing yet. But then this is still early in the discussion. To be fair - the CBO did talk about the substitution effect from higher marginal tax rate, which is something a conservative economist might want to emphasize. But the CBO discussion went further than that in discussing the multitude of channels as to how the ACA will affect labor markets including the income effect from better health care access. Don't trust the political spin and do read the CBO's interesting discussion.

Good Luck, New Ms. Fed Chair

And, yes, Janet Yellen, congratulations, but you certainly need some good luck, particularly given that the day that your worst enemy on the Board of Governors, Daniel Tarullo, swore you in this morning as new Fed Chair, the US stock market crashed worse than it has in a very long time.  In any case, I think you did well getting there, with your excellent hubbie, George Akerlof, present along with many others, and you maintaining an appropriate silence while smiling to the applause.  Yes, you will be up in a week for the House Financial Services Committee to defend the current compromise gradual taper, although today it seems interest rates are down, even though the first reports of the taper last May triggered long run interest rate increases. Heck, today we had one nation (Japan) whose market is falling because its currency is rising (eeeek,reduced future exports!) while two others have ones that are falling (Turkey, Argentina) because, well, you know, falling confidence (eeeeek, even though future exports are likely to rise!).  Such fun and games will be your regular fare.

There was a long and thoughtful front page story in the Washington Post today about Janet Yellen and her rise to her current position, by Ylan Q. Mui, who last summer was with only minimal filtering passing on various sexist rumors from insiders at the White House as part of its campaign to push Larry Summers.  But Mui presumably has figured it out now that Yellen is in, and Larry's old friend, the Olivia Pope of Fed media management, Michelle Smith, is now managing publicity for the new boss, Janet. All that cynical stuff said, the article is well done and provides interesting background that the very discrete and careful Yellen had kept under wraps until now, and she was not quoted in the article or openly cooperated with it, although some of the material in it is not necessarily flattering. Anyway, a major sub-theme is how she suffered from sexism over a long period of time.

I confess to knowing both of them, but while I knew some of this, I did not know the full extent of it.  George and Janet are now the star couple of economics, with her reputedly the most powerful woman in the world, or mighty close, and he, well, a highly respected Nobel Prize winner.  Hard to top that. But they had their rough times.  The article brings out that he was turned down for his first effort to be promoted to Full Professor at Berkeley, despite having already published his slam dunk for a Nobel paper on the market for lemons previously, leading to a bout of depression and the end of his first marriage.  After being the only woman in her class at Yale, and one of only two women at Harvard, getting turned down for tenure there, with Harvard econ dept not tenuring a woman for another decade (and ironically her having then undergrad Larry Summers in one of her classes), they both were hanging out at the Fed around 1977, recovering from their respective traumas when they found love in the Fed cafeteria, now clearly the hottest power passion pit in Washington.

After a stint at LSE, where George got the job with Janet a "trailing spouse," they went to Berkeley where he got his promotion, but she was relegated to the Haas Business School, where she was only the second woman hired, and some there resented having her on board.  In those ancient days, there was no maternity leave, and when their son Robert was born in the early 80s, Janet got no leave and taught a full load of courses after his birth.

The turn in her career came with her appointment to the Fed Board of Governors by Clinton at the behest of Janet's colleague at Berkeley, Laura Tyson.  After that, she was on an upward trajectory, always fully supported by husband George, with the article making it clear that their marriage has been a great success, with them "in all but perfect agreement about macroeconomics" (according to George).  Taking that more seriously, while Yellen is usually described as a "Keynesian," her husband's Presidential address some years ago at the AEA was on "Behavioral Macroeconomics," and if one looks at their famous papers on labor market dynamics, while some involve mathematical technicalities, most are driven by behavioral economics concerns such as workers looking at each others' pay.  Indeed, the whole 2% inflation target itself comes from a paper by Akerlof with Dickens and Perry at Brookings in the mid 90s based on microeconomic relative wage adjustment arguments in the face of behaviorally founded downward stickiness of nominal wages, which Yellen sold to Greenspan shortly thereafter, from where it spread all over the planet.

I can note a silly personal observation on the change in their relative status at Berkeley after her 90s stint in Washington.  Even though he had the Nobel, he had arguably become the "trailing spouse," and the article notes that he has been very willing to follow her as she has moved about on her upward trajectory.  I happened to wander the hallways in the econ dept at Evans Hall at Berkeley during the brief interlude a bit over a decade ago when they had returned to Berkeley, but she had not yet been appointed as SF Fed President.  Neither of them were there when I did this, but I did observe office locations.  She had a corner office, and the word was she was about to be appointed Dean at the Haas School, where previously some had complained about her being hired at all.  George just had a regular sized office in the middle of the hall.  But then, in those days Berkeley had several other Nobel Prize winners, a dime a dozen there, while future Fed Chairs, well...  :-).

I shall close this by quoting from the piece by Mui, which reflects Janet's careful and discrete approach to dealing with the gender issue as she has risen, even as she is reported to having come to realize last summer that she had become a "role model" for women.

"Yellen's silence is a reminder that the workplace can still be treacherous terrain for many women.  She never spoke out, when President Obama mistakenly referred to her as 'Mr. Yellen,' nor when a few snarked that she wore the same outfit to her confirmation hearing and nomination ceremony.  Instead, Yellen - who declined to comment for this article - deployed the same strategy she has used for the past 40 years: letting her work speak for itself."

Barkley Rosser

The XL Pipeline Decision

I dislike disagreeing with my friends in the environmental movement, but I am going to come down for letting the Canadians build their XL pipeline in the US.  This is an issue where both sides have way overhyped the issue, with neither the environmental damages nor the supposed economic boost in teh US as bad or gas ood as either the critics or the supporters claim.  It is a mostly pretty small stuff, but huge noises and huffing and puffing have gone down on both sides, with it becoming highly partisan, just to totally distort things.  I would link to Jim Hamilton now, but his posts on this were ages ago, but this was his bottom line: this is a normal garden variety deal like what goes on in the US all the time (see fracking for oil and gas in North Dakota), turned into a big deal because it is a cross-border deal.

Cutting to the most recent chase is the freshly-delivered State Department report that says it essentially has no impact on global warming.  Why is that?  Because even if Obama kills it, the Canadians will still develop their tar sands and sell the output to China, probably sending the stuff across the Rockies to Vancouver to ship, either by train or pipeline, which will almost certainly entail a higher risk of ground environmental damage due to spills, plus damage to global warming due to or say "blame Canada," but they are currently the best friend of the US, despite a long history of the US ignoring their interests and violating trade and other treaties, with the US having a long history of sending pollution of various sorts, including acid rain, across our mutual border into Canada, damaging their forests and fisheries, which they are far more dependent on economically than we are in the US.

We have had a long history of ignoring them on such matters, and even though now our environmentalists might say that we are on the side of virtue for once, sort of, I do not see the damage to our relations with them worth the, frankly, zero gain to the environment that will occur by slapping them in the face on this matter.  Just say yes and build the damned thing. Those tar sands are going to get developed no matter what anyway.

Barkley Rosser

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