Rabu, 09 Oktober 2013

Playing dice with our future

I have a new column out in Bloomberg. Touch on politics, I've learned, and you get an order of magnitude more comments than you do otherwise, and this is proof again (not that I choose my topics this way). Many of the comments seem particularly vicious, but I did venture to wade into the Tea Party/Government Shut Down saga, so there's no surprise.

The article is motivated by my perception -- right or wrong? -- that many people in the Tea Party movement (and many Republicans in general, perhaps) have a naively safe view of the world. They seem to believe in the inherent superiority of America and the American System -- in American Exceptionalism, if you want -- and find it hard to imagine that we could easily slip way down in the world relative to other nations. This belief persists despite all kinds of statistics showing that our standing in things like education, public health, life expectancy, quality of life, etc. has indeed dropped way down in recent decades.

This kind of naive belief in a guaranteed good future breeds, I think, dangerous complacency regarding current policy. We can reduce taxes, disregard investment in infrastructure, not worry about trying to improve the healthcare system, etc., because we are, after all, NUMBER 1, aren't we! Well no, and keeping standards high in anything from education to communications infrastructure demands investment and hard work, not just slogans and tax breaks. And defaulting on the debt might actually be quite a good way to screw up our economy quite quickly.

Anyway, my article may tries to make this point in an unusual way -- with reference to evolution, adaptation and extinction -- but that's how my brain works. The 239 comments so far make it clear that quite a few people think I'm pretty daft, although roughly half seem to agree.

BTW, for interesting perspective on what lies behind the Tea Party furor, I highly recommend this fascinating article by Thomas Edsall in the New York Times.  The word cloud at the top of this post shows the words used most frequently by people in Tea Party focus groups when talking about the country and Obama. They really seem deeply frightened that Obama is trying to turn the US into a Soviet state where old style (white) Americans won't be welcome and a majority gay/black/hispanic/other immigrant population of slackers will live entirely off government programs. As Edsall notes:
Among Greenberg’s other findings from his focus groups:
  • The participants “are very conscious of being white in a country that is increasingly minority.”
  • Republican voters are threatened by Obama and the Democratic Party, but they are angry at their own party leaders. “The problem in D.C. is not gridlock; Obama has won; the problem is Republicans failing to stop him.”
  • Together, evangelicals and Tea Party supporters comprise more than half the party. Moderates, about a quarter of Republicans, “are very conscious of being illegitimate within their own party.”
 I find all of this quite disconcerting. Fear + ignorance generally spells trouble.

Selasa, 08 Oktober 2013

Republicans: destroy planet if need be to stop OBAMACARE

A gem from the Borowitz Report:

WASHINGTON (The Borowitz Report)—Senator Ted Cruz (R-Texas) raised the ante in the battle over the Affordable Care Act on Sunday, telling CNN’s Candy Crowley that “destroying the entire planet is really the best and only way to stop Obamacare.”

“Look, I’m in favor of shutting down the government and not raising the debt ceiling, but let’s not kid ourselves. Those are only half measures,” he told Crowley. “If we are really serious about stopping Obamacare, we’ll destroy the entire planet.”

Explaining his proposal to a visibly alarmed Crowley, Senator Cruz said, “Obamacare is like a parasite that needs a host to feed on. If you want to kill the parasite you kill the host, and in this case that means killing this planet. As long as there’s a planet Earth, the nightmare of Obamacare could always come screaming back to life.”

While he was not specific about how he would go about destroying the planet, Cruz said, “This is something that my colleagues and I have been working on for some time.”

The Texas senator refused to speculate on whether there were enough votes in Congress to support his proposal of obliterating Earth, but he ended his interview on a personal note: “Candy, I don’t want my children and my children’s children to live in a world with Obamacare. And the best way to guarantee that is by destroying the world.”

Ross Douthat explains the conservative movement

Today's column by Ross Douthat in the New York Times is a must read, as it is a kind of confession of what the Conservative Movement really wants, according to Douthat. What really has them so angry, he says, is the history of the last 40 years or so during which, even when the Republicans were in power, they were unable to roll back the various programs they hate so much that were established from the 1930s to the 1960s. Mostly because they discovered, quite inconveniently, that most people in America want those programs. He quotes Conservative Dave Frum from the early 1990s:
However heady the 1980s may have looked to everyone else, they were for conservatives a testing and disillusioning time. Conservatives owned the executive branch for eight years and had great influence over it for four more; they dominated the Senate for six years; and by the end of the decade they exercised near complete control over the federal judiciary. And yet, every time they reached to undo the work of Franklin Roosevelt, Lyndon Johnson and Richard Nixon — the work they had damned for nearly half a century — they felt the public’s wary eyes upon them. They didn’t dare, and they realized that they didn’t dare. Their moment came and flickered. And as the power of the conservative movement slowly ebbed after 1986, and then roared away in 1992, the conservatives who had lived through that attack of faintheartedness shamefacedly felt that they had better hurry up and find something else to talk about …
The Conservative Movement is really upset, it turns out, because the policies they long for are more or less completely out of tune with what most Americans want. Or, as Douthat prefers to rather crazily phrase it , "American political reality really does seem to have a liberal bias." (Isn't reality, by definition, unbiased??) In other words, if most people don't agree with me, they must be biased.

I recommend reading some of the comments, where NYT readers chop Douthat into little pieces. Here are a few of my favorites for amusement:

  • Don Duval, North Carolina
What Mr. Douthat apparently fails to grasp is in democracies, majorities matter, and Americans have repeatedly--in both elections and opinion polls--indicated that there isn't just majority support--but super-majority support for maintaining and even strengthening the programs that formed the heart of the New Deal (Social Security) and the Great Society (Medicare)"

The right's passionate hatred for both programs--and for the true believers' obsession with dismantling both--is not shared by anyone outsider their base.

Equally bogus is their belief that conservative ideas and ideals have never Ben given a chance--if you look at Romney's--and the right's economic policy--compared the economic, tax and governance policies of Coolidge and Hoover, in the 12 years that Mellon served as Treasury Secretary--one could be forgiven for wondering why Mellon's heirs are not suing the right for plagiarism.

An America without Social Security?

That's not a new idea--we tried that for two centuries.

Ditto for a society where seniors were forced to depend upon charity for healthcare at the time in their lives where there was a high need for medical care and virtually no chance for employment that offered health benefits.

The right fights because they are convinced that a bygone era was a golden time in this nation--when all was right in America.

Far right.

  • Jeff G, Atlanta
If these foolishly romantic right wingers actually got a truly smaller government, what do they imagine would fill the vacuum? Do they expect an 18th century agrarian society to spring up spontaneously? This small government fantasy might have made sense in the early twentieth century, when they were opposing FDR. It was even a silly but excusable delusion through the late twentieth century. But now it's clear that the era of the rugged individual, small town values, and decentralized authority is long gone. In its place we have an interdependent worldwide economy, multinational corporations with revenues larger than the gdp of most nations, global terror networks capable of engaging in effective asymmetrical warfare, and a rising foreign middle class competing with us for jobs and resources while our own middle class is shrinking.
There's certainly a case to be made for limiting government's growth, and for continuing to seek greater efficiencies in its dealings, and keeping markets reasonably unfettered, and protecting individual liberties. But government actually gets smaller (enough to drown it in Grover Norquist's bathtub for instance) whatever accretion of power takes it place will certainly be much less humane, enlightened, or accountable to the masses than what we have now. Some fighting for this small government fantasy are well aware that they are really fighting for corporate plutocracy (such as the Kochs) but most have just been duped.

  • RDG,  Cincinnati
"But to many conservatives, the right has never come remotely close to getting what it actually wants, whether in the Reagan era or the Gingrich years or now the age of the Tea Party."

Maybe because that is because the "right", meaning the far-right of the GOP, wants a national government that resembles 1912. And that far-right are in the driver's seat.

Meantime,"American political reality really does seem to have a liberal bias." True enough. The American people don;t want Wall Street brokers handling their Social Security or vouchers for their Medicare and seem to like what the ACA (as opposed to "Obamacare") has to offer so far.

They want clean water, safe food, drugs and bridges. Leaving those and other issues to the mercies of the private sector is not always the answer.

Cut spending? How about no tanks for an Army that doesn't want them, streamlined but still effective regulation, tax loopholes that don't only benefit the very well off, the end of fee-for-service medical practices, farm subsidies to folks averaging $250 in annual income and some tightening up of welfare outlays without hurting those who really need the help.

Acting as wreckers rather than governing to make what is in place better and more cost efficient in serving the people is why the GOP enjoys the reputation it enjoys today...outside its gerrymandered districts, that is.
 Read more here.

Senin, 30 September 2013

Some conspiracies are real...

I wrote a while back in Bloomberg about the mystery of how so little has changed in economics and finance, despite the crisis. I mentioned there the great new book, “Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown,” by economic historian Philip Mirowski. It reads a little like a conspiracy theory, as he argues that defense of the academic status quo in economics and finance also serves an array of interests in business and finance for whom the “markets always work best” mantra paves the way to profit. Hence, the profession’s claim that nothing is seriously wrong with economic thinking has found ready allies, especially in conservative and libertarian-leaning think tanks and foundations.

 The picture above is of Polish economist Michael Kalecki, who died in 1970. Lars Syll points out that Kalecki had some very wise things to say -- and not all that different from Mirowski -- about the convenience of many "principles" of economics for industrial interests:
Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence.

Kamis, 26 September 2013

What do we know about climate?

Sad to say this is only my second post of September. I have been busy with other things... extensive travel.... re-roofing a barn... the usual. Anyway, just a couple of links I'd like to mention in connection to my most recent Bloomberg column, which appeared yesterday.

The point of my column was to emphasize just how complex the science of the Earth's climate really is. I was struck by two recent articles in Nature, both of which are worth reading. One, an excellent feature by Nicola Jones, describes a few of the counter-intuitive effects of climate, for example, how the sea can rise (or fall) in different ways in different places. Water doesn't just spread out, as you might intuitively think. It has mass, and inertia, gets blown by winds, etc., and can pile up. A short taste:
When Jeff Freymueller, a geophysicist at the University of Alaska Fairbanks, visited Alaska's Graves Harbor more than a decade ago, his marine charts showed three isolated little islands; what he saw, instead, were three grassy peninsulas connected to the mainland. That was because water levels in some parts of Alaska are dropping — by up to 3 centimetres per year.

The ground there is lifting upwards, in a slow-motion rebound that has been going on for 10,000 years, since the glacial ice sheet that once weighed down the continent receded at the end of the last ice age. Gravitational influences on the oceans are also at work: as local glaciers recede and the Greenland ice sheet melts, their gravitational pull is subtly reduced, allowing more ocean water to slop southwards.

Trends in local sea level can differ strongly from the global average, which is increasing by around 3.2 millimetres per year. “Some places, sea-level rise is ten times faster than the average,” says Jerry Mitrovica, a geophysicist at Harvard University in Cambridge, Massachusetts.

One side of this equation is the movement of the land. Canada's Hudson Bay, for example, was once buried under more than 3 kilometres of ice, and the release from that load is now causing the land to rise at about 1 centimetre per year. As that part of North America moves upwards, land to the south is being levered down: the US east coast is dropping by millimetres per year.

Subsidence can cause some areas to sink much faster. Compaction of river sediments and hollowing out of the earth by groundwater extraction, for example, are causing parts of China's Yellow River delta to sink at up to 25 centimetres per year4.

Adding to the complexity, the oceans do not rise evenly all over the world as water is poured in. Air pressure, winds and currents can shove water in a given ocean to one side: since 1950, for example, a 1,000-kilometre stretch of the US Atlantic coast north of Cape Hatteras in North Carolina has seen the sea rise at 3–4 times the global average rate5. In large part, this is because the Gulf Stream and the North Atlantic current, which normally push waters away from that coast, have been weakening, allowing water to slop back onto US shores.

Finally, waters near big chunks of land and ice are literally pulled up onto shores by gravity. As ice sheets melt, the gravitational field weakens and alters the sea level. If Greenland melted enough to raise global seas by an average of 1 metre, for example, the gravitational effect would lower water levels near Greenland by 2.5 metres and raise them by as much as 1.3 metres far away.
Scientists and engineers are only just starting to wrangle all these effects into local projections. In June, the New York City Panel on Climate Change updated its estimates of sea-level rise by including the local effects of gravitational shifts6. Panel members concluded that they expect to see 30–60 centimetres of rise by 2050. Finding and combining the right data sets took about six months; the exercise should pave the way for other cities to do the same, says Cynthia Rosenzweig, a climate-impact researcher at NASA's Goddard Institute for Space Studies in New York City. “We really are working to get the best science.”

Equally interesting and informative, in a very different way, is a commentary piece in the same issue by K. John Holmes. This looks at the history of the use and management of the arid lands in the central and western US. Sounds a little boring, but Holmes argues that the process then was just as messy, just as fraught with hysteria and massive disinformation, as is the current debate over climate change and what to do about it:
When nineteenth-century explorer William Gilpin travelled across the Great Plains, the expanse that covers much of the central and western United States, he marvelled at the “great pastoral region”, the dry climate of which was “favorable to health, longevity, intellectual and physical development”1. Great cities could be built there, he imagined, taking advantage of the wealth of local resources — rivers, forests and even gold.

Geologist John Wesley Powell saw things differently. Moving from the humid east to the arid west would affect agricultural practices, occupations, social interactions and political customs, he contended2, 3. Dry-land agriculture could not support a large population; any towns built in the west would need appropriate designs, irrigation and resource management. A controversy erupted.

The ensuing debates about how the arid lands should be settled hold lessons for us today on adapting to a changing climate. At their heart was a development plan for the region that Powell published in 1878 (ref. 2). It called for detailed scientific and engineering surveys, and analysis to inform land-use plans and laws. Although it addressed a spatial change in conditions caused by westward population expansion, Powell's coupling of physical and human dimensions was a forerunner to the assessment approach used today by the Intergovernmental Panel on Climate Change (IPCC).

Powell's plan was never implemented in its entirety, but it began an era in which large-scale environmental and natural-resources assessments became central to the policy process in the United States4. Stalled by misinformation, political controversy and recessions, legislation for allocating resources in the arid lands took decades to enact. Then, as now, the assessments and their validity became part of the debate. Eventually, extreme weather, including long droughts, pushed policy-makers to act.
Read the whole thing here

Minggu, 08 September 2013

Undoing the pretzel logic of finance

My latest column in Bloomberg came out a few days ago. The article looks at some recent work of young MIT economist Alp Simsek that considers how new derivative instruments influence market stability. He comes to a conclusion that most ordinary people would find utterly unsurprising:
Financial markets in recent years have seen a proliferation of new …financial assets such as different types of futures, swaps, options, and more exotic derivatives. According to the traditional view of …nancial innovation, these assets facilitate the diversi…cation and the sharing of risks. However, this view does not take into account that market participants might naturally disagree about how to value …financial assets. The thesis of this paper is that belief disagreements change the implications of …nancial innovation for portfolio risks. In particular, market participants’' disagreements naturally lead to speculation, which represents a powerful economic force by which fi…nancial innovation increases portfolio risks.
There you go. Because not all people have the same views on the future, derivatives can be used to speculate and gamble. This increases risks in the market. More derivatives and more complete markets is not always a good thing, as standard financial theory would have it.

To be clear, I'm not poking fun at Simsek's work. Not at all. I think this work should be spread far and wide. That this idea comes as news to the academic finance community shows how deeply confused they have become by the received wisdom of market completeness as an ideal. They (at least many) do believe that UP = DOWN, and so news to the contrary sounds radical. In the article I've mentioned several other earlier studies (I've written about them here before, just search on "derivatives") that point to the same conclusion: more derivatives in general leads to more market instability (again, as most people already believe).

It's nice to see some influential young economists picking up and exploring this idea.

Rabu, 28 Agustus 2013

The real trouble with economics

I pretty much agree with everything Mark Thoma says here in pointing to sociological factors within academic economics as the source of recent problems. Anyone who has read this blog knows I'm not so sanguine about the supposed "sophistication" of the analytical models currently used in macroeconomics, but, that to one side, Thoma is right that the real problem has been a lack of imagination and willingness to build models (probably messy and inelegant ones) that would inform us in a practically useful way about possible market instabilities:

 "I talked about the problem with the sociology of economics awhile back -- this is from a post in August, 2009:

In The Economist, Robert Lucas responds to recent criticism of macroeconomics ("In Defense of the Dismal Science"). Here's my entry at Free Exchange's Robert Lucas Roundtable in response to his essay:
Lucas roundtable: Ask the right questions, by Mark Thoma: In his essay, Robert Lucas defends macroeconomics against the charge that it is "valueless, even harmful", and that the tools economists use are "spectacularly useless".
I agree that the analytical tools economists use are not the problem. We cannot fully understand how the economy works without employing models of some sort, and we cannot build coherent models without using analytic tools such as mathematics. Some of these tools are very complex, but there is nothing wrong with sophistication so long as sophistication itself does not become the main goal, and sophistication is not used as a barrier to entry into the theorist's club rather than an analytical device to understand the world.
But all the tools in the world are useless if we lack the imagination needed to build the right models. Models are built to answer specific questions. When a theorist builds a model, it is an attempt to highlight the features of the world the theorist believes are the most important for the question at hand. For example, a map is a model of the real world, and sometimes I want a road map to help me find my way to my destination, but other times I might need a map showing crop production, or a map showing underground pipes and electrical lines. It all depends on the question I want to answer. If we try to make one map that answers every possible question we could ever ask of maps, it would be so cluttered with detail it would be useless, so we necessarily abstract from real world detail in order to highlight the essential elements needed to answer the question we have posed. The same is true for macroeconomic models.
But we have to ask the right questions before we can build the right models.
The problem wasn't the tools that macroeconomists use, it was the questions that we asked. The major debates in macroeconomics had nothing to do with the possibility of bubbles causing a financial system meltdown. That's not to say that there weren't models here and there that touched upon these questions, but the main focus of macroeconomic research was elsewhere. ...
The interesting question to me, then, is why we failed to ask the right questions. For example,... why policymakers didn't take the possibility of a major meltdown seriously. Why didn't they deliver forecasts conditional on a crisis occurring? Why didn't they ask this question of the model? Why did we only get forecasts conditional on no crisis? And also, why was the main factor that allowed the crisis to spread, the interconnectedness of financial markets, missed?
It was because policymakers couldn't and didn't take seriously the possibility that a crisis and meltdown could occur. And even if they had seriously considered the possibility of a meltdown, the models most people were using were not built to be informative on this question. It simply wasn't a question that was taken seriously by the mainstream.
Why did we, for the most part, fail to ask the right questions? Was it lack of imagination, was it the sociology within the profession, the concentration of power over what research gets highlighted, the inadequacy of the tools we brought to the problem, the fact that nobody will ever be able to predict these types of events, or something else?
It wasn't the tools, and it wasn't lack of imagination. As Brad DeLong points out, the voices were there—he points to Michael Mussa for one—but those voices were not heard. Nobody listened even though some people did see it coming. So I am more inclined to cite the sociology within the profession or the concentration of power as the main factors that caused us to dismiss these voices.
And here I think that thought leaders such as Robert Lucas and others who openly ridiculed models they disagreed with have questions they should ask themselves (e.g. Mr Lucas saying "At research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another", or more recently "These are kind of schlock economics"). When someone as notable and respected as Robert Lucas makes fun of an entire line of inquiry, it influences whole generations of economists away from asking certain types of questions, some of which turned out to be important. Why was it necessary for the major leaders in macroeconomics to shut down alternative lines of inquiry through ridicule and other means rather than simply citing evidence in support of their positions? What were they afraid of? The goal is to find the truth, not win fame and fortune by dominating the debate.
We need to take a close look at how the sociology of our profession led to an outcome where people were made to feel embarrassed for even asking certain types of questions. People will always be passionate in defense of their life's work, so it's not the rhetoric itself that is of concern, the problem comes when factors such as ideology or control of journals and other outlets for the dissemination of research stand in the way of promising alternative lines of inquiry.
I don't know for sure the extent to which the ability of a small number of people in the field to control the academic discourse led to a concentration of power that stood in the way of alternative lines of investigation, or the extent to which the ideology that markets prices always tend to move toward their long-run equilibrium values caused us to ignore voices that foresaw the developing bubble and coming crisis. But something caused most of us to ask the wrong questions, and to dismiss the people who got it right, and I think one of our first orders of business is to understand how and why that happened.
I think the structure of journals, which concentrates power within the profession, also influence the sociology of the profession (and not in a good way)."