Economists Do It With Models

Warning: “graphic” content…

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I’m Pretty Bad With Money, So This Seems Appropriate…

November 18th, 2016 · No Comments
Income Distribution

I contributed to a thing. It’s pretty interesting!

Bad With Money With Gaby Dunn – Get Rich or Die Vlogging
by Gaby Dunn/Panoply

You know those money podcasts where financial experts teach you practical steps for maximizing your income? “Bad With Money” is the opposite of that. Gaby Dunn is anything but a financial expert. A self-described “bridge-burning livewire,” she’s always viewed money as an endless existential crisis – and she has a sneaking suspicion you do, too. So much of our identity and self-worth is caught up in how much money we have (or don’t have), how hard it is to get it, and even harder to keep it. Money makes us freak out, cry, and do wildly inappropriate things. So how come nobody ever talks about it? Join Gaby for conversations with comedians, artists, musicians, actors, her parents, a financial psychologist, her boyfriend, and many others about the ways that money makes us feel confused, hopeless, and terrified. This is a safe space to admit that you have no idea what you’re doing either.

Source: iTunes

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The Disposition Effect, Now With More Data Subsets…

November 17th, 2016 · No Comments
Behavioral Econ · Videos

Apologies for the break in posting videos- I got distracted and kind of forgot I hadn’t finished with them! Anyway, this one looks at some more detail in the disposition effect data and discusses whether investors in the sample seem to be learning to be rational as time goes on.

As usual, you can see the whole behavioral economics playlist here in case you want to catch up or need a review.

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Maybe Working-Class Trump Voters Aren’t Racist, But They Are Comcast…

November 16th, 2016 · 2 Comments
Trade

Trying out a new platform here…so far so good I think? At least it’s more productive than screaming into my poop emoji pillow, which is the other thing I’ve been doing lately.

Maybe Working-Class Trump Voters Aren’t Racist, But They Are Comcast
by Jodi Beggs

It’s only been a week since the country was rocked by a seemingly improbable election result, and we are seeing an unprecedented level of protest and anger at both Donald Trump and those who voted for Trump. Much of the protesting appears focused on social and civil rights issues, which have been discussed fairly extensively in the media. (Personally, I think this guy has got my feelings covered.) In addition, there are many think pieces expressing frustration over how Trump voters either aren’t going to get what they voted for or won’t actually be helped by it. I certainly concur with these sentiments, but I also have my own economist-y reasons for being irritated with at least a particular subset of Trump voters. Allow me to explain via an analogy…

Source: Medium

Hope you enjoy my rage. =P

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Unemployment Numbers, Now With More Biden…

November 15th, 2016 · No Comments
Macroeconomics

I can’t resist appropriating a good meme…

It occurred to me earlier that some people didn’t get the joke, so allow me to ruin it by explaining. Donald Trump, staying in theme with the fake news that made him look good during his campaign (and after I guess), has on numerous occasions claimed that the “real” unemployment rate is around 40 percent rather than the 5 or so percent that the government reports. His general idea appears to be that the 5 percent doesn’t include nearly enough people who should be working but aren’t, but to get to Trump’s number you’d basically have to count every student, grandma, stay-at-home-mom-married-to-i-banker, etc. as unemployed. While it is true that convincing them to work would increase output (i.e. GDP), I tend to recall that history suggests that people don’t like being forced to work, so the 40 percent calculation isn’t really helpful from a policy perspective as an indicator of economic health. Besides, the government already publishes a number of “alternative measures of labor force underutilization,” which try to capture discouraged and underemployed workers that the main unemployment number doesn’t account for. (The government is clearly better at numbers than coming up with sexy names for said numbers.) To be fair, however, labor force participation has been declining since about 2007, which does give a bit economists a bit of pause, though it’s important to understand a bit more about the drivers of this decline (hi, retiring baby boomers!) before deciding what, if anything, to do about it.

I’m sure Ivanka’s going to explain this to him any day now.

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All It Takes Is A Basic Macroeconomic Error to Bring Economists Together…

October 3rd, 2016 · 6 Comments
Macroeconomics · Policy · Trade

I am not a macro person (by nature at least- I don’t deal well with severe empirical limitations and unanswered questions I guess). That said, I enjoy this profusely:

What I think I don’t like about basic macroeconomics is that I feel like we (I mean instructors) don’t always do a great job explaining why things work the way that they do. For example, we introduce the concept of gross domestic product, or GDP (but even then are kind of murky on how goods with imported components get counted), and we give the “real” version of GDP a variable, namely Y. We then say that Y can represent aggregate production, expenditure, or income. Ok great- I guess it has to be true that the amount people spend on our stuff has to equal our income, but it would be nice to point that out explicitly. What is less obvious is why it must be true that the amount of stuff we produce has to equal the amount that people spend on the stuff we make- sure, that should be true in equilibrium, but what is stopping an economy from producing a whole bunch of stuff that goes into inventory? As it turns out, the extra output is counted as purchased by the company that made it, so we’re sort of forcing that part of the equality by redefining expenditure a bit. Sure, why not.

Then we get to the “expenditure categories of GDP”– you know, the thing in the bed:

Y = C + I + G + NX = C + I + G + (X – IM)

You see this all the time in macro, and what it means is that the spending on an economy’s output can be broken down into

  • Consumption spending (C) – spending by households in an economy
  • Investment spending (I) – spending by (mostly) businesses in an economy on stuff that makes more stuff
  • Government purchases (G) – spending by the government
  • Net Exports (NX, or X – IM) – the difference between foreign spending on domestic goods (exports, X) and domestic spending on foreign goods (imports, IM)

If you’re anything like me, this all makes perfect sense until you get to the net exports part, and then you’re like wait, what? Allow me to summarize a discussion that I think should happen in the classroom much more…

If we think about the different ways that stuff can be produced and consumed, we get something like this:

Since GDP, by definition, represents domestic production (regardless of where stuff is consumed), the area that should count in GDP looks like this:

But let’s think about the other GDP categories for a second- consumption, for example. Consumption represents the purchases by domestic households (other than newly constructed houses, technically speaking), and, if you’re anything like me, some of what you consume is produced in the U.S. and some of it is imported. As a result, the consumption area looks like this:

Therefore, the GDP identity needs to have a correction factor to turn the domestic consumption area (and, by similar logic to some degree, investment and government spending) into the domestic production area. Looking at the picture, it becomes pretty clear that we can do so by adding in exports and subtracting out imports. Funny thing- this is exactly what the net exports category of expenditure does!

Hopefully that helps the expenditure identity actually make sense as opposed to something you just memorize and try not to think too hard about. But it also highlights an important point- taking away imports, in and of itself, doesn’t increase GDP. Now, I get why people might think that, since looking at the basic Y = C + I + G + (X – IM), it certainly seems like Y goes up if you take away the thing that is subtracted out. The problem with this logic, as the pictures above illustrate, is that the IM part is just a correction factor, and you can’t take away a correction factor without also taking away the thing that you’re correcting! In other words, if you’re going to take away IM, you have to reduce, well, mainly C, and maybe some I and G, by a corresponding amount, at least in an accounting sense.

As a result, whenever anyone tells you that limiting or eliminating imports will increase GDP, they are making hidden assumptions about consumption (mainly along the lines that people will just buy domestic stuff instead and nothing else will change) that generally fall under the heading of assuming the conclusion. They are also potentially ignoring the fact that such an increase may not actually increase households’ standard of living if it makes their consumption decrease. (Taking away $100 of my imported stuff isn’t going to magically generate $100 of just as cool stuff for me to purchase from domestic producers- if this were true, I probably wouldn’t have been buying imported stuff in the first place.)

With me so far? Great, you’re farther along than Trump’s economic advisers in an important way. In reality, there are interconnections between the expenditure components that are not shown in the basic Y = C + I + G + NX identity, and these interconnections make it so that you can’t just look at this simple equation to analyze cause and effect.

Here, Greg Mankiw explains it a bit better, after mentioning that he agrees with Paul Krugman on the matter:

But of course you can’t model an economy just using the national income accounts identity. Even a freshman at the end of ec 10 knows that trade deficits go hand in hand with capital inflows. So an end to the trade deficit means an end to the capital inflow, which would affect interest rates, which in turn influence consumption and investment.

I suppose that their calculations might make sense in the simplest Keynesian Cross model, in which investment is exogenously fixed and consumption only depends on income. But that is surely not the right model for analyzing the impact of trade policy over the course of a decade.

(Mankiw provides more detail, but you have to acknowledge that Krugman wins the headline game.) I find it funny that people make it such a big deal when Mankiw and Krugman agree on anything…I mean, they agree on lots of stuff, namely basically everything in their respective textbooks. (Related: I know people who won’t use one of said textbooks bc of bias or whatever, and I find it hilarious since they are functionally identical for the most part.)

→ 6 CommentsTags: Macroeconomics · Policy · Trade

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On The Role Of Economics, Trolley Problem Edition…

September 20th, 2016 · 5 Comments
Policy

I’m guessing many of you are familiar with the trolley problem:

The problem is interesting because there is an objectively “right” answer- absent specific circumstances, one dead person is better than five dead people- but psychology, philosophy, ethics, etc. bring in a whole host of other considerations having to do with intention, fate, and so on. Such considerations result in a problem without a correct answer, and these considerations can’t (and probably shouldn’t) be ignored in a society of human beings and not robots.

Because of this unexpected complexity, the trolley problem has spawned a number of extensions, ranging from the even more nerdy…

…to the snarky and political:

There’s even what I will call the economist version, which incorporates opportunity cost/cost of effort as well as a few other factors…

In any case, we seem to be pretty familiar with the “clear efficient answer under some basic assumptions, but fairness and ethical considerations make things complicated” concept. So allow me to present a more accurate economic version of the trolley problem:

You are currently looking at a crisis area. The status quo is that there is a large shortage of Uber drivers to get people out of the area. Do you 1. Do nothing, or 2. Implement surge pricing?

I think this is a situation that we’ve seen before a number of times. Allow me to explain the similarities to the trolley problem:

“Clear Efficient Answer Under Some Basic Assumptions”

Surge pricing is the obvious answer here, under two assumptions: first, that surge pricing gets more drivers to the area, and second, that how much a person is willing to pay for an Uber is an accurate proxy for how important it is to them. Under these assumptions, shortages are smaller (or nonexistent) under surge pricing than they would be otherwise, and cars go to those who need/want them the most. (In case you’re curious, the first assumption seems to have empirical support even though surge pricing doesn’t appear to always get more drivers on the road overall.)

“But Fairness and Ethical Considerations Make Things Complicated”

I can’t really tell you what’s fair- that’s kind of the deal with value judgments- so I will instead report some common themes that I’ve come across. One is that people should have at least a chance to get an item at the “regular” price, and some people view random rationing as more ethical than price-based rationing when extenuating circumstances are present. (I wonder how this would change if pricing were framed as regular prices and discounts rather than surge pricing.) Another is that willingness to pay is a better proxy for wealth than need/want, in which case surge pricing unfairly rations items to rich people. (This may be true in cases of extreme income inequality, but shouldn’t be the case in a market with more uniformly distributed resources, so this view is somewhat of a fact/opinion hybrid.) Yet another that hadn’t even occurred to me (thanks Internet!) is that it’s unethical to use the promise of money to get largely low-income individuals (the Uber drivers) to take on risk of bodily harm, especially when said risk is incurred during the service of higher-income individuals. (See last point, and note that this is the same logic used to justify outlawing kidney donations and such.) Yet another is what Russ Roberts says. You’ll notice that all of the fairness arguments presented except the last one are against surge pricing.

My point in bringing this up isn’t to have a discussion on fairness or convince you of anything in this regard- like I said, you’re more than welcome to subscribe to one of these viewpoints or come up with your own. My point, instead, is to highlight the role that economics can play in conversations about what is best for society. To that end, here are a few points to keep in mind:

  • Economists can tell you what is efficient under certain assumptions, but they can’t definitively tell you what is fair.
  • The assumptions used to determine the efficient outcome can and should be examined.
  • Just because something is a market outcome doesn’t mean it’s fair. (In fact, the existence of market failures implies that market outcomes aren’t even always efficient.)
  • Fairness matters.
  • But so does efficiency- it’s reasonable to ask economists to stay in their lane, but not to discount them entirely.

I guess I could do something similar for economists:

  • State your assumptions.
  • At least try to stay in your lane.
  • When you venture into the philosophical lane, make it clear that you are doing so.
  • Fairness matters, and people really hate it when you dismiss their value judgments as irrelevant. They’re even likely to reject what you can show them about efficiency if you do so.

Okay? Great- now let’s go have some thoughtful policy discussions.

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