# Economists Do It With Models

## Warning: “graphic” content…

#### January 26th, 2012 · 14 CommentsPolicy · Uncategorizable

First off, I think it’s fantastic that the State of the Union address is available online, even with an enhanced version that includes charts and graphs(!) and makes it totally worth it to watch again. In case you missed it:

I’m actually watching the speech again for the charts and graphs, and also because I was distracted the first time by Chad Ochocinco’s tweets and the State of the Union drinking game:

Anyway, I decided to write about the SOTU address not so much because I wanted to provide political commentary (there’s plenty of that to go around) but because I wanted to share some economic commentary as well as sources for a number of points Obama made that were (intentionally or not) based on actual economic research. That said, plenty of randomness sneaks in, but here goes…

1:12: “For the first time in 9 years, there are no Americans fighting in Iraq.” I have no idea why I immediately got a visual of an American couple in Iraq having some sort of domestic disagreement- I think I have to accept that my natural inclination is to be contrary.

1:26: The graphic of Osama bin Laden with the big X over it is so JV it’s hysterical. I’m also noticing that this recorded broadcast could have been made a lot shorter if the video people just edited out all of the structured applause.

2:17: When Obama pointed out that the troops are great because they aren’t “consumed with personal ambition,” I half expected the sidebar graphic to switch to headshots of Mitt Romney and Newt Gingrich.

4:50: The scale of the graph bothers me, since I find it misleading to exaggerate the perceived differences in the height of the bars when there’s not really a space constraint justification for doing so. I also don’t particularly like a graph about income disparity being used to support the point that “a growing number of Americans are barely getting by,” since whether a household is getting by is an absolute rather than a relative thing. (In other words, I only find it harder to get by when I have less money, not when I simply have less money compared to other people.) That said, I am willing to believe the underlying point anyway.

5:35: Along those same lines, I want people to imagine what this graph would look like if the red line for the rich people was taken off. What I take from this is that real incomes for the middle 60% of the population has grown by almost 50% over the course of my lifetime. This isn’t shockingly impressive, but it doesn’t exactly fill me with rage either, as the overall graph is apparently supposed to do. I would prefer this to be broken out to show how large a percentage of people have seen their real incomes decline over this period, since those are the ones I am actually worried about. (I’m also shocked at how much variability there is in righ-guy income over time.)

5:42: “Technology made business more efficient but also made some jobs obsolete.” It’s important to remember that these same technologies also creates new jobs in other fields. I think the term Obama is looking for here is creative destruction, and it has an interesting history. (A summary of the wikipedia article is basically “it sucks when people get laid off, but creative destruction is an important driving force in economic development.”)

7:43: Holy crap, the graphics people put a ring and a leash on the Wall Street bull’s nose.

8:49: The “Built to Last” theme is back. Most people commented on the somewhat blatant car metaphor, whereas I am wondering which of Obama’s speech writers is a serious Dead Head. (Don’t worry, I have my guesses.)

8:53: I would like to know who decided that an American economy based on manufacturing is the way to go, since it seems in general like an uphill battle. I also don’t want to get into tin-foil-hat libertarian territory, but since when is it the government’s responsibility to figure out what the economy should be focused on? I thought that that was one of the things that markets were good at.

9:56: From a purely economic standpoint, I don’t understand how Chrysler hiring people in the US to build cars is any different from a (publicly-traded) foreign company hiring people in the US to build cars, but I suppose it doesn’t sound as good to boast about how awesome Toyota is or whatever.

10:20: Is it bad that I think the most interesting part of that graphic is that Volkswagen sold more cars than Toyota in 2011? (I’ll give you three guesses what kind of car I drive.)

10:38: Anyone else notice that Cleveland, Pittsburgh, and Raleigh are all in swing states?

10:48: “It’s getting more expensive to do business in places like China.” Isn’t this what I’ve been saying for a while now? What we’ve seen with offshoring, at least in part, is that when American companies send work overseas, they help to develop the economies of the countries they are sending the jobs to. One of the consequences of economic development is an increased standard/cost of living, which means that the labor doesn’t stay as cheap as it initially was forever. This is when some of the companies start looking for a new developing country to use, but if convergence is really a thing, American companies will eventually run out of these opportunities and might as well bring jobs back home. My hypothesis is that this offshoring “problem” will right itself eventually, but that doesn’t mean that job losses are politically tolerable in the short term. Non politically, there are sets of skills and institutional knowledge that could get lost in the process of allowing industries to leave and come back. (The MasterLock example that Obama uses later supports my hypothesis, but I don’t think Obama considered that it also supports a lack of intervention. That said, I suppose most of what he did just was ask nicely for companies to bring manufacturing jobs back.)

10:55: “Meanwhile, America is more productive.” More productive than what? The chart shows worker output per hour over time, which implies that Obama meant “more productive than in the past,” but the connotation was that he meant “more productive than China,” and I don’t know if this is true.

12:00: I LOVE LOVE LOVE that the sidebar explains what the “tax breaks to send jobs overseas” thing really is, since it’s (as I now know) incredibly misleading. The graphic says that the tax breaks are because the expense of shutting down a factory due to moving jobs overseas is a business expense and therefore isn’t part of the taxable bottom line. It’s not like the government is actually saying “Moving jobs overseas? Here, have some cash.” It irks me more than a little that this supposedly special treatment for those companies moving jobs overseas is actually just treating all business expenses equally, and I am disappointed by the purposely misleading wording on this issue.

12:22: Please, for the love of all that is good and holy in this world, stop saying that companies get tax deductions to send job overseas. You’re better than this.

12:32: “That money should be used to cover moving expenses for companies like MasterLock that decide to bring jobs home.” News flash: those expenses are also business expenses and thus not part of the taxable base, i.e. tax deductible. Shouldn’t you, therefore, be bragging that you’re giving tax deductions to corporations who bring jobs home?

12:45: “No American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas.” I don’t disagree with this on principle, but then I have an easy solution for those looking to minimize taxes- don’t be an American company, or, if you are, make sure you avoid creating jobs domestically right from the start. See the problem? In related news, trying to get multinationals to somehow subsidize companies who stay and do business in America probably isn’t going to make those multinationals want to do business in the US.

14:59: “I will go anywhere in the world to open new markets for American products.” *cough cough* Cuba, anyone? *cough*

15:08: “I will not stand by when our competitors don’t play by the rules.” What rules? Their rules as sovereign nations? I get that countries like China say that they have copyright laws and such and then don’t work so hard to enforce them, which is in fact breaking their own rules. But it’s hard to say at minute, let’s see, 12 or so that you want to subsidize companies who keep jobs in the US and then at minute 15 criticize other countries for doing essentially the same thing.

16:35: “I also hear from many business leaders who want to hire in the United States but can’t find workers with the right skills.” Yep, that’s called structural unemployment, and economists have been aware of the phenomenon for a while now. The “Jackie” example that Obama uses is actually how structural unemployment often gets resolved- notice that the only government role in the flowchart is the existence of the community colleges to offer the training. Therefore, I am reading the takeaway here as “hey Americans, if you can’t find a job, go learn how to do something that companies need.” (Okay fine, if the government is working to facilitate these sorts of company/college partnerships, I can stop being a crankypants and give credit where credit is due.)

18:33: Holy crap there is a Pac Man graphic. Is Obama suggesting that Americans eat their way to new jobs? Michelle is gonna be pissed about this.

19:45: “We know a good teacher can increase the lifetime income of a classroom by over $250,000.” OMG Obama is quoting economic research. #nerdgasm In case you’re curious, here is an article about said research. Said research was even coauthored by one of my grad school classmates. *jealous pouty face* The interesting point here is that the$250,000 is even potentially a lowball figure, since other research puts the value of a great teacher in the neighborhood of $400,000 per year. 20:25: You realize that you’re suggesting “pay for performance” for teachers, right? That’s what “rewarding the best ones” is, after all. Also, I don’t understand what the big deal about “teaching to the test” is about- I mean, it works fine for Advanced Placement courses, right? If “teaching to the test” is viewed as counterproductive, has anyone considered the possibility that perhaps the test is crappy? 21:14: “When students are not allowed to drop out, they do better.” I’m swooning right now…and also having flashbacks to my undergraduate econometrics course. See, economists Josh Angrist and Alan Krueger have a nice little paper that gives evidence of the positive impact of mandatory schooling on wages. In related news, I’ll give you two guesses as to who Obama’s Chief Economic Adviser is. 21:52: I get that the cost of college is intimidating, but student loans versus credit cards is a weird comparison. I mean, I would *hope* that Americans would have more student loan debt than credit card debt, if for no other reason than the optimal amount of the latter is probably near zero. I like the sidebar information on the student loan interest rates (supposed to double in the middle of this year), and I still am perplexed as to why so many student loans are only offered at variable interest rates, even as we warn people against taking out variable-rate mortgages. I’m calling it now- the next disaster waiting to happen is right here. 23:27: I’m looking at a graph that is outlining unemployment rates by level of education. (Spoiler alert: college grads have the lowest unemployment rates.) STOP USING THIS DATA TO IMPLY THINGS ABOUT THE CAUSAL IMPACT OF EDUCATION. Sorry, just had to get that out. Does it not occur to anyone that there is plenty of selection bias in who chooses to complete high school and/or college? See correlation versus causation problem. 24:58: Sooo…you’re against offshoring jobs to other countries, but you are more than happy to bring foreign engineers and scientists to the US to compete with Americans for jobs? Given the structural unemployment issues discussed earlier, I don’t really have a problem with this, but I’m not the one that took issue with offshoring either. 26:50: Government funding of research is a tricky issue. On one hand, there isn’t a lack of incentive for private companies to conduct research that leads directly to innovation and new products. On the other hand, private research is, for the most part, driven by the profit motive, which may or may not always be in line with long-term social value creation. (For example, Pfizer has more of an incentive to develop Viagra than to invent new malaria treatments for developing countries.) Therefore, I think Obama’s case for research funding in the clean energy sector should be more explicitly based on the fact that clean energy has positive externalities (or at least lack of negative externalities) rather than just arguing that it’s the next awesome thing or it creates jobs or whatever. 31:55: Given the “tax breaks” semantics earlier, I really wish there were a sidebar graphic that explained exactly how oil companies get tax breaks. 33:28: Am I the only one wondering why, if being more efficient would really save companies all that money, companies don’t upgrade their facilities and take the other measures that Obama wants to encourage on their own? 34:11: You certainly don’t need to sell me on the idea that it makes sense to undertake needed (or valuable) infrastructure projects during times when people would otherwise be unemployed, since that makes more sense than pulling lots of people out of private-sector employment. (Obama makes this point later, as does the “1.3 million unemployed construction workers” infographic at 35:39.) That said, I think the key words here are “needed” and “valuable.” 36:50: A lot of people took issue with the “no bailouts” theme here, since Obama had earlier talked about how the auto bailouts were productive. I’m willing to give the benefit of the doubt here and interpret this as wanting a system where we wouldn’t get to the necessary bailout stage in the first place. 37:08: “We’ve all paid the price…that’s why we need smart regulations to prevent irresponsible behavior.” Orrrrrrr…how about smart regulations that prevent the irresponsible behavior from becoming everyone’s problem? Let’s not go overboard with the paternalism here. 38:30: Guess who’s not Washington’s Funniest Celebrity? 48:08: I love how Warren Buffett’s secretary is the poster child for crippling taxes on working people, when in reality she is probably one of the few secretaries on the planet who is reportedly clearing six figures. 45:00: There’s really no right answer to what one’s “fair share” in taxes is. Economists talk about the “benefits principle” (taxes should be paid by those who benefit most from what the government provides) versus the “ability-to-pay principle” (taxes should be paid by those who can afford to), but these principles don’t provide much specific guidance. What really strikes me in the debate is the issue of absolute dollars versus percentage points- for example, even if tax rates (i.e. percent of income paid in taxes) were the same for everyone, the person making$1 million per year would still be paying 20 times as much to the government as someone who makes $50,000 per year, but this somehow gets overlooked in the debate. (In related news, if you really want to pay your fair share in taxes, there’s nothing to stop you from writing a check to the IRS.) 49:00: What’s this about insider trading by members of Congress? Yeah, apparently there’s an exception to insider trading laws for members of Congress. Does it matter? Yeah, apparently members of Congress get pretty consistently higher rates of return on their investments than does the average person, which suggests that they are actually taking advantage of their exemption in some way. That’s what I call a job perk. =P 52:00: “That’s why my education reform offers more competition and more control for schools and states…” Again, economics FTW- Economist Caroline Hoxby has focused much of her career on looking at the effects of increased competition on school performance, and it’s nice to see that people are paying attention. (Also, for the record, Prof. Hoxby was basically the economist darling of the Bush administration.) Okay, Tom Vilsack, you can come back now, and Joe Biden, you can go take that nap you’ve been dying for. Tags: Policy · Uncategorizable ### 14 responses so far ↓ • 1 Lucas M Engelhardt // Jan 26, 2012 at 5:07 pm “From a purely economic standpoint, I don’t understand how Chrysler hiring people in the US to build cars is any different from a (publicly-traded) foreign company hiring people in the US to build cars, but I suppose it doesn’t sound as good to boast about how awesome Toyota is or whatever.” In my analysis on my blog, I really lay into Obama on this one. He seems to really really hate the idea of companies operating across borders – so much so that he (says he) wants to tax EVERY multinational… presumably even if they don’t have a presence in the US? If we take Obama literally on these points, he actually sounds borderline insane. • 2 Punditus Maximus // Jan 26, 2012 at 7:57 pm The graph isn’t supposed to fill you with rage, it’s supposed to defeat the “the middle class has less money because it is less productive” meme. • 3 Punditus Maximus // Jan 26, 2012 at 8:00 pm If you want to know how much you benefit from access to our economic system, compare your income to the same percentile of Somalia. What you figure out pretty quick is that the amount of income that’s due to “you” as versus “where you are” is rounding error. Almost every penny we make, we make because we live in a safe place where we can specialize and interact with other persons who are also productive. It’s a team effort. Where am I going with this? My point is that for everyone, “benefit” is 90%+ of their income. It’s not a gauge that gives us any information. • 4 Dan L // Jan 26, 2012 at 10:43 pm Dear Punditus, How dare you imply that my not every penny of my earnings is entirely due to my own hard work and intelligence! Clearly, I am just smarter and harder working than those Somalians. Why else would Somalian immigrants in the US still be so poor? Or in other words, you must be an evil communist. \end{sarcasm} • 5 Hasdrubal // Jan 27, 2012 at 10:53 am “(I’m also shocked at how much variability there is in righ-guy income over time.)” I think it was Landsburg or one of the Econlog guys who pointed out that a very large fraction of the people who earn over$1 million a year are small business owners where business income = personal income. When they have a good year and don’t expand, they make a ton, but the rest of the time their income is much lower. They may be upper middle class, but they’re not 1%ers except for the occasional exceptional year.

Unfortunately, I don’t have a cite for that.

• 6 David Welker // Jan 27, 2012 at 3:51 pm

“I would like to know who decided that an American economy based on manufacturing is the way to go, since it seems in general like an uphill battle. I also don’t want to get into tin-foil-hat libertarian territory, but since when is it the government’s responsibility to figure out what the economy should be focused on? I thought that that was one of the things that markets were good at.”

To answer your “since when” question, the idea of government promoting certain industries is nothing new. Go back to Alexander Hamilton’s Report on Manufacturers for an example.

That obviously doesn’t establish that it is a good idea. But it does establish that there is an answer with a long pedigree to the “since when” question.

But, I want to know why you just assume that “markets” (remember, markets are people) are ALWAYS good at establishing themselves in particular areas without assistance.

I think Paul Krugman’s insights on economic geography are relevant here. The establishment of businesses does not occur in a vacuum.

To give you an example, the fact that Steve Jobs was born in Silicon Valley, which was fully of nerdy engineers, I think is a key component to the rise of Apple. Why were all these engineers in Silicon Valley? Was it magic? Or did it have something to do with a lot of government spending on high tech defense projects???

Just saying. Nothing in the real world happens in a vacuum.

I think this is one of the major problems I would identify in the economics profession. Too many abstract models, not enough concrete reality. Why has it taken so long for economists to wonder whether they should consider the behavior of actual concrete people, rather than abstract “autonomous utility maximizing agents” that only partially resemble real people? And how about a little more economic geography and economic history. (And by economic history, I am not talking about the history of abstract economic ideas, but the historical development of industry in all its messy complexity. The concrete who, what, where, why, and how.)

Hey, I like economic models as much as the next guy. But I think too much is inferred from them. Economists go from their economic models which neglect things like geography, history, and culture and jump to conclusions that “markets” (these are also known as people) are always good at establishing productive enterprises without the assistance of “government” (also known as OTHER people).

Well, is the assertion that people are good at doing X without the assistance of other people (and that is precisely what we are talking about, when you get concrete about it) really going to be persuasive as a universal assertion?

I mean, I am sure you can find many situations where this assertion is true. And you can find many situations where it is untrue. At the very least, it certainly a heavy burden on the person who wants to assert such an ambitious universal statement.

• 7 EconoNerd // Jan 27, 2012 at 7:00 pm

“over 1,000 Americans are working today because we stopped a surge in Chinese tires,”

Really, Obama?
I’m usually more or less on board with your economic policies because many of them are centrist, but to brag about American jobs at the expense of Chinese jobs is kind of like kicking a puppy.

• 8 Russell Nelson // Jan 28, 2012 at 6:06 pm

Jodie, I took your very handy mm:ss times and converted them into Youtube URLs that start the video right at the section you’re discussing. You might want to replace your blog posting with this:

• 9 BradyDale // Jan 30, 2012 at 1:38 pm

The silence in the room was more profound than any other moment in the whole speech when POTUS suggested they ban insider trading by members of Congress.

In other news: bugged the hell out of me that he claimed there would be no more bailouts when obviously there will be. We still have too big to fail banks, so they will be bailed out. It’s B.S. Also, how does he get away with that line while bragging that he bailed out GM and Chrysler?

• 10 Punditus Maximus // Feb 1, 2012 at 11:18 am

This was one of the more dishonesty-dense SOTUs, and the reason for it is that America as a whole is in some kind of psychotic fugue where we refuse to examine what is going on.

• 11 Graphic Enhanced State of the Union Address | Toppli // Feb 1, 2012 at 1:28 pm

[...] For further insight (on both design and economic issues), I HIGHLY RECOMMEND watching this in conjunction with Jodi Beggs critique over at Economists Do it With Models. [...]

• 12 Dave // Feb 1, 2012 at 3:50 pm

We saved 1,000 jobs in the tire industry, but it cost us jobs in the poultry industry as China slapped retaliatory tariffs on our exports of chicken as payback for our tire tariffs. But let’s not talk about the negative aspects of our policy, mm-kay?

• 13 DMoni // Feb 10, 2012 at 1:36 pm

Hahahaha wow: Econgirl these are the kinds of posts that make me consider driving north and proposing.

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