The Next Time a Top Economist Predicts Disaster…

Shortly before Obama took office, many American banks, including the largest ones, were given a huge amount of money by the Federal government (“bailed out”). Why? Because Secretary of the Treasury Henry Paulson, Chairman of the Federal Reserve Ben Bernanke and other economists (not necessarily independent of Paulson and Bernanke) predicted a second Great Depression if they weren’t. I didn’t believe Paulson et al. — their track records of prediction were terrible. They hadn’t foreseen the crisis. Why should I think they knew how to fix it? I believed their predictions of disaster were too confident.

At the time I didn’t know this bit of history:

The blood-curdling threats [now] being issued by Eurocrats should sound familiar to British readers. We went through precisely the same experience 20 years ago, when we were stuck with an over-valued exchange rate in the Exchange Rate Mechanism.

As in Greece, our leaders – all the main parties, the CBI, the TUC, the Bank of England – assured us that leaving the ERM would be disastrous. On September 11, 1992, John Major solemnly told us that withdrawal was ‘the soft option, the inflationary option, the devaluer’s option, a betrayal of our country’s future’.

Four days later, we left the system, and our recovery began immediately. Inflation, interest rates and unemployment started falling, and we enjoyed 15 years of unbroken growth

Those who don’t know the past are doomed to over-trust experts.

“We’re Economists. And We Don’t Care About Innovation”

In a Planet Money show about whether Super Bowls help host cities, a sports economist named Victor Matheson, a professor at College of the Holy Cross, described himself and other sports economists:

We’re economists. And we’re concerned about equity and we’re concerned about efficiency. And what most economists see . . . “

He didn’t say “We’re concerned about innovation”. The way he ignores innovation reflects the whole field of economics. Here’s the same thing from Christine Romer. In an editorial about whether manufacturing deserves special treatment, she considers only productivity and equity:

It might be better to enact policies that will make all American businesses and workers more productive and successful. . . Today, we face a profound shortfall of demand. . . .We need actions that raise overall demand. [She doesn’t say we are in a period of profound stagnation in most industries, which is also true.] . . . More aggressive monetary policy that lowered the price of the dollar would stimulate all our exports . . . Moving is very costly for dislocated workers with ties to their communities. . . Manufacturing jobs are seen as one of the few sources of well-paying jobs for less-educated workers. . . . Public policy . . . should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality.

As if innovation (and lack of it) don’t exist. Here’s an example from Robert Reich, in a post “rebut[ing] the seven biggest economic lies”:

Shrinking government generates more jobs. Wrong again. It means fewer government workers – everyone from teachers, fire fighters, police officers, and social workers at the state and local levels to safety inspectors and military personnel at the federal. And fewer government contractors, who would employ fewer private-sector workers. According to Moody’s economist Mark Zandi (a campaign advisor to John McCain), the $61 billion in spending cuts proposed by the House GOP will cost the economy 700,000 jobs this year and next.

Nothing about the effect of shrinking government on innovation. Many types of innovation increase jobs.

This is like doctors ignoring the immune system. Ignoring the effect of this or that policy on innovation is likely to lead to decisions that reduce innovation in favor of something easier to measure or defend, such as productivity or equity. The cumulative effect of ignoring innovation is stagnation and decline, caused by problems that got worse and worse as, due to lack of innovation, they failed to be solved.

Tyler Cowen (The Great Stagnation) and Alex Tabarrok (Launching the Innovation Renaissance) are absolutely right to focus on innovation and the lack of it. The obesity epidemic is 30 years old — a good example of a problem that has gotten worse and worse. Judging by Tara Parker-Pope’s reporting, mainstream weight researchers don’t have a clue — in the form of empirical results — how to solve it. Outside mainstream academia, the dominant weight-loss idea is a low-carb diet. That idea is a hundred years old (Banting). How little innovation there has been. That Parker-Pope failed to criticize researchers for their lack of progress shows how deep the problem is. She appears not to grasp the possibility.

Gelman and Fung versus Levitt and Dubner: How “Wrong” is Freakonomics?

In the latest issue of American Scientist, Andrew Gelman (an old friend) and Kaiser Fung criticize Freakonomics and Superfreakonomics by Steve Levitt and Stephen Dubner (who wrote about my work). Although the article is titled “Freakonomics: What Went Wrong?” none of the supposed errors are in Freakonomics. You can get an idea of the conclusions from the title and this sentence: “How could an experienced journalist and a widely respected researcher slip up in so many ways?”

Gelman and Fung examine a series (“so many ways”) of what they consider mistakes. I will comment on each of them.

1. The case of the missing girls. I agree with Gelman and Fung: Levitt and Dubner accepted Emily Oster’s research too uncritically.

2. The risk of driving a car. I think Gelman and Fung miss the point. Yes, the claim (driving drunk is safer than walking drunk) was not well-supported by the evidence provided because the comparison was so confounded. However, I read the whole example differently. I didn’t think that Levitt and Dubner thought drunk people should drive. I thought their point was more subtle — that comparisons are difficult (“look how we can reach a crazy conclusion”).

3. Stars are made not born. I think Gelman and Fung fail to see the big picture. The birth-month effect in professional sports, which Gelman and Fung dismiss as “very small,” is of great interest to many people, if not to Gelman and Fung.  It suggests what Levitt and Dubner and Gladwell and others say: Early success matters. That’s not obvious at all. There are lots of similar associations in epidemiology. They have been the first evidence for many important conclusions, such as smoking causes lung cancer. Are professional sports important? Maybe. But epidemiology and epidemiological methods are surely important. By learning about this effect, we learn about them. Lots of smart people fail to take epidemiology seriously enough (e.g., “correlation does not equal causation”).

4. Making the majors and hitting a curve ball. Gelman and Fung point out that one sentence is misleading. One sentence. This is called praising with faint damn.

5. Predicting terrorists. Gelman and Fung say that the terrorist prediction algorithm of a man named Ian Horsley, which Levitt and Dubner seem to take seriously, is not practical. But their review fails to convince me it was presented as practical. Since there are no data about how well the algorithm works, and Levitt and Dubner are all about data….

6. The climate change dust-up. I agree with Gelman and Fung that Nathan Myrvold’s geoengineering ideas are unimportant. (My view of Myrvold’s patent trolling.)  But in this case, I’d say both sides — Gelman and Fung and Levitt and Dubner — miss what’s really important, namely that the usual claims that humans are dangerously warming the planet are held far too strongly. The advocates of this view are far too sure of themselves. I have blogged about this many times. In a nutshell, the climate models that we are supposed to trust have never been shown to persuasively predict the climate ten or twenty years from now (or even one year from now). There is no good reason to believe them. That Levitt and Dubner seem to take that stuff seriously is the only big criticism I have of their work . At least in that geoengineering stuff Levitt and Dubner were dissenting from conventional wisdom. Gelman and Fung do not. They fail to realize that something we’ve been told thousands of times is nonsense (in the sense of being wildly overstated). It was Levitt and Dubner’s comments about this that led me to look closely at all that climate-change scare stuff. I was surprised how poor the evidence was.

The biggest problem with Gelman and Fung’s critique is that they say nothing about the great contribution of Steve Levitt to economics. They fail to grasp that he has made economics considerably more of a science, if by science you mean a data-driven enterprise as opposed to an ideologically-driven or prestige-driven one (mathematics is prestigious, the more difficult, the more prestigious). He did so by pioneering a new way to use data to learn interesting things. His method is essentially epidemiological, except his methods are considerably better (better matching, less formulaic) and his topics much more diverse (e.g., sumo wrestling) than mainstream epidemiology. A large fraction of prestige economics is math, divorced from empirical tests. This stuff wins Nobel Prizes, but, in my and many other people’s opinion, contributes very little to understanding. (Psychology has had the same too much math, too little data problem — minus the Nobel Prizes, of course.) To persuade a big chunk of an entire discipline to pay more attention to data is a huge accomplishment.

Levitt’s methodological innovation makes Freakonomics far from what Gelman and Fung call “pop statistics”. It is actually an amusing and well-written record of something close to a revolution. In the 1980s, a friend of mine at UC Berkeley took an introductory economics class. She told me a little of what the teacher said in class. All theory. What about data? I said. It’s a strange science that doesn’t care about data. My friend went to office hours. She asked the instructor (a Berkeley economics professor): What about data? Don’t worry about data, he replied. Gelman and Fung fail to appreciate what economics used to be like. The ratio of strongly-asserted ideas to persuasive data used to be very large. Now it is less.

Thanks to Ashish Mukharji.

Assorted Links

  • A brash high-school student discovers — maybe by accident — how much famous writers, such as Ralph Ellison, Norman Mailer, and John Updike, don’t want to write. Any excuse to avoid writing will do.
  • A pretty good  talk by John Cochrane, a University of Chicago professor of economics, called “Restoring Robust Economic Growth in America”. What’s most interesting is what’s missing. At one point he asks: “Why are we stagnating? I don’t know. I don’t think anyone knows, really. That’s why we’re here at this fascinating conference.” In spite of this topic, his talk contains nothing about what controls the rate of innovation. Not only does he not know anything about this (judging by this talk), he doesn’t even realize the gap in his knowledge (judging by this talk).  Shades of Thomas Sargent. It’s as if a Harvard Medical School professor spoke about how to fight disease without mentioning the immune system, without even appearing to know that the immune system exists. (Which happens.)
  • Garum, a fermented fish sauce. It was the “supreme condiment” of ancient Rome.

Thanks to Allan Jackson and Peter Couvares.

Bryan Caplan Disses College

In this post, Bryan Caplan says (again) that college is vastly overrated. Like me, he says that the only thing college professors know how to do is be professors and that is all they can actually teach. Graduate school, where professors teach students who want to be professors, makes sense. Undergraduate school, where almost no students will become professors, does not. Like me, he ridicules the idea that professors teach students “how to think”.

He omits half of my criticism. It isn’t just teaching (“how to think” — please!), it’s also evaluation. Professors are terrible at evaluation. Their method of judging student work is very simple: How close is it to what I would have done? The better you can imitate the professor, no matter what the class, the higher your grade. This is one size fits all with a vengeance because there is no opting out. Sure, you can choose your major. But every class is taught by a professor. What if your strengths lie elsewhere — in something that your professors aren’t good at? Tough luck. Your strengths will never be noticed or encouraged or developed.

At Berkeley (where Bryan went and I taught) and universities generally, the highest praise is brilliant. Professor X is brilliant. Or: Brilliant piece of work. People can do great things in dozens of ways, but somehow student work is almost never judged by how beautiful, courageous, practical, good-tasting, astonishing, vivid, funny, moving, comfortable, and so on it is. Because that’s not what professors are good at. (Except in the less-academic departments, such as art and engineering.) To fail to grasp that students can excel in dozens of ways is to seriously shortchange them. To value them at much less than they are worth — and, above all, to fail to help them grow and find their place in the world after college.

At Berkeley, I figured this out in a way that a libertarian should appreciate: I gave my students much more choice. For a term project, I said they could do almost anything so long as it was off-campus and didn’t involve library work. What they chose to do revealed a lot. I began to see not just how different they were from me but how different they were from each other. One of my students chose to give a talk to a high-school class. This was astonishing because she has severe stage fright. Every step was hard. But she did it. “I learned that if I really wanted to, I could conquer my fear,” she wrote.

One of my Tsinghua students recently asked me: “Are you a brave man?” (She wanted to give me a gift of stinky tofu.) I said no. She said she thought I was brave for coming to China. Perhaps. I have never done anything as brave as what my student with stage fright did. I have never done something that terrified me — much less chosen to do such a thing. Her homework hadn’t been very good. When I read about her term project — conquering stage fright — I realized how badly I had misjudged her. How badly I had failed to appreciate her strengths. I saw that it wasn’t just her and it wasn’t just me. By imposing just one narrow way to excel, the whole system badly undervalued almost everyone. Almost everyone had strengths the system ignored. And it’s a system almost everyone must go through to reach a position of power!

This is related to what I call the hemineglect of economists — they fail to see that innovation should be half of economics. Diversity of talents and interests is central to innovation because new things are so often mixtures of old things. By rewarding only one kind of talent, colleges suppress diversity of talent and thereby reduce innovation. (It’s no coincidence that Steve Jobs, whom we associate with innovation, didn’t finish college. He saw his talents wouldn’t be valued.) Psychologists are also guilty of this. Many psychologists glorify IQ. Somehow having a high IQ is crucial to success . . . somehow a society that doesn’t encourage people with high IQs will do badly. And so on. In The Bell Curve, Herrnstein and Murray showed that high IQ scores correlated with other measures of desirable social outcomes (e.g., income — people with higher IQ scores made more money). Like many successful people, they failed to see the possibility that the whole world had been shaped to reward the things that the people in power (i.e., they themselves) are good at. Not because those talents work (= produce a better economy). But because they are easy to measure (by college grades). The glorification of IQ has had a solipsistic aspect and has ignored what should be obvious, that diversity of talents and skills promotes innovation. Without a diverse talent pool, any society will do a poor job of solving the problems that inevitably arise.

Duct Tape, the Eurozone, Status-Quo Bias, and Neglect of Innovation

In 1995, I visited my Swedish relatives. We argued about the Euro. They thought it was a good idea, I thought it had a serious weakness.

ME It ties together economies that are different.

MY AUNT It reduces the chance of war in Europe.

You could say we were both right. There have been no wars between Eurozone countries (supporting my aunt) and the Eurozone is now on the verge of breaking apart for exactly the reason I and many others pointed out (supporting me).

Last week a friend said to me that Europe was in worse shape than America. I was unconvinced. I said that I opposed Geithner’s “duct-tape solution”. It would have been better to let things fall apart and then put them back together in a safer way.

MY FRIEND Duct-tape works.

ME What Geithner did helped those who benefit from the status quo and hurt those who benefit from change. Just like duct tape.

This struck me as utterly banal until I read a one-sided editorial in The Economist:

The consequences of the euro’s destruction are so catastrophic that no sensible policymaker could stand by and let it happen. . . .  the threat of a disaster . . . can anything be done to avert disaster?

and similar remarks in The New Yorker (James Surowiecki):

The financial crisis in Europe . . . has now entered a potentially disastrous phase.. . . with dire consequences not just for Europe but also for the rest of us. . . . This is that rarest of problems—one that you really can solve just by throwing money at it [= duct tape]

Wait a sec. What if the Eurozone is a bad idea? Like I (and many others) said in 1995? Why perpetuate a bad idea? Why drive further in the wrong direction? Sure, the dissolution will bring temporary trouble (“disaster”, “dire consequences”), but that will be a small price to pay for getting rid of a bad idea. Of course the Euro had/has pluses and minuses. Anyone who claimed to know that the pluses outweighed the minuses (or vice-verse) was a fool or an expert. Now we know more. Given that what the nay-sayers said has come to pass, it is reasonable to think that they (or we) were right: The minuses outweigh the pluses.

You have seen the phrase Japan’s lost decade a thousand times. You have never seen the phrase Greece’s lost decade. But Greeks lost an enormous amount from being able to borrow money for stupid conventional projects at too low a rate. Had loans been less available, they would have been more original (the less debt involved, the easier it is to take risks) and started at a smaller scale. Which I believe would have been a better use of their time and led to more innovation. Both The Economist‘s editorial writer and Surowiecki have a status-quo “duct-tape” bias without realizing it.

What’s important here is not what two writers, however influential their magazines, think or fail to think. It is that they are so sure of themselves. They fail to take seriously an alternative (breakup of the Eurozone would in the long run be a good thing) that has at least as much to recommend it as what they are sure of (the breakup would be a “disaster”). I believe they are so sure of themselves because they have absorbed (and now imitate) the hemineglect of modern economics. The whole field, they haven’t noticed, has an enormous status-quo bias in its failure to study innovation. Innovation — how new goods and services are invented and prosper — should be half the field. Let me repeat: A few years ago I picked up an 800-page introductory economics textbook. It had one page (one worthless page) on innovation. In this staggering neglect, it reflected the entire field. The hemineglect of economics professors is just as bad as the hemineglect of epidemiologists (who ignore immune function, study of what makes us better or worse at fighting off microbes) and statisticians (who pay almost no attention to idea generation).

MORE Even Joe Nocera, whom I like, has trouble grasping that the Euro might be a bad idea. “The only thing that should matter is what works,” he writes. Not managing to see that the Euro isn’t working.