My Neighbors Know

In my precinct, 79 percent of registered voters voted (I was one of the voters).  Of the voters in that precinct, only 31 percent voted for Congressman Jesse L. Jackson, Jr (I was not one of those). Nevertheless, thanks to the many other precincts, the Congressman got 70 percent of the total votes in his Congressional District shortly before heading for prison.

In case you were wondering, that same precinct cast 59 percent of its votes for Obama-Biden.

 

Blind Squirrel Finds No Food

It's a good sign that there are critics of The Redistribution Recession, and that so far every one of them admits that he hasn't read any of it. I'm trying to think about how I could encourage such behavior, because any citation is a good citation.

With enough attempted criticisms and a little luck, the law of large numbers predicts that non-reading critics will eventually put forward something that might be valid. That's what's impressive about this admitted non-reader's piece: it makes quite a few claims about the book and every single one of them is false! I'm sure because I HAVE read the book ... many times.

(please click through to take a look: it has a nice picture and page views are the reward I mentioned above)

Example: The book allegedly does not address specific criticisms (without reading a book, how do you know what's missing from it?), when in fact I anticipated these criticisms years ago and devote entire chapters of the book to them.  (Oxford owns the copyright, and I will not steal from them in order to further help non-readers by reprinting or paraphrasing those chapters here or elsewhere on the internet.)

I understand that reading takes time, so in order to help the blind squirrels find an acorn every once in a while, I have prepared a www page (with Oxford's permission) with a brief summary of the book, a brief Q & A about the book, and a short video presentation.

Another alternative, or prelude, to reading: take a look at the opinions of some people who have read the book, or are currently reading it:

• Stephen Moore at the Wall Street Journal
• Tyler Cohen at Marginal Revolution
• Matt Kahn at Green Economics
• Robert Barro
• Jerry Hausman: "...an innovative analysis of our current economic woes which should cause most economists to rethink their views of what has gone wrong."
• David Neumark
• Stephen Bainbridge

"Rethinking one's views" is even more costly than regular reading, which is one more reason to talk, blog, or curse about the book without actually reading any of it.  Even opening to page one could prove to be expensive. 

You too Suffolk?!

Suffolk County NY begins gas rationing.  Suffolk County has a lot to brag about, but their regulations are not  among them.

I have an idea: while Suffolk County official require boaters to take a boat-operator's course, the county should require their officials to take an economics course -- at the University of Chicago!

Gas Lines are Unnecessary

Copyright, The New York Times Company

When it comes to making the last week unpleasant, Hurricane Sandy got some help from government officials.

As the water from the storm began to recede, people in the New York metropolitan area wanted to repair, rebuild and get back to normal, But one of the most visible obstacles has been 1970s-style lines for gasoline. Many customers waited in line for hours only to learn that fuel had run out. Gasoline was rationed in New Jersey, where license plate numbers determined which days drivers were permitted to purchase fuel.

Waiting in line is a waste of time. The people there were certainly not helping bring more gasoline to the region and could instead be helping rebuild or could be productive in other ways.

Economists on the right and on the left agree that market prices – prices that reflect both supply and demand location by location – are much better at allocating scarce resources in extreme situations like the storm’s aftermath. But state and local government regulations, in the form of antigouging laws, effectively outlawed market pricing.

Early on, Steve Bellone, the executive of Suffolk County on Long Island, warned suppliers that he would punish anyone charging prices that were too high. Gov. Chris Christie of New Jersey sent similar messages. In New York City, federal officials interfered with the market by giving gasoline away; those lines were so long and contentious that New Jersey decided not to use that strategy.

If officials had allowed the price system to work, it would have alleviated lines in a number of ways. As suppliers seek the maximum profit, temporary and extraordinary prices encourage them (and make it affordable for them) to go to extraordinary lengths to get the electricity and fuel needed to have gasoline available to customers where it is needed the most.

Were they permitted, high prices would also have encouraged customers to economize creatively on their usage and acquisition of gasoline. If it had cost $10 or $15 a gallon, some people on those lines might have been willing to delay vehicle usage, leaving more for people who were willing to pay that price or who had no other choice.

Of course, many suppliers and customers take prudent steps because they want to be helpful during a time of emergency. But why not let the market bring forth more supply and more customer conservation by adding a financial reward?

Instead, officials resorted to begging customers to conserve – Gov. Andrew Cuomo of New York said, “Now is not the time to be using the car if you don’t need to” – and spending law enforcement resources dealing with hoarding, gouging and other crimes that would not exist if the price system had been allowed to work.

Mistakes of economics will happen sometimes, but it is too bad that government officials in the New York area are making so many when residents can least tolerate them.

Flashback: Don't Read This Until Nov 7

from last week:

If your candidate lost yesterday, I'm sorry. If you lament because you assumed that your candidate would have implemented superior public policies, then you can feel better already because your sorrow is based on a false assumption.

Democrats and Republicans clearly have different rhetoric. But rhetoric is not policy. Republicans talk a great game when it comes to cutting government spending, but President Clinton's administration had one of the lowest ratios of government spending to GDP. President Bush added immensely to Medicare spending with the Prescription Drug Act. Democrats talk a great game about helping the poor, but they pushed through a bill to tax America in order to bail out Wall Street. FDR started Social Security, but Nixon did the most to increase its spending. Democrats talk about limiting the power of the state when in comes to the death penalty, but a Republican Governor (Ryan in IL) put a moratorium on the death penalty.

Do you remember when Democrats were devasted because Roe-v-Wade would be overturned once President Reagan made his Supreme Court appointments? Well, those appointments happened and Roe-v-Wade still stands. I could go on and on with examples.

Economic theory suggests that political party might not affect policy, but instead merely reflect public policy preferences of the citizens. With some exceptions (see below), political parties compete with each other. Obama was one of the most liberal U.S. Senators because he faced little contest in Illinois, but became quite middle-of-the-road when it came to the Presidential race. Politicians are politicians first and (at best) ideologues second. A public opinion shift may give one party or another a small advantage and thus create a correlation between public policy and party-in-power, but this does not mean that political party itself has a significant impact on policy. Indeed, it would be inefficient if it did.

A number of economic studies have failed to find a correlation between party-in-power and public policy. Others have found a correlation (Professors Besley and Case have a nice survey in the JEL), but even there the implied impact is quite small. For example, Besley and Case look at state governments (where spending is about 1000 1982-dollars per capita per year) and find that governor's party is not correlated with spending and that a 10 percentage point increase in the Democratic party's share of the state legislature is associated with additional state government spending in the amount of $10 per capita per year. $10 per capita per year could be less than the cost of voting itself! Furthermore, effects at the state level may be larger than they would be at the national level because state-legislature elections are often uncontested and the whole economic logic cited above presumes competition.

Professors Snowberg, Wolfers, and Zitzewitz tried to look at situations in which party-in-power was significantly different even when citizen preferences were not. They found some effects, but they were also quite small. Eg., a Bush administration (rather than Kerry or Gore) was expected to increase stock prices by 2-3%. That is pretty trivial, given that the stock market fluctuated that much in the 20 minutes it took me to type this entry (back in October 2008).

Professor Quiggin Could Learn a Lot from My Book

I recently criticized Paul Krugman's recent book for ignoring marginal tax rates, which were hiked by the stimulus law and would be further hiked by the bigger stimulus that he proposes in his book. Moreover, I asserted that high marginal tax rates are responsible for a lot of the U.S. labor market's recent depression, and that Krugman's plan would have depressed it further.

Although not the author I was criticizing, Professor Quiggin recently wrote that

1. I was obviously wrong because of what happened in other countries,
2. The very recent (last 6 months or so), withdraw of some of the 99 weeks of UI benefits proves that marginal tax rates don't matter, and
3. "As for food stamps, the expansion in the number of recipients is not due to changes in policy."

All of these points are addressed  in my book, before Professor Quiggin even wrote them.  Even if he had not read my book, a little investigation would have quickly shown him that his claims are incorrect. I take the points in reverse order.

3.  SNAP (aka, food stamps). Professor Quiggin has been repeatedly refuted by the US Department of Agriculture (it administers SNAP), most recently in its Sept 2011 report where it says "The continued growth in SNAP participation from 2009 to 2010 is likely attributable to the slow recovery from the recent economic recession, expansions in SNAP eligibility, and continued outreach efforts."  [emphasis added]  My book agrees that all three were a factor, provides estimates of their separate quantitative importance (Table 3.4), and discusses the academic literature on the subject.

One way to quickly see how Professor Quiggin is wrong about food stamps is to look at SNAP participation as a ratio to either (a) persons in poverty, (b) persons on Medicaid, (c) persons on SSI, or (d) persons on SSDI.  Of course a "bad economy" expands participation all of these things, but why would SNAP grow so much more than the others?  The answer is simple: SNAP policy changed, while the definition of poverty was constant and the policy rules for Medicaid, SSI, and SSDI were relatively constant.

2.  99 weeks no more.  As of October 2012, unemployed people could not collect 99 weeks UI, thanks to UI rule changes going into effect this spring.  But they still could collect 60+ weeks, not to mention remain on Medicaid, SNAP, and other programs indefinitely.  My book quantifies all of these factors, and finds that the difference between 60+ weeks and 99 weeks (actually, 96 weeks was the national average) is real but fairly small (extending UI from 26 to 52 weeks is a big deal).  So my model predicts that, adjusted for age and other factors, the labor market would rebound slightly during 2012, which is exactly what happened.  (There are also issues of timing here, which are discussed in my book).

3.  Austerity depresses the economy.  I agree (see also here) that European governments have typically failed to revive their economies, and probably further depressed them.  But austerity is not opposite of redistribution (ie, hiking marginal tax rates).  Think of how austerity might be implemented in the U.S.: we might cut Medicare and Social Security, but only for the more successful beneficiaries.  Regardless of whether redistribution is achieved by withholding benefits from families with high incomes, providing more subsidies to families with low incomes, or both, an essential consequence is the same: a reduction in the reward to activities and efforts that raise incomes.  Many kinds of austerity enhance redistribution, and that’s an important reason why austerity depresses the labor market.

With that said, I am very much in favor of cross-country comparisons.  I would love it if Professor Quiggin or anyone else measured marginal tax rate time series for any country that we could compare to my series for the U.S.  But Professor Quiggin has failed to do that, and instead  claims without evidence that marginal tax rates were constant (or falling) everywhere outside the U.S.

Finally, if marginal tax rates were found to be constant in Estonia (the only specific country that Professor Quiggin points to), does that mean that marginal tax rates do not matter in the U.S.?  Please let me know so I can notify American economists that Estonia is our ideal laboratory, and notify policymakers that they can safety hike marginal tax rates to 100 percent without noticeable consequences.

Added: I have heard the claim that the ratio of SNAP to Medicaid increased so sharply because Medicaid was cut sharply, rather that SNAP changing its rules.  The claim ignores the help that Medicaid got from ARRA and, more important, that Medicaid spending and participation per person in poverty was pretty flat.  Why don't the allegedly sharp Medicaid cuts result in sharply less Medicaid per person in poverty?  The answer is simple: Medicaid cuts, if any, where nowhere near the magnitude of SNAP expansions.  For more on SNAP expansions, see The Redistribution Recession.

WSJ reviews The Redistribution Recession!!

“What if Keynesian economics is a bankrupt theory and the massive "stimulus" bill in 2009 made the economy worse, not better? Those are among the questions that Casey Mulligan asks in "The Redistribution Recession," a biting analysis of our current economic malaise.”

Click here for Stephen Moore's favorable review

http://online.wsj.com/article/SB10001424052970204712904578093021310711016.html

Opportunity for Election Forecasting

I have absolutely no expertise in election forecasting. But I have enough faith in the stability of human behavior, properly understood, to believe that election forecasting experts (not me!) should be able to accurately and confidently predict who will be president next year.

This not to say that such a forecast would merely consist of taking the leader in a large national poll, or the leader of a large poll conducted in Ohio. You have economic data, rallies, campaign contributions, early voting patterns, billions of tweets and facebook chatter, and many other glimpses at what people might do on Tuesday. I would think an expert could process all this and tell us who will win.

Theory 1: The Experts do Know

One view of the state of forecasting is that the experts have done exactly that, and President Obama will win. One reason I hesitate to embrace this view is that the experts I have seen (not a good sample, because I am not an expert on experts, either!) have not considered all that much data (I don't consider repeats of flawed data to be much data, regardless of how many times it is repeated).

Nate Silver, for instance, gives the President an 84% change primarily on the basis of state-level polling data, and gives essentially zero weight to the national polling data (see the middle of this long post), let alone any of the other sorts of data I mentioned. He may have the right weights -- he's the expert -- but an explanation of his dramatic departure from Bayesian good practice (ie, throwing out important data sources rather than down-weighting them on the basis of assessed flaws) is conspicuously absent.

Justin Wolfers looks at who people expect to win (which also points to victory for the President). That's an interesting data source, and he explains why he puts less weight on the usual polls. But what about all of that other data?

Intrade, meanwhile, puts the President's chances at 2/3 (ie, 2-to-1 odds of losing). That's pretty close, and not the confidence I am expecting from a good forecaster. (for confidence, look at silver's odds, which exceed 5-to-1). Either intrade refutes the theory that the experts know who will win, or intrade has done a poor job of aggregating information.

If the President wins by a non-trivial margin (ie, by more than Ohio, or by a 5+ percentage point margin in Ohio), it will tough to reject Theory 1. But that outcome would also support the theory that the experts got lucky.

Theory 2: It Really is Too Close to Call

Some elections, such as Bush v Gore, are genuinely close and I don't expect the experts to know those outcomes ahead of time (or even the day after the election). But they should know that they don't know. Silver, and maybe not even Wolfers, are saying that they don't know. Other experts are calling it a tossup, but I am worried that they work for TV networks who want viewers.

If either candidate wins by a non-trivial margin, that casts a lot of doubt on Theory 2 unless we have good reason to believe that the world changed significantly in the last hours before the election.

Theory 3: The Experts aren't Doing a Very Good Job

If the President loses by a significant margin, Theory 3 has to be the favored theory, which is an opportunity for an ambitious election forecaster to get it right next time.

We are Supposed to Trust Them with Trillions

DeepenEnd This Depression Now! insists that we taxpayers should trust the author and other Keynesians with trillions of our dollars, and in return they supposedly would end this depression fully and quickly. Meanwhile, the best the author can do to earn our trust is to take a vacation from both logic and economic understanding:

1. He and I agree that soup kitchens did not cause the Great Depression.  But only he can conclude from that fact that incentives should be ignored when studying the labor market, and that the best way out of this recession is to further broaden the population of people with no incentive to work.
   
   
2. He and I agree that a massive safety net expansion all by itself would increase wages (he never says by how much, though ... my book looks extensively at that: it's just a couple of percent in the short run, and then falling back to trend).  Then, with the intention of showing that safety net expansions were trivial, he puts up a graph showing that wages continued to increase (sic) after the recession began!  Notice in particular the vertical axis in his chart (and ignore that he cherry-picks a disportionately manufacturing sample ... my book shows how manufacturing did experience a sharp demand reduction but that manufacturing is not the entire economy): the axis is measuring wage CHANGES and all of its numbers are positive.
   
   
3. If he had wanted to test the theory a little more carefully, he might have looked at wage levels, and acknowledge safety net contractions as well as expansions.  That's what I did in my book, and in my "Why did wages rise and then fall?"  Here's what you get: real wages rose above trend when the safety net expanded, and did not start to fall until part of the "stimulus" started to expire.

4. We can quibble about whether wages went up a couple of percentage points or went down a percentage point or two, but the real issue with wages is what happened to after-tax wages: they fell about 12 percent below trend because of the massive hikes in marginal tax rates. So even if you really did have a demand drop that by itself depressed pre- and after-tax wages by 3 percent, and a safety net expansion that by itself increased pre-tax wages by 2 percent and depressed after-tax wages by 9 percent, then the net result would be pre-tax wages falling by one percent -- Professor Krugman and friends could have their "gotcha" -- yet still after-tax wages fall by 12 percent, three-quarters of which is due to the safety net expansion. If your choice was to ignore the safety net and focus on demand or ignore demand and focus on the safety net, you would get a lot closer to the truth with the latter approach.
   
5. when it comes to real wages, my model is Keynesian in the sense that it says that wages are counter cyclical (high when employment is low). It's kind of funny that, regardless of what the data show, Krugman would attempt to discredit the Keynesian part of my model by insisting that wages are procyclical. I guess he sides with Kydland and Prescott on wages and indeed he does appreciate nonKeynesian approaches :)
   
   
   

Kudlow Appearance Tonight