Pursuit of Truthiness

Has global temperature risen significantly in the last century?  I’m sure this post will settle the global warming debate once and for all.

Seriously though, I am surprised how economists feel the need to qualify their discussion of the subject by saying “I’m not an expert”.  True, economists are not experts on climate, but many are leading experts on the analysis of time-series data.  One of the biggest debates in economics for the last 3 decades is about the trend in a time series- not temperature, but gross domestic product.

I am not an expert even on this narrower subject, but in some sense this is an advantage- I don’t know enough to cheat.  I can’t keep trying different approaches until the results come out the way I want, because I only know a couple of approaches.  Compare this to graphs, where I know enough to get exactly the results I want.  Here is a graph of global temperatures since 1881, data from NASA:

Hard to see an upward trend there.  Case closed?  Well, check out the temperature anomaly (difference from the average), graphed in a different way:

Now that’s an upward trend if I’ve ever seen one!  These two graphs are two basically legitimate ways to look at essentially the same data, but they seem to point to opposite conclusions.  This is one reason statistical tests are important- they can’t be fooled by changing axes or adding a constant to the whole series.  Of course, the disadvantage is that they require a lot more knowledge to use and analyze than graphs do.

You can already see the result of one statistical test- the regression equation on the second graph that was used to draw the trend line.  It estimates that temperature is increasing .006 degrees Celsius each year, and that this simple increasing-temperature model predicts 75% of the variation in the annual data.  A regression on the first graph shows the same thing (rescaled), though I did not include it as it would undermine the how-to-lie-with-graphs point.  Time is strongly significant in this regression (p-value 0.00)- so this basic analysis says the increase in temperate is statistically significant.

A more advanced way to test for a trend in data is an Augmented Dickey-Fuller test.  This test also suggests there is an upward trend- technically, that we cannot reject the null assumption of a unit root (more technically, it looks like it is ARIMA(0,1,3), for those who care).  So, according to my naive analysis, there certainly seems to be an upward trend in temperature.

What does this really tell us?  Perhaps not much.  First, I assumed that the dataset from NASA is correct.  Second, I chose to analyze 130 years, but there is no reason to choose this number except that it is how much data I had; the results are certainly sensitive to the number of years included.  Finally, I have done nothing to test the idea that increased carbon is causing this increase- perhaps I will in another post.  So, with those three grains (big rocks?) of salt, it looks like we have global warming.

Scott Sumner has said that monetary policy was the Achilles heel of conservative/libertarian/free market economics all through the world in the 20th century.  I am realizing how big a problem it still is.  I always thought that it we be great if some twist of fate brought us President Ron Paul, because I think most of his proposed policies would make Americans much better off; my only big disagreement is with his monetary policy.  However, I can’t say I disagreed when I read Adam Ozimek’s description of what hypothetical presidents would bring:

You know who else ran for President in 2008? Ron Paul. President Paul would have yanked out Bernanke and put in a gold bug, which would have outdone anything any other president could do, short of unnecessary nuclear war, in terms of a welfare loss. President Paul would have heralded in the Great Depression 2, not the Great Recession.

I don’t think it is unreasonable to expect a second Great Depression to do as much damage to free-markets and libertarian politics as the first.  You might think that a libertarian president could get lucky and get elected during good economic times, when tight money would not push us all the way to a Depression.  However, any President that does drastically shrink the government is going to cause a recession; almost every post-war demobilization is accompanied by a recession.  This doesn’t mean we shouldn’t end wars or shrink government of course, but such times do call for an accommodative monetary policy- and given the current state of libertarian beliefs and politics, we are likely to get just the opposite.  Unless we get a new Milton Friedman(who I guess is now a money-debasing statist), a libertarian president will be bent on bringing “sound money” and will be a disaster for the country and for free markets.

A recent David  Brooks column had an interesting analysis of the new power elite.  He claims they are more diverse, meritocratic, and talented than ever, but at the same time less trusted and perhaps less successful than ever.

Are government, finance, and journalism really run no better than they were 50 years ago?  It is hard to say, or even to come up with a good metric to judge this by.  But society is much richer than it was 50 years ago, and these institutions may have had something to do with that.

Brooks continues, “To leave a mark in a fast, competitive world, leaders seek to hit grandiose home runs. Clinton tried to transform health care. Bush tried to transform the Middle East. Obama has tried to transform health care, energy and much more.”  But most 20th-century presidents attempted major transformations.  The attempts of recent presidents are a dim shadow of the breadth and speed of transformations brought about by Franklin Roosevelt and Lyndon Johnson, members of the old-style elite.

This seems more on target to me: “Third, leadership-class solidarity is weaker. The Protestant Establishment was inbred. On the other hand, those social connections placed informal limits on strife. Personal scandals were hushed up. Now members of the leadership class are engaged in a perpetual state of war. Each side seeks daily advantage in ways that poison the long-term reputations of everybody involved.”

But again, do I really know how dirty and competitive politics was 50 years ago compared to now?  No.  It is easy to go astray when we rely on vague impressions, especially about the past since the “other side” isn’t around to correct us.  Most good datasets do not go back beyond the 70′s, but there must be some adequate proxies available.

There are lots of Great Internet Debates- over operating systems, video game consoles, or politics.  This last week, a similar sort of name-calling verbal brawl broke out among prominent macro-economists.  But that exchange featured long posts and highly technical arguments.  To simplify it for you, I will summarize the debate as the flame war it was at heart.

Nobel Laureate Paul Krugman: Who is to blame for the failure of economists to respond effectively to this crisis?  Well, there are two types of economists: freshwater and saltwater.  It sure wasn’t us saltwater people, so it must be that the freshwater types are to blame.  They are so detached from reality that they think the Great Depression was just a Great Vacation for workers, resurrecting absurd fallacies I thought we had dispatched for good 70 years ago and thinking they must be right because their ideas are gussied up with fancy equations.  Saltwater Keynesianism is the only game in town.

John Cochrane: Paul Krugman wants us to ignore the last 40 years of work in economics.  In science, he would be the global warming skeptic of the HIV-AIDS denier.  Only a paranoid, calumnous, superficial, idea-less schlock would rely on name-calling and personal attack like he did.  Us freshwater types do not, in fact, deny the reality of bubbles, recessions, and other such real events.  Krugman has no idea what caused the crash, and just advocated fiscal stimulus because he wants the government to be bigger. “So what is Krugman up to? Why become a denier, a skeptic, an apologist for 70 year old ideas, replete with well-known logical fallacies, a pariah… The only explanation that makes sense to me is that Krugman isn’t trying to be an economist, he is trying to be a partisan, political opinion writer…. Krugman wants to be Rush Limbaugh of the Left. I still want to be Milton Friedman, but each is a worthy calling.”

Brad Delong: John Cochrane’s 9-page response had one sentence that was TOTALLY wrong.  The rest of what he said? I don’t feel like talking about it.

Paul Krugman: Nobody likes the freshwater people.  They have no idea what Keynesians even said.  I, by contast, know the literature so well that I finally cited a paper.  Maybe next post I will cite two!

Brad Delong: Freshwater types haven’t read Keynesians?  Of course, but more than that they haven’t read anyone.  They commit fallacies which show they haven’t read Knut Wicksell, Irving Fischer, (fellow Chicago-school monetarist) Milton Friedman, or David Hume’s First Economics Paper Ever.  Today’s Chicago school is an intellectual train-wreck.

Narayana Kockerlakota: What are you talking about guys?  Macro is fine.  If freshwater economists are so clueless why do we dominate the journals and provide most new hires at top universities?  Really there isn’t even a freshwater/saltwater divide anymore.  Here are links to a bunch of papers that Krugman thinks don’t exist, because they are about things he says we ignore.

Brad DeLong: Richard Posner is Uranus!

Justin Wolfers: All these old dudes are just cranky, Narayana is right that the new hires are moving past these problems and these flame wars.  But macro isn’t really ok until the new generation starts paying attention to policy, and policymakers start paying attention to them.

David Levine: Paul Krugman is clueless about economics and just wants to expand government.  It makes me feel physically ill that a distinguished economist could be so ignorant of his own profession.

Brad DeLong: David Levine is so clueless he is not in our galaxy.  His piece is so bad the Huffington Post [not exactly the newspaper of record! JB] should not have published it.

Bob Murphy: A pox on both their houses! Paul Krugman is a jerk and offers horrible policy advice. But John Cochrane’s response is no friend-of-the-court brief in the Austrian critique of Keynesianism.

Scott Sumner: A pox on all their houses! Old Keynesians, New Keynesians, Monetarists, New Classicals, and Austrians are all wrong, and I am right.

Eric Falkenstein: All macro-economists are wrong!  They have tried to fit their business cycle theories to the same ten data points, and the appearance of an eleventh one is not about to solve anything.  It may eliminate some theories, but this is not so helpful since there an infinite number of ways to be wrong.  Macroeconomics is the triumph of hope over experience, and has been no more successful than sociology [the ultimate insult to economists! JB].  At least private companies have figured out how useless this is and stopped hiring macro-economists.

Tyler Cowen: What the hell guys, you really thought you were going to fix macro with a flame war?  I look forward to seeing some peer-reviewed journal articles.

Yoram Bauman: Maybe macro flame wars are a good thing, because the three most terrifying words in the English language are “macro-economists agree that”.  The trouble with macro is built in to the definition of the field: micro-economists are wrong about specific things, while macro-economists are wrong about things in general.

Me: It is a bit traumatic for a young economist like myself to see this go down.  I wonder, why do Mommy and Daddy have to fight like this?  This is weird even by internet standards, because incivility is usually attributed to anonymity, but everyone here uses their real names and goes to the same conferences.  What happened to the good old days when Milton Friedman and Paul Samuelson could lead opposing schools but still be friends?  Do real sciences ever get this divided- was there ever a string theory flame war?  But as economist/comedian Yoram Bauman says, maybe this will turn out for the best.  Perhaps Krugman and Cochrane will do a joint show at the AEA humor session this January in which they reveal that this was all a hoax, and ask whether that wasn’t the most epic trolling ever.  But it seems more likely that the reconciliation will be slow.  Indeed, we may see a repeat of the late 70′s, when the two main factions (Keynesians vs Chicago Monetarists then, New Keynesians vs Chicago Ratex/RBC/New Classicals now) so effectively discredit each other that a third school will seize control of the policy arena.

(Continuing from my previous post, Does the  idea of sustainability survive sustained inquiry?)

Sustainability means preserving good things for future generations.  But as Bob Solow notes, we have no idea what the preferences of future generations are; we are likely to think they are weird.  After all, if someone in 1800 were trying to make people in 2009 better off, what would they do?  Burn less coal?  Would these 2009 people prefer to have more cities, or farms, or picturesque villages, or wilderness (but who likes wilderness? We haven’t had a romantic movement yet, and Thoreau hasn’t even been born)? Certainly we would leave them better off by exterminating dangerous and destructive animals like tigers and wolves.  And we are going a great service to future generations by spreading Christianity and civilization to the backward tribes of the world!

Clearly, it would be pretty hard for a well-meaning person in 1800 to do the right thing from our perspective.  Presumably, the future is also pretty hard for us to figure out.  Solow wisely notes this, then promptly ignores his own advice.

Most blatantly, he says that “control of population growth would probably be the best available policy on behalf of sustainability.”  If he is considering the average utility of the members of future generations then this is at least plausible, although I would not bet on it as the best policy to please weird future people.  But if he is considering the total utility of future people (as I think is proper), then then this is probably nonsense.  A future with 10 billion people will have more happiness than a future with 9 billion people unless those additional people push the world over into famine and resource exhaustion, which seems to me at least highly implausible.  And total utility is the right measure, because considering average utility leads to even more serious moral problems than utilitarianism generally; for instance, it implies that we should euthanize depressed people, or taken to its logical extreme we should euthanize everyone but the happiest person on earth.

But this is an isolated case of Solow being wrong.  Now for the more general theory of his wrongness.  He notes rightly that it is hard to know whether future generations would prefer for us to invest or to preserve the environment, since both are likely to benefit them.   The problem is that he then asserts that both should be categorically superior to present consumption, which can only benefit the current generation.

This disdain for current consumption is at best an oversimplification.  First, we need to distinguish the consumption of non-renewable resources from all other consumption.  In general, this is the consumption that actually makes future generations worse off (by eliminating resources they could have used), and Solow’s idea to count it is a good one (we could subtract the consumption of nonrenewable resources from total GDP to get a measure of “sustainable GDP”, just as economists have sometimes tried to separate out GDP generated from the depreciation of the capital stock).  In some special cases, of course, this consumption could still benefit future generations: the technologies developed for mining are applied more generally, or if today’s resource becomes tomorrow’s nuisance (invasive species?), or if the byproducts of consumption are actually beneficial (say, if future people like a warmer earth then they would appreciate that our consumption lead to CO2 emissions [there is probably a better example of this idea]).

But most consumption does not involve (at least directly) the use of nonrenewable resources.  If I consume a lot of perishable, rival goods like corn or trees, people in the future could simply grow more.  This sort of consumption is something people in 100 years would, in most cases view neutrally.

Most interestingly, there is the consumption of non-rival goods.  Will people in 100 years be worse off because I read too many books, or watched too many movies, saw too many plays, listened to too many concerts?  Not at all.  In fact, to the extent that such consumption encourages the creation and preservation of such non-rival, not-very-perishable goods, it actually benefits future generations! Again of course there are exceptions, many people in the 20th century would have been better off if Lenin et al hadn’t bought Karl Marx’s books, and it is hard to imagine much current music being of any benefit to future generations.  But in general the consumption of art and writing can be of great benefit to future generations.

Back to the general theory.  Think of someone living in Athens in the golden age of Greece.  What could they do to be of most benefit to future generations?  Solow suggests that we would value their environmental protection and their investment.  Well, I certainly don’t mind that they invested; I’m sure they enjoyed operating capital-intensive olive oil businesses.  I suppose it is good that they protected their environment, though I might enjoy Greece more if they had turned more non-renewable marble into buildings and statues.  But what I, weird future-person, value most from average ancient Greeks is their consumption- the fact that there was a market for Plato’s dialogues, Aristophanes’ plays, and Herodotus’ histories.  This same applies to Renaissance patrons of the arts, classical concert-goers, the book-buying public of the Enlightenment and the modern era.

In a way, I suppose this blind spot for the incredible power of ideas, information, and other non-rival goods should be expected from Solow, whose namesake growth model sees technology as exogenous!  But given that the development of ideas and technology really does depend partly on the knowledge that people will pay to consume them, I am glad that people in the past undertook that consumption and left us with the treasure trove of ideas we have.

In Bob Solow’s 1993 “Economist’s Perspective on Sustainability“, it survives as a “necessarily vague, but useful” idea.  He notes that sustainability has been conflated with other moral ideas about environmental protection, but that sustainability itself does not necessarily mean preserving species or wilderness.  Instead it is about “distributional equity” between the present and the future.  This means that we should be comparing general standards of living- how much are we better off because we make future generations worse off- rather than only the status of the environment.

To Solow, this means that future generations will value our investments as well as our preservation of resources, so they would not necessarily want us to preserve resources at the expense of investment; but he does say that both investment and resource preservation should be preferable to consumption.

His best idea is to clarify all this by looking at the sustainability of past generations.  We are talking about doing well by future generations, but to past people we are one of those future generations!  Are we happy with how sustainable our predecessors’ economy was?

Well, they killed off the dodos and mammoths, used up most of the oil in the continental US, and left a lot of toxic chemicals lying around; so in the purely environmental sense, they did not do very well.  But in a broader sense, they did fine by us; in fact, I think we got the much better end of the deal.  We have a vastly higher standard of living than people did 50 or 100 or 10000 years ago; inter-temporal distributional equity would actually entail more past environmental degradation insofar as it allowed our very poor ancestors a higher standard of living.

This same logic implies that we should worry less about developing countries like China raising their living standards though industrial pollution, since future Chinese people (as well as current and future moralizing Westerners) will have better living standards even after resource degradation and pollution has been accounted for.

Certainly, I am happy that past generations built Philadelphia rather than leaving forests, built Paris rather than leaving plains, built Boston rather than leaving us swamps to enjoy.  I would like to have mammoths around to look at in zoos (or hunt?!!), but I am sure that prehistoric hunter-gatherers got a lot more enjoyment from not starving than I would from having a better zoo.

Perhaps there is some inherent moral value to not polluting, or to preserving wilderness, or (most plausibly) to not causing species to go extinct.  But this is a different thing than sustainability for the sake of future generations of humans; it is instead about valuing other species, or the environment generally, inherently and for their own sake.  Which is another discussion entirely!

Through all this I am on board with Solow.  In my next post, I will show how Solow gets things a bit wrong through oversimplification.

After the American Revolution, democracy was the new thing that all the cool Americans were doing.

In the 1960′s and 70′s, a large youth cohort and a constitutional amendment lowering the voting age brought down the age of the median political participant.  Political policies and styles became more in tune with the youngest generation which is the eternal font of cool.

Now the youth cohort is small but technology is multiplying their influence.

Two recent examples deal with symbolic bills rather than policy but demonstrate this so perfectly.

First, the Oklahoma State Legislature decided to choose the Official Rock Song of Oklahoma using an internet poll.  In an upset over many classics and many songs that had more to do with the state, the winner was the Flaming Lips’ “Do You Realize” (which can be found on the video page of the band’s website).

Second, the creators of the gaming webcomic Penny Arcade just got commended by the Washington State Legislature.

This officially ushers in the age of hip techno-democracy!

David Brooks’ NYT column introduces a useful framework for evaluating the stimulus and economic policy.  In the short term this a welcome exhortation for less grandiose plans.  In the medium term, the stimulus and bailout packages will provide an excellent test for the potential of government planning.  I hope people will look back two and five years from now at our current economic policies using the lenses provided in the column.  An except:

President Obama has concentrated enormous power on a few aides in the West Wing of the White House. These aides are unrolling a rapid string of plans: to create three million jobs, to redesign the health care system, to save the auto industry, to revive the housing industry, to reinvent the energy sector, to revitalize the banks, to reform the schools — and to do it all while cutting the deficit in half.

If ever this kind of domestic revolution were possible, this is the time and these are the people to do it. The crisis demands a large response. The people around Obama are smart and sober. Their plans are bold but seem supple and chastened by a realistic sensibility.

Yet they set off my Burkean alarm bells. I fear that in trying to do everything at once, they will do nothing well. I fear that we have a group of people who haven’t even learned to use their new phone system trying to redesign half the U.S. economy.

We can all think of specific times when a political party has shot themselves and their base in the foot.  In fact, the last eight years may have been one of these times.

If we believe what most say, that power corrupts, then any party long in power will get old and corrupt.  There is no one party, or set of ideas, which can govern well indefinitely; that is not how human nature works.  They must eventually be replaced by new people and new ideas.  In traditional political systems this could be accomplished through royal marriage to outsiders, or weak regimes being conquered, or revolution.  In a liberal democracy, the new regime can be voted in.

There will always be new political challenges that call for new leadership.  But there are also old challenges that emerge anew.  Some problems may move in a cyclical manner.  I posit that inequality is one of these.

For many voters (though not myself), relative equality is an important consideration; even if no one is starving, it is wrong or obscene for a CEO to make 400 times the pay of his company’s janitor.

In a place where inequality is greater, these voters are more likely to support policies which reduce inequality; where inequality is less of a problem, voters will not support redistributionist policies so strongly.  As these policies take effect, they will change the political reality and bring about the end of the economic reality which gave them political life.

Suppose one party, lets call them Republicans, became associated with policies which brought inequality, while another party, call them Democrats, became associated with redistributionalist policies to reduce inequality.  These parties, if strongly associated with these policies, could become tied up in the back-and-forth political cycle of equality.  So if Republican tax policies over the past 8 years increased inequality in America, then Republicans faced a more hostile political environment of their own creation.

David Frum in the New York Times from puts forward a similar thesis from an explicitly conservative perspective and with loads of anecdotal evidence.  This theory deserves further investigation using rigorous statistical analysis, comparing data on inequality at the most local level available with election results at static points in time, and how changes in inequality over an election cycle or over longer periods affects results.

You’ve got to read P.J. O’Rourke’s essay in the Weekly Standard, “We Blew It”.  The whole conservative and Republican establishments are trying to figure out what went wrong and what to do next; this is one of the best attempts at the former.

Excerpts:

“It took a Democratic majority in the House of Representatives 40 years–from 1954 to 1994–to get that corrupt and arrogant. And we managed it in just 12“

“Conservatives should never say to voters, “We can lower your taxes.” Conservatives should say to voters, “You can raise spending. You, the electorate, can, if you choose, have an infinite number of elaborate and expensive government programs. But we, the government, will have to pay for those programs. We have three ways to pay.

“We can inflate the currency, destroying your ability to plan for the future, wrecking the nation’s culture of thrift and common sense, and giving free rein to scallywags to borrow money for worthless scams and pay it back 10 cents on the dollar.

“We can raise taxes. If the taxes are levied across the board, money will be taken from everyone’s pocket, the economy will stagnate, and the poorest and least advantaged will be harmed the most. If the taxes are levied only on the wealthy, money will be taken from wealthy people’s pockets, hampering their capacity to make loans and investments, the economy will stagnate, and the poorest and the least advantaged will be harmed the most.

“And we can borrow, building up a massive national debt. This will cause all of the above things to happen plus it will fund Red Chinese nuclear submarines that will be popping up in San Francisco Bay to get some decent Szechwan take-out.”

Yes, this would make for longer and less pithy stump speeches. But we’d be showing ourselves to be men and women of principle. It might cost us, short-term. We might get knocked down for not whoring after bioenergy votes in the Iowa caucuses. But at least we wouldn’t land on our scruples. And we could get up again with dignity intact, dust ourselves off, and take another punch at the liberal bully-boys who want to snatch the citizenry’s freedom and tuck that freedom, like a trophy feather, into the hatbands of their greasy political bowlers.”