Pursuit of Truthiness

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Archive for February 2012

What is Macroeconomics?

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Studying for the comprehensive exam in economics meant wading through a lot of difficult math that still vastly oversimplifies things. It is enough to make anyone wonder, what is the point of it all? This post is my attempt to explain what the point is.  There are a lot of different ways to carve up what a field is, so I will make a brief attempt at several.

End Goal: Most simply, macroeconomics is the study of how to make national economies work well, meaning how to bring about material conditions that make people in general happier.

Intermediate Goals: high GDP growth (more stuff), low unemployment (people who want jobs can get them), and stable prices (a monetary system that facilitates trade). All else equal, these things tend to make people happier, and they are a lot easier to measure than happiness.

Time Frame: We find it useful to divide the field of macroeconomics into growth (long-run) and business cycles (short run), because we think there is little overlap between the best ways to increase long-run growth and the best ways to prevent or reverse sharp declines (recessions). Denying that difference is sometimes seen as denying macroeconomics.

Conclusions: Keynesians think the best way to end recessions is with fiscal policy (government lowering taxes and/or increasing spending).  Monetarists thought we could prevent recessions and high inflation by stabilizing the growth of the money supply; market monetarists now think we can accomplish these goals by stabilizing the expected growth of nominal GDP.  New Classicals think the government can’t really do anything to end recessions.  One can divide macro into many more schools based on such policy conclusions.

History: Recessions in the modern sense (where we have an industrial economy able to recess) begin happening in the early 1800’s, so people begin trying to explain them.  Some like are JS Mill are “under-consumptionists”, saying the economy gets so productive we have trouble consuming all the production or finding useful work for people to do.  Jevons comes up with a sunspot theory, that every 10 years or so sunspots will change the earth’s weather and reduce the productivity of agriculture. A growing thread focuses on the importance of interest rates and money.  The biggest recession of all hit in 1929, leading to the perception that macroeconomics is its own separate crucial field. Governments and public opinion seem to prefer economists who tell them to do something rather than nothing. I can go on with history for a long time, and I haven’t even discussed the history of growth theory, so that is enough for now.

Tools: Often it is not differing goals or conclusions that seperates people but rather the tools they use. Economics began with Adam Smith who was trained as a moral philosopher and whose main tools were eyes to examine the world and a pen to write verbal arguments. David Ricardo turned the profession toward abstract models, looking at a simplified and formalized world about which we can make stronger and more certain statements than we could about the real world in all its complexity. Alfred Marshall brought in graphs and algebra; Jevons and Walras brought calculus. Paul Samuelson showed that most questions in economics could be posed as constrained optimization problems using Lagrangians.  Later economists used the more complex optimization tools of Hamiltonians, dynamic programming and stochastic calculus. Another thread pioneered by Ken Arrow turned up the formalism another notch by using set theory and real analysis; after the 1950’s it is common to speak of theorems and proofs. At any given time some “institutional” or “historical” school is pushing back against the ever-increasing use of math.  Many fear that excess formalism limits the set of questions we think we can answer or even ask. The last great tools-war on the theoretical side is the debate over the use of Dynamic Stochastic General Equilibrium in the 1970’s and 80’s. It is said that many Keynesians objected because they thought the tool would inevitably lead to certain (small-government) conclusions, then stopped objection once it was shown that the tool could be used to support many different conclusions.

There has been a whole separate evolution of tools on the empirical side.  For one thing the quantity and variety of data and the capacity and power of computers has kept expanding. Alongside this has come the gradual development of modern statistics and econometrics.  The many-equation macro models developed in the 1950’s have mostly been displaced by Vector Autoregressions and calibration.

Analogous fields: We have physics envy. We may have succeeded in emulating string theory. The predominant modern paradigm of DSGE uses a mathematical advance to beautifully and elegantly unify of micro, growth, and business-cycle theory.  It also does a poor job of describing the real world.

Stylized facts: Are there any? See jokes.

Jokes: The three scariest words in the English language are “macroeconomists agree that”.  The difference between microeconomics and macroeconomics is that microeconomists are wrong about specific things, while macroeconomists are wrong about things in general.

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Written by James Bailey

February 16, 2012 at 9:23 pm

Current Paper Ideas

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Steve Levitt has said that he became a successful economist by coming up with a lot of ideas and quickly discarding the 98% that are bad.  Assuming 98% of my ideas are also bad, I should make sure to have at least 50 ideas to sort through to have a chance of a good one.  Here’s where I am now:

Insurer Mandate Research Program: How do mandates affect insurance prices and quantities? Knowing this, we can determine the price elasticity and the health benefits of health insurance.  Examine specific mandates to determine the elasticities and health benefits of specific procedures.  Determine optimal composition of the “essential health benefits package”.

Rational Lotteries: Determine how often there is a positive expected monetary value to playing the lottery after implicit marginal tax rates are taken into account.  Compare behavior with predictions of prospect theory.

Value of a Statistical Life: Calculate using insurance fraud

Fraud and the Business Cycle: Empirically test the hypothesis that fraud is a cause / leading indicator of recessions.

Elections and Inequality: Expand on my earlier paper about how inequality affects voting.

Size of Nations: What is the optimal size of a nation (empirically, which size maximizes various good outcomes like gdp), and is it decreasing over time as the world gets more peaceful?

How to Make Money: One of the many ironies of economics is that Homo Economicus would keep market anomalies to himself, while economists regularly publish their discoveries.  I will write a blog post of general ideas, but the low-hanging fruit here is perpetually disappearing.

Testing Hansonianism: Robin Hanson is always noting ways in which people care more about buying medicine than health.  One way to empirically investigate this is to see how much demand for hospitals is driven by high subjective evaluations verses objectively good health outcomes using different variations of hospital report cards.

CEO Pay:  Expand on a previous paper of mine that cast doubt on the highly-cited Gabaix and Landier  paper.

Alternative Currencies:  How much are money substitutes expanded in response to central bank tightness (as measured by some kind of Taylor rule).  Theory question- why do some money substitutes (alternative currencies) expand in response to tightness while others (credit) are reduced.

Drug Laws: What is the effect on poverty and other economic outcomes.

I Just Ran 3 Billion Regressions: Update Sala-i-Martin 2001 using another decade of data, and using a modern supercomputer to run the specification that Sala-i-Martin proposed but was unable to do with the computers of the time.

Data-Driven Investigation: All the above ideas basically start with an idea and look to data to test it.  But nowadays there are huge amounts of data being generated that have yet to really be investigated. So an alternative strategy is to be on the lookout for interesting-looking, unexamined datasets.

….not quite to fifty yet.  Perhaps I have lucked out and one of my ideas is actually decent.

Written by James Bailey

February 7, 2012 at 5:44 pm

Posted in dissertation, Economics