Pursuit of Truthiness

my gut tells me I know economics

Archive for the ‘Overarching Historical Pronouncements’ Category

Stop Feeding the Trolls

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So many of the problems of this decade could be fixed by people learning not to feed the trolls.
Most obviously, internet comment sections would only be half as terrible as they are now.
Donald Trump wouldn’t have got the nomination without the huge amount of free airtime from news channels covering his latest outrageous statement.

Growing political polarization is partly due to how the straw man / weak man fallacy is amplified by trolls. Many actual news stories are about the outrageous thing some random Twitter egg on the other side said.
Terrorism would be cut in half if shooting a bunch of innocent people weren’t the quickest way to get famous.
….
I just wish there were an easy way to fix this without censorship. The necessary culture change sounds incredibly difficult, but I hope that with time we will learn how to adapt to social media and 24 hour news.

For a start, I plan to never do terrorists’ jobs for them by sharing stories of their terror. I encourage my friends to do likewise.

Written by James Bailey

July 22, 2016 at 3:12 pm

Give me a lever long enough and a place to stand, and I will move the world

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G.K. Chesterton was a mad genius, a bullet-biting Archimedes. From his What’s Wrong with the World, in response to doctors wanting poor childrens’ hair cut short to prevent lice:

Now the whole parable and purpose of these last pages, and indeed of all these pages, is this: to assert that we must instantly begin all over again, and begin at the other end. I begin with a little girl’s hair. That I know is a good thing at any rate. Whatever else is evil, the pride of a good mother in the beauty of her daughter is good. It is one of those adamantine tendernesses which are the touchstones of every age and race. If other things are against it, other things must go down. If landlords and laws and sciences are against it, landlords and laws and sciences must go down. With the red hair of one she-urchin in the gutter I will set fire to all modern civilization. Because a girl should have long hair, she should have clean hair; because she should have clean hair, she should not have an unclean home: because she should not have an unclean home, she should have a free and leisured mother; because she should have a free mother, she should not have an usurious landlord; because there should not be an usurious landlord, there should be a redistribution of property; because there should be a redistribution of property, there shall be a revolution. That little urchin with the gold-red hair, whom I have just watched toddling past my house, she shall not be lopped and lamed and altered; her hair shall not be cut short like a convict’s; no, all the kingdoms of the earth shall be hacked about and mutilated to suit her. She is the human and sacred image; all around her the social fabric shall sway and split and fall; the pillars of society shall be shaken, and the roofs of ages come rushing down, and not one hair of her head shall be harmed.

Written by James Bailey

January 20, 2015 at 3:38 pm

Escape from Capital

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The composition of this book has been for the author a long struggle of escape, and so must the reading of it be for most readers if the authors assault upon them is to be successful,a struggle of escape from habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds. -John Maynard Keynes

The first economic model of growth came from David Ricardo. He thought that capital accumulation was they key to growth, capitalists were heroes, and landlords were villains who would eat into the profits capitalists needed to finance economic growth.

Marx made people think of capitalists as villains, but he was even more obsessed than other economists with the importance of capital for long-run economic growth; he just thought it was too important to be owned by capitalists alone. Capital was the name of his magnum opus and his constant focus.

In the 20th century, economists have discussed many other factors that determine economic growth: institutions, culture, entrepreneurship, human capital, technology. But the old obsession with physical capital has remained.

Joseph Schumpeter introduced the idea of creative destruction, the importance of innovation and entrepreneurs. But at the end of the day, he thought that communism would win out over capitalism because it would accumulate more capital and communist countries would out-grow capitalists. He loved the freedom of capitalism, but thought that communist countries forcing investment in physical capital would prosper more.

Robert Solow created a new model of economic growth, and his empirical tests of the model showed that the vast majority of differences in economic growth across countries could not be explained by differences in physical capital. Instead, we should focus on the Solow residual- the other things like technology that influence the productivity of labor. But Paul Samuelson, friend and colleague of Solow and arguably the greatest economist of the 20th century, still couldn’t shake the old focus on physical capital- his bestselling textbook kept predicting that forced capital accumulation would lead communist countries to surpass capitalist right up until the breakup of the Soviet Union.

New work continues to show the importance for growth of factors other than physical capital- Paul Romer on innovation, Acemoglu and Robinson and Douglas North on institutions, McCloskey on culture. Yet somehow, economists cannot escape from a focus on physical capital. Perhaps it is this, not modeling, that is the true Ricardian vice.

Written by James Bailey

December 9, 2014 at 1:31 pm

States Rights: Learning How to Lose

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I’ve been reading some of the Anti-federalst papers and was pretty quickly convinced that sticking with the Articles of Confederation would have led to better outcomes on most issues. Of course, it would probably have led to a worse outcome on one really big issue: slavery.

Race seems to have always been the bane of states rights in the US. Southern states seeking to protect slavery and Jim Crow ultimately led to major gains in federal power in general, and a major loss in credibility to “states rights”. Even if the Southern states weren’t willing to do the right thing on moral grounds, it seems they should have let this one pass simply on pragmatic grounds.

Look at how the power of the Supreme Court has grown over the past 226 years even as the power of states relative to the Federal government has faded. How has the Court accomplished this? Largely by learning when to lose. They have consistently preserved and enlarged their power over the long run by being willing to lose one today. This is how they established judicial review, fought off court-packing, and maintain a good deal of independence from Congress and the President today.’

Conversely, states fought to the death on slavery and lost much of their power, then fought hard to preserve Jim Crow and lost much remaining credibility. It will take a long time to restore the power of arguments for states rights. I hope that the recent history of state versus federal legislation on gay marriage, marijuana, and health insurance has begun to convince liberals that states rights are not so bad after all.

What Do Markets Predict About Obama’s Second Term?

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While I saw this a Coke vs Pepsi election with no real differences between candidates, it seems that markets do expect some difference. If you believe the Efficient Markets Hypothesis (which I mostly do), then markets will reflect the best guess that can be made about the future by taking all publicly available information into account.

According to prediction markets, there was a 70-80% chance that Obama would win as of Tuesday afternoon; by Wednesday morning after the election this was 100%. So we can try to attribute any change from Tuesday to Wednesday as representing the effect of a ~25% increase in the probability of an Obama presidency. Multiply the effect by 4 to get the total difference between an Obama presidency and a Romney one. (If you believe the prediction markets. I am still kicking myself for not funding accounts in time to arbitrage between them)

The most obvious reaction has been that the US stock market declined about 1.5% from close on Tuesday to opening on Wednesday. This means people think stocks will be about 1.5*4=6% less valuable during an Obama presidency. It is unclear to what extent this should be interpreted as the economy generally doing 6% worse, as opposed to stocks alone being a worse investment as taxes on capital gains and dividends increase / fail to decrease.

Treasury bond yields decreased slightly, meaning that markets think the government is less likely to default under Obama, or alternative assets will perform worse, or both. I’m not used to calculating the TIPS spread, but it looks like nominal 5 year treasury yields decreased by 4 points more than real yields, meaning a 0.04 percentage point decrease in inflation expectations (meaning overall inflation would have been 0.16% higher under Romney? Perhaps people expected him to appoint Mankiw as Fed chair). On the other hand, gold prices increased ~0.5%. No big differences here.

The biggest difference, and in my opinion the best news, seems to be on foreign policy. Intrade has a prediction market on whether Israel or the US will make an overt airstrike on Iran by the end of next year. This declined from 49% to 37% as the election news came in, suggesting the chance of this happening would have been 4*12+49=97% had Romney won. The chance that China will take overt military action against Taiwan also declined from 10% to 3% on Intrade. These markets are thin enough that I don’t claim they are definitely right, but it is still good to see the chance of war declining.

Comparing the changes in these various markets gives a clear demonstration of what economists have often said– the US President has very little influence over the economy, but quite a bit of influence on foreign policy.

Written by James Bailey

November 12, 2012 at 7:42 pm

Paging All Vegetarian Supervillians

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It’s hard to convince people to stop eating meat by making them guilty for doing so (sure hasn’t worked on me yet). It would be a lot easier if instead they felt horrific physical illness after eating meat. It turns out this is a real possibility: tick-induced meat allergy is totally a thing. Just breed the little buggers and release them en masse in major cities. Its about the only way I can imagine, short of the invention of delicious super-cheap vat-grown “meat”, that most people will stop eating animals.

Written by James Bailey

September 28, 2012 at 7:38 pm

A Naive Economist Analyzes Climate Data

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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.

Written by James Bailey

April 23, 2011 at 12:00 am