Worthwhile Canadian Initiative

A Public Policy Keltner List

In the 1985 edition of his Baseball Abstract, Bill James published his Keltner List, a series of 15 questions designed to evaluate a baseball player's worthiness for the Hall of Fame.

I have a similar, albeit shorter, list of questions I like to ask when analyzing public policy proposals.

Most viewed posts in 2011

This is to complement Frances' post on which WCI posts were most liked on Facebook. Here are the ten posts that received the most page views since January 1:

1. The mathematics generation gap
2. This is what a balance-sheet recession looks like, and it's not pretty
3. Dumb men commercials
4. US productivity exceptionalism
5. What's the best way to scale grades?
6. The behavioural economist's dilemma: induction versus deduction
7. A brief history of the federal budget surplus
8. Do Keynesians believe their own models?
9. I=S
10. Why New Keynesian economists are against labour unions

Frances and Nick - you might want to forward this to your dean.

Debt is too a burden on our children (unless you believe in Ricardian Equivalence)

So, I was out there shovelling snow, thinking about writing a post on the burden of the debt on future generations. And about how macroeconomists' beliefs on this question had silently shifted about 30 years ago, and about how we as a profession have engaged in a sort of "memory falsification" (like Timur Kuran's concept of "preference falsification"), because we didn't want to admit that we now believe something we used to believe only unsophisticated economically illiterate rubes believed.

And I then I thought "Nah, what's the point of rehashing old ground?. Nobody nowadays believes that old "we owe it to ourselves" stuff that we used to believe."

And then I came inside and read Paul Krugman's blog post. Now I absolutely have to write the post I had decided not to write.

"That’s not to say that high debt can’t cause problems — it certainly can. But these are problems of distribution and incentives, not the burden of debt as is commonly understood. And as Dean says, talking about leaving a burden to our children is especially nonsensical; what we are leaving behind is promises that some of our children will pay money to other children, which is a very different kettle of fish."

Sorry, but that's just plain wrong. The economically illiterate rube who thinks that the national debt is a burden on our children or grandchildren is basically right. It's the exact opposite of "especially nonsensical". Unless you believe in Ricardian Equivalence.

[Update: Paul Krugman has a second post.

"And you don’t have to be a right-winger to acknowledge that yes, very high marginal tax rates act as a disincentive to productive activity. So real GDP may well fall significantly.

This is what I mean when I say that the burden of debt is about incentives, not about having to deliver resources to other people.

......

The general point is that the analogy with a family that owes too much is all wrong. Unfortunately, this dumb analogy dominates our national discourse."

And I'm saying that it's not (just) about incentives, and it is about having to deliver resources to other people, and that the analogy with the family is not dumb and not all wrong (even though, like all analogies, it doesn't work perfectly).]

Most liked posts of 2011

What WCI readers liked on Facebook in 2011 (number of likes in parentheses):

The mathematics generation gap (205)

This is what a balance-sheet recession looks like, and it's not pretty (89)

No, we really don't want to reduce inequality (73)

Where will Canada's growth come from?

The consensus outlook for Canadian economic growth in 2012 is generally tepid, with the possibility of another international financial crisis tipping us into recession as it did in the fall of 2008.

After looking over the potential sources of growth, it's easy to see where this consensus came from. One of those data-intensive posts with lots of graphs is below the fold. I don't necessarily have a profound insight, but I think it's useful to look through the numbers in order to get a better idea of where we are and how we got here.

Does Christmas Really Create Deadweight Loss?

"I want a baby doll and a waterproof [coat] with a hood and a pair of gloves and a toffee apple and a gold penny and a silver sixpence and a long toffee." Annie Howard, Christmas 1911.

In 1993, Joe Waldfogel asked his undergraduates to estimate the total amount paid by the gift-givers for all of the holiday presents they had received that year. He then asked:

Apart from any sentimental value of the items, if you did not have them, how much would you be willing to pay to obtain them?

The answers to the second question were ten to 30 percent lower than the answers to the first, leading Waldfogel to conclude that Christmas destroys value, and creates a deadweight loss.

Books for budding economists

"Magrathea is a myth, a fairy story, it's what parents tell their kids about at night if they want them to grow up to be economists, it's..." Douglas Adams, Hitchhiker's Guide to the Galaxy.

What books should you give your children (nieces, nephews, friends) if you want them to grow up to become economists?

The Trade Cycle; why I=S is a bad place to start doing macro.

In the olden days, economists used to talk about the trade cycle. (They meant a cycle in the amount of all trade, not just international trade). They meant a cycle in the amount of exchange. There are fluctuations over time in the amount of buying and selling that people do. In a boom, trade speeds up; and in a recession, trade slows down.

I think we should resurrect that old term. Thinking about the trade cycle is a better way of thinking about short run macroeconomics than how we currently think about it. Nowadays we don't talk about fluctuations in trade; instead we talk about fluctuations in output. It's not the same thing. We are wrong; the old guys were right. Somewhere, maybe around the 1920's or 1930's (I wish I were better at history of thought) macroeconomics took a wrong turn.

This post is a follow-up to my previous post.

Pigou and Paternalism

Here is a question from the final exam for my public finance course:

A typical person’s demand for potato chips is given by p=5-q where q=the number of packages of chips purchased, and p is the price of chips in dollars per package. The marginal cost of producing potato chips is $1 per package. The potato chip market is competitive, so p=MC. Dr. Economides estimates that each package of potato chips consumed creates marginal damage of $0.50. 

1. Illustrate these facts with a diagram.
2. Define the phrase “Pigouvian tax”
3. Show how a Pigouvian tax could be used in this example to improve efficiency.
4. Calculate the revenue raised by the Pigouvian tax. Show on your diagram, and calculate, the efficiency gain created by the tax.
5. Opponents of the tax on potato chips take a careful look at Dr. Economides’ study. It turns out that the only people harmed by potato chip consumption are potato chip eaters themselves, as potato chip consumption is associated with bad skin, weight gain and depression. Does this strengthen or weaken the argument for taxing potato chips?

Solutions to parts 1 to 4 are here. The interesting part is question 5: if potato chips only harm potato chips eaters, does that strengthen or weaken the case for taxation? Vote here to express your opinion (only the first 200 answers will be counted).

Why Y? A disproof of Keynesian macroeconomics?

There's something really wrong with the way we do short run macroeconomics. We focus all our attention on the output of newly-produced goods and services. That's what we call "Y". We talk about Aggregate Demand and Aggregate Supply, and what we mean by AD and AS is the demand and supply of those same newly-produced goods and services.

Keynesians then go on to divide Y into C+I+G, and C+S+T. Monetarists talk about MV=PY. Both agree that a recession is a fall in Y, caused by a drop in demand for Y.

But a moment's reflection tells you this is wrong. It's not just new stuff that is harder to sell in a recession; it's old stuff too. New cars and old cars. New houses and old houses. New paintings and old paintings. New furniture and antique furniture. New machine tools and old machine tools. New land and old land.

Rendering More Unto Caesar

Given that the Christmas season is associated with giving, rendering unto Caesar is a suitable blog topic even if it is compulsory rather than voluntary giving. 

Why the distribution of reality is skewed and so newspapers are biased towards bad news

"News" is the difference between what happens and what you expected to happen. If you have rational, and hence unbiased, expectations, then the news, on average, should be neither good nor bad. The good news and the bad news should cancel out.

So why does the news that gets reported seem mostly bad news? Does bad news sell more newspapers than good news? Are newspapers biased?

Suppose reality is skewed. The distribution of the news has a zero mean by assumption, if our expectations are unbiased. But suppose the distribution has a long tail on the bad news side, and a short tail on the good news side. And suppose newspapers only report on big news, that's (say) one standard deviation or more away from the mean. Then most of the news reported would be bad news, because there are very few good news stories that are big enough to be worth reporting, just lots and lots of little good news events. "There were no serious accidents today on highway 401" never makes it into the newspapers.

But why should reality be skewed? That's the tricky question. But I think I can answer it.

Bryan Caplan and Joseph Stiglitz

OK, I've said that Joseph Stiglitz gets Aggregate Demand wrong. It's only fair that I say that Bryan Caplan gets AD wrong too, for much the same reason.

Where are you Mark, Paul, and Brad? Seriously, you're not allowed to do any posts criticising Bryan Caplan for this, until after you have said that Joe Stiglitz is wrong too! It's only fair!

But, curses, I have exams to mark. And I really shouldn't be spending the time to explain fully why Bryan is wrong, until after I've marked my exams.

The gizmo theory of the recession

I've just come up with a new theory of what caused the recent recession.

There was a technological improvement in making gizmos. The productivity of gizmo producers increased, so the price of gizmos fell. The demand for gizmos is price-inelastic. So total revenue from gizmo production fell. So incomes from producing gizmos fell.

SRAS/SRPC; levels vs rates of change

Something's been puzzling me about the data for the last couple of years. (This post isn't very clear, sorry. I can't even get my head clear enough to explain clearly what's unclear to me.)

There are two curves in short run macroeconomics: the AD curve, and the "other" curve. This post is not about the AD curve. It's about that other curve. The other curve is the one that tells us what happens when the AD curve shifts exogenously. The other curve tells us whether a shift in the AD curve will affect real variables or nominal variables or both. Theory tells us that the other curve should be close to vertical in the long run, when AD affects only nominal variables. I'm more interested in that other curve in the short run.

In particular, if we put the levels of real variables on the horizontal axis, what belongs on the vertical axis of the other curve? Is it levels, or rates of change? Is it the price level, or the inflation rate? Does it matter?

London, ON: Learning about Income Disparity

Apologies for the shameless self-promotion, but if you're in London, ON tomorrow (Tuesday), I'd like to invite you to a free symposium on income inequality.  I will be presenting along with Trish Hennessy of the Canadian Centre for Policy Alternatives and Michael Shapcott of the Wellesley Institute.

My talk - Income Inequality, a Tale of Four Countries examines what the United States and Canada can learn from Denmark and Sweden.  Needless to say I will be borrowing heavily from many of Stephen Gordon's pieces here at WCI.

What not to wear, economist edition

What should you wear for an academic job interview? Ariel Rubinstein suggests casual attire:

I would argue that wearing jeans and a t-shirt is your dominant strategy:

If you are a good student, then a department that will not give you a job because of your "sloppy" appearance does not deserve to have you.

If you are mediocre, then there are many other candidates like you and dressing casually is the only way for you to get noticed.

Shakespeare, speaking through the character of Polonius, suggests buying the most expensive clothes you can afford: 

Costly thy habit as thy purse can buy,
But not express’d in fancy; rich, not gaudy:
For the apparel oft proclaims the man;

These two pieces of fashion advice are not as diametrically opposed as they might seem. Both recognize that clothes act as signals. The question "what not to wear?" is asking what should, or shouldn't, a person be signalling.

Italian Public Finance

It is odd how ideas, thought and reading evolve over the course of a day.  I started off early this morning reading Nick Rowe’s post on structural deficits in the Eurozone and assorted news stories on the European crisis.  I then began working in my office and while shuffling  a few books on my desk came across my copy of First Principles of Public Finance (1936) by Antonio De Viti De Marco.  The book was given to me a number of years ago by Norman Bonsor at Lakehead when he retired and I had started reading it several weeks ago given that I was looking for something different as I began preparing for next term’s intro lecture for my public finance course.  De Marco was part of the “Italian school” and had a focus on institutions and political economy that made him (and I suppose the Italian School) a precursor to public choice.  As Europe struggles with its fiscal crisis and trying to rein in deficits, it may be instructive to consider a few passages from De Marco’s First Principles to gain some perspective on the European fiscal mind. 

What is a (Eurozone) "structural deficit", again?

I don't have much to say about the latest EU "agreement" that hasn't already been said. To me, it looks just like the old "stability and growth pact" warmed over, and with a bunch of judges having to approve budgets. (Does this mean we are going to leave fiscal policy to the lawyers? Do they teach it in law school?)

But there's something other commenters have, I think, missed. The agreement says that countries can't have a structural deficit bigger than 0.5% of GDP. What exactly is a "structural deficit"? What does it mean? How do we measure it?

Read my old post, where I answered part of this question two years ago. Then let's continue from there.

Some identification problems in the debate on taxing top earners

Two recent papers on top-earner taxation have made an important contribution to the policy debate on the topic, but it seems to me that we still have some way to go before we have an understanding of the phenomenon that is robust enough to use as a basis for policy.