Category Archives: Political economy

Are economists evil?

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This is Paul Krugman in the New York Times Magazine (september 6, 2009):

How Did Economists Get It So Wrong?

I. MISTAKING BEAUTY FOR TRUTH

It’s hard to believe now, but not long ago economists were congratulating themselves over the success of their field. Those successes — or so they believed — were both theoretical and practical, leading to a golden era for the profession. On the theoretical side, they thought that they had resolved their internal disputes. Thus, in a 2008 paper titled “The State of Macro” (that is, macroeconomics, the study of big-picture issues like recessions), Olivier Blanchard of M.I.T., now the chief economist at the International Monetary Fund, declared that “the state of macro is good.” The battles of yesteryear, he said, were over, and there had been a “broad convergence of vision.” And in the real world, economists believed they had things under control: the “central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago in his 2003 presidential address to the American Economic Association. In 2004, Ben Bernanke, a former Princeton professor who is now the chairman of the Federal Reserve Board, celebrated the Great Moderation in economic performance over the previous two decades, which he attributed in part to improved economic policy making.

Last year, everything came apart.

Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right. There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.

And in the wake of the crisis, the fault lines in the economics profession have yawned wider than ever. Lucas says the Obama administration’s stimulus plans are “schlock economics,” and his Chicago colleague John Cochrane says they’re based on discredited “fairy tales.” In response, Brad DeLong of the University of California, Berkeley, writes of the “intellectual collapse” of the Chicago School, and I myself have written that comments from Chicago economists are the product of a Dark Age of macroeconomics in which hard-won knowledge has been forgotten.

What happened to the economics profession? And where does it go from here?

You can read the whole thing here.   These are other viewpoints on the same question:

A quick and perhaps defensive reaction: and are there any non-economists who got it right?  Did any politician/historian/philospher got it right? Who should we turn now for financial and economic advice? In my view, if this debate boils down to reloaded Keynesians vs. neo-neoclassicals, it seems like the economics profession remains mostly unchallenged (for better or worse).

Toronto / APSA 2009

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This weekend I will be attending the American Political Science Association Annual Conference, in Toronto, 3-6 September 2009. These are the abstracts of the papers that we will deliver.

The Political Economy of Collective Remittances: The Mexican 3×1 Program for Migrants

Javier Aparicio and Covadonga Meseguer

 Abstract.  The 3×1 Program for Migrants (Programa 3×1 para migrantes) is a matching grant scheme that seeks to direct the money sent by migrant organizations abroad to the provision of public and social infrastructure, and to productive projects in migrants’ communities of origin. To do so, the municipal, state, and federal governments match the amount sent by hometown associations at a 3 to 1 rate. We explore the types of projects awarded to assess whether the program is subject to political manipulation. Following the literature on redistributive politics, we posit that an increase in competition in municipal races may lead to more private (or clientelistic) projects awarded, relative to public infrastructure ones. Using data on the 3×1 Program for Migrants for over 2,400 municipalities in the 2002 to 2007 period, we find that municipalities with a higher effective number of political parties are associated with a lower provision of public goods funded by the 3×1 program. These results cast doubts about the program efficacy in promoting public welfare in politically competitive locations with high migration levels.

 

Committee Leadership Selection without Seniority: The Mexican Case

Javier Aparicio and Joy Langston

Abstract. How are committee leaders in legislatures chosen absent seniority norms?  This paper argues that the prior political experience of legislators can serve as cues to caucus leaders to reduce adverse selection in a legislature where seniority cannot be the basis of allocating committee leadership posts because of single term limits. We assess whether differences in background and expertise have any effect on the likelihood of leading major, issue, or duty panels in the Mexican Chamber of Deputies elected between 1997 and 2006. Using a dataset of 1,391 federal deputies, we estimate the effect of the level (federal, state or local) and type (legislative, bureaucratic or party) of their prior expertise on committee leadership. Using Bayesian multinomial logit models, we find that well educated legislators with bureaucratic expertise are more likely to lead a major committee than those with prior legislative or other national level expertise. We find mixed evidence for so-called state governor loyalists.

Who pays for health care?

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Very basic ideas that journalists, pundits and politicians often misunderstand…  There is no free lunch because: 1. Everybody is a consumer.  2. Sooner or later, consumers pay for “everything”.

Who Really Pays for Health Care?: The Myth of “Shared Responsibility”
Ezekiel J. Emanuel, MD, PhD (Department of Bioethics, Clinical Center, National Institutes of Health); Victor R. Fuchs, PhD (Department of Economics, Stanford University). 
Journal of the American Medical Association. 2008; vol. 299: 1057-1059.

When asked who pays for health care in the United States, the usual answer is “employers, government, and individuals.” Most Americans believe that employers pay the bulk of workers’ premiums and that governments pay for Medicare, Medicaid, the State Children’sHealth Insurance Program (SCHIP), and other programs.

However, this is incorrect. Employers do not bear the cost of employment-based insurance; workers and households pay for health insurance through lower wages and higher prices. Moreover, government has no source of funds other than taxes or borrowing to pay for health care.

Failure to understand that individuals and households actually foot the entire health care bill perpetuates the idea that people can get great health benefits paid for by someone else. It leads to perverse and counterproductive ideas regarding health care reform.

This argument is also true in Mexico where the quality of IMSS/ISSSTE is so low that some employers resort to secondary or additional health care insurance from private providers.  If an employee ends up paying both the  public and private insurance premiums, the distortion on labor markets is even larger.  This is because public insurance (IMSS or ISSSTE fees) is mandatory in formal jobs: an employee cannot opt out of it if she chooses a secondary private option.

Special interests unite!

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OpenSecrets.Org, also known as the Center for Responsive Politics, keeps track of the largest contributors to both the Republican or Democratic party.  These are the top 20 donors between 1989 and 2008.  Do note that this period includes Bush I and II, B illClinton as well as Obama’s election cycles.  The website includes lots of details by election year as well as by company. 

What I find remarkable is that the list is dominated by unions in this period.  Consider this the next time you hear claims that US democracy is captured by evil “corporate interests”.  Corporations, such as AT&T and Citibank, actually give as much to one party as the other, ie, they hedge their bets.  Unions, on the other hand, are lopsided toward the Democratic party. 

More details here.

 

1

 ORGANIZATION

AT&T Inc

 Total

$43,501,240

 %Dem

44%

 %Rep

55%

  
2 American Fedn of State, County & Municipal Employees $40,965,173 98% 1%   
3 National Assn of Realtors $35,179,013 48% 51%  
4 Goldman Sachs $31,183,662 64% 35%  
5 Intl Brotherhood of Electrical Workers $30,920,696 97% 2%   
6 American Assn for Justice $30,734,429 90% 9%   
7 National Education Assn $29,908,625 92% 6%   
8 Laborers Union $28,201,600 92% 7%   
9 Service Employees International Union $27,510,257 95% 3%   
10 Teamsters Union $27,402,304 92% 6%   
11 Carpenters & Joiners Union $27,368,258 89% 10%  
12 Communications Workers of America $26,748,746 99% 0%   
13 Citigroup Inc $26,562,905 50% 49%  
14 American Medical Assn $26,213,449 39% 60%  
15 American Federation of Teachers $25,996,071 98% 0%   
16 United Auto Workers $25,767,002 98% 0%   
17 Machinists & Aerospace Workers Union $24,793,477 98% 0%   
18 National Auto Dealers Assn $24,048,808 31% 68%  
19 Altria Group $23,869,891 28% 71%  
20 United Food & Commercial Workers Union $23,742,074 98% 1%   

Big pharma

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This is from Robert Reich blog:

I’m a strong supporter of universal health insurance, and a fan of the Obama administration. But I’m appalled by the deal the White House has made with the pharmaceutical industry’s lobbying arm to buy their support (…) Sunday’s New York Times reports that Big Pharma has budgeted $150 million for TV ads promoting universal health insurance, starting this August (that’s more money than John McCain spent on TV advertising in last year’s presidential campaign), after having already spent a bundle through advocacy groups like Healthy Economies Now and Families USA.

No, this not a Republican/Fox News kind of source.  Reich was secretary of labor under President Bill Clinton. He also served on President-Elect Obama’s transition advisory board…  IMHO, this proves that not all Democrats are on board with Obama–and that special interest politics is alive and well in the USA.

Statistics are sexy!

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This is from The New York Times (August 6, 2009):

For Today’s Graduate, Just One Word: Statistics

MOUNTAIN VIEW, Calif. — At Harvard, Carrie Grimes majored in anthropology and archaeology and ventured to places like Honduras, where she studied Mayan settlement patterns by mapping where artifacts were found. But she was drawn to what she calls “all the computer and math stuff” that was part of the job.

“People think of field archaeology as Indiana Jones, but much of what you really do is data analysis,” she said. Now Ms. Grimes does a different kind of digging. She works at Google, where she uses statistical analysis of mounds of data to come up with ways to improve its search engine. Ms. Grimes is an Internet-age statistician, one of many who are changing the image of the profession as a place for dronish number nerds. They are finding themselves increasingly in demand — and even cool.

“I keep saying that the sexy job in the next 10 years will be statisticians,” said Hal Varian, chief economist at Google. “And I’m not kidding.”

The rising stature of statisticians, who can earn $125,000 at top companies in their first year after getting a doctorate, is a byproduct of the recent explosion of digital data. In field after field, computing and the Web are creating new realms of data to explore — sensor signals, surveillance tapes, social network chatter, public records and more. And the digital data surge only promises to accelerate, rising fivefold by 2012, according to a projection by IDC, a research firm.”

Also related, a blog confession by Peter R. Orszag, director of the Office of Management and Budget:

The President has made it very clear that policy decisions should be driven by evidence – accentuating the role of Federal statistics as a resource for policymakers.  Robust, unbiased data are the first step toward addressing our long-term economic needs and key policy priorities.

In my speech this morning, I noted two particular areas where more and better data would be useful: health care and education.  In health care, bending the curve on cost growth will require more information about how we’re spending our health dollars, the health outcomes we’re producing, and how specific interventions rank against alternative treatments.  In education, better longitudinal data on the progress of individual students, which can be linked to specific programs and teachers, will go a long way to helping us understand what works better – and what doesn’t — and as a result, where to target scarce resources to bolster student achievement.

Beware overconfident advice

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An excellent post from Orgtheory.net:

From The New Scientist, some research showing that people prefer cockiness to expertise:

The research, by Don Moore of Carnegie Mellon University in Pittsburgh, Pennsylvania, shows that we prefer advice from a confident source, even to the point that we are willing to forgive a poor track record. Moore argues that in competitive situations, this can drive those offering advice to increasingly exaggerate how sure they are.

But this is pretty dangerous! Orgtheory.net also reminds us of:

(…)a famous paper by Kruger and Sunning showed, people who are bad at what they do are generally also incapable of understanding that they suck — and this directly contributes to inflated self-perception. So, incompetence tends to make people cocky and people prefer cocky judgements over demonstrated expertise, which is pretty much the worst of both worlds.

And this is Krueger and Sunning famous paper:

Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments.

Justin Kruger and David Dunning / Cornell University

People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overestimated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacognitive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of participants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities.

Impossible accountability?

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Economists like to use phrases like: “sure, poverty and unemployment are on the rise (or whatever) but things would have been even worse if POLICY X had not been implemented.” Conversely, political scientists use phrases like: “sure, with the recession the incumbent party was set to lose seats but they would have lost many more seats if CAMPAIGN X had not been implemented.”

You guessed it: these counter-factuals are never observed–academics and experts just estimate these counterfactuals with a little help from theories and statistical methods.  But what if the estimated counterfactuals are really off the mark? In real-world policymaking, this makes accountability an almost impossible task…

Greg Mankiw tackles this very issue here.

Miedo a las encuestas

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 De vez en cuando se escuchan argumentos en contra del levantamiento y difusión de encuestas debido a la “influencia desmedida” que pueden tener en el electorado, en la estrategia de los candidatos y otros actores.  Nuestro propio COFIPE prohibe la difusión de encuestas en los días previos a la elección.  En lo personal, me parece muy extraño el “temor a la información” que las encuestas (ya sean electorales, sobre políticas públicas, popularidad presidencial, etc.) despiertan en algunos periodistas y analistas de diverso calibre.

He aquí un debate sobre este tema entre Conor Clarke (The Atlantic) y John Sides (The Monkey Cage):

1. Conor Clarke’s proposal to “get rid of polls” in The Atlantic Monthly.

2. John Sides replies in The Monkey Cage: “Should We Get Rid of Polls?”

3. Counter-reply by Conor Clarke: Why Do We Care About Polls?

4. Counter-reply by John Sides:  “Why Should We Have Polls?”

…I say the Monkey Cage wins against the “no information” argument…

Mind wandering

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Stop Paying Attention: Zoning Out Is a Crucial Mental State

“(…) mind wandering is not useless mental static. Instead, Schooler proposes, mind wandering allows us to work through some important thinking. Our brains process information to reach goals, but some of those goals are immediate while others are distant. Somehow we have evolved a way to switch between handling the here and now and contemplating long-term objectives. It may be no coincidence that most of the thoughts that people have during mind wandering have to do with the future.

Even more telling is the discovery that zoning out may be the most fruitful type of mind wandering. In their fMRI study, Schooler and his colleagues found that the default network and executive control systems are even more active during zoning out than they are during the less extreme mind wandering with awareness. When we are no longer even aware that our minds are wandering, we may be able to think most deeply about the big picture.

Because a fair amount of mind wandering happens without our ever noticing, the solutions it lets us reach may come as a surprise. There are many stories in the history of science of great discoveries occurring to people out of the blue.”

The social value of academia

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From Robin Hanson’s Overcoming Bias, a discussion on the social function of academia. This is Hanson:

“Academics get support from students, foundations, governments, media, and consulting clients.  Yes academics mainly publish papers, books, lectures, etc.; the question is why academics are paid to do this. The standard idealistic answer is that academics know useful and important things, things which students want to learn, media want to report, consulting clients want to apply, and which foundations and governments want to promote the creation and spread of, for the good of the everyone. (..) But not only are these idealistic theories pretty implausible from an evolutionary point of view, they also have detailed problems (…) it seems far simpler to me to just postulate that people care primarily about affiliating with others who have been certified as prestigious.”

But Andrew Gelman emphatically disagrees…

You can read the complete post  here.

Opposing Chavez

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The Price of Political Opposition: Evidence from Venezuela’s Maisanta

http://papers.nber.org/papers/W14923

Chang-Tai Hsieh, Edward Miguel, Daniel Ortega, Francisco Rodriguez

In 2004, the Chavez regime in Venezuela distributed the list of several million voters whom had attempted to remove him from office throughout the government bureaucracy, allegedly to identify and punish these voters. We match the list of petition signers distributed by the government to household survey respondents to measure the economic effects of being identified as a Chavez political opponent.

We find that voters who were identified as Chavez opponents experienced a 5 percent drop in earnings and a 1.5 percentage point drop in employment rates after the voter list was released. A back-of-the-envelope calculation suggests that the loss aggregate TFP from the misallocation of workers across jobs was substantial, on the order of 3 percent of GDP.

Electoral Accountability and Corruption

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This is very replicable research… that is, if we only had reelection… and good data on corruption.

Electoral Accountability and Corruption: Evidence from the Audits of Local Governments

April 2009
Claudio Ferraz and Frederico Finan
http://www.nber.org/papers/w14937

Political institutions can affect corruption. We use audit reports from an anti-corruption program in Brazil to construct new measures of political corruption in local governments and test whether electoral accountability affects the corruption practices of incumbent politicians. We find significantly less corruption in municipalities where mayors can get reelected. Mayors with re-election incentives misappropriate 27 percent fewer resources than mayors without re-election incentives. These effects are more pronounced among municipalities with less access to information and where the likelihood of judicial punishment is lower. Overall our findings suggest that electoral rules that enhance political accountability play a crucial role in constraining politician’s corrupt behavior.

Swine flu, measurement error, and policy responses

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Is the Mexican government overreacting to the swine flu virus outbreak? It is still to soon to know. So far, in the first week of the “contingency”, most of the actions taken by the Mexican government have been backed by the WHO, and by a majority of the public opinion.

We also have witnessed a parade of numbers trying to assess the evolution and riskiness of the virus. How can we measure this? An important statistict in epidemiology is the Case Fatality Ratio (CFR = number of deaths / number of cases). The latest figure of “suspected” swine flu-deaths is 159 but only 7 of them have been confirmed as positive cases by laboratory tests. Also, the latest estimate of atypical neumonia cases in this period is about 2500 (April 29th, 2009). Thus, making the extreme assumption that all deaths become positive cases (and keeping all else equal) results in an estimated (upper bound) CFR of 159/2500 = 6.36%. Clearly, these figures will change as more positive cases and/or swine-related deaths occur (see update below).

It is important to note that measurement error on either the numerator or the denominator affect any CFR estimate, thereby making the virus to appear more or less deadly. For instance, if the virus is very contagious but not deadly, the CFR will become approximately close to zero (not too risky a ratio, but consider that seasonal influenza kills 36,000 people in the US every year). On the other hand, if the virus turns more deadly but not very contagious, the CFR will increase (for instance, SARS has a CFR of about 50%, very deadly indeed).

But then again, is the Mexican government overreacting? Do we really need to close schools and restaurants, or should we focus instead on revamping our health services? We don’t know yet. Oddly enough, the more deadly this virus becomes (ie, the higher the CFR worldwide), the better our government will look in retrospective for properly reacting to a serious risk.

Alas, if the swine flu virus ends up being more deadly here than elsewhere (ie, with a CFR higher in Mexico than abroad), the worse our overall health system will look and the more off-target the Mexican reaction will be. It may be the case that Mexico’s poor health care services and limited coverage turn more deadly than a new found virus. I truly hope to be wrong on this.

Related links:

Swine Flu and the Mexico Mystery: Why does the swine flu seem to be more deadly in Mexico? from Slate
Mexico’s High Death Rate Poses Key Question on Virus from the Wall Street Journal
Swine flu: what do CFR, virulence and mortality rate mean? from Effect measure
Swine flu: Questions and answers from the Virology blog
Disease Outbreak News from the World Health Organization.

May 6 Update:
In Mexico: 29 deaths / 942 confirmed cases = 3.07% CFR
In the US: 2 deaths / 642 confirmed cases = 0.311 CFR

Risk Communication in Epidemics

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Great piece on the the hazard vs. public outrage tradeoff.

"Let me tell you the basics of risk communication, and then I want to apply them, a little bit, to bird flu. The fundamental principle of risk communication can be summarized in a number, [which] is the correlation between how much harm a risk does and how upset people get about it. If you look at a long list of risks, and you rank them in order of how upset people get [about them], then you rank them again in order of how much harm they do, then you correlate the two, you get a glorious 0.2.
Those of you who remember your statistics know you can square a correlation coefficient to get the percentage of variance accounted for: If you square 0.2, you get 0.04, or 4% of the variance.
That is, the risks that kill people and the risks that upset people are completely different. If you know that a risk kills people, you have no idea whether it upsets them or not. If you know it upsets them, you have no idea whether it kills them or not."

Read the whole thing by Peter Sandman, Risk Communication Specialist