Zombie economics gets a mulligan: or, how Obamacare caused the Global Financial Crisis

I’m adding a little section to each of the chapters in my Zombie Economics book called “Reanimation”, about the attempts that are already under way to revive economic ideas killed (at least according to the standard rules of hypothesis refutation) by the global crisis. I wasn’t surprised to find plenty of examples for the efficient markets hypothesis (easy to render immune from any kind of refutation by an appropriate formulation) or for policy ideas that yield big benefits to the rich and powerful, such as privatisation and trickle-down economics. But I was surprised a little while ago to see the crisis described as a transitory blip in the continuing Great Moderation. Still that pales into insignificance compared to this piece by Casey Mulligan of Chicago (h/t commenter Daniel ), in which (I swear this is true!) the crisis is the result of financial markets correctly anticipating the adverse labour market impacts of possible legislation under Obama, such as a health plan that might include means tests.

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Two kinds of ignorance

Also, in yesterday’s Fin, Geoffrey Barker accused Abbott of going for the bogan vote (paywalled), where bogan is taken to mean ignorant. Leaving aside the class/cultural analysis implicit in the term “bogan”, which I think is wrong, the argument is the same as I made in my post on agnotology, as his characterization of Rudd as a technocrat, not really at ease with the kind of politics that includes demands for authenticity and so on. Coming back to “bogan”, the big issue in agnotology is not ignorance in the ordinary sense of the term (people who don’t know much about political issues, and don’t care to learn – that is certainly part of the stereotypical bogan image, and may perhaps be descriptive of the actual demographic groups commonly associated with the term, though I don’t know of any evidence of this).

The ignorance associated with climate change delusionism and other rightwing factoids is metacognitive and has much more to do with the Dunning-Kruger effect of overestimating one’s own competence. The classic example is the kind of person who eagerly circulates reports that there has been no statistically significant warming since 1995. The only information content in such a report is that the person doing the reporting doesn’t understand the concept of statistical significance[1], and therefore is incapable of assessing any issue involving statistical analysis, of which climate change is a prime example.

The stereotypical candidate, in relation to climate change, is that of a 50+ male[2] with a business background in engineering or some similar field where practical judgement is accorded more value than theoretical expertise, and where a willingness to push on regardless is an important element of success. Journalists and opinion columnists[3], accustomed to “mastering a brief” at short notice are also highly susceptible – lawyers who may actually have to master briefs involving technical issues seem mostly to recognise that this is the kind of problem where expert judgement is required, as does the more sensible kind of economist[4]

fn1. Note for pedants. A Bayesian statistician would say that confusion over the concept of significance reflects the logical problems of the concept and the underlying classical theory of statistics. But that only makes sloppy misuse of the concept even worse. I’ll have more to say on this soon, I hope.

fn2. A demographic group to which I belong

fn3. This one, too.

fn4. This one, too, I hope.

Greece: Haven’t we seen this movie before

My piece in today’s Fin compares Greece with some Australian states who also play games to conceal debt. The emerging news (also in today’s NY Times) is that the same banks who facilitate the dodgy debt deals established a CDS market for Greek sovereign debt and some have large short positions (translated from marketspeak: they are betting that the deals they set up will go bad and Greece will default). This can of course be defended as insurance, but it obviously changes your relationship with your bank or financial advisor if they can steer you into a deal and then bet on its failure. The potential for moral hazard in the CDS market has yet to be fully explored, but I think we will get to find out the hard way before too long.

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Ideology and agnotology

The way in which I’ve generally thought about politics is in terms of ideology and particularly, the divide between the left (socialists, social democrats, labour and related groups) and the right (various strains of conservatives, market liberals and business advocates). But increasingly I doubt that this is the right way to look at things.
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