The macro foundations of micro (crossposted at Crooked Timber)

John Quiggin57 Comments

Twitter alerted me to an amusing exchange between Chris Auld, posting a list of “18 signs you’re reading bad criticism of economics and Unlearning Economics, responding with 18 Signs Economists Haven’t the Foggiest. UL suggests that Stephen Williamson manages an impressive 9 out of 18 in his review of Zombie Economics (my response here with more from Noah Smith.

Scoring myself against Chris Auld’s list, I’d say I’m in the clear. But quite a few commenters on Zombie Economics have made complaints along the lines of his point 1, that I focus too much on macroeconomics (and finance). The implication is that, even if macro is totally wrong, only a minority of economists do it, and microeconomists are in the clear.

This defense doesn’t work, at least not in general.

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Abbott's Sister Souljah non-moment

John Quiggin40 Comments

As I said in my last post, Tony Abbott has set himself the tightrope-walking task of maintaining his government’s official endorsement of mainstream climate change, while keeping his denialist base happy. Having made a mess of this with his bushfire comments, he had a chance to rectify the situation when he gave an interview to denialist and conspiracy theorist Andrew Bolt. Newscorp ran in under the headline “Andrew Bolt tackles the PM on the big issues”, but Bolt was playing touch, not tackle.

The interview was a sycophantic exercise in mutual admiration, with all the tough questions you might expect from, say, Anne Summers interviewing Julia Gillard or Kevin Rudd interviewing himself. But such interviews present smart politicians with the chance to play against type, by disagreeing with the interviewer on an issue dear to the base, but politically problematic for a would-be statesman. Presented with a soft lob question about the bushfires, Abbott could have taken the chance to define his own position as the “sensible centre”, by repudiating both Bolt’s denialism and the “alarmism” of those stressing the link between bushfires and climate. Bill Clinton famously did this when he denounced radical rap artist Sister Souljah, signalling the shift to the right undertaken by the Democratic Leadership Council of which he was part.

Instead, Abbott chose to dig himself deeper, extending his denialism on bushfires and further claiming that the observation of record high temperatures is not evidence of climate change. I mentioned in my last post that he would have a problem in formulating a response to the likelihood that 2013 will turn out to be the warmest year in the Australian observational record. He’s chosen his answer now, one that is unlikely to carry much credibility except with those already committed to denialism.

His summary of climate science, previously reported as “crap” has been replaced by “hogwash”, perhaps in deference to the sensitivities of Greg Hunt, who took strong exception to being confronted with the previous term by a BBC interviewer. I won’t link to Bolt, but the relevant passages are quoted over the fold.

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Falling off the tightrope

John Quiggin56 Comments

Having gained office on the basis of three-word slogans, the Abbott government has the problem that it now needs to answer questions in complete sentences. As a result, Abbott has immediately faced some tricky tests, and failed most of them. “Stop the Boats”, for example, ran into the problem that it assumed the Indonesians could be strong-armed into doing our government’s bidding. Unsurprisingly, that proved false, though the inevitable backdown was managed reasonably smoothly.

The trickiest balancing act, though, is on climate change. The government needs to balance its base, the vocal elements of which are almost uniformly denialist[1], with the risks of adverse consequences to Australia if we repudiate our commitments on the issue, and the risks to its own credibility of being openly anti-science.

After only seven weeks in office, both PM Tony Abbott and Environment Minister Greg Hunt, have fallen off the tightrope, rejecting the clearly established (and intuitively obvious) IPCC findings on bushfire risk in Australia [AR4 (2007) , WGII , Chapter 11, Executive Summary]

“The climate of the 21st century is virtually certain to be warmer, with changes in extreme events. Heatwaves and fires are virtually certain to increase in intensity and frequency (high confidence).”

These findings were reinforced in an interview with the head of the UN’s climate change negotiations, Christiana Figueres (listen to the audio,as the report may mislead)

Abbott’s response was to accuse Figueres of “talking through her hat”, while Hunt went to Wikipedia to discover that “bushfires in Australia are frequently occurring events during the hotter months of the year”.

This was really an unforced error by both Abbott and Hunt. They could have ducked the issue by resorting to the standard formula that climate predictions are about frequencies, not about individual events. Abbott could even have cited Figueres who was careful to say that “the World Meteorological Organisation has not yet established a direct link between the these fires and climate change.” (emphasis very clear in audio). Hunt scrambled back to the script at the end of his interview, but after the Wikipedia reference, it was far too late.

Given Abbott’s earlier “total crap” statement[2], it’s going to be hard for him to walk back a second time. He now faces two problems. On the one hand, now that he’s outed himself as one of them, the denialist base will be encouraged to demand the scrapping of his Direct Action policy. On the other hand, locking the LNP into denialism is a recipe for long-term disaster, especially with Malcolm Turnbull waiting in the wings.

It’s highly likely that 2013 will turn out to be the hottest calendar year on record for Australia. The frequent occurrence of record highs like this is a predictable consequence of climate change. Abbott had better get his spin doctors working on a form of words to handle the inevitable questions.

fn1. I’ve decided to abandon “delusionist”, my own coinage, in favor of the more standard term “denialist”. I’ll write more on this later.
fn2. In fairness, this statement was presented as a view his audience might hold, rather than as Abbott’s own. But since he’s held every possible view on this topic, and some that seem impossible, fairness can only go so far.

Free riders

John Quiggin47 Comments

It’s widely assumed that small rich countries, like Australia, can choose to do nothing about climate change, without suffering any adverse consequences. Like a dozen or so other countries, we contribute about 2 per cent of total emissions. So, whether we reduce emissions or not won’t (at least directly) have a big impact on the climate change we experience, just as an individual decision to engage in (or refrain from) littering, won’t have much impact on the amount of litter they see.

But this analysis assumes that countries that do make a serious effort won’t impose any sanctions on those that don’t. Until recently, this was a reasonable assumption since the most prominent laggards were China and the US, both of which can do pretty much as they please in international matters. But China and the US are taking their commitments seriously now, and are taking some big steps to reduce emissions. That changes the calculation for a would-be free rider.

The Harper government in Canada is already discovering this. Harper is a (barely concealed) climate denialist, who has attacked climate science, and promoted the work of ‘sceptics’. Having repudiated Canada’s commitments under the Kyoto Protocol on the grounds that it interfered with Canada’s aspirations to be an ‘energy superpower’ Harper imagined he would have no trouble securing agreement for the Keystone Pipeline, which is supposed to carry oil from the hugely destructive Alberta Tar Sands projects to markets in the US.

Canada is in the inner core of US allies, historically distinguished by its devotion to being a global ‘good citizen’. Unsurprisingly, the Canadians had plenty of favors to call in at the US State Department, which duly reported that the project was environmentally benign and should be approved.

But then everything went wrong for Harper.

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A minor life hack (crosspost from Crooked Timber)

John Quiggin3 Comments

I’m currently reading Scarcity by by Sendhil Mullainathan and Eldar Shafir. At this stage, I’m inclined to sympathise with the unnamed colleague who commented “There’s already a science of scarcity. It’s called economics”. So far, it’s mostly straightforward applications of the observation that time and attention are scarce resources, combined with some fairly familiar observations from behavioral econ on how people fail to optimise either the first-order problems of allocating a tight budget or the second order problem of allocating time and attention to the first-order problem (my terms here, not theirs). However, I’m only part way through, and the authors promise to show how their approach differs from the way in which economists would normally think about this kind of problem.

This post is about a specific and well known observation cited by Mullainathan and Shafir. Faced with paying $100 for an item that could be had elsewhere for $50, most people are willing to put in a fair bit of effort (say, driving for an hour) to get the lower price.[^1] On the other hand if the item costs $1050 and could be had for $1000, people with reasonably high incomes mostly pay up, instead of driving to the other store. This is obviously inconsistent with standard opportunity cost.
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Moral panic on bikies

John Quiggin68 Comments

I won’t say much about Queensland’s new anti-bikie laws since they are so obviously indefensible, and will surely be struck down by the High Court. Unless AG Jarrod Bleijie was deliberately seeking this outcome, it seems that he is as wet behind the ears as his public appearances suggest and as his legal experience (limited to conveyancing it is said) would suggest. A couple of observations

First, although bikies are involved in crime, it appears to be limited to things like taking rake-offs from drug dealing (who would be at least as common if they were independent operators not obliged to pay off gang leaders) and to rackets around tattoo parlours. The public brawling we’ve seen recently, and the various piece of inter-gang violence seem to be controllable by ordinary law enforcement

Second, I don’t think freedom of association should be absolute. If it can be proved, in open court, that an organization is engaged in facilitating crime, there ought to be legal remedies (US RICO legislation is a possible model, though it has its problems). But the Queensland Legislation simply declares a large number of bikie clubs to be illegal, without any chance to have their day in court. Such laws could be applied to political parties, trade unions, companies or even individual groups of friends. Menzies tried this with the Communist Party (which at least had aspirations to be dangerous to the existing order of society, unlike, say the Bandidos) and was rightly rejected both by the High Court and the Australian people

Why do we *still* have a Nobel Prize in Economic Sciences?

John Quiggin35 Comments

Ingrid Robyens at Crooked Timber links to some fascinating discussion from Philip Mirowski of the role of Swedish domestic politics in the establishment of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, with emphasis on the way in which claims of “scientific” status for economics helped the claim of the Swedish central bank to independence from government.

In the broader context, it seems pretty clear that, if the idea had arisen even a few years later, it would have been rejected. In 1969, economics really did seem like a progressively developing science in which new discoveries built on old ones. There were some challenges to the dominant Keynesian-neoclassical synthesis but they were either marginalized (Marxists, institutionalists) or appeared to reflect disagreements about parameter values that could fit within the mainstream synthesis.

Only a few years later, all of this was in ruins. The rational expectations revolution sought, with considerable success, to discredit Keynesian macroeconomics, while promising to develop a New Classical model in which macroeconomic fluctuations were explained by Real Business Cycles. This project was a failure, but led to the award of a string of Nobels, before macroeconomists converged on the idea of Dynamic Stochastic General Equilibrium models, which failed miserably in the context of the global financial crisis. The big debate in macro can be phrased as “where did it all go wrong”. Robert Gordon says 1978, I’ve gone for 1958, while the New Classical position implies that the big mistake was Keynes’ General Theory in 1936

The failure in finance is even worse, as is illustrated by this year’s awards where Eugene Fama gets a prize for formulating the Efficient Markets Hypothesis and Robert Shiller for his leading role in demolishing it. Microeconomics is in a somewhat better state: the rise of behavioral economics has the promise of improved realism in the description of economic decisions.

Overall, economics is still at a pre-scientific stage, at least, as the idea of science is exemplified by Physics and Chemistry. Economists have made some important discoveries, and a knowledge of economics helps us to understand crucial issues, but there is no agreement on fundamental issues. The result is that prizes are awarded both for “discoveries” and for the refutation of those discoveries.

Can you run an ironman and run a country?

John Quiggin150 Comments

I’m not generally a fan of political scandals: at worst, they are spurious, at best, they involve random exposure and punishment of misdeeds that usually go unchecked. But there’s one big exception for me, and that’s when political scandals intersect my sporting interests.

Last year, the high-profile case was that of Republican VP nominee, Paul Ryan, who claimed to have run marathons in his younger days, with times in the 2:50s, an impressive achievement at any age. It turned out that he had run a single marathon, in 4:01:25. As all runners know, no one who has put the effort to run a marathon makes that kind of mistake. Ryan’s time is better than either of mine (4:37 and 4:24), but I’m aiming to break four hours in the next year or two, and I have a good few decades on him.

Now there’s Tony Abbott, who seems to have claimed expenses for everything from weddings to music festivals. But the only one that really interests me is the $2100 he claimed when he went in the 2011 Port Macquarie Ironman. I couldn’t find a time for 2011, but he did the 2010 event (3.8 km swim, 180 km cycle 42.2 k run) in 14 hours, whereas I took 8 hours to do half as much in the Cairns 70.3 in June.

What strikes me about this is not so only the expenses issue (although that obviously irks me) as the training time that must be involved, and the implications for the rest of Abbott’s commitments. Preparing for a marathon or a 70.3 while working full time, even in a flexible job like mine, requires putting most other things, like social engagements, on hold. If he’s training for a full ironman and managing the commitments inherent in being a politician, it’s hard to believe he can have any significant amount of time free to study policy issues and consider the best responses (as I know, you can’t think about these things while you’re running an endurance event – there’s not enough blood flow to the brain to think about much more than keeping your legs moving).

Looking at Abbott’s actual approach to policy, the three-word slogan approach is unsurprising. He can’t have had the spare time or energy for anything better. That worked fine in Opposition, but it hasn’t been great preparation for government.

A rocky start

John Quiggin83 Comments

The Abbott government has had the rockiest start of any newly-elected government I can recall[1]. Opinion polls are already showing the government trailing Labor, even before the election of a new opposition leader.
The failure has two main elements. The first is the consequence of gaining office on the basis of slogans and personality politics rather than any coherent set of policy proposals. ‘Stop the boats’ was a great vote-winner for the LNP in opposition, but in office it’s a hostage given to fortune. Maybe the boats will stop and maybe not, but bombastic rhetoric will have no effect one way or the other.
The implication for Labor is not to respond in kind with wrecking and cheap slogans. Rather, it’s to make the point that, however dysfunctional the previous government may have been terms of leadership, and whatever the problems of implementation, it was in the right (or at least better than the LNP) on all the major policy issues[2].
The implied political strategy is to defend and extend the key policies of the Rudd-Gillard government, with the exception of the mistakes driven by short-run political exigencies (the archetypal example being the withdrawal of benefits from single parents, and the associated failure to do anything to improve the treatment of unemployed people in general).
That means treating the Abbott government as a temporary interruption a program of reform that includes carbon pricing, the NBN, NDIS and Gonski reforms. The only big gap in Labor’s program is the absence of a credible plan to finance these policies in the long run, while allowing state governments sufficient revenue to do their work. Labor needs to use the time in opposition to break with the low-tax rhetoric of the past, and work out a coherent plan to increase revenue. In practice, there’s no real chance of increasing the rate or coverage of GST, so the options will have to come on the income tax side. More on this soon, I hope.
The second factor in Abbott’s poor start is the ‘born to rule’ mentality that we’ve already seen in Queensland. Newman and his ministers have been shameless in grabbing more and better perks, giving jobs to their mates and so on. Abbott has started in the same vein, with examples such as the sacking of Steve Bracks, and his rumored replacement with a mate such as Nick Minchin. The contrast with Rudd, who left Liberal appointees in place, and gave plum appointments to well qualified Libs, is striking. Although the travel expense scandals now coming to light date from the past, they fit into a pattern that is already evident.
Of course, Labor is hardly innocent in this. But the isolated examples that have come to light, and the near-total absence of ministerial scandals in the Rudd-Gillard government suggest that this is not a case of ‘everybody does it’. Labor should join the Greens in pushing reform of the entire system.

fn1. The arguable exception is the Labor minority government that emerged from the 2010 election. But this wasn’t a new government or a new PM: Labor had a couple of years on top after 2007 and Gillard had already had her honeymoon period in the immediate aftermath of the deposition of Rudd.

fn2. ‘Better than Abbott’ was a pretty low bar when it came to refugee policies. But Labor did at least increase the refugee intake, while Abbott has cut it.