Once more, with feeling...

Yes, I know I've already covered this. But for some reason, it just won't go away:



About half way through the interview, Barbara West quotes Karl Marx and asks "how is Obama not being a Marxist?" when he calls for changes in US tax policy. Later on she worries that Obama envisions turning America into a socialist country like Sweden.

Maybe some people are content with Barbara West's understanding of the history of economic thought. But for the rest of us, it's worth checking out the Concise Encyclopedia of Economics, a wonderful resource maintained by the Library of Economics and Liberty. According to them (and, well everyone else who actually knows what these terms mean), Socialism is "defined as a centrally planned economy in which the government controls all means of production". Examples of socialist countries throughout history include the Soviet Union, Cuba under Castro and China up to the mid to late 1970s. On the other hand, Social Welfare States like Sweden are not socialist, since they have private ownership of production.

This is not a minor technical issue. "Socialism" and "Marxism" are politically charged terms that evoke powerful images. Socialism failed as an economic model. Robert Heilbroner, himself a socialist for much of his life, was ultimately scathing in his appraisal of the idea:

"Socialism...was the tragic failure of the twentieth century. Born of a commitment to remedy the economic and moral defects of capitalism, it has far surpassed capitalism in both economic malfunction and moral cruelty."

Clearly, linking Obama to the failures of Socialism is a powerful political strategy. But we can get lost in the rhetoric. The following chart from the Wall Street Journal shows proposed tax rates by both McCain and Obama, as well as under current law:

There are clear differences between the two candidates on tax policy. But to put this into context, Obama favors increasing the top marginal tax rate to 41%, roughly the same as during the Clinton years and lower than under Ronald Regan.

Serious people can debate the merits of Obama's tax policy. Gregory Mankiw, for example, has raised some interesting concerns about the effect on work incentives. But unfortunately much of our national debate isn't conducted by serious people; it's conducted by people like Barbara West.

Big Bad John

Yes, this is real. I promise.



If this ad makes you want to vote for John Cornyn, then you're a real American.

Identity and Science

This is the third part on a series about Objectivity and Truth in Political Science.

The issue of identity and power permeates science today: there is a questioning of who is doing science, what is deemed appropriate method for conducting science, and what topics are opening up to be studied. Political scientists must keep these issues in their minds at every step of the research process, from question forming to interviewing to the writing of findings as a way of buffering past legacies of injustice and prejudice to infiltrate today’s questions. Gender, class, and race have all recently been questioned not only in how they relate to the way in which science is conducted, but also at the very core of how we understand the world and each other.

One issue in science today is how to de-centralize traditional white male dominated scientific tradition with one that not only incorporates individuals of all races and genders into the field of science, but also shifts the institutional values to validate knowledge generated by critical processes of exploration and experimentation. Feminist scientists, like Ruth Hubbard and Evelyn Fox Keller, make the point that what is considered knowledge is determined by people in positions of power, historically, by men. They push for the incorporation of more feminine perspectives on and within science because not only can women do science as well as men, but also as outsiders they are able to cast a critical eye upon the institution of science in a way that men cannot. This incorporation of the outsider perspective cast upon the dominate group of power is echoed by hooks. bell hooks points out in her essay "Representations of Whiteness in the Black Imagination" that people in positions of power have the ability to change shift their paradigm to one that includes a more critical perspective of one’s self. She explains that once a white male in a position of power “shifts locations” he is able to “see the way in which whiteness acts to terrorize without seeing himself as bad”. Change is possible if people in positions of power are able to take a critical view of themselves through criticism cast from the outside.

Navigating these issues of identity within and without science requires more than trying to be politically correct by using the racial descriptor du jour or “she/he” –which is both grammatically incorrect and awkward to type/pronounce/read/write. These critical scientists place a higher value in localized information analyzed with passionate rationality rather than the cold gaze of attempted objectivity as a way of generating knowledge that is not only more equitable, but possibly the only honest form of fact-finding. This shift places emphasis upon qualitative research rather than quantitative research; it also places emphasis on local, small-scale theory rather than the broader generalizations so attractive for scientists to come up with. One attempt to move the political science field in this direction was the Perestroika movement that successfully shifted the focus of the American Political Science Association more towards qualitative research in some fashion. It is unclear whether this was the start or a ‘crisis’ or simply a fad incorporated into the predominant scientific culture as a way of pacifying dissidents.

Scientists must review their positions of power and how they view the world around them, as well as work to change how the world understands. Researchers cannot continue to propagate notions and practices that subjugate anyone not in an academic position of expertise as a second-class thinker. Hubbard recommends that scientists must insist on a change in the way science is taught and communicated to the public. This means a fundamental change in the textbooks, lectures, and laboratory exercises through which the public learns about science through which scientists learn their trade as a way of expanding the process of science and who is invited to participate in the process of knowledge generation.

By educating people about the process of how science is done and the fallacy of objectivity, people would then see the ‘facts’ generated by science not as hard truth to be adhered to at all costs but with the healthy skepticism and curiosity that defines the scientists themselves. Currently experts have the “decisive word, or at least a great deal of say, with regard to asserting what people should eat, what sort of housing they inhabit, how their children should be educated, how the country should be defended, what Washington should do about waste and pollution,” etc. (Ricci, 5). This is a great deal of power held in the hands and minds of scientists. This leads to the disempowerment of the individuals with every decision they no longer feel qualified to make. While division of labor is an important method to achieve progress through specialization, thinking and decision-making are two skills individuals should not depend upon others to do for them and which science needs to work to give back to the public.

Objectivity: The Impossible Goal

This is the second part of a series on Objectivity and Truth in Political Science

While individual scientists may strive for objectivity in order to remove as much bias from the experimental process as possible, the social and subjective system of academia through which this information is supported, filtered, and disseminated is a way that it uses yesterday’s mistakes, injects today’s prejudices, and generates tomorrow’s “facts”(Feyerabend, Against Method, 1979). For the hard sciences, there are a set of facts that remain constant and are considered knowledge by the science community because they are testable and replicable in any high school science classroom: sodium and chloride will bond to make salt, a dropped object will move downwards at a predictable rate. There is a strong understanding of certain phenomenon and the natural world through the current paradigm (Kuhn, The Structure of Scientific Revolution, 1996). The more concrete the subject matter, the more ‘objective’ individual experimenters can be and the more reliable and replicable their findings are. For these concrete types of problems and experiments, objectivity is believed to be obtainable by individual scientists.

When culture becomes the subject onto which the scientist applies his analytic eye, the ability to take an objective position becomes more difficult for the researcher. Kuhn argues that “no natural history can be interpreted in the absence of at least some implicit body of intertwined theoretical and methodological belief” (Kuhn, 16-17). These beliefs Kuhn is talking about stem from cultures and society both within and without of the scientific realm. “Our place in society causes us to believe certain things, and even convinces us that those things are objectively true“ (Ricci, The Tragedy of Political Science, 1984). We cannot explain phenomenon without previous knowledge and beliefs which can often be implicit or impossible to address from the prospective of someone inside the culture. This inability of separate ingrained beliefs about society leaves individuals in the soft sciences particularly impotent to make claims objectively.

Not only is the individual less able to view a subject matter objectively, due to a blindness of many of his own preconceptions and assumptions, but the system and society within which he operates is unable to perform the check it is expected and required to do.

When political scholars work together, the facts they discover and the knowledge they transmit will almost inevitably, given the orthodoxies encouraged by organized endeavor, constitute a very special and perhaps dangerously incomplete version of the real world they are responsible for studying. (Ricci,10)

Given the grave responsibility of providing a “scientific” construction and understanding of reality which is then used as a way to justify certain policies, programs, and behaviors, scientists who study cultural phenomenon must be humble in what they can or cannot claim, lest their claims be used to justify and perpetuate common social transgressions of the time.

One of the most blatant examples of this failure to censor bad science and scholarship in the history of modern social science is Dr. Samuel George Morton who studied human skulls as a way to prove the superiority of Caucasians over blacks. Using a variety of measurements and methods, Morton "factually" proved that Caucasians were capable of a superior level of intelligence than blacks. His findings were peer reviewed and accepted by both the scientific community and society in general as truth. “Today, we recognize that Morton’s conclusions were totally false. Because of the influence of cultural bias, however, neither Morton, his fellow scientists, nor the general public at the time recognized that Morton’s work was badly flawed” (Brush, The Limitations of Scientific Truth, 2005). While one may argue that time is the great teacher that will illuminate these more difficult paths researchers attempt to traverse, John Stuart Mill argues that a commonly agreed upon mandate that is wrong “leaves fewer means of escape, penetrating much more deeply into the details of life, and enslaving the soul itself” (Mill, On Liberty, 1869). To preserve not only the integrity of science as well as how these findings are used, the scientist must always ask how and why certain research is popular and accepted. Care must be taken not to repeat history extreme caution used as science progresses forward in the pursuit and distribution of knowledge.

Objectivity and Truth in Political Science

The is the first post in an Objectivity and Truth in Political Science series.

I have lived some thirty years on this planet, and I have yet to hear the first syllable of valuable or even earnest advice from my seniors. ~Henry David Thoreau, Walden.
The intellectual tradition is one of servility to power, and if I didn't betray it, I'd be ashamed of myself. ~Noam Chomsky

Science is not only the process of how individual practitioners attempt to generate new knowledge, but also the process through which one version of Truth is selected as the prevailing paradigm by the scientific community. Thomas Kuhn,in his book The Structure of Scientific Revolutions, defines ‘normal science’ as “research firmly based upon one or more past scientific achievements, achievements that some particular scientific community acknowledges for a time as supplying the foundation for its further practice”. Paul Feyerabend, in Against Method, argues that success in Big Science ”depends not only on rational argument but on a mixture of subterfuge, rhetoric, and propaganda”. This process and institution is built upon the work of individual scientists wrestling with how to study and represent the real world in a way to generate objective facts devoid of bias and personal prejudices. The issue is neither the process of individual experimentation and representation nor the collective process of truth selection and knowledge propagation are objective.

The political scientist must be cognitive of the limited objectivity available to him to make factual claims about the world around him. He must recognize that as a member of a scientific field and a society outside of academia he is ingrained with certain prejudices that will be propagated through the practice of science as currently structured. Most importantly, given this knowledge, the political scientist must not continue bull-headed down the path carved out previously, but take careful measures to reevaluate his placement within not only the political science field, but also within the other communities within which he is a part. This requires a conscience individual to reposition himself within the discipline of political science and society at large.

The second part of this series will address the fallacy we know as objectivity.

...and I guess I'm a socialist, too

I know, I know. I need to spend less time writing about stuff Sarah Palin says. But I swear, I can quit any time I want.

Sarah Palin recently criticized Obama's tax plan, saying, "this is no time to experiment with socialism". But is a little more income redistribution really "socialism"? Economists for Obama weigh in:

1. The definition of socialism to which most economists, poli sci types, etc, adhere is that socialism is that form of economic organization in which the state controls the means of production.
   
2. While there are some examples of this sort of thing in just about any market-based economy (geez, the government controls the military!), the idea that redistribution per se implies socialism is ridiculous. Hell, the second welfare theorem states that in a perfectly competitive economy (I bet that got the attention of all those neoclassical macro fans!), you can get to any desired (Pareto) efficient allocation with laissez-faire marginal tax policy and the right set of lump-sum...wait for it...redistributions! I guess in current parlance you might call that socialism the Arrow-DeBreu complete-markets way.

Trade theory works the same way. The idea is that there are winners and losers, but the winners win more than the losers lose, so they can compensate them.

For those of you who don't know, the Arrow-DeBreu model is the foundation of neo-classical microeconomics. While people typically think of economists as advocates of completely unfettered markets, a stroll through standard economic theory paints a more complicated picture.

And while we're on the topic of redistribution, would Sarah Palin like to explain why Alaska receives more federal revenue than any other state?

So I guess that makes me lazy, profane and un-American, right?

Like both my parents, and 3 out of 4 of my grandparents, I was born in the United States. I pay taxes, watch baseball and vote. Plus, I've held a US passport for years. So I was a bit surprised when I found out that (according to Sarah Palin) I wasn't a "real American". At a recent rally, she remarked:

"We believe that the best of America is not all in Washington, D.C... We believe that the best of America is in these small towns that we get to visit, and in these wonderful little pockets of what I call the real America, being here with all of you hard working very patriotic, um, very, um, pro-America areas of this great nation. This is where we find the kindness and the goodness and the courage of everyday Americans. Those who are running our factories and teaching our kids and growing our food and are fighting our wars for us. Those who are protecting us in uniform. Those who are protecting the virtues of freedom."

Now I have to assume that Palin was making an empirical statement and not reciting vague platitudes to stir up the Republican base. So I thought we could go through the charges*:

Small-town Americans fight our wars:
This is a bit misleading. According to research at the conservative Heritage Foundation, rural areas are slightly overrepresented in the military. Specifically, as the rural concentration of an area rises, so does the proportion of military recruits. However, most Americans live in suburban/urban areas. As a result, 80% of military recruits come from areas where at least half the population is urbanized. This means that there are lots of soldiers from big towns and cities who ought to be offended by Palin's comments.

Tim Kane, the author of the study, has an interesting explanation for why this is. Since military recruits are actually slightly better** educated than the general population they have more to gain from the technical job training the military has to offer. This would be particularly attractive to rural recruits, as Kane explains:

Rural areas generally offer a less flexible, thinner job market. The military extends job opportunities into these areas, with technical training that is usually unavailable otherwise.

Small-town Americans run our factories:
Again, this is a bit misleading. Research from John Quigley at the Federal Reserve Bank of Kansas City looks at the differences between urban and rural employment. A higher proportion of rural workers are employed in the manufacturing sector (1 in 5 vs 1 in 8). However, since urban workers account for a much larger percentage of total employment in the US, there are more urban manufacturing workers than rural ones.

People in small-towns are more virtuous:
Most people buy this one. After all, small-town folk are decent and pure, and avoid the vice that's common in the big city, right? Fortunately Reason Magazine is there to set the record straight:

Illicit drugs are nearly as common out there as they are in cities and suburbs. In 2007, a survey of 8th graders by the Monitoring the Future project at the University of Michigan found that country kids were 26 percent more likely to experiment with drugs than middle-schoolers elsewhere. Overall methamphetamine consumption among adults and teens is more than 50 percent higher in the country.

The story with alcohol is worse still. "Relative to their urban counterparts, rural youth ages 12 to 17 are significantly more likely to report consuming alcohol," says a 2006 study by the Carsey Institute at the University of New Hampshire. Excessive boozing among adults, it noted, appears to be no less widespread in Mayberry than in Metropolis.

Nor is the countryside exempt from social problems often associated with the inner city—such as, if you'll forgive me, out-of-wedlock births. The federal government apparently doesn't tabulate these births according to whether they occur in urban or rural areas. But it does break them down by state, and wide-open spaces are no guarantee of responsible sexual behavior.

The highest rates of births to unwed mothers are in Mississippi and New Mexico, both of which have high rural populations. The most urban states, New Jersey and California, do better than the average in out-of-wedlock births.

What about the unspoken charge leveled by Palin? Her comments clearly suggest that big-city "fake" Americans leach off of small-town folk who grow their food, protect them from hard, and manufacture their sex toys. Unfortunately for Palin, the data suggest otherwise. According to John Quigley, transfer payments (government payment such as tax rebates, welfare, etc) are a much larger proportion of total income in rural areas (19% in 1999 vs 12% in urban areas) and have been growing since 1983.

So yes, I was offended my Palin's remarks. But I wasn't the only one:




*Throughout this piece I will use the terms "urban" and "rural" according to the definitions used by the US Census department

**98 percent of all enlisted recruits who enter the military have an education level of high school graduate or higher, compared to the national aver­age of 75 percent (see study link above)

Jokes about the Financial Crisis

Here are some jokes about the financial crisis, courtesy of Calculated Risk:

• I went to the ATM this morning and it said "insufficient funds"...I'm wondering is it them or me?
• With the current market turmoil, what's the easiest way to make a small fortune? Start off with a large one.
• How do you define optimism? A banker who irons five shirts on a Sunday
  

The funniest one is actually in the comments section:
"This is worse than a divorce. I've lost half my net worth and I still have a wife."

HT: Marginal Revolution

Joe the Metaphor

Since being mentioned 2 dozen times at Wednesday's debate, "Joe the Plumber" has become an instant celebrity. But beyond the media craziness, his example illustrates some interesting points about policy and how it's portrayed in the campaigns.

Catherine Rampell at Economix points out the crucial distinction that was somehow missing from the debate: when Joe said he wanted to purchase a plumbing company that makes $250,000 per year, was he referring to revenue or profit? As she explains:

"If he was talking about revenue, then Senator Obama’s plans probably will not affect him. Taxes on corporations are based on profit, not on revenue, and so Senator Obama’s $250,000 threshold refers to profits above $250,000. (Which Joe’s company cannot be making if it is bringing in $250,000 in revenue but has even 1 cent in expenses.) Senator Obama’s reply bungled this point. He said, 'If your revenue is above 250, then from 250 down, your taxes are going to stay the same.'"

Assuming this is the case, then Joe's story is actually representative of the majority of American small businesses:

"...most small businesses earn much less [than $250,000] in profit. In 2009 about 35 million tax returns will report some income from small businesses, according to Roberton Williams, principal research associate at the non-partisan Tax Policy Center. Of these only about 660,000 tax units — or 1.9 percent — would see an increase under Senator Obama’s tax proposal.

Joe probably overstated how much his company makes, though. According to the Bureau of Labor Statistics, the mean wage for a plumber is $47,930 per year. A plumber in the 90th percentile earns $73,500. (Joe’s company is apparently a two-person company; if we assume the employees each take half of the company’s profits basically in lieu of a salary, which is not necessarily the case, then the $250,000 to $280,000 profit figure means that the company is exceptionally successful.)"

So Joe really was an appropriate metaphor, though not the one McCain would have liked.

Joe's story became even more interesting after we learned that he is not a licensed plumber (See the first link in this post). This raises the issue of the wisdom of professional licensing, which is common in many fields. This practice was heavily criticized by Milton Friedman (the godfather of the free market) as an unnecessary barrier to entry into many fields, one that artificially raised the price of services by restricting the supply of workers. The standard argument is that inept plumbers, for example, would be driven out of the market by competition, rendering the licenses superfluous.

Certainly there's room for debate on a job-by-job basis. Inept doctors may lose repeat customers by killing them. Similarly, faulty construction can put people in serious risk. But Alex Tabarrok at Marginal Revolution provides several examples of ludicrously unnecessary license regimes:

"In Alabama it is illegal to recommend shades of paint without a license. In Nevada it is illegal to move any large piece of furniture for purposes of design without a license. In fact, hundreds of people have been prosecuted in Alabama and Nevada for practicing "interior design" without a license. Getting a license is no easy task, typically requiring at least 4 years of education and 2 years of apprenticeship."

Which category does plumbing fall into? It's an issue that should perhaps be debated.

What a week!

For Paul Krugman, that is. First he wins the Nobel Prize in Economics. Then Wikipedia says he died. Then we find out that was simply cyber-vandalism, and he's alive and well. As Krugman says on his blog, the reports of his death have been "greatly exaggerated".

His Wikipedia page has been updated, but someone did manage to get a screen shot of the sad (and fake) news:



In addition to being a political commentator, Krugman is a serious academic economist and a giant in the field of international trade theory. Plus he takes one hell of a candid photo:



So congratulations Paul Krugman, for winning the Nobel Prize and for not being dead!

Also, for those interested in trade theory, the Nobel website has a game called "Trade Ruler".

Is that the same "Joe" as "Joe Six-Pack"?

The "Joe the Plumber" discussion was surreal, even by Presidential debate standards. Thankfully, Dean Baker helps put it into context:

"Under Senator Obama's plan, the tax on income above $250,000 would increase by 3 percentage points from 33 percent to 36 percent. This means that [Joe the Plumber] could expect to see his tax bill rise by between $0-$900, assuming that this plumbing business would be his entire taxable income. If he has additional taxable income, then he would see a larger increase in his taxes."

American liberals need to acknowledge that increases in marginal tax rates* create a disincentive to work and to investment. But American conservatives need to get more realistic about the magnitude of the effect.

For a long time, the top marginal rate was over 90% and was 50% as recently as 1986. One can legitimately argue that such high rates were a strain on the economy. By contrast, the top rate is currently 35% and, under the Clinton administration, was almost 40%. There's not a whole lot of evidence to suggest that small changes in marginal rates have such dire consequences. Again, Baker illuminates this point:

"In response to a few notes, we have had far higher tax rates and much higher economic growth in years past. So, Joe might claim that he will shut his business and fire his workers if he has to pay another $900 a year in taxes, but the evidence suggests that there are plenty of other plumbers who would be happy to run the outfit even if the tax rate were somewhat higher."

Maybe we should calm down about this.

*Marginal tax rates are the rates on income earned above a certain point. For example someone filing individually in 2008 faces the following marginal tax schedule:

• 10% on income between $0 and $8,025
  
• 15% on the income between $8,025 and $32,550; plus $802.50
  
• 25% on the income between $32,550 and $78,850; plus $4,481.25
  
• 28% on the income between $78,850 and $164,550; plus $16,056.25
  
• 33% on the income between $164,550 and $357,700; plus $40,052.25
  
• 35% on the income over $357,700; plus $103,791.75

SEX!!! - ok, now that I have your attention, let's talk about how the economy relates to sex

Sorry for the tease. But I did find two interesting pieces today about the relationship between sex and the economy.

The first comes from that venerable vestige of hard-hitting journalism, the New York Daily News. The article discusses the effect that the economic downturn has had on the call-girl industry. Apparently, while the down-turn is causing Johns to cut back on their consumption of commercial sex (the econ-jargon actually makes this sound dirtier!), customers are still coming in:

"'The market is down, business is down, but we feel it less,' said Dylan, 24, a promotional model-turned-Manhattan prostitute. 'We're still busy'...

Sadie admits her business has suffered a bit in the fiscal crisis. Some clients are cutting back on their spending, and some aren't returning, she said.

Sienna, who's earning a graduate degree in English literature, mentioned a Manhattan banker who's among her regulars. He now spends less time and money - although he doesn't miss his regular appointments.

'He used to spend at least an hour or two,' she said. 'Lately he's down to a half-hour, and he's no longer a big tipper.'"

Alex Tabarrok writes about new research supporting the "Environmental Security Hypothesis", which states that, "in tough times men will prefer women who are good at production, generally older, taller, heavier, less curvaceous women with less body fat. In good times, they will prefer women who are good at reproduction, generally younger, shorter, lighter, more curvaceous women." According to the authors:

Consistent with Environmental Security Hypothesis predictions, when social and economic conditions were difficult, older, heavier, taller Playboy Playmates of the Year with larger waists, smaller eyes, larger waist-to-hip ratios, smaller bust-to-waist ratios, and smaller body mass index values were selected. These results suggest that environmental security may influence perceptions and preferences for women with certain body and facial features.

Fortunately the datasets are available just for geeks like me. Tabarrok also notes that this year's Playmate of the Year is an outlier.

There was no word in the Daily News article on whether older, heavier call-girls are getting more business...

If you don't laugh you cry...

For the lighter side of the financial crisis, check out "Sad Guys on the Trading Floor". This one is my favorite:

Thank god this man’s head was there to deflect the market upward.

Is there a silver lining?

Not working in the financial industry, it is all too easy to be cavalier about layoffs at Bear Stearn's, Lehman Brother's and the like. People have lost their livelihoods and are suffering real consequences. But when the dust settles, this crisis may have served a function for our economy.

For a long time now, the best and brightest minds have been drawn to Wall Street. Harvard sent 39% of it's workforce-bound seniors to consulting and financial services in 2008, and 47% in 2007. Conversely, 8.7% went into pubic service and 6.6% went into technology-related industries.

Consulting and finance draw a vast pool of talented individuals beyond the traditional economics and finance majors. In particular, graduates in mathematics and the hard sciences (including computer science) are prized for the mathematical modeling skills and computational acuity. For these students, the lure of the financial industry (where the median salary was $65,000 plus bonuses versus $35,000 elsewhere) was too great.

In many ways, workers are like all other resources in the economy. They are scarce and they need to be channeled into various sectors of the economy. And, like other resources, that channeling is accomplished through the price system.

Wages (the price of labor) help us understand the value of different skill sets and job functions, as determined (mostly) by the forces of supply and demand. For example, doctors make more money than Walmart employees largely because there are fewer people with the ability to perform medical services. Usually, the price system does a good job of approximating the "societal value" of skill sets. But sometimes, as we have seen in the recent financial news, prices can get it wrong.

MIT economist Esther Duflo commented recently that a decrease in the demand for financial services workers might not be a bad thing:

What the crisis has made bluntly apparent is that all this intelligence is not employed in a particularly productive way. Admittedly, a financial sector is necessary to act as the intermediary between entrepreneurs and investors. But the sector seems to have taken a quasi-autonomous existence without close connection with the financing requirements of the real economy. Thomas Philippon calculates that the financial sector, which accounts for 8% of GDP in 2006, is probably at least 2% above the size required by this intermediation. Worse, the sub-prime crisis is almost certainly in part linked to the fact the needs of the financial markets (the insatiable demand from banks for the famous “mortgage backed securities”) led to excessive borrowing and a housing bubble. Watching the events of the last few days unfold does make us one want to send some of the finance CEOs back home. More pragmatically, the disappearance of their exorbitant earnings may encourage younger generations to join other industries, where their creative energies would be socially more useful. The financial crisis could plunge us into a severe and prolonged recession. The only silver lining is that it could cause a more realistic allocation of talents.

Dulfo also notes that, "The “Harvard and Beyond” survey, a survey of several cohorts of Harvard graduates conducted by Claudia Goldin and Larry Katz showed that in 2006 those who worked in finance earned almost 3 times more (195%) than others, after controlling for grades in college, standardized scores at entry, choice of major, year of graduation, etc". This is likely to change in the coming years. But in the end, we may have more scientists, engineers and inventors. That could be very good news for all of us.

WWMD (What Would a Maverick Do?)

If Sarah Palin had one word to describe John McCain it would be "maverick":



In the actual debate (I know, it's hard to tell the difference), she used the word "maverick" 6 times. The message is that John McCain doesn't run with the herd; he ruffles feathers in both parties in order to get the job done. Is this reputation deserved? Fortunately, this is something that can be measured.

Brendan Nyhan points us to work by Kieth Poole and Howard Rosenthal of UC-San Diego. According to them:

There are, to be sure, occasional mavericks in Congress... John McCain (R-AZ), normally one of the very most conservative members of the Senate, has been the worst fitting member of the Senate in each of his eight Senates, most notably the 103rd (2001-02), where he frequently voted with the Democrats, perhaps in pique over losing the race for the presidential nomination in 2000.

They go on to note, however, that McCain's "maverick-status" has changed over the years:

In our dynamic model, very rapid shifts are foreclosed by our imposition of the restriction that individual movement can only be linear in time. This restriction fails to capture a few cases. For example, John McCain (R-AZ) started as a conservative, became a moderate after losing the Republican nomination to George Bush in 2000, and recently reemerged as very conservative.

So according to the data, McCain (on average) is very conservative, but his voting is highly variable. Poole and Rosenthal accurately describe him as an "occasional maverick". More cynically, Bryan Caplan suggests that this has been a long-term strategic decision on McCain's part:

Is this just coincidence? Is being an outlier a smart way to get national attention? My guess is that being an outlier is just a high-variance strategy that happened to pay off.

So where does the term "maverick" come from, anyway? According to John Schwartz, writing in the New York Times:

In the 1800s, Samuel Augustus Maverick went to Texas and became known for not branding his cattle. He was more interested in keeping track of the land he owned than the livestock on it, Ms. Maverick said; unbranded cattle, then, were called “Maverick’s.” The name came to mean anyone who didn’t bear another’s brand.

What's more interesting is the Maverick family's legacy:

Sam Maverick’s grandson, Fontaine Maury Maverick, was a two-term congressman and a mayor of San Antonio who lost his mayoral re-election bid when conservatives labeled him a Communist. He served in the Roosevelt administration on the Smaller War Plants Corporation and is best known for another coinage. He came up with the term “gobbledygook” in frustration at the convoluted language of bureaucrats.

This Maverick’s son, Maury Jr., was a firebrand civil libertarian and lawyer who defended draft resisters, atheists and others scorned by society. He served in the Texas Legislature during the McCarthy era and wrote fiery columns for The San Antonio Express-News. His final column, published on Feb. 2, 2003, just after he died at 82, was an attack on the coming war in Iraq.

For roughly 400 years, the Maverick family name has been synonomous with American liberalism and progressive ideals. And unsurprisingly, Terrellita Maverick (Murry Maverick Jr.'s sister) is unhappy with her family's name being used to describe John McCain:

Considering the family’s long history of association with liberalism and progressive ideals, it should come as no surprise that Ms. Maverick insists that John McCain, who has voted so often with his party, “is in no way a maverick, in uppercase or lowercase.”

“It’s just incredible — the nerve! — to suggest that he’s not part of that Republican herd. Every time we hear it, all my children and I and all my family shrink a little and say, ‘Oh, my God, he said it again.’ ”

“He’s a Republican,” she said. “He’s branded.”

You can't make this stuff up.

Things are certainly bad... but they're not that bad

I recently tried to allay fears (for those few people who actually held them) that particle physics experiments at the Large Hadron Collider would inadvertently cause the end of the world. Well, it seems that we've found the economic equivalent of the Large Hadron Collider fear: the start of another Great Depression.

According to a poll by CNN, 60% of Americans view the prospect of a depression "likely". This view contrasts sharply with that of most economists, including those quoted in the CNN article:

"We've been in a recession all year and it's going to get worse," said Anirvan Banerji, director of research for the Economic Cycle Research Institute. "We're going from a relatively mild recession to a more painful recession. But we're a long, long way from a depression."

Most people use the term "recession" generally, to describe a weak economy. Conversely, economists tend to use terms like "recession" and "depression" sparingly, and only when the situation meets specific criteria. A recession, for example, is defined as "two consecutive quarters of falling GDP". This is why many economists said we weren't in a recession for most of the past year.

Depressions, of course, are much worse. While recessions typically last between 6 and 18 months, depressions last for several years. The Great Depression, for example, was characterized by severe declines in economic performance:

"During the Depression, unemployment was 25% and wages (for those who still had jobs) fell 42%. Total U.S. economic output fell from $103 to $55 billion and world trade plummeted 65% as measured in dollars."

Additionally, bank failures lead to millions of people losing their savings and widespread homelessness. Fortunately, that experience contrasts sharply with today. Several banks have failed (IndyMac, WaMu, Wachovia, etc), but their deposits are insured by the FDIC, which has helped facilitate buyouts of these failed institutions by solvent companies. As a result, customers didn't lose their deposits. Similarly, unemployment is currently around 6% and most "worst case scenario" forecasts have it topping out in the 10-12% range. I don't want to minimize the actual suffering that this has and will continue to cause. But it's important to recognize the distance between this crisis and the Great Depression. (For more on this, check out this piece by Robert Samuelson).

Why is there such a disconnect between economists and the general public? One reason probably has to do with terminology. When economists say we won't have a depression, they're usually referring to the fact that 25% unemployment and mass poverty are unlikely, not that things aren't (or won't be) bad.

But another reason is the way the debate has been cast. As Dean Baker notes, the Bush administration made dire predictions (largely unchallenged by the media) of what would happen if the bailout package wasn't passed:

"Remember way back to last week when it was going to be the end of the world if Congress didn't pass the bailout package? Remember the Washington Post's account in which Treasury Secretary Henry Paulson told President Bush, 'there is no Plan B.'

Well, it looks like the Fed has discovered a Plan B. It turns out that the Fed can buy commercial paper directly from non-financial corporations needing credit to maintain operations. This will keep the credit markets working even if the zombie banks aren't up to the task. In other words, the threat of a complete meltdown in the absence of a bailout was nonsense and the media once again got taken for a ride by the Bush administration."

One of these days people are going to stop believing this administration when it says there will be doom if we don't expand its powers.

Vote and Die

Back in 2004, Steven Landsburg explained why many economists don't bother to vote:

Your individual vote will never matter unless the election in your state is within one vote of a dead-even tie. (And even then, it will matter only if your state tips the balance in the electoral college.) What are the odds of that? Well, let's suppose you live in Florida and that Florida's 6 million voters are statistically evenly divided—meaning that each of them has (as far as you know) exactly a 50/50 chance of voting for either Bush or Kerry—the statistical equivalent of a coin toss. Then the probability you'll break a tie is equal to the probability that exactly 3 million out of 6 million tosses will turn up heads. That's about 1 in 3,100—roughly the same as the probability you'll be murdered by your mother.

Steven Levitt (of Freakonomics fame) provides a similar explanation. Many people retort, "if everyone thought that way, then no one would vote". But, of course, many people do vote. The real question is, given the limited impact of any one vote, how seriously (or "rationally") do people take this opportunity? Bryan Caplan has many interesting thoughts on this issue.

But now voting-agnostics have another line of argument: voting can kill. According to new research published in the Journal of the American Medical Association:

On the eight election Tuesdays, a total of 1,265 people -- drivers, passengers or pedestrians -- were killed during the hours that polls were open, equivalent to 158 per day or 13 per hour. On the 16 Tuesdays a week before and a week after election day, 2,152 people were killed in the same time span -- equivalent to 134 per day or 11 per hour.

Seems like Diddy may have gotten this wrong:

Sarah Palin vs. Logic (cause and effect, without the cause)

I wasn't going to post this, but she repeated this argument at the debate last night.

Andrew Revkin at the "Dot Earth" blog, has some analysis on Palin's views on global warming and their potential effects on policy.

If you disagree with the mainstream-liberal position on global warming (global warming is real, is caused by man-made CO2 emissions, and requires urgent public action), there are three positions you can take:

• The scientific evidence linking CO2 emissions to warming is weak, thus reducing CO2 emissions would have no benefit
• Global warming is real and is man-made, but we are already too far down the path to stop it now, thus reducing CO2 emissions would be too costly without actually mitigating the negative effects of climate change
• Global warming is real and is man-made, but it is more cost effective to raise living-standards in the areas that will be hardest-hit (particularly in the developing world) so people are better equipped to handle the effects of climate change (for more on this position, check out the Copenhagen Consensus)

Palin takes a different line of "reasoning":

Couric: Is [global warming] man-made in your opinion?

Palin: You know … there are man’s activities that can be contributed to … the issues that we’re dealing with now with these impacts. I’m not going to solely blame all of man’s activities on changes in climate. Because the world’s weather patterns … are cyclical. And over history we have seen changes there. But kind of doesn’t matter at this point, as we debate what caused it. The point is it’s real, we need to do something about it. And like … Tony Blair had said … when he was in leadership position, he said, “Let’s all consider the fact that it is real.” So instead of pointing fingers … at different sides of the argument as to who is to blame, and if nature just to blame, let’s do something about it. Let’s clean up our world. Let’s reduce emissions. And let’s go with reality.

I don't know if the last sentence is meant to be ironic. There's more to the interview (it's on the Dot Earth post cited above) and it's worth reading. But it's amazing to me that she has staked out a position that doesn't make any sense. She won't acknowledge that man-made CO2 emissions are contributing to global warming. But, as she says, it doesn't matter. Obviously, it does matter. You can't solve a problem if you have no idea what's causing it. That seems self-evident. But just to make this clear, I wrote a short, one-act play to illustrate the point. I call it, "Dr. Palin":

Scene opens in a doctor's office decorated with "Jesus is Lord" and "Hang in there Kitty" posters. A middle-aged man enters.

Man: "Dr. Palin, I've been experiencing chest pains."

Dr. Palin: "Oh, well we can all agree that something needs to be done about that."

Man: "So what do you think it is? Am I having a heart attack or is this just heart-burn?"

Dr. Palin: "Well, it doesn't really matter what's causing your heart pain. What matters is that we both want to treat it."

Man: "You're certainly a maverick, Dr. Palin, and your folksy, hockey-mom nature has really put me at ease."

Curtain opens on a darkened stage.

Narrator: Two days later the man died from a heart attack. Dr. Palin tells herself, "at least I didn't blink."

Fin

How about Morgan Freeman for the role of the Narrator?

Notes on the Financial Crisis

For those of you who are tired of listening to politicians and journalists with little grasp of the topic, here's a list of articles and podcasts that help explain the current financial crisis:

• Harvard economist Ed Glaeser on housing prices
• Yale economist Robert Shiller discussing the housing bubble (econtalk podcast)
• George Mason economist Arnold Kling talking about the roles of Fannie Mae and Freddie Mac (econtak podcast)
  
• U Chicago economist John Cochraine on the bailout
• Harvard economist Ken Rogoff on the bailout
• Harvard historian Nail Ferguson on parallels with the Great Depression

As for the parallels with the Great Depression, it's important to remember the policy choices that deepened the crisis. Among these are the Fed's decision to contract the money supply, the Hoover administration's decision to raise taxes in order to balance the budget, and the passing of the Smoot-Hawley Tariff Act, which ushered in a period of disastrous trade wars and further halted economies throughout the world.

Governments in the US and Europe have the tools and the knowledge that should help avert anything akin to the Great Depression. That said, we are likely in for the most serious recession in the last 30 years. And, as Barry Eichengreen warns, 10% unemployment is not out of the question.