Tuesday, March 03, 2015

Passive management vs. saving more

So, John Bogle and Eduardo Porter wrote an article telling people they should switch to passive management. Here's an excerpt:
On average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings, according to the Federal Reserve’s Survey of Consumer Finances...The standard prescription is that Americans should put more money aside in investments. The recommendation, however, glosses over a critical driver of unpreparedness: Wall Street is bleeding savers dry [with fees for active management].
Ryan Decker does not like this. Bogle and Porter, he says, are "straightening the deck chairs on the Titanic". The real problem, he says, is not that people are paying too much in fees, but that they aren't saving enough in the first place. Ryan writes:
So people are approaching retirement with $104,000, and "a greater part of the problem is the failure of investors to earn their fair share of market returns."...Do Porter and Bogle really want us to believe that the main reason people are trying to retire on $100 grand is that they haven't made sufficient use of passive funds?... 
I'm as big a fan of passive management as anybody, but this is totally absurd...What would the average nest egg be if everyone had chosen the right fee structure and asset allocation? Whatever it is, it's not going to get anyone very far in retirement, particularly if they're accustomed to spending money at the kind of rates that lead to having such a small stash at that age... 
By all means, don't throw your money away on active management, and don't waste your time trying to pick stocks. That stuff matters at the margin. But that particular margin is insignificant compared to the problem of low savings rates.
Ryan is right, and he's also wrong.

Ryan is right that saving more of your income is capable of supporting a lot more retirement spending than saving money on management fees.

But Ryan is wrong to say that this makes Bogle and Porter's argument invalid. Actually, Bogle and Porter have a good argument. Here is why:

If you consume less today in order to consume more during retirement, you have to give something up (today's consumption). Thus, Bogle and Porter are recommending something that gets you more total consumption, while Ryan is recommending something whose main effect is just to move around your total consumption. Reducing fees is no substitute for saving more when it comes to increasing retirement consumption. But saving more is no substitute for reducing fees when it comes to increasing lifetime consumption.

Let's make that concrete. Suppose I save $1000 more when I'm 30 and consume $1000 more when I'm 65. And suppose my per-period utility is u(c_t), and the discount rate over 35 years is B. Then my utility gain from saving more is u(c_30 - 1000) - u(c_30) + B*u(c_65 + 1000) - B*u(c_65), where c_30 and c_65 were the amounts I would have consumed, before I decided to save more. The first part, u(c_30 - 1000) - u(c_30), is going to be negative. The second part, B*u(c_65 + 1000) - B*u(c_65), is going to be positive. In other words, the utility gain from saving more is only the utility gain from more consumption smoothing. And if people are already doing the optimal amount of consumption smoothing, that utility gain is zero.

Just for fun, let's think about that point a little more deeply. We should ask Ryan: Why do we think people aren't doing the optimal amount of consumption smoothing already? What sort of behavioral bias is keeping them from making the right choices for themselves? Do they have hyperbolic discounting? Do they have self-control problems? What's wrong with these people? If nothing is wrong, then saving more would actually be bad for them.

(The same, of course, could be true of active management. Maybe people are choosing active management, and paying the fees, because they get some utility out of doing so. It's certainly possible. Of course, if you take that position, you should then explain why more and more people are switching to passive management, just as Bogle has been urging. Preference shift? Seems unlikely.)

But anyway, the point is that you can't simply compare saving more with paying fewer fees in terms of the increased retirement spending the two are capable of supporting. That's like ridiculing people for picking up a $10 bill by pointing out that they could get a lot more than $10 if they sold their car.

Sunday, March 01, 2015

Japan is not a collectivist society

As I prepare to get an Airbnb reservation for my upcoming trip to Japan, I am reminded of this article that came out about a week ago in the New York Times. The article is very good, the reporting is very good, but I did notice this bit from the Hofstede Center:
Dutch social psychologist...Geert Hofstede...developed a matrix of cultural dimensions by which one country could be viewed against another....[H]e came up with six measures...These include individualism versus collectivism, indulgence versus restraint, power distance (a group’s acceptance or rejection of hierarchy) and, perhaps most important for Airbnb, uncertainty avoidance...The center’s portrait describes Japan as a pragmatic culture that emphasizes collectivism and hierarchy and as “one of the most uncertainty-avoiding countries on earth.” (emphasis mine) 
Now, I wouldn't be surprised if the Hofstede Center makes good money dishing up this stuff to American businesses eager to "understand" Japan before they invest there. There's just one problem: this isn't what Japan is actually like.

Don't take my word for it. Go by the data. Grab a copy of David Matsumoto's 2007 book The New Japan, and skim through it - it'll take you maybe half an hour. Matsumoto, a Japanese-American social psychologist, rounds up data from a bunch of cross-cultural studies that use Hofstede's measure and others to measure individualism, collectivism, and a number of other cultural traits.

What they find, in short, is that Japan is not very collectivist. On the individualism-collectivism scale, Japan ranks about the same as the United States (which has consistently measured near the top of the individualism scale). Actually, Japan measures as slightly more individualistic than the U.S. Some of the studies also include Russia and South Korea. Russia is more collectivist than Japan or the U.S., and South Korea is the most collectivist of the four, at least when the studies were done (15-20 years ago).

Now, what's interesting is that this apparently used to not be true! Until the 1980s, Japan really did measure much higher than the U.S. on the collectivism scale. Then in the 80s, something changed, and Japan went individualist in a big way.

Now, Matsumoto is actually upset about this. He really likes traditional Japanese values, and he's actually sad that Japan has become more individualistic. The second part of the book is Matsumoto recommending policies that he thinks will restore Japan's old collectivist values. The policies are fairly silly, and this part of the book can be safely skipped.

Anyway, the data in Matsumoto's book shows two things:

1. Western stereotypes of Japan as a collectivist place are wrong, wrong, wrong.

2. Japan's culture probably underwent rapid change in the 80s, indicating that A) Japanese culture is not the eternal, unchanging thing that some people think, and B) economic changes really do have the power to cause big and sudden cultural changes. When countries get rich they become more individualistic. (I predict Korea measures much more individualistic now than in the 1980s. There's some evidence that China may be moving in the same direction as well.)

I don't expect the Western stereotype of "collectivist Japan" to die overnight. Stereotypes are actually more persistent than the cultures they claim to describe. But eventually, if you keep hitting a stereotype over the head with the hammer of data, it has to cry uncle.

Friday, February 27, 2015

Should you lambaste your intellectual adversaries?

v. t. 1. to beat with a cane;
        2. to scold, reprimand, or berate harshly.

Paul Krugman is well known for attacking his intellectual opponents harshly (and many of them do the same to him). Here is how he defends that rhetorical approach:
When I was a young economist trying to build a career, I...believed that by and large better ideas tended to prevail: if your model of trade flows or exchange rate fluctuations tracked the data better than someone else’s, or resolved puzzles that other models couldn’t, you could expect it to be taken up by many if not most researchers in the field... 
This is still true in much of economics, I believe. But in the areas that matter most given the state of the world, it’s not true at all. People who declared back in 2009 that Keynesianism was nonsense and that monetary expansion would inevitably cause runaway inflation are still saying exactly the same thing after six years of quiescent inflation and overwhelming evidence that austerity affects economies exactly the way Keynesians said it would. 
And we’re not just talking about cranks without credentials; we’re talking about...Nobel laureates...academic [macro]economics, which still has pretenses of being an arena of open intellectual inquiry, appears to be deeply infected with politicization. 
So what should those of us who really wanted to be part of what we thought this enterprise was about do?... 
Point out the wrongness in ways designed to grab readers’ attention — with ridicule where appropriate, with snark, and with names attached. This will get read; it will get you some devoted followers, and a lot of bitter enemies. One thing it won’t do, however, is change any of those closed minds... 
It really would be nice not having to do things this way. But that’s the world we live in — and, as I said, there’s some compensation in the fact that one can have a bit of fun doing it.
So let's represent these considerations as value functions:

V = value of writer pursuing polemical strategy
V_p = value of improved public policy that results from writer pursuing polemical strategy
V_e = entertainment value of writer's polemical strategy
V_d = value of improved quality of public debate from writer pursuing polemical strategy
V_pr = V_p if writer is right about correct policies
V_pw = V_p if writer is wrong about correct policies
p_r = probability that writer is right about correct policies
V_es = self-entertainment value from writer's polemical strategy
V_eo = entertainment value to others from writer's polemical strategy

V = p_r*V_pr + (1-p_r)*V_pw + V_es + V_eo + V_d

(Sorry for not making that pretty; I was too lazy, and I'm watching a webinar while writing this.)

So V_es is something you know really well. You know how much fun you have from lambasting people.

V_eo is hard to know. Many people are entertained when you lambast your opponents, but many people are also angered. It's hard to tell which group is more numerous, and how intense their like/dislike is, and it also depends on how much you care about each group. Looking at your own popularity only gives you a little information about this, because if you're hated by 90% of people and loved by 10%, you'll still be very popular.

V_d is extremely hard to know. If by lambasting people you cause the whole public debate to become more politicized, for example, your strategy could have a negative indirect effect on public policy, even if your direct effect on policy is good.

p_r comes from people's personal confidence in their own ideas. A lot of people seem to think that the people who talk about macroeconomics in the media - and probably a lot of academic macroeconomists - are highly overconfident in their own ideas. I tend to agree with that assessment.

So basically, deciding whether to adopt a polemical strategy is a decision that is full of uncertainty. What if for every person you entertain, you are making two people feel bitter and aggrieved? What if you're poisoning future debates with politics even as you fight off politicized opponents in the current debate? And, most troubling...what if you're just plain wrong?

Although this is a difficult decision to make, I think there are some general things you can do to minimize the risks of a polemical strategy:

1. Instead of insulting people in a mean-spirited way, tease them in a funny way. Do not accuse people of dishonesty without direct evidence of corruption. Don't call people stupid, because calling people stupid gets under people's skin more than it should. Teasing, from what I've seen, is just as effective as insulting in terms of discrediting an opponent and his ideas, but it runs less risk of poisoning the debate and making bystanders feel bad.

(Obviously there is still risk. Personally, I generally find Brad DeLong's jabs to be funny and lighthearted, but many others seem to find them mean. Over the internet, it's especially hard to tell, since different people pick up on humor in different ways.)

2. Don't hold grudges. If someone seems to be engaging in irrational, politically motivated thinking in one situation, don't assume they always will. Don't hold past arguments over people's heads. Don't pull the "Oh, but you're the guy who said [whatever] back in 2004!" thing. Holding grudges prevents people from being able to come over to your side, but doesn't actually help you discredit someone; thus, it seems entirely pointless to me.

3. Always make a good-faith effort to figure out ways you might be wrong. Even when you're still convinced you're right, verbally acknowledge the possibility you might have made a mistake somewhere.

I believe that if you use these techniques, you can get almost all of the benefits of the polemical strategy, while avoiding most of the costs. You will minimize the downside risks embedded in V_eo, V_d, and V_pw.

Tuesday, February 24, 2015

Back to corporatism?

A potted history of American political economy goes like this: After WW2 and the Depression, the laissez-faire/cronyist developing-country economy we had earlier was replaced with a corporatist one. The corporate welfare state, supported by a thicket of government regulation and high taxes, and given a sense of stability and security by the deglobalization that occurred in the mid-20th century, created a middle-class nation. Most workers had well-paying, secure jobs, although some outsiders (women, blacks, the poor) were excluded from the cushy system. Worker bargaining power was strong and unions flourished. The power of the corporation was yoked to the interests of the workers. Then, beginning in the early 70s, neoliberal policies replaced corporatist ones, Deregulation, the rise of shareholder capitalism, and the resumption of globaliztion crushed the old corporatist system, leading to a bifurcation of the middle class and to the end of job security.

If you believe something resembling this potted history, that still leaves a big question: Was the end of corporatism driven mainly by globalization or mainly by domestic politics (assuming we reject conservatives' preferred explanation, the "rise of the robots")? If foreign competition, first from a resurgent Europe and Japan and later from China and a whole host of poor countries, made America's cushy managerialist corporate welfare state simply unviable, then neoliberalism can be seen as a natural, necessary response, however suboptimal its implementation was. But if you think that domestic political changes - the switch of the South to the Republican party, for instance, or the introduction of big money into politics - drove the neoliberal revolution, then you'll probably conclude that neoliberalism can be politically reversed without doing much damage to the economy.

I see this as being big debate among American liberals. The ambivalence can be felt in this recent Brad DeLong post:
On the two-year and ten-year agendas...are dealing with and reversing the enormous upward redistribution that has taken place with the rise in the social, political, and economic power of the Overclass. That is:
  • Restoring full employment as a priority…
  • Rebalancing the corporation so that shareholders and the financiers top managers who can initiate corporate control transactions are no longer the only stakeholders that matter…
  • Restore long-run productive investment as a priority in public budgeting…
Underlying this position is a belief, perhaps, that so much of what is produced is so close to a joint Leontief product that something like the marginal product theory of distribution is profoundly unhelpful, and that questions of distribution are overwhelmingly resolved by economic bargaining power conditioned by social mores and politically-chosen institutions. Perhaps there used to be three sources of bargaining power, and thus three sources of durable advantage:
  • Possession of the intellectual property and expertise needed to construct the high-throughput mass-production assembly lines of what used to be called “Fordist” capitalism…
  • Control over the brands and other distribution channels necessary in order to sell the products of high-throughput mass-production factories to the middle classes of the North Atlantic who could afford to buy them at a good price…
  • A blue-collar working class that had sufficient class consciousness to bargain for itself, and that was insulated by the requirement that the factories be located near to the engineers and to the corporate headquarters which needed to be placed so as to keep their eyes on the market…
And then, perhaps, over the past generation the third has dropped away, with the coming of globalization and the successful war against private sector unions. The rest are now themselves in flux. And perhaps they have been joined as a source of rent-extraction by those with the ability to tap into the savings produced in this age of the Global Savings Glut… 
But I think that the sources of this enormous upward redistribution have not yet been properly sorted-out.
DeLong is conflicted. He is a rationalist, and so he concludes that he does not have enough data to decide whether globalization or domestic politics was mainly to blame. Not having enough data, he cannot bring himself to make a policy conclusion about how to achieve the second of his three objectives ("rebalancing the corporation", i.e. restoring corporate welfare). DeLong is like me in this way. I try to assess the data objectively first, then think about solutions only after making the assessment of the facts.

But Marshall Steinbaum, the young colleague whose post DeLong is responding to, is no such rationalist. There is no question which culprit he will blame. And there are many others like him. So I think that in the internal liberal argument over the reason for corporatism's collapse, the people who think the shift was political are almost certain to win.

There are three reasons for my prediction.

First, people would rather be powerful than powerless. If globablization is responsible for the end of the corporate welfare state, then the corporate welfare state is not coming back in our lifetimes. And the veto points in the American political system, combined with an increasingly rejectionist Republican party, mean that a government welfare state along European lines will be very difficult to implement here in America. So believing that we could choose to reinstall corporatism without big adverse effects is an empowering belief.

Second, people are afraid to be seen as anti-trade, or protectionist. In actuality, globablization couldn't be reversed by U.S. protectionism. Corporatism might be restored here at home, but the loss of our export markets would make it a pyrrhic victory. So believing that globalization killed corporatism is NOT actually an argument for protectionism. But people will see it as such. That means if American liberals start blaming globalization, they'll get A) a lot of people actually trying to implement protectionist measures, and B) a ton of flack from defenders of free trade, a concept that is still enshrined with pride of place throughout the econ and public policy worlds.

Third, people like to blame their political enemies for bad things, rather than nature or chance. Blaming the Koch brothers and the South for killing corporate welfare is more pleasing than blaming globalization, because doing the former gives us a reason to beat up on the Koch brothers and the South, while the latter does not.

So for these reasons, I predict that we will see more liberals decide that the corporate welfare state can and should be restored by political fiat - whether or not that is actually possible or desirable.

Saturday, February 21, 2015

Is human capital really capital?

Is "human capital" really capital? This is the topic of the latest econ blog debate. Here is Branko Milanovic, who says no, it isn't. Here is Nick Rowe, who says yes, it is. Here is Paul Krugman, who says no, it isn't. Here is Tim Worstall, who says yes, it is. Here is Elizabeth Bruenig, who says that people who say it is are bad.

So as usual, it's up to your friendly neighborhood Noah to settle the debate once and for all. *chuckle*

Here's the thing. Calling anything "capital" at all requires a simplification and abstraction. A drill press is different than a building, an oil field, or a computer. Lumping a bunch of stuff in together, putting a dollar value on it, and calling it "capital" is a huge abstraction. This was pointed out in a famous debate called the "Cambridge Capital Controversy." Well, folks, that's how modeling works. Any time you make a model, you make simplifications and abstractions.

Human capital, no matter what you call it, is different than other kinds of capital. It's different in the way it's produced. It's different in the ownership laws applied to it. It's different in the way you extract value from it (in the costs of extraction, how it enters into production functions, etc.). It's different in the way it depreciates with time and with usage. Etc.

Lumping human capital in with other forms of capital requires you to take a stand and say "I don't think those differences are important, at least for the phenomena I'm trying to model right now." Other times, if you think the differences matter, you'd keep human capital and other capital separate.

Economists do the same thing with consumption. In models where economists think the main important feature of consumption is its timing, you lump all consumption together if it happens during a certain period. That's where you get your "u(c)" in macro models. But if you want to model the consumption of, say, peanut butter and jelly, you might separate your utility into u(c_peanutbutter, c_jelly). Etc.

There's nothing wrong with this, per se. You can make stupid assumptions, of course, but that doesn't mean all simplifying assumptions are stupid.

So how should we think about human capital? Here's an analogy that I think works well. You agree that a chainsaw is capital, right? OK, now imagine a chainsaw that you graft permanently onto someone's arm, like Bruce Campbell in the movie Evil Dead 2. It's so thoroughly grafted on that you can't remove it without making it permanently useless.

This chainsaw is very very much like human capital.

Like human capital, the arm-attached chainsaw requires resources to create, including the resources of the eventual owner (he has to hold his arm still, at least, and spend some time undergoing the grafting procedure). Like human capital, you can use the chainsaw to create future value - for example, you can use it to chop up skeletons, demons, and other baddies, like Bruce Campbell does in Army of Darkness. Like human capital, creating value from the chainsaw requires the owner to sacrifice some leisure. Like human capital, the owner can rent the chainsaw out, but he can't sell it to anyone.

(The main difference between the chainsaw and human capital is depreciation. Skills often increase as you use them, while the chainsaw will eventually wear out from chopping up baddies.)

So if you think a chainsaw is capital until you graft it onto Bruce Campbell's arm, but then suddenly becomes non-capital, fine. But now the ways in which human capital acts like other forms of capital should be clear. (By the way, if you think this example is fanciful, watch this video.)

Here's another analogy that I think is useful for understanding the difference between "capital" and "labor". It's a finance analogy. "Capital" is an option (which gives you the right to extract value from something), and "labor" is the exercise fee for that option. "Human capital" is an option you can't resell - the only way to extract value from it is to pay the exercise fee (the labor). "Physical capital" and "land capital" are options you can resell.

Therefore, whether human capital is really capital depends on what decisions you're trying to model. It might be, or it might not be. If you're trying to model a company's decision to invest in worker training, and the workers have lifetime employment, then you probably can go ahead and model human capital the same as other capital. If you're modeling a country's decision to invest in education as a development strategy, you can also probably treat human capital as capital. But if you're modeling people's decisions to get PhD's, then you probably shouldn't model human capital the same as other capital.

For some applications, actually, you can actually represent anything as capital - just calculate its expected present discounted value, and voila, you're done.

So what about the moral dimension of human capital?

If our social welfare function cares about wealth inequality, should we count human capital as wealth? Well, I think it depends on that exercise fee - on the disutility of labor. Suppose I really love writing silly blog posts, and I know that people will always be willing to pay me to do it. In this case, my blogging skill really is a kind of wealth, because since I love doing it anyway, the exercise fee is low. But suppose I also had coding skills with which I could make money, but really hated to sit around coding. Well, in that case, the cost of extracting value from my human capital would be very high, and it wouldn't really represent much wealth.

Some people oppose the use of the term "human capital" because they think it allows conservative types to claim that wealth inequality isn't as severe as it appears, since poor people have human capital. Actually, this is wrong - if you count human capital, wealth inequality will be much much much worse. Rich people have a lot more lifetime earning potential than poor people, and their work is probably more pleasant too.

Other people oppose the term "human capital" because they value leisure as a special good. If I own physical capital I can resell my capital, and have all the leisure I want. But if I have human capital, I have to give up leisure to get value. The more our social welfare function values leisure relative to other things, the less human capital adds to welfare.

You are, of course, entitled to your own social welfare function, so you can care about anything you darn well please. And you're also entitled to your own modeling conventions and definition of terms. So whether human capital is capital is up to you.

Update: One more objection to the use of the term "human capital" is that it objectifies people - it seems to imply that human beings can be bought and sold (even though this is not actually the case, as the chainsaw analogy demonstrates). In fact, "skills capital" would be a better term - especially because in the future, AIs will be able to learn skills too. One great thing about economics is that you can make up and use your own terms. So I say, if you don't like "human capital", use the term "skills capital" instead. There's really no reason not to. Maybe it will spread.

Friday, February 20, 2015

Help save Borderlands!!

In a real-life reenactment of the movie Empire Records (only without Liv Tyler), a grassroots effort is being launched to save Borderlands Books, the coolest sci-fi bookstore I know. The basic idea is that you can buy a membership (called a "sponsorship") for $100.

You get some cool benefits from being a Borderlands sponsor, potentially including:

  • Reserved seating at author events
  • The ability to rent the cafe and / or bookstore outside of normal operating hours for private events at cost (which is roughly $25 to $100 per hour)
  • Invitations to a quarterly gathering at the cafe where you can socialize with other sponsors, members of Borderlands' staff and occasional special guests
  • Access to preview sales of rare and collectable books whenever we make a large acquisition
  • The opportunity to purchase occasional items produced by us for sponsors and not offered to the general public (such as limited Ripley prints, chapbooks, and so forth)
  • A selection of unique apparel and accessories showing your status as a sponsor and not available to the general public
  • Invitations to sponsor-only events, like small gatherings with authors, exclusive writing workshops, and more
Obviously these things are more valuable if you live in the Bay Area, or visit frequently.

This is what's called a "quasi-public good". By supporting Borderlands, you help support a business you like for reasons other than the value of the goods and services you buy from it directly. Think of "fair trade" coffee as an analogue. Borderlands creates positive externalities by bringing together the nerd/geek community in downtown San Francisco. By becoming a sponsor, you donate to help preserve this positive externality, and receive some services in return as well.

To become a Borderlands sponsor, you just have to call and give them your credit card info (or mail a check). I did it this afternoon. Here's the specific info:
To pay in person, just come into the store anytime between noon and eight and inquire at the counter. To pay by credit card, please call 415 824-8203 or toll-free at 888 893-4008 during the same hours (please be patient if you get a busy signal as we only have two phone lines).  To pay by check, please send the check to - Borderlands Books, Sponsorships, 866 Valencia St.  SF  CA 94110 and make sure to include your phone number, email address, and mailing address.
The people at Borderlands, and their far-flung network of allies, are thinking of additional schemes for keeping the store afloat. One obvious scheme is to open an Amazon store or other e-commerce store (currently the store sells online through Biblio but does not have its own infrastructure in place for shipping large volumes of orders). This could potentially be combined with a membership fee, like what Audible does, so that you get one book per month for a year.

If anyone has any other bright ideas for saving Borderlands, please leave them in the comments! I know there are lots of people with more business savvy than myself (or most of those involved with this effort) who read this blog. Lend your wisdom!

Wednesday, February 18, 2015


Over at Bloomberg View, I gave a quick guide to the econ blogosphere. As expected, I left out some important people. Those would include:

1. Steve Williamson

This was just pure moronitude on my part, since I meant to move him up from the bottom section to the "Macro Geeks" section and then just forgot and left him out entirely! In any case, read his blog, it's good. Also, he's blogging a lot more recently, after a long hiatus, and including a lot of great charts. And he's not talking about Krugman anymore, which is a good thing. ;-)

2. Carola Binder

Another pure mistake on my part. I had meant to put Carola's blog at the bottom and simply forgot. This is especially egregious because she was my chief substitute blogger for half a year! Carola's blog is probably the most similar to my own, I think.

3. Owen Zidar

A great source for paper links. As with Carola, I meant to give him a mention at the bottom and simply forgot.

4. Steve Waldman

Usually a bit too verbose and literary for my tastes, but undeniably an important pillar of the blogosphere.

5. David Glasner

Usually a bit too verbose and literary for my tastes, but undeniably an important pillar of the blogosphere.

6. Nick Bunker

The new kid on the econ blogoblock. Looks excellent so far! Forgot him because he's too new.

7. Bill McBride

I always thought of Calculated Risk as a finance rather than an econ blog, but people on Twitter beg to differ.

8. Mike Konczal

Mike Konczal is awesome. For some reason I thought he wasn't blogging anymore! Then just this morning I saw a great post by him, and I realized I was dangerously wrong.

9. Jeff Smith

Michigan economist Jeff Smith has shaved his Ron Swanson moustache, but has not lost any of his power. He needs to blog more, though. As an expert in applied micro, he could demolish a lot of overhyped studies in the media.

10. Chris House

My old macro sensei blogs very occasionally. He hasn't blogged since October of last year! But hopefully he will return soon...

11. Frances Coppola

Frances has moved a lot of her blogging to Forbes (like I moved to BV), but still maintains a personal blog as well.

12. Crooked Timber

A great eclectic blog that occasionally does blog about economics.

13. Timothy Taylor

If you are new to econ, you should probably start with Tim Taylor. If you're not new to econ, you should still read his blog.

14. Kevin Grier and Michael Munger

How could I leave out Kids Prefer Cheese??? GET TO THE CHEDDAR!

I'm sure this list will grow as people keep reminding me of blogs I forgot to include...

Tuesday, February 17, 2015

How Charles Murray changed my mind

I always get a lot of pushback from liberals when I say that Charles Murray is one of America's most important thinkers, or that he's changed my mind in big, deep, fundamental ways. So let me explain.

First of all, The Bell Curve, of which I've only read part (the part about race), strikes me as relatively unimportant and counterproductive. James Heckman's takedown of the methodology hits the mark. Heckman does also praise the book for bringing the issue of IQ into the public consciousness, but my impression is that most Americans already think that IQ rules everything, so the book was probably just telling people what they already believed. And I think that on the margin, focusing on IQ is very very bad and counterproductive for Americans, and that Carol Dweck - who I think is the most important thinker in America today - shows exactly why. On the margin, America needs less focus on IQ and more focus on mindset. And of course I also think that the section on race stirred up racist attitudes among the American populace in a counterproductive way.

But The Bell Curve is not the Murray book that changed my thinking. That book was Coming Apart: The State of White America, 1960-2010.

Before I read Coming Apart, I was relatively unconcerned with the situation of the American lower middle class. I knew that their incomes had slightly declined, and that their economic risk had increased. But compared to people in poor countries, they seemed very well-off. Also, they weren't particularly nice people in high school. So I pretty much disregarded their problems.

Coming Apart  totally changed my mind.

First of all, the "white" part in the title didn't bother me a bit - in fact, I saw it as an attempt to atone for the excessive focus on race in The Bell Curve. Murray seemed to be saying "I'm not bashing black people here; now, I'm talking about class." Naturally, his detractors will tend to be less charitable, but that's how I interpret the title.

Anyway, Coming Apart is all about the social problems of the American lower middle class. They have broken families and poor health, and are disengaged from their communities. If you read the book, you will be convinced by the numbers that these things are really happening. The same problems are not happening to the upper middle class.

In other words, a big quality-of-life difference has opened up between the lower- and upper-middle-class. Economics typically disregards quality-of-life issues (except for things like hedonic regressions, which I think tend to have all kinds of problematic assumptions, and aren't always applicable anyway). But more and more, I've come to believe that human utility (and happiness) is dominated by things for which no market exists. I think this is much more true for people in rich countries than for people in poor countries.

If you focus on utility of wealth, and you assume diminishing marginal utility of wealth, then you tend to conclude that true inequality - inequality of utility - has decreased hugely in American society, even if wealth inequality has increased. If almost everyone is free from material deprivation, why should it bother us if rich people get mansions and private jets? That stuff makes you a little happier, but not much happier.

What Murray showed me is that I had been thinking too much like a neoclassical economist. Once you bring in non-market goods like family stability, imperfectly treatable health problems, and community engagement, you see that inequality of utility (or happiness) between the classes may actually have increased - or certainly hasn't decreased as much as you'd think from only looking at utility of wealth.

To reiterate: Murray, a sociologist, convinced me to stop thinking so much like a neoclassical economist, to have more concern for the lower middle class, and to worry more about inequality.

Quite a trick, eh?

Anyway, I still think that Murray's policy prescriptions for remedying this social inequality are not the right ones. But they are also not the main focus of the book - they are an afterthought, tossed in in the final chapter. The vast bulk of the book is about documenting the social ills of the lower middle class, as I describe above.

Diagnosing a problem, and making people care about it, is much easier than finding a workable solution. But diagnosis, and making people care, are necessary first steps on the road to finding and implementing a solution. In Coming Apart, Charles Murray does the former with amazing force and persuasiveness. That he does not manage to do the latter should not diminish the importance of his accomplishment.

Sunday, February 15, 2015

Why do non-experts think they know about macroeconomics?

Scott Sumner asks one of the eternal questions of the econ blogosphere: Why do all these people who have never studied macroeconomics, much less done it as a job, have all these strong opinions and viewpoints, and seem to think they know more than the experts? His answer is that macro seems deceptively similar to things in people's daily lives:
Suppose we were talking about string theory instead of macro. Imagine I was debating a string theorist, and I told him the theory was a bunch of worthless nonsense, as it was not refutable. He might respond that I didn't know what I was talking about. And to be honest I would have to agree with him, I don't know what I'm talking about in the realm of string theory. And having once read someone who does, who also criticizes the theory for being unfalsifiable, doesn't change that fact... 
Perhaps because people can immediately recognize that fields like physics and biochemistry are way over their heads, but macro looks deceptively simple. Macro uses a lot of terms like money, saving, interest rates, investment, income, demand, unemployment, inflation, exchange rates, debt, deficits, etc., that seem to correspond to things in our everyday experience. And we obviously do have opinions on things in our everyday experience. And we are entitled to those opinions. But in fact almost none of these terms mean the same thing in macro as in everyday life.
I do think this is part of the story, but I think there are some other reasons too:

1. Macroeconomics is relevant to most laypeople. String theory, to use Scott's example, is not. String theory is something you hear Brian Greene or Michio Kaku talk about, and you think "Wow, neato, the Universe is mysterious and funky!", and then you never think about it again. Macroeconomics is something related to our jobs and our investments. It affects us every day. Notice that laypeople do not often hold forth on game theory or decision theory.

2. Macroeconomics has political implications. Many people have political agendas. The "heterodox" people you meet in the blogosphere are almost all just leftists who see mainstream econ as a tool of the neoliberal oppressor, and since macro is by far the most visible branch of econ, they equate "econ" with "macro" and bash it. Or take the "Austrians", whose goal is actually to make econ into a tool of the neoliberal oppressor, for real. Then you have a whole bunch of people who aren't pushing political agendas, but who feel that macroeconomists are pushing agendas, and don't like that. In fact, some macroeconomists are pushing political agendas, though I think it's a clear minority (no, I won't name names). This is also why a lot of laypeople get involved in climate science debates.

3. There is the perception that macroeconomists don't understand their own subject. The Great Recession convinced a lot of people that macroeconomics hasn't solved any of the problems it was created to solve. Contrast that with physics or bio or chem, which have very obviously given us a lot of the awesome stuff that makes our society rich. In addition, you have very public and acrimonious debates between macroeconomists like Krugman, Cochrane, and Sumner. That convinces a lot of people that there is no consensus within macro, which in turn makes them suspect that macroeconomists haven't gotten any answers out of the Universe. If the experts don't understand anything, why can't the amateurs weigh in?

I am not annoyed by normal people's penchant for butting into macro debates (though the "Austrian" and "heterodox" people do annoy me, since they approach things in a tendentious rather than an inquisitive manner). I think it's natural. Sure, a lot of stupid stuff gets said, but let he who is without sin cast the first stone!


Ryan Decker writes in response to my Reason #3 above:
When I fire up my web browser I'm not bombarded with confident non-expert opinions about earthquakes, despite seismology's apparent inability to predict them.
True, but seismologists are pretty up front about this, including any seismologist in the press. I think there's a public perception that while seismologists realize their shortcomings, and are therefore probably "on the job" in terms of trying new stuff, macroeconomists might have declared premature victory. A lot of macro people in the press express a lot of certitude about things. John Taylor expresses incredible confidence that the Taylor Rule (with coefficients of exactly 1.5 and 0.5!) is THE best monetary policy rule. Scott Sumner expresses incredible confidence that NGDP targeting is best. Paul Krugman expresses incredible confidence that fiscal stimulus is effective and that austerity is counterproductive. John Cochrane expresses incredible confidence that structural form - removing "sand in the gears" - is the best medicine for an economy in recession. Robert Lucas said that the "central problem of depression prevention has been solved." And so on, and so forth. 

I think normal people realize that that certitude is basically never warranted. Yes, those economists often (but not always) have some evidence to back up their claims. But not the kind of evidence that people have in disciplines where data is more abundant, controlled, and replicable. Which brings me to Ryan's second point:
Moreover, there are the usual talking points: how well would physics and chemistry be doing if they had the physics/chemistry equivalent of 5 or maybe 10 data-rich, non-experimental recession observations to study? We can interpret the massive success of physics and chemistry and relative lack of success in macroeconomics as meaning physicists and chemists are better at their jobs than are economists, or we can interpret it as meaning that getting reliable answers in economics is a lot harder than it is in physics. 
Yep. Exactly. If macroeconomists haven't gotten the kind of answers natural scientists have gotten, it's because macro is harder to get answers out of, not because macroeconomists are less intelligent or less honest. I think that's something that more laypeople should understand. That's why I think blog posts like this one by Mark Thoma, this one by Steve Williamson, and this one by David Andolfatto are the most important.

Ryan concludes:
A scenario in which economists know much more about economics than the typical lay person is not inconsistent with the latter interpretation. I also think it's a stretch to jump from the notion that there is much we don't know about recessions to "macroeconomists haven't gotten any answers out of the universe."
Also true. Macroeconomists know more than a lot of people think they do. That doesn't mean they know a lot. And macro discussions in the public sphere tend to focus more on the contentious stuff - the stuff where no one really knows all that much. That's where normal people feel justified jumping in. If you tell them that investment is the most volatile component of GDP, they're not going to argue. If you tell them that the central problem of depression prevention has been solved, they're going to argue, and in my opinion they're right to argue.

Meanwhile, Adam Ozimek thinks these reasons also explains why laypeople get involved in debates over nutrition science.

Robert Waldmann also chimes in. He thinks it's mostly about politics, and that macroeconomists don't really know any facts that an intelligent amateur couldn't quickly discover for herself.

Wednesday, February 11, 2015

What is the EROI of nuclear power?

Today I noticed this article about EROI, or Energy Return on Investment, by James Conca in Forbes. The numbers are from this study by Weissbach et al. (2013). Here's the relevant graph:

Whoa, nuclear looks great! 75:1?? That's amazing!!

Excited by this, I looked to corroborate the numbers. Looking on Wikipedia, I found these numbers from a study by Murphy and Hall (2010):

Hmm, that's not so good. Nuclear is listed at "5 to 15" in the data, meaning from 5:1 to 15:1.

Digging a bit further, I found that the literature is very divided on the EROI of nuclear, listing it at anywhere from 1:1 (i.e., uneconomical at any price) to 90:1 (i.e., the most bountiful energy source in history).

So what is the real EROI of nuclear? What is the reason for the huge variance of numbers in the literature? Are some studies forgetting to account for the (huge) fixed costs of constructing nuclear plants? Are there big assumptions involved about how the technology will change?


Sam Wilson, on Twitter, suggests that the high numbers might be counting nuclear submarines and aircraft carriers in addition to power plants.

Colin, on Twitter, suggests that decommissioning costs may play a role as well.

Monday, February 09, 2015

Crusades vs. Jihads

It's been interesting reading the reactions to Obama's speech about religious violence. Especially funny (darkly funny) are the scattered attempts to defend the Crusades and the Inquisition. Good luck with that, bro.

I wrote my own historical Islam-Christianity parallel, which was about how the current violence in Iraq and Syria reminds me of the Thirty Years' War in Germany. But I also think that there definitely is a parallel between the Crusades and the modern-day Jihads of al Qaeda, Islamic State, and the rest. Here are what I see as the parallels.

(Warning: this posts contains sloppy history and a bad imitation of the War Nerd writing style.)

In the case of the Crusades, you saw a once-great but now-fallen civilization - West and South Europe - under pressure from a civilization at the height of its power, sophistication, and wealth (the Middle East). You had high birth rates in Europe, lots of poor young guys ready for a fight. You had a religious hierarchy deeply involved in government, looking to preserve and expand its power.

In the case of the modern-day Jihads, you see a once-great but now-fallen civilziation - the Middle East - under pressure from a civilization at the at the height of its power, sophistication, and wealth (the U.S. and West Europe). You had (until *very* recently) high birth rates in the Middle East, lots of poor young guys ready for a fight. You have lots of religious scholars who act as local legal authorities and assume some of the roles of government, looking to preserve and extend their power.

In the Crusades, you had a religious leader - Pope Urban II - calling for violence by Catholic people in order to protect an Orthodox ally (the Byzantines) and reclaim the Holy Land. The call was answered by lots of random people and many kings as well.

In the modern-day Jihads, you had a quasi-religious leader - Osama bin Laden - calling for violence by Muslim people in order to expel foreign troops and influence from the homeland and reclaim the Holy Land. The call was answered by a smattering of random people and a few warlords.

In the Crusades, you saw the element of surprise win a spectacular and brutal early victory - the capture of Jerusalem - which was followed by an unending stream of underwhelming performances. Along the way, Crusaders killed a bunch of Jews and sacked the Orthodox Christian city of Constantinople (which they were initially called in to help). Eventually a crusading culture emerged, accompanied by the emergence of autonomous quasi-religious military orders like the Knights Templar and the Knights Hospitaller.

In the modern-day Jihads, you saw the element of surprise win a spectacular and brutal early victory - the 9/11 attacks - which has been followed by an unending stream of underwhelming performances. Along the way, Jihadis tried but failed to kill Jews, and blew up quite a lot of Muslims. Eventually a jihadi culture emerged, accompanied by the emergence of autonomous quasi-religious military orders like ISIS and the many al Qaeda branches, in addition to a few that already existed, like Hezbollah and Hamas.

(I think Hezbollah really are the modern Knights of St. John. This is my favorite of the parallels, for some reason.)

So anyway, I do think there are some parallels here.

So how did it all end? Eventually, after centuries of pathetic defeat (culminating at Nicopolis), you saw the Crusades run out of steam, and the word "crusade" adopt a more peaceful meaning - much like the peaceful meaning many Muslims attribute to the word "jihad". The Crusades had some very positive effects, like opening up Europe to trade. Even more importantly, the unending string of defeats - contrasted with the ease with which the Mongols swept into the Middle East, burned it to the ground, and left - seemed to convince European leaders that a different strategy was needed. Europeans began to use advanced weapons, which allowed them to kick holy hell out of their Muslim opponents in later Europe-Middle East clashes like the Battle of Lepanto or the Great Turkish War.

(That's the Western Way of War for you - first send the jocks out to charge the enemy head-on and then when that fails to work, go dig the nerds up out of the basement to invent some fancy super-weapons and blow the enemy to kingdom come. Then send the nerds back to the basement so the jocks can claim all the credit and get the girls...but I digress.)

Meanwhile, the failure of the Crusades may have been instrumental in teaching Europeans that the civilizational strategy they were pursuing in the Middle Ages - theocracy, insularity, and high birth rates - was a dead end. Out of failure comes adaptation, and the debacle that was the Crusades may have been what started Europe on the long road away from Catholic Church dominance and toward science, democracy, liberalism, and technology - the road that eventually made them (temporary) masters of the world.

Now, the modern Middle East is starting from a much better initial point than Medieval Europe. The world is much richer place now than it was then, and information technology is much better. I doubt it'll take anywhere close to 400 years for Muslims to realize that the al Qaeda/ISIS strategy is a dead end - in fact, by now they already have realized it. Support for terrorism among Muslims has gone from a minority to a tiny minority. There were a couple years after 9/11 where some people probably thought that al Qaeda-style attacks were the "strong horse" that would reclaim Middle Eastern pride and expel the foreign barbarians. No longer.

Sure, there are a handful of angry young men going to fight for ISIS. Most will get what they want (the chance to rape some young girls, followed by a swift glorious death). But the great mass of Middle Easterners, and of Muslims elsewhere in the world, now realize that the Jihads are bullshit. Perhaps - hopefully - the failure and brutality of the Jihads will lead the people of the Middle East to realize that Islamism is not the future, and prompt them to start looking for other routes to civilizational greatness.

And the Enlightenment will be there, waiting. Still the best civilizational strategy humanity has ever invented.

Sunday, February 08, 2015

Who do I admire most?

After the most recent results of Gallup's traditional "most admired" poll turned up some odd answers (Vladimir Putin??), Tyler Cowen asked his readers to identify their most admired living individuals. Well, there's little I like better than a good hagiography, so here's my list, in no particular order. Note that these are people I admire for what they're doing now. And of course the list is heavily weighted toward people in the media (and people I know); there are people working to take out terrorists, or discovering the technologies for better batteries, or working on cancer cures whom I would admire if I knew their names. With those caveats, here is the list:

1. Elon Musk

An obvious choice. But what other individual has the chance to singlehandedly save the world? Not only would electric cars help bring down oppressive petro-regimes all over the planet, but cheap batteries for cars and houses would be a huge help in the fight against global warming. Musk is the most important individual working to make those technologies happen.

People I admire for similar reasons: Danielle Fong, Lyndon Rive

2. Kathy Matsui

As you all know, women's equality in Japan is a big issue I care about. I'm also of the school that thinks that economic equality is a prerequisite for social equality. No one has done as much to promote the idea of "womenomics" as Kathy Matsui. Many of the changes we are seeing in Japan originated from the ideas of Matsui.

People I admire for similar reasons: Sayaka Osakabe, Akie Abe

3. Elizabeth Warren

I don't agree with Warren on every issue, not by any means. But no other person in the United States has been as tireless and effective about fighting the excesses of the 2000s-era industrial policy. Just pushing through the CFPB would be heroism enough for one lifetime. Warren will probably go down in history as the most important reformer of the current period.

People I admire for similar reasons: Paul Volcker

4. Shinzo Abe

I was once about as big an Abe detractor as you could find, back in 2006 when it seemed like he was undoing everything Junichiro Koizumi had accomplished. But then Abe transformed himself into the super-Koizumi, with some help from his wife and his economic advisers, made a stunning comeback, and is now transforming the Japanese economy and society in ways that will be mostly good.

People I admire for (somewhat) similar reasons: Koichi Hamada, Joko Widodo

5. Steve Chu

The energy crunch is humanity's biggest challenge, and it will take both government and the private sector to beat it. On the private sector Elon Musk is the icon, but in the government sector, Steve Chu is the biggest hero. Chu worked tirelessly to create a sensible energy policy that was diversified and that balanced the need for boldness with the fear of waste.

People I admire for (somewhat) similar reasons: Barack Obama

6. Marc Andreessen

Putting Marc on this list will cause me some embarrassment next time I see him on Twitter, but there's no way I could leave him off. Well of course he did kind of invent the Internet, but remember that this list is about current activities. Nowadays, as a venture capitalist, he's A) funding neat stuff, while B) working to define the culture of Silicon Valley in a positive way. Many other people do (A); few other people of such prominence do (B). Along with his wife, Laura Arrillaga-Andreessen, he's working to increase women's participation in the IT industry.

People I admire for (somewhat) similar reasons: Bill Gates

7. Jim Pethokoukis

Yes, this is a repeat from the "heroes of blogging" list, but oh well. Transforming one of America's two dominant political ideologies is a tall, tall order. Of all the people in the "reform conservative" movement, the one with the best vision and message is Jim Pethokoukis of the American Enterprise Institute. See here, here, and here for his attempts to grab the tiller of the conservative ship and steer it in a more rational, forward-looking direction.

People I admire for similar reasons: Michael Strain

8. Jon Stewart

There was a moment, sometime in 2005, when it seemed like Jon Stewart was the only sane man in America. American politics was still in a fever from 9/11, and the Iraq War and the second Bush election certainly didn't help. I still feel like the turning point, for some reason, was when Stewart destroyed the moronic show Crossfire on live TV. More importantly, Stewart has worked tirelessly for over a decade to expose the hyper-partisanship of our era for the joke it is.

People I admire for similar reasons: Stephen Colbert, John Oliver

9. Terence Tao

It's one thing to be the smartest human on the planet. It's another thing to be both the smartest human on the planet and a nice, well-adjusted person. We are raised on archetypes of the crazy smart guy - Isaac Newton slurping mercury, Grigori Perelman turning down a million dollars and living off of his mother's pension. Of course, it's not those guys' fault that they are oddballs, but symbolism is important. Tao is a new model of hypergenius -  a well-adjusted guy who shares his work on his blog, collaborates with everyone, and just has fun.

People I admire for (somewhat) similar reasons: Jim Simons

10. My "heroes of blogging": Brad DeLong, Annalee Newitz, Ramez Naam, Devin Stewart, Cory Doctorow, Phil Yu, Richard Florida, Paul Krugman, Barry Ritholtz, Mark Thoma, Miles Kimball, Justin Wolfers, and more!

Obviously, this is not an exhaustive list. But I'm exhausted now, in any case.


Tyler Cowen posted his own "most admired" list, mostly consisting of everymen/everywomen in various important or dangerous positions. Good point - it's easy to forget the quiet heroism of normal people.

Tuesday, February 03, 2015

What killed my favorite bookstore? (SEE UPDATE)

My favorite bookstore in the world is Borderlands Books in San Francisco, a sci-fi themed bookstore.

Or rather, it was my favorite bookstore, because it's about to be forced out of business courtesy of San Francisco's new minimum wage hike, and pressure from Amazon.

Two lessons from this:

Lesson 1: The bad effects of minimum wages are real. 

There's just no way around it. Yes, we liberals often like to talk about all those studies that show that the effect of minimum wage hikes isn't that big. But on the margin there is going to be an effect. And when your favorite business is on the margin, that means your favorite business gets the ax.

If you want to accuse Borderlands owner Alan Beatts of being a money-grubbing profiteer, be my guest, but you'll be wrong. The whole reason Borderlands exists in the first place, in the face of pressure from Amazon, is that it is close to being a nonprofit. From Beatts' blog:
[T]he basic facts: 
1)  The bookselling side of Borderlands has never been terribly profitable.
2)  Based on current business, the new minimum wage, once fully in effect ($15 per hour in 2018) would move the bookstore from being modestly profitable (roughly $3000 in 2013 before depreciation) to showing a yearly loss of roughly $25,000.
3)  It is reasonable to expect that the best-case, long term sales trend for a brick-and-mortar bookstore is relatively flat.
4)  Making 50-60 hours of work, per week, with no real holidays on my part an intrinsic part of our business plan is neither viable long-term nor something I am going to do.
5)  Any solution would need to have a very good chance of working.  Closing now is a straightforward process and doesn't require any money and a limited amount of frantic work.  Pouring money and / or time into a solution that might work is not something that I'm willing to do at this point in my life. 
The only solution that I can see would be to reduce expenses by an amount at least equal to our projected yearly loss.  The only expense that is large enough to reduce by that much is our rent.  So, the only viable solution I can see would be to substantially reduce or eliminate the amount we pay to house the store.  The problem is that I can't see any realistic way to achieve that.  If I had the money, I would buy a building, move the store there and stop paying rent.  It would be a terrible investment, since I'd be losing out on the income from that money, but if I were driven by profits or money, I wouldn't be running a bookstore to start with... 
However, I don't have even a fraction of the money that would be required for that.  Based on the current market and the sort of building we would need, the price tag would probably be somewhere between 1.5 and 3 million dollars.  So, what it gets down to is -- if someone (or a group of someones) out there wants to buy us a building, I'll be happy to move the store and stay in business.  But, otherwise, I cannot see any solution that will allow us an even half-way reasonable chance to make the business work at a minimum wage of $15 an hour. 
Do I seriously think that someone will buy us a permanent home for the store?  Not at all.  I would do it for my store, but I don't think I'd do it for anybody else's.  On the other hand, if I had as much cash as Ron Conway, Mark Zuckerberg or Elon Musk, I guess I might do something like that.  But, realistically, it's not going to happen. 
But, if it did, I would keep running Borderlands 'til someone carried me out feet first.  I really don't want to close.  But I can't see any real, sane alternative.
Now you tell me if he sounds like a capitalist pig.

No, a high minimum wage really does kill some good and valuable things.

Lesson 2: Technological progress does have drawbacks.

I LOVE Amazon. I would NEVER go back to the days of brick-and-mortar stores. But that doesn't mean that the advent of this cool new technology is costless. When bookstores disappear, a unique kind of positive experience will no longer be available to humanity. Amazon's bookselling business may give customers more overall pleasure than bookstores, but there is a type of pleasure involved with hanging out in a bookstore that will not be replicated by Amazon ever (or at least until virtual reality technology becomes almost inconceivably more advanced). Just because costs are worth paying doesn't mean there aren't costs.

But in fact, since there is a positive externality to bookstores, created by the presence of other shoppers, it's likely that there are a few individuals out there who will actually be made worse off, in the strictest sense, by the advent of Amazon.

In other words, new technology is an improvement by many yardsticks, but not always by the yardstick of Pareto efficiency. When brick-and-mortar bookstores are gone, you really can't buy your old bundle back (unless you are a very rich person who can afford to buy a bookstore and operate it at a loss).

My new goal is to get really rich so I can buy and operate a Borderlands-type bookstore at a loss.


Borderlands may not be dead yet. Here's how you can help save it. And more plots are being hatched...

Saturday, January 31, 2015

Nuclear will die. Solar will live.

In a recent article, I suggested that batteries might replace oil for many of our transportation needs within two decades. Batteries store energy, and we need a way to produce that energy in the form of electricity. Currently we produce most of our electricity from natural gas and coal. And while our use of natural gas and coal doesn’t feed the coffers of unsavory regimes like Russia and Saudi Arabia the way our use of oil does, it’s still the case that these energy sources are limited. They run out.  What will replace them?
The leading candidate is solar power. Cost is dropping like a rock, including “balance of system” costs that include things like installation and land. For an update on the status of solar power, see this excellent article from The Economist. Of course, improvements in battery storage are very helpful for solar, since you need to store some energy for nighttime.
But there is still a strong contingent out there who is dead-set against the solar revolution – not because they want to keep using fossil fuels, but because they are convinced that only nuclear power can solve our energy crunch.
One example of this faction is the Breakthrough Institute, which regularly releases articles comparing nuclear and solar, invariably supporting the former over the latter. Of course, solar costs continue to perform much, much better than they predict, but they continue to insist that nuclear – and only nuclear – must be the energy source of the future.
I’m always a bit puzzled by the anti-solar antipathy of the pro-nuclear crowd. Energy is energy, after all. Perhaps nuclear looks muscular and futuristic – an emblem of national greatness – while solar looks like wimpy hippie stuff.
But regardless of people’s feelings, the fact is that conventional nuclear power – by which I mean uranium fission, the kind of thing Mr. Burns produces on The Simpsons – is on the way out. This is not a cry of triumph on my part, but a lament. Nuclear power is cool. It’s just not the future.
For the most convincing evidence that uranium fission is on the way out, I again point you to The Economist. Their 2012 special report, called “The Dream That Failed,” shows how nuclear usage is flat, and expected to decline in rich countries.
There are three basic reasons conventional nuclear is dead: cost, safety risk, and obsolescence risk. These factors all interact.
First, cost. Unlike solar, which can be installed in small or large batches, a nuclear plant requires an absolutely huge investment. A single nuclear plant can cost on the order of $10 billion U.S. That is a big chunk of change to plunk down on one plant. Only very large companies, like General Electric or Hitachi, can afford to make that kind of investment, and it often relies on huge loans from governments or from giant megabanks. Where solar is being installed by nimble, gritty entrepreneurs, nuclear is still forced to follow the gigantic corporatist model of the 1950s.
Second, safety risk. In 1945, the U.S. military used nuclear weapons to destroy Hiroshima and Nagasaki, but a decade later, these were thriving, bustling cities again. Contrast that with Fukushima, site of the 2011 Japanese nuclear meltdown, where whole towns are still abandoned. Or look at Chernobyl, almost three decades after its meltdown. It will be many decades before anyone lives in those places again. Nuclear accidents are very rare, but they are also very catastrophic – if one happens, you lose an entire geographical region to human habitation.
Finally, there is the risk of obsolescence. Uranium fission is a mature technology – its costs are not going to change much in the future. Alternatives, like solar, are young technologies – the continued staggering drops in the cost of solar prove it. So if you plunk down $10 billion to build a nuclear plant, thinking that solar is too expensive to compete, the situation can easily reverse in a couple of years, before you’ve recouped your massive fixed costs.
If you want to see these forces at work on the largest possible scale, look at the example of Japan. Japan was a leader in solar when the technology first emerged, but the government bet big on nuclear. Now, with nuclear power suddenly…um…radioactive following Fukushima, Japan is struggling to catch up in solar. Meanwhile, huge losses by the Japanese nuclear industry are going to land in the lap of the government and the too-big-to-fail banks.

Uranium fission was a great idea, but it hasn’t worked out. If nuclear fission is going to be viable in the future, it’s going to require thorium fuel (which is much safer than uranium) and much smaller, cheaper reactor designs. Those technologies are still in the research stage, not ready for immediate use. Meanwhile, solar power is racing ahead much faster than anyone expected, continuing to beat all the forecasts.

Our government should continue to fund research into next-generation nuclear power. But what next-generation energy source should we be installing, right now? It’s not even a contest. Solar beats nuclear.

Wednesday, January 28, 2015

Priors and posteriors

A really wonderful blog post by Stephen Senn, head of the Methodology and Statistics Group at the Competence Center for Methodology and Statistics in Luxembourg, sums up the philosophical problem I've always had with Bayesian inference in scientific studies. Basically, the question is: Where does the prior come from? Senn argues that it can't be your real prior, since you can't quantify your real prior.

Where else could your prior come from? Here's the list I thought of:

1. You could use a "standard" prior that a bunch of other people use because it's "noninformative" in some sense (e.g. a Jeffreys prior). See this Larry Wasserman blog post on some of the potential problems with that approach.

2. You could use some prior that comes from empirical data. This is the foundation of the "empirical Bayes" approach.

3. You could choose a bunch of different priors and see how sensitive the posterior is to the choice of prior. This could be done in a haphazard or a systematic way, and it's not immediately clear if one of those is always better than the other. The drawback of this approach is that it's a bit cumbersome, and hard to interpret.

4. You could choose a prior that is close to the answer you want to get. The less informative your data is, the closer your prior will be to your posterior. This seems a bit scientifically dishonest. But I bet someone out there has tried it.

5. You can choose an "adversarial prior" that is similar to what you think someone who disagrees with your conclusion would say. (Thanks to Sean J. Taylor of Twitter for pointing this out.)

Have I missed any big ones?

Anyway, as always in stats, there's some element of intuition that can't be incorporated into the estimation in a systematic way.

Anyway, Andrew Gelman, one of the high priests of Bayesianism, so to speak, had this to say about Senn's post:
I agree with Senn’s comments on the impossibility of the de Finetti subjective Bayesian approach. As I wrote in 2008, if you could really construct a subjective prior you believe in, why not just look at the data and write down your subjective posterior. The immense practical difficulties with any serious system of inference render it absurd to think that it would be possible to just write down a probability distribution to represent uncertainty. I wish, however, that Senn would recognize “my” Bayesian approach (which is also that of John Carlin, Hal Stern, Don Rubin, and, I believe, others). De Finetti is no longer around, but we are! 
I have to admit that my own Bayesian views and practices have changed. In particular, I resonate with Senn’s point that conventional flat priors miss a lot and that Bayesian inference can work better when real prior information is used. Here I’m not talking about a subjective prior that is meant to express a personal belief but rather a distribution that represents a summary of prior scientific knowledge. Such an expression can only be approximate (as, indeed, assumptions such as logistic regressions, additive treatment effects, and all the rest, are only approximations too), and I agree with Senn that it would be rash to let philosophical foundations be a justification for using Bayesian methods. Rather, my work on the philosophy of statistics is intended to demonstrate how Bayesian inference can fit into a falsificationist philosophy that I am comfortable with on general grounds.

Update: Thinking about it a little more, I don't think Senn's point really has any implications for study design. But it does seem to have implications for how a "client" (or reader of a paper) should treat a "Bayesian" researcher's results. Basically, a researcher doing Bayesian inference is not the same as a Bayesian agent in a model. A Bayesian agent in a model always uses her own prior, and thus always uses information optimally. A researcher doing Bayesian inference cannot use his own prior, and so may not be using information optimally. So using Bayesian inference shouldn't be a free ticket to respectability for research results.

Tuesday, January 27, 2015

Postwar vs. New Gilded Age: How did the middle class do?

Here's another point in the ongoing debate over the fate of the American middle class in recent decades (installment 1 here, installment 2 here).

In his original post, Brad DeLong wrote:
Across most of the income distribution Americans today are little if any better off than their predecessors back in 1979...For 150 years before 1979 Americans had confidently expected that each generation would live roughly twice as well in a material sense as its predecessor, not find itself struggling against the current to stay in the same place.
In my previous posts, I pointed out that median household income had increased. But let's just look at median individual income. Was 1979-2000 really worse than the postwar period, for the average person?

Let's look at the relative performance of the period, not its absolute performance.

I found this cool graph from the Russell Sage Foundation. Using Census data, it shows inflation-adjusted median and mean household and individual income, starting in 1947:

Median individual income in constant 2012 dollars is the green time series. I drew three horizontal lines, corresponding to 1947, 1979, and 2000. 

From 1947 to 1979, real median individual income went from around $16,000 to around $21,000 - a total increase of about 32%. That is a compound annual growth rate of about 0.8%.

From 1979 to 2000, real median individual income went from around $21,000 to around $28,000 - a total increase of about 33%. That is a compound annual growth rate of about 1.38%.

Let's do a comparison that's a little more favorable to DeLong and Thomas' argument, and a little less favorable to mine. Let's use 1972 as the end of the "good" times and 1972-2012 as the "bad" times.

From 1947 to 1972,  real median individual income went from around $16,000 to around $23,000 - a total increase of about 48%. That is a compound annual growth rate of about 1.46%.

From 1972 to 2012,  real median individual income went from around $23,000 to around $27,000 - a total increase of about 17%. That is a compound annual growth rate of about 0.4%.

Finally, From 1979 to 2012,  real median individual income went from around $21,000 to around $27,000 - a total increase of about 28%. That is a compound annual growth rate of about 0.76%.

You can play around with these numbers more, but several conclusions emerge:

Conclusion 1: If you go by personal rather than household income, it is not true, as Brad asserts, that the average American saw his or her material standard of living double in the Postwar period.

Conclusion 2: The period from 1979-2000 - the Late 20th Century Boom - was about as good for the average American's income as the Postwar Boom period from 1947-1972. The Postwar Boom wins, but only slightly, since both booms have fairly high compound growth rates.

Conclusion 3: The Total Postwar period, from 1947 through 1979, is almost exactly the same as the Total New Gilded Age from 1979-2012, although both have fairly low compound growth rates.

Conclusion 4: The Late 20th Century Boom thoroughly thumps the Total Postwar Period (1947-1979) in terms of the growth in the material standard of living of the average American.

Conclusion 5: The 1970s was bad, but was over quickly. The Post-2000 period has also been bad, and is stretching out for longer than the 1970s.

In other words, Brad DeLong's contention that the average American saw a dramatic slowdown or reversal in the rate of growth of his or her material standard of living in 1979 is not supported by this evidence. And his contention that the Postwar rate of growth in material standard of living represented a generational doubling is not correct, if you exclude the effects of technological improvements. It was more like a 33%-50% increase.

And my contention that the period from 1979-2000 was a great time for the average American's material standard of living is correct, if you compare it to the period from 1947 -1979, and even looks pretty good if you compare it only to the best Postwar decades.

Again, this is not accounting for leisure and home production. But observe that the Postwar period, just like the period from 1980-2000, saw a steady increase in the percent of women in the labor force:

Therefore, hours spent on home production were decreasing at about the same rate in the Postwar period as in 1979-2000. In other words, although women's workforce entry contributed more to rising income in 1979-2000 (because women's wages had converged somewhat with men's by then), the rate at which household production hours were sacrificed - the rate at which women exited the home and went into the workforce - was roughly the same in both periods.

So as I see it, the entire case that 1979-2000 represented a dramatic slowdown in the growth of material living standards relative to the Postwar period rests on the fact that leisure increased during the Postwar but flatlined during 1979-2000:

If you want to make the case that the American economy did dramatically worse for the average American in 1979-2000 than in 1947-1979, this is the most convincing case I can think of. 

(Note: I still think the Postwar period represented a much bigger jump in the welfare of Americans, since marginal utility of consumption is concave. Getting food on the table, warm clothes, and a roof over your head is vastly more important than getting a bigger house, a second car, etc.)