Lord, Forgive the Economists, For They Know Not What They Do

A remarkable disruption in the force.  How anyone could understand the complex rules of threat, deterrence, and protection as "profit-maximizing" per se is beyond me.  But it does illustrate how bizarrely intellectually impoverished economics is as a field.

Fighting as a profit maximizing strategy in the National Hockey League: More evidence 

Duane Rockerbie 
Applied Economics, forthcoming 

Abstract: This article estimates the effect of fighting in hockey games on attendance in the National Hockey League (NHL) over the 1997–1998 through 2009–2010 seasons. After estimating a system of equations developed from a model of a profit-maximizing club owner, it was found that fighting had a small negative effect on attendance implying that encouraging fighting on the ice is not a profit-maximizing strategy. The results are quite robust when incorporating capacity constraints on attendance and exogenous ticket pricing. Other factors that determine club performance and market size were found to significantly affect attendance. The empirical results also suggest that NHL club owners are maximizing profit.

Look, folks, hockey fights, like stylized fights in the animal kingdom, prevent actual violence and injury.  Having specialized goons makes the game cleaner.  And, in equilibrium, there is less violence.  Selecting on instances of violence and then drawing inferences is not just a misunderstanding of hockey, but a show of ignorance of basic game theory.  If you have a reputation for effective violence, you won't have to fight.  And you won't get that stick handle poke-check to your star forward's chest, breaking his rib.  Gretzky pretty much never got touched.  'Cause if he did, there would be a fight.  Gretzky wouldn't fight, and not because he was a pussweiler.  Gretzky didn't fight because he was too valuable, TO BOTH TEAMS.  Nobody wanted Gretzky hurt, and someone who hurt Gretzky was gonna get an ass-whuppin'.  Knowing that, the "no violence" equilibrium could be supported.

For a Canadian (and Duane Rockerbie is clearly a Canadian, eh?) to make this mistake is even more inexcusable.

For those seeking enlightenment, the answer (as always) is one of my appearances on EconTalk.  This one, in fact.  This recent book does a nice job of discussing when violence is "virtuous."  And, like any literate people, they know enough to reference EconTalk as THE authoritative source. Or, something like that.

Nod to Kevin Lewis

The Importance of Basic Economic Education

The reporters of the New York Times illustrate yet again the importance of a basic knowledge of economics.  By, yet again, showing what happens when "reporters" lack such basic knowledge.

A truly remarkable article.  Even by the appalling standards of the Times, this is terrible.

Pelsmin provides this commentary, via email.  I have underlined some points that made me giggle:

I've been following the NYTimes' coverage of drug shortages. I'm sure you've seen the stories about how critical drugs are running out, even generics. The lack of understanding of the most basic economic principles is funny, or maybe sad or pathetic. To me, there was only one POSSIBLE reason why widely manufactured on-patent and generic drugs could be running out; government interference. 

Sure enough, the reasons I've seen include factory shutdowns imposed due to failure to meet gov't quality standards and restrictions and hurdles placed on "over-prescribed" drugs like Adderal and certain pain killers. There is now a shortage of saline solution (!) and critical cancer drugs. 

The Times' coverage not only misses this but presents the government regulators as acting heroically to fix this. For example, the FDA proposed that a company with physical contaminants in a product FILTER the product and then sell it, instead of shutting down the factory, as if the company wouldn't have proposed this themselves. Now, not imposing a draconian restriction or condition on a company is considered innovative problem-solving by the government. 

Better is their feeble stab at the evil thinking by the drug companies. First, they blame "narrow profit margins" as one reason companies won't make vital drugs that are in short supply. I'm trying to picture the curve that explains this (currently reviewing some Escher drawings for inspiration...) The writer also states that "in a peculiarity of the generic drug industry, a drug is often made by only a few producers, making it difficult to mitigate the effects of a shortage". 

Think about that one; generic drugs are only made by a few producers, whereas on-patent drugs are -- what, made by hundreds? No, made by one company, typically, except for license deals. Other reasons indicate that either the writer understands factory production line optimization better than the companies, or maybe doesn't have a clue what she is talking about. Of course, the only way the wackier ideas of high-demand/low-supply/low price are possible is if the FDA has caused this (e.g. Medicare sets and enforces prices that have no bearing on costs or utility.) Yet the article cites praise for the government and "acknowledged that [the FDA] could not ultimately force drug companies to produce." Not yet, until the new five-year quotas are issued under executive order through the medical commisar.

P-Kroog, the Pot, and the Kettle

John Cochrane on prediction, and the slugfest.

A slug in the slugfest.

It would be nice if P-Kroog would write about economics.  He certainly knows very little about whatever it is that he is writing about now.

Nod to Gerardo

All aboard Obama Motors

Obama General Motors, is not doing too well. When it went public again in November 2010, the stock price was $33.00. It's around $20 today. The Dow has risen significantly over this same time period (almost 30%), so the stock is a real dog.

GM is also still losing market share. They had a US market share of 20% in 2011, so far this year it's running at 18%.

How you like them Volts, 'Merica?

If the President is re-elected we may well be able to refer to GM as "the company so nice, Obama bought it twice!

All this and much more at this link.

Hat tip to Chris L.

"It isn’t easy to understand how the world works"*

And it doesn't help that we get bombarded with BS on a minute by minute basis:

"Tax rates were higher under Clinton than under Bush/Obama and things were better, so raising taxes now won't hurt economic performance."


"We tried stimulus and the economy was worse than the governments' "no stimulus" baseline, so fiscal stimulus doesn't work."


"We spend more on health care than some other nation does and get worse results, so if we adopted the system used by the other country we'd get better results with less cost."


These are examples of the common mistake of not taking other relevant factors into account. Using one bilateral comparison to determine causality is rarely going to be correct.

Consider the third example above. For the claim to have any shred of validity, we'd need to find a nation that had roughly the same population, income distribution, ethnic diversity, rates of obesity and exercise, diet, and probably a few other things as well. That ain't Sweden, or Singapore, or France.

But yet we hear it every day repeated as a killer argument for some alternative health care delivery system.

Then there are the claims that conflate average with marginal:

"Wages are higher in manufacturing than services, so we should subsidize increases in manufacturing jobs"


"Higher top tax brackets won't deter economic expansion because they only apply to the last money earned. The overall average tax rate won't go up very much." 

Averages just aren't relevant for economic decisions. To determine what kind of job is better, we need to study what are current hires in manufacturing earning compared to services. When deciding to expand production businesses compare the marginal costs and benefits of doing so.

Take heart, at the least the BS shot at you by econo-pundits is not as grossly ridiculous as that delivered by medico-pundits.

Take this recent gem: "If you sit a lot, you will have a shorter life expectancy" which is being widely interpreted as meaning "sitting will shorten your life!"

Did it never occur to these geniuses that sick people probably sit a lot more than healthy people??

And no, state of health was NOT a control in the meta-analysis that is cited in the articles. Only age and gender were used as controls. In other words, the statement is meaningless.


*title quote is from Larry Summers as discussed here by one of his former students, Miles Kimball.

All dressed up but nowhere to go

There are a lot of things that drive me crazy about the current practice of econometrics. People who think over-identification tests validate their indentifying assumptions. People who think that if you fail to reject the null at the 0.05 level, it's fine to proceed in your analysis as if the null was true (i.e. people who don't believe in type II error).

But one of the biggest is the practice of thinking we do no harm by using estimators we know to be inappropriate for the data at hand and thinking we somehow fully fix that issue by using robust standard errors.

I annually beat my head against the wall trying to get my students to appreciate these issues (only to often have my work undone by their reading papers/books that make these mistakes), but now on this last point, I have some help!

Continue reading below the fold

Inevitability of Politics?

This is a truly remarkable performance.  The mindless state worship.... the condescension, the paternalism.  Breath-taking.  Here is what self-appointed dictator of others Dorman has to say for his big finish:

The non-reflexive-libertarian view does not require a market failure or a taste for paternalism.  It sees Conditional Cash Transers as policy initiatives to shift cultural norms regarding education and health.  (And, no, trying to shift norms is no more paternalistic than choosing to not shift them.  Welcome to the inevitability of politics.)  Recipients of transfers can reasonably be asked to meet education and health conditions because child-rearing is recognized as socially necessary work, and it is equitable to pay people for it provided it is done in a way that meets societal expectations.

Okay, so it actually works as follows...(continued below the fold)

Baffle them with bulls**t

Oh my.  Jeff Sachs has a piece in The Lancet, extolling the accomplishments of his Millenium Village Project, that is, shall we say, weak.

Let's concentrate on child mortality, described in the Lancet piece as the "primary study outcome".

Sachs et. al. claim that, "Mortality rates in children younger than 5 years of age decreased by 22% in Millennium Village sites relative to baseline (absolute decrease 25 deaths per 1000 livebirths, p=0·015) and 32% relative to matched comparison sites (30 deaths per 1000 livebirths, p=0·033)."

They present this evidence in a table (page 7 of the article, the last row of the results there) comparing the change from year zero to year 3 in the MVs and in the comparison villages.

So far, so good, right? Well, what if I told you that, in the words of Sachs et. al., "Local comparison village sites were introduced in the third study year to enhance the plausibility that recorded changes were the result of intervention exposure."

In other words, the comparison villages were added ex-post! So how then can they report the change in child mortality in the comparison villages over a time period that started before they started to study those villages?

"Year-0 value is based on recall items in the year 3 survey (eg, women’s reproductive histories)."

YIKES!!

So in year three, they asked women how many children they had under 5 that died in year zero and compared that to the actual numbers they measured in year 3, while the MV change was computed from measurements (not surveys) in both years.

Why does this matter? Well according to the table in the Sachs et. al. article, child mortality is RISING in the comparison villages. This "result" is driving the whole claim quoted above. In the MV case, child mortality falls from 113 to 88.7 over the time period, while in the comparison villages the rate rises from 90 to 96!

So if that comparison is no good what can we use? Well, the total percentage decline in child mortality in the MVs was around 22% which is pretty much right in line with the overall figures the World Bank is reporting for many Sub-Saharan African countries!

I am by far not the first one to point this out. Here's an article from Nature, quoting Michael Clemens than makes many of the same points.. Here's the Roving Bandit pointing out other statistical silliness in the Lancet paper. Here's more from Aid Thoughts about the overall decline of child mortality in Africa.

I really don't understand why a well published PhD economist would bend good practice to this extent, no matter how noble his ultimate goals.

Sometimes a picture isn't worth spit

Take this one in today's WSJ for example. A scatterplot of countries average growth rate over the 41 years from 1960-2000 against their average math test scores in the same period.

And, yes, of course the authors take the graph as causal explaining how that if we could just get our math performance up to the level of Canda's, we would all become way richer (yes I know the graph shows us growing faster than Canada already. The authors certainly could have picked a better example to tout their "theory").

I agree with the authors that K-12 education in America is failing an unacceptably large number of students and I favor reforms and experiments to search for better solutions. But let's not kid ourselves that the graph presented provides us a "menu" where we pick the growth rate we want by achieving the requisite test scores.

Silver linings

The Venezuelan government is on an unsustainable treadmill. They are running a sustained inflation rate of between 25-30% per year. People complain about higher prices, so they institute price controls and nationalize "offending" companies. Both actions tend to reduce supply, so customers then face shortages and long lines for the products. The NY Times has a good article on the situation.

But as they say, there's always a silver lining. Some citizens are getting healthier:

Waiting in line to buy chicken and other staples, Jenny Montero, 30, recalled how she could not find cooking oil last fall and had to switch from the fried food she prefers to soups and stews.


 “It was good for me,” she said drily, pushing her 14-month-old daughter in a stroller. “I lost several pounds.”

In (limited) defense of the Bernank

Progressive social media is echoing with the theme that everything would be well with the American economy were it not for the willful obstructionism of Ben Bernanke.

Here is a tweet from Matt Y:

"the gaps get smaller with every month Bernanke lets our human and physical capital stock decay -- that's the problem!"

and another:

"I'm not sure I understand why it's my job to "understand" the man presiding over a total disaster."

And here's the usually excellent Interfluidity telling us that our current economic woes are a deliberate choice made by our policymakers:

"We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives."

Wow.

First of all, we are not in a depression. Nor is the economy a "total disaster". We are in a disappointingly slow and painful recovery from a very deep recession.

Second, the Bernank actually helped to save our asses back in the darkest days of financial panic.

Third, these are the same folks who generally believe that wages are too low and workers don't earn enough compared to capital. Yet their solution to the low growth / high unemployment problem is for the Fed to lower wages?

Fourth, the Fed cannot automatically control the real interest rate. Do you think the Fed could set inflation or inflation expectations at 10% and simultaneously hold nominal rates at zero?

Fifth, NGDP targeting is not some magic bullet that would solve our current problems. It relies crucially on a particular path for expectations. If you think it's easy for an actor who can't easily make credible commitments to control expectations, you should read Svensson's work and ask yourself how likely it is that the Fed could ever follow Svensson's foolproof path.

I personally support having the Fed try some additional unorthodox policies in the short run. Even if there's only a .25 chance they significantly affect employment and growth, why not try? But I do not think the Fed is sitting on policies that will definitely cure our economic ills. The Fed is not close to omnipotent.

Hatin' On the Econ Game

New York Times has been running a series; more to come.

Here is the good N. N. Taleb, on models. Not sure he has this right.

And also in the Times (though not in the same series) Clarke and Primo on physics envy.

Unicorns & Rainbows

Ezra Klein has identified why the government didn't "fix" the great recession; Politics:

The compromise was clean and obvious: Investments and tax cuts now, coupled with a much-larger deficit reduction package that would kick in once unemployment fell below, say, 7 percent. 


 What doomed this package wasn’t a theoretical divide. I spoke with many freshwater economists who thought a package like this would be sensible. Rather, it was politics wot (sic) done it. 

 This type of storyline refuses to recognize the simple brutal fact that current politicians cannot commit future politicians to a specific course of action. The proposed "package" was simply not credible because the back loaded pain is unenforceable.

Advocates of deficit reduction (I'm not saying that it's the right policy) could clearly see that the only policy that would actually happen for sure was a big increase in the deficit and were completely rational in opposing such a plan.

Absent a credible commitment mechanism, promises of future actions are basically worthless. This is an example of the "asynchronous exchange" issue Oliver Williamson has elucidated. Some call it the "St. Augustine problem" ("Lord grant me chastity, but not just yet")

The phenomenon doesn't rely on there being different politicians in place when the deficit reduction is supposed to kick in. The exact same politicians can simply decline to enforce their previous agreement.

Let's see what happens to the "automatic" sequestration.

If you really want deficit reduction (again, I'm not saying that it's the right policy), all you can do is try to get it done NOW.

Matt Y commits the infra-marginal fallacy

Man oh man. Can't anybody on these interwebs play this game?

People, the fact that the average wage in manufacturing is higher than the average wage in non-manufacturing is SIMPLY UNINFORMATIVE about whether new hires in manufacturing enjoy a wage premium vs. new hires in non-manufacturing.
Economic analysis is MARGINAL ANALYSIS.

We know that new hires in manufacturing nowadays often come with wages and benefits significantly below historical averages.

This is a basic economic point, but people just keep getting it wrong.

Degrees of freedom

In my seminar on Growth & Development today we discussed a paper where the sample size was fairly small, around 75 observations. The authors said due to the small sample size, they couldn't estimate models with a lot of regressors in them because of degrees of freedom issues.

Then they proceeded to investigate upwards of 30 variables, by using them one at a time! To "save" degrees of freedom!

Yikes!

First off, excluding relevant variables in the analysis biases results unless the variables are somehow orthogonal to each other, which is EXTREMELY unlikely.

Second, estimating 30 small regressions on the same sample does not actually save ANY degrees of freedom over estimating one big regression on the sample.

Sure you can say it does and use the nominal critical values in each case, but you are kidding yourself and misleading your readers.

Degrees of freedom are like cigarettes. Once you use them, they are gone. They can't be re-used over and over again.

Overall the paper reported well over 100 estimated coefficients. On 75 data points. In a ton of different regressions all with the same dependent variable. Used the nominal critical values in every case.

What is the critical value for a "t-stat" with negative 34 degrees of freedom?

Anyone?

Bueller?

The CBO and potential output

Jim Bullard from the St. Louis Fed has been pilloried for his comments about what affects potential output.

Noah Smith accuses him of being a Solow Model denialist (saints preserve us)!

Tim Duy says that can't be right because Bullard is too dense to even realize that Potential GDP is calculated using the Solow model.

People, I'm not here to defend Jim Bullard. But I am here to say that according to the link provided by Duy to the CBO's description of how they calculate potential output, the statistic is a mess. Making sausage is a much cleaner enterprise.

First off, it's based on an accounting identity! God I love the government:

Q_nfb = AL^aK^1-a

(this is my crudely typed version of equation 3 in the CBO document)

Sadly they forgot the third bar in the equal sign. This is an accounting identity! A is TFP which is defined as what's left over in output after we impute the effects of labor and capital (the CBO freely admits this by the way). a is assumed to be 0.30 and constant over time.

So, forecasting potential output means forecasting potential TFP, potential labor, and actual capital (read the document if you doubt me) and plugging those values into the equation.

People, they ain't using the Solow model to accomplish those tasks!

Potential labor and potential TFP are forecasted by piecewise linear regressions where the breakpoints ARE NOT DETERMINED BY ANY SORT OF STATISTICAL CRITERION (again, read the document if you doubt me).

The CBO method is arbitrary and weak. Defending it via appeal to authority by saying "it's based on the Solow model" is pathetic.

First of all, the Solow model stinks! It cannot come close to describing the evolution of the world income distribution since 1950.

Second, the measure of potential output is crucially dependent on all the forecasting assumptions used to produce potential Labor and potential TFP, which are not based on any real economic theory or optimal statistical algorithm.

Finally, the CBO itself says things that are remarkably Bullard-like right in the document Duy links to:

"CBO's framework explicitly models the factors that determine the accumulation of capital, so the projection for the capital stock is fully consistent with CBO's projections for private saving and the federal budget. Specifically, a higher projected rate of saving will lead to faster accumulation of capital and faster growth of potential output. Therefore, a higher projected federal surplus, which generally raises

the rate of national saving, will speed up the growth of the capital stock and potential output in the model. Conversely, a recession or other event that depresses the saving rate will temporarily slow the accumulation of capital and the growth of potential output."

That's right, according to the CBO, federal deficits lower the path of potential output! It must be true, after all, it's based on the Solow model.

Give me a break.

umm....this kind of stuff happens all the time

Headline on Yahoo this morning condemning "human zoo" where indigenous people danced for tourists in exchange for food.

People, to different degrees, this happens all the time all over the world. Mrs. A and I have seen it advertised in Africa, Asia & Latin America. Heck it happens in Hawaii quite a bit!

I don't like it. We avoid such suggested outings, and have at times simply left our hotel when groups were brought in to perform. I feel like the people must hate doing it and that makes me embarrassed to watch/listen. (I have enjoyed gamalan concerts in Bali and traditional dance performances in Bali though (at places where you went and bought a ticket) so maybe I am a hypocrite here?) It is usually very hard to convince local people that you don't want to go to the "show".

But, food is good. Money is good. If the "performers" aren't slaves and choose to do their thing in exchange for the offered remuneration, how is it like a zoo? By my refusal to attend, am I sending people home to be hungry?

Every day, all over the world, millions of people voluntarily do things we generally consider unseemly or unsafe or undignified. This is one reason why, to me at least, global economic growth is still imperative.

Class dismissed

This sentence both confused and delighted me:

Many people, including me, have decided that the overclass poses the most serious threat today to the middle class in the United States because it markets the assertion that the underclass is the source of all our problems.

The author is Nancy Folbre, the source is the NY Times Economix blog.

I ran it through various translators and the best I could come up with was, I hate rich people and you should too. 

Anyone else?  Bueller?

 

They keep burying these deeper and deeper

but I keep finding them! Bob Shiller continues his relentless march deeper and deeper into the NY Times Sunday Business Section, but I ferreted his column out on page 8!

Lets take a quick sample:

THE failure of the Congressional supercommittee to come up with any agreement on the budget deficit makes it even less likely that Congress will rise above its partisan divisions and act on behalf of the millions of out-of-work Americans.Yet without government intervention, we may well have high unemployment and social discord for years to come. How did this disaster happen?

Let's blow right by the supercommittee non-sequitor and focus on the second sentence: without government intervention.

YIKES.

He doesn't say "without FURTHER intervention"; he acts like nothing has been done!

Hey Bob, lets take a peek at the Fed's balance sheet:

No government intervention? Dude!

How about on the fiscal side?

Since 2007, We've more than tripled the Fed's balance sheet and more than tripled the Federal deficit. I think that qualifies as a fair amount of "government intervention" (am I weird to think that when automatic fiscal stabilizers kick in that counts as government intervention?).

Yes, long term unemployment is a big problem in this country. Will another $400 billion "jobs" program solve it or even noticeably reduce it? Will another round of quantitative easing solve it?

I think the problem goes far beyond a failure of "demand management"

The Grand Game: Farmer Bob Edition

In the contest for worst analogy ever, "The economy is like a farm" has GOT to be a serious contender. In today's NY Times, Bob Shiller trots it out for a spin.

Let's start at the beginning. I grew up in a rural setting and have worked on farms. Farmers don't wait until winter to fix their fences. If there is a break in the fence and the cows are loose, you fix the damn fence then and there. Same with your barn. If there's a hole in the barn roof in June, you don't wait until January to patch it.

Then there's what I think is the weirdest part of the analogy:

The farm needn’t go into debt to do this. All able-bodied people on the farm are expected to contribute their labor, an imposition we can view as an informal tax.

In my experience, farmers laid off many of their seasonal workers after the harvest. Those that were kept on, to deal with animals or to do projects were paid hourly wages. They weren't "expected to contribute their labor".

The farmer had to save part of the farm's income to pay for what workers were needed in periods when the farm wasn't making a lot of income.

(A lot of the kids I knew that lived on farms were expected to make this "contribution" year round and they really really hated it. Winter was their favorite time of year because they didn't have to work nearly as hard)

I acknowledge that in some areas of the country and for some types of farms, business is seasonal. However, farmers mostly deal with that seasonality by laying off workers!

P.S.

The funniest thing of all about this is probably the title of the HTML link for the article which I reproduce here for your enjoyment (I am NOT making this up):

http://www.nytimes.com/2011/10/16/business/a-proven-principle-behind-obamas-jobs-plan.html