The ignorance of macroeconomists

Brad DeLong and Paul Krugman offer some explanations for the fact that so many prominent macroeconomists are ignorant of macroeconomics. DeLong blames Milton Friedman for oversimplifying macroeconomics in an attempt to "hide how close to the Keynesians his own monetarist-libertarian model of the business cycle was." Krugman says Friedman isn't to blame: today's "freshwater" macroeconomists are "two intellectual generations of intellectual retrogression beyond that."

I think one problem is the economics profession's obsession with mathematics. It's not that math isn't useful, mind you. Mathematical model-building tightens an argument, ensures that it is internally consistent. I understand an economic argument much better after wading through the fifty equations an author uses to describe it than I do, say, reading the General Theory, which is almost entirely verbal. But a mathematical model is only worth plowing through if it has some relevance to real economic phenomena. Our graduate programs make little or no effort to ensure that the students they admit or the Ph.Ds they produce have any knowledge of the real world. Look at the advice American Economic Association gives to undergraduates aspiring to pursue a Ph.D in economics:

Students from a wide variety of backgrounds earn graduate degrees in economics. This includes economics and non-economics majors, those with and without prior graduate training, and those with and without prior economics employment experience... One criterion admissions committees use to gauge applicant qualifications is the GRE exam. Research by Stock, Finegan, and Siegfried... reveals that the average GRE quantitative score was 772 (out of a possible 800), and the average GRE verbal score was 562 (out of a possible 800) for the entering Ph.D. class of 2002. Among students in tier 1 schools*, the averages were 785 and 575; among students in tier 2 schools, the averages were 782 and 547; among students in tier 3 schools, the averages were 765 and 573, respectively.

785 math and 575 verbal! No wonder so many economics articles are unreadable!

The AEA suggests that students who want to get into a good graduate program had better take advanced calculus, advanced linear algebra, differential equations, stochastic processes, topology, real and complex analysis, and advanced probability theory. In other words, you're more likely to get into a graduate school as a math major than as an economics major! Again, I love math and the more math the better as far as I'm concerned. But it would be nice if graduate schools put some weight on knowledge of economics, history, political science, or some other aspect of the real world in addition to math. Is it not possible that someone who did not score 785 on his GRE (but has some facility with mathematics) yet has read Smith, Keynes, Marx, Hayek and Friedman, might be a better candidate for a Ph.D program than someone who has studied nothing but mathematics? Graduate schools have long since stopped requiring students to study the history of thought (or history or any other real-world discipline outside economics). If they also recruit solely on the basis of math preparation, why are we surprised when they turn out a generation of economists who know nothing of the economy?

Do laws that make it harder to dismiss employees stimulate innovation and growth?

Yes, say Viral Acharya, Ramin Baghai and Krishnamurthy Subramanian.

Stringent labor laws can provide firms a commitment device to not punish short-run failures and thereby spur their employees to pursue value-enhancing innovative activities. Using patents and citations as proxies for innovation, we identify this effect by exploiting the time-series variation generated by staggered country-level changes in dismissal laws. We find that within a country, innovation and economic growth are fostered by stringent laws governing dismissal of employees, especially in the more innovation-intensive sectors. Firm-level tests within the United States that exploit a discontinuity generated by the passage of the federal Worker Adjustment and Retraining Notification Act confirm the cross-country evidence.

In other words, when a company faces few legal restrictions on firing employees the fear of being dismissed may cause employees to innovate less. This may have an impact on profitability and growth. The authors test this hypothesis in a number of ways, first looking at cross-country data and than at the effects of the WARN act in the US. The WARN act test is especially interesting. The WARN Act was passed in 1988 and came into effect in 1989. It required private companies with more than 100 employees to give workers 60 days' notice before instituting mass layoffs. So Acharya et al. ask whether companies subject to the WARN Act subsequently had greater rates of innovation (defined by patent filings) than those that were not subject to the Act. They compared the change in patent filings before and after the act in companies with 95-99 employees to those with 100-105 employees and got the graph on the left: following the act, companies with 100-105 employees increased patent filings significantly relative to the control group. To test whether this was just an anomaly they did the same experiment with companies above and below a 50 employee cutoff line (right graph). As predicted, there is no difference between these groups of companies because WARN applies to neither group.



This is not my field, but it seems to be a really nice, careful piece of research. It would seem to have applications to the issue of the impact of unions as well. Obviously, as Acharya et al. note, when unions protect their weakest performers from dismissal there is a reduction in efficiency ex post. But ex ante, protection from dismissal through unions should encourage employees to innovate in ways that can enhance a company's profitability. Obviously in most environments patent filings aren't the appropriate measure of innovation, but a teacher can innovate by trying out new teaching methods, a state employee can suggest different ways of organizing the office, an auto worker can suggest new quality control techniques.

[Update: but when unions negotiate strict workplace rules innovation might be suppressed. Perhaps the ideal union would protect workers from dismissal while preserving flexibility of work assignments.]

On the other hand, a tenured professor can spend his morning blogging instead of revising his paper on the Great Inflation...

The Crazy Nastyass Honey Badger (original narration by Randall)

This is making the rounds. It's hilarious but I don't know why.

Jobs, jobs, jobs

The consensus forecast for February payroll employment growth in tomorrow's BLS release is +197,000. That would be a nice strong number IF we weren't short about 11 million jobs and IF January's number hadn't been pushed down because of weather. If weather really was responsible for January's low number, February's figure should be higher because of January's new jobs would be recorded in February.

All the recent employment data is strongly positive: ISM manufacturing and non-manufacturing employment indexes are way up, initial claims for unemployment insurance are finally below 400,000 and falling fast. The ADP report says private payroll employment rose 217,000 in February following a 189,000 rise in January (ADP's report is not affected by weather apparently). That's a two month total of 406,000. If the BLS numbers for January and February match ADP's that would give us a rise of 370,000 in private payrolls. Knock 20,000 off of government employment and we're still at 350,000. So I'm going to say that something considerably bigger than the consensus estimate is likely. Let's say, oh, +300,000.

Except - the payroll numbers have been really goofy lately (the seasonal adjustment factor, rebenchmarking, and the BLS's birth-death model have been playing havoc with the data. So it may be more likely that we see a number as big as +300,000 in the household survey than in the establishment survey. So: +300,000 employment in the household survey, with the unemployment rate rising or falling depending on the flow of workers into the labor force. You heard it here first!

Bidder 70

A former wilderness guide, University of Utah economics student, and now environmental activist infiltrates a federal oil-and-gas drilling auction in Utah and buys $1.7 million of drilling leases that he has no intention of paying for. His bidding raises the price by a total of about $300,00 on 20 other contracts that were won by "legitimate" oil men. For this he is charged with "interfering with and making false representations at a government auction" and faces up to ten years in prison and fines of up to $750,000. He is said to be the first person ever to be charged with failing to make good on bids at a lease auction of public lands in Utah.

Is it appropriate to press criminal charges against Tim DeChristopher for his actions? It seems to me that the appropriate penalty is to force Mr. DeChristopher to come up with the $1.7 million that he promised to pay. He reportedly has offered to try to do this by soliciting funds from environmental organizations (some of which are organizing protests at his trial that began this week). From that amount perhaps the government should discount the $300,000 that Mr. DeChristopher earned the Bureau of Land Management by bidding up prices on the 20 contracts that he didn't win. Surely the top bidders for those contracts have no legitimate complaint against Mr. DeChristopher. They paid no more for the contracts than they thought those contracts were worth; Mr. DeChristopher merely denied them the windfall that they otherwise would have gotten, to the benefit of the BLM. Arguably Mr. DeChristopher's actions regarding those 20 leases provided a social benefit - he assured that the resulting price of contracts reflected their true social value, a criterion for economic efficiency.

The environmentalists protesting outside the courthouse in Salt Lake City charge that the government's true motive in prosecuting Mr. DeChristopher is to prevent outsiders from interfering in the process by which leases to drill on federal land are distributed below fair value to the oil and gas industry. Question: what would the reaction of the government have been had Mr. DeChristopher intended to pay for the leases he bid on? Would the government still view his actions as somehow illegitimate because he did not intend to drill on the land he leased? Clearly it would be wrong to view those actions as illegitimate: if Mr. DeChristopher and the environmental organizations that support him value the right to prevent oil and gas companies from drilling on Utah public lands at $1.7 million they should be able to buy that right. Recognizing Mr. DeChristopher's right to do this is not only fair, it serves the cause of economic efficiency by ensuring that the price of public lands reflects its true worth to the companies that want to drill on it as well as the opportunity cost of drilling on that land.