Don’t worry, this isn’t (directly) about Trump.
In a blog post titled, “Innumeracy drives me nuts,” Scott Sumner lists several examples of people (allegedly) being innumerate. I definitely agree with some of his examples, but others are stretching it.
However, one of Scott’s arguments in particular seemed flat out wrong to me. Here’s what Scott wrote:
The claim that greater infrastructure spending would significantly boost US economic growth is absurd. It might boost it, but the US economy is far too large and diverse for a $550 billion infrastructure package to make much difference, especially during a period of 4.6% unemployment and monetary offset. Tax reform and deregulation are more promising, but even here the claims of 4% to 6% RGDP growth are ridiculous, at least over an extended period of time (I suppose one or two quarters are possible.) Trend RGDP growth during the 20th century averaged about 3%, under wildly different policy environments. I’m not saying policy had no impact (I’m a moderate supply-sider), but people tend to overrate the impact.
Now this is a strange argument indeed. Imagine if someone said, “It’s ridiculous to suppose you could sample Americans and get four guys in a row who are over 6’5″, because the average height over the whole population–including people with wildly different genes and diets–is about 5’10”.” The fallacy–dare I say innumeracy?–there would be obvious, and yet that seems to be what Scott’s argument is.
In any event, here’s a chart on annual percentage increases in real GDP, using quarterly data, from FRED:
As you can see just eyeballing the chart, Scott’s apparent claim that 4% to 6% real GDP growth (for longer than a quarter or two) is “ridiculous” is simply wrong.
Indeed, I crunched the numbers and, assuming no Excel mistakes, I found that from 1950 through 1979, the arithmetic average of year/year growth rates in real GDP was 4.0%. If we just look at 1960-1969, the figure rises to 4.5%.
In context, Scott is talking about people who are saying tax reform and deregulation could deliver sustained 4% – 6% real GDP growth. (I found John Taylor saying it here, for example.) I would think that surely, if a new Trump Administration could deliver 4% or higher for four years straight, then that would satisfy these claims. Yet Scott seems to be arguing that history shows us such hoping is ridiculous.
Well, assuming I didn’t make an Excel mistake, if you take the period 1948 – 2016 (3q), and calculate all the arithmetic averages of the annual growth rates in real GDP looking forward 4-years, then 29 percent of the time, that number will be at least 4%.
In other words, if you randomly pick a quarter from the postwar period (as far back as the standard BEA real GDP series goes), there is a 29 percent probability that from that point forward for 4 years, annual GDP growth will exceed 4%.
(For purists: You have to be careful with averaging the individual growth rates etc. [This is why reports of the “average performance” in a stock fund can sometimes be grossly misleading.] So I downloaded the levels of real GDP, and calculated the compounded annualized growth rate from 1950 to 1970: it was 4.2%.)
Now to be sure, we can quibble with the legitimacy of the BEA’s numbers. For example, maybe they are driven by the Korean and Vietnam Wars, and in that respect are bogus. But Scott didn’t seem to be throwing out the “official” numbers, he seemed to be saying the official numbers showed that sustained 4% – 6% growth had never happened in the US.
Yet on the contrary, it did happen, and during a time with very high marginal income tax rates. So I agree with John Taylor that a smart package of economic policies would allow the US economy to grow in this range for several years. (I’m talking in general. As readers know, I have long been warning of a coming crash due to the Fed inflating an asset bubble.)
I realized recently that secular people with little familiarity of Christianity (particularly fundamentalist Protestantism) might not understand the suspicion that so many have of “globalism” or “the globalists.” With Brexit, Trump, etc., this issue has more political relevance now than at any time I can remember.
For my Bible study tonight we were covering chapter 15 of Exodus, and we were linked to this:
We cannot fail to connect in our thoughts the circumstances of this magnificent triumph-celebration with that other scene, described in the Apocalypse, where they who have “gotten the victory over the beast, and over his image, and over the number of his name, stand on – i.e., on the margin of – the sea of glass, having the harps of God,” and “sing the song of Moses, the servant of God, and the song of the Lamb” (Revelation 15:2). We do not enter into any elaborate explication of the Apocalyptic symbols. The beast and his followers obviously represent the Antichristian foes of the Church – the worldly secular powers that resist, oppose, and persecute the true servants of Christ. God’s judgment on these hostile world-powers, already summarily depicted in Exodus 14:19, 20, is to be afterwards more fully described under the imagery of the seven last plagues.
I’m not going to get into it in much detail right now, but here’s a bit more context: In Exodus, Moses (himself following God’s instructions) leads the Israelites out of bondage from Egypt. Pharaoh’s mighty army has just been slaughtered through divine intervention when the Red Sea parted to allow the Israelites safe passage, but crashed back on the soldiers and chariots.
(You may know this scene:
So for Christians who take the Bible literally, the Devil is the “prince of this world.” The earthly governments are “of the world” and are actively fighting God’s people. (I’m not cracking a joke, I’m being serious: I realize certain American evangelicals combine this general perspective with their adoration of the US federal government and endorsement of the US military. I’m just noting the apparent contradiction here, before some wiseguy jumps on me in the comments.)
So no, I’m not saying that a Bible-believing person necessarily would say, “God doesn’t like the eurozone”; it’s way more complicated than that. But I’m giving some of the context for why right-wing groups dislike “globalism.” They associate it with worldly powers that are the enemies of God’s people.
I’m being dead serious, we really caught Krugman in a whopper on this one (unless someone wants to defend his honor in the comments and explain why I’m wrong). Also, keep listening after the ending music kicks in–there’s a fun bonus.
And if you want to check out my limited-time book offer, here’s the direct link.
Some people in the comments of previous posts have been psychoanalyzing me, wondering why I spend so much of my precious time pointing out hypocrisy in Trump’s critics (as opposed to ridiculing Trump’s ridiculous statements). I actually thought maybe they had a point, and then this happened on Twitter.
— Robert P. Murphy (@BobMurphyEcon) December 3, 2016
His segment starts around 14:40.
[UPDATE: It was not until I pushed this post out on Twitter that I realized I should have called it, “WHY DID THE ECONOMIST CROSS THE ROAD?” Ah, life is full of regrets.
But seriously, that is a clever title for this content, beyond the obvious.]
I am in the middle of a lot of “day job” projects and can’t devote the full time to this post that it deserves. The context is that Milton Friedman famously said in economics, models need to make testable predictions, otherwise we are not being scientific but instead are engaged in spinning out mere tautologies.
Mises and many of his followers reject this strongly, thinking that economic laws should be deduced logically from the axiom of human action.
OK now to my anecdote: To walk from my apartment to my office at Texas Tech, I have to cross a busy street that has 4 total lanes, with a divider in the middle. So in the morning when it’s busy, what usually happens is that I wait for a break on my side of the street, I walk to the middle and hang out on the divider, and wait for a break in the traffic going the other way to get totally across the street.
The rub is that there’s a gap in the divider, so that cars going one way on the street are allowed to do a U-turn through the gap, so that they can effectively get onto the other side of the big street, going the other way.
Anyway, yesterday it was really busy. I made my way across the first two lanes of traffic, and I was hanging out on the divider. I saw a car turned right onto the busy street (behind me), drove up past me on my right, and then was waiting “in” the gap in the divider (about 20 feet in front of me), trying to turn left.
The driver of that car and I were *both* waiting for the oncoming traffic to give us an opening, so that I could cross and the driver could make the turn. Now normally in this situation I have to be careful, because if a car is pulling a U-turn, then obviously it will be heading straight for me if I’ve also entered the road (jaywalking across the remaining two lanes).
But I was very confident that the car would NOT pull a U-turn, but instead would make a 90-degree left turn and go straight through to the side street that intersected the busy 4-lane road.
How did I “know” this? Because I realized that if the driver pulled a U-turn, it would simply bring him back to where he had been a few minutes ago. In other words, had the driver wanted to get to where the U-turn would place him, it would have been dumb for him to turn right onto my busy street in the first place. He should’ve kept going straight.
Now granted, this wasn’t a prediction on the order of astronomers telling us where to find Halley’s comet. But I *was* right. The driver *didn’t* pull a U-turn, and I was able to cross the street. (By the way, I made sure the driver wasn’t turning. I didn’t stake my life on my prediction.)
One last thing: Notice that my prediction, based on “getting inside the head” of the other acting being, was way more tractable than if I had asked a bunch of neurobiologists to analyze the state of the driver’s brain stem and predict the physical movements of his feet and hands. My knowledge of praxeology allowed me to navigate in the real world a lot better than the natural sciences alone would have allowed.
Daniel Kuehn has a very interesting new paper on possible spillover bias when using a “contiguous county” approach in economic analysis. For example, this is the approach in the influential Dube et al. (2010) minimum wage paper, which Paul Krugman for example singled out as epitomizing the new research that overturned the old view about the minimum wage hurting teen employment.
The basic logic of Dube et al. (2010) is that traditional panel data studies erroneously took one region of the US as a good “control” for every other region. Sure, they’d control for things like the national unemployment rate, but if there were local trends that just so happened to hit states that raised their minimum wage, then it would falsely bias the estimated coefficient on the minimum wage variable. (I’m making this up, but: Suppose only the Rust Belt states were the ones that raised the minimum wage above the federal level. Then a nation-wide panel data approach covering the years 1960 – 1990 might conclude that the minimum wage caused serious job losses [particularly in manufacturing]. But that would be overestimating the harm of the minimum wage.)
So to correct for that potential problem, Dube et al. instead construct pairs of contiguous counties that straddle a state border. Thus when we run the regression, each county is only being directly compared with a contiguous county that may have a different minimum wage. Any regional differences are thus assumed to be washed out, because a county in (say) Michigan is only being compared with other counties that are also in the Rust Belt.
What Daniel does in his paper is show that construction of pairs of contiguous counties might not be the perfect control group after all. If county A is in a state that raises its minimum wage, while adjacent county B is in a state that doesn’t raise its minimum wage, then we can’t simply look at the growth in employment in the two counties to assess the impact of the minimum wage hike. This is because workers are allowed to cross state borders, and so commuter flows might change in response to the minimum wage hike in county A, giving a false impression of the effect.
The following is MY illustration of what Daniel is talking about. (Note that in practice Daniel found that Dube et al.’s approach UNDERstated the harmful effects of the minimum wage, but in principle it could’ve gone the other way. I’m going to flesh out how their approach could understate it, but the following is my explanation, which Daniel might not endorse.)
Suppose county A has 9,000 teenage workers with a bad work ethic and 1,000 teenage workers with a great attitude. County B has the same. Initially neither county has a minimum wage. Every worker is employed. Specifically, the bad workers earn $5/hour and the good workers earn $7/hour.
Now county A imposes a new $6/hour minimum wage. The firms in county A lay off lots of the bad workers, and they bid up the wages of good workers, as they re-staff their operations. The firms in county B respond to the changes in worker availability.
In the new equilibrium, county A’s *employment* (not residence) is now 8,000 bad workers and 1,500 good workers, while county B’s employment is 10,000 bad workers and 500 good workers. In both counties, the good workers earn $8/hour. In county A, the bad workers earn $6/hour, but in county B, they earn $4/hour.
So if we “naively” looked at these numbers, without considering the commuter flows, we would conclude that the imposition of a $6/hour minimum wage caused county A to lose 1,000 teenage jobs relative to county B: namely, 9,500 teenagers vs. 10,500 teenagers.
However, if originally BOTH counties A and B had imposed $6/hour minimum wage laws, then maybe the new equilibrium would look like this: Both would have 7,000 bad workers earning $6/hr, and both would have 1,000 good workers earning $9/hour. (Don’t read too much into the specific employment and wage levels; I don’t have a full-blown model in my mind. Maybe some of these numbers don’t make sense, I’m just trying to show the potential problem.)
So in this case, it’s clear that the “real” impact of the minimum wage is to reduce teen employment in a given county from 10,000 down to 8,000, meaning a loss of 2,000 teenage jobs per county. But when we only applied the minimum wage to one county and used the adjacent one as a “control,” the commuter response made us erroneously conclude that the minimum wage would only cost 1,000 teenage jobs for a given county. I.e. the contiguous county approach, in this contrived example, would make us conclude that the minimum wage’s harm was half of its true value.
On Thanksgiving, while most Americans were drinking beer and watching football, Donald Trump was hard at work keeping jobs in America!!
When word came out that the company Carrier would in fact keep its operations in Indiana, rather than outsourcing, naturally the Trump forces claimed victory. But Justin Wolfers on Twitter was horrified:
Every savvy CEO will now threaten to ship jobs to Mexico, and demand a payment to stay. Great economic policy. https://t.co/t2WAJOgh8F
— Justin Wolfers (@JustinWolfers) November 30, 2016
Notice he got 6,400+ retweets. Obviously, lots of Trump critics agreed with Wolfers’ assessment.
Then along comes Tyler Cowen, who had this to say about the affair in Bloomberg:
When an American company “moves jobs to Mexico,” it doesn’t disassemble a factory and load all of the parts onto border-crossing trucks. That might be relatively easy to stop. Instead, the company closes or limits some U.S. production while expanding or initiating new production south of the border. Given that reality, how is government supposed to respond?
Perhaps most importantly, a policy limiting the ability of American companies to move funds outside of the U.S. would create a dangerous new set of government powers. Imagine giving an administration the potential to rule whether a given transfer of funds would endanger job creation or job maintenance in the United States. That’s not exactly an objective standard, and so every capital transfer decision would be subject to the arbitrary diktats of politicians and bureaucrats. It’s not hard to imagine a Trump administration using such regulations to reward supportive businesses and to punish opponents. Even in the absence of explicit favoritism, companies wouldn’t know the rules of the game in advance, and they would be reluctant to speak out in ways that anger the powers that be.
Another good argument, right?
Now notice something interesting. If you hate Trump, and especially if you’re an economist, I bet you nodded your head at *both* Wolfers’ critique and Cowen’s.
And yet, they are saying opposite things. They can’t both be right. (Wolfers is saying Trump just opened up a new subsidy for domestic manufacturers, such that they’ll even *fake* that they want to outsource. Cowen is saying Trump just opened up a new method of oppressing domestic manufacturers.) If you thought they both showed different reasons that Trump’s behavior is dumb, then you suffer from confirmation bias.
P.S. I think Trump’s behavior vis-a-vis Carrier is dumb. But I at least have enough introspection to realize that Wolfers and Cowen can’t simultaneously be right.