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Arnold Kling is probably the blogospheres most outspoken proponent of the recalculation theory. That is, that the recession is the result of individuals and firms shifting towards a new equilibrium that involves less manufacturing and construction and more education and health care.  While few if any economists deny these long term trends most of us feel that there is a large monetary/financial aspect to the recession and that there is no particular reason recalculation should be associated with high unemployment.

I’d like to here Arnold’s take on the following graph borrowed from A Dash of Insight.

Business Dyanmics Gross Changes

We see gross job losses rising sharply during the latest recession. Thats perfectly consistent with Arnold’s story. However, the net change in employment seems to be dominated by a reduction in gross job gains.

If recalculation is the story then shouldn’t we see most of the action in gross job losses. We might even expect a modest increase in gross job gains.

The big news today is that November establishment survey showed a loss of only 11K jobs.  Taken alone this is good news, but what really caught my eye was the big revisions to prior months.

September was revised from 219K jobs lost to 139K and October was revised from 190K lost to 111K lost. As I have talked about before, it is very difficult to measure job creation in real time. Thus the number are always filtered through a model. The models used by the BLS have an inertia component built in.  This causes them to overshoot on the way up and undershoot on the way down.

The BLS then corrects its models by comparing to unemployment insurance records and other measures hard measures of total employment. These corrections form the basis of the revisions. When we see big revisions in one direction it is a strong indication of a turning point.

We also so unemployment edge down a bit. My sense is that the unemployment rate has been usually noisy in this recession. Some times spurting ahead, sometimes dropping back. It also seems that it was a little higher than trend relative to the rate of payroll growth but that there has been some trend reversion in the last few months.


What follows is probably more of a discussion on price discrimination and countercyclical prices than almost anyone is interested in, so I’m putting most below the fold.

Arnold Kling weighs in again on price discrimination, clarifying his theory of Black Friday discounts and explaining how it can apply to Cyber Monday discounts as well. Arnold has previously responded to my theory of price discrimination by arguing that “the key issue here is that the cost of many products is dominated by overhead costs, and marginal costs are close to zero”, and so a wedge between mc and p may be a necessary and welfare improving. He also argues that because marginal costs do not decline in my cost based theory of black friday, it’s not a traditional microeconomic story.

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Apologies for the gross generalization… but liberals want a jobs bill that spends money on infrastructure and creates WPA like jobs, and conservatives don’t because they think that kind of spending would be inefficient and wasteful. I offer a compromise: we do the $400 billion jobs plan from the liberal think tank, the Economic Policy Institute, and in exchange, we permanently repeal the Davis-Bacon act, which requires prevailing union wages to be paid on public works programs. Deal?

Since I didnt beleive that compensation structure was a cause of the financial crisis, the executive pay caps and threats of clawbacks always struck me as populist pandering that simply made it less likely banks would be healthy enough to repay TARP funds. Today’s news that BOA will repay TARP, and their apparant motivation of freeing themselves from pay caps, has me reconsidering.

Imagine that the Treasure has taken a close look at the financials of TARP recipients and can see a clear path to repayment, but can also see that the path to repayment is not the most profitable for the bank. If pay caps and other interference significantly increase the probability that the banks will choose to pay back the money if they can, while only slightly decreasing the probability that they will actually be able to pay us back, then they might in fact be the best policies for us.

If you count the value of the policies as a threat to counter future moral hazards, then the probability they were the best policies is even higher.

If it becomes obvious, maybe through leaked internal memos, that this was in fact the Treasury’s justified belief, then I will conclude I was incorrect about these populist policies.

Victor Davis Hanson at the National Review criticizes the complexity and nuance in “Dean” Obama’s Afghanistan speech because “ times of war, when troops are headed into battle, Americans would rather hear “smoke ‘em out” and “dead or alive” than a Noble Peace Prize preamble.” I totally agree with Hanson. You know what else was missing from the speech? A flight suit and a “Mission Accomplished” banner. Enough with the subtlety Professor Obama, declare victory already!

Adam noted the pushback that Tyler Cowen is getting from suggesting that the Climategate could raise one’s estimate of the probability of Climate Change.

I think that while Tyler’s point is theoretically valid, and as I said before that any bad behavior was motivated deep belief that the fate of the world was a stake. However, it seems unlikely that this should raise most people’s assessment of the likelihood of climate change.

One’s assessment is only going to rise if this evidence leads you to believe scientists have more conviction than you thought.  However, anyone who is interested in the Climate Change issue but doesn’t think that scientists deeply believe in global warming, almost certainly believes that there is a conspiracy. If they believe there is a conspiracy then the emails only serve to bolster that belief.

Thus I have a hard time seeing whose mind is changed for the positive by this.

That being said, it doesn’t change my mind much to the negative. I have gone from probably a 98% belief that humans are causing Climate Change to around 90% – 95%.

It does, however, make me more interested in ensuring that the skeptics have a fair hearing. Previously I had written most of them off as cranks. Now I would like to at least see a back and forth, in which the strongest criticisms are refuted.

Tyler is getting unreceptive responses to his modest plea for p > 0. People are most hesitant to move their belief probabilities from 0 or from 100. I’d bet that in general people have an easier time moving from p = 10 to p = 90, than  move from p = 0 to p = .01. This is probably because p is nonlinear in some latent, unobserved variable. But in general, I think people should be more willing to accept small nonzero probabilities.

The administration looks to be getting ready to unveil some new job stimulus (HT Mark Thoma), and meanwhile the disagreement among economists over the last stimulus seems to be as large as ever. Professional modelers, and the economists who trust them, argue that the models show the stimulus worked. Critics say, or seem to be saying, that the assumptions of these models drove the pre-stimulus estimates that the stimulus would work, the assumptions have not changed, and so no empirical reality that could have arisen would show that the stimulus didn’t work. These critics suggest that by the nature of macroeconomics, the effects of the stimulus are unknowable. Either way, there is obvious disagreement about the impacts of the $787 billion.

My modest proposal is that if there is to be a second round of stimulus we should structure it in a way such that it’s efficacy will be knowable.  One way to do that would be to randomize some small portion of the stimulus, say 1%. For instance, if we are going to cut payroll taxes across the board by 1%, cut it by 2% for a randomly selected subset of counties. Then we can look at the counties that randomly received 2% and see how much, it at all, employment improved over the control group. The randomization will prevent any endogeneity problems that would make causality difficult to tease out econometrically. Obviously it would be much trickier to randomize infrastructure spending, but surely some clever person can devise some way induce enough randomization into the process to estimate impacts reliably, right?

There will be those who argue that this would be a waste of precious stimulating potential. But it must be worth 1% of the stimulus so that next time we know a) which programs work the best, or work at all, and b) so we can avoid either spending money that has no impact, or forgoing the opportunity to reduce the suffering and costs of unemployment.  Had we done it the first time we might not need to be having the debate we’re having now.

The Salvation Army and a charity affiliated with the Houston Fire Department are among those that consider immigration status, asking for birth certificates or Social Security cards for the children.

The point isn’t to punish the children but to ensure that their parents are either citizens, legal immigrants or working to become legal residents, said Lorugene Young, whose Outreach Program Inc. is one of three groups that distribute toys collected by firefighters.

“It’s not our desire to turn anyone down,” she said. “Those kids are not responsible if they are here illegally. It is the parents’ responsibility.”

I’ve always wondered how the US government could reasonably enforce certain laws against illegal immigrants. To my knowledge there is no set of identification I have to have to prove I was a citizen. Isn’t it incumbent on the authorities to prove that I am not?

Of course this is a private charity, which changes the legal if not moral obligations.

HT: Yglesias

Tyler Cowen is too easy on the Good vs. Evil model

Good vs. evil thinking causes us to lower our value of a person’s opinion, or dismiss it altogether, if we find out that person has behaved badly.  We no longer wish to affiliate with those people and furthermore we feel epistemically justified in dismissing them.

Sometimes this tendency will lead us to intellectual mistakes.

Take Climategate.  One response is: 1. "These people behaved dishonorably.  I will lower my trust in their opinions."

Another response, not entirely out of the ballpark, is: 2. "These people behaved dishonorably.  They must have thought this issue was really important, worth risking their scientific reputations for.  I will revise upward my estimate of the seriousness of the problem."

I am not saying that #2 is correct, I am only saying that #2 deserves more than p = 0.  Yet I have not seen anyone raise the possibility of #2.  It very much goes against the grain of good vs. evil thinking:  Who thinks in terms of: "They are evil, therefore they are more likely to be right."


One of the more deleterious effects of the good vs. evil model is to lead us to underestimate our own potential for error and the potential for our allies errors. If bad things are caused by bad people and we know that we aren’t bad then surely we can’t be causing bad things. Right?

I am sure that Tyler’s #2 is at least partially correct, in that the climatologists behaved as they did because they believed so strongly in the truth of their arguments. However, its precisely this belief – that I know I am right and that the fate of the world depends on others hearing the truth of my words -  that leads to the most disastrous consequences.

We may be evolutionarily programmed to worry about people deceiving us, however, far more dangerous in the modern world is the possibility that people will be deceiving themselves.

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