Sunday, December 26, 2004

Getting Your Parents To Pay: Medicaid Edition

This is nice to hear:

Fearful that President Bush plans to shift more Medicaid costs to the states, the nation's governors are mounting a bipartisan lobbying effort to stave off new federal limits on the program.

Medicaid, the nation's largest health insurance program, is costing the states and the federal government more than $300 billion a year. The growth of the program, which covers the poor and disabled, has outpaced state revenues, and Medicaid is now a larger component of total state spending than elementary and secondary education combined, according to the National Governors Association.


Showing rare bipartisan unity, governors of both parties said in interviews this week that they would press hard in the coming months to preserve or even increase their current Medicaid allotments.
. They are right on the merits: Medicaid shouldn't be cut back. In general, I' m a huge fan of universal health care. But this is politics at its finest. Governors have every incentive to get the Federal government to pay for things so that the states don't have to. This lets them spend money on their pet proposals. So far as I could tell from Clinton's book, as a governor he had no sense of the Federal budget as limited, he just wanted to get as much federal money in as possible. It's like the child who thinks that their parents have unlimited funds. Good for the governors to resist Bush, but don't give them too much credit.

I Didn't Make The Comparison

Why is Jim Lindgren defending the Iraq War by saying that it isn't as bad as...Vietnam? Does Vietnam set some sort of baseline of a war-that-went-okay and so long as fewer people are dying in Iraq we're doing better? I honestly don't get it. In what way was Vietnam successful and in what way could it be seen as some sort of benchmark? A funnier person than I could write an entire article skewering this line of reasoning. Alas...

Thinking About Social Security

Brad Delong writes
Marty's[Feldstein] argument these days is much more likely to be the claim (with which I have a lot of sympathy) that the stock market does a lousy job of mobilizing society's risk-bearing resources. Stocks appear to be priced as though the marginal investor is a rich 62-year old with some clogged arteries and a fifteen-year life expectancy who is not expecting to leave a fortune to his descendants. But if the stock market were working well, the marginal investor would be a 40-year old in his or her peak earning years looking out to retirement spending 40 years in the future--an investor much less averse to risk than the 62-year old.
Turning Social Security into a forced-equity-savings program would, Marty believes, not only produce huge profits for the system but also materially improve the efficiency of U.S. financial markets.
The Feldstein argument had never quite made sense to me, but in this formulation it does: our society doesn't save early enough so if we make people save their social security money in private accounts invested in the stock market, then they have to. Thus, we get people saving younger . Younger meaning risk seeking. Risk seeking meaning we make the U.S. economy more innovative. At least in theory I buy it, to a degree.

The interesting thing about the argument, though, is that it rests on people not saving sufficiently when they are younger which means that any model incorporating a life-cycle consumption hypothesis (that people smooth out spending, and saving, at any given time to reflect their entire income stream) has major empirical problems.

It does clarify what is at stake in the theoretical privatization debate (Bush's actual proposal, whatever it is, wouldn't accomplish anything productive, guaranteed): a desire to raise investment requires a rise in savings and economists think that saving is too low (who are they to make such a normative claim?), so to raise saving you force people to save. You could mandate more private saving, but you already see it in social security. By Ricardian equivalence, it shouldn't matter if it's public or private, shifting that savings to the private sector from the public sector shouldn't change anything in the economy, but some economists think that it will be invested more aggressively (in a risk seeking way) by the private sector than by the government. If it is invested in a more risk seeking way, then that spurs innovation and is good for long term growth. However, this confuses the purpose of social security: it isn't really supposed to be about forced saving (and thus of generating investment) in the economy, but is really meant as a security blanket. And if that money is thrown back into the private sector, then it becomes risky and some people might lose their money, sort of defeating the purpose.

I agree with economists like Feldstein that the saving rate in the U.S. is scandalously low and that this cannot have good long-term effects and that we should do something about it. Yes, more 40 year olds should be heavy in the stock market. But playing with social security does not seem like a good mechanism to resolve this problem.

Thomas P.M. Barnett

Just watched him on C-SPAN. Interesting perspective...from a political science/policy wonk/military type (he's at the Naval War College.) He focuses on "rule sets" which sound a hell of a lot like what economists refer to as "institutions" and defines crises as changes in rule sets. Too glib about economic development in my estimation, but thats not *really* his thing. He also has a book and a blog.

Wednesday, December 22, 2004

Why Bill? Why?

Over the weekend, I read My Life, Clinton's autobiography. I had expected to find the account of his childhood quite gripping and to be bored by all the policy details of the rest of the book. In fact, his childhood was quite boring to read about especially because he had to tip his hat to everyone he ever met as being nice or helpful or what have you. While this need to write an extended thank you note remains, there is far more meat in the rest of the book. It is very good as a summary of the main accomplishments and battles of his time as governor and president, but it lacks a certain depth which would let you say why, exactly, he did what he did. You rarely get a sense of the hard decisions that had to be made -- and what the moral convictions that supported those decisions are or where they came from. Yes there are vague allusions to caring about the downtrodden and etc., but why does he embrace -- no, found -- the DLC, rather than going for the old line liberal? Why does he not protest the Vietnam War until 1970 when everyone was doing it? Esepcially because in '67-'68 as a staff member on Fullbright's foreign policy committee he had had access to classified government documents showing that the government was deceiving the American people. Why did he go into politics rather than policy? Somehow, the book lacks that explanatory element which could potentially make it life changing or inspiring. What Clinton did was admirable (particularly because I, in general, agree with him), but you can't actually put down the book and say "I want to be Clinton" because you have no sense of why he is who he is and why he believes what he believes. This is certainly too much to expect from a presidential autobiography, and probably for the genre it is quite good, but a boy can hope, can't he?

Ahhhhh!!!!

Brad Setser writes
Forget the headline number: we knew it[October trade data] would be bad because of oil. Look at what happened to non-oil imports and export growth. Export growth is still strong (y/y), at 12.8% or so. But export growth also seems to be slowing: the y/y increase was 14% in August, 13% in September, and 11% in October ... the monthly data bounce around a bit, but the basic trend seems pretty clear.

Conversely, non-oil import growth if anything seems to be accelerating -- year to date it is now almost 15% (14.7%), up from its YTD increase earlier in the year. That implies each new monthly data point is showing a stronger y/y increase ... Imports from China are up 28% y/y; even imports from old Europe (eurozone) are up 12% y/y (not bad, given the fall in the dollar/ rise in euro in 2003). (Growth in US imports from the UK and Japan have lagged the overall market, as one, suspects has growth in US non-oil imports from Mexico).

All this is bad news -- there is no evidence yet that the underlying expansion of the US trade deficit is close to turning around, even though the dollar fell substantially in 2003.
But I thought that a falling dollar was supposed to reverse the trade deficit. Clearly it can't last, but any rigidity makes the adjustment all the more painful. Why????

Logic and Reason

Nick Confessore doesn't quite follow. He argues that for the new DNC chair to be a true "reformer" s/he has to be willing to shift the primary schedule so that "whatever states were closest in the last election [were] at the top of the list for the next one. Such a schedule would put a premium on Democrats who fit the "persuader" type, who can win back the voters who in many respects should be voting for their party, but for various reasons did not." The five states that should be first following this criteria: Iowa, New Hampshire, Ohio, New Mexico, and Wisconsin. Makes sense. Two paragraphs later, Confessore argues that "the New Hampshire and Iowa potentates who insist, against all logic and reason, that they should be first on the schedule are no less a part of the party's problem than the Beltway class that gets so much grief." But it appears that those potentates aren't contrary to logic and reason, after all, they were two of the five closest states. We would obviously like to continually recalibrate the primary schedule to make it match the last election cycle, that is a good idea, but it seems that New Hampshire and Iowa tend to be among those five closest states -- thus, the potentates have logic and reason when they say that they ought to be right at the beginning.

The Grass Isn't Greener On The Other Side

Yesterday I read I Am Charlotte Simmons. Contrary to reviews, I thought it was quite good. Classic Tom Wolfe, in fact, insofar as he sets up a compelling situation in three or four hundred pages and then spends two or three hundred pages trying to bring it to a neat conclusion, something which is invariably unsatisfying and unconvincing. What he gets right is the basic shock of college life where people seem to devote a disturbing amount of energy and attention to partying and that sort of thing, considering that you attend on of the finest academic institutions out there. Then you have to figure out where you fit in -- and where your academics fit in. Of course he exaggerates, but it does ring true. Even at Swarthmore there is the odd experience of seeing girls being serious -- and damn good -- students during the day, and then on weekend nights being, well, differently put together. Something vaguely similar happens with boys. That dissonance is disturbing because we want people to be easily understandable: simple and one -dimensional.

Wolfe wants this to be a terrible terrible thing which it isn't. Why is it so bad to party and etc.? Just because this isn't what has always been, why is it bad? In the book he offers the answer that it's bad because you lose all that you have been, you stop valuing all that you once did. A typical conservative argument. And it is unconvincing for two reasons. One, we can bring out relativism: why not indulge pleasures of the flesh and all, what's so wrong with stupid fun? What do we gain by moral uprightness? Two, he gives far too little credit to people's ability to hang on to what is important to them. Sure people experiment first semester of college, but it strikes me as a sort of things-I'll-never-do-again kind of thing, not a give up all that you were. Also, plenty of people are able to sustain a partying life and being academically and intellectually serious, these are not mutually exclusive.

Henry and I always joke that everywhere else people are getting a "real" education, as opposed to the weak stuff we're getting at Swarthmore. And Wolfe is guilty of much the same thing, he thinks that at some point people were pure and diligent and studied hard and never partied. Sure the ways in which people party and blow off work change over time, and a given manifestation can seem surprising, but I'm enough of a believer in the immutability of human nature to think that he's comparing today to an age that never happened. Throughout time people have made reference to the shocking behavior of college students, and they will continue to do so. Given that Wolfe is so trenchant a social observer, I would have hoped to get a more subtle indictment of the college experience.

Huh??

Kevin Drum jumps into the whole should-everyone-go-to-college-debate
I'm not going to get into the middle of this...but here's something to chew on anyway. It turns out there's already a representative subset of American high school graduates who all go to college: NCAA scholarship athletes. Within a small margin of error, this group is scholastically average, is forced to go to classes for (at least) four years to maintain eligibility, has their tuition completely paid for, and gets loads of special tutoring and other assistance.

So how do they do? Answer that question, and I think you've pretty much answered...[the] question.
Bizarre. I don't have all the statistics on hand, but it strikes me that this is not a pool from which you can extrapolate, well, anything. No other scholastically average group of students has such an extracurricular time commitment; no other scholastically average group of students has lived a life in which they are told that academics aren't necessary because sports will get them through; no other scholastically average group of students, well, anything that defines the athlete's experience and background has very little to do with the pool of students who would be going to college in a universal program.

Tuesday, December 21, 2004

Good news!

The Times reports:
Foreign applications to American graduate schools declined 28 percent this year. Actual foreign graduate student enrollments dropped 6 percent. Enrollments of all foreign students, in undergraduate, graduate and postdoctoral programs, fell for the first time in three decades in an annual census released this fall. Meanwhile, university enrollments have been surging in England, Germany and other countries.
At least for those of us applying to graduate school in the next few years.

College For All? No!

Much talk about education, and college education for all in particular. I'm skeptical of the college for all mantra. While it has its appeal -- who doesn't want everyone to have the wonderful elitist experience I'm having? -- I don't quite see how it's practical or even desirable. There is a lack of clarity about, what exactly, a college education is for. If it's for enhancing the skills level and economic prospects of students, then the current elite model is quite flawed and it's unclear that it's even effective. We'd have to move to more technical education. But I don't think that the university (or community college) system is necessarily flexible enough to teach useful skills if what skills are needed keep on changing. Subsidize industry training programs, either on the student or the institute end, sure, but make everyone go to college, no. If education is for making thoughtful individuals and better citizens, then maybe college for all makes sense. But I don't think that it actually accomplishes that. It only helps people who want to be helped. College for all is one of those things which sounds nice and happy, but until people are clear on what, exactly, they think it can accomplish, I'll remain a skeptic.

Saturday, December 18, 2004

Social Security

Edmund Andrews has a great Economic View in the Times which debunks the Social Security "reform" scheme:
Stephen Goss, the Social Security Administration's chief actuary, has endorsed the assumption of higher returns. In evaluating the major proposals for putting some payroll taxes into personal investment accounts, Mr. Goss estimated that even people who hedged their risk by mixing stocks and bonds could expect an average return of 4.45 percent.

But that logic is as flawed as a perpetual motion machine. If it were true, the government could erase Social Security's entire projected deficit by selling bonds at 3 percent and buying stocks that yield 7 percent.

Why doesn't the government do just that? Because higher returns are inseparable from higher risk. No risk, no reward. And if the goal is to enhance security, if people are to have a solid reason to expect a particular level of wealth at retirement, the risks have to be relatively low.

"The entire argument is absurd," said William C. Dudley, chief United States economist at Goldman Sachs. "These returns weren't free. You are getting these returns precisely because you are taking on risk."

Thursday, December 16, 2004

Finals: Done!

Blogging will resume within 27 hours.

Saturday, December 11, 2004

Finals

We apologize for the dearth of posts lately, but it's finals. We do have priorities.

David Brooks is a complete idiot

He writes:
I may be a complete idiot, but I actually believe that Democrats and Republicans can reach a grand bargain that includes personal Social Security accounts while addressing Democratic objections.
Not if conservatives don't even take those objections seriously. In my view, the primary objection to Social Security "reform" is that it makes the system less solvent. It does not make sense that 14 years before the system begins to run a deficit we would direct money away from it. Shouldn't we try to improve the solvency of the system, not worsen it? But David Brooks ignores this, writing:
Before we get lost in the policy details, let's be clear about what this Social Security reform debate is really about. It's about the market. People who instinctively trust the markets support the Bush reform ideas, and people who are suspicious oppose them.

The people setting the tone for the opposition to the Bush Social Security effort depict the financial markets as huge, organized scams where the rich prey upon the weak. Their phrases are already familiar: a risky scheme, Enron accounting, a gift to the securities industry, greedy speculators preying upon Grandma's pension.

As is par for the course for David Brooks, he totally mischaracterizes the actual debate and moves it into his black and white realm of thought. Beyond that fact that he ignores the central issue of solvency he somehow believes that the debate is over whether or not to use free-markets. But Paul Krugman, Brad Delong, and I are not opposed to free capital markets in the United States. The point is not that those opposed to Social Security reform think the market is "rigged." It's not. But one can be for free capital markets and also realize that most financial markets have a larger degree of risk than government bonds. They do: this is why they typically have higher returns. Does it make sense to move previously government-guaranteed retirement savings to a riskier but potentially more rewarding investment? Perhaps, but right now I don't think that is the case. But David Brooks completely ignores the subtleties of the situation. No wonder that he asks us to ignore the details of policy before explaining what the debate is "really about." Please, David Brooks, leave the economics to Krugman and go back to your silly "sociological" generalizations.

Tuesday, December 07, 2004

Other People Think, Too

Kieran Healy adds to the commentary on Posner. A bit of the way down he has a point that should have been obvious to me given that I've just been doing a bit of game theory. But I'm not designed to think strategically so I missed it:
In the case of cost-benefit arguments about preventive war, there are other objections. One, pointed out by Chris in the comments to my earlier post, is the the worry that your adversaries are thinking about preemptive attacks in much the same way you are, and so will move to preempt your preemptive attack with one of their own. You can still be committed to weigh up the costs and benefits as best you can, but it would be foolish to think one had a straightforward technique that cut through the difficulty and reduced it to a matter of simple calculation. One of the most important contributions of game theory is the way it reorients your thinking from a parametric to a strategic point of view. That is, you stop thinking of other agents as passive bits of the world and realize that they, like you, are searching for the smartest decision given what they anticipate their opponents will do. If you’re inspired by rational choice theory, as Judge Posner is, the simple application of cost-benefit methods should not look very plausibly as a way of reaching a strategic decision about the use of preventive action in cases like Iraq.
Realizing that other people aren't stupid and react and adapt to what you do is one of those key insights of modern economics (particularly rational expectation-type macro) which have to be rediscovered and rediscovered because it is so tempting to think of others as so simple. Alas, others are sentient beings too.

Update: Or, to tie this into my previous post, game theory isn't covered in intro. econ. Thus, Posner doesn't consider it.

Monday, December 06, 2004

Posner Only Took Econ. 1

The much hyped Becker-Posner blog has its first real posts today (here and here). The topic is preventive war. See this marvelous skewering by Kieran Healy.

The issue is that Posner wants to begin to talk about a cost benefit analysis of preventive war:
But what if the danger of attack is remote rather than imminent? Should imminence be an absolute condition of going to war, and preventive war thus be deemed always and everywhere wrong? Analytically, the answer is no. A rational decision to go to war should be based on a comparison of the costs and benefits (in the largest sense of these terms) to the nation...It is relevant in two respects. First, future costs may not have the same weight in our decisions as present costs...Second...if the threat of attack lies in the future it is difficult to gauge either its actual likelihood or its probable magnitude. But this is not a compelling argument against preventive war. What is true is that a defensive war is by definition waged only when the probability of an attack has become one; the attack has occurred. The probability of attack is always less than one if the putative victim wages a preventive war, because the attacker might have changed his mind before attacking.
In the abstract this is uncontroversial. As Henry put it, what can this tell us but that a country should do the thing with the highest expected value (which Posner does later in the post with a numerical example). But Posner's second point brings home the problem with a simple utilitarian framework: how? What do these costs mean and how do you calculate them? He offers no insight into this, which is what a meaningful analysis would have to do. As a commentator at Crooked Timber put it: “Posner learned economics from reading intro text books. He should have read some more.” A meaningful analysis would grapple with question of more advanced economic theory: uncertainty and information (and if I knew more econ. probably even more questions). First, what level of risk is a country willing to bear in terms of the possibility that it is right? You can certainly construct numerical examples where expected value of preventive war is higher than nothing, but the possibility of turning up nothing is 80 or 90 percent. Ought we to go to war then? Second, information. How do the information asymmetries between a country at risk of preventive war and one at risk of waging one work out? The case of Iraq shows that the answer is not necessarily intuitive: we would typically think that Iraq would have done quite a lot to give the U.S. full information on its lack of weapons. But it did not. Why is this and how do you account for it in your analysis?

We have a normative injunction against preventive war for good reason: these are not trivial questions. It is very difficult to grapple with them and come to a clean answer. Therefore a good heuristic is simply not to do it: the risks and uncertainties are too high. Posner, by not even grappling with these complications, says absolutely nothing useful (except to raise the initial question, which is thought provoking). Like many a simple-minded conservative, the reliance solely on econ. 1 leads to rather foolish policy. Why don't they at least take intermediate theory?

I Almost Know Someone Who Is Almost Famous

Swarthmore biology professor Colin Purrington has an op-art piece in the New York Times today. Oddly, I had been poking around his website on Saturday because I decided that maybe I should take evolution; after all, social scientists enjoy the metaphor of evolution and it might be good to actually know what it is. In the event, I came across this page which seems to be an extended version of the op-art piece.

Sunday, December 05, 2004

Consumer spending

The Times has a silly article on consumer spending. It's a mix of anecdotal evidence and hasty generalizations:
Indeed, while there was a good deal of tut-tutting about Ms. Millard's refusal to take responsibility for her spendthrift ways, it might be time to ask if American consumers are entirely responsible for all their out-of-control spending. After all, the United States economy depends on its citizens' penchant for spending with abandon. Consumer spending accounts for two-thirds of the nation's $11 trillion economy, and the machinery of American advertising, marketing, media and finance all encourage the consumption habit. Many consumers are unable to resist the overpowering mantra: spend, spend, spend.
Damn those corporations who have programmed us to recite the mantra: spend, spend, spend! Helpless to overcome the mantra, consumers scurry from store to store, spending, spending, spending!

In all seriousness though, it's true that consumer spending is now 70.5% of GDP. A few things about this. First, the Times article actually understates this, saying that it is two thirds of GDP. But 66.6% is the average share of consumption in GDP for the last 20 years, while 70.5% is the highest since 1939. Sometimes precision matters, Steve Lohr. Second, 70.5% IS the highest share of consumption in GDP since 1939. And this number has been steadily moving up since 1981 when it was 62.0%. (You might say that government spending has been coming down in that same period, you are correct. But government spending plus consumption has been rising, so decreases in government spending are recovered more than one-to-one in increases of consumption.) To give you an idea of what this means, since 1946 mean consumption has been 64.2% with a standard deviation of 2.2%. This means that since 1981, share of consumption in GDP has risen by 3.8 standard deviations. This is a significant and compelling number. But where is this in the Times article?

Instead, Steve Lohr focuses on sillier points, like the fact that consumption is most of GDP. But this is not news, consumption has been around two thirds of GDP for the last 50 years. Of course the economy depends on consumption! This is the most basic of economic activities. And statement like this are simply ridiculous:

And in surveys of children age 10 to 13, Ms. Schor, the author of "Born to Buy: The Commercialized Child and the New Consumer Culture," found that their overriding goal was to get rich. In response to the statement, "I want to make a lot of money when I grow up," 63 percent agreed, and only 7 percent disagreed.
No one should find it particularly worrying that most 10- to 13-year olds want to make a lot of money when they grow up. And certainly no one should draw the conclusion from this that "their overriding goal was to get rich."

The point is that, yes, there are problems with consumer spending. But articles like this one do not present a clear and accurate view of the facts and the problems involved, instead relying on unneeded alarmism to make a point.

Friday, December 03, 2004

Mankiw news

Via Brad Delong. Of course we are all wondering why the Keynsian Mankiw is still in the Bush administration. But at least he has some sense:
Calling the current system of Social Security benefits unsustainable, a top economic adviser to President Bush on Thursday strongly implied that any overhaul of the system would have to include major cuts in guaranteed benefits for future retirees.

"Let me state clearly that there are no free lunches here," said N. Gregory Mankiw, chairman of the Council of Economic Advisers, at a conference on tax policy here.

"The benefits now scheduled for future generations under current law are not sustainable given the projected path of payroll tax revenue," he added. "They are empty promises."

...

In what seemed an effort to anticipate complaints that a new system would reduce future benefits, Mr. Mankiw warned that the benefits promised under current law are fictitious because they cannot be afforded.

"Be wary of comparisons between a new, reformed Social Security system and current law," Mr. Mankiw said. "Unless a listener is discerning, empty promises will always have a superficial appeal."

Let's hope he asks the right question, which is "given that benefits cannot be afforded, what can we do to ease the burden on those who are retiring in the next two decades?"

Happiness

In Isaac's post on interpersonal comparisons of utility, he restates the usual objection to using objective, or cardinal measures of happiness. First, I don't think we can say they are exclusively using a cardinal measure of happiness. Certainly, they do when they say
And again, contrary to previous research, the researchers found that divorcees in the study reported being slightly more cheerful during the day than did married women.
There is no way you can make a claim like that without somehow assuming that a happiness rating of 7 for me is a happiness rating of 7 for someone else, right? They do, however, measure well-being in many more dimensions than just happiness. There is a range of emotions that were rated by the subjects. But it's hard to say whether or not adding more dimensions increases or decreases the accuracy of the measure. Of course the question of the *actual* methods they used could be easily cleard up by a quick perusal of the study itself.

In fact, the study handles this in a very clean and creative way:

In well-being research, the standard deviation of individual differences is normally the metric used to express the size of group differences. Because the DRM supports both between-subjects comparisons (e.g., different age groups) and within-subject comparisons (e.g., different situations or times of day), it provides an additional metric that facilitates the interpretation of results. Exploiting the broad consensus that exists on the relative enjoyment value of many activities and situations, we constructed a scale of enjoyment demarcated by types of familiar situations. We first chose two activities near the extremes of low and high enjoyment: commuting to work (mean = 2.86) and relaxing with friends (mean = 4.92). We then identified five other activities with mean enjoyment ratings spaced approximately evenly within that range. The selected activities satisfied two conditions: (i) There was no significant difference in the overall average of enjoyment ratings between individuals who engaged in the activity and others who did not; and (ii) there was broad agreement between the rankings of the activities in the DRM results and in generic judgments of their enjoyment value (19, 20). Using this scale, we display the effects of selected work circumstances and individual differences on reported enjoyment, at work and at home (Fig. 3).
The study uses both interpersonal and intrapersonal measures of happiness, so we can still say that people enjoy relaxing with friends more than commuting to work if each person rates relaxing with friends higher than commuting to work. So, taking the activities which have a similar form of consensus, they constructed a metric based on how people rated those activities to measure other factors which may affect well-being. For example, we can say that if there is no time pressure at work, then people ranked work as enjoyable as "shopping with a spouse", but when there is time pressure, work was ranked as low as "commuting."

So the study does not succumb to the temptation to use a cardinal measure of happiness. Let's relate this to an economics framework. Consider two situations, X and Y. If we know that across a broad spectrum of agents X is strictly preferred to Y we can use this to analyze the utility of a third situation, Z. For example, there may be some factor which affects the utility of Z. We can measure the effect of this factor by seeing where agents locate the utility of Z in relation to X and Y. If, when the factor is present, agents consistently prefer Z to X or are indifferent between Z and X (remember, X > Y) but when the factor is NOT present, agents consistently prefer Y to Z or are indifferent between Y and Z we can "objectively" say that the presence of the factor decreases the utility of Z for any given agent. This is essentially what this study does.

I'd also like to say a word about the Times' reporting on the study. Their headline reads, "What makes people happy? TV, study says." But TV is far from the activity that people find most enjoyable, according to the study, which was "intimate relations." In fact TV is almost the median activity on the scale of "positive affect" among observed activities. So why did Benedict Carey seem to think TV was "what makes people happy?" And why did the article's headline not read "What makes people happy? Sex, study says." ?

Furthermore, the Times seemed to take as the results of the study the actual data produced, but if they had read the conclusion they would have learned that

The goal of this report was to introduce a new tool for the study of well-being and to illustrate its potential uses.
It was NOT intended to produce a definitive answer on what makes people happy. And this can be seen in the details of the study: subjects were from a convenience sample, were only women, and only those women who worked during the day were included in the study (thus excluding the unemployed and the truly poor.) Very poor show by the Times and Benedict Carey.

Overall, the study is quite impressive as a demonstration of a new technique for measuring well-being. I hope that we will see many extensions of this in the future. I would personally like to see some sort of intertemporal study, for example, comparing *intra*personal happiness after going from situations of employment to joblessness etc.

Not Good

AP reports
U.S. employers pulled back on hiring as they entered the holiday shopping season, adding just 112,000 new jobs overall in November. It was the weakest gain in five months and about half of what economists had forecast.

Still, the overall, seasonally adjusted civilian unemployment rate dropped fractionally -- by 0.1 percentage point -- to 5.4 percent, as more people looking for work found jobs, the Labor Department reported Friday.
Advertisement

Employers' payrolls have expanded by 2.3 million since August 2003, but the monthly pace has been sluggish. Analysts had predicted in advance of Friday's Bureau of Labor Statistics report that approximately 200,000 new jobs were created last month. Even October's blockbuster showing was tempered a bit in revised figures. The department lowered from 337,000 to 303,000 its previous estimate of new jobs during that month.
So no jobs are created yet the unemployment rate continues to fall. In this economy right now clearly the unemployment rate is a meaningless statistic. What matters is the labor force participation rate. Yet such a number is not included in the article. Why?

Interpersonal Comparisons of Utility

We learn in economics that you cannot do interpersonal comparisons of utility because a level of utility has no meaning outside of variations within a person: it is ordinal not cardinal. That is, if I assign a value of $10 of utility to an activity, and you assign a value of $10 of utility to an activity, then we really cannot say how our levels of utility compare. Sure we value it the same in dollar terms, but how do we value dollars. So what's interesting about this article is the claim that you can, in fact, make interpersonal comparisons of happiness -- which we could understand, from an economists' perspective, to be utility. The Times article isn't extensive enough on method to know for sure, but it does seem that the researchers claim that you can make explicit comparisons of happiness across people, else you couldn't come up with all the data they do. For example, the income statistic I cited above. Unless the participants had changes in income, then to claim that variations in income did not have an effect on happiness means that you have to have made such an interpersonal comparison of happiness.

My point is that utility and happiness are essentially subjective measures which have no objective measure. And if you ask people to put themselves on a scale, then for two different people a 7 may mean very different things. After all, we don't know what it means for someone else to be "really" happy or "slightly" happy, we only know what that means for us. Someone might just always be 100 times happier than me, but such a scale wouldn't reflect this. So all this study can say is not that certain things make people more or less happy in some objective sense, but that these activities put people at such and such points on their own happiness scales. Some people or cultures may have a tendency to say that they are less happy, even though they are at the same level in some indeterminate objective sense.

Now Daniel Kahneman who did this study is a hell of a lot smarter than me: he's a Nobel Laureate in economics and has probably thought of these things. Given that economists are so often criticised for being unsubtle about human emotions, it is interesting that a psychologist thinks that it is possible to even present the results as somehow compiling and comparing happiness when economists have concluded that such an idea is ludicrous because each person's happiness is so subjective.

Old News

A while ago I went through my closet and looked at where my shirts were made. The list follows:
  • 2x Indonesia
  • 2x Guatemala
  • Malaysia
  • Canada
  • Madagascar
  • Hong Kong
  • Taiwan
  • 2x Bangladesh
  • 2x India
  • Kuwait
  • Honduras
  • Korea
  • Dominican Republic
  • Qatar
  • Mexico
  • Sri Lanka
Isaac made the point that many shirts may have only passed through the country to which they are attributed in order to avoid import quotas, but this is still a stunning and powerful demonstration of the global nature of the economy. Also that I have a lot of shirts.

Thursday, December 02, 2004

Uncle Bernie

My Ec 1 professor, Bernard Saffran, passed away this week. It was certainly a shock, I had expected him to be around, to take his Senior Honors Study, to joke with him in Kohlberg halls. His advice was a big part in deciding what to do with my life. Arnold Kling, a Swarthmore alum, wrote a very touching and accurate eulogy. Also, a senior at Swarthmore, Josh Hausman, wrote a piece in the college newspaper. Bernie will be missed.

Yes!

Extreme poverty makes people sad.
After controlling for other factors, Dr. Kahneman and his colleagues found that even differences in household income of more than $60,000 had little effect on daily moods. Job security, too, had little influence.
This is good. It justifies my wanting to do development. For if level of income has little impact on happiness then how do you justify doing development? Well you can and do -- it turns out that inequality has its own moral pull . But the strict Benthamite justification is so much more appealing: raising people's income makes them happier! If development works, then I can make people happier. Yay!

The Economy

The New York Times carries an AP story on retail sales in November: not good.
The International Council of Shopping Centers-UBS sales preliminary tally of 70 retailers increased 1.7 percent for November, lower than the reduced forecast of 2.5 percent to 3 percent range.
Also, a story on unemployment. The article is a bit unclear, but reports that
The Labor Department reported Thursday that new filings for unemployment insurance increased by a seasonally adjusted 25,000 to 349,000 for the week ending Nov. 27, which included the Thanksgiving Day holiday. Some analysts were expecting a smaller rise -- of around 7,000....On the layoffs front, last week's level of claims at 349,000 is consistent with a labor market in recovery, analysts say.
Finally,
The number of people continuing to collect unemployment benefits, meanwhile, dropped by a sharp, seasonally adjusted 20,000 to 2.72 million for the week ending Nov. 20, the most recent period for which that information is available. That marked the lowest level since late April 2001.
In sum, the economy ain't great, but it ain't too terrible; left to itself, it will limp along.

What will be decisive is the dollar and interest rates: a falling dollar (it reached multi-year lows against the Euro and Yen) makes exports more "competitive" and imports cheaper. Both producers (exporters) and consumers (of imported goods) do better. Thus there is more income sloshing around the economy which causes it to expand: demand increases. To balance out this increased demand, producers raise prices -- which leads to an overall increase in the price level, and thus inflation. The Fed might raise rates, which weakens the economy both because it makes borrowing more expensive and so reduces demand and because it has the effect of making dollar-denominated assets more desirable and so strengthens the dollar and thus reduces exports and increases imports, to try to prevent the inflationary impact of a falling dollar. Yet this probable rise in rates hurts an already sluggish economy. It's unclear what the ideal solution is: hope that a falling dollar can accelarate the economy and worry about inflation later, or try to have a smoother ride but risk screwing up. It's hard to be Alan Greenspan.