Are foreigners perpetual outsiders in Japan?

Time for a post that's not about economics.

Number 4 on this list of "5 Things Nobody Tells You About Living In Japan" is, in fact, something that almost everybody tells me about living in Japan. Namely, that foreigners will always be outsiders there. I've stopped arguing about this with my friends and acquaintances and drunk people I meet in bars, because frankly the discussion has become repetitive, and I never really manage to convince anyone of my point of view. (I felt like I was constantly screaming "There...are...four...lights!!!")

So I thought instead I'd write it down.

Here's what the article has to say about life as a foreigner in Japan:

Simply put, the country just isn't very accommodating to people who can't speak Japanese. Without the language, you will barely be able to buy food or get around, let alone establish any kind of permanent living situation that doesn't involve keeping a bilingual girlfriend/boyfriend/hostage on hand 24/7 to translate every commercial that comes on the radio. You can't just exchange shouts with people and come to a working understanding like Han Solo and Chewbacca. Real life doesn't work that way. 

So how is that different from moving to any other country where English isn't the native language? Well, for starters, Japanese is one of the hardest languages for Americans to learn, requiring 2,200 hours of study if you want to be considered truly proficient. This is partly because of the difficulties of learning a new language as an adult, and partly because English and Japanese have about as much in common with each other as Halloween and Halloween III. 

That being said, once you actually got the whole language thing down, you might expect to finally be able to integrate yourself into Japanese society and thrive, right? Well, here's how it was with me: I've been coming to Japan for nearly a decade, my wife is Japanese, I speak the language fluently, I know the culture inside and out, and yet I'm still "that foreign guy" to most people here (even the ones who have known me for close to 10 years). 

Japan is one of the most homogenous nations on Earth -- roughly 98 percent of the population is ethnically Japanese. No matter what you do to try and fit in, you will always stick out like a sore thumb in a room full of people who have had their thumbs removed by rototillers. 

For instance, one of the biggest hot button issues in Japan concerns people of Korean ancestry who live in the country. In most cases, these are people who were born in Japan, have Japanese names and speak almost exclusively Japanese, but because of their Korean lineage, they are still legally considered foreigners and as such face several restrictions (such as the inability to vote or hold management positions in the public sector, a law that the Supreme Court actually upheld in 2005). The government literally decided that all Koreans are dastardly shitheads who are not to be trusted and mandated it to the entire country. 

So now ask yourself this -- if the Koreans in this example (who by all rights should be full Japanese citizens were it not for ethnic prejudice) are given the same treatment as convicted felons, what chance does a white kid in a Gundam T-shirt have to not be considered a complete outcast? 

I'm not saying that every single person in Japan hates foreigners, but if you live here, you will be constantly reminded that you are most decidedly not Japanese, nor are you likely to spontaneously become so.

This is pretty typical of stuff I hear from Westerners who have lived in Japan. No, not pretty typical; depressingly, mind-numbingly ubiquitous. It's almost as if Westerners living in Japan are in thrall to some sort of...well, never mind, I shoudn't go there.

Anyway, to put it bluntly, this runs directly counter to my own experience of life as a Westerner in Japan.

I lived in Japan for 2.5 years between college and grad school, and I've been back several times since then, mainly to work at Japanese universities, but also to help my friend make a documentary. The experiment in my job market paper was run at Aoyama Gakuin University in downtown Tokyo. When I showed up in the fall of 2003, my Japanese was pretty rudimentary; I had taken one year of the language in college, but that was it. So I made a concerted effort to learn the language, hanging out around people who spoke no English, reading manga, and memorizing kanji off of the internet. It took about a year and a half before I was really able to carry on an intelligent conversation.

Japanese is not a difficult language. Reading it is difficult, because of the use of Chinese characters. But you can memorize these pretty easily by reading on the Web and using a rollover dictionary like Rikaikun. In fact, this method was suggested to me by my friend Tobias Harris, a political scientist who specializes in the study of Japan. Using this method, he was able to teach himself to read Japanese so well that, after only a year of study, he was able to work as campaign operative for a Japanese politician in Kamakura.

As for the grammar and pronunciation, neither is particularly difficult. Compound and complex sentences are easier to construct than in English; there are fewer verb tenses, and most nouns can easily be made into verbs. Pronunciation is quite simple, as Japanese has only one sound that English doesn't have (a kind of humming "nn" sound). 

Despite the easiness of the Japanese language, many Westerners never bother to become truly fluent. The reason is simple; they can get by in the country speaking simple English and broken, simple Japanese. Of course, as the author of the article above suggests, this makes it difficult to really relate to most of the people in Japan. It makes it tough to form close relationships, tough to be included in social activities, and tough to work productively with Japanese coworkers. But because Japanese culture is generally friendly, and because some Japanese people take it upon themselves to speak English to foreigners, these Westerners can manage a sort of stunted, good-enough social life over there without ever spending the effort to become fluent. No wonder they feel like outsiders! What would you expect??

So much for the language part. What about the cultural attitudes? The xenophobia, the closed society, the racial homogeneity?

To be perfectly honest, I haven't seen much of it.

These days I go to Japan to work with my coauthors, at Aoyama Gakuin University in Tokyo, and at Osaka University in Osaka. When I'm there, I'm mostly around academics - professors, grad students, and undergrad research assistants. Culturally, they are essentially identical to academic people in the United States (who themselves are usually from a mix of countries). They bemoan stupid politicians. They make nerdy puns. They go rock climbing and biking. They show up to work late and then stay up all night reading papers. They try to eat at interesting restaurants. They read science fiction. They occasionally check out blogs. They politely pretend to follow each other's seminar presentations. In other words, if you are at home in a university setting in America, and if you speak Japanese, you will be at home in a university setting in Japan. And never once has anyone there treated me as an outsider. 

What about other, less intellectual, less cosmopolitan segments of Japanese society? Well, when I lived in Japan the first time, I went to plenty of rock and techno shows. I found the people there to be extremely welcoming and friendly - and not just in a "Wow, look, a white guy came to our show!" kind of way, but in a "Hey, want to hop on scooters go out for a beer?" kind of way. They didn't speak a word of English, they knew hardly any American bands, but they were essentially the same people as the rock hipsters I've hung out with in Los Angeles, Austin, or San Francisco.

Another time, I joined a "yosakoi" dance team - I saw them practicing in the park at about 9 PM, wandered up, and asked if I could join. They said yes. Again, none of them spoke any English, but we got along great. I volunteered at the yearly festival and had a great time, and some of those people became my friends. We'd go out for yakitori (chicken skewers) at 2 AM after we got done practicing.

There are plenty more examples.

Yes, I've met some Japanese people who seem nervous or shy around foreigners, or just plain uninterested. They're not as bad as the Texans who screamed "fag!" at me from the windows of pickup trucks when I was a blue-haired college kid, or my racist Texan junior high teachers. But they did exist. I don't know how many Japanese people there are who don't want to accept foreigners into their social circle, and there's a very good reason I don't know: I don't hang around those people.

Yes, that's right, "people". You see, if you spend your life speaking pidgin Japanese and walking around thinking "I'm a foreigner, I'm an outsider," you can easily fail to realize that Japanese people, despite their vaunted "racial homogeneity", are just as heterogeneous in terms of their tastes and attitudes and personalities as Americans or Canadians or Australians. As in so many situations, individual differences matter far more than group differences. And if you're walking around Japan feeling a wall of alienation between you and everyone you meet, chances are it's due to the cultural prejudices of one specific individual: you.

Oh, and as for that legendary prejudice against Koreans, it is true that Japan doesn't have birthright citizenship. But in no way are "zainichi Koreans" prevented from becoming Japanese citizens. If you are born in Japan to non-citizen residents, you have the option of becoming a Japanese citizen when you reach adulthood. I have a couple friends who did that, in fact. No, Japan is not as welcoming to immigrants as America or the rest of the Anglosphere, but few countries are. It is certainly not true that "the government literally decided that all Koreans are dastardly shitheads". That's just trumped-up BS disguised as a lame, misplaced attempt at humor.

So there you have it. The myth that foreigners can never be accepted in Japanese society is, to all the evidence of my eyes, a myth.

These sort of myths about Japan are common. For example, I've had lots of Westerners insist to me - absolutely insist! - that Japanese people use the word "gaijin" ("foreigner") only to refer to non-Japanese people, even when abroad. Yet I've asked a number of Japanese people living in America: "Are you a 'gaijin'?" And every single one of them has immediately answered "Yes." (Although one did take care to point out to me that "gaikokujin" is a more polite term). So there you go. There...are...four...lights!!!

Anyway, my apologies to everyone who comes to this blog looking to read about economics. I just needed somewhere to vent. Now, instead of getting into the same old argument about Japanese "xenophobia", I can just link to this post.

(Oh, and by the way. #3 on that list was "Hospitals are closed on evenings and weekends." Hey dude, have you ever tried to go to a doctor on the weekend in America? Good luck! Try the Emergency Room instead. Which is open in Japan 24/7, just like in America. They even have their own version of "ER".)


Update: The more time I spend in Tokyo, the more I start to think that maybe my perspective just comes from having spent most of my Japan time in Osaka.

Bob Lucas on macro

I find Bob Lucas more intriguing than any other economist of the last few decades. I'm always interested to read what he has to say, for example in this recent interview (hat tip to Steve Williamson). Some excerpts, and my quick reactions follow. Here's Lucas on the Lucas Critique:

[T]he term "Lucas critique" has survived, long after [the] original context has disappeared. It has a life of its own and means different things to different people. Sometimes it is used like a cross you are supposed to use to hold off vampires: Just waving it it an opponent defeats him. Too much of this, no matter what side you are on, becomes just name calling.

This is basically what I was conjecturing in this blog post. Of course Lucas gets to say it more matter-of-factly, because...well, his name is on the Critique. Anyway, here's Lucas on DSGE modeling:

Virtually all macroeconomic models today are dynamic, stochastic and general equilibrium (where here "general equilibrium" means you have the same number of equations and unknowns)...If we narrow the definition of DSGE by using "general equilibrium" to refer to competitive or Nash equilibria where the strategy sets of each agent are made explicit in an internally consistent way then we have Kydland-Prescott and other RBC descendants and not much else.

This is interesting, for several reasons. One is that Lucas expands the definition of "general equilibrium" to include Nash equilibria, which is not the way I've ever seen it done; I have always understood the term "general equilibrium" to be synonymous with "Walrasian equilibrium".

Also, it's interesting that Lucas says that RBC models are essentially the only equilibrium models (of the business cycle, presumably) in which "the strategy sets of each agent are made explicit in an internally consistent way". Is this true? I don't think it is true. For example, take a Calvo model. In a Calvo, model, agents' ability to set prices is restricted by a mysterious, exogenous "Calvo Fairy"...but, given the existence of such a "Fairy", the strategy sets of agents in the model are quite explicit and quite internally consistent. In a Prescott-type RBC model, agents' decisions are constrained by exogenous "technology"; you might think that this is more plausible of an assumption than a "Calvo Fairy", but in terms of its effect on the internal consistency of the strategy sets of the agents in the model, it seems no different.

Or maybe I'm reading Lucas wrong here?

Lucas on the causes of business cycles:

I was [initially] convinced by Friedman and Schwartz that the 1929-33 down turn was induced by monetary factors...I concluded that a good starting point for theory would be the working hypothesis that all depressions are mainly monetary in origin. Ed Prescott was skeptical about this strategy from the beginning... 

I now believe that the evidence on post-war recessions (up to but not including the one we are now in) overwhelmingly supports the dominant importance of real shocks. But I remain convinced of the importance of financial shocks in the 1930s and the years after 2008. Of course, this means I have to renounce the view that business cycles are all alike!

In 1980, Lucas had written:

If the Depression continues, in some respects, to defy explanation by existing economic analysis (as I believe it does), perhaps it is gradually succumbing under the Law of Large Numbers.

But with the post-2008 recession looking so similar to the Depression, it seems to have become clear to Lucas that the Law of Large Numbers will no longer do the trick. There must in fact be two types of recessions, with one (more frequent, less severe) type caused by "real shocks", and the other (rarer, more severe) type caused by "financial shocks". 

That Lucas has now twice changed his ideas about the underlying causes of the business cycle - the most important question in all of business cycle theory - is in my opinion a reason to admire him. When the facts change, Lucas changes his mind, as any scientist should.

Incidentally, the idea that "financial shock" recessions are different would tend to put Lucas more on the Reinhart-Rogoff side of things. Though Lucas doesn't mention here whether he thinks financial-shock recessions should last longer.

But the fact that history can cause even the smartest of macroeconomists to change his mind about the fundamental question of his field not once, but twice over the course of his lifetime is a stark illustration of the poverty of data that business-cycle theorists have to work with. In a sense, all we can do is watch history go by and hope it repeats itself enough for us to get a handle on what's happening.

Finally, Lucas on microfoundations:

The "[micro]foundations" of...models don't guarantee empirical success or policy usefulness. 

What is important...is that if a model is formulated so that its parameters are economically-interpretable they will have implications for many different data sets. An aggregate theory of consumption and income movements over time should be consistent with cross-section and panel evidence...An estimate of risk aversion should fit the wide variety of situations involving uncertainty that we can observe...Estimates of labor supply should be consistent aggregate employment movements over time as well as cross-section, panel, and lifecycle evidence...This kind of cross-validation (or invalidation!) is only possible with models that have clear underlying economics: micro-foundations, if you like. 

This is bread-and-butter stuff in the hard sciences. 

This I completely and utterly agree with. The power of microfoundations is that they allow unification. They give you the hope of explaining many phenomena in terms of one underlying phenomenon. In fact, there really should be no conceptual difference between the terms "microfoundations" and "unification". Microfounded models - when they work -are inherently more useful and powerful than equivalent "ad-hoc" models.

Of course, as Lucas points out, this makes microfounded models inherently more vulnerable to falsification than other models. An "ad-hoc" non-microfounded model only has to explain one thing, but a microfounded model has to explain many things. This means that as soon as the microfounded model fails to explain any one of the things it purports to explain, you have to conclude that the model is flawed, and look for a better model. (In practice of course, not everyone actually does this when they ought to...)

Anyway, it's always valuable and fascinating to read Lucas' thoughts. I seem to agree with him on quite a number of important things, though not on issues related to the assumptions or the value of the RBC modeling paradigm...Not that many people especially care whether I agree with Bob Lucas, mind you, but hey, it's my blog!

Keynes Hayek, by Nicholas Wapshott

I just finished listening to Keynes Hayek: The Clash that Defined Modern Economics, by Nicholas Wapshott. You won't learn much economics from this book, which is mostly an account of the lives and labors of its two protagonists. But you will learn a lot about what economic debate was like back in the 1920s and 1930s, and you will gain some interesting hints about the intersection between science, politics, and personal egos.

Many of the debates between Keynes, Hayek, and other economists working in the UK at the time were carried out in the pages of economics journals, in particular Economica. Hearing these debates summarized and quoted in Wapshott's book, I was immediately struck by how similar they were to today's econ blog debates. There was a huge amount of people talking past each other, quibbling over definitions, and claiming that they'd been misinterpreted. For example, the incredibly byzantine debate between Hayek and Piero Sraffa put me in mind of the Sumner/Wren-Lewis blog debate from early 2012. The sarcastic, bombastic clash of tempers between Keynes, Hayek, and others like Lionel Robbins and Joan Robinson reminded me distinctly of the recent rhetorical fireworks between Paul Krugman, John Cochrane, and others (with Arthur Pigou playing the part of Tyler Cowen, chiding the other debaters for their incivility while advancing conservative ideas in a genteel fashion).

There are some major differences, of course, between the discourses of then and now. The fiery econ debates of the early 20th century advanced a lot more new ideas, and employed more rigorous analysis, than today's blog debates. Steve Williamson often says that you won't learn any cutting-edge economics from reading blogs; but for the back-and forth debates of the 1930s, that was definitely not the case. These days, of course, ground-breaking theories and rigorous analysis have remained in academic journals, and have taken on a far more detached, scientific tone, while sharp debates have mostly moved to the blogs.

As for Keynes and Hayek, the book taught me much more about the latter than the former. Hayek didn't start out as the Anti-Keynes, it turns out - he was a ringer, brought in by Lionel Robbins, William Beveridge, and other British conservatives to battle Keynes when Robbins & co. felt that they themselves weren't up to the task. They brought in Hayek when their first choice, Ludwig von Mises, proved to be too bad at English (and too downright grumpy).

It seems to me that Hayek took his appointed role as the Anti-Keynes a bit too seriously. During his attempt to formulate alternatives to Keynes' General Theory, Hayek repeatedly flirted with ideas that were - in my opinion - much deeper than the simple theory of aggregates that was being advanced by Keynes. These included the mutual inconsistency of economic plans, and the potential failure of economies to reach stable equilibria. Maybe Hayek bit off more than he could intellectually chew, or maybe he shied away from exploring ideas whose implications ran so counter to the political views of his mentor, von Mises. But in any case, Hayek didn't follow up on his tentative forays into the economics of complexity, instability, and disequilibrium, and instead went into political philosophy.

Hayek's most famous piece of political philosophy was, as we now know, completely wrong. In The Road to Serfdom, Hayek claimed that Keynesian-style macroeconomic management would lead to totalitarianism; in reality, nothing of the sort has ever happened. America, Europe, Japan, Korea, and others became solidly Keynesian after World War 2, and while macroeconomic management didn't always work as advertised, it nowhere and never led to the advent of totalitarian regimes.

It's also interesting that Hayek, despite hating the Nazis and totalitarianism in general, seems to have been somewhat influenced by many of the early 20th century Central European ideas that led to the rise of Nazism itself. For example, he repeatedly asserts that people are not created equal, making reference to "superior people," and stating that he would prefer an economically libertarian dictator to a democratic government that restricted economic freedom. This foreshadowed the unfortunate libertarian support for dictators like Augusto Pinochet, as well as more recent libertarian flirtations with "scientific racist" ideas.

Still, the author of Keynes Hayek credits Hayek with keeping the flame of libertarianism alive through the dark winter of Keynesian dominance, and views the emergence of Milton Friedman as the vindication and apotheosis of Hayek's ideas. In this, I feel that the author makes a major mistake; Friedman's monetarism was a type of macroeconomic management that was more amenable to conservatives of the 1970s and 80s than the type advocated by Keynes, but it was central planning nevertheless (as von Mises pointed out). It was Robert Lucas and Edward Prescott who truly restored Hayekian "classical" economics to dominance in the macro field, with their models of frictionless economies and near-optimal business cycles.

In any case, I definitely recommend Keynes Hayek, especially the audio version.

Michigan Health Care Claims Tax Fight -- Additional Rounds Ahead

It’s been a tough fight thus far in opposition to the Michigan Health Insurance Claims Assessment Act, which imposes a one percent (1%) assessment on all health care payers, including self-insured employers and certain business partners, for medical services rendered to Michigan residents in the state of Michigan.

As this blog has previously reported, business groups in Michigan signed off on the legislation last year noting it was part of a larger budget deal that was not as bad as possible alternatives.   ERISA preemption concerns were outweighed by the belief that self-insured employers could absorb the new tax without much disruption. 

Then in August of this year, a federal district court in Michigan dismissed an ERISA preemption lawsuit, which contended that the administrative obligations imposed by the Act are unlawful.    

Game over?  Well, not exactly.

An appeal of the District’s court ruling has just by filed with the Sixth Circuit Court Appeals and incorporates some very strong arguments to justify a reversal.  And this time, the self-insurance industry will have an unlikely ally in this legal fight – organized labor. 

What has not been widely recognized is that the tax applies to self-insured Taft-Hartley plans and the ERISA preemption argument is even stronger as it relates to these plans.   So it is a positive development that at least two Taft-Hartley plans are expected file amicus briefs next week. 

But while more pressure is being applied in Federal Court, things are heating back up in the Michigan State Legislature to make the tax significantly more onerous.

The Act was structured based on the assumption that it would raise $400 in annual revenue from all payers.   Of course, government budgeting is often suspect and Michigan bureaucrats have lived up to this reputation.  Through the first half of 2012, the state collected only $109 million from the health claims tax, which means the annualized estimate is short nearly $200 million.

So it should not come as any surprise that the Michigan Legislature is now considering a proposal during a lame duck session to significantly hike the tax.  SB 1359, introduced earlier this month, would allow for an unlimited and variable rate on the claims tax so that it would float up and down to ensure that the tax generates $400 million annually.  The bill would also eliminate the proportional credit/refund provision should the tax collect more than the $400 million target amount.

Interestingly, state business groups who provided tacit approval to the tax last year have now launched an aggressive lobbying effort to defeat the proposed 2.0 version.   We’ll see if labor groups join the cause. 

While it’s certainly encouraging that there is strong push back against SB 1359, the opposition remains focused on the economic argument.    Yes, this is clearly important but arguably not as important as the ERISA preemption issue.

We’ll concede that the most self-insured employers in Michigan have figured out how to comply with this new tax obligation, but multi-state employers will also tell you that if other states implement a similar tax scheme this would greatly complicate compliance efforts.  In turn, this could make the self-insurance option much less attractive – a particularly troubling development in the post-ACA world where self-insurance offers a critical safe harbor.

Look around.  Most states have budget challenges, especially as it relates to health care obligations.  If the Michigan tax withstands legal and legislative challenges then we should not be surprised if other states attempt the same approach.

So the stakes are high in Michigan as it is now ground zero in the ERISA preemption fight.

Econ grad students and the Macro Wars

In the blog world, there's been some argument as to what the younger generation really thinks about the whole "Macro Wars" thing. Do up-and-coming econ grad students think that the current paradigm needs to be revamped? Do they think macro is basically doing fine? It's tough to tell, because - understandably - most grad students are afraid to get into these academic-political fights (obviously I was one exception, but I'm crazy). But when grad students can speak their minds without fear of consequences, we can see that there is a lot of angst out there over the state of macro - and even over the value of macro itself.

I'm talking, of course, about Econ Job Market Rumors, the anonymous forum. Of course you don't have to be an econ grad student to post at EJMR, but it's hard to imagine that many other people would be interested in the economics job market. If you've ever read EJMR, you'll know that no punches are pulled.

So here's a pretty well-known thread in which the EJMR folks dish their opinions about macro. (The title, "macro no giod p", is an inside-joke meme; I'll let you figure out the meaning for yourself.) A large fraction of the commenters are very critical of the macro field in general, for example:

It's interesting that the fact that their models don't fit does not bother macro economists that much. Whenever a "good" model fails empirically, they just call that a paradox and write hundreds of papers about it.

***

I feel depressed explaining to my friends what I learned in PhD macro . I'm sure most lay people interested in macro would be reallllyyyy disappointed by what is taught and published. But don't fret! You can shrug it off. Just like the students who turn away from macro, lay people too can be dismissed as not sophisticated enough to truly understand the insights of RBCs.

***

[T]he best explanation you [macroeconomists] can come up for business cycles is either 'people are lazy' or a 'negative technology shock'. 

Macro = ideological crap and everything which challenges that view (like ABM) are told that they do not have 'microfoundations' and that's why they are crap. 

Of course, as long as macroeconomists do make the correct predictions they can claim they have the correct explanations, because assumptions do not matter. Oh wait, you even fail on this part. 

To sum it up: Macroeconomists don't know anything about human behavior, how markets work or something about the economy.

***

The biggest puzzle is actually that macroeconomists are so proud about their 'microfoundations' yet they do not understand them at all.

***

I can't wait for the day where econ departments split and leave macro behind, much like physical anthropologists sometimes leave cultural anthropologists behind in their own little circle jerk departments.

***

macro too corrupt
too much black-box
not enough predictive success
too wrong too often

***

macro = ideological bulls**t, should be removed from economics.

***

Oh quit your bellyaching...Nobody likes macroeconomics unless they're a macreconomist. You still have to take it. It's the rite of passage. Just pass your prelim and never look back like the rest of us did. 

A small handful of people in the thread show up to defend macro, but their defenses tend to be very circumspect:

In real life though I find the people who usually make macro no good comments have little to no exposure to modern macro yet have a pretty strong opinion. Its one thing to critique a subject with an understanding of it, then there is a room for intelligent debate. It is anotherthing to dismiss the subject 

Even if you don't like the approach in current macro, macro has difficult questions that are worth asking and answering. Being stupid enough to voice allowed an opinion that macro shouldn't be studied at all means you aren't fit to be an economist. It shames me that some of you are Ph.D's or Ph.D candidates. 

It seems that some of you haven't ever intelligently thought about why the lay person seems to barely realize that there are other fields in economics other than macroeconomics. It is the economics they see as most relevant to them. They do not care about novelty/usefulness of an approach. They care about whether what you have to say is relevant to their understanding of the world, and if it impacts them or those around them. Macroeconomics of fields has the most visible impact on ordinary people and which is why it is a field worth studying.

***

Now you probably learned nothing in substance in a conventional macro-course. You worked through a few seminal papers most of which were written in the 80s and mid 90s (King, Rebelo, Kydland Prescott, gali 1999). You might have looked at Solow 1956 for good measure and some other growth papers from 1970s. The point of that curriculum is to learn the existing approach to dynamic economics. Something you spend little to know time in studying in your mathematics economics courses or first year micro-theory courses. That approach in general can go a long way to explain phenomena around us, even the current crisis. 

You can criticize the approach, but one needs to understand that simply stating the approach is no good isn't any sort of substantive critique. Its unfortunate that few outside of the field have been able to give a real substantive critique, beyond that calibration is wonky and you don't like exogenous shocks. I think most of us realize calibration is wonky, except maybe Prescott. The point of the modern approach is to endogenize as many variables as possible, as that was even more prevalent in the past. (This is really why we ought to teach IS-LM, in grad classes.)

And then a number of people seem to accept that macro field has severe limitations, but still insist that the field is worth studying:

When macro is the subfield with the highest demand for economists, second only to metics? What are you going to do then? Micro theory? 

What you guys don't realize is that in the eyes of the public macro IS economics (and vice versa). Let go of macro and just see enrolment fade and your salaries plummet.

***

Yes. Perhaps that precisely is the problem. The public wants us to do things we aren't very confident with. I must admit, I don't think I would have started in econ if macro wasn't a part of it.

***

I admit macro is no good, but maybe that is why macro is precisely the best subfield for us, since so many questions still lie ahead. What more can we really do in econometrics?

***

I am a macroeconomist too. I decided to work in this area partly because I am interested in the questions, and partly because it is clearly a field where the social marginal product is potentially very high.

***

no one thinks macroeconomics we are doing is that robust. There wouldn't be disagreement in the first place. Its because we lack tools to do good causal inference in the first place. Its nice you can use cross-sectional data or panel data and come-up with an identification strategy as outlined in mostly harmless econometrics. 

We on the other hand have about 4 business cycles worth of auto-correlated time-series data to do most of our inference on. What ever empirical tools are only fit to answer a narrow range of questions. That is why the a toybox economy like DSGE model can catch on in the first place.

(These last two probably best sum up my own views on the topic. Macro has very poor data to work with, and this means we should lower our expectations for the field to some degree; at the same time, the lack of real progress in the field leaves it wide open for innovative thinkers to make a big difference.)

Anyway, I was somewhat surprised at the depth of animosity towards macro among the grad student community. Not only were the anti-macro posts far more numerous, but they received far more likes than dislikes. The same pattern seems to hold elsewhere on EJMR. Non-macro students tend to be very disparaging of macro, and macro students tend to express deep misgivings and reservations about their chosen field. There are, of course, exceptions. But despite a couple retorts of "micro no giod p", there doesn't seem to be nearly the same amount of skepticism directed toward the various micro fields.

I'm not sure what conclusions we can generalize from these anonymous forum posts, or whether EJMR is an accurate barometer of econ grad student sentiment. But the criticism of macro nevertheless was eye-opening, even to a macro-skeptic blogger like myself.


Update: A commenter points me to this thread, where EJMR denizens debate the value of structural estimation. Not really related, but also fun.

Thanksgiving Safety Tips from NFPA

Here is an article from the National Fire Protection Association (NFPA) on Thanksgiving Safety Tips.  From our family here at Fey Insurance Services to yours, have a wonderful and safe Thanksgiving! 

THANKSGIVING SAFETY TIPS
The kitchen is the heart of the home, especially at Thanksgiving. Kids love to be involved in holiday preparations. Safety in the kitchen is important, especially on Thanksgiving Day when there is a lot of activity and people at home.

Safety tips:


•Stay in the kitchen when you are cooking on the stovetop so you can keep an eye on the food.

•Stay in the home when cooking your turkey and check on it frequently.

•Keep children away from the stove. The stove will be hot and kids should stay 3 feet away.

•Make sure kids stay away from hot food and liquids. The steam or splash from vegetables, gravy or coffee could cause serious burns.

•Keep the floor clear so you don’t trip over kids, toys, pocketbooks or bags.

•Keep knives out of the reach of children.

•Be sure electric cords from an electric knife, coffee maker, plate warmer or mixer are not dangling off the counter within easy reach of a child.

•Keep matches and utility lighters out of the reach of children — up high in a locked cabinet.

•Never leave children alone in room with a lit a candle.

•Make sure your smoke alarms are working. Test them by pushing the test button

Let's have a little chat about inflation...

Inflation is one of those things that almost nobody who isn't an economist seems to understand (though that doesn't mean all economists understand it either!). First of all, there is the fact that most people don't even seem to know what inflation is. Some people seem to equate the word "inflation" with "a decrease in [my] real wages" - if things seem harder to afford, then it must be "inflation". Others seem to think that if stock prices go up, then that is "inflation". Still others use the word "inflation" to describe specific price changes - for example, if oil gets more expensive, people call that "oil price inflation". And the other day, I had a friend tell me: "[It's] simple. Low [interest] rates mean the price of money is low. That's a form of deflation."

(Note that that last statement is the exact opposite of correct. Inflation is a decrease in the value of money. Deflation is an increase in the value of money.)

Or the other day, someone on Twitter asked me: "How is it possible for inflation to help debtors when wages are going down? If wages are going down, doesn't inflation just make it harder for people to pay off their debts?"

The answer is no. Here's why. Suppose you make $50,000 a year and you have $50,000 in debt. Your debt-to-income ratio is 1. Also, just for convenience, let's say the general price level starts out at "1".

Situation A: -50% real wage growth, 100% inflation.

In this case, the new price level is 2. Your new real wage is $25,000. Your new nominal wage is $25,000 x 2 = $50,000. Your debt is still $50,000. Your debt/income ratio is still 1.

Situation B: -50% real wage growth, 0% inflation.

In this case, the new price level is 1. Your new real wage is $25,000. Your new nominal wage is $25,000 x 1 = $25,000. Your debt is still $50,000. Your debt/income ratio is now 2.

Situation C: -50% real wage growth, 50% deflation.

In this case, the new price level is 1/2. Your new real wage is $25,000. Your new nominal wage is $25,000 x 1/2 = $12,500. Your debt is still $50,000. Your debt/income ratio is now 4.

So as you can see, even if your real wage is going down by 50%, it's better to have inflation than no inflation if you are a net debtor. Inflation erodes the value of your debt no matter what is happening to your real wages.

So what's going on here? Why do so many people misunderstand inflation? Maybe it's a form of "Stockholm Syndrome". Inflation-hawkish economists have been bellowing, so loudly and so vehemently, that inflation is Satan - this goes back at least a hundred years - that non-economists just can't help believing it. People end up trying to think up reasons why inflation must be bad after all. When you offer them freedom - when you tell them that sometimes inflation can erode debt, relieve balance sheet recessions, and help stimulate the economy - they don't want to take it. , and they come up with more brilliant ways to identify with their captors. Or something like that.

I don't know. I feel like that's kind of a weak theory. What's really going on here? Why don't most non-economists seem to get what inflation is or what it does?

Why I love Michael Moore

I've seen four Michael Moore films: Roger and Me, The Big One, Bowling for Columbine, and Sicko. I've seen him speak twice, once when I was in the Stanford Speakers' Bureau and helped bring him to campus, the other time at Michigan. Every film of his that I've seen has made a big impression on me and changed my thinking in some important way. Every time I've seen him speak, I have come away more sympathetic to his worldview.

Roger and Me is, in my mind, the definitive window into the Rust Belt. It is absolutely heart-wrenching; I dare you to watch the famous "rabbit scene" and not feel a wave of despair. Here's what it's really about: In the 1980s, foreign competition, shifting trade patters, and new technology conspired to break the power of manufacturing unions, end the "corporate welfare state", and relegate much of America's middle class to a new lower middle class. At the same time, we made the conscious policy choice not to use wealth redistribution to compensate for those changes. To economists, these things are just mathematical models and historical facts, but in the real world, they had enormous human costs. Roger and Me makes you look those costs right in the face. That's something I believe every economist should be required to do.

The Big One is a sort of coda to Roger and Me, showing the effects of globalization and deregulation on America's labor markets (and on the real human beings who populate those labor markets).

Bowling for Columbine is about America's gun culture. I don't think it does a good job of explaining America's extraordinary levels of gun violence, most of which is involved in the drug trade, and relatively little of which is committed by the type of gun nuts depicted in the film. But I do think that Bowling for Columbine sheds light on a very dark corner of American culture - white supremacist and secessionist militias - that causes a hefty amount of human suffering in the present and could be very dangerous for our national security in the long run.

Sicko is about America's health care system, and the alternatives. Before I saw Sicko, I believed the common line that, for all its flaws, America's health care system was "the best in the world". After I saw the movie, I did not believe anything of the kind. Sicko opened my eyes to the existence of Britain's National Health Service; after watching the movie, I looked into the NHS, and found that it achieves better results than the U.S. on almost any outcome measure, for far fewer costs. Importantly, it does this using a rational incentive system - doctors are paid for improving the health of their patients, not for recommending large numbers of expensive services.

I'm not sure, but around the same time that I stopped believing that America had the best health system in the world, I noticed that other people stopped saying it (and in fact started saying the opposite!). Around the same time I started thinking that Britain's NHS is the best alternative, I noticed a lot of policy-wonkish people praising that system in the press. Around the same time I started realizing the insanity of the "fee for service" incentive system, everyone started talking about it. So I wonder if Sicko, rather than just changing my mind, actually changed the whole national conversation about health care. If so, that would make it one of the most politically influential films of all time.

So Michael Moore A) shows slices of life that reveal the real human consequences of economic policy choices, and B) raises important policy issues. And he does this while managing to be entertaining enough to hold an audience's attention. In my opinion, this makes him an important and positive figure in America today.

But it has recently come to my attention that there is quite a lot of anti-Moore sentiment out there. As with anyone who becomes a favorite media target, it is not obvious what Moore has done to deserve being "hated on" to such an extent. Here are some possible reasons not to like Michael Moore, and why I think each one is not a very strong reason.

1. "Moore advocates bad economic policies." Michael Moore talks like a fire-breathing socialist - he criticizes the profit motive, demonizes big business, and even praised Cuba's health system. And watching his movies and listening to him speak, it quickly becomes apparent that Moore doesn't have any coherent alternative to Anglo-Saxon capitalism - no, good middle-class manufacturing jobs are not going to be brought back by the generous altruism of corporate CEOs.

But I don't mind. Because Moore is a filmmaker, not an economist. Because I think it is perfectly fine to show problems without offering solutions. Simply alerting people to a problem is a valuable social service. And making people witness and understand the downsides of the tradeoffs they make - like keeping America's productivity growing at the expense of the lifestyles, self-worth, and communities of millions of workers - is a valuable social service. You don't need to replace capitalism to show the flaws in the American flavor of capitalism.

2. "Moore distorts the facts". Somewhat predictably, this criticism seems to be made mostly by people who appear to have no problem with the Alternate Reality Bubble in which the entire conservative movement has recently encased itself, in which lying in support of conservative policy goals is regarded as a virtue. So I take claims that Moore plays fast and loose with the facts with the same grain of salt that I take the "Krugman Truth Squad", the mercifully short-lived and utterly bullshittinous National Review column from ten years ago. Somewhat unsurprisingly, a quick Google search for "Michael Moore fact check" reveals that Sicko is not too shabby in the accuracy department. Reading the websites dedicated to showing that Moore is a liar, I find that many of the supposed lies are actually either A) juxtapositions that the critic thinks are misleading, but seem perfectly legitimate to me, or B) simply things the critic disagrees about, like whether America has a high murder rate. Only rarely do I see something that looks like it might be an actual intentional distortion.

(A note, however: Much of the criticism of Moore's factual accuracy seems to be made with regards to his film Fahrenheit 9/11, which I have never seen, mostly because I heard bad things about it from everyone I asked. So maybe that movie makes more fibs than the others?)

So this criticism might be true - and if true, it is of course a legitimate criticism - but I haven't seen solid evidence for it yet.

3. "Moore is a hypocrite". Here's a guy who criticizes the rich, and has gotten rich off of his successful movies. This criticism doesn't really bother me, for at least three reasons I can think of. First reason: Moore criticizes people who get rich by exploiting workers, and he may feel that the workers involved with the production and distribution of his movies are not exploited. Second reason: One person giving up his money is not going to change the system. Third reason: Even if Moore is a total raging hypocrite, who cares? Does that decrease the importance or the quality of his films?? No.

I love Michael Moore professionally. Personally, he may be Earth's douchiest douchebag. I don't know and I don't care. I don't even know the guy.

So while I allow that there might be bigger problems with Michael Moore than I have yet realized, so far I love what I've seen. Feel free to try to convince me otherwise; I am not committed to this point of view...

Captives & Dodd-Frank -- Hitting the Right Target

The recent announcement of an industry coalition to push for federal legislation clarifying that the Nonadmitted and Reinsurance Reform Act (NRRA), included as part of the Dodd-Frank law, does not apply to captive insurance companies certainly sounds like a positive initiative.  But despite good intentions, this blog is skeptical that it will acheive the desired result.

We have actually been tracking this issue for some time and is aware of discussions that have taken place with key congressional sources regarding the viability of a possible legislative fix (two conversations as recent as yesterday).  The consensus is that it could be done technically, but DC politics dictate that such an effort would be a heavy lift.

The political reality is that neither Democrats nor Republicans have the appetite to open up the Dodd-Frank Law for any changes at this point. 

Truth be told, congressional Republicans don’t want to do anything to help the law actually work, as this was a highly partisan piece of legislation, much like the Patient Protection and Affordable Care Act.  The only way Republicans would be motivated to even consider amending the legislation is if such action would substantively lessen the administrative burdens on the banking industry and provide certainty to the business community, especially small business.

 Democrats, for their part, will be resistant to “technical amendment” legislation even if they support it in principle for fear that it would become a legislative vehicle where additional amendments would be grafted on with the intent of watering down the law.

And neither party wants to come back under fire from the powerful financial services industry lobby, which would surely happen if Dodd-Frank is opened back up – even for so-called technical fixes.   

But just for the sake of argument, let’s assume that legislation is introduced and some co-sponsors are lined up.  Does that mean success is any more likely?  Probably not.  To understand this assessment, we need to talk about the relative political power of interest groups in DC. 

While many of the larger lobbying organizations active in DC have the ability to block and/or shape legislation, there are far fewer who have enough political juice to get their own special interest legislation passed through Congress, no matter how limited. To be blunt, the captive insurance industry simply does not fit into this latter, more exclusive group.   

Finally, the country’s biggest captive domiciles simply do not have powerful congressional delegations with regard to insurance-related issues, which could potentially offset the deficiencies and complications described above.  That is not to say these members of Congress would not be forceful advocates, they simply are not positioned to move legislation envisioned by proponents of this approach.

So does all this mean that there will never be clarity relative to whether the NRRA applies to captives?  Well, it may not to come from Congress for the reasons we just explained, but it may come from federal regulators as part of the Dodd-Frank rule-making process. 

In fact, this avenue is now being actively explored by self-insurance industry lobbyists.   This strategy can best be described as a “surgical strike,” as opposed to an expensive and pro-longed “land war,” which the congressional route would surely become. 

We’ll see if the political operatives now engaged with the regulators can hit the target.  But at least an arguably clearer path has been identified.

 

 

 

 

 

 

New Atlantic column: The case for a Federal University System

My new column in the Atlantic makes the case that we should establish a Federal University System in parallel to the state and private systems we already have. Excerpts:

[T]he price of college is high. And attendance has been growing...When you have increasing price and increasing quantity sold, Econ 101 tells you that what you're seeing is a shift in the demand curve. Lots more people want to go to college, and they are willing to pay more. The reason for the increase is not surprising -- it's the college wage premium, combined with low unemployment among people with a college degree... 

And we can only expect demand to increase, especially if we do what we ought to do and let in a lot more high-skilled immigrants. Those immigrants will be great for the economy, but their kids are going to be competing with native-born kids for college spots. Unless we do something, that competition could cause a xenophobic backlash among the high-skilled native-born, as well as driving up tuition even further. 

What do you do when you have a big increase in demand for a product? Well, if you're a company, you probably ramp up supply... 

So here's my idea for increasing the supply of college: A system of federal universities...
Federal university systems have been very successful in other countries. One prime example is the Indian Institutes of Technology (IIT)...Another example is Japan's federal university system... 

A system of national universities would (1) fight the rise in tuition, and (2) accommodate all those smart second-generation kids whose parents we should be recruiting to our country in droves. But it will also help the nation in a 3rd way by giving us an outlet for higher research spending. The U.S. has been spending less and less on R&D as a percentage of our GDP, even as R&D becomes more and more important. In part because of this, there are legions of PhDs being forced to take private-sector jobs in which they have no expertise. These trends need to be reversed in order to maintain America's status as the leading technological nation. And a system of federal universities is the perfect vehicle to increase research spending and provide an outlet for all those PhDs... 

Federal universities are an idea whose time has come.

   

Public perceptions of freshwater macro

Cato scholar and Forbes writer Timothy B. Lee is hardly what you'd call a liberal. Nevertheless, he's written a scathing column on conservatives' "Reality Problem". He mentions Nate Silver denialism, climate change denialism, and evolution denialism, but this part especially caught my eye:

On macroeconomics, a broad spectrum of economists, ranging from John Maynard Keynes to Milton Friedman, supports the basic premise that recessions are caused by shortfalls in aggregate demand. Economists across the political spectrum agree that the government ought to take action counteract major aggregate demand shortfalls. There is, of course, a lot of disagreement about the details. Friedman argued that the Fed should be responsible for macroeconomic stabilization, while Keynes emphasized deficit spending. 

But rather than engaging this debate, a growing number of conservatives have rejected the mainstream economic framework altogether, arguing—against the views of libertarian economists like Friedman and F.A. Hayek—that neither Congress nor the Fed has a responsibility to counteract sharp falls in nominal incomes.

Basically, Lee is saying that freshwater (or "New Classical") macro is essentially a political shibboleth - an intellectual excuse for conservatives to oppose government action, rather than a serious attempt to model economic reality.

This is a point of view I hear expressed more and more frequently, not just in liberal circles, but in libertarian ones as well. It is an accusation that I myself have been unwilling to make, though I don't rule it out either. If this is becoming the conventional wisdom, it represents serious trouble for freshwater macro. Supporters of that school of thought should sit up and take notice.

What's interesting is that conservatives have long viewed Keynesianism as a thinly disguised Trojan horse for socialism. Suggestions that money is non-neutral, that recessions are caused by demand shocks, that the Fed should try to stabilize output, or that Congress should use fiscal stimulus to fight recessions are often waved away as excuses to redistribute wealth. Now, it seems that mainstream American opinion is concluding the exact opposite - that the modeling of recessions as supply shocks is the more politicized assumption.

The financial crisis probably has a lot to do with this, as does the recession. Prices fell in the crash and grew only slowly afterward, making it very hard to portray the recession as a shortage. The financial crisis itself made it difficult for the current generation to accept the idea - central to freshwater analysis - that markets run smoothly when left to their own devices.

But I must say, freshwater macroeconomists have not gone out of their way to eschew political motivations. Casey Mulligan, a well-known labor economist who claims that government benefits caused the slump, entitled his book "The Redistribution Recession" - an obvious jab at liberals. Conservatives who cite "policy uncertainty" as the root of our woes routinely fail to identify the Debt Ceiling Standoff of 2011 as the high point of uncertainty (as serious scholarly analysis suggests), instead focusing on supposed anticipation of socialist redistribution by the Obama administration. And freshwater economists confronted with the question of "Why did the financial crisis of 2008 occur?" routinely state - in the absence of evidence - that the root cause was government policy encouraging lending to poor people.

All of this does not look good in the eyes of people who are not firmly wedded to the conservative movement. It looks like politicization. And while attitudes and statements like this don't prove that RBC models and the like are political sales pitches for laissez-faire policies, they certainly don't do much to discredit the growing ranks of critics who, like Timothy B. Lee, speculate openly that this is the case.

Freshwater macro has an image problem that it really needs to address. People are whispering, but they're not giggling.

Update: A commented asked "Who are the freshwater people?" I had written a big explanation of this, but deleted it because I felt it was pedantic. Briefly, they are mainstream macroeconomists who think that supply shocks are the main cause of business cycles. This includes RBC theorists like Ed Prescott, Charles Plosser, and much of the Minnesota economics dept. Other famous New Classicals include Robert Lucas and Robert Barro. New Classical thinking appears to be strong at Wash U (Steve Williamson, for example, is there, and his work has a freshwater flavor). Tim Kehoe, Robert King, and Randy Wright are some other prominent New Classicals I know of. The freshwater school is also generally held to include Casey Mulligan and other labor economists who argue that labor supply shocks caused the Great Recession. All in all, the New Classicals are a very powerful faction within macro these days, though not quite as influential as the dominant New Keynesians.

Update 2: I'm definitely not saying that all the people listed above are politically conservative. Some are (Mulligan, for instance). Others may not be; people tell me Steve Williamson is politically liberal. But the image exists...to say the image doesn't exist, I'd have to deny reality. Also, I struck Robert King from the "freshwater" list; he did a lot of prominent work in the RBC field, which is the only work of his that I knew, but it has been brought to my attention that he's done work in the "New Keynesian" area as well. It's very difficult, and usually inaccurate, to assign individual people to these "schools".

Murphy's Law? or, Follies of a Finite Physicist

"Murphy was an optimist." - Unknown

It's two years later, and I'm still being linked to Tom Murphy's famous blog post, "Exponential Economist Meets Finite Physicist." The header reads "1787 views this month; 0 overall," which I assume is a coding glitch rather than an existential conundrum; the point is, the post continues to receive a lot of attention. And, as you should know by now, it is in my basic nature to critique things that receive tons of attention while at the same time being less than fully brilliant. Usually, I gleefully support the trolling of economics by physicists; today, it's time to troll my own side.

Tom Murphy, a physics professor at University of California San Diego, writes a blog called "Do the Math", in which he attempts to show that every single alternative energy source is going to fail, and hence economic growth is soon going to either grind to a halt (in the best case scenario) or go into full reverse. But his most famous post, if my Twitter feed is any guide to fame, is "Exponential Economist Meets Finite Physicist." Because in this post, he purports to show that economists' most basic ideas about growth are inconsistent with the laws of the Universe. 

The post is structured as a sort of Platonic dialogue, in which Murphy recounts a dinner conversation between himself and "An Established Economics Professor from a Prestigious Institution," a mild, bumbling individual who begins the exchange with utmost confidence in a rosy future of unlimited growth, but - after a thorough thrashing at the hands of Murphy - is forced to reexamine and recant most of his ideas.

Murphy's basic argument is this: Exponential growth can't continue forever, because of A) waste heat, and B) energy limitations. If we keep energy usage growing at a 2.3% annual rate, waste heat will boil the Earth in 400 years. Keep that up for 2500 years, and we'd be using the entire energy output of the Milky Way Galaxy. Hence, economic growth must halt.

This is correct. And in fact, Murphy didn't even need to mention waste heat or anything like that to make his argument; he could have just said "Hey, eventually the Sun will explode, and then the whole Universe will degrade into heat, and where will your economy be then?" So what if that happens 500 million years in the future, or 10^100 years? What's the difference? One way or another, the human race is kaput!

Are economists ignoring this basic fact? Do economists' models crucially hinge on the idea that economic growth will continue forever and ever and ever? No. The "long term trend growth" that is used in growth and business cycle models is only meant to represent a trend that lasts longer than the business cycle - so, longer than a decade or two. No economist - I hope - thinks that currently living humans are making economic decisions based on what they think is going to happen in 400 years, or 2500 years, or 500 million years.

The fact that Murphy's interlocutor fails to point this out tells me that either his existence is partially apocryphal, or hiring standards at certain "Prestigious Institutions" have fallen.

Murphy does make an attempt to argue that 2500 years (and hence 400 years) is not a very long time. Here is his argument:

2500 years is not that long, from a historical perspective. We know what we were doing 2500 years ago. I think I know what we’re not going to be doing 2500 years hence. 

Does anyone else think this is complete gibberish? Does the fact that we have history from X years ago imply that we should be able to forecast the future X years in advance? And the idea that "we know what we were doing 2500 years ago" makes 2500 years a short amount of time...does that make any sort of sense? I mean...we also know what we were doing 2 billion years ago. Is 2 billion years "not that long, from a historical perspective"?

In "Act Two: Salad", the possibly-apocryphal economist comes up with a pretty good retort: What about virtual reality? With awesomely powerful computers, we can simulate whole worlds. Virtual apples, piped directly to the pleasure centers of your uploaded mind, are just as yummy as real apples, and a heck of a lot cheaper to create in terms of energy. That's quite a lot of economic growth, right there.

To which Murphy replies:

[N]ot everyone will want to live this virtual existence...I suspect many would prefer the smell of real flowers—complete with aphids and sneezing; the feel of real wind messing up their hair; even real rain, real bee-stings, and all the rest. You might be able to simulate all these things, but not everyone will want to live an artificial life.

Oh really? Well, that's settled then...and while we're at it, who'd want to spend a third of their waking life in front of a glowing screen? Oh wait...

Anyway, Murphy continues:

And as long as there are any holdouts, the plan of squeezing energy requirements to some arbitrarily low level fails. Not to mention meeting fixed bio-energy needs.

See, this is true, but it doesn't help Murphy's point at all. Suppose there are 100 holdouts who refuse to upload into a virtual world. Suppose that these people's standard of living doesn't increase at all, but the standard of living of the uploaded people in the virtual world keeps going up and up (say, as new virtual stuff gets invented inside that world). In that case, economic growth is still positive, even though the 100 physical people aren't seeing any of the benefits! Economic growth does not necessarily benefit all people equally (as America has recently learned). Murphy seems not to realize this at all.

In the third act, "Main Course", Murphy asserts that energy can't become arbitrarily cheap. He supports this contention with a truly eye-popping piece of bad economics:

But if energy became arbitrarily cheap, someone could buy all of it, and suddenly the activities that comprise the economy would grind to a halt. Food would stop arriving at the plate without energy for purchase, so people would pay attention to this. Someone would be willing to pay more for it. Everyone would. There will be a floor to how low energy prices can go as a fraction of GDP. 

What?! What about the air, dawg? Air is arbitrarily cheap right now. There is a finite, fixed amount of it. And without air, no economic activity could happen. Do you see anyone trying to corner the air market? No. So why should energy be different? The answer: It shouldn't. Because if someone started buying up all the air in the world, the price of air would rise until he had to quit; he could then sell off the air he had bought, but he would be unlikely to make a profit. This is why market corners nearly always fail.

The fact that the "Established Economics Professor" fails to point out this obvious howler, and instead meekly concedes Murphy's point, only further convinces me that his existence has been a bit...colored by embellishment.

OK, after much verbose meandering, Murphy concludes with the following:

The conversation recreated here did challenge my own understanding as well. I spent the rest of the evening pondering the question: “Under a model in which GDP is fixed—under conditions of stable energy, stable population, steady-state economy: if we accumulate knowledge, improve the quality of life, and thus create an unambiguously more desirable world within which to live, doesn’t this constitute a form of economic growth?” 

I had to concede that yes—it does. This often falls under the title of “development” rather than “growth.” I ran into the economist the next day and we continued the conversation, wrapping up loose ends that were cut short by the keynote speech. I related to him my still-forming position that yes, we can continue tweaking quality of life under a steady regime. I don’t think I ever would have explicitly thought otherwise, but I did not consider this to be a form of economic growth.

So, here in the epilogue, Murphy basically concedes the whole argument. "Yes," he says, "Growth as defined by economists can continue indefinitely, but I don't really consider that 'growth'. My entire argument about finite 'growth' was based on me using my own Tom Murphy definition of 'growth in energy usage', rather than the definition given in any undergraduate economic textbook." All concepts "fall under the title" of what Murphy instinctively feels they ought to be called.

Nice to clear that up.

OK, now, as a physicist-turned-economist, let me hit you with this one: Murphy's "still-forming position" probably isn't right. What he calls "development" (i.e. what economists call "growth") will also probably halt. Why? Because we will eventually satisfy ourselves. Modern economics is based on the idea of "local nonsatiation" - the idea that no matter how much you have, you always want more of something. But local nonsatiation is not necessarily true in the real world. Actually, given the fact that human motivation arises from physical processes, local nonsatiation must fail in some situations. Rocks are completely satisfied. Dead people are completely satisfied. 

So as soon as humans completely satisfy ourselves, economic growth will stop. This probably won't mean "getting all the stuff we want". It'll mean changing our desires directly, through the application of Desire Modification technology. This is far easier than creating a virtual world to give us ever-increasing amounts of virtual stuff. Instead, we just change ourselves to like the world we have, more and more. When we like the world so much that we don't want anything to change, then we will have no more reason to grow the economy.

In fact, many economists know this. When I took my second-year grad macro course, my teacher (Miles Kimball, of course) started the class with a list of the various time scales at which economists model the world. A few months was the "very short term". A few years was the "short term". A few decades was the "long term". And 100 years was the "very long term". Next to the words "very long term", Miles wrote "(all human problems solved)". At this point, he noted, all our models would become beside the point.

So Tom Murphy thinks he has found an epic gotcha. He thinks that with a few moments of thought, he has managed to expose the concept of "long-term economic growth" for the fraud it is, and thus undermined the foundations of much of economics. But he is wrong. He - and his not-very-credible dinner-discussion foil - have merely pretended that economists believe things about the far, far future that they do not actually believe. And in the meantime they have failed to say anything useful about economic growth over then next 100 years.

Look, I am all for physicists barging in and busting up the cozy world of economics. I welcome this. I encourage it. It's a good thing. But stuff like "Exponential Economist Meets Finite Physicist" just falls under the title of...well...let's just say it doesn't fall under the title of trenchant critique.


(Note: Just so readers don't get the wrong idea, I do think Tom Murphy generally does good analysis regarding alternative energy technologies; I do think oil scarcity is a source of economic stagnation and that the government should be pouring funds into alternative energy research; and I do think that there are economists out there who don't take energy scarcity as seriously as they should...)

Why war might really be over (and why it might not)

In his new book The Better Angels of Our Nature, Steve Pinker demonstrates that war and violence have declined worldwide, and speculates as to possible reasons why this has occurred. Many people have criticized this conclusion: for example, see Nicholas Taleb. The thrust of all the criticisms is the same:

"Sure, war has declined recently, but the decline may not be structural. A new bout of war could occur any day now. In fact, the very factors that have suppressed war in recent decades may just make future wars more catastrophic."

And this is of course true, as far as it goes. Past performance is never a guarantee of future results; even if there has been a deep structural change that has led to a drop in war, what's to say there won't be another deep structural change that brings war back? And of course it's possible that the current decline in war is just as much an illusion as the macroeconomic "Great Moderation" turned out to be.

Then again, maybe not. Sometimes, structural changes happen that are, for all intents and purposes, permanent. For example, smallpox is now really and truly gone from the planet; it declined and never bounced back. Nor is there any sign of a return to high rates of infant mortality.

So I don't understand the critics of Pinker. Simply pointing out that Pinker does not have a well-verified scientific theory of what drives the grand sweep of history should not blind us to the real phenomenon of declining global violence. Instead of saying "Oh, the Great Moderation was an illusion, this must be too!", we should recognize the reality of the violence decline, and dig deeper in order to root out the structural causes (or lack thereof).

Why might war have declined? The common theories include:

1. MAD: The threat of devastating nuclear retaliation makes war too risky for any major power.

2. Commerce: Global supply chains are just too valuable to disrupt with a war.

These two ideas are often criticized. MAD might simply shunt all the risk of war into the heavy tails, leading to a brittle standoff that eventually snaps and results in a holocaust that more than makes up for all the decades of peace. Commerce has proven to be a flimsy peacemaker in the past, since global trade networks didn't forestall WW1 and WW2.

I agree with these criticisms. But I also see some other possible structural reasons why war might be on the way out. To wit:

3. Low reward of war: Economically, the main benefit of war (other than a stimulus to get one's economy out of a slump!) is seizing of natural resources. But nowadays, natural resources are just not a very valuable prize. Countries with very few natural resources - Japan, Germany, France, etc. - tend to be the richest, while most resource-rich countries are poor. And the 2003 American invasion of Iraq, widely thought to be motivated by a desire for oil resources, ended up not paying for itself via oil. It just wasn't worth it! In the modern economy, wealth comes mainly from physical and human capital, not from land - and you just can't easily seize and exploit an opponent's factories and PhDs (as the Nazis discovered). There's just no benefit to be had from fighting anymore. Of course, this was probably true in WW2 as well, but perhaps now nations have had enough experience losing money on wars to realize that there's no profit in smashing up the means of production.

4. The information age: In the past, countries going to war were highly uncertain about what kind of threat they faced, and so it was much more possible for two opponents to each believe they had a very good chance of victory. Nowadays, with the advent of the internet and other vast sources of free public information, countries probably have a lot more realistic assessments of how likely they would be to prevail in any given conflict. And since countries will tend not to choose war when they think it likely that they will lose, this will mitigate against military adventures. Look how extensively the Bush Administration had to deceive itself and isolate itself from reality in order to persuade themselves that Iraq would be a cake walk!

5. Low fertility rates: There is a clear and well-established correlation between high fertility rates and violence. Yet fertility has declined dramatically in most regions of the country since the 1970s; at this point, only some parts of Africa and a few scattered small countries elsewhere have fertility rates in the 4+ range, which used to be ubiquitous. Fewer surplus "angry young men", more cautious old people, more grandparents to take care of...it all adds up to reduced impetus to war.

6. High monetary costs of war: Weapons are becoming more and more expensive, and so is the energy required to power them. Missiles and drones and ships cost insane amounts of money, but it is no longer possible for great powers to fight wars without these things. This raises the cost of war.

These are structural factors that usually go overlooked in discussions of the "end of war". But I think they're real. Of course, to be fair, I should mention some structural factors that might work in the opposite direction:

1. Nuclear terrorism: If people get the ability to build nukes in their basements, as in the Vernor Vinge story "The Ungoverned", then all bets are off, because it will be possible for personal rather than national grievances to start very high-casualty conflicts. The same goes for home-made super-viruses.

2. Resource scarcity: We've hit the age of "peak everything", and some resources are getting scarce. Food, in particular, has gone way up in price, and water is becoming scarce in many parts of the world. This will act against Reason 3 above, and raise the return to war, especially for poor countries.

3. Cyberwar combined with automation of nuclear arsenals: This risk should be pretty obvious.

So in conclusion, I see lots of structural factors lining up against war, and only a few lining up in its favor. This doesn't mean that the former will win, and it definitely doesn't mean that we won't see any more big wars. But it points us in the direction that I think we need to look if we want to confirm whether the trend observed by Steve Pinker is structural and durable.