Driving Drowsy

A 2008 study, taken from the Annals of Internal Medicine, suggest that some antihistamines may impair driving ability, even more than alcohol. The driver doesn’t even have to feel drowsy.

Forty study participants, when given diphenhydramine and an amount of alcohol to boost their blood alcohol level to .10 (legally impaired in most states), tested worse in a driving simulator when under the influence of antihistamine than under the influence of alcohol. A newer non-sedating antihistamine, Allegra, did not affect driving any more than the placebo given in a blind test screen.

The Asthma and Allergy Foundation of America estimates there are 50 million allergy sufferers in the United States. Allergies account for more than 17 million outpatient physician visits each year. Since the 1940s, antihistamines have been among the most widely prescribed medications. It is estimated that currently there are 30 million patients in the United State taking regular antihistamine medications in this $8 billion drug market.

If you have taken antihistamines, ask your doctor if a non-sedative prescription will work for you.

He's right and he's right? They can't both be right!

Ryan Avent, perhaps prodded by my comment-thread heckling (yeah...in my dreams!), has started making a lot more sense in his arguments against the industrial-policy-ists:

And over the long-term, the needs in America are the same as they have been for decades. The country has been underinvesting in the basics, and the effects have become ever clearer. Its infrastructure—from transportation to water and power to broadband—is wholly inadequate. Educational attainment is plateauing and may begin to decline. Its labour market policies aren't up to handling sectoral shifts or millions of people in long-term unemployment. Its research funding is ample for any project with a potential military application and meagre for everything else. The weaknesses are clear.

This is absolutely right. The collapse of America's pubic-good provision is the single biggest problem with our economy. Trade issues, and industrial policy, are secondary to our crumbling infrastructure and dysfunctional education system.

And yet, when Tim Duy says things like this, it's hard to ignore the sneaking suspicion that maybe trade-imbalance and industrial-policy issues are a bigger part of the picture than we realize:

[I]n aggregate real wages and nonfarm payrolls have been stagnant for a decade. Where are these high wage paying jobs? Or even median wage paying jobs at this point? Silly me, I actually believe the unapologetic and unquestioning supporters of free trade need to answer this question. We are millions of jobs below trend, and we have lost millions of jobs in manufacturing - the manufacturing of goods that we still consume, no less. Moreover, these two trends occurred in the same decade, in concert with a third trend - the sharp rise in foreign official reserve accumulation. How can you not be even allowed to suggest that there just might be a connection?

The problem I see with Avent and his fellow-travelers (Yglesias) is not that they are wrong about the structural problems facing our economy - the lack of investment in public goods, the Republican commitment to ever-expanding deficits - but that they are so dogged in their belief that these are the only problems we face. Perhaps they are afraid that they'll labeled as economic know-nothings if they question the free-trade orthodoxy (a legitimate fear, given that most of the Grand Old Men of the economics professions are still ideological conservatives). Or perhaps a trade war with China is what they fear most.

But either way, if Tim Duy's question turns out to have an answer we don't want to hear - an answer that implies that a strong-dollar policy and a finance-favoring industrial policy have hurt our economy - then writers like Avent and Yglesias are preventing liberals from coming up with a workable answer to America's economic woes. Which, in the long run, is bad news for the liberal movement.

Trade models I don't teach - The "New Trade Theory"

I was going to have three posts on trade models - the two I teach, and the one I don't teach. But I realized that the middle model - the Heckscher-Ohlin model - is not different enough from the Ricardian model to merit its own post.

(Briefly, the Heckscher-Ohlin (HECK-sure o-LEAN) model tries to describe trade between rich and poor countries, by pointing out the fact that rich countries have a lot of equipment and machines and buildings and infrastructure (capital), while poor countries have a lot of cheap labor, so poor countries will make labor-intensive goods (e.g. clothing) while rich countries will make capital-intensive goods (e.g. cars). Fine. But the thing is, Heckscher-Ohlin treats each country like a single person, just like the basic Ricardian model, and so there can't be any negative externalities to trade...hence, the model assumes right off the bat that free trade is always and everywhere a good thing. Yawn.)

Instead, I want to discuss the "New Trade" model, invented by Krugman in 1979 and refined in 1991, for which (among other things) he won the Nobel prize a couple of years ago. This is the model that most economists actually use now to explain and predict trade. I am never asked to teach it in Econ 102, but that's only because it involves lots of math that most undergrads can't handle.

Krugman's model was developed in order to explain the fact that many trading partners produce very similar goods: Japan and America both produce cars, for example. The classic Ricardian theory of trade says that comparative advantage determines what gets imported and what gets exported, but the data seem to buck that. So Krugman brought in a different idea. People like variety, he said, so different countries will trade different varieties. Small initial differences between countries (example: Japan had no domestic oil reserves, and so focused more on smaller, more efficient cars) determine which variety gets produced where.

OK, so far, so good. Now, what about free trade? Unlike the Ricardian and Hecksher-Ohlin models, New Trade DOES have an externality. Specifically, since people like variety, the more variety I produce and sell, the more you can produce and sell as well. Each company becomes sort of like a monopolist, being the only producer of its own specialized variety of good. More trading countries means more global variety, making consumers better off everywhere.

Of course, this externality is purely a positive externality. Japan selling us cars is good because it allows us to focus on producing a different type of car. There is no negative side effect from increased trade, and so free trade, again, becomes by assumption the best possible policy, always and everywhere. The free trade orthodoxy is still baked into the cake.

In order to get a model that says that free trade might not be the best policy, we'd need to write down a model that has a negative externality to trade. Perhaps opening up trade allows companies to put their dirty factories in the country with the most lax pollution regulations, hurting the environment. Perhaps opening oneself up to trade creates financial instabilities because of international investment flows. Or perhaps countries can engage in "predatory" trade practices, to which the best response is a temporary trade war.

These models all exist (see links), but no one has yet paid them much attention. Instead, whether in the classroom or in our actual modeling, we continue to unquestioningly use models that assume that no trade restriction can ever be a good idea.

Now, I'm not saying these are bad models! And I am not saying that free trade is not, in fact, the optimal policy. What I am saying is that in every intro macro course, one of the first (and last) things we say is: "Macroeconomists agree on very few things, but they generally agree that free trade is good." And this is true, they do. But the reason that they agree is not that they've proven it. It's that they assumed it, and decided to use models that assumed it. When the inevitable chorus of economists turns out to cheerfully berate anyone who suggests "protectionism," they may be reveling in their rare opportunity to finally agree on something...but really what they are doing is drowning out dissent for the fun of it. Our profession-wide consensus comes at the expense of scientific honesty - and, if it turns out that the consensus is wrong, it has also come at the expense of American prosperity.

An econ prof explains why macro went down the tubes

I've often ranted about the "neoclassical revolution" in macroeconomics, which came along in the late 70s and early 80s and turned macro into a cargo cult (or what Krugman calls a "Dark Age"). I've generally implied, or said outright, that the reason people like Robert Lucas and Ed Prescott committed this dastardly deed was political - they wanted an intellectual justification for the rising tide of anti-government conservatism that was sweeping the nation. But rarely do you hear supporters of the neoclassical (or "Real Business Cycle") paradigm admit this openly. Which is why this blog post by Stephen Williamson of Washington University (the most "conservative" econ department after Chicago) is so refreshing:

In the Keynesian world, fluctuations in aggregate economic activity are inefficient, and the logic appeared to be consistent with what we observe. We find ourselves in the middle of a recession. In terms of the its basic fundamentals, the economy looks more or less the same as it did before the recession happened. There is roughly the same set of people, with the same skills. The same buildings and machines are in existence, and we know just as much about how to produce stuff as we did before the recession happened. However, we are producing less and more people are out of work. Surely something has gone wrong, and the government can do something about it, by spending more and relaxing monetary policy to put people back to work.

However, the Phelps volume writers and Lucas got us thinking about the following. An unemployed person is someone who answers the labor force survey in a particular way. This person is engaged in a particular activity – search – and we can analyze this process just as we would analyze anything else in economics, as involving choice and incentives. Due to a mismatch between the workers that firms want and the jobs that workers would like to have, separations due to various factors, and people moving in and out of the labor force, there will always be unemployment. Further, fluctuations in these factors determining unemployment will make the unemployment rate fluctuate. Indeed, we might imagine fluctuations in unemployment that are purely efficient – there may be nothing the government should do about this.

The part in bold illustrates the neoclassical concept of unemployment: it doesn't exist. Unemployed people are simply unwilling to take the jobs that are being offered to them. You can hear this idea in the speeches of many Republican politicians to this very day.

Next, along come Kydland and Prescott in 1982, with what later became known as real business cycle analysis...Kydland and Prescott were thinking outside the box, and they were very much in the faces of mainstream macroeconomists...[they] gave economists license to contemplate the possibility that business cycles could be bad events that we should do nothing about – government intervention could serve only to make the problem worse[.]

This is extremely telling. Usually, you hear economists say that Prescott's contribution was methodological; that he showed economists that they could make models using more sophisticated techniques than they had been using before, and that these new techniques allowed economists to take more things into account. What Williamson is saying is that, actually, Prescott's work was embraced because of its ideological contribution - it gave people "license" (i.e. an excuse) to say that government shouldn't try to do anything about recessions.

The economics of Kydland, Prescott, Lucas, Sargent, and Wallace looked more firmly grounded in the solid general equilibrium theory developed by Arrow and Debreu, and these people had good arguments which appeared to match well with empirical observations. Relative to this, mainstream Keynesian economics just looked mushy. Who would want to tie their caboose to that train?

The part about "matching empirical observations" aside (RBC models do not), what Williamson is saying is that the fancy math of RBC models was useful because it made Keynesian models look bad in comparison. Math was used as a signal of smarts, in order to get people to abandon Keynesianism.

Now, though Kydland and Prescott presented an extreme view of business cycles, which could be interpreted as telling us that the government is irrelevant...[t]he key lesson is that...[s]kepticism about the role of government is healthy[.]

Williamson is not directly saying that economics should be moral philosophy first and descriptive science second. But that is what his retelling of history amounts to. Models, in his view, should receive attention according to the moral stories that they tell. After all, anyone can write down a model that assumes that the government is powerless to change the economy; it didn't take Prescott's fancy math to do that. Williamson and other supporters of the RBC paradigm looked for the lesson they wanted to be taught.

(Of course, this is not exactly surprising, given that Prescott said just the other day that our current recession was caused by people predicting that Obama would be elected and raise their taxes! But it's one thing to expose Prescott as a crank, another to realize that a whole school of macroeconomic thought was embraced by thousands of economists for ideological reasons.)

This illustrates one of the basic problems with macroeconomics as a science - politics always gets involved. Good economic management inevitably has to compromise itself to the interests of various groups who are seeking to divide the pie to their liking; in the case of the RBC "revolution," the interest group in question was composed of rich individuals who wanted lower taxes and businesses who wanted lighter regulation. They wanted a theory that said government is bad, and they got it. In the short term, only the scientific credibility of macroeconomics suffered, but thirty years later, it's your job, your wages, your prospects, and your security that are suffering.

(Note: in the photo above. Prescott is the man smiling at the camera. The man shaking Bush's hand is Finn Kydland, his co-author on the original RBC paper - i.e. a Norwegian guy Prescott brought in to do all the math.)

Michael Spence joins the heretics

Michael Spence, winner of the 2001 economics Nobel, joins the heretic movement that was given voice by Andy Grove:

The structural evolution of the US economy over the past 15 years has been driven by excess consumption, enabled by debt-fuelled asset inflation. The crisis put a stop to this, but structural deficiencies remain. America’s export sector is too small and underdeveloped. The financial sector became outsized, and is down-sizing.

A pattern of underinvestment in infrastructure has left the economy less competitive than it should be. Energy pricing issues have been ignored, causing underinvestment in urban infrastructure and transport. The education system has widespread problems with efficiency and effectiveness...

The real issue is employment: not just stubbornly high unemployment, but a bigger problem described recently in a thoughtful article by Andy Grove, the long-time chief executive of Intel. He argued that manufacturing is vanishing in the US, a trend that must be reversed. The question is how.

There is little doubt that America’s social contract is starting to break. It had on one side an open, flexible economy, and on the other the promise of employment and rising incomes for the motivated and diligent. It is the second part that is unravelling.

Incomes in the middle-income range for most Americans have stagnated for more than 20 years. Manufacturing jobs are moving offshore. Globally the set of goods and services that is tradable is expanding, but the US and other advanced countries are not competing successfully for an adequate share of the tradable sector.

The employment effects of these trends over the past 15 years have been masked by excess consumption and the overdevelopment of sectors such as finance and real estate. The latter are now set to shrink, as multinational companies grow where they have access to high-growth emerging markets in Asia and Latin America. Such companies will locate their operations where market and supply chain opportunities lie. In the tradable sector, in manufacturing and in a growing group of services, that means outside advanced countries.

The availability of low-cost, disciplined labour forces in developing countries reduces the incentive for these companies to invest in technologies that enhance labour productivity in the tradable sectors of the advanced economies. As a result, the evolving composition of advanced economies is increasingly weighted towards the non-tradable sector, combined with a set of high-end tradable services where both human capital and proximity matter. The rest of the tradable sector is shrinking.

The shrinkage creates problems. Over-specialisation could threaten independence and national security. Spillovers between R&D, product development and manufacturing will be lost if manufacturers leave. Employment will stagnate. Income distribution will move adversely and the social contract will erode further...

To avoid an outbreak of protectionism, there has to be an alternative. President Barack Obama’s new export council, announced on Wednesday, is a step in the right direction. But a bolder move is needed: a broad public-private partnership to invest in the development of technology in parts of the tradable sector where there are opportunities to make advanced countries competitive. The goal must be to create capital-intensive jobs that have labour productivity levels consistent with advanced country incomes.

Would this damage developing countries? Clearly not. The US (or even developed economies combined) does not have hundreds of millions to employ. A targeted programme would leave the vast majority of labour-intensive manufacturing right where it is now: in the developing world. With new credible growth strategies in America (and other advanced countries) developing countries may even be willing to play an important complementary role in restoring global demand through, for example, the reduction of excess savings.

I added the emphasis, in order to note something very interesting: Spence obviously believes that export competitiveness is heavily influenced by the kind of public goods that I am always ranting about: infrastructure, education, and most importantly research. It is precisely these public goods that conservatives have neglected over the past 20-30 years, in their zeal to eliminate all government intervention in the economy. But it may be precisely these public goods that enable a country to have good high-paying middle-class jobs.

Anyway, blogger Mark Thoma already endorses Spence's heresy. Paul Krugman hasn't addressed this particular controversy yet, but has made noises about China's currency policy. Could we have a movement on our hands?

(If so, one positive sign for the industrial-policy movement is the fact that the first people to criticize Grove's article have been editorialists from The Wall Street Journal and Forbes' Reihan Salam. As they say, "by their enemies shall you know them"...)

Trade models I teach - the Ricardian trade model

In my last post, I wrote:

I myself have participated in this, in the Introductory Macroeconomics course I TA for at the University of Michigan. We always include a lecture that pits pro-free-trade arguments against anti-free-trade arguments, and we make sure that the former always come out the "winner" at the end of the day. We use the very simplest models of trade, and we never mention industrial policy or the manufacturing sector or mercantilism. And another four hundred students tramps off to be America's next generation of businesspeople, lawyers, journalists, professors, and voters...

So to follow up on this, I thought I would explain the trade models I teach - and those I don't teach but which are in common use - and illustrate why these models say that free trade is always good. The first model I talk about will be - must be - the classical, or "Ricardian" trade model, which is the one I teach in introductory macro courses.

The Ricardian trade model deals with aggregate trade between countries - in other words, it treats each country as a single person, saying "Brazil can produce 100 cows or 50 peppers, Argentina can produce 75 cows or 25 peppers." You may already be able to see how this setup already assures that free trade is always optimal. The reason is: if Brazil is a single person, and Argentina is a single person, they wouldn't agree to trade if trade weren't good for both of them.

This is actually a very deep principle in economics. It's called the "first welfare theorem," and it says: two people will not engage in any economic transaction that doesn't benefit both of them. Thus, any economic transaction that happens - such as international trade, for example - must make both parties better off. the only way a transaction is bad is if it has some kind of effect on a third party not involved in the transaction - a side effect, or "externality." An example is pollution; when I sell you a piece of metal that I mined by dumping arsenic in a river, people get hurt who had no say in whether or not we did the deal.

But if there's only two people in the world ("Brazil" and "Argentina"), there can't be any externality, by definition! Thus, no matter what kind of forces drive international trade in the Ricardian setup, it must conclude that free trade is always and everywhere good. Game over.

But just in case you want to know, the Ricardian theory is all about something called "comparative advantage". This means that each country specializes in the thing it can produce relatively cheaply. To use an example from Mankiw's intro textbook, suppose I'm a lawyer who can make $2000/hr. lawyering or $100/hr. typing. And suppose my secretary types only half as fast as I do. It still makes sense for me to pay my secretary to do the typing, even though I'm twice as good at typing as he is, because I can make more money for an hour of lawyering than for an hour of typing. Even though I have an "absolute advantage" in typing, my secretary has a "comparative advantage" in typing, because he can't lawyer at all. It's impossible to have a comparative advantage in everything, so countries will always have an incentive to trade.

So that's how that works. But notice - "comparative advantage" is not necessary to conclude that free trade is always good. That conclusion was assured by the fact that the model treats each country as a single person. The mere fact that free trade allows more trade is what makes it automatically good in that sort of setup, comparative advantage or no; if trade is bad for one of the country-persons, that country-person will simply refuse to trade!

In fact, the only argument one can muster against free trade in the Ricardian setup is the "winners and losers" idea. This is the idea that, even if a country as a whole benefits from free trade, some people inside the country (for example, producers who lose their jobs when cheap imports put them out of business) might lose out. And this is the "argument against trade" that we always trot out in Econ 102 to explain why people aren't always happy about trade. But in the end, this argument always loses, because we just say "Instead of restricting free trade, we should find ways to have the 'winners' compensate the 'losers'" (you see those terms, "winners" and "losers," a lot in articles about trade). And voila, free trade is good.

So if you read a commentary by some smarty-pants columnist who says "Of course free trade is good, because comparative advantage exists, you dummy!", then now you realize that he's wrong. If externalities exist, then comparative advantage might not be enough to make free trade good. If you have a model that assumes no externalities, like the Ricardian model and many others, then free trade is good whether there's comparative advantage or not.

But where's the proof? If there are no externalities (and as long as a nation distributes its gains from trade properly among its citizens, which we assume it can), then free trade is always good. But how do we know there are no negative externalities to trade? The Ricardian model just assumes they don't exist! Of course, you can't prove a negative, so the burden of proof is on a free trade opponent to come up with an idea for a negative externality (a few have tried; so far, they have not been paid much attention). But merely having an assumption in place that no negative externality exists is not the same as evidence in favor of free trade.

If I were to teach trade models honestly, I would say: "Look, if these assumptions are right, then free trade is always good. But the fact is, we're not sure they're right, and we need to look into the matter a lot more before we bet our credibility on the statement that free trade is always good." But I don't teach trade models honestly, because scientific skepticism will not help my students pass their exams.

When on The Go... How Your Homeowner Liability Insurance Follows You

Homeowner liability insurance provides financial protection against legal obligations of the insured arising out of activities and conditions at the premises where the insured maintains a covered residence.

This coverage also extends to a personal activities of the named insured and household members anywhere in the world. You are on vacation in Europe- you’re covered; your child is on a mission trip in Mexico- you’re covered.

The homeowner policy defines an insured location as:

1. The qualifying residence premises where the named insured resides and which is shown as the residence premises described in the declarations.


2. The part of the premises used by the named insured as a residence and shown in the declaration, such as a seasonal residence.


3. Any premises used in connection with a residence as defined by one and two above.


4. The part of any premises not owned by an insured where the insured is temporarily residing. Examples would include a hotel room or vacation condo.


5. Vacant land, other than farmland, owned by or rented to an insured. Vacant land is generally defined as land upon which no man-made structures exist. An exception to this is land owned or rented to an insured on which a one to four family dwelling is being built as a residence for the insured.


6. Burial plots or vaults of an insured.


7. The part of premise occasionally rented to an insured for other than business use. An example would be a rented hall for a wedding reception.
   

An insured is defined as the person named in the declarations; that person’s spouse, as long as a resident of the household; relatives residing with the insured at the residence; and persons under the age of 21 and in care of the named insured, spouse or resident relative. This would include foster children or children for which the insured has guardianship.