How successful are Jews really?

Jerry Z. Muller, writing at Project Syndicate, calls for more research into the question of "Why do Jews succeed?" He's hardly the first to ask this question. Even the famous economist Simon Kuznets thought Jews might contain the secret to human capital. The typical explanations for "Jewish success" are:

1. High IQ, possibly evolved in response to European social pressures

2. A culture that values education and hard work

3. Secret societies, cabals, nepotism, and other forms of clandestine skulduggery

(Notably absent from this list are 4. God, looking out for his "chosen people", and 5. Large noses, which allow us Jews to sniff out opportunities for profit.)

But before we sic the social science hordes on the Jewish Question, we should consider some other factors that might be making "Jewish success" stand out more than it should.


1. Selective immigration. The highest-income ethnicity in the U.S. is actually Indians. Filipinos rank extremely highly as well. No one asks about the reason; it's obvious that selective immigration policies have given us the best and the brightest (and often, the richest) of India and the Philippines.

So what about Jews? Most Jews came to America to escape repressive regimes in Europe. It stands to reason that more successful and/or wealthier Jews would have a better chance of making it out. So American Jews are not a random sample of all Jews; they're going to be biased toward the smart, the rich, and the risk-tolerant.

Note that this is a common feature of "model minorities" across the world, from the Lebanese in Latin America to the Chinese in Southeast Asia.


2. Urbanization. Jews in Europe were famously clustered in big cities. Probably this was in part because they weren't allowed to own a lot of land. But whatever the reason, the trend persisted when Jews immigrated to America. Sure, there are some Jewish hillbillies out there (I have some cousins in Arkansas who fit the bill), but you find Jews mostly clustered in big cities like New York and L.A.

It's a well-known fact that people in cities have higher productivity and higher incomes, on average, than people outside of cities (part, but not all, of that goes to pay higher rents). Although the causality can obviously run both ways, there is evidence that simply moving people to cities gives them an immediate productivity boost. So Jews' statistical success is probably exaggerated due to their tendency to be city folk.


3. The "one-drop rule". In Jewish tradition, you're a Jew if your mom was Jewish, or if you convert to the faith. But in the modern world, that definition is often...stretched, to include people with Jewish-sounding last names, people with a Jewish father and a non-Jewish mother, etc. That can distort the statistics in a variety of ways.

First, the "one-drop rule" may be applied selectively more to successful people than to unsuccessful people; see the footnotes in this list of "Jewish" Nobel Medicine Prize winners, for example. Or see this song by Adam Sandler ("Harrison Ford's a quarter Jewish; not too shabby!").

Second, we may engage in confirmation bias and attribution error; upon seeing a successful person with one Jewish parent, we may attribute her success to the Jewish parent, but upon seeing an unsuccessful person with one Jewish parent, we may ignore her Jewish ancestry completely.


4. Temporary group effects. Jewish "success" became noticeable mainly after 1800 (perhaps not coincidentally, when Jews started migrating to big cities in Europe). Among the famous scientists and writers and mathematicians and thinkers of pre-1800 Europe, there are notably few Jews. Who is to say that Jewish achievement is not a temporary blip? In America, Jewish achievement seems to fit the pattern of overachievement among recent high-skilled immigrant groups, Indians and Filipinos being other examples. Already, many have talked of a reversion to the mean in Jewish achievement; here's Slate in 1996, and here's Ron Unz more recently.

It would not be the first time something like this happened. The 1700s and 1800s are sometimes called the "Scottish Golden Age". Scottish people were extraordinarily over-represented in Britain and the former British colonies during that time, in science and academia, in business and industry, in politics, and even in the upper ranks of the military. Anecdotally, people in the 1800s compared Scots favorably to Jews. Today, though I suspect Scots would still stand out somewhat on average if anyone was able to track ancestries carefully, Scottish overachievement is not really a hot topic. I can easily see the same happening to Jews, especially given ultra-low Jewish fertility rates (sure to be lower among the rich and educated), and the trend toward outmarriage among non-Orthodox Jews; the Jewish upper crust will simply evaporate away from the Jewish group identity.


5. Temporary country effects. Jews had the good fortune to be clustered in Europe at the time of Europe's greatest overachievement, and then to move to America just in time for the American Century. Obviously that doesn't explain Jewish outperformance within those countries, but it does explain a lot of Jewish outperformance in terms of global measures, like scientific achievement.


Now, I'm not saying that these factors explain 100% of Jewish overachievement. I'm simply saying that A) all of these factors make the original hypothesis of Jewish special-ness seem somewhat less interesting, and B) some, though not all of these factors will tend to bias upward any statistical measures of Jewish achievement.

In addition, I think that a large part of whatever Jewish overachievement remains will probably be attributable to the fact that Judaism is a religious minority, and religious minorities tend to overachieve. Look at Quakers and Mormons in the U.S. Look at Sikhs and Jains in India. Even look at Christians in Taiwan and Korea. Religious minorities often seem to do well.

So the question should not be "Why do Jews succeed so well?" It should be "Do Jews, identified consistently, succeed enduringly well, relative to other religious minorities, relative to other Americans or Europeans, and after taking into account selective immigration and a preference for urbanization?"

The answer might still be interesting. But the question no longer seems quite so interesting, when compared with other hypotheses about human capital formation.

(Of course, there's also the question of why Jews are renowned as the world's greatest lovers... *ducks*)

A healthy side effect of High Frequency Trading?

High Frequency Trading is nearly universally reviled. The Tournament Externality is just too obvious; it yields no social value to bring a piece of information to the market 1 millisecond before it would otherwise have arrived, but people are apparently spending lots of money in an effort to do so. It can't be efficient to commit our best and brightest minds to beating each other to the punch by 1 millisecond. Because of this, many have suggested a small Tobin Tax to curb HFT. Others have suggested batch auctions.

As for me, I've never been that worried about HFT, because I viewed the costs as small. HFT profits have been falling steadily in the few years since the technique became popular, from almost $5B in 2009 to just over $1B in 2012. Trading volume is down too. And I'm not very scared of flash crashes. So I viewed HFT as a very minor nuisance at worst.

But what about the benefits of HFT? The one usually cited - "providing liquidity" - seems a minor benefit. Minor benefit, minor nuisance. Then there's this interesting paper by Douglas Cumming, Feng Zhan, and Michael Aitken, which suggests that HFT actually drives out market manipulators. Robots defeating sneaky underhanded Wall Street fixers? That sounds good to me! Though of course HFTs can engage in manipulation of their own.

But when I read this article, I thought of another possible benefit of HFTs. The article, by Eddy Elfenbein (excellent name, btw), is about day traders being made obsolete by HFT robots:

I’ve got bad news for all you day traders out there. Just like assembly-line workers, switchboard operators, copy clerks, and hand weavers before you, you’ve now been automated out of existence... 

What [HFT] means for you is that now more than ever, day trading is a fool’s errand. If you were ever tempted to enter the fray, recognize once and for all that those banks of computers chugging away at their algorithms have you hopelessly outclassed. There’s simply no way an individual human being can compete against a fleet of CPUs that rivals NASA’s. Do not, I repeat, do not try it. You will lose.

This gave me a new, positive vision of HFTs. If day traders across America really do believe what Elfenbein is saying, and if they really do stop day-trading and start doing long-term fundamental investing, then the HFT robots are doing the Lord's work.

Why do I say this? Because here's the thing about day traders: Even before HFT, day traders consistently lost money. Actually there is a small number of day traders - maybe 1% - who make money day trading. But the rest just lose, and lose, and lose. The evidence is not ambiguous.

As for the reason that human day traders lose money, there are probably several factors. Humans are overconfident. We don't benchmark our performance very well. Mental accounting makes us ignore trading costs (which tend to gobble up whatever profits a day trader thinks he's making, and more). Self-attribution bias makes us think that our gains came from skill and our losses came from luck. The basic fact is: You, a human, make a lousy, lousy HFT algorithm. And if robot HFTs make you realize this fact and quit trying to be a human HFT, then they are doing good for both you and for the world.

Thinking of this, I'm starting to realize why Zero Hedge hates, hates, hates HFTs. With its shirtless Brad Pitt avatar and its tough-guy language, Zero Hedge caters to testosterone-junkies. Testosterone junkies are young overconfident dudes with a little money in their pocket, who maybe work day jobs on Wall Street, or maybe just got their law degrees, or maybe work as engineers and think they'll be the next Steve Jobs, or whatever. Being young, overconfident dudes, they think their intelligence and energy and sheer will-to-power will allow them to take on the world. And when it comes to their finances, taking on the world means beating the market by seat-of-the-pants day trading.

We've all met these guys.

So of course these guys, and the websites that cater to them, despise HFT. Not because it crashes markets, not because it wastes money on pointless "information tournaments", but because it takes away their dreams of outwitting the world and landing that big score.

To which I say: Sorry, dudes. Much as it pains me to say this to anyone, your day-trading dream was always kind of an illusion. You were always just going to eat trading costs and die. Here's my advice: Don't give up on crazy world-conquering dreams, but try to switch to one that creates real value for society instead of just adding noise to financial markets and feeding the coffers of quant funds. Give up the day-trading dream, and focus on being the next Steve Jobs.

Triangle Man and the libertarians

The modern American libertarian movement can be understood by listening to the song "Particle Man", by They Might Be Giants. Here are the lyrics, and here's a video. The song describes the travails of the insignificant Particle Man and the degraded, downtrodden Person Man. In addition to the natural misery of their lowly station in life, these two must cope with the attacks of a bully named Triangle Man, who attacks and defeats both during the course of the song. The only being who could (presumably) save Person and Particle from the depredations of Triangle is the even more powerful Universe Man, who is "usually kind to smaller man". However Universe Man is occupied with lofty pursuits, and cannot be bothered to intercede more often than once per eon.

In modern America, Particle Man and Person Man can be seen to represent normal people, and Triangle Man stands for the various local power figures that bully normal people - shop owners who don't want to admit black people, bosses who put their employees in danger to boost profits, clergy who revile gay people, etc. Universe Man is the biggest power figure of all - the U.S. government, who has a monopoly on the legal use of violence.

The idea of the "progressive" movement, in a nutshell, has been to use democracy to call in Universe Man to restrain Triangle Man. The "libertarian" movement, which arose in opposition to the progressive movement, is mostly about restraining Universe Man from doing this, in order for Triangle Man to retain his local bullying power. I laid out this theory in a blog post about a year and a half ago, but unfortunately failed to reference They Might Be Giants.

The idea of libertarianism as a defender of local bullies can be seen in this article by libertarian political consultant Stephen P. Gordon (no relation to Stephen Gordon of Worthwhile Canadian Initiative), and in the articles he cites by Tim Carney and other libertarians. The article is called "Same-Sex Marriage, Religious Liberty and Extremism From Both Sides of the Aisle". In it, Gordon frets about the possibility that the religious figures whose religion forbids homosexuality might be "forced to perform a same-sex marriage ceremony". He worries that pro-gay extremists might bring about such an illiberal outcome. Gordon sums up his position with this quote:

“Homosexuals have the same rights as everyone else. Just as other libertarians have said, your rights do not change based on your sexual preference. Correspondingly, you also do not get special rights because you are homosexual. An individual or government cannot, for instance, force a minister to perform a wedding ceremony against his will.”

The first question about this article should be: What does it mean for a clergyman to be "forced to perform a same-sex marriage ceremony"? Does this mean that the U.S. government would enact a law saying that if clergymen did not perform a gay marriage ceremony, they would be punished, fined, thrown in jail, or otherwise violently coerced into performing the ceremony?

If so, then the article is pure unadulterated nonsense, because no one, no one at all, is contemplating such a law. The most extreme pro-gay activist on the planet would be unlikely to want to throw someone in jail for refusing to perform a gay marriage ceremony.

So since I am giving Gordon the benefit of the doubt, I am assuming he means something else when he says "forced". Perhaps he means that state or local governments might revoke the official marriage-licensing power of clergy who refused to perform gay marriages? That seems like a possible step.

But would that constitute "forcing" clergy to perform gay marriage ceremonies? Only under a very odd and unusual definition of the word "forced". After all, suppose a traffic cop refuses to issue speeding tickets to Korean people, and is threatened with being fired unless he agrees to write tickets to people of any race. Is he being "forced" to write tickets to Korean people? The ideal libertarian definition of "force" would seem to say "no", because the cop has the option to go find a new job whose requirements do not go against his principles.

Similarly, a clergyman who was barred from issuing marriage certifications due to a refusal to marry certain groups of people would still be perfectly free to perform religions marriage ceremonies. No law would stop him from doing that. He would simply be barred from his government job of issuing government marriage certifications. He would simply be barred from participating in the weird church-state union that currently turns clergy automatically into part-time government bureaucrats.

So it seems that here we have a case in which libertarians are bending over backward - i.e., changing their typical definition of "force" - in order to come down on the side of a local bully (anti-gay clergy).

What about the pro-gay "extremists" of which Gordon warns? Here is the example he gives:

One issue is that there are extremists on both sides of the issue. I’ve already picked on Robertson, Perkins and Falwell, but here’s the other side of the coin:

Many Christians attempt to argue that, since their opposition to gay marriage is based on religious grounds, allowing gay marriage or prohibiting discrimination against gays is somehow infringing upon their religious liberty.

The short answer to this is: “Tough!”

The long answer is: “Tough shit!”

This same-sex marriage entry went on to indicate that the free expression of religion doesn’t “include hate crimes.”

Notice that the pro-gay "extremist" that Gordon is quoting is talking about gay marriage legalization, not about forcing clergy to perform gay marriage ceremonies. In other words, Gordon's example of a pro-gay "extremist" is someone who says the word "shit" while contending that legalization of gay marriage does not violate religious liberty.

Seriously???

Anyway, Gordon fails to give even one single example of a pro-gay person advocating forcing clergy to perform gay marriage ceremonies. He quotes a number of anti-gay conservatives who fret about the possibility, but zero evidence that any pro-gay person actually wants to do it. His entire evidence for pro-gay extremism comes in the form of a single use of the word "shit" from a wiki website. And he repeats the anti-gay line that gays are somehow demanding "special rights".

I think this article is a good demonstration of the priorities of libertarianism. It really bends over backwards to warn us about an imagined future government violation of the liberty of a local bully, while utterly ignoring the effects of the bullying itself.

This makes me all the more certain that the libertarian movement engages in a peculiar form of doublespeak, in which "liberty" is used to mean something that most people would regard as the opposite of liberty - namely, the freedom of Triangle Man to beat up Particle Man and Person Man. That seems very similar to the phrase "freedom is slavery", from the book 1984.

So after I read Gordon's article, I tweeted: "Opposing gay marriage to protect "religious liberty" is just one more way "libertarians" redefine slavery as freedom."

Gordon was very angry at this, and replied: "That's an outright blatant lie. Read the article; I/we totally support gay marriage - as well as other individual rights."

I will let the reader decide whether or not my statement was "an outright blatant lie".


Update: Gordon responds, in a considerably less angry fashion. I find his response quite reasonable in most regards, though I think it still evinces too much reflexive suspicion of "the far Left".

Update 2: I forgot to mention that Julian Sanchez, a prominent libertarian writer, also got mad at my tweet, and told me that no true libertarian opposes gay marriage. I asked him if opposing bans on racial discrimination by privately owned restaurants constituted opposition to civil rights. He said no. So that just reinforces my whole point. (After seeing this update, Sanchez called me "breathtakingly dishonest" and a "hack". But he said what he said!)

Thinking out loud: Do government deficits equal private surpluses?

I hear a lot of people say this: "Government deficits equal private-sector surpluses," or "Government deficits equal private savings." For example, Jan Hatzius says this.

Is this true? I'm not immediately sure. It sounds true - after all, how does one save except by lending to another, and how can you lend unless the other borrows? But can I find a counterexample?

Let me think about it.

OK, first suppose there's no government. In that case, if government deficit equals private saving, then private saving must be exactly zero. That means that if total net private savings (assets) begin at 0, they must remain at zero forever.

Is that true?

Suppose that the economy consists of a number of hunters, who never interact with each other. They just hunt deer, eat some of the meat, and store the rest in the form of salted venison in their sheds out back (imagine that salted venison stays edible forever). Over the years, the stock of salted venison grows and grows.

Is it correct to say that total saving in this economy is zero? Well, it seems like the answer is "no", since households are increasing their stock of real assets. There's no debt, no money, and no firms. It seems like real aggregate saving is positive in years when the total stock of salted venison increases.

Can this be right? Do the hunters have some liabilities that I am not counting, to balance out their real assets? I can't think of any. They have no debts. They don't interact with each other at all. I could make up a corporate sector, and pretend that each household owns a "firm", but it seems like the liabilities and assets of each of those firms would exactly cancel out, leaving the private sector (households + firms) with positive total assets, due to the positive assets of households.

So it seems to me that by storing durable goods, it is possible to save by lending not to an external counterparty, but to nature itself. The private sector runs a real surplus every year, and the only deficit is nature's deficit.

Similarly, suppose we measure savings as income - consumption. Well, income (the amount of fresh venison + the amount of salted venison that enters the hunter's possession each year) is definitely more than consumption (fresh venison eaten each year) for each hunter. That seems to me to indicate that real saving is positive for each household, and thus for the private sector as a whole.

I've been talking in real terms so far. But how about nominal terms? To measure surpluses and deficits in nominal terms, we need a unit of account. So suppose that the hunters now are able to interact with each other, and to trade. Suppose that they decide that the unit of account is the pound of fresh venison. Hunters can trade salt for fresh venison, salted venison for fresh venison, etc. The amount of "money" (fresh venison) in the economy is determined randomly, by nature - i.e., some years, there are more deer to be hunted, some years less.

OK, so what about the nominal value of the real assets (salted venison) sitting in the sheds? This is determined by the nominal price of a pound of salted venison - i.e., how many pounds of fresh venison must be exchanged for a pound of salted venison. The total stock of nominal assets in the economy is given by: (lbs of salted venison) * (lbs of fresh venison / lb of salted venison)

Can this rise? It seems to me that it can. Suppose that the stock of salted venison increases, s per the previous example, but the price of salted venison stays fixed (which we can assume because we're just looking at accounting identities, not at the determinants of prices). It seems that aggregate nominal saving is positive.

So it seems to me, at first blush, that there can be net private saving without the existence of a government, and hence without net government deficits. Thus it seems to me, at first blush, that the private sector's surplus need not equal the government deficit.

But this is just "at first blush". I have only thought about this question for less than an hour, and for only about ten minutes if you don't count the time it took to write this post. Furthermore, I am not that knowledgeable about accounting conventions. So I may have missed something in this simple example. If so, please tell me what I missed, in the comment section.


Update: Some people are telling me that "private-sector surplus", as used by Hatzius and others, does not mean "private saving", but rather "private saving minus private investment". In that case, the accounting clearly makes sense, and does not conflict with my example (since storing salted venison is investment).

However, I still have some doubts about whether the true government "deficit" in this latter sense, i.e. govt. investment - govt. saving, can be measured accurately. But that's a topic for another post.

Conservative economic arguments since the crisis: A review

If you ever find yourself thinking "Wow, my side has all the smart arguments, and the opposition is talking nonsense", watch out! You are probably suffering from "myside bias", which is a far nastier and more irrational cousin of derp.

So when I think to myself "Gosh, the right has deployed one specious argument after another since the 2008 crisis", I instantly suspect myself of suffering from this pernicious endemic mental disease. So to try to ward off confirmation bias, I want to go through the main economic arguments put forth by conservatives since the crisis, and try to be as fair and even-handed as I can to each. Maybe that's a hopeless task, but it's healthy to do these things once in a while.

Argument 1: "Fannie, Freddie, and possibly the CRA caused the crisis."

Background: This has become almost an article of faith within conservative circles. The political motivation for believing this is clear - "It wasn't the captains of industry that screwed up, it was the government, those meddling socialists, and the irresponsible minorities they're always handing money to!" is a tempting argument. I find that if I have discussions with conservative friends about the crisis, they insist as a prerequisite for continued discussion that I apportion at least some of the blame to govt. affordable housing policies. Kind of like when you're fighting with a family member, and they insist that you take at least some of the blame, in order to let them save face. "We were both wrong, now let's hug and make up."

Evaluation: It is probably the case that affordable housing policies led to some people getting homes who couldn't afford them. Then again, maybe not. The CRA dates from the 70s, and Fannie and Freddie have been pushing affordable housing since at least the 90s, but house price/income ratios were pretty steady until 2000, at which point they took off. So it seems possible that affordable housing policy really didn't do all that much til the 00s. 

But regardless, the idea that affordable housing policy caused big banks to collapse seems obviously wrong. Suppose it was govt. policy driving the lowering of mortgage standards. Why didn't banks realize this and adjust their expected default rates accordingly? There's no good reason. Conservatives are essentially arguing that without government policy, banks' crappy risk management and crappy due diligence would not have had big negative consequences. Some excuse!!

Anyway, as anyone familiar with the crisis knows, one fatal assumption in banks' risk models was the backward-looking assumption of constant correlations. That's not an assumption that depends on government housing policy one way or another.

OK, but what about banks' other key fatal assumption: That historical default rates would be constant? By encouraging lenders to lend cheaply to unworthy borrowers, couldn't Fannie and Freddie and the CRA have made default rates spike? Well, in theory, sure! But in practice, it's worth asking why this did not happen in 1985, or 1995, or even in 2002. We had Fannie, Freddie, and the CRA back then. And default rates did not suddenly spike until the housing bubble burst in 2006-7.

So did government policy cause the housing bubble itself? Answer: No. Because a lot of other countries had simultaneous and even larger housing bubbles, and those countries did not have Fannie, Freddie, or a CRA. Also, it would be odd if Fannie, Freddie, and the CRA were benign for decades and then suddenly caused a giant bubble.

Also, Mike Konczal and others have made other arguments against the "affordable housing caused the crisis" argument. These arguments are reasonably convincing.

However, it does seem true that Fannie and Freddie got themselves into quite a bit of trouble in the housing bubble, and that the brief specter of their failure (before they were formally nationalized) raised risk, hurt liquidity, and probably made the crisis worse than it otherwise would have been, in addition to costing the U.S. taxpayer a big chunk of money (though they may soon finish paying that money back).

Conclusion: I judge this conservative argument to be 5% right.

Argument 2: "Stimulus can't possibly work."

Background: When fiscal stimulus was first mooted, a number of conservative-leaning economists came out and said "Stimulus can't work, because it's just moving demand from one part of the economy to another." This was basically the "Treasury View" expressed during the Great Depression. However, conservatives seemed to stop saying this fairly rapidly after the initial burst of anti-stimulus mania.

Evaluation: There were theories that said otherwise, of course, that could not be dismissed easily. As John Cochrane, himself a noted stimulus skeptic, wrote in early 2012:

Stimulus [is] still an economically interesting proposition, and there is a great deal of uncertainty about whether, when, and how well it might work. There is a huge academic literature being produced right now... 

Here are the facts. Some economic models do predict a fiscal stimulus effect. Some don't...The facts are far from decisive...So, there is a lot of uncertainty and a lot we don't know about how the macroeconomy works.

I would agree with that statement. There is evidence that stimulus works; there is evidence that stimulus does not work. There are theories on both sides of the question. And since macro data are uninformative, the argument won't be resolved soon.

But note: A common conservative argument in 2009 wasn't that stimulus doesn't work, it was that stimulus absolutely can't work, and that this fact is obvious from simple logic. As Cochrane notes, that just isn't true.

Conclusion: I judge this conservative argument to be 0% right.

Argument 3: "Welfare is the main force prolonging the recession, by discouraging people from working."

Background: This argument - that the spike in unemployment is a "Great Vacation" - has been promoted by a substantial minority of conservatives. Casey Mulligan has been the chief standard-bearer of this argument. It has also been propounded by Nicholas Eberstadt.

Evaluation: This argument basically says that a big chunk of the increased unemployment in America is voluntary. That is inconsistent with the fall in wages during the acute part of the recession. It is also inconsistent with the slow wage growth since then. It is also somewhat inconsistent with the fact that there is a big drop in satisfaction between people who kept their jobs and people who lost theirs; if the newly unemployed were on a "Great Vacation", then they should be close to indifferent between keeping their jobs and losing their jobs.

It also seems highly unlikely that similar shifts in welfare policies happened simultaneously all over the developed world. And yet the sharp recession and slow recovery looked very similar all over the developed world. That just does not fit Mulligan's theory.

That said, however, the number of people claiming Social Security Disability benefits does indeed look fishy. It seems likely that in the absence of this program, some of these people would be forced to find work, however low-paid and unfulfilling annd unpleasant.

Conclusion: I judge this conservative argument to be 10% right.

Argument 4: "Fear of liberal policy interventionism is the main thing holding back the recovery."

Background: This was the main conservative thesis about the cause of the slow recovery, and remains such. The argument was that fear of Obama's socialist policies, including Obamacare's negative impact on business and Obama's personal rhetorical attacks against the business class, were spooking businesspeople into holding back investment.

The assertion seemed to get a boost in 2011 from a paper by Scott Baker, Nick Bloom, and Steven Davis. These professors constructed an index of economic policy uncertainty by counting newspaper articles that seemed to discuss policy uncertainty. They found that their measure of policy uncertainty was correlated with slow growth. 

Evaluation: The paper by Baker, Bloom, and Davis is credible. Nick Bloom in particular is someone I know, admire, and trust, and I find it highly unlikely that he would suffer from political bias. However, even though the authors were careful, strong conclusions should not be drawn from this methodology. There is the issue of causation, as Mike Konczal points out:

As commenters pointed out, it would be easy to construct an index that gets the causation to be spurious or even go the other way. If weak growth could cause the Economic Policy Uncertainty index to skyrocket, then it’s not clear the narrative holds up as well. “There’s uncertainty over whether or not Congress and the Federal Reserve will aggressively fight the downturn” isn’t what the index is trying to measure, but that’s what it seems to be doing.

Also, the Policy Uncertainty Index doesn't appear to be performing as well out of sample as it did in sample. That is, of course, entirely typical for macro forecasting tools.

Additionally, the data do not seem to support the conservative argument that policy uncertainty has been driven by Obama and the Left. The largest identifiable sources of spikes in Baker, Bloom, and Davis' index have been caused by the Republicans' 2011 debt ceiling brinksmanship, Europe, and efforts to sue Obamacare out of existence. There really is no evidence of all that fear of Obama's antagonistic attitude toward business is pushing up uncertainty.

Finally, there is the international element. The slow recovery all over the developed world may indeed correlate with policy uncertainty in each developed country. But given the diversity of policy regimes, that suggests that uncertainty is an effect of recession more than a cause. Still, the U.S. is a very large and important country, and U.S. policy may be driving the economies of other countries (though personally I'd bet on Europe being the biggest source of policy uncertainty).

Conclusion: I judge this conservative argument to be 15% right.

Argument 5: "Quantitative Easing will cause inflation."

Background: Read the WSJ, and you see this repeated over and over. A number of famous economists have added their voices to the chorus. 

Evaluation: The notion that printing money causes inflation is a centerpiece of a lot of economic theories, especially "old monetarist" theories in the tradition of Milton Friedman. 

However, the failure of inflation to materialize in response to QE has left conservative inflation hawks looking a little bit like flat-earthers. A number, like Larry Kudlow, have reversed their positions and no longer fear inflation from QE.

However, there is always the possibility that one day inflation will suddenly "snap up" to high levels, as a delayed result of QE. Since humanities understanding of macroeconomics is so limited, this can't be ruled out, even given Japan's decades-long deflationary experience. There is always the unknown.

Conclusion: I judge this conservative argument to be 10% right.

Argument 6: "Deficits are dangerous and must be cut, but only by cutting spending rather than raising taxes."

Background: This is a little rich coming from conservatives, whose tax cuts drove essentially all of the rise in deficits from 1980 through 2008. But it is a common refrain for them, even when they can't identify any concrete things to cut other than Social Security, Medicare, and Medicaid (which they are usually afraid to admit openly that they want to cut). The conservative case against debt received help from Reinhart and Rogoff's now-discredited paper about a 90% debt-to-GDP "threshold".

Evaluation: Is government debt bad for an economy? There are theoretical reasons to think that it is, in normal times, especially for a country whose debt is not entirely internal, such as the U.S. Debt carries over from recessions into normal times. And it is often politically difficult to do the right thing and run surpluses during boom times (Clinton managed to do it, just barely, but it is a rare feat). Governments and people get addicted to low tax rates and to government transfers. Additionally, there is the precautionary principle. We may need to spend money on some other catastrophe - a war, or another recession sparked by a European or Chinese collapse. It would be useful to prepare for such an event by reducing the debt/GDP ratio beyond what would be reasonable if we were certain of a smooth return to trend growth.

Of course these considerations should be weighed against the obvious short-term economic harm of deficit reduction. "Austerity" has hurt the economy of every country that tried it, and may be hurting the U.S. now, as the "sequester" bites into government spending. Still, even without the sequester, U.S. policymakers have acted to set the country on a path to lower long-term deficits, and people in general seem to be relieved about that. It is probably the case that a middle path on deficits is the wisest one. The infrastructure spending we need to be doing could be financed by tax hikes and cuts in transfers, to the benefit of all.

Conclusion: I judge this conservative argument to be 50% right.

(Update: The second part of that argument - that spending cuts are OK while tax hikes are not OK - is wrong. So the 50% figure should just be applied to the "deficits should be cut" part, since it seems to me that deficits probably should be cut for the long-term, just not too quickly to choke off recovery. With the "spending cuts but no tax increases" part included, I knock it down to 15% right.)

To sum up, as hard as I try, I can't rid myself of the notion that conservatives have tossed out a lot of bad economic arguments in the last five years. It seems to me mostly a defensive reaction. The 2008 crisis put everything in American politics and political economy in flux, and conservatives desperately wanted to avoid a general turning of public opinion against the business class. Now that that looks unlikely, conservative writers and intellectuals are making somewhat fewer obviously specious economic arguments (Republican politicians, of course, are another matter). Notice that I said "somewhat". 

Of course, this is not to say that liberals have had nothing but good economic arguments since 2008. But being on the offensive rather than the defensive, they have had a lot more ideas. And my fingers are getting tired, so I'll avoid tackling that list today...

The death of theory?

As I see it, there has been a huge revolution in economics over the past 35 years or so.

But it wasn't a change in the dominant econ theory. Theory has certainly changed, sure, but more by evolution than revolution - things like game theory and behavioral theory have slowly been mixed in with the old hyper-rational "neoclassical" paradigm.

No, the big revolution has been in the role of theory itself. Go back and read some old 1970s papers (I'm not going to link to any specific ones, following my policy of not singling out specific authors), and you'll be amazed at the disconnect from reality. A lot of those papers would take great pains to specify that the outcome space was assumed to be a Borel space, while spending precisely zero time discussing how the model could be tested against real-world data. This was econ's famed "deductive method" at its most arrogant. It really was enough to just show up, state your assumptions (i.e. herp your derp), solve the resultant math problem to get some nice-looking equations, and call it a day. 

That doesn't seem to be so true anymore. Theory papers peaked as a percent of the total sometime between 1973 and 1993, and have been declining ever since:

That's a very dramatic drop. And notice that a lot more theory papers nowadays include simulation.

A lot of people can feel the wind changing. "Theory is kind of dead," Tyler Cowen once told me over drinks (beer for me, soft drink for him). "Nothing big is coming out of theory these days." "What about social learning and herd behavior?", I countered. "That was sort of the last gasp of theory," he said with a grin, "and it was twenty years ago." 

Macro has been slower to embrace the change, because macro data is so uninformative that often all you can do is spin one theory after another. But macro also seems to feel the pressure. "We don't really need more macro theorists," a prominent macroeconomist once told me. "What we need are macro empiricists."

I call that a revolution. It's not quite a Thomas Kuhn style paradigm shift - more of a shift in the underlying criteria that the economics community is using for deciding how the world works. Deduction is on the way out, and induction is on the way in.

Why did this happen? I'm not sure, but my guess is that the meteor that hit the economics dinosaurs, and set the field's evolution off in a new direction, was named Daniel Kahneman. Starting in 1973, Kahneman released a torrent of papers showing that human behavior didn't look anything like the way that homo economicus was supposed to act. Other behavioral meteors followed. There was Richard Thaler, who showed how behavioral effects could mess up many of the decision-making processes in economics. There was Vernon Smith, who showed that even simple markets don't work the way economists long assumed. There was named Colin Camerer, who scanned people's brains and confirmed that non-rational decision-making processes were at work. There were many others. Really, it was a giant comet of Behavioral Economics that broke up somewhere in orbit and fell to Earth in many parts.

As the weight of evidence mounted, the economics community could no longer ignore the contradictions between theory and reality. But though they had found a swarm of factual anomalies, the behaviorists failed to produce a new grand theory to replace the hyper-rational paradigm their empirical work had smashed. Even simple, limited theories like Prospect Theory have struggled to make sense of the world outside the lab. The ship of economics hasn't so much been pointed in a new direction as set adrift without a compass.

Of course, this was probably inevitable. The old hyper-rational theory was unified only because it dramatically oversimplified the world. But it could only oversimplify the world because it refused to look at the world. As soon as someone came along and forced economists to look out at the world, most of the work that economists had done had to be discarded. (Not all, interestingly; the pure-rational-deductive approach has had a few stunning successes.) 

So what do you do when you can't make sense of the world? You just keep trying to get a better picture of the world. My guess is that this is why econ is shifting from theory to empirics. 

But I also see econ's shift as being part of a bigger, deeper change that is happening all across academia. In physics, fundamental theory has hit a wall. The Standard Model, completed in the 70s, has been well confirmed by experiments, and all the leading candidates for new physics seem to be untestable. Even in math, formal deductive proof is slowly being replaced by proof-by-computer; at some point the question of whether math is an empirical science gets harder to answer definitively. As for the humanities, "theory" has basically become a giant joke, even if a lot of leading scholars haven't gotten the joke yet. Meanwhile, a lot of the big revolutionary advances seem to be coming in biology, while the other "lab sciences" of chemistry, materials science, neuroscience and electrical engineering continue to rack up steady progress. And "data science" is considered the new frontier. Obviously all these fields make use of existing theories, but they rarely tend to cook up dramatically new theories, or to work in "deductive", theory-first paradigms.

Maybe humanity is reaching the end of a big Theory Wave. The late 19th and early 20th centuries saw such enormous victories for theory - Cities destroyed! Thinking machines invented! Logistics revolutionized! Chemistry reinvented! - that we poured a lot of our brainpower into sitting down with pencil and paper and working out mathematical ideas about how the world might work. Maybe we've temporarily exhausted the surplus gains available from ramping up our investment in theory, and the boom is quietly coming to an end.

But that's just my theory. To back it up, I'd need some better data.


Update: A number of people have suggested that the supposed decline of economics theory is really just an explosion of empirical work due to the decline in the cost of computing and the increase in the supply of publicly available data. I certainly do believe that a decline in the cost of computing has led to an explosion of empirical work. However, here are some points that suggest that the "theory is dying" hypothesis has some legs:

1. In the past, increases in the supply of data (from new experimental techniques and from earlier improvements in computing power) have sparked simultaneous booms in theory, as theory was needed to explain the new data gathered. I don't think we see that happening in econ.

2. Currently, experiments are rising as a share of published papers. The cost of experiments is mostly subject fees, not the cost of computing.

3. According to a similar study by Card and Della Vigna, the absolute number of papers published in top journals has fallen. this means that the total number of theory papers, not just the percentage, published in top journals has fallen. If an explosion in empirics due to cheap computing had simply outpaced a more gentle increase in theory papers, we would expect to see the top journals increase their number of papers, or for new top journals to emerge. Instead, neither has happened. In fact, the failure of the computing boom to lead to more top-journal papers is a puzzle in and of itself.

4. As seen in the Hammermesh study, the percent of top-journal publications doing empirical analysis on borrowed data has also decreased recently, despite the increase in the supply of such data.

5. According to Card and Della Vigna, The frequency of citations for "theory" papers (which means pure micro theory, and so doesn't include all theory) is falling relative to other fields.

Now, it may be the case that top-journal publications are simply a bad guide to how much is getting discovered. Much more good research may now be getting published in lower-tier journals. Or perhaps the fraction of truly important research in even top journals was always small, so trends in total top-journal publication might not reflect trends in truly important results.

In that case, all we have to go on are anecdotes and the zeitgeist within the profession.


Update 2: Paul Krugman's anecdotal evidence agrees with mine - theory is becoming less important in trade and macro. He has different hypotheses about the cause, however.

Update 3: Tony Yates (whose blog I just now discovered, thanks of course to Mark Thoma) disagrees, and thinks that macroeconomic theory is alive and well. I think he does have a good point; macro seems to have resisted the shift to empiricism more than the other econ sub-fields. Of course, Yates and I would probably disagree on whether or not that is a good thing.

Conservative White America, you need a new Grand Strategy

Time for a (mostly) non-economics post/rant. Warning: Contains oversimplified history, sketchy data, and sweeping generalizations.

In 1396, an allied force of European crusaders met an equally sized Ottoman Turkish force in battle at Nicopolis, in modern-day Bulgaria. The vanguard of heavily armored European knights bravely charged the Turkish lines, and after being subjected to vicious attrition by archers, sharpened stakes, and trained pikemen, were flanked by the more lightly armored and thus far more agile Turkish cavalry. It was a rout; barely any of the Crusaders escaped. (And this crushing defeat came at the hands of an enemy who was far from the most fearsome of the non-European powers of the day.)

The Battle of Nicopolis was the last gasp of three centuries of European failure on a grand scale. Three hundred years earlier, climbing out of the Dark Ages on the back of a population boom, and loosely united by the Catholic Church and the Holy Roman Empire, Europe entered into a contest with its neighbor, the Islamic civilization of the Middle East. It was a protracted, one-sided beating. Europe's technological stagnation, its weak feudal economy, and its poor political organization led to repeated thrashings at the hands of the Muslims, who were equipped with world-class siege technology, mounted archery, trade-based economies, and more effective military and political organization. Europe fared even worse against the Mongols when they raided in the 1200s. One could be forgiven for thinking that the only reason that Europe escaped Mongol conquest (and, later, the depredations of Timur) was that it was too poor to be worth conquering. In fact, as the historian Ian Morris has noted, Medieval Europe never came close to achieving the wealth of the old Roman days.

But after three centuries of disastrous defeats, and other shocks like the Black Death and the Great Famine, Europe somehow miraculously got its act together. I don't pretend to have any idea why or how this happened, but it did. Autarkic feudal economies were replaced with global trading empires. Literacy spread, and technology and science blossomed. Military strength followed, and by five centuries after the Battle of Nicopolis, the descendants of those brave, dumb, doomed Crusaders had essentially conquered the entire planet, while vaulting the world into a technological and economic explosion that has still not come to an end.

Which just goes to show, with a good model of social organization, even white people can do pretty darn well.

This fact is heavily on my mind as I think about the plight of another group of white people - conservative white Americans. I'm talking about the vast sweep of suburban and exurban whites, many of them working class or middle class, who consistently vote Republican, who hold conservative social values, and who adhere to conservative Christianity. 

It has become increasingly apparent that "[conservative] white racial panic" is the main social force causing gridlock in American politics today. No reasonable person denies this. But when I think about Conservative White America, I am increasingly struck by the sense that this is an entire civilization in crisis. It is under threat not just - as conservatives would claim - from increasing numbers of Hispanic and Asian voters. "Demographic drowning" doesn't begin to describe its problems. Like Medieval Europe before it, Conservative White America is stuck using a social model that just is not working anymore. 

1. First, Conservative White America has failing families. Divorce rates are highest in the "Bible Belt" states where Conservative White America is strongest. While professional whites (who are often liberals) have reversed the trend toward higher divorce, working-class whites are essentially abandoning marriage. While conservatives would claim that this trend is due to the spread of liberal, secular values, the reverse is true; Bible Belters get married more often and earlier than their Northeastern cousins. They just get divorced a lot. Those conservative values are shoving white people, especially working-class white people, into unhappy marriages that cannot last in the modern world. 

2. Next, Conservative White America has failing health. Of course, this is true of all of the United States, and American blacks and Hispanics fare worse than American whites on most health measures. But white Europeans significantly defeat their American cousins on most health outcomes, while Americans pay much more and enjoy much more uncertain access to care. This is due mainly to the success of conservatives in blocking the implementation of universal health care (a case of all America having problems due to CWA policy triumphs). Some small part of it may also have to do with the effect of suburban sprawl and lightly regulated corporate food (loaded with sugar and/or fat) on obesity rates. Additionally, suburban and rural drug use may be rising, even as urban drug use has fallen steadily. And white teens are more likely than black or Hispanic teens to abuse drugs. These trends do not bode well for the health of Red America.

3. Add to that failing economic mobility. Much is made of the economic dynamism of Red states like Texas (well, mainly Texas). But white Americans experience the least economic mobility in the South, the most conservative region. And upward mobility for whites seems to be lowest in regions with heavy sprawl.

4. Conservative White America, like the rest of America, also has failing economic performance. Sure, rich people - who have done pretty well over the past 13 years of stagnating incomes - tend to be conservative. But the vast majority of conservative white voters are not rich, and have seen their incomes fall along with the rest.

5. And to some degree, Conservative White America also has failing social lives. Studies show that suburban residents are less satisfied with their neighborhoods than urban residents, with loneliness and social isolation probably to blame. Other research has shown that urban design has a big influence on social connection. It's just really hard to meet people in the spread-out, isolated non-cities into which conservatives would have us move - and into which much of white America has moved over the past sixty years. Gone are the days of small-town America where everyone knew their neighbors. In the modern suburbs, you are stuck in a box with nobody and nothing.

6. Now finally we get to Conservative White America's failing electoral clout. The poor performance of the GOP cannot, as some hopeful conservatives have claimed, be ascribed to "missing white voters". Whites for whom race defines politics - i.e. most of the current Republican base - have shut themselves out of future political coalitions. They could have followed the example of liberal whites, who allied with minorities, including poorer minorities (blacks, Hispanics) and richer minorities (Asians), and thus will have a big say in shaping America's future policies. Meanwhile, stuck in permanent racial panic mode, all Conservative White America can do is pull their veto levers - the filibuster, etc. - to gum up the machinery of American politics and slow the inevitable.

Each of these points relies on a mix of evidence and personal anecdotal observation. All are to some degree speculative. None is 100% proven. There are counterarguments to each. Maybe good counterarguments. The failure of Conservative White America is not anywhere near as clear as the failure of the Medieval European system was by the time of the Battle of Nicopolis.

But I don't think we should let things get to the Nicopolis level before we reevaluate the Grand Strategy of Conservative White America. Because I want America to succeed, and so I want Conservative White America to succeed. I am not "concern trolling". Seeing rural white American communities spiral into drug use does not give me a shiver of pleasure. Seeing working-class white Republican families disintegrate does not give me a shot of vindictive glee. Seeing white working-class people fat and unhealthy and socially isolated and stuck in dead-end careers out in vast suburban wastelands does not make me smirk and say "I told you so". These things make me sad, and angry, when I see them.

(Nor do I think Liberal White America is without its own problems. I'll discuss these some other times. No group and no social model has it all figured out. But in the past few decades, Liberal White America, especially the urban, educated type of self-identified liberals, seems to have made real headway against the problems of divorce, drugs, and social isolation, and seems to have gradually increased its political clout from the nadir of the Reagan years.)

The reason I'm writing this post (which only a comparatively small number of people will read) is frustration. When I look at the thought leaders of Conservative White America, I see them almost uniformly urging their followers to double down on the old model. To go back to the source, to reaffirm the traditional tactics, to keep charging their horses into the Turkish arrows. And I think that this is very bad advice.

The five big pieces of Conservative White America's Grand Strategy that I think need reevaluation are:

1. "White flight" to suburbs and exurbs

2. Rigid and inflexible "family values" 

3. Hostility toward immigrants and minorities

4. Excessive distrust of the government

5. Distrust of education, science, and intellectualism

I could go through each of these in detail, but I won't. So just a few words on each. The "white flight" thing, though it seems to me to be a dead end, is still a sacred cow of the conservative intelligentsia. Here's Stanley Kurtz writing in the National Review:

[A new HUD regulation] is part of a broader suite of initiatives designed to block suburban development, press Americans into hyper-dense cities, and force us out of our cars. Government-mandated ethnic and racial diversification plays a role in this scheme, yet the broader goal is forced “economic integration.” The ultimate vision is to make all neighborhoods more or less alike, turning traditional cities into ultra-dense Manhattans, while making suburbs look more like cities do now. In this centrally-planned utopia, steadily increasing numbers will live cheek-by-jowl in “stack and pack” high-rises close to public transportation, while automobiles fall into relative disuse.

See? The idea here is that under no circumstances must whites ever countenance themselves to live near nonwhites, and that life in mass exile in tomb-like suburbs is the necessary price of escaping the hellish depredations of diversity. 

As for conservative families, modernity seems to be proving that flexible family values bend, while rigid brittle family values break and result in no families at all. Many East Asian countries and conservative European countries, with their insistence on traditional patriarchal family systems, have seen marriage and fertility rates collapse, while countries like France and Sweden, where women have much more equality and cohabitation is not frowned upon, have maintained healthy fertility. Meanwhile, by delaying marriage and by embracing cohabitation, educated liberal white Americans have made headway in shaping a new, effective kind of family structure more suited to the realities of the modern world. 

Conservative racism, including anti-immigrant nativism, seems unlikely to budge any time soon. But in the past, America was greatly strengthened by the addition of immigrant groups previously considered "nonwhite". This needs to happen again. Conservative white Americans also need to bring Asians and Hispanics into their fold if they are going to win elections going forward; the tooth-and-nail opposition to the Dream Act does not bode well.

I also feel like Conservative White America has shot itself in the foot by assuming that government is always its enemy, and corporations its friend. America's private health care system has not served conservative white Americans well. The amount of fat and sugar consumed on a daily basis by conservative white Americans, turning their bodies to slush, was put into their food by corporations, not by the government. Obviously government is not always good (and personally I think that America's conservative movement provides a needed restraint on government). But the idea that government is always bad, and that its badness is a pillar of conservative faith, should be questioned, for the good of the conservative Americans themselves.

And finally, the contempt for education, science, and intellectualism urged on conservative audiences by many of their media figures seems so purely and obviously self-defeating that it almost doesn't require discussion.

So there are my thoughts on the specifics. Even if my general case is right, my prescriptions could still be wide of the mark.

But I want to mention one more reason why I may seem to be in a bit of a rush to conclude that Conservative White America's strategy is not working. It's because Conservative White America's Grand Strategy looks uncomfortably similar to the approach that served the Europeans so poorly in the Middle Ages. Weak institutions, excessive trust in the Church, low mobility, education only of the elites, persecution of minorities, disdain for science and reason...we've tried this before. And it only led to hundreds of years of poverty, disease, and getting cut down by Turkish archery. One day we woke up and tried something different...and it worked. I say we keep trying something that looks sort of like the thing that worked.