Cafe Hayek

On America's Middle Class

In two of his Forbes columns, NYU's Thomas Cooley challenges - with data - the widespread misunderstanding that America's middle-class is disappearing.  Here, and then here.

(HT Greg Mankiw)  The Terry Fitzgerald work that Cooley mentions was mentioned here at the Cafe a while back.

I raise, though, one objection to Cooley's otherwise excellent columns.  In the first one linked to above, he credits technological change for the explosive economic growth of the 1980s and 1990s.  I don't accept technology as an explanation.  A rush of technology has causes; it must be explained.  Technology is not a variable exogenous to economic growth.

Fooled by randomness

According to my car thermometer, It was 54 degrees this morning at 8 am here in DC on May 19. It encouraged my skepticism about global warming. Paul Krugman has none:

The scientific consensus on prospects for global warming has become much more pessimistic over the last few years. Indeed, the latest projections from reputable climate scientists border on the apocalyptic. Why? Because the rate at which greenhouse gas emissions are rising is matching or exceeding the worst-case scenarios.

One of us is being fooled by randomness. Hard to say which one. But Paul is very confident. He is willing to justify protectionism:

As the United States and other advanced countries finally move to confront climate change, they will also be morally empowered to confront those nations that refuse to act. Sooner than most people think, countries that refuse to limit their greenhouse gas emissions will face sanctions, probably in the form of taxes on their exports. They will complain bitterly that this is protectionism, but so what? Globalization doesn’t do much good if the globe itself becomes unlivable.

It’s time to save the planet. And like it or not, China will have to do its part.

The implications of Krugman's certainty is much more frightening than he is willing to admit. If you think China is destroying the planet, a tariff is just the beginning of what you will do.

Did Roubini Get It Right?

Here's a letter that I sent several days ago to the Washington Post:

In your "Conversation With Nassim Nicholas Taleb" (March 15), Mr. Taleb rightly warns against taking seriously any specific macroeconomic predictions made by economists.  But I'm surprised that Mr. Taleb identifies Nouriel Roubini as an exception to this rule - as an economist who "got it right" when it came to predicting today's economic downturn.

Roubini has predicted economic Armageddon for years now, so he did not accurately predict the timing of this downturn unless you regard incessantly screaming "we're doomed" to be an accurate prediction.  And he got important details wrong.  For example, as recently as 2005 Roubini warned that the "hard landing" would occur because foreign holders of dollar-denominated assets would start to diversify out of these assets, leading (in his words) "to a sharp fall in the value of the U.S. dollar [and] significantly higher U.S. long-term interest rates."* None of these things has happened.

Sincerely,
Donald J. Boudreaux

Sickness is bad for your health

Evidently, smoking, obesity and diabetes are bad for your health. So is sickness. Death is bad for your life expectancy. So discovers the New York Times:

THROUGHOUT the 20th century, it was an American birthright that each generation would live longer than the last. Year after year, almost without exception, the anticipated life span of the average American rose inexorably, to 78 years in 2005 from 61 years in 1933, when comprehensive data first became available.

But new research shows that those reassuring nationwide gains mask a darker and more complex reality. A pair of reports out this month affirm that the rising tide of American health is not lifting all boats,...

I'm going to stop the quote there for a moment.

Is the reality really "darker and more complex?" Does anyone really think that "the rising tide of American health" lifts all boats?

Does anyone think that rising life expectancy is really a birthright?

If you go sky-diving every week without a parachute or even with one, you don't live as long as the average. If you smoke a lot and eat too much, you might not live as long as the average:

The most startling evidence came last week in a government-sponsored study by Harvard researchers who found that life expectancy actually declined in a substantial number of counties from 1983 to 1999, particularly for women. Most of the counties with declines are in the Deep South, along the Mississippi River, and in Appalachia, as well as in the southern Plains and Texas.

The study, published in the journal PLoS Medicine, concluded that the progress made in reducing deaths from cardiovascular disease, thanks to new drugs, procedures and prevention, began to level off in those years. Those gains, as they shrank, were outpaced by rising mortality from lung cancer, chronic obstructive pulmonary disease and diabetes. Smoking, which peaked for women later than for men, is thought to be a major contributor, along with obesity and hypertension.

Read the rest of the story if you really want to know why this unsurprising absolutely unstartling finding confirms the world view of John Edwards.

Telling Stories

Which of these stories is right?

The Giants will win the Super Bowl. They have the momentum on their side. They have a great pass rush. They will be more relaxed than the Patriots because they don't have the pressure of the perfect season. They'll be able to control the ball with Brandon Jacobs. Manning hasn't thrown an interception in the playoffs.

Or is it this one:

The Patriots are the better team. They have Super Bowl experience. They have the better coach. Their quarterback is better.They will shut down the Giants running game and force Manning to make mistakes.

So which one is better? Neither, of course. They're just stories. But on Monday, one narrative will look convincing and the other will look foolish. But of course there was no way to really know ex ante which story was better. Ex post it will seem obvious. But even ex post, judging the stories or the storyteller is just so much finger-snapping. It's just one data point. Don't be fooled by randomness.

Can a camel understand football?

From the Asbury Park Press:

Forget what the sports analysts are saying. Super Bowl XLII will end in victory for the New York Giants, according to Princess, "Popcorn Park Zoo's famous prognosticating camel," the zoo announced Monday.

Princess had an 11-6 won-loss record for games picked during the season. And "her playoff standings were phenomenal, selecting eight out of 10 winning teams. Last week she accurately predicted the Patriots for the championships, but not the Giants," the zoo press release states.

Each week, Popcorn Park's general manager, John Bergmann, has had the names of two teams playing that weekend written on his hands. Then he offered Princess her favorite snack — graham crackers — in both hands. Whichever hand she nibbled from, that was regarded as her choice in the game.

"I can't explain it, but her predictions, more often than not, are right on the money," Bergmann said. "I'm hoping she's right this time, because I'm a Giants fan."

I think most people understand that the success of Princess is not due to her understanding of football, or her "gut feeling" or her intuition. It's just random. But on Monday morning, some human football "experts" will seem smart and some less so, simply because of one data point, the result of Sunday's game.

 

Which story is better:

The economy is in crisis. The subprime mortgage mess has taken down the housing market and thrown the banking industry into turmoil. The crdeit crunch that is inevitable will soon knock out other industries as well.  The anemic December job numbers (18,000 net jobs created) show are just the beginning of the problem. A recession is imminent or we may already be in one. We have to do something.

Or is it this one:

Yes, housing and banking are struggling. But the rest of the economy is healthy. The December job numbers were atypical. Unemployment claims are down. We don't need a stimulus package.

Who is right? Tomorrow, February 1, the January job numbers will be released. There are hints that they will be very strong. Some people's stories will look wise and others less so, at least for a while. If the numbers are strong, the worriers will find some other data point to wave around.

But I suspect the experts are like Princess, the pigskin prognosticating camel. We are fooled by randomness. We don't really understand the macroeconomy. Certainly not enough to micromanage it.

Snapping his fingers

I debated an economist the other day on the stimulus package. He thought it was a good idea and that it would stimulate the economy. I disagreed.

When we were done, we were chatting informally. He was a nice guy. Smart. Articulate. I asked him if there was any evidence that the 2001 "rebates" had any effect. He looked at me earnestly and said, "Sure. The economy recovered."

He was serious.

There once was a man on a Manhattan street corner snapping his fingers over and over again. What are you doing, someone asked. Keeping away tigers, he said. You don't think that really works, do you? It's working so far, he answered.

How would you know whether the 2001 rebates "stimulated" the economy? Or the 2002 rate cuts? I did see a reference to a CBO study that showed that personal spending rose after the rebates. Real of finger snapping? Very hard to say.

Interestingly, I just discovered that the 2001 "recession" turned out not to be a recession in the formal sense of two consecutive quarters of falling real GDP. At the time, there were three consecutive quarters. But when the data were revised:

The new data show GDP falling at an annual rate of 0.5% in the first quarter of 2001, then rising at an annual rate of 1.2% in the second quarter and falling again at a rate of 1.4% in the third quarter.

The old data had GDP falling at annual rates of 0.2% in the first quarter, 0.6% in the second quarter and 1.3% in the third quarter.

Here are the current data, after the 2004 revisions, for real GDP by quarter in 2001 (in billions):

9,875.6
9,905.9
9,871.1
9,910.0

So in the fourth quarter, GPD not only went up, it went up enough to offset the fall in the third quarter. So in the technical sense, there was no recession. But employment did very poorly and took a long while to recover. Here is monthly total nonfarm employment, in thousands:

2001	132471	132551	132504	132209	132177	132047	131930	131776	131521	131191	130883	130721
2002	130594	130476	130430	130347	130324	130371	130290	130275	130206	130324	130334	130191
2003	130256	130103	129907	129859	129826	129850	129860	129818	129899	130075	130130	130298
2004	130412	130443	130786	131073	131342	131444	131503	131610	131780	132130	132195	132363
2005	132458	132693	132817	133157	133345	133610	133937	134139	134244	134351	134702	134904

So in February of 2001, total nonfarm employment was  132,551,000. It took FOUR YEARS for employment to return to that level. This is very unusual. What was the reason? No one really knows. At the time, some blamed it on Bush because the recovery after the "recession" was so slow. The defenders of Bush said that the recovery was slow because the downturn was so mild. I suspect that the real cause of the slow growth in employment had other causes such as an increase in productivity. Maybe. No one really knows.