Monday, October 11, 2010

Quick Thought on the 11th October

I mentioned in a prior post my suspicion that we are becoming lazier in research, probably on average. Anyone willing and able to fight this will probably be at an informational advantage in whatever field he or she chooses, unless that field disproportionately has people who have avoided that laziness (hard to believe given the prevalence of Google and the like) or that field has practically all information available online and easily findable.

I have a suspicion that in one of the fields I follow that the majority of the people do not reading the filings available for free online at a government commission's website; and furthermore, that those who do mostly focus on certain bits, not all of the reporting and therefore may miss something utterly relevant tucked into a footnote towards the end of a 200 page document. So while those people are at an informational advantage compared to the majority, they themselves are at an informational disadvantage compared to the people who read all of the reporting (though only if those people reading all of the reporting are able to interpret it).

Right now I am slogging through This Time is Different. Unfortunately, this means that I do not have the time to read Christina Romer's paper "The Macroeconomic Changes of Tax Changes" where purportly the argument is that tax cuts result in increases in GDP.

Funnily though, or maybe displaying a case of "whose bread I eat, his song I sing," in a blog post on the White House's site and a farewell speech given upon her resigning from Obama's economic team, she makes the case that extending the high-income tax cuts will provide very little in terms of short term job creation. (This blog entry was from July 28, 2010, so as you can see, I am rather late in my criticism. Then again, since I'm not a blogger for a conservative, libertarian or liberal institution, I have the liberty of writing about what I want when I want. And my small readership hasn't complained...yet.) Romer also notes that:

"Since most postwar tax changes have been broad-based, our evidence indicates that broad-based tax cuts have large effects.  But it’s important to note that our study did not distinguish among tax cuts for different groups and did not focus on high-income earners.  Thus, it provides no basis for doubting the compelling evidence that tax cuts for high-income earners are less effective than broad-based tax cuts focused on the middle class."

Now, here's where the laziness mentioned above comes in play, for me at least. If I read those remarks correctly, Romer says that the paper does not focus on high-income tax cuts. However, since she looks at broad-based tax cuts, presumably the effects include tax cuts for the rich since she did not focus on tax cuts for any one socioeconomic class but any tax cut package. Since I have not had the chance to read Romer's paper, I can only make that remark based on my reading of her blog post, not the primary source, her paper. That, my friends, is intellectual laziness on my part.

May I note this though? If her paper included effects of the tax cuts on the rich, not separating them on, then Romer has no basis to say that tax cuts to the rich will have little effect. Her paper focused on broad tax cuts, which included tax cuts for the rich. It did not do an analysis of which tax cut to which group had the most effect, so how does she have a basis to say that tax cuts for the rich will provide little benefit when her research did not disaggregate the effects? (She quotes the CBO and a Goldman Sachs study,  Goldman Sachs Global ECS US Research, “US Daily:  Extending the Expiring Tax Cuts:  What, How, When and Why (Phillips),” July 26, 2010.) Dare I say that this could be intellectual laziness on her part? Or a case of "whose bread I eat, his song I sing," since this administration seems to love to target the rich whenever possible? I'm not sure if it is a case of laziness, but unless that Goldman study is econometrically rigorous (again, laziness on my part for not reading it), I think it's more a case of "whose bread I eat, his song I sing."

Continuing on the theme of "whose bread I eat, his song I sing," let's run a thought experiment about the CBO. The CBO is a part of the government. In my skeptical mind, that means that it is biased towards anything that increases government revenues (and size), since those revenues form the basis of what can be spent and help fund the CBO's existence. (Sorry, not going to discuss the deficit.) So, while the CBO may not be biased towards either political party, it probably is biased towards government, since that is the system it is part of. And rationally, it would want to increase its revenues wherever possible. Hence, why they think high-income bracket tax cuts will be ineffective. Or maybe it's just that they want that additional revenue, eh?

Finally, let me level another criticism at Romer, again from her lovely blog post:

"Likewise, estimates by the Council of Economic Advisers suggest that spending $10 billion to prevent the layoffs of teachers, firefighters, and police would lead to nearly twice as many jobs as the estimated $30 billion of high-income tax cuts—that’s twice as many jobs for one-third the cost."

While I have nothing to say on the police, I must note that a paragraph like this seems to be terribly short-run biased. Actually, all economic discussions seem to be very short-term biased, not medium-term biased on the necessary structural reforms to government spending to prevent the day when my generation pays the bill for the excesses and irresponsibility of prior generations if we continue on this path. In this case, Romer's assumption is that it is good to preserve any job possible, the kind of logic that leads to a bailout of GM rather than asking the hard question of if those jobs are truly necessary, if it is good resource allocation to bailout an ailing motor company with structural woes (labor unions) rather than cyclical woes.

That same question applies to teachers and firefighters (and probably police). The unfortunate thing about teachers is that seniority overrules performance, the exact opposite of a rational employment system. And so when cuts need to be made, the teachers fired are likely the ones you want to keep, probably being young, ununionized, and not disenchanted with education yet; the ones retained are the ones you want to fire. So is it the right thing to spend money to save teacher jobs who would otherwise be fired? Keeping the teachers who would otherwise be fired, as long as they are the outperformers, is not bad; except that patches like that delay any necessary structural reform. Better would be to demand structural reform before handing out some money to teachers. But instead such $10 billion (part for the teachers) inefficiently allocates scarce government resources inefficiently by supporting a system that needs to be revamped if it is to actually serve the customers it purports to serve - the students. Shame on an economist for not thinking about that - or again, is it a case of "whose bread I eat, his song I sing?"

And while I have not seen anything statistical on firefighters, let me provide an anecdote from Merseyside (read it in The Economist), with a sentiment from the fire chief there that reflects part of my gloomy opinion about government in general - "the trouble with the public sector is bone-idle staff":

In 1999-2000 there were 2,140 fires in the Merseyside area and 15 fire-related deaths; last year (2009-10), there were 1,299 and 8. Meanwhile, the number of traditional fire officers has fallen from 1,400 to 850, saving money. [Better results with less staff and money - what's not to like?]

Mr McGuirk saw that speedy response wasn’t enough: prevention was the key.[...]

All this involved cutting the number of fire officers, who, Mr McGuirk realised, were underemployed for long periods during their shifts. Anyway, fewer fires required fewer rescuers. Although no one was made redundant involuntarily, in 2006 the fire-brigade union called a strike. Protesters dubbed the fire chief “McJerk”; 2,000 of them walked through Liverpool carrying banners with slogans such as “I hate McGuirk”.  [When you're part of a system, even if that system is part of a problem, the fact that you're in that system and that it puts the bread on your table means that you will fight for it no matter that it may need reform to fix the problem.]

Ironically, it was soon clear that the 200 officers who stayed at work could run the service at full capacity. [Emphasis mine]“I told the local press they would never notice there was a strike,” says Mr McGuirk. “It’s not my job to be popular, it’s to deliver.” The strike was defeated in a month.

Dare I say that the $10 billion comment from Romer represents intellectual laziness? A distressingly short-sighted viewpoint from an economist, who should look longer term than the next year, two or three? Someone failing to realize that preservation of a job is not the same thing as efficiently allocating resources where needed for the most return? Someone failing to question whether those jobs are truly needed, or whether those departments can run more efficiently with less or whether something structural, such as teachers unions, are the problem with dealing with budget shortfalls for education (if you could fire your worst performers during a cyclical downturn, instead of having to retain them and fire your best performers who are not unionised, wouldn't that make more budgetary sense than just doling out money to keep all the jobs and perpetuate a system in need of reform)?

My ending conclusion is that a constant focus on the short term means that you will always be in the short term, losing sight of the long view and avoiding problems that will come in the medium term until it is too late. Short term pain seems like it will be long term gain, in this case; or as Ben Franklin put it, "An ounce of prevention is worth a pound of cure." But a focus on the short term at the cost of the medium and long term means that we will continue to emphasis that pound of cure (and therefore waste resources) over that ounce of prevention.

N.B. Politics is something that is quite incendiary. Economics is something that can bore many people. While I have a small readership, no doubt I have said something that may have incensed or bored you. Please bear in mind that these are my opinions, and that I can be quite arrogant. If you disagree with me, either politely comment or impolitely send me an angry email - I would rather have any comments with inflamatory remarks, including any four letter words, to be in my mailbox. Besides, you'll have a higher chance of me reading it than if you put it in a comment. And if you're commenting, didn't you want me to read it in the first place? Hence why it is logical for you to send inflamatory remarks (and maybe all of them) to my inbox rather than posting a comment.

N.B. #2 Psychologically speaking, confirmation bias exists. And most people are susceptible to it. Broadly speaking, once I've come to a conclusion about it, I will tend to seek out data that confirms my view rather than data that disagrees with my view. This is probably one of the reasons for the joke "Science advances by the funeral." Replace science with "society" and you probably still are accurate in describing societal mores. (Another post for another day, about J.S. Mill's quote about conservatives.) Anyway, I know I am susceptible to confirmation bias (I also suspect that to be true of writers for think tanks and newspaper blogs of all political stripes). And hence, I promise myself and anyone reading this that I will not let this post lie like this. I've noted above that I've not had a chance to read Romer's paper, the Goldman Sachs or CBO studies. Since those potentially contain views and data disagreeing with my opinion, it is intellectually incumbent upon me to read those when I can and further decide if I am wrong or if the opposition's arguments have enough flaws to render their conclusions suspect. So once I'm done with This Time is Different, I shall read the literature mentioned above and revisit this post (though I'll probably preserve this post as is for my own humor in seeing the potential evolution of the argument).

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