Talk to Me Like I’m Stupid: “The sky is (not) falling!” Edition

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Tod Kelly

Tod is a writer from the Pacific Northwest. He is also serves as Executive Producer and host of both the 7 Deadly Sins Show at Portland's historic Mission Theatre and 7DS: Pants On Fire! at the White Eagle Hotel & Saloon. He is  a regular inactive for Marie Claire International and the Daily Beast, and is currently writing a book on the sudden rise of exorcisms in the United States. Follow him on Twitter.

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270 Responses

  1. Avatar Morat20 says:

    Speaking just for myself, I think there’s a useful thought experiment that might be worth considering.

    What happens if, in a modern economy, wealth is concentrated in the investment class? What do the wealthy do with that wealth? (Invest it, for the most part, as the wealthier one is the harder and harder it is to actually spend all your income even if you tried to).

    If you have a great deal of wealth seeking investment, how will the markets react? What happens when you have too much wealth and insufficient investments? Can you get an investment version of “too much money chasing too few goods?” If so, what would it look like?

    And given we try not to allow major investment or banking crashes (under the theory that they’re highly bad for the economy if we don’t mitigate it, something I tend to agree with) — how does this equalize without a massive bust destroying these concentrations?Report

    • Avatar Kolohe in reply to Morat20 says:

      ” Can you get an investment version of “too much money chasing too few goods?”

      tulips, south seas, railroads (multiple times), stocks (multiple times), real estate (multiple times), natural gas, gold.Report

      • Avatar morat20 in reply to Kolohe says:

        I’m pretty sure that the end result of wealth concentration is bubbles in an otherwise stagnant economy. Maybe we’re not there yet, but if wealth keeps concentrating the end case is pretty simple: All this capital, chasing investments, locked away from actual spending part of the economy — the part where money moves around, creating jobs and paying people and buying stuff.

        Pretty sure the stock market’s bubbling again (it’s certainly not soaring on a roaring US economy).

        We can’t let the finance industry implode (which would fix some of it, at the cost of a nice Depression). So how do we correct this?

        I mean, I know the stock liberal answer (tax gains as income, make the tax code progressive again — I mean, no need for a 90% top rate or anything, but an actual in effect progressive system would be nice, inheritance taxes, the usual mechanisms. I’m not sure they’re sufficient) — and I know the stock economics answer (“let it crash and burn, it’ll sort itself out over the next 50 years or so”). I don’t think either are terribly realistic, and I’m afraid the only other solution (“pitchforks”) would be something I’d prefer avoiding.

        Peasant rebellions are never pleasant.Report

      • Avatar j r in reply to Kolohe says:

        @morat20

        Maybe we’re not there yet, but if wealth keeps concentrating the end case is pretty simple: All this capital, chasing investments, locked away from actual spending part of the economy — the part where money moves around, creating jobs and paying people and buying stuff.

        I do not understand this statement. Can you give me an example of “investment that is locked away from the actual spending part of the economy?”Report

      • Avatar morat20 in reply to Kolohe says:

        JR:
        There’s certainly a technical term I’m not using, but — say, Apple sitting on billions in cash. That money isn’t circulating. It’s not being used to pay anyone, or used to purchase anything, or drive the economy. It’s just..sitting there. (Or say, index funds — in a growing economy, pouring money into an index fund makes funds available to all those businesses — which can be used to expand facilities, do research, etc — invest to increase future earnings. In a stagnant economy, what’s it do besides bid up the price on the fund?)

        I’m not talking a moral or fairness based problem with wealth concentration, I’m talking purely pragmatic — if the masses, the ones who spending actually circulates money and drives the economy, are going into debt just treading water — what’s worth investing in? What’s an actual ‘growth area’ rather than feeding a speculative bubble?

        If money concentrates amongst the wealthy, that’s more money on the ‘investment’ side and less money on the ‘spend most of your paycheck’ side — and it’s the latter that fuels growth. Investment money is necessary — an expanding market NEEDS investment in everything from businesses to infrastructure — but what happens when there’s way too much money seeking investments, and not enough being spent?Report

    • Avatar Dave in reply to Morat20 says:

      @morat20

      If you have a great deal of wealth seeking investment, how will the markets react? What happens when you have too much wealth and insufficient investments? Can you get an investment version of “too much money chasing too few goods?” If so, what would it look like?

      “Too much money chasing too few goods” is exactly what I see happening in the capital markets for medical real estate assets (both acute care and non acute care facilities). The amount of capital flowing into this sector is obscene and there just aren’t enough deals to satisfy the appetite for investors. What has happened is the following:

      1. Pricing on existing assets has risen substantially and investors are willing to accept a lower return just so they can allocate capital (or they get a little more creative in their underwriting).

      2. Pricing on real estate development has gotten even more aggressive, almost to the point where people wonder how developers are going to make money on these deals long term. The yields that developers are quoting could very well be lower than than the yields they get when they sell the properties in the future. Higher yield = lower price. Not a good thing. I’ll also note that investors have are all over developers trying to partner with them because of their development pipelines.

      3. To the extent that cash doesn’t get deployed, it sits. At some point, when enough surplus cash starts to pile up in the various investment funds, this sends signals to the market that the market is already over saturated with cash. No new capital will be raised and investors may have to shut down funds or return cash to investors so they can deploy it elsewhere.

      It doesn’t necessarily have to lead to a bust condition because investors can decide that an investment class isn’t worth the time and effort and seek to deploy capital elsewhere. As far as busts go, there are a lot of investors with a low cost of capital and act as long-term holders. Given that they’re all cash buyers and don’t have any significant exposure to debt, they can afford to hold on to assets without having to worry about short-term volatility in the markets (unless real estate fundamentals go south – but that won’t be the case in healthcare, not as far as I can see).Report

      • Avatar Mad Rocket Scientist in reply to Dave says:

        @dave
        Pardon my ignorance, but this makes it seem as though there is a large population of investors who are not savvy, or who are very short on clues, and are thus chasing investments like fashion trends, rather than looking for smart opportunities.Report

      • Avatar Kim in reply to Dave says:

        MRS,
        The greatest fool game is a fun game to play. So long as you aren’t stuck holding the bag at the end.
        75% of money in the stock market is “dumb money” anyhow.Report

      • Avatar Dave in reply to Dave says:

        @mad-rocket-scientist

        Pardon my ignorance, but this makes it seem as though there is a large population of investors who are not savvy, or who are very short on clues, and are thus chasing investments like fashion trends, rather than looking for smart opportunities.

        No worries. Yes, those investors do exist and I’ll assume there’s a large population of them. Based on the number of people that rushed into buying private label mortgage backed securities during the subprime boom, this is probably true. However, the real reasons you see an increased interest in medical real estate are two-fold:

        1) the asset class has gained substantially greater institutional acceptance so while you’ll see some of the more less savvy investors come into the space, there is an abundance of more sophisticated institutional capital chasing this product.

        2) the demand drivers for medical real estate mirror the demand drivers for healthcare services as opposed to general economic conditions, making the asset class relatively resistant to recessionary condition although it remains to be seen how the implementation of the ACA affects this sector.Report

      • Avatar Kim in reply to Dave says:

        Dave,
        “sophisticated institutional capital”
        Harvard sophisticated or CALPERS sophisticated?Report

      • Avatar zic in reply to Dave says:

        @kim 75% of money in the stock market is “dumb money” anyhow.

        I don’t think so. Maybe something close to half. But not 75%, I’d think, since 1% own 50% of the world’s wealth. Report

      • Avatar Dave in reply to Dave says:

        @kim

        The endowments are not big players in medical real estate but the CalPERS type pension fund investors do have investments. Because of the nature of the asset class, pension funds are slowly moving towards the asset class and typically make their investments through pension fund advisors. It’s rare for us to deal with pension funds directly.Report

      • Avatar Kim in reply to Dave says:

        zic,
        NYSE, specifically. And my stats are from around 2008, which was the last time I was credibly paying attention.

        The rich have bought tons of London real estate, sure, but that’s not on the NYSE.Report

    • Avatar Kim in reply to Morat20 says:

      Cochrane just put up an article saying “Just stop the Busts” and let the bubbles rise and fall without bank runs. His ideas are interesting, and worth a read.Report

  2. Avatar greginak says:

    Interesting questions and i’ll be interested to see the answers. I tend to think the concerns you have about the data you present are significant and not to be hand waved away. I think what Econ knower people tend to do is present their interpretation as fact when there are usually multiple interpretations. Also, and more importantly, they often ignore that the choices we make on macro econ thingees are based on values not just on theories. Saying the above data is just fine are very much value judgments that people use econ terms to hide behind. Why is it good for the top . 1% to be getting so much richer and the massive beneficiaries of our system, is a value question not just a question of simple econ theories.Report

    • Avatar James Hanley in reply to greginak says:

      So you’re interested in the answers, but you’re going to preemptively excuse yourself from taking them seriously?

      Well, that didn’t take long.Report

      • Avatar greginak in reply to James Hanley says:

        Wha huh? No i am interested in the answers. I’m hoping people will move beyond “this is Economics therefore you are wrong.” There is more than one theory about what the stats mean and how economies work ( now someone is going to say that there are certainly things almost all economists agree on and are considered true. Yes i know that, but there are economists all over the political spectrum so there is no one true view.) Some of how we interpret this data is not just this or that econ theory, it is about values and wants and our vision of what society should be.Report

      • Avatar James Hanley in reply to James Hanley says:

        So any answer you don’t like you’ve preemptively designated as just one interpretation that someone is hiding behind. You totally poisoned the well.Report

  3. Avatar Jaybird says:

    The biggest problem that we, as a society, are dealing with is Prohibition 2.0.

    Much like with Prohibition last time, it creates gang violence, results in contempt of the law for ordinary citizens, forces otherwise non-criminals to interact with organized crime, and ends up throwing otherwise upstanding citizens into prison for acts that should not be crimes in the first place.

    The fact that Prohibition 2.0 is on the trail to ending is great news for us as a society. We will damn near all benefit from it ending and those who will be harmed (sadly, a non-zero number) are likely to have been harmed worse by continuation of the former policy.

    The effects upon this particular economic debate are secondary, however. It will have an effect upon, oh, purchasing power, GDP, so on and so forth but those outcomes seem a lot more indirect than the societal benefits of making things that shouldn’t be crimes into things that aren’t crimes.Report

    • Avatar Saul Degraw in reply to Jaybird says:

      While I agree with you that Prohibition 2.0 needs to end, I think there are many issues in the economy which cannot be fixed or aided by the ending of Prohibition 2.0. Prohibition 2.0 does not change the fact that most of the jobs being created are low-wage and low-skill service jobs.Report

      • Avatar Chris in reply to Saul Degraw says:

        Hmmm… is there data on which particular sectors are seeing the most job growth, showing that unskilled, low-wage jobs are driving most of it?

        That’s not how I read the BLS projections, but maybe you’re looking at something else. I know the service sector growth has been high the last couple quarters, but that’s not a long-term or even medium-term trend, as far as I can tell. What are you seeing?Report

      • Avatar Saul Degraw in reply to Saul Degraw says:

        @chris

        See the Weismann and McArdle articles below. Arguably there are good jobs because of the various construction booms as well. Also it seems like more and more formally stable careers are becoming subject to bubble bursting.

        http://fredrikdeboer.com/2014/10/07/were-all-chumps-now-pharmacist-edition/Report

      • Avatar Jaybird in reply to Saul Degraw says:

        I think there are many issues in the economy which cannot be fixed or aided by the ending of Prohibition 2.0

        Of course there are. There are issues in Health Care that cannot be fixed or aided by the ending of Prohibition 2.0. There are also issues in Iraq/Afghanistan and our War On Terror than cannot be fixed or aided by the ending of Prohibition 2.0.

        But if you wanted to talk about why schtuff is looking up for the good old U.S. of A. at the tail end of 2014? This is the big one. This is the something that will be helping people 10, 20, 30 years down the line. Most folks won’t remember who was governor 20 years ago in 20 years.

        But they’ll remember when they stopped having to deal with vaguely sleazy dealers to get a bag.Report

      • Avatar Chris in reply to Saul Degraw says:

        Yeah, that’s not quite what McArdle is saying there.

        The legal profession is a mess mostly for reasons internal to the legal profession. In particular, nth-tier law schools pumping out law grads like the whole world was about to go on a crime and tort spree, with a new law school opening every other day.Report

      • Somewhere is there is a story about the proliferation of law schools and the market for them being a result of a lot of people graduating with a liberal arts degree that they weren’t sure what to do with.

        (Couldn’t resist.)Report

      • Avatar Chris in reply to Saul Degraw says:

        I remember among philosophy majors back in my undergrad days, there were two types: those who planned to go to law school and those who didn’t. I remember many of us who didn’t thinking of those who did as inauthentic philosophy students, because they weren’t in it for the love of wisdom itself. That was unwise of us.Report

      • Avatar Saul Degraw in reply to Saul Degraw says:

        @will-truman

        It is probably a lot easier to say that X amount of law schools need to close than to make it happen.

        A lot of the schools that are easily mocked have long and respected histories of providing the work-a-day lawyers for their respective regions. This includes Suffolk in Boston. My own alma mater is an example. They were founded in 1913 and this hardly makes them a fly by night operation. For decades the school educated the bar and bench of San Francisco. This is mentioned in Kevin Starr’s magnum opus history of California and this was evident by the 1930s. I’ve met with not too older lawyers who tell me that my law school used to be a great regional law school but was destroyed by Tech 1.0 making the Bay Area desirable again and the US News and World Report rankings.

        @chris

        A few years ago I was looking at theatre PhD programs out of curiosity. Stanford’s theatre PhD program had a “What are our graduates doing now section?” Many people were going to law school.Report

      • I don’t really have a position on whether law schools should close, though some of that is the belief that people who go to law school this day and age are making a choice with consequences that are not really my responsibility.

        It does seem detrimental how many have opened, but that says nothing about your alma mater, Suffolk, or any of those that have been around for a while.Report

      • Avatar LeeEsq in reply to Saul Degraw says:

        @will-truman, what Saul said. My law school, New York Law School, is one of Paul Campos’ frequent targets. It opened in 1891, meaning its over a century old, and produced one Supreme Court Justice, the second Justice Harlan. Senator Robert Wagner also graduated from my law school.

        Each major city or region in the United States used to have a regional law school that produced members of the local bar and judgeships. Than U.S. News and World Reports came along with their list and everything got more competitive.Report

      • My law school, New York Law School, is one of Paul Campos’ frequent targets. It opened in 1891, meaning its over a century old, and produced one Supreme Court Justice, the second Justice Harlan. Senator Robert Wagner also graduated from my law school.

        I don’t think that really matters. There’s a combination of “what have you done for me lately” and “don’t rest on your laurels” that applies there. That said, if people choose to spend their money and gamble their futures there, then as long as they’re doing it with more or less clear eyes, they might as well.Report

      • Avatar Michael Drew in reply to Saul Degraw says:

        @will-truman

        What do you propose we do about this big problem we have of people studying hard in high school, getting into college, enrolling, and studying subjects they’re interested in?Report

      • Good question. Mostly soft things. A greater eye towards post-college career and financials, less expensive options for “learning for the sake of learning” folks, and things like that. There’s always the “rethink college” thing, though that’s less applicable to people who get into decent law schools (“decent” being very broadly defined).

        (The first part doesn’t actually prohibit LA majors, if there is a plan.)Report

      • Avatar Michael Drew in reply to Saul Degraw says:

        Even if we make college less expensive, what you study in college is still what you study. I.e., if you get a college degree in something “you’re not sure what to do with,” then that has still happened. So I’m not sure that making it less expensive addresses the issue if we define it as a problem in that way.

        So if we do define it that, who applies this “greater eye,” how, and when? Liberal arts department do engage in efforts to define the kinds of careers their degrees enable; it’s just often not a very convincing effort they put in. More to the point, how do we get those who aren;t doing it now to do it? Should this occur in initial advising of incoming freshman – a soft but clear nudge away from liberal arts, just because they’re the liberal arts? Or is this a parenting thing? And if so, what’s your intervention method?

        As I say, I think the point about the cost of education is a good one, but it requires you to back down from yur definition of the problem. The advantage for the too-many-liberal-arts-majors perspective of lowering college costs would not be in reducing the number of people who get liberal arts degrees, but in making the cost of that first degree less, allowing getting a more professionally-focused degrees (whether grad level or a different bachelors) to be a more viable option. I think that’s the best way to address this “problem.” That, and requiring a bit more baseline technical (math, computers, etc.)work for all BAs (as well as BSs), so that some technical basis is there for LA majors to transition to a professional field that may be a ways away from their undergrad major.

        Of course, law school is exactly one of the routes that performs this function now. To my mind, the solution to the law school scam problem is not discouraging liberal arts degrees, but exposing the schools contributing to the scam in a way that gets the message to students choosing majors that law school isn’t meant to be thought of as a safety option. OTOH, where the degrees aren’t scams (i.e. have a real earning value that’s consistently higher than the costs), I don’t see that there’s really a scam. I’m coming to think that Campos is doing God’s work in the cases of many individual law scools, but may be overstating the size of the problem as a part of all law school degrees awarded.Report

    • Avatar Chris in reply to Jaybird says:

      I remember watching the 2008 Democratic primary debates and setting one candidate answer almost every question with “end the war on drugs” (except the ones about ending the war in Iraq). I thought he was just taking the opportunity to promote the issue. Maybe I was wrong?Report

      • Avatar Jaybird in reply to Chris says:

        The only candidates I remember discussing that in 2008 are Mike Gravel (REPRESENT!!!) and Ron Paul (Google Ron Paul (don’t Google Ron Paul Newsletters)).

        Googling the positions of others, I’m finding Obama said “I am not interested in legalizing drugs,” Obama replies. “But what I am interested in is putting more emphasis on a public health approach to drugs, and less on the incarceration approach to drugs.”

        I don’t know how we should be grading Obama on the drug war and how much he’s done to change public opinion on this. Personally, I don’t grade him highly but I’d be interested in reading arguments from people that do.Report

      • Avatar greginak in reply to Chris says:

        He hasn’t done much on the WOD. I do recall a furor over changing sentencing guidelines for different typees of drugs. He has been pretty chill over legalization of pot although i know there have some problems. I would guess the best defense of him is that there is no strong lobby pushing/pulling him and it isn’t like he has the power to do anything he wants. He has been pushing on immigration reform and we can see how far that has gone. HCR was a huge, draining battle, etc, so there is not much energy left to do much on the WOD nor was it ever his highest priority.Report

      • Avatar Chris in reply to Chris says:

        Gravel is who I was thinking of, though a quick search suggests Kucinich and Sharpton, who ran in ’04, are pretty staunchly anti-war on drugs. Particularly Sharpton, who I believed mentioned it several times in the ’04 debate.Report

      • Avatar Jaybird in reply to Chris says:

        I caucused for him in 2008! They broke my group up.Report

      • Avatar Kim in reply to Chris says:

        Jay,
        the hot chicks only go to Iowa caucuses, right?
        😉Report

  4. Avatar Saul Degraw says:

    I think the best answer I’ve seen to this issue is that we need to stop thinking in a binary. There is no one American Economy. There are many American Economies and they can be doing good or bad at various points.

    The Finance Sector seems to be doing very well and has largely recovered from the Recession and Financial Crisis. So has the upper-echelons of the wealthy who know control 22 percent of the United States Economy.

    Tech 2.0 in San Francisco seems to be doing very well. There seems to be an endless supply of venture capital that gives X amount of 20 and 30 something six-figure salaries and this causes more restaurants and stuff to boom in San Francisco including the very tasty but often derided 4 dollar toast. I personally think Tech 2.0 is a bubble but probably one that will not burst for two or three more years.

    My doubts on Tech 2.0 is that it largely seems to be built on solving the social and laziness problems of well-to-do/relative economic elites (formally known as yuppie) urbanites in their 20s or 30s. The latest service I’ve seen is called Caviar which is trying to be a more upscale version of grub hub. Now this is not necessarily a bad business but I don’t see how it expands beyond certain cities. Another big issue with the tech industry is that there is this weird true-believer thing going on and they have a hard time understanding non-participants who don’t use Uber/Lyft/Washio/Handybook/Square and other services on a regular basis. Nor do they understand people who might not be as well off. When I made this critique of tech to a woman I know, she pretty much said that every MBA start-up is dedicated to solving the social and laziness problems of affluent urbanites. She is an Ivy League MBA.

    http://thebillfold.com/2014/10/my-day-interviewing-for-the-service-economy-startup-from-hell/

    The other parts of the economy do not seem to be doing well or they are doing well at the expense of everyone else. Last week, Jeffrey Toobin had an article in the New Yorker called “Law Schools and the Legal One Percent.” The article shows that the very top of the legal market has partners who are making multimillions but we still have a surplus of lawyers who are underemployed or not employed as lawyers.

    So a lot of places have taken the recession and learned to be leaner and more efficient machines. This raises the question of whether firms should be leaner machines to generate more profit or whether they have a moral and ethical responsibility (sorry James) to take on less profit per a partner and hire some more associates. There are also a lot of smaller firms which might not have enough work to justify hiring new associates.

    What I do know is that a lot of law schools and bar associations are very concerned about all the underemployed lawyers or people who have law degrees and are not working as lawyers? Their concern is largely because they are worried about their own future of course. They are unwilling or unable to do what is really necessary though which is get firms and the government to higher more lawyers.

    Another article I saw today said that the savings rate for people under 35 is negative two percent.

    I think you are up against your old friend of Ideology is the Enemy. If people are true believers in the Free Market and Unregulated Capitalism than it is in their ideological best interest to pretend or strongly argue that everything is fine and we are healthy. James is at least honest in the other thread when he says it might be 40-60 years before better jobs come to the United States.Report

    • They are unwilling or unable to do what is really necessary though which is get firms and the government to higher more lawyers.

      This assumes that firms and the government have useful things for additional lawyers to do. Substitute who the “they” is and you can replace “lawyers” with engineers, or physicists, or construction workers.

      We keep cranking out physicists even though we don’t need many more of them. There’s a limit to how much physics research we’re willing to fund, and it’s a whole lot cheaper to make the classes a few students bigger than it is to hire more faculty. Engineers are more productive — software engineers are enormously more productive than they were when I was in school learning the basics. We keep finding new ways to automate construction jobs. I’m sure the legal profession is more efficient than it used to be. Or, if it’s not, then that’s an argument against however we’re doing lawyer things, since the rates that consumers get charged seem to keep going up.Report

      • I don’t have a knee-jerk negative reaction to the notion of makework, but the idea of makework for lawyers sends chills down my spine.Report

      • Avatar Saul Degraw in reply to Michael Cain says:

        @michael-cain @will-truman

        There is a big need for legal work. The problem is that this big need is among people who really can’t afford lawyers. This includes criminal defense (public defender offices), immigration, and legal aid type non-profits.Report

      • My comment was excessively glib and I apologize for it. I think on some level for me “Finding lawyers work” translates on some level to “People suing my wife.”Report

      • I’m not necessarily opposed to finding a way to ensure that poorer people get the legal services they need. But the primary focus ought to be on getting the services to those people. The primary goal shouldn’t be “we need to find jobs for lawyers.” If any program is sold as “helping out ex-law students,” it won’t get much traction anyway. But “helping out people who need the services” could work.Report

      • @saul-degraw
        There’s also a big need for software development work. I’ve said before, and still say, give me six weeks in any of the larger departments in any state government in the country and I’ll find $100M worth of software development that is needed but going undone. Not just “oh, that would be nice” software — let me pick the department and I’ll find unfilled software needs that are literally killing people.

        A lot of the people who can’t afford lawyers can’t afford other things either — shelter, food, heating fuel, and medical care come to mind. I would argue that in the current political environment, spending on the poor has become a zero-sum game — increased spending on legal services means decreased spending on the other things. That’s part of the problem with child-welfare services in many states. We know that if we don’t substantially increase what we spend on that, some percentage of the kids in the system are going to continue to die in ways that no kid should suffer — but finding that money has become difficult-to-impossible.

        A random sort of question here. Sometimes you need a tax attorney. Most of the time you need a reasonably bright person (college grad, say) who’s had the six-week H&R Block training course that covers what forms must be filed by when, and how to fill them out. Why can’t more routine legal things be done by non-attorneys?Report

      • Avatar Kazzy in reply to Michael Cain says:

        @michael-cain

        Isn’t that what services like LegalZoom are trying to address? With all the necessary caveats about internet access, tech barriers, and the like.Report

      • Avatar Saul Degraw in reply to Michael Cain says:

        @michael-cain

        Because law like other things is complicated and then you end up in the world of “complicated problems have solutions that are easy and wrong.” If you are an individual going against a corporation for employment discrimination or putting a bad product on the market that injured you, you are going to want a lawyer. The corporation is certainly not going to go without one.

        @kazzy

        I’ve heard anecdotal evidence that lawyers love Legalzoom because people try it and inadvertently screw up and leave out a key provision from the contract or will or whatever that they were trying to write.Report

      • Avatar Saul Degraw in reply to Michael Cain says:

        @michael-cain

        What’s a routine legal thing?

        I will give you an example of why things get easily complicated. A guy in my apartment building works as an economist for a major research university (not as an academic though). He asked me about getting a patent for a paper he wrote. I immediately asked him if he meant a copyright and he professed to not knowing the difference between a patent and copyright.

        So he needs a copyright. Theoretically he could do this on his own and fill out a form. But then you get into questions about whether this was already published in a journal, did he write it on his own or while the agent of his employer or someone else (which brings up the work-product doctrine and then you have to analyze whether he owns the copyright or his employer/master does).

        There are very few legal matter that are routine despite what people think. Maybe uncontested and nofault mediated divorce (I’d still want a lawyer), maybe a really simple will, etc.

        Life is complicated for all things.

        But I agree with you that we are living in an age that does not want to pay for things that make society more equal and just even if they are Constitutional rights like representation for criminal defendants or access to the courts.Report

      • I thought I’d throw this out here, because the lawyer-glut issue is one I see discussed a lot here, and it’s almost always presented as being due to too many law schools.

        My cousin and his son stayed with a couple of weeks ago, and I asked him for his take on the subject. He’s in his early 60s, and is a principal at one of the largest firms in his city. He said that the reason there’s a glut is almost entirely to do with technology. Not that long ago, he and all the other principals all had staffs of between 8-12 attorneys researching all the time. He said that junior partners had staffs of 3-6 attorneys doing research for them. But now all of those people are unnecessary, because according to my cousin thanks to the internet and online subscription specialty databases the amount of time it takes for him to research a case is less than it used to take him to review the notes of his 8 attorneys who were researching for him. And when you think about it, big firms being able to go from needing 4-13 people to do a job to just one, it’s hard to see how that doesn’t create an enormous pool that’s larger than you need.

        I only bring this up because in all the countless law-glut talks I’ve seen here, I’ve never heard anyone mention this particular dynamic.Report

      • Avatar Kim in reply to Michael Cain says:

        Saul,
        any idiot doing a greater than $100,000 transaction without a lawyer deserves what he gets. Nobody running a business would be that stupid.

        And most idiots don’t bother getting a real estate lawyer.Report

      • Avatar Saul Degraw in reply to Michael Cain says:

        @tod-kelly

        That sounds right. You used to have look up cases and law in a bunch of different books and this would take time and usually more than one set of eyes. Now you have Westlaw and Lexis that have put everything on-line. The searches have gotten easier since I’ve been in law school. You used to have to do all these fancy things with terms and connectors and now they run like Google searches.

        The same is true with going for evidence/discovery. You used to just have everything in a warehouse or conference room and have all the junior attorneys go through it. Now you can put it all on-line and even do a lot of predictive coding where the computer looks for key phrases and terms much faster than any human can and even with higher degrees of accuracy.

        The only thing is that the predictive coding and Westlaw and Lexis are very expensive. All law students are given free reign to Lexis and Westlaw by their schools. Every now and then you will see a solo lawyer try to use his or her intern for their Lexis and Westlaw access even though this is considered unethical. I think Westlaw and Lexis finally stopped giving unlimited access during summers. Smaller firms (especially plaintiff firms) still like having lawyers look at evidence more than predictive coding.Report

  5. Avatar Kazzy says:

    “I think I may be the only contributor here at OT that doesn’t list “economics” as either an area of expertise or a hobby…”

    I once got yelled at on the ol’ Freakonomics blog because I thought that people who studied economics should know how the economy works. Apparently, that was stupid of me. So I’m probably right there with you in not knowing shit about the topic.Report

  6. Avatar Saul Degraw says:

    http://thebillfold.com/2014/11/millennials-having-a-hard-time-saving-money/

    Another issue is that it is very hard to tell whether we are just in a rough spot that will improve or a “new normal” and it can decades to figure this out.

    I don’t know if I wrote about this here or somewhere else. When I was in my first year of law school, two major San Francisco firms crashed and burned. These were firms that were founded in the 1800s and became multi-state or multi-national businesses. This causes students to panic and it caused the admin to panic. In the spring semester we were required to come in on a Saturday and listen to a panel or lawyers and judges. Some of those lawyers and judges also graduated into recessions. One said he needed to work as a house painter to pay the bills for a while. Another said the only way to get experience when he started was to go into law firms and say “I will argue your loser cases.”

    Now it could be that in 20 or 30 years I can be up in front of a panel of law students talking about how bad it was when I graduated and I needed to temp and freelance for X amount of years before landing a position. Or it could be that I am not practicing law. No one knows the future.

    What I do know is that feels a bit condescending when people say stuff about how it has always been hard and are unwilling to make any concessions about structural changes that might very well be real.Report

  7. Avatar Saul Degraw says:

    To take it from a Libertarian Side:

    http://www.bloombergview.com/articles/2014-11-10/us-voters-looking-for-a-better-job-market

    “But I’m not sure that helps us here, because it still doesn’t explain why people would support a higher minimum wage, but not the party that wants to pass one. So let me offer an alternative suggestion: People support a higher minimum wage, but that is not their largest concern. Neither is the unemployment rate. Their biggest concern is not how high their wages are, or even whether they have a job. Rather, they are most worried about the stability of their jobs, and how much of a future their employers seem to promise.

    That has changed dramatically over the last 30 or 40 years. Layoffs used to be just that: a temporary reduction in staff to match output with falling demand. They were still an immense financial hardship. But they were more likely to be a temporary hardship, not “the new normal.” By contrast, these days, workers are increasingly likely to be permanently separated from their employers due to structural changes in their industry. This sort of unemployment takes longer to recover from; it may mean that you never again make as much money, or enjoy the same level of work and prestige, as you once did.

    The lack of a clear and stable career path is, to my mind, a worse problem than the wages paid by firms that employ large amounts of low-skilled labor. You can do anything for a short period of time, including slave away for very low wages. But for this to be true, your labors have to lead somewhere other than more slavery at very low wages.”Report

    • Avatar Kolohe in reply to Saul Degraw says:

      “That has changed dramatically over the last 30 or 40 years. Layoffs used to be just that: a temporary reduction in staff to match output with falling demand. ”

      Eh, I’m skeptical. I’m pretty sure the Good Times theme song lyric is meant ironically.

      Just to clarify, 40 years ago is 1974. 40 years before *that* was just past the peak (that is, nadir) of the Great Depression. So, at most, the notional period of nice cyclical employment cycles you allude to was only in the relatively brief window of the 50s and 60s. (when boomer demographic bulge was not yet in the labor force)

      But even in the 50s factories were closing and never coming back. What help the numbers was this labor being ‘outsourced’ to the old confederacy, instead of Asia (that would come later).Report

  8. Avatar zic says:

    I think economists do a lot of sloppy work. I gave an example on the previous thread — looking at household income instead of hours worked per household income. We don’t work a household week, we work a 40-hour week; and most ‘middle class’ families have two parents each working a 40-hour week. So any measure that starts with household income and doesn’t account for hours worked is bogus.

    I have, on multiple occasions, asked economists about the household income vs. hours-worked for that household income; and more than once, had the economist in question thank you for pointing that out; it matters. I’ve also seen a few I like actually change their data because of that question. Most ignore it; yet given what happened in the late 1980’s and the 1990’s (women worked more and more, and still shouldered most of the household chores,) that’s a huge thing. Thank god you dads are, more and more, stepping up to the plate. Go Dads!

    Economists are sloppy; they think they’re measuring one thing, but really, they’ve forgotten thus huge pool of necessity that’s either being ignored or causing lack of sleep or being paid for. Like regular, family meals, clean laundry, homework time, fun-time with kids, time to help improve the community you live in, and on and on.

    Economists are sloppy. I do not see any evidence that the real size and shape of the American Underground Economy is well understood or accounted for in their numbers, particularly at the micro level. But from what I see, the underground economy is where a good many of the people who cannot afford the basics make up the differences. They might grow or sell a little pot. They might clean houses or babysit or fix cars under the table.

    Economists are sloppy; but I’ll cut them some slack here. It’s not that a dollar is earned that matters, it’s that a dollar is earned and spent and re-spent. (This is, in part, why black market economies are so important in economically-depressed areas, too.) It’s not just what any particular dollar will buy that matters, it’s how many times that dollar is used to by that value that matters.

    Economists are sloppy. The basket of goods different indexes use don’t, I think, account for the value of people’s time. Particularly the working poor. On the one hand, their time is not worth much; most places, less than $10 an hour. On the other, because they have to spend so much of it working, the time they’re not working is priceless. Sleep is valuable. A clean home, someone to make sure homework is done, and on and on. . . these values are not caught up in household income. I do not, for one minute, believe the prices attached to the baskets, because they don’t measure the non-tangible benefits that contribute to overall quality of life. They don’t measure the stress of worrying about next-months rent or the decision to fix a car so you can get to work vs. paying the rent; or maybe it’s fix your car or repair the leaking roof, which will, over time, add up to a substantial ding in your property value or bigger repair if ignored.

    Economists are sloppy. They measure the easy stuff, and tell us it’s science. But they don’t factor in commute times, days to care for sick children, and a host of other stuff that actually, real-life matters.Report

    • Avatar Murali in reply to zic says:

      Suppose economists are sloppy. Are non-economists any better? If economists are likely to be wrong X% of the time, non-economists are likely to be wrong more often about how the economy works. There is no justification for taking a non-economist’s word about the economy over an economist’s (provided said economist is specialised in the field pertaining to that question). In the worst case scenario, economics as a science does not systematically approach the truth more closely than common prejudice. Then, where there are disagreements, you suspend judgment. Not stick to your own guns.Report

      • Avatar zic in reply to Murali says:

        @murali I read a lot of pixels spilled by economists. I don’t ‘not listen’ to them. In fact, I do listen to them enough to know that they frequently disagree, and that the ones who’s ideas are most broadly accepted are defining the suck-it-up-to-the-top economy that’s happening right now; so Saul’s point, which I quoted below, fit’s here nicely.

        But I also do not believe that they have any where near the handle on how the economy works as they’d like us to think they do.Report

      • Avatar Murali in reply to Murali says:

        When I mean listen to economists, I don’t just mean take in their ideas mull over them and then reject them. I mean defer to them on areas in which there is a consensus among them.Report

      • Avatar Kim in reply to Murali says:

        Murali,
        zic isn’t bitching about Feige, when she’s talking about the underground economy, She’s bitching about Krugman, Cochrane, and bunches of other NON EXPERT economists. It’s not their field of study.

        I don’t expect a programmer to be able to discuss motion vectors and b-frames and the horror that is interlacing, unless they’ve actually done video before.Report

    • Avatar James Hanley in reply to zic says:

      Economists are sloppy…not like us journalists

      Economists are sloppy…they don’t focus on the things Inpersonally care about.

      Economists are sloppy…they can’t precisely measure that which cannot be measured.

      Some people might think they need to actually study a topic carefully before they know enough to critique practitioners. But like righties judging physics, or anti-vaccers judging biology, there’s always a set of people who think ignorance leads to better understanding.Report

      • Avatar zic in reply to James Hanley says:

        Economics is very valuable to us, @james-hanley ; it’s how we attempt to understand economies, and I don’t dismiss the work of economists. But I do understand that it’s as much an art as a science.

        I’ve just begun reading a few books written by women who are also economists; I’ll let you know if I find more comprehension of the things I think most economists tend to exclude from their work. And I didn’t say (anywhere) that we should dismiss the work of economists; but that we should recognize that their work is based on a (mostly) male-centric view of how economies work. The house-hold income vs. hours worked is a huge problem for me. Typically, when reading someone’s work, I’ll try to puzzle out what/how they approached that; it’s mostly impossible, and much of the time. But when someone tries to tell me a family is better off when their household income has increased slightly, if they haven’t asked what was sacrificed for that income (like 30 or 40 hours of a second person working), they’ve made a big mistake at the very root of collecting data to use. That’s sloppy. I’ve seen it over and over, too. Or, to put it in other words, try googling for charts showing both household-income vs. hours-worked over time. They’re not common; but there’s freakin’ thousands of variations of income alone; as if that’s the only measure that, economically speaking, matters.

        I have, multiple times, asked about this particular peeve on the blogs of economists, too. And every time, I get a, ‘yes, that’ matters, not included, would change things,’ sort of answer. One person re-did the work he was blogging about, and I saw that small shift become more prominent in his ongoing work, and his analysis was not nearly as rosy as it had been before.

        I’ll go back to another pet-peeve of mine — the portions of the economy that are underground. I see that underground economy; it’s an obvious thing here where I live because there’s a lot of open land to grow pot, a lot of people with marginal income working under the table; a lot of bartering, friends helping friends exchanges instead of cash exchanges. It’s pretty common to hear, for instance, that pot is the biggest cash crop for a state (I hear that for mine, but I disagree; trees are probably the biggest cash crop here in Maine.)

        So economists are sloppy; they leave crumbs here and there, and those crumbs are the economy, and how it functions for a lot of people. For women, for instance, who went to work and still had the burden of most household chores and child care in the 1980’s and ’90’s, which is why hours worked really matters. For marginally poor families where work isn’t steady and reliable (seasonal employment, outsourcing, etc.), and who only survive due to some form of underground-economy participation. Nannies and housecleaners and landscape workers paid under the table. Even economists like Geithner have had some problems there, as I recall. He owed something like $34,000 in back taxes on behalf of his housekeeper, remember? That’s the underground economy at work.Report

      • Avatar James Hanley in reply to James Hanley says:

        Be sure to read Deirdre McCloskey.

        As to the underground economy, A) it’s exceptionally hard to measure well because it’s underground; B) most economists rely on government data collection (while recognizing its imperfections). So A) it’s not wise to criticize someone for not measuring what’s not very measurable, and B) if A is wrong, then you need to critique the government, not the academic economists.Report

      • Avatar Kim in reply to James Hanley says:

        James,
        when the underground economy goes from 4% of gdp to 8% (and that’s not all Pot!), we really ought to be asking whether we’ve got a Problem.

        zic,
        Plenty of economists do studies on the underground economy (some in the Midwest are looking at the sale of watermelons). But, it’s hard to measure everything at once in the underground economy. There’s a lot of different aspects.Report

    • Avatar zic in reply to zic says:

      This is pertinent to the discussion of why hours worked for household income matters.Report

  9. Avatar zic says:

    Also, @saul-degraw’s explanation of outsourcing/freemarkets/global trade has a crucial nugget in the analogy at the end on the previous thread:

    The thing about nerds — well, the thing about people who test well and have lots of education — is that they’re routinely pretty opposed to group-based discrimination. Why? Because they prefer meritocracy. Why do they prefer meritocracy? Because meritocracy sets ground rules that allow good test-takers and highly educated people to obtain disproportionate success and social influence, regardless of their race, religion, and so on.”

    So perhaps market anarchists and globalization advocates benefit from it more and merely phrase it in ways that justify their benefit.

    So just substitute ‘economist’ for ‘market anarchist’ here; and recall this tidbit: something close to 100% of economists (not quite, but nearly) failed to predict how fast and how far the market would contract in 2007. They were pretty much useless, in fact. It’s more important than ever for us to place faith in their measuring now. Particularly important for those for economists; which is very much why Saul’s post seemed pertinent.

    (Thanks, Saul, I should have told you on the other thread how much I appreciated this response of yours, too.)Report

    • Avatar Saul Degraw in reply to zic says:

      @zic

      When Capital in the 21st century came out in English, Pinkerty basically said this. He pretty much accused American economists of being at the trough of finance for their paychecks and this caused them to not realize certain things.Report

    • Avatar James K in reply to zic says:

      @zic

      That’s like saying that because climatologists didn’t predict Hurricane Katrina that we shouldn’t listen to them on climate change.

      Forecasting is a tiny part of what economists do, and the nicest thing that can be said about it is that it better than nothing. In fact, the Efficient Market Hypothesis suggests that predicting future market activity with nay real accuracy is functionally impossible, meaning that most economists will actually tell you they can’t predict what the market is going to do.Report

      • Avatar RTod in reply to James K says:

        “meaning that most economists will actually tell you they can’t predict what the market is going to do.”

        Ah. These would be all the economists who don’t get interviewed by the press, rease their work to polital candidates, write best selling books or talk, ever, on television or radio then.Report

      • Avatar Chris in reply to James K says:

        Evoking the EMH in the context of the 2008 crisis as a, uh, justification of economists’ failures with respect to said crisis is not in the least bit ironic.

        That last sentence was not sarcastic in the least.

        That last sentence was a lie.Report

      • Avatar James K in reply to James K says:

        @rtod

        Indeed, the vast majority of economists do none of those things and the ones that do are not a random sample. “The universe is uncaring and unpredictable” is a tough sell, which is why religion exists. Just because economists will tell you they can’t predict the future doesn’t mean anyone will actually listen.

        @chris
        Your failure to understand the Efficient Market Hypothesis is not an indictment of the Efficient Market Hypothesis. For a market to be readily forecastable it has to be inefficient.Report

      • Avatar Alan Scott in reply to James K says:

        Okay, sure…

        But didn’t climatologists basically predict Hurricane Katrina? Or at the very least say something like “our models predict increasingly severe hurricanes in the Gulf of Mexico?”

        Look, if a bunch of Economists had been wrong about 2007 in a bunch of different ways, that would be one thing. But when they’re all wrong in the same direction? That suggests that something is fundamentally wrong either with the data they are using or the way they draw conclusions from it.Report

      • Avatar James Hanley in reply to James K says:

        Evoking the EMH in the context of the 2008 crisis as a, uh, justification of economists’ failures with respect to said crisis is not in the least bit ironic.

        I’ve heard this frequently, and I can only wonder at what people think the efficient markets hypothesis is. It does not say markets work perfectly, and it definitely does not say market collapses could be predicted. This is the kind of thing that’s frustrating–the assured confidence while totally misunderstanding a concept. You would sneer at others who misuse concepts in areas you know well, but seem to not apply the same rules here.

        Alan,
        No, they did not predict Katrina. No single weather event can be predicted by the models or even conclusively linked to warming. And while most models predict increasing hurricanes, there has been decreased hurrucane activity over the past 30 yearsReport

      • Avatar Chris in reply to James K says:

        Your failure to understand the Efficient Market Hypothesis is not an indictment of the Efficient Market Hypothesis. For a market to be readily forecastable it has to be inefficient

        @james-hanley @james-k yeah, I don’t know what it means. That’s why I agree with so many economists about the extent to which 2008 was one of the final nails in the coffin of the EMH, a coffin, it should be noted, that researchers had begun to nail shut in the 90s. And I don’t just mean the strong version, which of course no non-religious zealout ever actually bought, but the semi-strong and even the weak. Hell, relative efficiency was the order of the day well before 2008, because the EMH was an empirical failure by then. 2008 just confirmed what the non-religious already knew. And that’s not because economists didn’t predict it, it’s because what happened is inconsistent with straight versions of it.

        But go ahead and evoke the EMH to explain something about 2008 and pretend that my chuckling at you for doing so is evidence of my ignorance.Report

      • Avatar James Hanley in reply to James K says:

        Explain it then, Chris, as well as how the financial crisis put a nail in its coffin.Report

      • Avatar Citizen in reply to James K says:

        There are economists that are agenda driven and there are economists plotting points objectively. Choose your sauce wisely.Report

      • Avatar Chris in reply to James K says:

        The old joke about the economists and the $50:Two economists are on a walk in Chicago (of course), when they come across a $50 on the sidwalk. One of the economists starts to bend down to pick it up when the other grabs his shoulder and says, “Don’t bother. If it were a real $50, someone would have picked it up already.”

        http://www.themoneyillusion.com/?p=3773

        http://underbelly-buce.blogspot.com/2009/06/effficienrt-marketsa-eulogy-for-undead.html

        http://www.paecon.net/PAEReview/issue56/GuerrienGun56.pdf

        http://www.amazon.com/gp/product/B001NLL7LQ?btkr=1

        The 2009 Turner review (to which I can’t find a link, but with which I’m sure you’re familiar, since you know this stuff so well).

        http://jepson.richmond.edu/conferences/adam-smith/paper2010buchanan.pdf (I was looking for the 2009 article that this refers to, but this will work anyway.)

        These include some claims, from economists who know more about this stuff than any the three of us, that the EMH was responsible for 2008. I’m saying something less radical than that, that whatever was left of it, empirically, was killed by 2008. At least in any recognizable form (it’s not like there is one EMH, or even a sufficiently rich version of it that can be tested by itself, which is of course why many researchers think it’s not even wrong).Report

      • Avatar LWA in reply to James K says:

        It is probably unfair to accuse economists of failing to foresee a single event.

        But in all the mad rush to liberate the markets from the stifling regulations of the New Deal, who was warning that an increasingly risk-taking market would also be increasingly prone to catastrophic crashes?

        As noted above, climatologists DO warn of increasingly severe hurricanes, just not any specific one.Report

      • Avatar Troublesome Frog in reply to James K says:

        I’ve always liked that joke, but I think a better analogy would be that some people incorrectly assume that because people find $50 bills on the ground all the time (nationwide, surely they do), it should be possible for one particular person to come up with a system to find those $50 bills before anybody else on a fairly regular basis (not a chance).

        Market efficiency is driven by people looking for those $50 bills, so yes, people find them all the time. But that doesn’t say anything about the existence of a systematic method for better-than-average bill finding, and even if such a method is found, it will only work until everybody else is doing it.Report

      • Avatar Mark Thompson in reply to James K says:

        @rtod Here is an article explaining both how forecasting is foolish and not something to be engaged in by people serious about financial and economic analysis, as well as why they’re about all you hear on the airwaves: http://www.bloombergview.com/articles/2014-11-11/my-prediction-your-forecast-is-wrong

        Specifically, “the media loves them.” And the media loves economic forecasters because they’re good for ratings and subscription sales and pageviews.

        The difference between economic forecasting and actual economics is roughly equivalent to the difference between astrology and astronomy. Simply put, people have always been obsessed with trying to know the future – about what will happen – far more than they are interested in understanding what is happening or did happen, and why.

        That hardly makes economics useless, though – understanding why things are working or are failing (or did either in the past) is important for understanding what policies are most likely to be useful or harmful going forward.

        To go back to the astrology/astronomy analogy, the study of economics has only really been around for about 250 years. It’s probably not much further along than astronomy was around, say, the time of Galileo.

        A more modern equivalent might be seismology – it’s important and helps provide us with an understanding of why things happen when they do happen and perhaps what policies/building codes can help minimize the damage and mitigate the risks, but it’s still poorly situated to predict earthquakes and eruptions with any kind of certainty and period of forewarning.Report

      • Avatar Dave in reply to James K says:

        @chris @james-hanley @james-k

        I’ll use the Wikipedia version of the weak-form of the EMH and riff off of that:

        The weak form of the EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information.

        Define “publicly available information”? In the context of publicly-traded companies, this is a no-brainer. It’s the information provided in the company’s public filings.

        However, what constitutes publicly available information for private placements (Rule 144) like subprime-backed mortgage-backed securities? Do we limit that to the information that’s provided to accredited investors in the offering documents and any supporting information or do we also include the knowledge held by the people most responsible for originating the loans, appraising the properties and selling the loans to Wall Street (loan brokers, property appraisers and the nonbank finance companies)? Did the loan brokers that originated liar loans know more about the quality of those loans than the ratings agencies that assigned AAA ratings to the securities backed by those same loans? They most certainly did. Otherwise, criminal fraud cases against Wall Street firms and the ratings agencies would be a slam dunk.

        If the most basic definition of efficient markets suggests that markets are informationally efficient, then I would say that the market for residential mortgage backed securities during the subprime era was not at all informationally efficient. The true nature of the risk of the underlying loans became so obscured by the time that the loans were securitized and sold to investors that it was impossible for investors to be able to accurately price the risk. Making matters worse, the information that was obscured was so material to the valuation of those securities that investors were blindly walking into a bloodbath.

        Maybe none of this matters under the EMH framework since the EMH framework assumes (implies) that publicly available information is “known” by everyone at all. One could argue that what was only known by the investing public constitutes “public knowledge”. Plus, residential mortgage-backed securities aren’t very widely traded so prices on a given set of issues aren’t automatically updated like they are with stocks because investors typically buy and hold RMBS.

        Whatever the case, one thing I can say with 10000000000% certainty – the subprime-backed RMBS markets were not informationally efficient…not by a long shot.Report

      • Avatar Kim in reply to James K says:

        Dave,
        “The weak form of the EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information.”

        Oh, now, see, that’s just plain not true. If it was true, then the folks selling lead-painted toys would have seen their stocks tank when they released that information in their filings.

        … nobody actually reads half the available information. (and, of the people who do skim, apparently very few of them know Chemistry.)Report

      • Avatar Chris in reply to James K says:

        If the most basic definition of efficient markets suggests that markets are informationally efficient, then I would say that the market for residential mortgage backed securities during the subprime era was not at all informationally efficient. The true nature of the risk of the underlying loans became so obscured by the time that the loans were securitized and sold to investors that it was impossible for investors to be able to accurately price the risk. Making matters worse, the information that was obscured was so material to the valuation of those securities that investors were blindly walking into a bloodbath.

        Exactly.

        Note, further, that it wasn’t merely the weak version that was so popular in finance leading up to 2008, but the “semi-strong” version as it’s called in that Wikipedia article (and generally; only religious zealots would tout the “strong” version, I assume), or at least an approximation of it. If James and James want to argue that the weak version was not completely killed by ’08, I suppose that’s fine (I’d disagree, as, it would seem, would plenty of actual economists), but the semi-strong version ist kaputt.Report

      • Avatar Chris in reply to James K says:

        Also, I assume that, since both the Jameses must know the EMH and its history pretty well (since they’re both acting as though they do), they know full well what I’m talking about, and are merely posturing. Like I said, they think that they and their ideological compatriots are the only ones here who know what they’re talking about, so they believe they can get away with it like those Chinese speakers thought they could get away with talking about people in Chinese. When someone raises a well-known discussion about the EMH in the wake of the late-Aughts financial crisis, and their immediate response is, “You only say that because you don’t know what the EMH is,” they’ve given away the game.Report

      • Avatar Chris in reply to James K says:

        Also, this place may have taken a turn to the left, but man, one of the real echo chambers here is the particular version of market worship we’ve seen here in the last few days, in part because the econ folks here tend to be more libertarian/conservative, but also because those more libertarian/conservative folks generally just answer critiques with, “You say that because you don’t know economics,” as though their version were the version, to the exclusion of any other perspectives (even any other mainstream perspectives!). Witness, e.g., any discussion Roger has ever had about economics with anyone who disagreed with him.Report

      • Avatar Dave in reply to James K says:

        @kim

        Oh, now, see, that’s just plain not true. If it was true, then the folks selling lead-painted toys would have seen their stocks tank when they released that information in their filings.

        You give neither the investors nor the Wall Street analysts a whole lot of credit.Report

      • Avatar Troublesome Frog in reply to James K says:

        @kim

        Oh, now, see, that’s just plain not true. If it was true, then the folks selling lead-painted toys would have seen their stocks tank when they released that information in their filings.

        A couple of things:

        1) By “tank” you mean, “drop by an amount I personally think it should drop by,” right? Are you 100% sure that the best estimate for the post-lead valuation of the company is exactly what you think it is? I mean, industries survive killing off their customers with dangerous products all the time.

        2) You’re assuming that the release of that information in the quarterly report was the first hint the public had of that information. That seems to me to be unlikely.Report

      • Avatar Dave in reply to James K says:

        @chris

        Note, further, that it wasn’t merely the weak version that was so popular in finance leading up to 2008, but the “semi-strong” version as it’s called in that Wikipedia article (and generally; only religious zealots would tout the “strong” version, I assume), or at least an approximation of it. If James and James want to argue that the weak version was not completely killed by ’08, I suppose that’s fine (I’d disagree, as, it would seem, would plenty of actual economists), but the semi-strong version ist kaputt.

        If the semi-strong version argues that prices change to reflect new information, then I’m not sure if I agree. Shortly after the two Bear Stearns hedge funds failed in the summer of 2007 (or maybe it was before), the ratings agencies began downgrading CDO’s and mortgage-backed securities issues in a big way. The market’s response to this was immediate and forceful. Whether by law or choice, CDO investors were trying to sell…not just a few but just about all of them. The market had few if any buyers.

        I remember this because many of the same people that were buying CDO’s were also major buyers of commercial mortgage backed securities. Because the values of CDOs dropped so much, because investors were buying them on margin, they were not generating sufficient sales proceeds to cover their margins. To cover their losses, they were forced to sell assets of value. At the time, those were CMBS.

        I was working on the floor of an investment bank when this was happening, and I remember one of the consequences of all of this was that the commercial mortgage backed securities market shut down almost overnight because of the bloodbath that was taking place in the CDO/RMBS markets.Report

      • Avatar Dave in reply to James K says:

        @chris

        Also, this place may have taken a turn to the left, but man, one of the real echo chambers here is the particular version of market worship

        So we’re on the same page here, can you provide a non-Roger example? I understand how Roger approaches the issues the way he does. My main disagreement with him is that although I’d agree with some of what he says in theory, I’m not a big fan of having discussions at the 30,000 foot level (where I tend to think he likes to say) but rather somewhere at the boots on the ground to 10,000 foot level. I’ll talk markets until I’m blue in the face but I’d rather focus on specifics. “Regulate this vs. free market that” isn’t my cup of tea, something everyone here ought to know by now.Report

      • Avatar Kim in reply to James K says:

        Dave,
        Only because I can see the timeline. If one investor gets rich months later from shorting… that pretty much /is/ defeating the premise.

        tf,
        1) Toy company releases new earnings report that contains pictures of leaded toys
        2) Toy company’s stock goes up (not statistically significant vis the rest of the market, but is still climbing).
        3) Months later, a nice happy Consumer Safety report gets published, and gets a lot of press.
        4) Stock tanks, netting some chemist a decent amount of money.

        Yeah, this timeline says that the public release of damaging information was not properly worked into the pricing.

        This isn’t Enron, where one can say “But, we might have pulled it off!” This is children’s toys, where the market efficiently pricing in the potential loss could be naturally expected IF people actually read the publically available documents.Report

      • Avatar Troublesome Frog in reply to James K says:

        I’m not seeing it. The story you’re telling sounds an awful lot like, “Once the information that the toys had lead in them reached the market, the price of the stock adjusted nearly instantaneously to reflect the new information.”

        So what’s the contradiction here? Is there some ultra-strong version of the EMH that I’m not aware of that implies that markets can instantly recognize the chemical makeup of potentially lead-containing products simply by looking at pictures of them? If so, I think a futures market that posts photos of peoples houses could be a potentially profitable replacement for those old-school lead testing labs.Report

      • Avatar Kim in reply to James K says:

        tf,
        the pictures were publically available. That no one reads the publically available information is no excuse for the hypothesis, which fails in this case.

        Likewise, for LIBOR: http://www.ft.com/cms/s/0/94b27fa8-6a90-11e4-bfb4-00144feabdc0.html#slide0

        Calculated risk had a commenter who was commenting on this as it happened (the rigging of LIBOR). That’s freely available, public information that the market did not price into these banks.

        I’m about dead certain that I can pull something on MercenaryCompanies in Iraq as well, if needed. (Freely available news reports on mercs being POS)Report

      • Avatar Troublesome Frog in reply to James K says:

        So there is a photo-based lead test that I’m not aware of? Super cool.Report

      • Avatar Chris in reply to James K says:

        Dave, these last couple threads are good examples, but the major economic-talk people here (that is, the high level folks — you, and Patrick, and perhaps Morat, are more concrete economics folks), specifically the two Jameses, Roger, and Brandon, while they may not be in the majority politically, tend to dominate the economic discussions, and I’ve had both James and Brandon, in addition to Roger, respond to me disagreeing with them with some version of, “You don’t know economics” more than once (including this thread).

        Granted, I am not an economist, and wouldn’t pretend to be an expert in economics, but it’s not like we’re talking about stuff that’s not pretty widely known by non-economists here anyway.Report

      • Avatar Kim in reply to James K says:

        tf,
        lead’s the only way to make that color and gloss of yellow.
        Yes, any chemist would tell you “that’s lead paint!”Report

      • Avatar James Hanley in reply to James K says:

        Chris,

        Funny joke.

        I was actually hoping you’d take a stab at explaining it, instead of just linking to others. I mean, it’s ok to quote them in your argument, but just throwing out a bunch of links doesn’t demonstrate your own understanding in any way.

        And frankly “a bunch of people who know more than you or me” is not a convincing argument at all, since there’s also a bunch of people smarter than you or me who say the EMH was in no way rebutted by 2008. So if your standard is “a bunch of people who know this stuff,” then your only honest position is agnosticism. And you’re not agnostic, so obviously there’s some other standard you’re implicitly using.

        Now it seems particularly interesting to me that your first link is to Scott Sumner, who–perhaps you haven’t noticed–is an advocate of (at least the weak version of) the EMH, in multiple posts including the one you linked to.

        But let’s set aside a full explanation, and let me ask this one very specific question: What is it about 2008 that demonstrated that an investor can reliably beat the market?Report

      • Avatar James Hanley in reply to James K says:

        are merely posturing

        Really, Chris? You can’t explain the issue in your own words apparently, your first link is to somebody who rebuts your position, and you stake absolute confidence in your position on the standard that a subset of the discipline agrees with you, and you accuse others of posturing?

        I’m not sure if that’s evidence that you’ve got big brass ones, an incredible lack of self-awareness, or both.Report

      • Avatar Chris in reply to James K says:

        James, why don’t you explain it? You are, after all, the one who took my making a pretty widely made statement by actual economists to mean that I don’t understand it. I see no reason to respond to that with anything but a shrug. I was nice and gave you some links to people making the argument, in various forms. Each of those includes some level of explanation of what the EMH says, as well (I gave a short description of it below, in another subthread as well, but because the context, not condescension, called for it).

        Also, I noted somewhere in this thread that some people (including some of the most ardent detractors, like Quigglin) think that the weak version got out of 2008 no worse off than it was before. That is, the people who think the weak version, impoverished as it is, has some truth to it (and in some sense, it is tautologically true — that’s what you get with highly unspecific hypotheses) are likely to still think the weak version has some truth to it, while the people (by 2008, likely greater in number outside of the Chicago religion) who thought it was at best untestable, and at worst had failed whatever empirical tests were possible, will tend to think that 2008 was the end of it.

        My chuckling at James K was because pretty much anyone who knows the EMH debates would know that, as controversial as it was before 2008 (and it was extremely controversial among economists, even if within the finance world it was gospel, because a certain church of economists dominated there), it became that much more so after, so using it, in an offhand way, to explain 2008 is kinda ironic.Report

      • Avatar Kim in reply to James K says:

        tf,
        ” it should be possible for one particular person to come up with a system to find those $50 bills before anybody else on a fairly regular basis (not a chance).”

        Tried asking adobe? ;-P It’s picking them up that’s the problem…Report

      • Avatar Troublesome Frog in reply to James K says:

        @kim

        I’m not sure you’re working with a useful definition of the term “public information” here. Information known to only a handful of people is not public information. Information that nobody knows but that is available given some investigation isn’t public information. Once the public knows it, then it’s public information. And prices adjust predictably. If the information becomes public and prices don’t adjust, then that’s weird.Report

      • Avatar James Hanley in reply to James K says:

        Chris,

        None of that changes the fact that 1) you claim to understand it, but 2) can’t seem to explain it, or even seem to 3) tell the difference between essays that support EMH and those that critique EMH.

        I’m got to be honest here, and say that over the past few weeks you’ve been burning through all the once-substantial friendliness which I had for you, and your inability to defend a position you hold with such confidence here, combined with your “posturing” comment, has eliminated nearly all that was left.

        A few nights of insomnia have left me irritable, so due caution and the last remaining bits of friendly feeling tell me I should avoid commenting anymore on these threads. I am writing an OP, though, and I will make my argument–which, again, l point out that you have failed completely in doing yourself–there.Report

      • Avatar Chris in reply to James K says:

        James, assume whatever you like. Since neither you nor James K has demonstrated an understanding, and since you both reacted as though you’d never heard a commonly discussed point, among economists, I’ll just suggest that neither of you understands it. See how easy that is? (Absurd, of course, since James K is an economist and you have an economics background, but I’m just playing by your rules.)

        I believe Dave and I are the only one who’ve given any explanation of the EMH in this thread, actually, but you’ve been too busy up here trying to justify your lack of respect to notice.Report

      • Avatar Dave in reply to James K says:

        @chris
        @james-hanley
        @james-k

        If Chris is incorrect, am I also incorrect?

        There seem to be two parts to EMH: 1) the part that addresses future predictability based on current asset prices and 2) the part that starts with the underlying assumption of efficient financial markets as function of price reflecting all public information.

        My focus thus far has been on (2), but is I think (1) may not be true when taking into account asset bubbles and how investors behave in markets, especially when markets become volatile. Were dot-com stocks priced “efficiently” by anyone’s definition before the bubble burst?

        Then again, economists and us plain finance folk may approach this issue from different perspectives.Report

      • Avatar James Hanley in reply to James K says:

        Dave–I’m writing a post about it. Let me say that I don’t pretend to be an expert on the EMH. I’m not a macroeconomist. But I can see where folks are misunderstanding it.

        Chris–No, you’ve claimed it’s been falsified, but you haven’t explained it. Not even a little. I’ll refrain from saying more.Report

      • Avatar Chris in reply to James K says:

        I said dead, not falsified. As I’ve hinted multiple times, it’s unfalsifiable by itself, at least in its weak form, which is the only form that could possibly still be alive. More and more, you hear people who, before 2008, defended what looked a lot like the semi-strong form, saying “Oh, it’s just a heuristic, not a true hypothesis.”

        The random walk theory it was built to explain is falsifiable, and there’s plenty of data showing that stock prices show short term correlations, that pricing behavior is affected by the sorts of psychological patterns that behavioral economists describe, and that there may even be long-term correlations. The debate is now how important the deviations from randomness are. And part of what economists have been saying after ’08 is, “Yeah, now we see that they are.”

        I’m sure you remember Krugman and Delong being all over this. Books were written about it. Quiggin over at CT, who wrote one of those books, discuss it endlessly. The Chicago School got hammered from both sides because of the centrality of EMH in their thinking. I’m not stepping out on an economic limb here.Report

      • Avatar Stillwater in reply to James K says:

        I’ve been reading this subthread with some interest. Lots of interest actually. And I’ve got nothing to contribute but a question: to what extent is this dispute an example of a “theory/practice” problem? For example, Chris has repeated that the empirical data refute the strong version of EMH (if not the weak version as well), while the Jameses seem to be saying that the empirical data does no such thing. So I’m curious as to what extent each side in the debate is viewing the issue from radically different starting points: empirical data as a critique of a conceptual argument vs. conceptual evidence to refute an empirical argument (offered by Chris & Dave and James & James, respectively)? I mean, we already know that empirical data cannot refute an a priori truth (by definition!), and that a priorism cannot refute empirical data (by definition!). Is something similar happening here?Report

      • Avatar James K in reply to James K says:

        @chris

        I’m not sure how, but you have this entirely backwards.

        1) Those links are supportive of the EMH, not opposed to it.

        2) The three forms of the EMH are reasonably well-specified. The semi-strong form is a bit mushy, but not very much and the other two are very concrete.

        3) The EMH is almost certainly the most thoroughly-tested hypothesis in economics. It is most likely the most thoroughly-tested hypothesis in the social sciences. The reason for this is that the data used to test it is share price data, which is absurdly abundant. Would you like several thousand time series of daily-frequency, pre-cleaned data? Well, that’s what share price data is.

        I will say again, you do not understand the EMH well enough to comment on it. What this demonstrates to me is that I need to do a post on the EMH, but it will probably have to wait till the weekend.Report

      • Avatar Stillwater in reply to James K says:

        James K,

        When does Theory have to submit to Practice?

        Of course, practice is flexible whereas theory is not. So there’s that, yes? I suppose anyway. Am I wrong?Report

      • Avatar Chris in reply to James K says:

        1) Those links are supportive of the EMH, not opposed to it.

        I didn’t say they were opposed to it. I linked them quickly because they contain examples of the post-2008 arguments. Though I’ll note that the pro links also contain the pro-EMH backtracking I’ve mentioned: “Look, it’s just a heuristic. And I only ever meant the weak version, I swear.”

        2) The three forms of the EMH are reasonably well-specified. The semi-strong form is a bit mushy, but not very much and the other two are very concrete.

        No, they’re not. Hell, even the pro-people say this (see the links). That’s why, in James post, you’ll see him quoting people saying as much. It is well-known that in order to test it, you have to fill in certain other assumptions. Otherwise it is untestable.

        13) The EMH is almost certainly the most thoroughly-tested hypothesis in economics. It is most likely the most thoroughly-tested hypothesis in the social sciences. The reason for this is that the data used to test it is share price data, which is absurdly abundant. Would you like several thousand time series of daily-frequency, pre-cleaned data? Well, that’s what share price data is.

        It may in fact be the most tested hypothesis in finance, and the data weighs pretty heavily against it any time you fill in enough assumptions to make it testable. That is, the data pretty clearly shows that there are correlations, that there is excess volatility, etc.

        I will say again, you do not understand the EMH well enough to comment on it. What this demonstrates to me is that I need to do a post on the EMH, but it will probably have to wait till the weekend.

        I will say this, in fact: I’m now pretty sure neither you nor James H are actually familiar with the empirical discussion of the EMH. You probably learned about it in grad school and haven’t followed the discussion since. That’s cool, but that you keep attributing your ignorance to me is grating on me. And it reaffirms my posturing comment above.

        I have been following the EMH debate since the early Aughts, when Quiggin started posting about it at CT (I readily admit that before that I’d never heard of it). Now, I don’t have a background in finance, but I’ve actually used random walk models (in a completely separate context, but the models are computationally similar), and I know statistics pretty well, so it’s pretty easy to follow the discussion without having to know, or care, all that much about what sorts of information actually goes into real estate prices, say (that would be Dave’s thing, and you can see what he says in this thread). Then Quiggin wrote his Zombie Economics book, and I got more interested. You’ll probably note that the “dead” comment is a reference to it. That book contains all sorts of wonderful references to the discussion of the EMH, as did his blogging post-2008. Since you clearly haven’t kept up, I’d be happy to give you some links and references (start with LeRoy).Report

      • Avatar James Hanley in reply to James K says:

        Chris,

        1. If you’re asked to explain your position, and you grab a bunch of links without making an argument, “I didn’t say those links supported my position” is not a good defense. Normally when people throw up links that don’t support their position we laugh and call them names. I see no reason why you think you should be held to a different standard.

        2. If you’ve been reading Quiggin, then presumably you know he doesn’t reject the weak version of EMH.

        3. If James K and I are so stupid that we all of the research critiquing the EMH has passed us by, what do you say to Eugene Fama, to Robert Lucas, to Burton Malkiel, to Scott Sumner? Did they all learn about the EMH in grad school many years ago, and not pay any attention to any of the research since? That’s what your attack-defense demands, or even more straightforwardly, that they are just inferior in their economics knowledge to a psychologist in Texas, because some different economist agrees with you. I’m always amazed at your ability to be an expert in, apparently, every field of the social sciences and some of the humanities as well. I’d encourage your institution to name you Distinguished Professor of Everything.Report

      • Avatar Chris in reply to James K says:

        You didn’t ask me for links explaining my position. You told me I didn’t know what I was talking about, and then when I said I do, you just said, “explain the EMH.” To which I basically said fuck you and gave you some links. That’s all you deserved.

        If you want to begin with the assumption that I’m talking out my ass, I’m not going to bother taking the time. And I’m not going to bother being any more charitable when you make it clear that you actually don’t know what you’re talking about.Report

      • Avatar Chris in reply to James K says:

        And yeah, Quiggin’s basic position is that the weak version, in its most abstract farm, is both harmless and unfalsifiable, so it remains relatively unscathed in the wake of 2008.Report

      • Avatar James Hanley in reply to James K says:

        The status of your knowledge on any issue upon which you make an unsupported assertion is beyond question.

        I’ll make a note of that, sir, and reserve any queries for the vast multitude of lesser minds on the internet.Report

    • Avatar Kim in reply to zic says:

      zic,
      trying to catch a falling knife is Wall Street’s term for trying to make money on shorting the market. You need to get the timing right, and get out before the whole thing goes bankrupt. Dr. Doom wasn’t the only one predicting that the bubble would burst… But trying to analyze something in the dark (as derivatives were), doesn’t give us much knowledge on how well they’re going to do on analyzing things that are comparatively easy to get data on.

      Yeah, sure, if you want to say that 2008 proves that the economists can’t tell you how much gold is in the dark, sure. Or talk about the underground economy…

      But 2008 had significant structural flaws that I hope to hell we’ve fixed by now.Report

      • Avatar zic in reply to Kim says:

        This is actually pretty brilliant, @kim , and you’re precisely right.

        There was call to bring this dark market under regulation; google Brooksley Born.

        And somewhere, (I think it was @james-k ) there’s a good (very liberal sounding) description of when government needs to step into markets.

        There’s also @james-hanley pointing out that the information economists use is provided by the government, which as long been my argument of an unrecognized net benefit of government; it can provide tremendous value with the information it makes available.

        It’s a perfect storm — no information, forecasts modeled on available information, and policy set based on those forecasts.

        It’s tulips, far as the eye can see.Report

  10. Avatar Michael Drew says:

    The pictures of that guy at different times in different universes are pretty intense.Report

    • Avatar Kazzy in reply to Michael Drew says:

      There used to be a show called “Honey, We’re Killing the Kids”. It sought to shame parents who instilled/enabled unhealthy habits in their children by showing them what horrible monsters they’d one day turn out to be. It did “age progressions” based on the paths they were currently on and hypothetical ones based on healthier choices and the like. Some differences could be anticipated: poor diet and hygiene could lead to issues with weight, skin, hair, and teeth. Okay, that I can get. But they also made a point to have all the ‘dire’ projections showing the kids-as-adults in ugly clothes with bad haircuts and ridiculous glasses. And the ‘hopeful’ projections showed them all cleaned up and spiffy. As if poor eating habits also meant someone would have to buy ugly clothes and get a shitty hair do. It was manipulative and gross and disturbing on so many levels.

      I bring this up because I can’t figure out for the life of me why the illustration shows the poor gentleman with glasses and the wealthier gentleman without. Does the stress of poverty make one’s vision go?Report

  11. Avatar Francis says:

    A few miscellaneous thoughts:

    A. Anecdotally, I’m aware of a huge shift in legal technology and its effect on the legal business. There are only so many big clients with big legal budgets and they’re getting much smarter about reducing costs. Document review, for example, is now given to special-purpose law firms or even completely automated. Clients are bidding out virtually every major piece of work. Work that is not location-specific, like patent prosecution, is getting so cost-competitive that law firms are sending their patent lawyers to lower-cost jurisdictions.

    B. There’s nothing inherently unstable about an economy where a very few command a vast percentage of the wealth. That’s actually most of human history. Think of the feudal era — lots and lots of peasants and just a few knights. I would even argue that the cost of housing in Manhattan, London and Provence is reflective of this distribution. Morat20 is wrong, I think, to say that the wealthy are chasing new investments. They’re now reduced to chasing status.Report

    • Avatar LeeEsq in reply to Francis says:

      @francis, vast inequalities of wealth might not be inherently unstable and might define most of human economic history but that doesn’t mean its a good thing. People expect a certain standard of living and ever since the French Revolution, vast inequalities weren’t tolerated for very long.Report

    • Avatar Saul Degraw in reply to Francis says:

      @francis

      There seem to be plenty of opportunities for patent lawyers in NYC and the Bay Area….

      I did remember stories from the start of the law school crunch about big firms opening up e-discovery centers in places like West Virginia.Report

    • Avatar Kim in reply to Francis says:

      London real estate is a reserve currency. Please, do not use it in your examples, as it flatly disproves your hypothesisReport

  12. Avatar James K says:

    I don’t think it’s fair to say that there’s definitely no problem, merely that there might not be a problem. Also, it depends on what you mean by “problem”.

    If marginal productivity and compensation are misaligned then it means the labour market is broken. This is a serious problem, even leaving aside the distributional issues. The solution will require the government to directly intervene to fix whatever is broken with the labour market. If the problem is actually in a different market than that market needs to be fixed and tinkering with the labour market is counter-productive.

    If compensation is in fact tracking marginal labour productivity then the labour market is working just fine. That doesn’t mean that you have to like the growing income inequality the US is experiencing, but it is important to realise that (again, assuming this is actually what is happening) the labour market is doing what it is supposed to be doing – coordinating supply and demand for labour. The price mechanism is the nervous system of an economy and messing with it can have terrible consequences – your disaster of a health care system is the product of New Deal era wage controls.

    So what do you do about a market result you don’t like? I’m certainly not suggesting you just shrug and give up, but if the relevant markets are working properly then you want to effect a solution that doesn’t interrupt the market’s function. Interventions like increasing the progressivity of taxation, or increasing transfer payments would likely be the best response.Report

    • Avatar greginak in reply to James K says:

      “Interventions like increasing the progressivity of taxation, or increasing transfer payments would likely be the best response.”

      This puts you solidly in the liberal wing of the Democrat’s or even farther left in the constricted US spectrum. Welcome.Report

    • Avatar Chris in reply to James K says:

      At some point on the current curve, as technology increases and the labor market becomes super-saturated with demand, and people are working for nothing while capital accumulates, we will be able to point to the fact that the market is working like it’s supposed to and people will turn around and leave the Bastille, satisfied that there is no problem.Report

      • Avatar Chris in reply to Chris says:

        “Look, sure the company’s profits are higher than they’ve ever been — thanks in no small part to a dramatic reduction in labor costs — but it would be irrational for me to pay you a living wage when your wages already track your marginal productivity perfectly. Hell, we know that’s the case, because those are your wages. So you see, my hands are tied by the unbreakable strands of reason tied by the invisible hand of the market. So put down your pitchforks and get back to work, you lollygagging ingrates.

        Seriously, why can’t people just be happy they have a job, any job, in the first place?”Report

      • Avatar James K in reply to Chris says:

        @chris

        1) I pointed out that there are ways of addressing inequality without screwing up a functioning market – I made a point of offering substantive alternative to just saying “let them eat cake”.

        2) The relationship between income inequality and civil unrest is much weaker than you think it is.

        3) It is far from clear that technological change will lower labour productivity. The last 200 years suggests the reverse is true, though of course there is no guarantee that past returns are indicative of future results.Report

      • Avatar Chris in reply to Chris says:

        2) The relationship between income inequality and civil unrest is much weaker than you think it is.

        You watch what happens as wages continue to stagnate or, if the patterns some of ya’ll are talking about develop, drop, while debt continues to accumulate. Because the relationship between inequality and civil unrest may be complicated, but the relationship between debt and civil unrest is much more straightforward, and in this case, inequality and debt are closely related.

        3) It is far from clear that technological change will lower labour productivity. The last 200 years suggests the reverse is true, though of course there is no guarantee that past returns are indicative of future results.

        Who’s confusing different measures of productivity now? Hell, part of why Tod is asking this is because productivity, as a result of technology, has gone up dramatically. The claim ya’ll are making precisely what I’m riffing on, namely that the increase in productivity has not been accompanied by an increase in marginal productivity (and technology is quite obviously one reason for that; hell, some of ya’ll were invoking it in the other thread).Report

      • Avatar j r in reply to Chris says:

        @chris

        “Look, sure the company’s profits are higher than they’ve ever been — thanks in no small part to a dramatic reduction in labor costs — but it would be irrational for me to pay you a living wage when your wages already track your marginal productivity perfectly.

        Who is it exactly that is supposed to be saying this? Generally, employers don’t feel the need to justify why they pay wages in a certain range, because that would imply that there is some objectively meaningful wage that they ought to be paying. And there simply is not.

        When you go to the store to buy milk, do you ever pull the store manager aside and explain why you won’t be paying him $10/gallon for milk? My guess is no. And if that store ever tried to raise the price to $10/gallon, my guess is that you’d stop buying milk from them and go buy it somewhere else. Supply and demand operates as such, that it really doesn’t need to be explained and justified.

        If the supply and demand dynamics of the labor market for low-skilled workers is such that it leaves certain people below an objectively defined poverty threshold, that is a problem. I’m just not sure why it’s the employer’s responsibility. This is why we have a social safety net.Report

      • Avatar Chris in reply to Chris says:

        @j-r no one is actually saying that. I was suggesting that the idea that wages should track marginal productivity, strictly, even if a company becomes significantly more profitable and productive over all, isn’t going to be very comforting to those for whom wages are stagnant or falling.Report

      • Avatar j r in reply to Chris says:

        @chris

        OK, but so what? At some point I realized that women have a strong preference for men over 6ft tall. It was not very comforting.

        Instead of comforting people maybe it is time to treat them like adults and help them understand how the world works, so that they can put themselves in the best possible situation to benefit from it. And let’s help them benefit, but it is unclear how talking about a supposed living wage is going to do that.Report

      • Avatar Chris in reply to Chris says:

        I suppose my larger point would be that the world doesn’t have to work like that. There’s no inherent reason for a certain class to see dramatically increased profits while another class sees its share of those profits drop just as dramatically. There is no inherent reason why the system should be rigged in such a way that inequality grows.

        See my comment on Tod’s first thread about ownership of the means of production and, at the very least, strengthening labor.Report

      • Avatar Jaybird in reply to Chris says:

        Maybe if we put more effort into changing women, we could reach a point where height wasn’t an important piece of what they find attractive.

        I don’t see any downside to this whatsoever.Report

      • Avatar Chris in reply to Chris says:

        Yeah, the analogy to what women find attractive is silly.Report

      • Avatar LWA in reply to Chris says:

        @j-r
        “help them understand how the world works, so that they can put themselves in the best possible situation to benefit from it.”

        What does that even mean?
        How is that different than a shoulder shrugging indifference?

        In other word, it doesn’t sound like you are suggesting that we try to change wage stagnation, wealth inequality, or job instability. You merely want to somehow get people to accept it, and make the best of it.Report

      • Avatar Tod Kelly in reply to Chris says:

        @lwa ““help them understand how the world works, so that they can put themselves in the best possible situation to benefit from it.”

        What does that even mean?
        How is that different than a shoulder shrugging indifference?

        In other word, it doesn’t sound like you are suggesting that we try to change wage stagnation, wealth inequality, or job instability. You merely want to somehow get people to accept it, and make the best of it.”

        Do you really not see the difference between educating people about how to succeed within a system and ignoring them?

        I don’t know that I agree that what jr says here is the entire answer to inequality in a democratic society, but I can’t imagine how it doesn’t have to be at least part of any solution.Report

      • Avatar LWA in reply to Chris says:

        Tod-
        So are we going to educate people how to succeed with stagnating wages?
        How to succeed with risky short term unstable jobs?
        How to succeed when elections are bought and paid for by plutocrats?
        How to succeed when wars are lobbied for by the military contractors?
        How to succeed when innocent people are increasingly at risk of being imprisoned merely to enrich private prison corporations?

        There is more going on with inequality than simply “Bob can afford a boat, and Charlie can’t”;

        If I lack a meaningful input on our society’s path, if we are stripped of the ability to make long term meaningful careers, if the chaos of a casino job market makes it difficult to make and form family relationships, it is just glibness to talk about educating people to succeed within a system that itself is corrupt and unjust.Report

      • Avatar Tod Kelly in reply to Chris says:

        Well of course there’s more. I said so in my reply to you.

        But that doesn’t mean educating people is the same as ignoring them. If it were, we might just as well shut down every single social service agency right now and save ourselves some money.Report

      • Avatar j r in reply to Chris says:

        @lwa

        How do you expect me to take you seriously when you say ridiculous, easily-countered statements like this:

        How to succeed when innocent people are increasingly at risk of being imprisoned merely to enrich private prison corporations?

        People are being imprisoned “merely to enrich private prison corporations?” When you say things like this, I take it a sign that you are coming from a place of pure ideology.

        There are 62,000 inmates in private prisons in this country. That is 62,000 out of a total prison population of over 2 million. You think maybe there is something else behind our incarceration rate other than the evil corporations?Report

      • Avatar Citizen in reply to Chris says:

        @ Chris
        “There’s no inherent reason for a certain class to see dramatically increased profits while another class sees its share of those profits drop just as dramatically. There is no inherent reason why the system should be rigged in such a way that inequality grows. ”

        I completely agree with this and is a reason why I adopted the anti-rent seeking paradigm that has been proposed by James H.

        If I only had “three rules safe” for the economy anti-rentseeking would be one.Report

      • Avatar Chris in reply to Chris says:

        Citizen, what I like about you is that you and I see the problems in almost exactly the same way, in almost exactly the same places, and have solutions that look very similar right up until we start to fill in the details, at which point we end up being diametrically opposed. You want to get rid of the seeking, and I want to get rid of the rent itself ;).Report

      • Avatar zic in reply to Chris says:

        If it were, we might just as well shut down every single social service agency right now and save ourselves some money. (that’s @tod-kelly a few posts up).

        I volunteer at our local food pantry, where we distribute food to people who need food security once a month. At that time, we also keep an eye to other needs, and try and help desperate people find resources.

        So a few observations: first, most of our clients are not liberal. If anything, I’d say they trend conservative; they want small government. While waiting for help, they talk. They don’t call Obama Obama, the president, or things like that, they call him the tyrant, for instance. They’re hugely concerned about welfare fraud, in part because they probably feel they’re deserving, but perpetrating a little bit of welfare fraud, so the next guy over must be doing even more fraud. Most of them smoke tobacco; many smoke weed, many drink hard. They drive big, gas-guzzling cars and trucks because 1) they’re cheaper vehicles to purchase used, and 2) they want the status symbol of a big, powerful vehicle. They also probably don’t realize that the food pantry is a ‘social service’ agency, since our pantry receives some aid to purchase meat at a discount from the USDA, based on our survey of their income (which we’re required to at least ask, though not to verify, and the information isn’t shared with anyone else.) When they have some pressing need, they ask me to help them figure it out; though I’m just a volunteer without any social-service training, I’m the face they see; I sign them in, I help them fill out the one form they need to fill out once a year, and I’m the one who’s asking how things are going, if everyone in their families is okay. I spend several hours each month tracking down information for them, and this is unreimbursed time; nobody pays me to do this. I do it because they really do have legitimate needs; there is food insecurity. I do it, despite their politics (I don’t talk politics with them at all; I just smile at their conversations, and help them as I can). But it seems to me that they’re not voting their economic interests; they’re voting their ideology. And they’ve been repeated victims of rent seeking, hidden market information that should be transparent, and most particularly, information overload. They are, far as I can tell, hell bent on tearing down the very support structures they depend upon.

        I’ve some plans to begin changing that. Come Jan., most will have to fill out a new income disclosure form. I’m going to tell them why they have to do that: so that we can get money from the federal government to purchase the meat we give them.Report

      • Avatar j r in reply to Chris says:

        @chris

        Yeah, the analogy to what women find attractive is silly.</blockquote"

        Why do you say that?

        You want to get rid of the seeking, and I want to get rid of the rent itself ;).

        Do you really mean that? Are you actually in favor of getting rid of all economic rents?Report

      • Avatar Chris in reply to Chris says:

        j r, I say it’s silly because what’s doing the work is your theory about whether the attractiveness is inherent or, say, cultural.

        And yes.Report

      • Avatar LWA in reply to Chris says:

        @j-r
        Yes, people are in fact being imprisoned in order to enrich prison companies.
        First, there wasthe case in Pensylvania where adolescents were railroaded by corrupt judges and prosecutors in cahoots with a private prison company.
        Second, CCD, the largest private prison company in Ameirca has a contract with ICE to imprison 34,000 immigrants at all times.
        The idea that people are being swept up en masse is an exaggeration, I’ll grant. But I am sure the libertarians here will be able to document very well how private prisons have lobbied for draconian laws, designed expressly to increase the prison population.

        And once inside the system, the laws are designed- again by the private prisons- to extract the maximum amount of money from the already poor population.
        Inmates pay for their own testing, monitoring, phone calls, and so forth.

        Yes, I do exaggerate on occasion to make a point- that wealth inequality has caused the citizens to lose control of one of the most powerful and important functions of government.Report

      • Avatar Citizen in reply to Chris says:

        @ Chris
        I am not seeing any tangible downside to losing the rent. It took a minute to picture it though.Report

      • Avatar j r in reply to Chris says:

        @chris

        I really wish that I had a better idea of what you are getting at. Union wages are a form of economic rent. Do you want to get rid of those?

        I guess that under full-blown collective ownership of the means of production, if that is what you want, you wouldn’t need unions, because everything would be owned by the workers already. That’s in theory. It doesn’t really end up like that for real, though.Report

      • Avatar Chris in reply to Chris says:

        jr, yeah, strengthening unions is my suboptimal solution, as it is a solution that only makes sense in the capitalist system (unions are capitalist institutions, even if they are not institutions that work within certain ideas of how markets should work).Report

      • Avatar Citizen in reply to Chris says:

        The way I had it pictured, collective ownership didn’t have to be a specific requirement.Report

    • Avatar James Hanley in reply to James K says:

      Also, it depends on what you mean by “problem”.

      This may be a good place to point out that from a policy perspective, a “problem” means “something we can actually do something about through policy.” If something is not fixable through policy, it’s not a “problem” in that specialized sense.

      So one important question here is, “is this solvable through policy?” I imagine some people assume that answer is obviously “yes,” while certain others are inclined to shout out “no.” I lean toward, “maybe.”Report

      • Avatar Saul Degraw in reply to James Hanley says:

        @james-hanley

        How much debate is there about what can and cannot be solved by policy? It seems to me that a lot of partisan politics is fights about what can and cannot be solved by policy or which policies will actually fix a problem or not.Report

      • Even in those cases where the answer is yes, people tend to be too narrowly focused on that one exact problem that they perceive. Few ask questions like, “Is this the actual problem, or is it a symptom?” or “Is this a special case of something more general?” My personal peeve these days is that the federal government buys health care/insurance through a half-dozen or more programs: Medicare, Medicaid, TRICARE, the VA, employer group plans for direct employees, employer group plans for indirect employees (eg, Boeing’s defense division or most state’s unemployment insurance staff). How much cheaper would it be if they had one program, ran it as efficiently as possible, and what kind of money paid for a particular premium/fee was just a matter of accounting?Report

  13. Avatar Damon says:

    I think there’s quite a bit of things going on at the same time:

    1) The gov’t has, several times, “refined” the way they collect their stats for GPD, unemployment, CPI, etc. These changes make comparison to previous years difficult and I think the general public is less aware of these changes, so when people hear about some statistic and it doesn’t conform to what they experience, it’s confusing. Given my political bent, I conclude this is intentional.

    2) Most economics in the country are Keynesian. They are, therefore, unable or unwilling to look at issues through a different lens, say the Austrian way.

    3) I think that the growth of, and increasingly complex, regulation has only reinforced the trend of Corporatism in this country. Large corporations, and other large organizations are more able to endure regulation that stifles their smaller competitors and gives them an advantage. More money for them…less opportunity for the worker bees.

    4) The financial crisis caused a lot of havoc. Jobs that had once been fairly stable no longer were. Employers have all the leverage since the pool of unemployed is still quite large-see point 1. My own operating company has “rightsized” twice this year–and we’re the best performing company within the corporation I work for. The mortgage crisis was never really cleaned up. The Fed has been QE-ing our economy for half a decade and it’s not done what it was supposed to. Add the fact that we spent trillions on wars and foreign adventures and our debt has bloated.

    I could go on, but is it any wonder why things are in the s**t can?Report

    • Avatar morat20 in reply to Damon says:

      2) Most economics in the country are Keynesian. They are, therefore, unable or unwilling to look at issues through a different lens, say the Austrian way.
      That’s hilarious. I can only assume you have slept through the last two decades of economic policy.Report

      • Avatar Jaybird in reply to morat20 says:

        There’s also Uncle Milty’s “Monetarism”.

        A lot of people confuse Monetarism with Austrianism because neither is Keynesian.Report

      • Avatar Kim in reply to morat20 says:

        Zandi’s not Keynesian?
        Seriously, have there been any economic advisors recently who weren’t Keynesian?Report

      • Avatar Jaybird in reply to morat20 says:

        I imagine Morat’s referring to Greenspan.Report

      • Avatar morat20 in reply to morat20 says:

        I was indeed.

        Although I also would have noted, had I been more specific, the incredible popularity of Austrians among the chattering classes and politicians of late. Greenspan wasn’t exactly an outlier.

        (Watching their heads explode from the Great Recession was pretty fun. Pity about all the destruction. I’m not sure if the Austrians are generally behind the last five years of hilarious inflation doomsaying though. I hadn’t really paid attention to who was darkly warning of it, being too busy laughing).Report

      • Avatar Kolohe in reply to morat20 says:

        Greenspan may have been an Austrian when he was palling around with lil ol’ Ayn, but he certainly wasn’t one during his tenure as Fed Chairman.Report

      • Avatar Dave in reply to morat20 says:

        @morat20 @kolohe @jaybird

        If I recall, Greenspan was more of a fan of Rand’s work.

        Anyway, I’m very surprised that people believe that the Austrians would have anything nice to say about Greenspan because the Austrians categorically rejected the idea of the Greenspan put and blame his interest rate manipulations during 2003-2004 for opening up the credit floodgates. On this point, they were very right to criticize him.

        Greenspan was the worst of both worlds. He intervened in markets when he should have left things be and he left things be when he should have intervened. The “Rand-bot” free market ideologue characterization ignores the damage that his interventionist tendencies caused.Report

    • Avatar Troublesome Frog in reply to Damon says:

      On price indexes: Yes, it’s hard to tell from year to year whether your price index is actually estimating the change in cost of living. But over enough years, it should be pretty easy to see which one is better because any systematic errors in one direction will compound. So if you want to see who’s doing a better job, just do the long-run comparison. Another test is how well different methodologies agree with each other.

      Also, have you thought carefully about the possibility that the Austrian school hasn’t taken the world by storm because people who spend a lot of time studying economic data look at it and find it unconvincing? I mean, good ideas can be kept down for a generation or so, but after a century or so, something else might be going on. It’s easy to assume that people are just unable to see your perspective if you’ve laid out your best argument and they’re still unpersuaded, but that’s not the only explanation.Report

      • Avatar Damon in reply to Troublesome Frog says:

        Really? Of course people who study economic data don’t agree with the Austrians. That was covered in my comment “they all Keynesians”. Or monetarists.

        ..”but that’s not the only explanation.” True. It’s certainly possible that Austrian theory doesn’t conform to their world view and thus, isn’t considered “proper”. Remember, most Americans are statists.Report

      • Avatar Troublesome Frog in reply to Troublesome Frog says:

        Really? You’ve narrowed the failing of this one particular set of ideas down to, “They’re not listening,” and, “They’re statists?” That’s the lesson you’re drawing from this?

        If I were to say to you, “Most doctors reject the vaccine-autism link because they’re all brought up in the medical industrial complex and can’t see the truth,” do you nod your head, or does an alternate explanation pop into your mind? What would you say if I claimed that the fact that people who know more about medicine are more likely to reject my position is actually supportive of my position?Report

      • Avatar Damon in reply to Troublesome Frog says:

        Frog

        You make the assumption that most people have an open mind. That’s not my experience. Perhaps I should have said it that way. They are too wrapped up in their own biases to see it and disregard data that doesn’t support their own conclusions.

        Sure it’s possible that economists looked at Austrian theories and rejected them. But what’s more likely? Analysis and rejection or seeing the hand writing on the wall, i.e. why do the work when it’ll never get published, gives me no benefit, and isn’t part of the status quo? I’ll lay my bets on the “go along” vs “rocking the boat” anytime.Report

      • Avatar Troublesome Frog in reply to Troublesome Frog says:

        They are too wrapped up in their own biases to see it and disregard data that doesn’t support their own conclusions.

        I know that’s what you’re accusing a century’s worth of economists of. I’m just wondering if you’ve really seriously considered the alternative. I mean, what’s special about Austrian economics that makes it the one correct theory that doesn’t make inroads after a generation or two have died off? Personal bias is strong, but I don’t know of any other field of research where it has managed to be *that* strong. Good ideas tend to win out eventually. But “eventually” seems to be uniquely long in the case of this one set of ideas.

        Sure it’s possible that economists looked at Austrian theories and rejected them. But what’s more likely?

        On the one hand, you have a model of behavior in which academics with secret knowledge of breakthroughs in theory keep them quiet and on the other hand there’s the possibility that there just isn’t that much there. Given that we’re talking about a behavior that seems pretty rare in the real world (at least, rare for it to last for more than a generation, much less 100 years or so), I’m leaning toward the latter. I mean, was Milton Friedman a “go with the flow” guy when he rejected it? Are there examples of this type of long-term behavior from other academic disciplines, or is it unique to economics?

        To get more concrete, the economists I knew weren’t worried about impending hyperinflation in 2009 while the Austrians I heard from definitely seemed to be. In the absence of any other information, if you pinned me down and asked me to guess which group was letting their personal political priors or academic cultural taboos guide them, I know which way I’d lean.Report

      • Avatar Kim in reply to Troublesome Frog says:

        tf,
        Well, Mises actually tried to create a Cause/Effect theory. Keynes, not so much (He was more a “throw money at it” sort of guy). So, if you want to look for explanatory models as to what creates a recession/depression, far better to look at the Austrians. (and, yes, I’m getting this from someone who was working with Krugman at the time).Report

      • Avatar Troublesome Frog in reply to Troublesome Frog says:

        Well, Mises actually tried to create a Cause/Effect theory. Keynes, not so much (He was more a “throw money at it” sort of guy).

        You’ve got to be kidding me.Report

      • Avatar Kim in reply to Troublesome Frog says:

        tf,
        http://en.wikipedia.org/wiki/Austrian_business_cycle_theory
        Unlike the efficient market hypothesis, I don’t see super much to disagree with here, at least for our current stock market.
        (although I wonder if the periods of malinvestment disprove the EMH).Report

      • Avatar Troublesome Frog in reply to Troublesome Frog says:

        No, I’m not disputing that ABCT exists or that it’s a (somewhat) mechanistic theory. I’m wondering how much you could possibly have read of Keynes to actually write that he wasn’t working on cause and effect theories of recessions. Or more accurately, noting that there’s not a chance you’ve read his work on the topic, even though you no doubt worked personally with J.M. Keynes during one of your many interesting jobs.

        I mean, ignoring whether you agree with his models or not, you don’t usually write something with the words “General Theory” in the title if you’re not at least making an attempt at coming up with a general theory of how something works. He was wordy and hard to follow, but I’m sure that he wasn’t able to expand, “I dunno how it works, but we can probably throw money at it,” into that tome just by adjusting font sizes.Report

      • Avatar Kim in reply to Troublesome Frog says:

        tf,
        I talked with someone. I make no claims to be an economic expert. I’ll take your word that I should probably do more reading on the subject.Report

  14. Avatar Tod Kelly says:

    @james-k @james-hanley

    Probably not surprisinginly, the TTMLIS question of the post is making me ask TTMLIS questions in response to your responses. So if you will indulge me and allow me this follow up question: You say that economics is not predictive, and that most economists will tell you this. I confess I find this revelation startling, but also baffling.

    Why then, do we have economists? Or for that matter, economic theories? Or for that matter, economics as a discipline at all? This is a actually serious question. If you don’t use econ to create predictive maps that say, “If we do Y, X will occur, but if we don’t Z will occur,” I honestly can’t fathom it’s possible use.

    I think I have always assumed economics was like a larger, more inclusive, less-precise and fuzzier version of actuarial science: That is, that you can’t predict singular events (e.g.: which roofer will break their backs in 2015), but that you can use it as predictor for aggregate effects (e.g.: how many roofers in the state of California will break their back in 2015).

    What is it that I am missing here? And seriously, if economics and economists can’t make predictions, why bother with the discipline at all?Report

    • Avatar Glyph in reply to Tod Kelly says:

      I feel the same way about so-called “historians”. Always telling me what happened, never telling me what’s GONNA happen tomorrow. 😉Report

      • Avatar Tod Kelly in reply to Glyph says:

        I’m not sure it’s the same. I think the reason we have history is that it’s something people are drawn to; a huge chunk of how we’re wired to have a self-identity is based on the stories we tell ourselves about who and what we came from. If every college and university shut down their history department tomorrow, people will still buy books, go to movies, watch tv shows, and tell stories over beers about what happened in the past.

        Economics is something most people have zero interest in. As Hanley pointed out, the sats that are used don’t come from Apple or HBO, they come from the government, because no most people aren’t clamoring to pay Apple or HBO to tell them those statistics.

        If how the GDP, unemployment rate and inflation rate measures today means nothing about what will happen tomorrow, why bother to measure them?Report

      • Avatar Glyph in reply to Glyph says:

        I was mostly being silly and don’t have a dog in this fight, but I think the parallels remain. If I told you that the assassination of a single archduke with an alliterative name and hilarious mustache could plunge the world into violent war, you’d think me ridiculous, but here we are. Let’s put more bodyguards around all mustachioed, alliterative archdukes.

        I think it’s not so much that economics can’t ever be (somewhat) predictive – I think it’s maybe still too young to have gotten a total handle on all gazillion variables and their interactions? Were people perhaps meaning to make this weaker statement?Report

      • Avatar Glyph in reply to Glyph says:

        More specifically:

        If how the GDP, unemployment rate and inflation rate measures today means nothing about what will happen tomorrow, why bother to measure them?

        Because one day we may better understand their interactions and consequences, so we’d best start gathering the data now?Report

      • Avatar Tod Kelly in reply to Glyph says:

        @glyph I think to a certain extent, you and @mark-thompson are either dodging the question, or not dumbing things down enough for me. As best I can tell, the answer I’m hearing is:

        “Econ isn’t meant to be predictive, but we measure these things so that we can make big picture predictions.”

        Which is kind of a confusing answer to me.Report

      • Avatar Chris in reply to Glyph says:

        Given how much attention is given to forecasting in any econometrics course, the idea that economics isn’t meant to be predictive makes no sense. Economics is definitely meant to be predictive, though there may be areas, or scales, at which it isn’t, and there may be certain people in Chicago who think that’s a feature, not a bug.Report

      • Avatar Glyph in reply to Glyph says:

        @rtod – like I said, I was mostly just goofing, not trying to dodge; simply speculating that while economics can probably be predictive (in theory), and that we desperately want it to be predictive (in reality), there are so many variables (and the science so young), that any predictions actually made are still highly suspect. I don’t know if others meant this, but this would be how I understand it.

        But of course IANAE.

        How old would you say ‘economics’ is, as a discipline? A few hundred years at most, years in which the world and its population have changed extremely rapidly?

        How much did we understand about ‘medicine’, in the first few hundred years? It took us a LOOOONG time to figure out that lead probably wasn’t the best choice for plates and drinking vessels and fresh water pipes and paint and gas and such. And getting the lead out may be having all kinds of unforeseen effects.Report

      • Avatar Kim in reply to Glyph says:

        Glyph.
        depends on what you’re looking for.
        Microeconomics gets millions of transactions per day to look at.
        Macro’s a bit of a bitch.
        Stock Market Economics gets some pretty consistent trend analysis over the course of a couple of years, for a particular stock. One can find inflections and causality of price jumps for particular stocks. It’s decent money when the knives start falling, anyway.Report

      • Avatar Tod Kelly in reply to Glyph says:

        @glyph Though I’d probably quibble with your examples*, I get where you’re coming from. And more than anyone else’s, your answer makes sense to me.

        *I think if you’re comparing the study of econ over the past few hundred years as being similar to the study of medicine and other sciences prior to the enlightenment, that says really terrible things about the state of econ; lead manufacturers (and presumably, quite a few people in power) actually knew about the effects of lead very early on, they just didn’t do anything about it (which I actually learned reading Bill Bryson’s Short History of Nearly Everything).Report

      • Avatar Mark Thompson in reply to Glyph says:

        Like Glyph, I don’t have much of a dog in the specific fight that is the subject of the post. I will, however, say that the study of economics, in and of itself, tells us nothing – and purports to tell us nothing – about normative questions. In other words, whether the divergence between wages and average productivity (as opposed to marginal productivity) is a “problem” is entirely a normative question that economics does not purport to answer. Individual people with economics backgrounds may certainly claim that it is not a “problem” but they can only do so by referencing other normative values that others may weigh less than they. Indeed, there are surely plenty of economists that would view this divergence as a “problem” worthy of a solution (lest we forget, Paul Krugman is an economist, as was Milton Keynes, etc.).

        So with respect to your original post, while economics teaches us that, all other things being equal, wages will track marginal productivity rather than average productivity, it does not teach us that they should do so. As importantly, it does not teach us that all other things are equal – in fact, it recognizes that all other things are not in fact equal, and thus that it is possible for even marginal productivity to diverge from wages.

        Economics can then give us an understanding of why average and marginal productivity are diverging from each other and why one or both of them are diverging from wages. It can also give us a possible solution to that problem. It can also give us a range of possibilities for second order effects of that solution.

        It is for policymakers and voters to determine how to weigh the likelihood of a proposed policy solving the problem against the likelihood of the possible second order effects, not only in terms of how likely those effects are, but most importantly in terms of how important those effects are as a normative matter.

        But the key thing about economics is that it typically begins with the assumption of “all other things being equal” except perhaps for a small number of known variables. This means that its predictive value is very limited. It’s probably an overstatement to say that economists don’t do predictions; however, it’s not an overstatement to say that they don’t do predictions outside a limited range.

        In other words, they can say that “policy type X” will tend to have effects “Y and Z,” but they can’t do much in the way of predicting the full extent of those effects and the specific time frame of those effects. About the most they can say is that a policy will have certain general effects in a vaguely defined “short run” and certain other effects in the vaguely defined “long run.” One of the debates between economists of different ideological stripes is often between how much to value the “short run” and how much to value the “long run” as a normative matter.

        At this point, as I say in my comment above, we have a very limited amount of knowledge, but that is a far cry from saying that we have no knowledge. It is far from the point that physics or astronomy has reached, in which there is quite a bit that can be predicted (but also still quite a bit that cannot be predicted – otherwise we’d have no further need for those areas of study).

        In economics, there are some things that can be predicted. But we can’t predict that one policy change will have a specific, measurable effect outside of a particular range of activities. There are just too many damn unknown and unknowable variables – the so-called “calculation problem.”

        There are also a good number of things that all or virtually all economists agree upon – for instance, that price ceilings (e.g., rent control) will create significant and artificial supply shortages of those products as compared to the demand for those products. Or that allowing competition between suppliers in a given market will increase consumer surplus in that market: http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_eyDrhnya7vAPrX7

        Etc., etc.

        But none of that tells us whether the other effects of those policies are good, nor does it much tell us about what the unintended consequences (or benefits) of those policies might be. Hell, it doesn’t even tell us whether the primary objects of those policies is a normative good, although it is certainly safe to assume that most people would think that in most situations and all other things being equal, a greater supply of affordable housing is normatively good as is a greater consumer surplus (since everyone is a consumer).

        We can predict at least some vaguely defined unintended consequences as well – for instance, we can predict that price ceilings and floors will result in black markets or will result in people trying to find ways of otherwise evading those ceilings and floors – for instance, it should have been entirely predictable that the result of a generalized wage freeze would be that at least some workers would be paid under the table for wages above or below the ceiling (black market) and that firms would try to find other forms of compensation and benefits to compete with each other for labor. What would have perhaps been comparatively unpredictable would have been the full extent of those effects, particularly on the black market side.

        Similarly, it is almost impossible, based on what is currently known and knowable, to predict with any kind of specificity and reliability how a broad-based measure such as GDP or unemployment will look a year from now, much less a decade from now.* For the most part, we cannot generally forecast that a particular policy will cause a widespread recession within a short period of time – there are just too many other variables at play. We can say that the policy makes a recession somewhat more or less likely, and we can aggregate policies as a whole to say that they are likely to cause a recession – or even economic ruin – at some unknown point down the line.

        For instance, we can predict that economy-wide wage and price ceilings (floors are usually less problematic) will eventually cause economic ruin, but we can’t predict exactly when that will happen – the country, for instance, may experience a natural resources boom (I’m looking at you, Venezuela) that creates enough wealth to mitigate these effects for an extended period of time through black markets, subsidized imports of controlled goods, etc. Or commodities prices in the global market may remain unexpectedly stable for an extended period of time such that the price controls are relatively close to the “invisible hand” price. But eventually you’re going to wind up with a drastic undersupply of needed goods and workers, an oversupply of shit no one wants or needs and, without economic reforms, you’re going to need a pretty totalitarian government to keep things afloat.

        So it would be foolish to predict that, say, “within five years of instituting these price controls/regulations, the economy will collapse and GDP will contract by at least X%.” It would equally be foolish to predict that “within five years of instituting these tax cuts, the economy will boom and GDP will increase by at least X%.” Now there may or may not be some predictive value in aggregating such predictions, but no one person’s or ideological group’s formula is likely to be consistently reliable – there’s just too many variables for any formula or group of like-minded people to account for. And that’s before we even get to the issue of true “Black Swan” events.

        So we’re never going to have perfect knowledge in the field of economics, nor would we want to, frankly – such perfect knowledge would mean that people had become automotons whose needs and desires never changed or were at least entirely predictable. Indeed, in just about every instance where a true centrally planned economy was attempted (ie, an economy in which it was assumed that economists could at least approach perfect knowledge), there has been an attempt to turn people into exactly that through pretty totalitarian measures.

        But that hardly makes economics useless – that we can make vague but narrow predictions is certainly valuable to informing policy debates, and as time goes on and knowledge increases, those predictions can eventually become more specific and less narrow. As importantly, economics can give us an idea of how, if at all possible, to achieve specific policy goals without undermining other specific policy goals. Economists just shouldn’t be expected to define what those goals should be.

        *One thing I find interesting in this thread, by the way, is that it’s the more liberal commenters who have tended to take the harshest stand against economics even though it is liberal economists who are vastly more likely to view the economy as predictable and manageable.Report

      • Avatar Chris in reply to Glyph says:

        In other words, whether the divergence between wages and average productivity (as opposed to marginal productivity) is a “problem” is entirely a normative question that economics does not purport to answer.

        I took Tod’s confusion to be a result of the fact that, while he saw this as a normative problem, certain people better versed in economics than he were suggesting that it was, in fact, the way economics say things are supposed to work. See, e.g., the repeated insistence that if wages are tracking marginal productivity, things are hunky dory because that’s the way economics says it’s supposed to be. That is, they’re explicitly claiming that this is a descriptive issue, not a normative one.Report

      • Avatar Michael Drew in reply to Glyph says:

        Given how much attention is given to forecasting in any econometrics course, the idea that economics isn’t meant to be predictive makes no sense. Economics is definitely meant to be predictive, though there may be areas, or scales, at which it isn’t, and there may be certain people in Chicago who think that’s a feature, not a bug.

        I do have to agree with this to a degree. Economists seem pretty willing to say, “Doing that thing (economic intervention X) will/won’t have the economic effect you’re hoping it will; it’ll have something closer to this other effect.” It could be that those who say economics isn’t predictive don;t have that in mind as an example of a prediction, but it’s not clear to me why that would be a defensible prediction. Or maybe, despite how much many who believe they are educated about economics say this, and even when economists do, they understand themselves to be going beyond what economics itself holds, and are drawing policy inferences using non-economic reasoning that’s informed by economics. That would fair, but if it’s what’s going on it’s certainly going to look to the less-informed like economics is being used to do predictions. To the extent Tod is confused, then, in that way it seems a reasonable confusion, given how much statements of that form proliferate through our political (and that is a key point – political, and maybe not economic – ) discourse.Report

      • Avatar Mark Thompson in reply to Glyph says:

        @chris I didn’t read those comments as saying that “economics tells us that wages and average productivity are supposed to diverge” so much as they were saying that “economics doesn’t purport to tell us anything about wages and average productivity, only wages and marginal productivity, and in any event it also tells us that wages are stagnating in the US primarily because they are increasing elsewhere in the world.” They also claim that this is a good thing, but I don’t think they’re saying that it’s a good thing because economics tells us it’s normatively good. They’re saying that most of us would agree that increasing wages in the rest of the world are a good thing, and that economics tells us there’s a tradeoff between American (and really first world as a whole) wage increases and global wage increases.

        They seem to think that this is a positive tradeoff as a normative matter. But more importantly, they assume that others agree that this is a positive tradeoff. Regardless, it is not economics that tell us that this is a positive tradeoff, although many economists would certainly agree on a personal level that it’s a positive tradeoff – most economists are quite cosmopolitan in their outlook.

        The rough equivalent would be if we said that climatology theory tells us that global warming is the biggest problem we face in the world and no expense should be spared to stop it. But of course climatology does not, in and of itself, say that, even though many climatologists would certainly say that. Climatology itself simply asserts that certain things will occur if global warming is not brought under control, and what would be required from an emissions standpoint to bring it “under control.” It doesn’t tell us what measures would actually reduce emissions to the target levels, and thus it can’t tell us how to weigh the costs of those measures compared with the benefits of bringing global warming under control. It does, however, attempt to make us confront and recognize the costs of failing to bring it under control.

        I read the comments in the other thread as doing essentially the same thing – they’re saying that (1) economics tells us that wages are stagnating in the US because they’re increasing elsewhere; and (2) attempting to reverse wage stagnation in the US would necessarily result in smaller wage growth (or perhaps even wage stagnation) in the developing world. They’re saying that an attempt to reverse wage stagnation in the US needs to confront and acknowledge the potential effects of doing so on wages in the developing world if we are at all concerned with wages in the developing world as well.

        That said, I think Tod still poses a really important and strong question to those interlocutors in his post here, regardless of whether it is economics or personal belief that tells them that the overall effects of this are good. Specifically, he asks why these same interlocutors are such advocates of blowing the whole damn system up.

        I haven’t seen that question answered here. I suspect the answer from two of the three would be, with a good amount of justification, that they’re not advocates of blowing the system up, but instead are mostly advocates of preserving it with fairly modest changes. I don’t know what the answer of the third would be, though.Report

      • Avatar Chris in reply to Glyph says:

        Mark, that’s actually how I read most of them as well. I thought James K’s explanation of what he meant here said that as well. However, I can see why Tod might have thought they were saying the other thing (and I think Brandon might have been).Report

      • Avatar Michael Drew in reply to Glyph says:

        @mark-thompson

        In light of your (seemingly obvious) “it is not economics that tell us that this is a positive tradeoff” point, do you think that @greginak deserves the pushback he gets here?Report

      • Avatar Mark Thompson in reply to Glyph says:

        @michael-drew No, I do not.Report

    • Avatar Chris in reply to Tod Kelly says:

      In their defense, I don’t think either of the Jameses is saying that economics is not predictive. The EMH, in its weakest version, only says that prices reflect all publicly available information (with some to-be-specified time lag, of course), which suggests that, without some other information (say, insider information, unless you hold a stronger version of the EMH), you can’t predict future prices because the current ones already reflect the information you’d use to do the predicting. In other words, future prices aren’t correlated with existing ones in predictable ways because those prices change only in reponse to new, that is not currently available, information.

      The EMH itself, at least when filled in with certain other hypotheses, does make empirically testable predictions — predictions that don’t do very well, of course, but predictions none the less.Report

      • Avatar Chris in reply to Chris says:

        The implication, the one James is evoking at least, is that no one could have foreseen the hit that asset prices (real estate, stock market, whatever) took in 2008, because that hit was only in response to newly available information.

        Of course, there are other theories (some not entirely incompatible with the EMH) related to bubbles and such that can predict such hits quite well. I believe Dave and Morat are discussing such views above. That this is true suggests that the EMH doesn’t really say economists couldn’t have predicted ’08, though it’s a convenient excuse after the fact when folks who know a bit of economics think they’re talking to people who don’t (sort of like that hilarious website of Americans’ stories of native Chinese speakers in China thinking the Americans around them didn’t speak Chinese, and talking about them openly).Report

      • Avatar Kim in reply to Chris says:

        If Dr. Doom can predict 2008, it can’t be that hard.
        Hell, even the Keynesians weren’t the only people predicting a collapse there.

        It remains difficult to actually catch the falling knives, mind.Report

    • Avatar Jaybird in reply to Tod Kelly says:

      Dig this: someone responds to a snowstorm in Colorado by saying “thanks for the Global Warming, Obama!”

      The response is similar to one that one might give in defense of economics.Report

      • Avatar Chris in reply to Jaybird says:

        The propery climatological analogy for 2008 would be more like a sudden, global little ice age while climate models continue to project unbroken increases in global temperatures.Report

    • Avatar Patrick in reply to Tod Kelly says:

      @rtod

      Why then, do we have economists? Or for that matter, economic theories? Or for that matter, economics as a discipline at all? This is a actually serious question. If you don’t use econ to create predictive maps that say, “If we do Y, X will occur, but if we don’t Z will occur,” I honestly can’t fathom it’s possible use.

      There are broadly descriptive theories with predictive value, and there are predictive theories.

      Here’s a direct analogy to your question pointing at a harder science:

      Why, then, do we have geologists? Or for that matter, tectonic theories? Or for that matter, geoplanetary studies as a discipline at all? This is a actually serious question. If you don’t use geology to create predictive maps that say, “If conditions are Y, an earthquake will occur, but if conditions are Z, no earthquake will occur,” I honestly can’t fathom it’s possible use.

      In a lot of ways, the more complex the system is, the more probabilistic and the less binary you need to make your predictive theories. Economics is broadly similar to the folks who study earthquakes.

      You can’t say, “With these inputs, I can tell you with 100% certainty that there will be an earthquake on this day, this hour” (just like in economics, you can’t say, “I can tell you with 100% certainty that there will be a market implosion on this day, this hour”).

      But you can say, “With the information we have on hand, the probability of an earthquake in the next (timebox) is higher than we thought before we gathered this new bit of information”.

      That, in and of itself, is not as predicatively useful as “you have two days to structurally reinforce your home”, but it’s still useful.

      It’s regrettable, as James and James have pointed out, that the guys who wind up on the boob toob are usually selling something other than economics… but Dr. Oz doesn’t exactly sell medicine and he’s probably (equally regrettably) the most readily-recognizable medical practitioner out there right now.

      Personally, I think the problem that you’re illustrating with your graphs is related to what I see as the disjoin between the current distribution of money supply and the folks who use money. We have an awful lot of money in the hands of a very small number of people. This means that the vast majority of changes in value apply most to those small number of people.

      This is actually pretty easily reflected in a fairly stupid simple real-world analog that most anybody can understand: online massively multiplayer games, but writing that up won’t fit in a combox.Report

    • Avatar Mad Rocket Scientist in reply to Tod Kelly says:

      Oh just wait until I’m done with my current project & can finish my modeling post…

      Climate science has the same problem as economics. Fluid dynamics can make incredibly accurate predictions for well defined problems, but the larger the domain, and the more variables you allow to change, the more difficult the predictions become.

      It’s why I absolutely love climate science, but I want to kick certain scientists in the head.Report

      • Avatar Michael Drew in reply to Mad Rocket Scientist says:

        I was going to say something like, “Economics does predict, it just predicts for simplified models. About the real world? Not so much. Too many variables,” but I thought it might be too glib, or just wrong.

        The thing with models is that even the “time” is controlled. It’s a closed, defined system – there’s not really a later “time” when states are truly unknown. (Or is there?) So in a sense it’s not a prediction to predict outcomes when you run models. (Or is it?) I guess when you introduce an element of randomness and run thousands of trials you don’t know how any one of them is going to come out. The pattern of outcomes is what gives you a sense of what that model is telling you about your design of it. But that just shows why you can’t predict individual outcomes: even when you’re completely controlling the variables, just a bit of randomness makes any given run of the model impossible to predict. And reality is just one run of a model whose parameters you don’t control or know.Report

      • Avatar Patrick in reply to Mad Rocket Scientist says:

        Climate science has the same problem as economics.

        Broadly true, and largely for the same reasons. Complex adaptive systems are hugely dependent upon initial conditions when you try to model them.

        I’ll note, however, that climate science and economics having the same issue means different things to different people. Some folks use this as shorthand to say, “they are both dismal sciences”.

        There are reasonably powerful predictions you can make with economics… although their precision and accuracy aren’t necessarily as high as an individual would like, they’re still useful predictions. There will be another recession within N years within a 95% confidence interval. There will be another bubble within N years within a 90% confidence interval. The global average heat retention will go up 2 degrees +/- .N degrees within M years, within a 95% confidence interval.

        How those things are expressed in the details is largely unpredictable. We might have a recession, but how it will affect individual industries will depend. We can have a bubble, but knowing where it is is another matter entirely.

        We might be adding heat retention capabilities to the atmosphere, but how that will be expressed in terms of actual weather… we don’t know that for certain.Report

      • Avatar Patrick in reply to Mad Rocket Scientist says:

        Even when you’re completely controlling the variables, just a bit of randomness makes any given run of the model impossible to predict.

        Sure, but you usually don’t run a model once.

        Nowadays, you can run models for (nearly arbitrarily large) N runs, and aggregate the results of the N runs.

        So you set up a model, you have some set of initial conditions, you run the model. You tweak the initial conditions, you run it again. You tweak the initial conditions again, you run it again. And again. And again. Ten thousand, maybe a hundred thousand times or more.

        If you see a sufficient number of your runs come out within a reasonable delta of each other in terms of results, you have either really screwed up making your model or you’ve managed to come up with what looks like a pretty good model.

        Maybe 95% of your model runs produce outputs within a small variance. Either you’ve got a stupidly terrible model or you have a reasonably predictable one.

        That also doesn’t mean that if the outcome in reality ten years from now is in the 5% that your model was bunk, necessarily. Maybe one of the actual real initial conditions was one you didn’t include in your model (early runs of climate models, for example, didn’t account for carbon capture in oceans causing ocean acidification but cutting down on the greenhouse effect.)Report

      • Avatar Michael Drew in reply to Mad Rocket Scientist says:

        Sure, but you usually don’t run a model once.

        Right, I spoke to that, didn’t I? But when you’re asked to make a prediction about what will actually happen, you’re being asked to predict one run of a model you don’t even know, much less have designed.Report

      • Avatar Michael Drew in reply to Mad Rocket Scientist says:

        …But, so you’re saying, with a reasonable model you should be able to make a reasonable prediction. So are you basically saying economists could probably make predictions, they just more or less arbitrarily choose not to, or maybe because their confidence in their models is not great (which from what I read, it isn’t)? I.e. there’s no definitional reason that the field couldn’t do it; it’s just not good enough at modeling to do it?

        Also, do we have an academic/private sector split here? Do private economists working for banks tell people they don’t make predictions, even if they’re cautious, within rather wide ranges? Or are we (meaning those who say economics doesn’t predict) saying they’re not really economists if they do?Report

      • Avatar Kim in reply to Mad Rocket Scientist says:

        Michael Drew,
        Throw enough money at something, and magically the models get better.
        There’s a TON of private money in climatology.
        The economics of drought is very, very interesting.

        Economists make predictions all the freaking time.

        Oooh, here’s a public one:
        https://asunews.asu.edu/20140416-business-drought-grocery-prices-richardsReport

      • Maybe someone could help me out here? Because we’re having a whole lot of discussion about a particular economic collapse not being predicted — meaning this specific event.

        But my understanding of the failure of economics isn’t that they didn’t predict this specific event; but that it wasn’t in the range of predictions at all. It was so atypical, that the day they realized AIG was failing and what that would mean, they had no plans; it wasn’t within the range of economic predictions made. We’re not looking at a fortune teller, we’re looking at probabilities, and this was completely outside of that range.

        Since I’m the one who brought up the predictive failure, and the whole discussion of economics as predictor, I think it best be clear: I wasn’t expecting crystal ball, just some worst-case scenario modeling that never got done. I’d link Greenspan’s confession to Congress again if that helps, but we all know what he said; they never tried to imagine the unimaginable; they thought they’d developed a perpetual-motion risk hedge, and they really didn’t appreciate how few big players controlled so much of the economy and how intertwined those finances actually were; TBTF syndrome.Report

      • Avatar Patrick in reply to Mad Rocket Scientist says:

        @michael-drew

        So are you basically saying economists could probably make predictions, they just more or less arbitrarily choose not to, or maybe because their confidence in their models is not great

        I don’t think this is the case. I think plenty of economists make predictions on the layer of abstraction I’m talking about and they get printed in economics journals and folks argue about them at conferences and whatnot. James and/or James can probably confirm that.

        I don’t see this winding up on the news, but I see that disjoin between a lot of science fields and the popular media, so I don’t know this is a particular problem with economics.

        @zic

        But my understanding of the failure of economics isn’t that they didn’t predict this specific event; but that it wasn’t in the range of predictions at all.

        This is sort of missing my point.

        It was so atypical, that the day they realized AIG was failing and what that would mean, they had no plans; it wasn’t within the range of economic predictions made. We’re not looking at a fortune teller, we’re looking at probabilities, and this was completely outside of that range.

        I think this is part of the confusion… this is the sort of specific problem that wouldn’t be predictable with a general model.

        What happened with AIG is a specific instance. And indeed, you shouldn’t have needed an economist to predict that AIG would fail; their undercapitalization to cover their existing bets should have been recognizable to anybody who was looking at the numbers.Report

      • @patrick those numbers were not available, they were hidden in a dark market; a totally-free, unregulated market. Remember?Report

      • Avatar Patrick in reply to Mad Rocket Scientist says:

        Yes, but you don’t necessarily need full disclosure to see something is wrong.

        It’s like Madoff. Any reasonably savvy investor who hears that someone is returning 10% pretty much bang-on for nearly 20 years should know that something hinky is going on without even having to see the details. There’s enough information in that output to surmise that something is likely wrong.Report

      • Seriously, @patrick I’m threatening you with embedding Greenspan’s confession to Congress again. Don’t make me do that, please.

        It wasn’t just not knowing — obviously, there was plenty to suggest a bubble; the biggest probably being the disparity between the amount of housing an income could afford vs. actual real-estate prices. I’d been reporting as early as 2002; where I expected to see the 2001 recession (after 9/11) correct prices, and it didn’t. It was the presumption that the self-interest of financiers was aligned with sound capitalization and hedging. Greenspan presumed, that if left alone, bankers would not take risks that would sink the economy. Yet they did; and he admitted this was a failure of his imagination; something I’d translate to failing to include in potential economic models. Because the market was dark, the risk didn’t seem obvious. If they modeled this at all, they must have assumed the results would be small and contained, as in the S&L fiasco the sitting president was party to.Report

      • Avatar Patrick in reply to Mad Rocket Scientist says:

        I’m not sure if you’re arguing with a point I’m not making or if you’re trying to make a point that’s not relevant to what I’m saying, zic.

        Yes, Greenspan messed up. The Fed Chairman failed at his job, and it was not only a failure of imagination… because the signs were there that something was wrong, and he missed the signs… whereas someone without his biases should (and in many cases *did*) recognize that something was wrong.

        None of that has anything to do with what I’m saying, really.Report

      • There’s enough information in that output to surmise that something is likely wrong.

        So the information, which was easy to surmise, wasn’t used in any models at all?

        That’s exactly my point; economists are sloppy. Either that or they were blinded by the fact that the information they had was enough, right?

        But since the crucial information was hidden in a dark market, and since that market was dark, there was no way to suss it out, the models presumed (as Greenspan said) self interest would be the best defense. They never modeled lack of self interest.

        Sloppy.Report

      • Avatar Mad Rocket Scientist in reply to Mad Rocket Scientist says:

        @zic @patrick

        I can’t speak for economists, but in my profession, modeling for worst case scenarios is a pretty limited activity. You want to do it, but you do so in a very general sense, not a specific one.

        Going back to climate science, how many climate models do you think regularly factor in a significant meteor strike, or volcanic eruption? Sure it’s been done, but it is not part of the normal model run, and is most certainly not part of any of the common predictions. But we know meteors & volcanoes are out there, we know a significant strike/eruption can cause massive changes to the climate across the globe, and we can not track all the meteors out there (one could say they are operating in a free, dark environment).

        AIG was a meteor strike.Report

      • Avatar Patrick in reply to Mad Rocket Scientist says:

        That’s exactly my point; economists are sloppy. Either that or they were blinded by the fact that the information they had was enough, right?

        I don’t know that it’s fair to jump from “the Fed chairman was sloppy” to “economists are sloppy”, is it? Isn’t that rather inferring quite a bit?

        Amusingly, Greenspan’s doctoral dissertation indicates that he may actually have been better at his job earlier in his career, which may say all sorts of things about regulator/regulatee relationships or political confirmation biases or… well, you can draw your own conclusions about Alan.Report

      • Avatar James Hanley in reply to Mad Rocket Scientist says:

        my understanding of the failure of economics isn’t that they didn’t predict this specific event; but that it wasn’t in the range of predictions at all.

        Well, that’s just untrue, for two reasons. First, some economists were predicting it. The problem there is that we don’t know if their models are actually right or if they just got lucky–that is, so many economists are making so many predictions that for any event, some are going to be right. But in any particular case it could be that their models work well or they could just be the statistical anomalies.

        Second, contrary to what lots of people seem to think, the EMH in no way whatsoever excluded the prediction of a market crash. Its prediction is that nobody can predict the market–which means that of necessity it cannot predict that there will not be a market crash. So out of necessity, a crash of any size is within the predictions of the EMH, because the EMH isn’t trying to predict the economy, it’s predicting our inability to predict such things (at least in terms of specific stocks, which cumulatively add up to a big ol’ chunk of the economy).

        I think the term “efficient markets” misleads people as to what the model is actually saying–it’s not saying that stock markets are stable. That’s just not the theory, no matter how many journalists suggest it is.Report

      • @mad-rocket-scientist I could be wrong here, but it seems to me that @patrick is arguing the opposite; that the information was there; it wasn’t a meteor strike.

        So it was either something that could have been known (I was reporting on the housing bubble through much of the 2000’s, and I kept churning out these stories about how it should correct, and never did, and I had a lot of company in that type of reporting,) and wasn’t considered, or it was (more likely) to someone’s interest to ignore the growing unease; the signals that, like Madoff’s profits, something was out of whack.

        Either way, it’s obvious that economists can’t properly do their work when there are government-sanctioned dark markets. Elsewhere on this thread, I’ve mentioned the underground economy; I don’t know if I’d say the synthetic-derivative market was an underground economy, but it’s something I’d consider.

        We don’t necessarily need to predict a specific storm; we need to prepare for the storms models show we’ll, eventually, experience. Same with a meteor strike, volcano, and earth quake. And markets.Report

      • The problem there is that we don’t know if their models are actually right or if they just got lucky–that is, so many economists are making so many predictions that for any event, some are going to be right.

        Per my comment farther down, Wynne Godley has a formal macroeconomic model (had? he’s dead now but the model lives on); it got the ’92 pound crash, the dot-com implosion, and the ’07-08 financial crisis right; it lacks many of the things that academic economic models are mostly required to have. It assumes that banks (and bank-like things) are really, really important. Markets don’t always clear each period. The agents in it don’t solve long-term time-consistent optimization problems. It doesn’t solve for an equilibrium state. In short, it looks a lot more like the kinds of model I’m used to seeing in non-economics settings for studying the evolution of complex systems.Report

      • Avatar Mad Rocket Scientist in reply to Mad Rocket Scientist says:

        @zic

        So it was either something that could have been known … and wasn’t considered

        So are you concerned that no one saw AIG coming, or no one saw trouble coming? Because I think people saw trouble coming, just not exactly from where it would come. It’s like knowing that the recent snowfall is going to cause an avalanche, but not being able to predict which part of the mountainside is going to let go first.

        We don’t necessarily need to predict a specific storm; we need to prepare for the storms models show we’ll, eventually, experience. Same with a meteor strike, volcano, and earth quake. And markets.

        Predicting & preparing are two different things. I can model a meteor strike, and predict it’s results. Those results will inform preparations for a strike, but can not make those preparations happen. That is policy. I think people had been warning policy makers for a while that trouble was brewing.

        @james-k can correct me if I’m wrong, but I believe part of a healthy free market is transparency. In theory, government is supposed to enforce as much as can be tolerated (some things have to be kept close to the vest, obviously). The more obscure key information is, the more muddled price signals are. If AIG was playing around in this dark market, that is a failure of government more than a failure of market (although I believe there is an element of market failure to it).Report

      • Avatar Patrick in reply to Mad Rocket Scientist says:

        Argh, things are straining at the edges, but…

        It’s like knowing that the recent snowfall is going to cause an avalanche, but not being able to predict which part of the mountainside is going to let go first.

        This is more how I saw the economic collapse myself, not as a meteor strike or a volcano.

        We know that meteor strikes and volcanoes happen, but we don’t typically include the first in mid-range projections because we have no way of predicting the frequency. As to the second, I imagine that a 100 year projection should include some volcanic contributions, based upon historical norms, but I don’t know for certain that they do (if not, this would be one of those initial conditions errors).

        But the economy is much less like the climate in this particular sense because you don’t really get meteor strikes from outside the economy. Sometimes (the steam engine).

        Instead, cascade failures like AIG are like avalanches… you can tell snow is building up on the ridge, and you know that at some point some chunk of that ridge is going to cut loose and come down the hill along one slope, but you don’t know whether it will come down and bury the lodge or the ski lift or the parking lot.Report

      • Avatar Road Scholar in reply to Mad Rocket Scientist says:

        @zic (and others): They never modeled lack of self interest.

        Actually, they modeled it incorrectly. The basic assumption was that the interests of the people running the financial institutions necessarily aligned with the institutions themselves. As if the bankers literally were the banks and enjoyed the same rewards and suffered the same risks as the institutions they were directing.

        In reality, they were running corporations mostly* owned by other people and doing so playing with still other people’s money. I’ve said it before — Public Choice Theory is great stuff; proponents should spend some time applying it to corporations.

        * Recognising that most corporate executives hold stock and/or options in the companies they direct it’s still only a fraction of their personal wealth.Report

      • @road-scholar I knew, after I hit submit, that that was muddled; the ‘self interest,’ was a reference to Greenspan’s comments; and I pretty much agree with your gentle correction.

        Thank you.Report

      • Avatar Stillwater in reply to Mad Rocket Scientist says:

        but I believe part of a healthy free market is transparency.

        I just looked it up, MRS, and you’re wrong. A free market is defined in terms of gummint, to wit:

        A market economy based on supply and demand with little or no government control.

        I’ve gone thru the first ha’dozen or so of the Google supplied definitions, and transparency doesn’t come up once.

        For example, this from a guy or gal at Princeton:

        The theory holds that within an ideal free market, property rights are voluntarily exchanged at a price arranged solely by the mutual consent of sellers and buyers. By definition, buyers and sellers do not coerce each other, in the sense that they obtain each other’s property rights without the use of physical force, threat of physical force, or fraud, nor are they coerced by a third party (such as by government via transfer payments)….. A free market is not to be confused with a perfect market where individuals have perfect information and there is perfect competition.

        Just a sampling, and I’m with ya about transparency as a condition and all. But we seem to be in the minority.Report

      • Avatar Mad Rocket Scientist in reply to Mad Rocket Scientist says:

        @patrick

        What fun is an analogy if we can’t strain it until it screams? I would have opened with the avalanche analogy, but it didn’t come to me until later.

        @stillwater
        If I’m reading Dr. Hanley’s post on efficient market’s correctly, I’m confusing free & efficient (or perfect, as it may be). Thanks for looking that up.Report

      • Avatar Patrick in reply to Mad Rocket Scientist says:

        What fun is an analogy if we can’t strain it until it screams? I would have opened with the avalanche analogy, but it didn’t come to me until later.

        The funny bit about complex systems is that the system boundary is arbitrary, but most people don’t realize that and almost everybody fails to recognize what that means, including a lot of the folks who design complex systems.

        This is why you get IT folks saying, “according to all of our deliverable metrics, this project succeeded” while nobody’s using the system; because the system boundary was drawn where it didn’t include the user. This is why a civil engineer can build a bridge nobody uses and call it a success, or why an architect can build a building that has chronic maintenance problems and still be lauded as a visionary architect, or any one of a countless list of other examples.

        This is why folks often look at models that don’t incorporate meteor strike events after a meteor strike hits and say, “The model failed!” when they don’t actually understand that the model wasn’t built to cover meteor strikes in the first place (whether or not it is legitimate to do this depends upon many factors, not just whether or not the meteor strike is a common or uncommon occurrence).Report

      • Avatar Kim in reply to Mad Rocket Scientist says:

        zic,
        a lot of economists were predicting disaster because of the derivatives markets.
        Here’s a fun dark market for you:
        http://www.realclearmarkets.com/articles/2014/02/06/dark_gold_shedding_light_on_a_mystery_market_100885.html
        Stiglitz had a great article explaining why the derivatives market was so bad — essentially there was a TON of money in it.

        Dark markets aren’t the worst thing ever — so long as they’re functionally smaller than “the world economy”Report

      • Avatar Mad Rocket Scientist in reply to Mad Rocket Scientist says:

        @patrick

        Ah yup! 🙂Report

    • Avatar James Hanley in reply to Tod Kelly says:

      Tod,

      What are you trying to predict, and how much confidence do you need in the answer?

      If you want to know how people will respond to a particular change in price, economics can do a fairly good job of predicting–maybe not hitting the exact response with physics-level precision, but good enough to make intelligent policy choices. For example, it was some economists who estimated that raising cigarette taxes by X would have Y effect on teen smoking. They knew from evidence that teens would be more responsive to price increases than adults, so the price increases wouldn’t affect adult smoking much, but should significantly reduce teen smoking, thus reducing tobacco addiction, and thus adult smoking down the road. That was the basis for the policy of increasing tobacco taxes in the ’90s, and it’s worked quite well, with the results working out quite close to the predictions.

      Or we can look at the SO2 pollution market. Economists predicted it would reduce SO2 pollution more cheaply than command-and-control policies. They were right. But in a sense their predictions weren’t that great, because they were too conservative. The results were both faster and cheaper than even the economic models predicted. But the predictions worked in the right direction, and changed the nature of policy debates as a consequence. (That doesn’t mean pollution markets are the answer to all pollution, though.)

      Another example of good prediction is broken-windows policing, which was an economic theory, even though it had nothing to do with money (it had to do with human choices in response their environment, which is a big part of what economics is about). Lots of folks were skeptical, and I’ll make no attempt to hide the fact that when I first heard about it (before I ever studied economics, notably), I thought it was poppycock. Crime is caused by deep social problems, right? Well, probably some is, but that doesn’t mean all is, and it turns out that the more you stay on top of graffiti and vandalism, the less of it you have. It’s not the whole answer to crime, of course. The more recent claim that high crime is actually a response to aggressive law enforcement is also at least partly economic in its basics.

      But if you want to predict the macroeconomy? Do you have any idea how many more variables are involved in that, compared to predicting teens’ response to smoking, or businesses’ response to pollution markets? We’re jumping from specific policies to something that involves literally trillions of decisions made across the course of a year.

      In the mid 20th century there was a group of economists who thought the economic planning problem had been solved, at least in theory. Give experts all the economic data and they could determine what should be produced and at what price to have an efficient economy. Of course there were the technical problems that A) we couldn’t really gather all the data in a timely manner and, B) if we could we couldn’t analyze it in a timely manner, but the theory seemed well established, reducing it to just a mere technical problem. If they were right, then the economy was actually predictable.

      But Hayek demonstrated that the problem was not in fact theoretically solved. I won’t restate the argument here, but you can read my essay on it here at the OT from a couple of years ago. In brief, the economy isn’t perfectly plannable at all, so at the level of predicting what goods and services people demand, it’s not predictable.

      We aren’t completely helpless in macroeconomic prediction. We can predict that in general pumping more money into the economy will help it grow (assuming we don’t pump in so much we create hyperinflation), and that pulling money out will cause it to shrink. Except for ubermonetarists like Scott Sumner, most economists don’t think this prediction is absolutely true in all cases, and it’s debatable whether we can fine-tune it to know precisely how much money to pump into the economy, but even guys like Krugman and DeLong accept this as a generally accurate prediction. (Sumner thinks our problem all along has been not putting even much more money into the economy–it’s a controversial position, but lots of economists who aren’t persuaded are listening very seriously. I’m not sure if I agree, but then I also know factually I don’t even follow him completely, being weak on the macro side.)

      So it’s really a matter of what we’re trying to predict. The more narrow and specific a response you’re trying to predict, the more chance you have of an effective prediction. The bigger the issue, the more variables involved, and the more you’re dealing with the unknown of what people do, or will in the future, personally value, the harder it’s going to be.

      To bring this to down-to-earth examples, as a parent you probably predicted something like “I can get my kids to clean their room if I promise them cookies” (or whatever moved them). But only rarely can we predict any kid’s educational and career paths with great precision. The variables increase, the uncertainty about what future events will occur that pique/degrade their interest in something is the greater the farther off in the future we’re looking, and so on.

      I’m writing a post specifically about the efficient markets hypothesis, so I won’t address that here. But in general, to say either “economics is predictive” or “economics is not predictive” is to make an incomplete statement.

      But when economics is not predictive, it can still be explanatory. Sometimes the facts necessary to understand do not become clear until after the fact. And past events aren’t happening in real time anymore, so we have leisure to look at them more carefully, and more in-depth.Report

      • Or we can look at the SO2 pollution market. Economists predicted it would reduce SO2 pollution more cheaply than command-and-control policies. They were right. But in a sense their predictions weren’t that great, because they were too conservative. The results were both faster and cheaper than even the economic models predicted.

        The really interesting thing about it was that the “technology” that made SO2 reduction so cheap was low-sulfur western coal and railroads. The EPA economists thought that coal couldn’t be shipped more than a few hundred miles. Instead, the Wyoming surface mines in the Powder River Basin expanded enormously, the UP figured out how to ship cheaper, and… today, 40% of all the coal burned for power generation in the US comes out of six Wyoming counties, with the large majority burned very far from the mine. The Scherer generating station in Georgia burns 10-12 million tons of Wyoming coal each year. The same rail cars make the 2,100 mile trip east full, and west empty, over and over.Report

      • Avatar Stillwater in reply to James Hanley says:

        The same rail cars make the 2,100 mile trip east full, and west empty, over and over.

        Man, if someone could figure out how to fill those cars with West Virginy coal heading west they’d make a boatload.Report

      • Avatar James Hanley in reply to James Hanley says:

        Michael,

        Good point. It didn’t happen in the way any of the regulators, or as far as I understand, the economists proposing the market, expected. Which in itself is an indicator of the knowledge problem in regulation, and why it’s good to tap markets in cases that are amenable to it. It shows how limited the predictive power is–general outcomes could be predicted, or at least the direction of the trend, but not the specific decisions made.Report

    • Avatar James K in reply to Tod Kelly says:

      @rtod

      It’s not that ecoonmist can’t make any predictions, but they can’t do forecasts. I was being a little loose with my language up-thread, but let me try and explain the distinction.

      A forecast is an unconditional prediction of a future state of the world. When a meterologist says “there’s a 70% chance of rain in Boston tomorrow”, that’s a forecast.

      Prediction is a broader term. Forecasts are predictions, but there are kinds of predictions that are too conditional to be forecasts, these predictions typically take an “if-then” form. For example, you don’t have to be a meteorologist to realise that rainy days tend to be colder than sunny ones, so that if it rains in Boston tomorrow, it will be colder than if it doesn’t. Note that I’m not saying how likely it is that it will rain, or that it will be cold. I’m making a prediction, but it is conditional on knowing how likely it is to rain tomorrow. By being conditional, a prediction is easier to make but less useful.

      There are many predictions economists make, even in relation to efficient markets. For example, studies have been done on what happens to the value of a company if the CEO suddenly dies. But unless you know whether a CEO is about to suddenly die, that prediction is useless in terms of predicting whether the stock market is going up or down tomorrow.

      Economic forecasting is so poor because economies are so unfathomably complicated that making meaningful unconditional predictions about them is nearly impossible. There’s always some variable you overlooked that ruins your forecast. That’s not to say macroeconomic forecasts are useless, it’s just that they’re only a little better than nothing.

      Efficient markets are even worse because their behaviour reacts to forecasts made about them. In an efficient market, if people expect the price to rise tomorrow, the price will immediately rise until people on average no longer expect it to rise tomorrow. The markets actually destroy your forecasts of them.Report

    • Avatar Tod Kelly in reply to Tod Kelly says:

      @mark-thompson @patrick @james-hanley @james-k

      Thanks to all of you for taking the time for those replies. They were all extremely helpful. (And thanks to everyone else who pitched in as well.)Report

  15. Avatar Mad Rocket Scientist says:

    Question on the plots (& maybe this has been asked & answered above, I haven’t read everything yet)?

    I assume they are tracking compensation values that are objective (wages, benefits with actual cash value, etc.). Is there anything tracking the more subjective compensations, such as flexible hours/flex time, telecommuting. Or office benefits that do not track as readily, such as office pizza Fridays?

    Finally, from a policy standpoint, it seems to me one of the easiest ways to stop mucking with wages is to stop taxing them at both ends. This is part of why my health insurance is a work benefit, and that has not been working as well as hoped.Report

    • Avatar Troublesome Frog in reply to Mad Rocket Scientist says:

      I’m sympathetic to the idea that flex time and telecommuting have value, but I wonder how much of a wage cut the average office worker would be willing to take to enjoy Pizza Fridays.Report

      • Query: are there anchovies on this pizza, or not?

        RE: telecommuting. I do, and while I think it’s a net benefit to me (in gas and wardrobe and time saved), I do also see increased personal costs in electricity, coffee, and TP (these last two may be related).Report

      • Avatar Troublesome Frog in reply to Troublesome Frog says:

        I know what you mean. I have a bloody half-rack of servers running in my house these days. Fortunately, now that it’s getting out of hand, the company is covering that cost. And it’s winter, so given the extra heating, it may be a net win.

        Another side of it is cost savings for companies if they can actually close down offices. It’s hard to get *everybody* telecommuting in a certain region, but if you can downsize your office space needs, that’s a big win. My current company is entirely virtual at the moment, but I expect we’ll need a datacenter sooner or later.

        My last company was a big fan of outsourcing development and engineering while simultaneously taking the very strong position that having employees work from home was problematic due to accountability problems. I simply don’t know what to say about that.Report

      • Yeah, my company rented out a bunch of its floorspace.

        And it’s winter, so given the extra heating, it may be a net win.

        I only have a couple computers (and a stereo receiver, and hard drive, and maybe a couple other things) running in this small room at any given time, and it still heats up *fast*, so I am looking forward to the winter as well, so that spending nearly all day in the ‘warmest room in the house’ is no longer a drawback.

        I finally installed a ceiling fan in here recently, and I went for one that was far larger than would normally be recommended for such a small room. It looks like a Messerschmitt is bearing down on me.Report

      • Avatar Troublesome Frog in reply to Troublesome Frog says:

        I went with a whole house fan last spring and I’ve been thrilled with it. I live in a perfect area for it (low humidity and a good temperature crash as soon as the sun goes down) and it has almost eliminated my need for summer air conditioning. As long as the weather is good, I can click it on and open a window in the “server room” and pull cool air through it and exhaust it out through the attic. Huge win. I’m now a major house fan evangelist.Report

      • Avatar Mad Rocket Scientist in reply to Troublesome Frog says:

        @troublesome-frog

        That is kind of my point. I wonder if there is a disconnect between the subjective compensations & the perceived value to employer &/or employee?Report

  16. Avatar Saul Degraw says:

    @james-hanley @james-k

    Moving down thread to avoid too much stacking.

    I’ve been thinking about @zic ‘s comments and why liberals/progressives dislike the idea of the efficient market hypothesis and the idea that you don’t want to interfere with the market.

    I think people on the left are not inclined to agree with the idea that the status quo is good or natural because it is happening. Liberals look at the world as it is and wonder if it could be better. We are also willing to fight and change the status quo if we consider it unjust. This can usually be seen in the struggle for social and civil rights for minorities and outsiders.

    This probably continues into economic and other policy. Liberals are not inclined to take market-friendliness as a reason why 45 million people should be uninsured. Or that the United States economy might just be producing a lot of low-wage and low-benefit service jobs for the unforeseeable future.Report

    • Avatar Kim in reply to Saul Degraw says:

      This liberal simply says “level playing field FIRST” then leave it the fuck alone.
      Fortunately, that works well with universal healthcare, at least according to Detroit.Report

    • Avatar Chris in reply to Saul Degraw says:

      efficient market hypothesis and the idea that you don’t want to interfere with the market.

      Of course, you can only even begin to talk about the EMH in a well-regulated market. Markets that aren’t well regulated and sufficiently monitored turn out to be, on EMH terms, pretty damned inefficient. This is why you’ll never see anyone trying to apply the EMH to 90s-era former Eastern bloc markets that were chaotic and basically big cheats. There’d be no point in even trying.Report

    • Avatar Mad Rocket Scientist in reply to Saul Degraw says:

      Liberals are not inclined to take market-friendliness as a reason why 45 million people should be uninsured.

      The question in the US is not are 45 M people uninsured because the market is that way. The question is have we done anything to the market such that 45 M people can not get affordable insurance?

      The appealing fix is to have the government force things to be better. But that is not always the best approach, and we all know it. It is, however, what the bulk of the low information liberal voters want done (i.e. have the supposedly smart people fix it without straying too far from whatever ideological standard is in play).

      PS Yes BSDI.Report

      • Actually, the free market was much a part of the the systems we had prior to ACA. There were 50 sets of regulation, and much of that lightly regulated (or unregulated). So people who bought and paid for insurance would be kicked off when the got sick. People who got sick simply could not find affordable insurance at all. Insurance didn’t pay for things like having a baby in some places.

        The mush we had before ACA, where each state had it’s own set of issues and concerns, was very much a result of market forces. You can’t offer cheap insurance to healthy people if you actually pay for the health care of those people when they get sick. This was happening in many, many states. And the states where it wasn’t happening? Insurance was really expensive.Report

      • Avatar Mad Rocket Scientist in reply to Mad Rocket Scientist says:

        @zic

        But that is not the whole picture & you know it. The very act of linking insurance to employment affected the market for insurance. The abundance of regulations that were focused on outcomes more than opportunities also heavily distorts the markets (and the fact that there were/are 50+ sets of such regulations does as well).Report

      • I will freely admit that linking health insurance to employment is a sin of Democrats.

        But that whipping post’s got some ideological holes in it, too. First, it’s geriatric policy. Like the people who implemented it are old, and dying, and they’ve got Medicare, which was also part of the deal, no? And the only party I’ve witnessed trying to remedy the problem are Democratic policy makers; unless you can count Susan Collins not voting for filibustering PPACA as a Republican law maker trying to remedy the link; and that’s a stretch, since the whole plan put forward as essentially an employer-based + public market for those without employer-provided insurance; we never even discussed the single payer or public option liberals wanted.

        Personally, I’d have everybody purchase insurance independently, and let them, not their employer, decide what insurance needs they have. I’d like a plan tailored for people with migraine, for instance; my sweetie for stenosis care. These are chronic conditions, and help managing them well both increases our quality of life, decreases our potential unproductive time, and seriously decreases our other health-care costs, since both can trigger other health problems.

        I think you’d be hard pressed to find many liberals who think employer-provided insurance is ideal, though I’m sure there are some who might make that argument.

        But here’s why it won’t go away, too: relieving employers of that responsibility won’t result in employee wages increasing the amount the insurance costs; I’m guessing that a good share of the costs now put into insurance will simply go to corporate profit, not increased wages. It would be more of the top soaking something that trickles down (and trickles down less and less since approx. 1985). More redistribution to the top; more income inequality.

        This is what happens now, when you don’t purchase the employer’s insurance; particularly at the lower-wage jobs; the employer doesn’t pay you more, your just leaving that money on the table.Report

      • Avatar Saul Degraw in reply to Mad Rocket Scientist says:

        @mad-rocket-scientist

        I dissent from your analysis largely. Yes the purposeful wage freezes that FDR did in WWII did lead to employer-mandated health insurance. Most people on the left and the right believe this was a mistake and needs to be corrected. Single-payed universal healthcare has long been a goal of the left around the world. And social democrats like me simply can’t comprehend how the right and libertarians can’t stop quaking in fear and jumping up and down screaming “no no no no no” at single payer, universal healthcare. Universal healthcare has not ruined Capitalism in Canada or Western Europe nor did it cause the big European pharma companies like Bayer and Roche to go belly up and stop developing drugs.

        Reality is simply not on the marker anarchist side here. The insistence that the solution to the 45 million uninsured people must be market-friendly and done in a markets yay way is simply bollocks.

        There are plenty of good reasons to think why capitalism is good for some things but not all things and conditions of ethics and morality simply mean that capitalism should not come before things dealing with health and welfare and justice. In my mind it is as blind faith to Capitalism and the Profit Motive coming first is just as bad as blind faith to Socialism always being the first solution. There are times when the Free Market and Profit-motive give the best choices and solutions and there are times when socialism and government run solutions give the best choices and solutions.

        http://bostonreview.net/books-ideas/mike-konczal-profits-state-legitimacy-parrillo-goldstein-balko

        “Adam Smith was not the first, but he was certainly one of the most eloquent defenders of justice delivered according to the profit motive. In The Wealth of Nations, he wrote that since courts could charge fees for conducting a trial, each court would endeavor, “by superior dispatch and impartiality, to draw to itself as many causes as it could.” Competition meant a judge would try “to give, in his own court, the speediest and most effectual remedy which the law would admit, for every sort of injustice.” Left unsaid is what this system does to those who can’t afford to pay up.

        Our government is being remade in this mold—the mold of a business. The past thirty years have seen massive, outright privatization of government services. Meanwhile the logic of business, competition, and the profit motive has been introduced into what remains.

        But for those with a long enough historical memory, this is nothing new. Through the first half of our country’s history, public officials were paid according to the profit motive, and it was only through the failures of that system that a fragile accountability was put into place during the Progressive Era. One of the key sources of this accountability was the establishment of salaries for public officials who previously had been paid on commission.

        As this professionalized system is dismantled, once-antique notions are becoming relevant again. Consider merit pay schemes whereby teachers are now meant to compete with each other for bonuses. This mirrors the 1770 Maryland assembly’s argument that public officials “would not perform their duties with as much diligence when paid a fixed salary as when paid for each particular service.” And note that the criminal justice system now profits from forfeiture of property and court fees levied on offenders, recalling Thomas Brackett Reed, the House Republican leader who, in 1887, argued, “In order to bring your criminals against the United States laws to detection” you “need to have the officials stimulated by a similar self-interest to that which excites and supports and sustains the criminal.”Report

      • Avatar LWA in reply to Mad Rocket Scientist says:

        Of course the pre-ACA market was distorted and “unfree”- virtually no one involved wanted it to be “free”, and still don’t.
        The argument that there is a better solution than ACA is one thing everyone agrees on.

        The market oriented folk had about a century to propose a better version, and the best they came up with was RomneyCare.
        What separates the conservative health care proposals from the liberal ones isn’t the path to the goal; its the goal itself.

        Liberals see universal access as the primary purpose of a health care system; conservatives see cost efficiency as primary.Report

      • Avatar Mad Rocket Scientist in reply to Mad Rocket Scientist says:

        @zic

        Reading a lot into my comment there.

        I’m guessing that a good share of the costs now put into insurance will simply go to corporate profit, not increased wages.

        Short retort: Prove it.

        Under the current tax scheme, yes, there is little incentive to pay people more money, since companies get taxed on it. Doesn’t mean they won’t, since the first companies to boost wages will draw talent away from anyone who doesn’t. Cut that tax out & the incentives to hold onto the cash change again. If you want to make sure the process happens faster, build in even a small tax break for companies who don’t roll the savings into corporate profits.

        @saul-degraw

        You are reading a lot into my comment as well.

        Reality is simply not on the marker anarchist side here. The insistence that the solution to the 45 million uninsured people must be market-friendly and done in a markets yay way is simply bollocks.

        Did I say that? No, I said we should make sure we haven’t done something to cause the problem in the first place BEFORE we start looking to add more to the pile.

        I swear, do any of you people understand how to troubleshoot something?

        Step One: Roll things back to the base state, see if it works that way.

        Step Two: If it does, then add on features & constraints until you find the one that causes trouble.

        Step Three: Before deciding that the F/C that broke things is the problem, make sure it did it by itself. Rarely, especially in complex systems, is F/C x going to cause an adverse effect all by itself.

        E.g. Take an airliner crash. A 777 doesn’t just fall out of the sky because it lost an engine. It crashes because the engine loss caused a cascade failure that resulted in the pilots losing control. Identifying that cascade failure is critical. If the FAA/NTSB decided that our 777 crashed just because the engine died, I’d wonder what they were smoking, especially since a logical response to correct that problem would be to add a third engine, even though the plane was designed to fly on just one, and is capable of gliding to a landing if need be (and a place to land is close enough). Adding a third engine is not the answer, because the problem is not understood, and the fix is inadequate & unlikely to prevent future hull loses.

        So instead of asking why did the engine fail, we need to be asking why did an engine failure result in a fatal loss of control. This is the point I’m making. Things like employer provided insurance are one feature that caused trouble, but alone is not likely to have caused a systemic failure. The reason we have problem is because the low information voter doesn’t care about the failure path. Failure paths are often difficult to understand. Imagine if our 777 crashed because the failure path ran through the in-flight entertainment system to the aircraft Navigation system. The fastest way to prevent future crashes would be to disable the entertainment systems. I can guaran-damn-tee you that doing so would result in an uproar of the traveling public & the proliferation of conspiracy theories about The Real Reason Why (TM) (see contrails). The public doesn’t care that the change is necessary, even if temporary, it’s painful & they want their free movies & TV shows (that they paid for with their ticket).

        Now let’s look back at my comment:

        The question is have we done anything to the market such that 45 M people can not get affordable insurance?

        I don’t say that we did do something to the market, I’m saying it’s possible we did, and before we pile on more F/Cs, we would be wise to make sure the problem needs more F/Cs. Perhaps it does, or perhaps it needs fewer, or it needs some changed out & replaced with better ones (or better for the current state). Adding more is what the low information voter wants, because it’s easy to understand.

        As for why people resist single payer, I’m the wrong person to ask. I’m retired Navy, I enjoy full coverage for myself & my family. I’m a firm believer that it can be done adequately, especially if there is room left for a market to function.Report

      • Avatar Mad Rocket Scientist in reply to Mad Rocket Scientist says:

        Let me add, re: my troubleshooting comments – I know we can’t roll it back to the base state, not in reality. Doesn’t mean we can’t try to model the base state. This is why we have economists.Report

      • Doesn’t mean they won’t, since the first companies to boost wages will draw talent away from anyone who doesn’t. Cut that tax out & the incentives to hold onto the cash change again. If you want to make sure the process happens faster, build in even a small tax break for companies who don’t roll the savings into corporate profits.

        Just look at where we are now. Record corporate profits. Check. Boosting wages to hire talent? Only in a few industries; tech being one.

        I reported on the Maine wood products industry. It’s nearly gone, it’s been outsourced to China. One mill owner told me he knew it was doomed the trip he went to China and they were not only making wood stuff as well, but they were also making the equipment to make wood stuff as well (or better) then (not even American) first-world nations were.

        So don’t you think that, as pressure from software engineering firms in India mounts, those tech jobs will be outsourced, and those software engineers will have their insurance policies on the table? Talent is global, and wage competition is not one of the pressures on the talent pool at this time, I don’t believe. People will purchase insurance without the wage increase simply to have a job.

        It already happens. According to Table 9 of this 2010 Census Report, 15,258,000 people, by choice left that money on the table. Now a good chunk of that might be folks covered by a spouse’s or parent’s plan; but how many of those 15 million people had an increase in their wages to compensate for that money? I don’t know the answer to that question, but that’s where my proof would be. If the answer was even close to half, I’d gleefully admit I’m wrong.Report

      • Avatar Patrick in reply to Mad Rocket Scientist says:

        @zic

        So don’t you think that, as pressure from software engineering firms in India mounts, those tech jobs will be outsourced, and those software engineers will have their insurance policies on the table?

        I’ll answer this one:

        No.

        Because we’re actually seeing something of a reverse trend right now, where jobs are being nearsourced or brought back in-house. Because people are finding that outsourcing doesn’t necessarily result in the cost-savings that was projected. Software projects aren’t like making real goods.

        (And if oil prices weren’t so low, you might see the same thing in real product creation. However, bunker fuel is still cheap and shipping goods across the Pacific is still cheap enough that lots of goods still can be produced cheaper elsewhere.)Report

      • Avatar Mad Rocket Scientist in reply to Mad Rocket Scientist says:

        @zic

        Boosting wages to hire talent? Only in a few industries; tech being one.

        Perhaps because boosting wages costs more than just the wage increase. It also involves a corporate tax increase, a pretty significant one if I understand the system correctly.Report

    • Avatar zic in reply to Saul Degraw says:

      Interfering with the markets happens in lots of ways. It happens when regulation changes (see the potential for market mucking here, for instance. That’s a tremendous amount of regulatory uncertainty, and one with enormous potential to harm the health-insurance industry, lots of middle-income families, and one likely to result in driving premiums up for other people as millions of people drop their health insurance.

      It happens through lack of regulation. Synthetic derivatives of AAA-rated junk mortgages is an example of that; the WV water contamination is another example, the Gulf oil spill a 3rd.

      I’m not a big fan of Naomi Klein; but I think she was onto something with the notion of shock doctrine; she just had too much a conspiracy-theorist approach top-down world dominion approach to her ideas. I’m pretty certain most of the conspiring done is simply rent seeking run amok, not overt attempts to destabilize the economy. But the end result — the shocks from market and regulatory failures — are profound.Report

    • Avatar James K in reply to Saul Degraw says:

      @saul-degraw

      I would like to point out that the Efficient Market Hypothesis doesn’t really have much to say about whether you should intervene in markets, or how. The Efficient Market Hypothesis is about how well financial markets process information.Report

      • Avatar Stillwater in reply to James K says:

        It stipulates how well markets process information, no? In that sense it’s irrefutable, just like Chris said. It seems to me, anyway. And if that’s the case, then the concept can’t be refuted by empirical evidence, yes? It’s impervious. Just like all concepts.

        Or am I thinking about this wrong?Report

      • Avatar James K in reply to James K says:

        @stillwater

        Not at all, its a hypothesis (three hypotheses really), and there are well-established methods for testing it. These tests have been performed a lot because the data needed to do so is hyper-available.Report

  17. Avatar Barry says:

    Mad Rocket Scientist November 12, 2014 at 11:08 am
    “@Dave
    Pardon my ignorance, but this makes it seem as though there is a large population of investors who are not savvy, or who are very short on clues, and are thus chasing investments like fashion trends, rather than looking for smart opportunities.”

    Kahemann and Tversky.Report

  18. I am slowly (so very slowly) working my way through Godley and Lavoie’s Monetary Economics: An Integrated Approach to Credit, Money, Income, Production and Wealth. I don’t know if the models are better or worse overall than anyone else’s, but Godley had a better track record than most in terms of predicting financial disasters (the ’92 crash of the British pound, the dot-com implosion and the recent mess). Part of the attraction for me is that Godley builds a formal model around what I’ve long thought was intuitively true: in a modern economy, banks (and bank-like things) are incredibly important to the macroeconomy, and while they may be a necessary evil, they’re also very, very dangerous. (Corollary: we ought to regulate the snot out of them.) It may not answer Tod’s questions, but there are alternative views.Report

  19. Avatar zic says:

    So back in September (a lifetime ago, no?) there was a report on wage theft:

    Survey evidence suggests that wage theft is widespread and costs workers billions of dollars a year, a transfer from low-income employees to business owners that worsens income inequality, hurts workers and their families, and damages the sense of fairness and justice that a democracy needs to survive. A three-city study of workers in low-wage industries found that in any given week, two-thirds experienced at least one pay-related violation.1 The researchers estimated that the average loss per worker over the course of a year was $2,634, out of total earnings of $17,616. The total annual wage theft from front-line workers in low-wage industries in the three cities approached $3 billion. If these findings in New York, Chicago, and Los Angeles are generalizable to the rest of the U.S. low-wage workforce of 30 million, wage theft is costing workers more than $50 billion a year.

    Now if that estimate is anywhere near correct, that’s astonishing. Particularly when you consider that the types of theft folks get jiggered about (like bank robberies, car thefts, etc.) equaled approximately $14B for the same year (2012), according to the linked report, sourcing this to the FBI Uniform Crime Report.

    Which made me curious how the amount of wage theft compares to, say, the ACA subsidies for people who purchased on the exchanges this year. I found, according to the WH Obamacare page, that an average subsidy is about $5,000/year, and multiplied that by 9,000,000 people who enrolled, to get $45B. Now this is obviously an apples to oranges comparison, but it gives you some notion of just how efficient the markets are at soaking resources up.Report