Configurable Web Capture in Acrobat

Today I put in a feature request for a new feature for the next dot-release of Adobe Acrobat X. What I requested is a white-list/black-list (of URLs) capability for Web Capture.

You may already know about Acrobat's incredibly useful Control-Shift-O (Open URL) functionality, which does just what you think it should: It captures a web page as a PDF document. The built-in functionality is already plenty powerful. It walks all the links in a web page and captures all linked-to pages (and their linked-to pages, etc., however many levels deep you want), creating appropriate links and Bookmarks inside the finished PDF document. And you can specify "Stay on the same server" if you want, to be sure the web-capture session doesn't inadvertently pull in content from a partner's (or competitor's) site, say. Which is all pretty neat.

I ran into a situation the other day, though, where I wanted to capture all the web content from a site, but I didn't want to pull down any content from URLs containing /javadoc/. It would have been neat if Acrobat's Ctrl-Shft-O feature had an Advanced Configuration dialog in which I could have specified certain URLs which either MUST always (white list) or MUST NOT (black list) be followed in the course of a traversal. Neater still would be if you could supply white-listed or black-listed URLs as regular expressions. (Follow this pattern, don't follow that pattern.)

I don't hold out much hope that this kind of feature will make it into a dot release, but I figured I would submit it anyway. As they say, no squeaky, no greasy.

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In which Steven Landsburg utterly flips out

Steven Landsburg thinks he has come up with a proof that taxation of the "idle rich" is impossible:

[The extremely rich] Mr. Kendrick appears to do pretty much nothing but park and re-park his four cars all day long...Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick...

Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer. But Mr. Kendrick...consumes almost no goods or services whatsoever. He just pushes cars around all day. His consumption can’t go much lower.

Ah...but there’s still that $84 million in the bank. Surely we can tax that, no?...[but] what happens if the government takes Mr. Kendrick’s $84 million away? Answer: A bunch of zeros and ones get shifted around on bank computers. Mr. Kendrick goes right on pushing his cars around. And nothing else has changed.

Unless, of course, the government decides to spend some of that $84 million. Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else?...[T]he most likely answer is that when Mr. Kendrick withdraws $84 million from the bank to make his tax payment, the bank makes fewer loans, interest rates rise, and someone cancels a vacations, or postpones a car purchase, or abandons a half-built factory. Who bears the burden of the tax? The people who cancel their vacations and car purchases and factories, that’s who. Not Mr. Kendrick.

You can try to tax him, but any attempt to tax him turns into a tax-in-disguise on somebody else. And the reason for this is not ultimately to be found in the laws of economics; it’s to be found in the laws of arithmetic. You can’t drive a man’s consumption below zero.

OK, clever readers, your assignment is to reread the above blog post very carefully, and think of four reasons why Landburg's post is utter nonsense. That's right, four. I don't want to make it too easy for you.

All right, now here's the reasons I've come up with:

Reason 1: GDP does not equal consumption. This is a very, very basic Econ 101 fact. Like, the first thing you learn. GDP = Consumption + Investment + Govt. Purchases + Net Exports. Landsburg says: "For the government to consume more goods and services, somebody else must consume fewer." This is obviously false, since Government Purchases can rise if Investment or Net Exports goes down (or GDP goes up), with Consumption unchanged. There is no "conservation of consumption".

So, even before we go on to other, more sophisticated reasons why Landsburg is talking nonsense, we know from the most basic accounting identity in all of economics that he is, indeed, talking nonsense.

Reason 2: Revenue does not equal consumption. Landsburg writes: "It is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick." Wrong. Even if Landsburg's nonsensical idea about the "conservation of consumption" were right, this statement about revenue would be patently false, since a rise in Government Purchases accompanied by a fall in private Consumption would, if the deficit is unchanged, constitute a rise in revenue.

And yes, I know this is a fairly trivial and obvious reason that Landsburg is talking nonsense, but it bears pointing out before we move on to deeper and more interesting reasons.

Reason 3: Consumption today does not equal lifetime consumption. Maybe today Kendrick just reparks his cars, but tomorrow he might get tired of that, and might want to use some of his fortune to buy, say, a yacht. Confiscating his fortune takes away his ability to do this. Landsburg has decided that if Kendrick's current consumption is not reduced, it does not constitute "taxation" of Kendrick. By this logic, if I confiscate the entire contents of Steven Landsburg's bank account, it will not qualify as "robbery" if he did not plan on making an ATM withdrawal until tomorrow. 

Corollary to Reason 3: Local nonsatiation is an axiom of modern economics. This axiom states that, over his lifetime, Kendrick will consume his entire lifetime income (as Brad DeLong notes, this may include bequests to his descendants). Eventually he will do something with that $84 million, even if he just leaves it all to his kids untouched. So taking Kendrick's $84 million reduces the present value of Kendrick's lifetime consumption by...$84 million.

But wait, there's more.

Reason 4:  If Landsburg were right, aggregate savings could never change. Landsburg states that if Kendrick's fortune were withdrawn from his bank and spent on consumption goods, the bank would raise interest rates, and someone else's consumption would fall by an exactly countervailing amount. That is just wrong. Consider this: what if Kendrick himself decides to withdraw his $84 million and spend it on consumption goods (say, a few dozen more cars). Must consumption elsewhere in the economy fall by $84M? No? But in real terms, that is exactly the same as if the government confiscated Kendrick's $84M and bought the new cars for him - which, Landsburg insists, would reduce consumption elsewhere in the economy. 

Landsburg's statement is therefore equivalent to the mathematical statement that economy-wide consumption cannot be raised by a decrease in a single individual's savings. And since Income = Savings + Consumption, Landsburg is therefore saying that any decrease in one person's savings must, mathematically, be accompanied by either a decrease in economy-wide income (GDP) or an increase in someone else's savings. If the former is the case - if reducing my savings by $X reduces GDP by $X - then increasing my savings by $X must increase GDP by $X. And that would mean GDP is maximized if people consume zero (i.e. everyone dies). This is clearly not the case. So, by process of elimination, Landsburg must be asserting that if my savings go down by $X, someone else's must go up by precisely $X, and hence aggregate saving is constant over all time.

Needless to say, that is total nonsense.

There, that's four (though you may notice that Reasons 1, 3, and 4 basically address the same fallacy). I'll leave it to you readers to come up with more (and I'm fairly sure there are some more).

But I'll end by pointing out that Alex Tabarrok of Marginal Revolution gives the following uncritical endorsement of Landsburg's nonsense:

Steve is quite right. The key is this sentence, “For the government to consume more goods and services, somebody else must consume fewer.”

He even repeats one of Landsburg's patently nonsensical assertions (see Reason 1 above)! And although he does acknowledges Brad DeLong's critique (i.e. my Reason 3) in an addendum, he never takes back the nonsensical assertion that present consumption is conserved.

WHY? "Economics by accounting identity" is dubious at the best of times, but "economics by patently false accounting identity" is just inexcusable. You can get economic theory to say damn near anything you want. But by Adam Smith and all that is holy, you just cannot get it to say that consumption is constant by definition! You just...can't!!!


Update: Paul Krugman explains why Landsburg is misunderstanding the nature of taxation, a point that Brad DeLong also noted. That's five... 

Update 2: Niklas Blanchard points out that the government doesn't just consume, it invests! The existence of public goods and government investment mean that Landsburg's statement about "government consumption", in addition to being nonsense, is also a bit irrelevant to real public policy issues.

Update 3: Landsburg, responding to Krugman, doubles down: 

1) A tax imposes a burden.

2) If a tax has no effect on a man’s lifestyle, then it imposes no burden on him.

3) Therefore, if a tax has no effect on a man’s lifestyle, then it must impose a burden on someone else.

This demonstrates a failure to understand Local Nonsatiation. If Kendrick's $84M is confiscated, either A) his present consumption is reduced, B) his future consumption is reduced, or C) his ability to bequeath money to his heirs is reduced. Either way, his choice set is reduced, so by Local Nonsatiation his utility is reduced, i.e. a burden has been imposed upon him, QED.

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Idea of the day: National universities

I'm a little late in getting to it, but Matt Yglesias has a great post about America's human capital stagnation:

[T]hroughout our history, America has traditionally been the best educated country in the world. That goes all the way back to New England’s settlement by Bible-obsessed Puritans who through up schools everywhere so kids could learn to read the word of God. It continues through Justin Smith Morrill’s Land Grant Colleges Act, through an emphasis on being an attractive destination for high-skill workers, through to the GI Bill, and public school desegregation in the twenty years after 1955. But we’ve really slowed down. Our fancy colleges are getting more expensive rather than getting bigger or better. The downscale for-profit college sector is dynamic and innovative, but it’s basically a scam where barely anyone graduates. We’re not investing in high-quality preschool, we’re shutting the door on skilled migrants, and we’re not investing in effective job training programs. (Emphasis mine)

Yglesias is, of course, completely right. In fact, human capital stagnation seems to me a much likelier culprit for a "Great Stagnation" than the dubious hypothesis of a slowdown in technological innovation. People can't spend their whole life in school, so education really is "low-hanging fruit".

But that doesn't mean there isn't fruit left to be picked! Check out this graph of U.S. college enrollment rates:

There is some improvement here, but as you can see, just over a third of Americans of college age is actually enrolled in college. Furthermore, as Matt points out, a lot of that increase is in crappy for-profit colleges from which few people actually graduate, and which teach skills of dubious value. There is plenty of room to increase enrollment. In fact, since high school dropout rates have fallen to 10%, and since postgraduate education really isn't for everyone, increasing college enrollment (and completion!) might be our best bet for increasing our human capital.

Now note the phrase I highlighted in Matt's post above. State and private four-year universities - the real generators of top human capital - have been getting more expensive at an astronomical rate:

While college enrollment rates are up a little over 50% since 1980, the price of college is up by over 1000%.

What this points to is a supply shortage. As any Econ 101 student could (hopefully) tell you, when you have rapidly increasing price and slowly increasing quantity exchanged, it's indicative of a situation of a positive demand shock under inelastic supply:

More people want to go to college (probably because of the higher college wage premium), but the supply of high-quality colleges simply isn't that big. People are flocking to for-profit colleges because there just isn't room at public ones. And since there are good theoretical as well as empirical reasons to believe that for-profit universities just can't deliver the goods, the key fact of U.S. higher education would seem to be the stagnant number of spots at good universities. As Yglesias says, colleges are getting more expensive, but not bigger.

Which brings me to my idea of the day: A federally funded National University System.

When you have a supply shortage, one solution is to shift the supply curve to the right. Sometimes this is impossible. But in the case of U.S. public universities, it is very doable! Plenty of other countries have national university systems, and these national universities are often very high-quality. Why not us? Why don't we build a system of high-quality, federally funded national universities to co-exist alongside our already excellent state universities?

It's not as if we don't have the resources to do this. Land is not an issue. And academic jobs are in notoriously short supply, meaning that there is a huge pool of qualified PhD's ready to teach and do research. We bring the best and the brightest to get PhD's here, and then a bunch of them end up returning to India, China, or Korea...why not keep more of them here as professors?

As for Constitutional objections, note that we already have a number of federally funded universities.Ever hear of West Point?

Now, people who are opposed to this will say: Isn't this a risky undertaking? Suppose you build the national universities and you can't find enough high-quality students to fill them? In other words, what if demand for college enrollment has gone up in the U.S., but demand for high-quality college degrees hasn't, because we just don't have any more smart kids?

I highly doubt that this will prove be the case, since graduation rates have stayed constant or increased as enrollment has gone up. But even if we run out of smart kids, we have an easy backup plan to fill the national universities: overseas students. The world is a vast and infinite pool of smart kids waiting to be tapped. Now it's true that if we have to go shopping for smart kids overseas, the National University System won't do as much to reduce nationwide tuition costs (because that'll push up demand to match the increase in supply). But at least we'd wind up with a ton of imported human capital (assuming we let the overseas undergrads immigrate after graduating)!

And the spillover benefits from more top-quality research universities are potentially enormous. The U.S. depends on innovation and research for its prosperity, and yet federal spending on research and development has fallen by two-thirds since 1960, leaving private companies to pick up the slack. There are plenty of research activities that universities do that private firms can't, especially basic research. If the U.S. is to remain the world's technological leader, a National University System would seem to be a good move.

To sum up: a National University System would boost human capital, would boost research and development, and would probably reduce tuition costs. The U.S. has the world's best universities, and we should capitalize on this advantage. Until a rigorous cost-benefit analysis is performed, of course, I can't say with certainty that the benefits would justify the expense of building the universities. But it is an idea worth thinking about, and I don't really see anyone suggesting it. So here, I've suggested it.


Update: Niklas Blanchard at Modeled Behavior basically agrees. But there is one point of mine that I think he doesn't quite get. He asks: "But why would there be a supply shortage at such high tuition rates?" His answer is that universities require such huge initial investments, and take so long to pay off, that building them is not feasible for the private sector. I think that although this is true, the main reason for the supply shortage is that schools don't "pay off" in the traditional sense, ever. Colleges just seem to only work well as nonprofits. And the only people who are willing to invest huge amounts of money in nonprofits are the government and rich private individuals (e.g. Leland Stanford). We have a supply shortage because governments make the decision whether or not to build new public-school campuses (and recently they have not done so), while colleges themselves can only respond to skyrocketing demand by raising price.

Update 2: Matt Yglesias weighs in:

[T]he shortage isn’t so much of “universities” as it is of prestige. You could hire some people with PhDs and throw a few classrooms together pretty easily, but it would be extremely difficult to replicate the decades of history associated with America’s selective colleges and universities.

This is the old "signalling" model of education, which holds that college doesn't really give you useful skills, it only serves to prove to potential employers that you are smart and/or hardworking. In this model, a school's prestige is valuable because it sends a better signal.  I won't rehash the signalling debate here. But I would like to ask Matt: If you think that college is all about prestige and not about human capital, why did you equate human capital with years of schooling in the first place? Given that 95% of the populace graduates from high school, you pretty much have to think either that A) college gives you human capital, or that B) human capital shouldn't be measured in years of schooling. Pick one!

Update 3: Niklas Blanchard responds, and adds some interesting thoughts about why rich private individuals don't start universities anymore. My thoughts are: 

1) Even in Leland Stanford's day this was extremely rare. Stanford University is actually one of the youngest of America's elite schools, and probably only came into being because there were no elite schools in California in the late 1800s; in fact, Leland Sr. initially contemplated making Stanford an arm of Harvard! 

2) Although I think Niklas is right about the globalization of charity, it seems to me that private universities have never been that huge a factor in terms of numbers in the U.S. Schools like Harvard and Stanford grab headlines, but have small fractions of the enrollment levels of Berkeley or the University of Michigan. 

3) Niklas doesn't mention Baumol's Cost Disease by name (though he uses Baumol's favorite example of classical music!), but I think that's what he's getting at. Starting a top university is just a more expensive undertaking than it used to be...and it was always insanely expensive. But also keep in mind that large amounts of the funding for top public universities comes from charity (private alum donations).


4) Remember that universities don't just create human capital, they do research too! And research is as pure of a public good as exists anywhere. So government subsidies for research institutions are likely to get a lot of bang for their buck.

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Calm down, Will Wilkinson! Joe Stiglitz is not the problem.

 

Will Wilkinson is normally one of the calm voices of reason in the political-econ blogosphere. But when liberals complain about inequality, it just drives him up the wall. In response to Joseph Stiglitz' Vanity Fair article decrying inequality, Wilkinson wrote the following:

[The] explosion in public-private "partnerships", and the inevitable political corruption and economic distortion they produce, is not at bottom due to a plot of the top 1%. It is due in no small part to the success of progressive ideologues like Mr Stiglitz in arguing for ever greater government control over everything.

A political system that enshrines governments' power to grant monopolies and other barriers to economic competition, whether they be direct subsidies to government's chosen champion firms, or less direct subsidies by way of taxes, tariffs, and regulations that disproportionately harm less-favoured firms, inevitably attracts money to politics. Under close inspection, the progressive master narrative...is an argument against money in politics that argues for precisely the sort of government power that draws money to politics.

The progressive master narrative runs on the fuel of class interest, but it makes an arbitrary exception for members of the progressive technocratic elite, like Mr Stiglitz...These men and women, the technocratic elite...may be trusted with almost unlimited power to manage the nation's economy...Sure, these godlike king-making powers make professional courtiers of the money men, but not to worry. The public-minded technocrat pledges in his heart of hearts to express only the will of the people...

Inequality is a red herring that draws our attention away from the real, hard task that faces truly public-spirited reformers: how to fix the corrupt and corrupting interface between America's economic and political institutions. We may hope for, but should not expect, useful, impartial advice in this regard from powerful academics holding golden key-cards to the revolving door. And we may hope for, but should not expect, useful advice in this regard from progressives dizzy from chasing their tails. So, instead, we get righteous rants about the injustice and danger of inequality.

You know, I share many of Will's concerns. Collusion between government and the private sector has always been the biggest source of corruption and of undeserved gains. It is arguably the main problem with our financial system today.

But it just seems a bit nuts to blame progressives for this problem!

Consider this assertion: "corruption...is due in no small part to the success of progressive ideologues...in arguing for ever greater government control over everything." Seriously?? First of all, has government control over the U.S. economy increased in recent decades? Any reasonable person would say "No." Regulation was slashed under Reagan, slashed under Clinton, and slashed under Bush. "Privatization" has continued apace, to the point where even our prisons and our military are now partially farmed out to contractors. Total government employment, as a percentage of total employment, has been flat since 1976 at a little less than 10%, and the federal slice has fallen substantially.

And during this time, conservatives, not progressives, have been in the driver's seat. Even Democratic presidents have had to kowtow - remember Clinton's declaration that "the era of big government is over"?

Equally mistaken is the notion that public-private partnerships - the collusion that Wilkinson and I both decry - are a result of socialist meddling. It is Republicans who pushed through the bulk of the aforementioned "privatizations" - outsourcing of government functions to well-connected firms, often via no-bid contracts. Does Will think that Blackwater or Halliburton got where they are today by cozying up to progressive politicians or technocrats? And on the lobbying side, it was Grover Norquist and Tom DeLay who led the K Street Project, an attempt to institutionalize the revolving door between private-sector lobbyists and the Republican party.

Conservative support for collusion is especially the case in finance. Read Simon Johnson's book 13 Bankers, and you will hear him point out again and again that it was Republican politicians who were most receptive to lobbying efforts by big banks. Sure, Democratic administrations were (and are) complicit in the "revolving door" between the government and Wall Street, but this has occurred over the loud objections of progressives, while conservatives have typically turned a blind eye.

All this leads me to ask: Are Will and I living in the same country? This idea that progressive success has led to public-private collusion is very clearly a false narrative.

It seems to me that Will is just really, really, really pissed off by the attitude and priorities of people like Joe Stiglitz, to the point where he blames these intellectual technocrats for everything that is wrong with our political economy. The "progressive master narrative" - that the masses need technocrats to protect them from plutocrats - strikes people like Will as horrifically arrogant, elitist, and even autocratic. I get that. But if Will and like-minded libertarians would just calm the heck down for a minute, they'd see that this progressive master narrative has been getting its butt handed to it all over the world for the past thirty years. Repellent as the progressive narrative might or might not be, it is the conservative master narrative - that government ought to be drowned in a bathtub, that businessmen always make the right decisions because they are businessmen, that there are no such things as public goods - whose excesses have actually been put into practice.

See, I have my own master narrative. It goes something like this: In a well-functioning economy, the government and the private sector complement rather than cannibalize each other. No country's private sector will ever get rich without the infrastructure, schools, research, legal system, police, army, etc. that only the government can and will provide in sufficient quantity. Private businesses should usually not try to take over these functions, just as the government should usually not attempt to build factories, dictate bank lending, or refine petroleum. To maintain this balance, one thing we need is a strong free-market ideology that prevents the government from overstepping its bounds. 

But we also need high-quality technocrats in the government - technocrats who are dedicated enough or well-paid enough to resist the efforts of rational, self-interested, profit-seeking businessmen to use the government as a cash cow. If you demonize technocrats, all you'll succeed in doing is in making the technocrat profession a disreputable one. And all that will get you is...low-quality, easily corruptible technocrats! And if you try to respond to the existence of low-quality, easily corruptible technocrats by saying "Aw heck, Nozick was right, let's just drown the whole government in the bathtub," you'll just end up impoverishing your country, and then eventually you'll end up with kleptocrats rather than technocrats, and just watch what happens to your liberty under the kleptocrats.

So to people like Will Wilkinson with strong libertarian instincts, I say: Calm down. Put aside your gut reactions and take a cold serious look at the dangers threatening America's political economy. The danger of Marxism is long past. The danger of becoming a failed state is real and big and increasingly immediate. Yes, Joe Stiglitz is a big-forehead limousine liberal who thinks he knows what's best for the common people. No, Joe Stiglitz is not what ails this country.

(Side note: At the beginning of his post, Will links to a post by Scott Winship attempting to refute all of Stiglitz' claims about inequality. I am pretty unimpressed with this post. It consists of A) a headline claim that is swiftly retracted, B) a claim that increasing health care costs represent real wage increases, C) some opinion statements saying that Stiglitz' numbers just aren't that big of a deal, and D) a whole lot of taunting and calling Stiglitz a commie. If this is the best his detractors can do, I score this round for Stiglitz, despite the fact that I am not nearly so worried about inequality.)

Update: See comments for an explanation of why I'm not hugely worried about inequality. Short answer: It doesn't seem to be impacting people's quality-of-life as much as things like unemployment, financial insecurity, and stagnating income.

Update 2: The Economist's Matt Steinglass takes his co-blogger Wilkinson to task, making basically all of my points and a whole lot more, in this epic rebuttal.

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De divinationibus orbium oeconomiae

Except for showing off my knowledge of Latin, I have nothing to add to the following four items.

Rochelle Edge and Refet Gurkaynak on the failure of Dynamic Stochastic General Equilibrium models to help us predict the economy:

A good forecast should have a zero intercept and unit slope as well as a high R-squared. Table 1 shows the efficiency tests for DSGE model forecasts of inflation at different maturities and demonstrates clearly that the forecasts are very poor. R-squareds at all horizons are essentially zero, implying no forecasting ability.

Larry Summers on the future prospects of these Dynamic Stochastic General Equilibrium models:

Summers says Ptolomy model outperformed Copernicun model for 50 years after discovered. Same for IS-LM vs. DSGE... 

Robert Waldmann responds:

Is it true that Ptolomaic models gave better predictions than Copernican models until 50 years after the publication of "De revolutionibus orbium coelestium" in 1543 ?

I have recently noticed that this claim is sometimes made by economists. The appeal is simple. The fact that decades of effort by macroeconomists have not yielded models which give better predictions than an IS(with accelerator) LM adaptive expectations augmented Phillips curve model is frustrating. If, indeed, the same was true of the Copernican revolution, we can believe that we have made great progress...

A serious problem with the claim of fact is that the Copernican model was not improved in the 50 years which followed 1543. In fact, it wasn't improved at all. Rather it was replaced by Kepler's model (which yields excellent predictions)...

I am actually interested in whether non economists (other than Van Jacobson) make the claim that Ptolomaic predictions were better than Copernican predictions for 50 years. I suspect not. The belief seems to follow from the conviction that we have achieved a scientific revolution combined with the fact that our theories have had no empirical success.

And finally, Brad DeLong on the state of graduate economics education:

Rather, the educational problems [in economics] appear to be concentrated at the graduate level...we appear to have produced a professoriate--trained in graduate school--that appears remarkably ill-equipped to survive in the wild...

I suppose that I am still astonished at the failure of the financial crisis and the Great Recession to bring about a sea-change in the teaching of graduate macro. I expected people to say: we need to train our stunts to know--we need to learn--what Reinhart and Rogoff know. There is no point in turning out students who know the models of Prescott who do not know the models of Say, Mill, Bagehot, Wicksell, Fisher, Hicks, Metzler, Friedman, Tobin--Keynes.

In my introductory graduate macro class I learned "Real Business Cycle" models and Ricardian Equivalence, but nothing with money or demand shocks. In my macro field class I learned New Keynesian models. Having been a physics major in undergrad (and thus never having taken an econ class before grad school), I had to learn IS-LM by reading Wikipedia.

Thus marches onward the progress of science...

Update: Krugman and Thoma weigh in.

Update 2: More from Waldmann on Ptolemaic vs. Copernican models. It turns out that Ptolemaic models in their original, unmodified form were very useful for forecasting planetary motion, even over 1000 years after Ptolemy. Never knew that! Waldmann presents this as "Score one for Ptolemy over DSGE", and I sort of agree, though I don't think the comparison is 100% apt. We don't have the telescopes to see the economy the way we see the Sun and planets, and humans adapt to policy changes, so economic models will likely never have the forecasting performance that astronomical models do. But one would hope that someday we'd get an R-squared bigger than zero. And in the meantime, one would think we'd be a little bit more humble about our (lack of) explanatory power regarding the macroeconomy.

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Raghuram Rajan's wrongness rankles

Raghuram Rajan is at it again, taxing my powers of alliteration. His latest column in Project Syndicate contains what seems to be to be an even denser thicket of mistaken assumptions and does-not-follow conclusions than his assessment of why economists didn't predict the financial crisis.

Rajan has two theses: 1) that democratic governments are not good at planning for the long term, and 2) that the current crisis has caused Americans to lose our faith in government.

The first of these is not wrong, per se. Rajan writes:

Democratic governments are not incentivized to take decisions that have short-term costs but produce long-term gains, the typical pattern for any investment...The build-up of public debt in industrial countries (which was rising briskly well before the Great Recession pushed it to near-unsustainable levels) reflects this kind of calculus.

This is correct. Since future generations cannot vote, democratic governments have an incentive to overweight the present.

But Rajan's statement is also misleading, because it implies that non-democratic governments do better. The evidence says that they do not (see here and here). Rajan seems to believe the common fallacy that autocratic governments answer to no one, and thus have a free hand to make far-sighted investments, as long as the despot happens to be an enlightened one. In fact, autocratic governments also have to answer to someone - but instead of the people, it's usually a mix of army officers, party cadres, local officials, and mafia goons. There is always a selectorate, and they always have to get paid off. And in an autocracy, those payments can get really expensive, since the selectorate has the autocrat over a barrel - if he loses his job, he doesn't go off to fish at his ranch, he gets filled with lead and hung from a gas station roof.

This is why democracy, as Churchill said, remains the best of a menu of imperfect options.

I'm also a bit annoyed at what Rajan imagines an enlightened despot might do for America:

Even if inaction (or action oriented towards the longer term) is the best policy, it is not an option for democratically elected politicians, whom voters expect to govern, which inevitably means action with the potential for quick results. A sympathetic press amplifies heart-rending stories of lost jobs and homes, making those counseling against intervention or advocating longer-term fixes appear callous.

Again, he's not formally wrong. I wish our government spent more on infrastructure, research, and education (far-sighted stuff), and less on short-sighted tax cuts. But somehow I doubt that this is what Rajan is talking about. He seems to be supporting a kind of Austrian model of the business cycle, where recessions are a necessary, even refreshing, structural adjustment. That would put him in what DeLong and Krugman call the "pain caucus." Let's just say I agree with DeLong and Krugman; structural adjustment happens more quickly and easily when there are not legions of discouraged workers sitting at home for years letting their skills deteriorate.

Anyway, on to Rajan's second big point - that this crisis and recession have caused a loss of faith in government. Let me start by pointing out a little discrepancy. Early in his column, when he's talking about the irresponsibility of democracies, Rajan writes:

The public rewards democratic governments for dealing with the downside risk caused by competitive markets – whether by spending to create jobs or by rescuing banks that have dodgy securities on their balance sheets.

But scroll down a few paragraphs, and we see this:

Today, by contrast, broad segments of the public see the big banks and big government as being run by the same elites who created the crisis, and then spent public money under one guise or another bailing the banks out. Even as bankers are back to reaping enormous bonuses, taxpayers have been left to foot the bill for the economic collapse. (Emphasis mine)

So, to reiterate: Our government was forced to bail out the banks by popular pressure. Now people are angry at the government for bailing out the banks! The people are furious that the government does what they tell it to do! I suppose this could happen if the electorate were totally bat-shite insane. But a more likely explanation is that Rajan just didn't proof his column very carefully.

But where Rajan really, really goes wrong, in my opinion, is in his analysis of the Tea Party:

In the US, this sentiment has fueled the Tea Party, which coalesces around opposition to government expansion (and to elites more generally), even if that expansion is aimed at regulating big banks (presumably because government regulations tend to be shaped by the powerful among the regulated).

First of all, Rajan thinks the Tea Party's main issue is banking regulation. This is absurd. Doesn't Rajan read the news? The Tea Party says that their main issues are (lower) taxes and (lower) spending. Rajan. however, imagines that Tea Partiers are marching and shouting and shaking their fists because they're all riled up about regulatory capture by banks. Seriously??

A final note. Rajan laments that we've lost our faith in government:

One factor diminishing the likelihood of governments intervening more directly in markets is that the recent crisis seems to have discredited government as much as it discredited the financial sector...The US is not alone in having a discredited government.

And he wrings his hands about where this might lead:

[T]hree undesirable possibilities loom large...One is that [governments] intervene directly in markets, both domestic and across borders, to reduce competition and volatility while they rebuild their buffering capacity. Another is that they muzzle democracy to suppress public anger. A third is that they find scapegoats...[A]s the 1930’s showed, it is hard to imagine any possibility worse than where this type of behavior can lead.

I think Rajan is right to worry about this. But he's just written a whole column (and others in the past) implying that he himself doesn't think democracy really delivers the goods, and that government can't do much for the economy in the short term. He can't quite seem to decide if he's upset that people are losing faith in government, or triumphant.

And given Rajan's ranting against short-term pandering by democracies, it's interesting that he would choose the 1930s as his cautionary tale. In that decade, it was precisely that "pandering" - Keynesian policy and increased regulation - that saved the U.S. and Britain from the fate of Germany, Italy, etc. Germany and Italy decided that democracy was inferior to an enlightened, far-sighted despotism. Look where that got them.

Rajan and I agree on many things here. We agree that our government needs to step up its commitment to long-term provision of public goods, including better regulation and fiscal responsibility. But Rajan apparently thinks that this process will be helped by econ profs standing on the sidelines and egging on the Tea Party with shouts of "Government spending is waste!" and "Democracy is inefficient!" 

Call me crazy if I think that's a bad idea.

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About that TFP stagnation...

Via Tyler Cowen, I see that David Beckworth has posted a graph of U.S. total factor productivity (TFP) from 1947 to 2010, using data from John Fernald at the SF Fed (who BTW is a co-author of my advisor, Miles Kimball). Total factor productivity, recall, is the part of production that can't be explained in terms of inputs of capital, labor, and other known factors of production; TFP is often called "technology", though it probably includes a few other things.

Anyway, here is Beckworth's graph:

Assuming that TFP = technology, this graph definitely seems to support Tyler Cowen's hypothesis of a "Great Stagnation" in technological progress around 1973.

However, just for fun, I decided to update the graph. John Fernald, ever the careful empiricist, breaks his TFP series down into two sectors: TFP in the production of durable goods (cars, buildings, TVs, machinery) and TFP in the production of nondurable goods (clothing, food, services).

Here's what it looks like when we graph both of those on the same graph:

Wow! If you look only at the durables sector, there was no Great Stagnation at all - in fact, quite the reverse, since durables TFP has been growing more strongly post-1993 than it ever did in the post-WW2 boom! Consider this: In the 26 years from '47 to '73, durables TFP nearly doubled, but in the 15 years from '94-'09, durables TFP more than doubled.

Yes, from this graph, it definitely looks like something big did happen to technological progress. But it looks like it happened not in 1973, as Cowen claims, but a decade earlier. In the 15 years to 1963, the two sectors progressed pretty much in tandem. But sometime in the early- to mid-60s, they diverged wildly, with nondurables TFP rising anemically through the late 70s and then basically flatlining until now. Durables TFP looks to have suffered its own very minor slowdown in the mid-70s (which is probably the reason why overall TFP looks like it took a turn around that time), but then exploded with unprecedented vigor after '93.

Like David Beckworth, I am also more convinced of a Great Stagnation than I was before I looked at Fernald's data. But I think Cowen's hypothesis needs a bit of updating. It is only the nondurables sector that has stagnated, and it happened in the early 60s. Why did it happen? My first guess was agriculture, but nope, it's not that. Did the years after WW2 simply see an unprecedented one-off boom in nondurables production, with a return to normalcy in the 60s?

Anyway, figuring out what really happened to technology in the 60s will take far more data-gathering and careful analysis than I can put into this blog post. A detailed historical breakdown of TFP by industry would probably be the place to start. But in the meantime, I think we should look at the "Great Stagnation" as a more subtle phenomenon than simply the exhaustion of the "low-hanging fruit" of nature. Our technologies for producing durable goods are improving faster than ever.

Update: Thanks to commenter Andy for pointing out that services are also included in nondurables. 

Update 2: Slow service-sector TFP growth  appears to have been a big factor in the 70s and 80s, but not since the early 90s. Also, commenter Mark reports that utilities and mining (nondurables) have experienced drops in TFP since the 90s, while agriculture, trade, and transportation have seen strong productivity gains in that time frame. Hmm...

Update 3: Tyler Cowen responds, saying: "note the importance of sectoral shifts into lower-growing sectors". First of all, such a shift may be happening, but it is not apparent in Fernald's data set; the GDP share of the durables sector, in which TFP growth continues apace, has held steady at 20%. Also, note that a shift into sectors with slower TFP growth does not necessarily indicate that technological innovation is slowing down...imagine an economy in which we get infinitely better at producing right shoes, but no better at producing left shoes, and you'll see what I'm talking about.

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