Serious about Serious Things

My appointment officially starts on May 1st, so I have dedicated the time until then to revamping my physique.

I’ve lost about 20 pounds, an estimated 12 pounds of fat over the last three weeks. That puts me on track for 80 total pounds by May 1st – the most svelte since I was wrestling.

The point of this story, however, has to do with my methods. Being a through and through nerd I created a spreadsheet model where I tracked everything I ate, all of my exercise and my basal metabolic rate. I could then predict the changes in physique based on the actions I took.

Of course I bought a body fat estimator and new scale so that I could empirically validate the predictions of my model. So, far the two have tracked each other closely with the empirics every so often lagging the model (I attribute this to the way the body fat estimator treats food still in my digestive tract).

Despite the fact that model building and testing is what I do for a living my friends and family have continued to find my methods hysterically funny.

Why?

I suppose it is because they are abnormal. However, I am looking for abnormal results – shouldn’t that require abnormal methods?

Moreover, maintaining my health is important to me – perhaps more important than the work I do. Wouldn’t it stand to reason that I would use at least as powerful tools that I use at work at home?

Yet, I know that none of this stands to reason. The reasonable, or at least normal, thing to do would be to copy what others who try to lose weight do - despite the fact that most of them fail to achieve the type of results that I am after.

All of this builds to my true point, which is that cultural evolution rather than rational maximization is probably the origin of most normal behavior. It appears as if people are maximizing because they are copying behavior that has been refined over hundreds, in some cases thousands, of years by cultural evolution.

As such we should expect economic theory to be most successful at analyzing behavior that has changed little over time. Unfortunately, it is often most interesting to analyze behavior that is changing rapidly.

Tracking Back

Back when I was blogging at Innovation Online, the tech department told me I was getting thousands of hits per day. So far my personal counter here registers about 20 hits a day?

What gives?

I can't think of why Modeleded Behavior is particularly more obscure than Innovation Online except that Blogger doesn't do trackbacks. This means I can't steal readership from my favorite blogs by responding to everything they say.

Fairness

Kudlow and Company is my new favorite show. After 9 years in the Academy it reminds me of the soulless growth at any cost SOB I used to be.

But, seriously finance guys are a fun lot. I have noticed, however, that my sense of fairness has evolved over the years and I am now neither firmly on the left or right.

On reflection I think the two sides make inverse mistakes.

The left believes that if the US were a true meritocracy then things would workout fairly. However, things do not work out fairly and so the US must not be a true meritocracy.

The right believes that the US is a true meritocracy and since merticocracies induce fairness, things in the US must work out fairly.

The problem of course is that meritocracies are anything but fair. They are productive. They are stable. They are the best social organization thus far devised, but they are not fair.

Some people are quite simply more talented, more beautiful, more charismatic, and more inspirational than others. As if that wasn’t enough, all of those qualities tend to cluster into the same people or at minimum the same families.

This isn’t fair but its true.

To Answer Tyler

Tyler Cowen asks what kind of model would support David Neumark’s result that the EITC / Minimum Wage hike is good for women but bad for men.

The story is not complex. Both tend to increase the competition men face from working mothers.

Working mothers have high opportunity costs for work. They could be doing the very important job of caring for their children. As I have argued, however, for young men who either have no kids or are not involved in their children’s lives the opportunity cost of work is near zero and in some cases negative.

It is not uncommon for young college age men to get summer jobs for the primary reason that they are bored or they want to find people to socialize with. I have said repeatedly that as a single healthy young man working 90 hours a week is not unreasonable. The only other thing you would be doing is drinking or watching sports.

As a consequence, single young men will accept low wages.

For a working mom, however, the wage has to be reasonably high for her to enter the market.

So, what happens we either raise the minimum wage or the EITC?

In both cases we increase competition for jobs by inducing working moms into the workforce. This is particularly true for the EITC which gives very little to those without dependants.

The increase in supply of working moms cannot be fully absorbed in equilibrium and so some young men must lose their jobs.

Future Happiness

Arnold is predictably still unhappy with happiness research,

He quotes John Quiggin who says that the real problem is that happiness is a relative measure. People only know how happy they are relative to others or relative to themselves at another time.

They can’t answer the true counter-factual that we are after – how happy would you have been to live in under some completely different economic conditions. There are two ways around this as far as I can see.

1) The semi-section approach. Person A has probably experienced some range of economic circumstances. Person B another range and Person C still a third.

If we can ascertain that Person A is happier with his current than he was we he was in Person B’s shoes and we can establish that Person B is happier than when she was in Person Cs shoes then we can develop a piecemeal function for how happiness evolves with economic states

2) The proxy approach. We ask people who happy they are and then we run a bunch of tests to see if we can find a proxy. Happiness is correlated with say – lower blood pressure for a given fitness level, or more serotonin, or something else we can measure. Then we measure the proxy across different economic states.

I tend to the think the proxy approach is where we will be headed in the future.

Anything Socialism Can Do…

Capitalism with redistribution can do better. New case in point:

Nearly a century after it was founded, Israel's first and most famous kibbutz has voted to give up its early socialist ideals and to privatise itself.
. . .
In return they will have to pay for services such as electricity and water and they will have to pay a progressive income tax into the kibbutz which will be used to support the least well off.

When the kibbutz decides to start using the tax revenue to subsidize wages, instead of a pure transfer, we will all be in trouble.

Hat Tip . . . Wait for it . . . . Luskin

EMH Stikes Back

From iStetve

is that if you took your economics courses seriously, they would cripple your drive to make a bundle in the business. The Efficient Markets Hypothesis, for example, really does inspire the old joke about the two University of Chicago professors walking down the street who see a $20 bill lying on the sidewalk. They think about picking it up, but keeping walking because it's much more likely that they are both suffering mutual simultaneous hallucinations than that the free market would be so inefficient as to leave a $20 bill lying around.

No.

The EMH simply says that the return from picking up $20 bills cannot consistently exceed the opportunity cost of looking for them. Otherwise people would be quitting their jobs to look for $20 bills.

It is entirely possible that you find a $20 bill by accident. It is also, in direct reference to Steve’s point, possible that you could be hired to look for $20 bills by a bill-looking firm.

You should, however, not expect to make tons of money striking out on your own, unless you have some unique, unreplicatable ability to find $20 bills.

On Behavioral Economics

Jane says and Greg agrees that

. . . the left seems to believe [behavioral economics] is a magical proof of the benevolence of government intervention, because after all, people are stupid, so they need the government to protect them from themselves. My take is a little subtler than that:

1) People are often stupid
2) Bureaucrats are the same stupid people, with bad incentives

My interepretation is that behavioral economics is two things

1) It’s a wake-up call to those who took the neo-classical models to heart. It doesn’t say that people are stupid. It just says that simplistic modeling is not apt to catch everything.

2) And more importantly. It’s a statement that the discipline cannot wait. It cannot wait for formal models of thinking costs, and guilt costs, and cognitive consumption. It cannot wait for us to fit nice neat curves to everything because there are policy issues that need to be addressed now

Coming from a lower ranked school I always assumed that the big-boys in the other schools were not silly enough to fall into the trap of thinking that if it comes out of a simple model it must be true. Afterall, models are abstractions and are good for what they are designed to model and often bad for what they are not. Alas, I am often wrong.

Deadweight loss triangles, for example, give you an estimate of the loss in single market in terms of consumer surplus. They say little about what happens in general equilibrium, even less about what happens to measured economic aggregates and virtually nothing at all about economic growth.

Yet, many will assume if the deadweight loss is large then economic growth will suffer. Its entirely possible for the deadweight loss to be huge and the tax to increase economic growth. [Suppose I taxed having a child before age 27]

Anyway, I don’t think that behavioral and neo-classical are that far apart, unless you thought that neo-classical described the world with perfect precision. I certainly don’t think that behavioral says that people are stupid, just that they are human.

Upbeat

The Pew Center says I'm upbeat.

I'd say thats about right. Though many of the demographics don't apply to me.

Hat Tip to Jane Galt

What To Do About Mitt?

I would have voted to for Mitt Romney.

He was a progressive capitalist who understands the importance of free market economics in growing the economy, but also appreciates the role government can play in making sure that growth benefits the less fortunate and yes, less talented members of our society.

He was a man with seemingly strong personal moral conviction but without the need to impose those convictions on others. He was a supporter of gay rights, women’s rights and stem cell research.

He might have been the closest thing to a classically liberal candidate we’ve seen since the days of classical liberals.

That Mitt Romney, however, had no shot at winning the Republican nomination. And so, we are left with a different Mitt Romney. One who has had a “personal conversion” to more socially conservative ideals.

So what do I do now?

Do I support for the guy who used to be Governor of Massachusetts or do I oppose the man who is now running for President.

Can you trust that someone is being untrustworthy, hoping that they are genuinely disingenuous?

Ah, what to do about Mitt.

Titanic Spending

While Medicaid Part D is, I admit, not as bad as it could have been it was, nonetheless, unconservative at best and reckless at worst.

It seems to me that while the previous administration re-arranged the deck chairs on the sinking ship of entitlement spending, this administration punched another hole in the bow.

Now McFadden exclaims, well at least the ship is sinking as fast as the detractors had feared

Hat tip to Mankiw

Federal Doves

Bernanke and the Gentleman from Massachusetts spar on inflation. Frank is concerned over the Fed Chairman's concerns about inflation. Why isn't growth doesn't count for more.

However, I am left wondering why the FED has been so dovish on inflation. This year once again inflation is expected to come in above the Fed's unofficial target of 2%. IN my humble view the new flat yield curve is a sign that no matter what happens in the short-term investors are becoming ever more confident that over the long haul inflation will be tame.

This is a good thing and should be supported by an ever hawkish stance against raising prices.

Hard Sell

From Greg Clark via Arnold Kling

The triumph of capitalism in the modern world thus may lie as much in our genes as in ideology or rationality.

Clark goes on to explain that wealthy businessmen were more likely to have children and thus pass on their business friendly genes to their children. This includes a proclivity towards working and saving.

In short, Clark is saying that greater risk aversion won the evolutionary battle and produced capitalism

The problem is that this is contrary to the notion that capitalism favors risk takers. Clark notes that interest rates fell and that work hours rose. Both I would guess are the result of a less equal distribution of wealth in and of itself. A negative income effect on the workers would lead them to work more.

That is if taxes or rent on your land gets very high, you simply have to work more to support your family. In addition, high rents produce income for the land owners which is far in excess of subsistence and therefore allows for lending.

I would ask the question – was landownership becoming more concentrated as England approached 1800? Even if the number of landowner stayed concentrated or rose, did the landowner to population ratio decline? This seems are more parsimonious explanation.

My Hat

Before, I get back to econ blogging - I still have a Social Security proposal on tap as well as my take on why Lou Dobb's vision for America is called France.

However, I for the last six months I have been quietly obessing over Hemmingway's classic six word short story -

For Sale
Baby Shoes
Never Used

While I obviously can't match that here is my best shot

Brand New House
Truly Sad Day

On Immigration

Concerned about more citizens like this?

More Equal Than Others

This is a week smattered with news and postings on inequality. That is a good thing. The nation has already decided what it thinks of Iraq, if not how best to proceed from here. Dealing with the issue of inequality is our next greatest challenge.

Mankiw says that the difference between the right and the left comes down to Rawls vs. Nozick, and the question – is inequality of results in and of itself a bad thing?

For the uninitiated, Rawls is perhaps the most famous egalitarian philosopher. His central thesis is that we do not choose our innate talents or the income and education of our parents and so we should develop a society that benefits the least lucky among us. For if not for the grace of god, there would go we.

Nozick on the other hand argues that first and foremost we are people with the right to self-determination over our mind and body No one has the right to use us as simply a means.

Taken to its logical conclusion this means that we have the right to exit any relationship we deem poisonous, even if that relationship is working to benefit the poor. Perhaps, we should help the poor, but no one has a right to force us to help the poor. Nozick was at least for a time the leading libertarian philosopher.

However, there is a third approach. An approach that says we are not forced to help the least lucky. Yet, to the extent that our good fortune allows us to make a better living in society, society has the right to provide insurance for the less lucky.

The idea would be look, if you want to shirk off all of the benefits of government and organized society then fine, you have a right to that. Most people, however, will not be in a position to make the most of their wealth or their brilliance without the help of others.

It is no accident that nearly half of America’s billionaires live in either New York City or Los Angeles. Whether you are making money or spending money, the city is the place to be.

Technically, speaking I think this means that everyone has the right to denounce their citizenship and not pay taxes of any sort. Of course, this means not doing business with any tax paying citizen or anyone who does business with a tax paying citizen. In reality that group of people who would choose this is small and they could probably evade taxation anyway.

In reality this third approach means that we can and should provide some sort of social insurance to our population, but we should not do it to the point we begin to drive out our more wealthy and talented citizens. In a modern global economy I think this is the natural equilibrium anyone – good thing it also happens to be supported by my pet theory of justice

Delong on Inequality

Delong offers a good retort of the issue of inequality but I quibble a bit with this

This kind of inequality should be a source of concern. Bill Gates, Paul Allen, Steve Ballmer, and the other hundred-millionaires of Microsoft are brilliant, hard-working, entrepreneurial, and justly wealthy. But only the first 5% of their wealth can have any justification as part of an economic reward system to encourage entrepreneurship and enterprise. And the last 95% of their wealth? It would create much more happiness and opportunity if divided evenly among the citizens of the United States or the world than if they were to consume any portion of it.

But as a rule Bill Gates and company will not consume more than 5% of their wealth. Indeed, I wonder if they will consume even 5%

The rest will remain as perpetual capital, and fuel the consumption of the heirs or charities they designate. In either case the wealth will be spread over hundreds if not thousands of people.

The idea that capitalists are benefiting at the expense of workers is largely unfounded. As DeLong points at latter, skilled workers are benefiting and the expense of the unskilled. This is the problem we need to focus on. This is the problem that needs to command our attention.