I read an interesting article at The Market Mogul today entitled, "The Problem with Economic Models," by Aarondeep Hothi.  I reproduce the essay below.

The Problem with Economic Models
Aarondeep Hothi

Economic models are everywhere. They're used both implicitly and explicitly by politicians, economists, journalists and even the general public. These models somehow manage to wrap entire concepts in beautifully presented mathematics and graphs before presenting clear, concise conclusions. They provide a framework for digesting things such as how wages are determined, the effects of a living wage, how countries can grow after exhausting the gains from capital accumulation, the effects of certain policy decisions and many, many more key economic concepts. What could possibly go wrong when applying them to the real world? 

This article appeared in the Deseret News today (July 30, 2013)

One lesson from the 2007 recession is that financial crises have widespread, real effects. Often, particularly in small open economies, a financial crisis is linked closely to the exchange rate. One of the major concerns with Greece and its fiscal crisis, for example, has been that it will drop out of the Euro area and devalue its currency. Similar concerns drove a crisis in Argentina in 2002 and were a major underpinning of the Asian financial crisis in 1997-98.

Are recessions like traffic?

From the Deseret News, July 16, 2013

I have been in Korea the past few weeks, and part of that time I was attending the Society for Economic Dynamics (SED) meetings at Yonsei University in Seoul. The Society for Economic Dynamics is a relatively new organization. It was founded in the 1990s, and its official journal, The Review of Economic Dynamics, has quickly become one of the leading journals in macroeconomics (along with the Journal of Monetary Economics, and the Journal of Economic Dynamics and Control). The SED meetings are arguably the best forum today for state-of-the-art macroeconomic research.
From the Deseret News, July 2nd, 2013

The history of the Rust Belt, a swath of states running from New York to Wisconsin that borders the Great Lakes, was the focus of one session of the Midwest Macroeconomics meetings, a premier conference where relatively young macroeconomists gather to share cutting-edge research, which was held May 16-19 at the University of Illinois in Urbana, Ill.

From the Deseret News today, April 30, 2013

In my last article, I talked about economics as a science and focused on the role of statistical analysis in evaluating natural experiments. This time I want to talk about economic theory.

The scientific method requires hypothesis testing. Experiments test hypotheses and ultimately prove them right or wrong. Based on this acceptance or rejection of a hypothesis, scientists go back to their original theories and revise them as needed. This is the gist of the scientific method.

From the latest Deseret News article:

Economics is often called a social science. But is it really a science? Science considers data from the real world in order to ascertain truth. But analysis of data alone is not enough. The way the data are analyzed is very important. It needs to be considered in an objective way with a critical eye. This is not always easy to do.

Cars and Carbon

Appeared in the Deseret News today.

Bjorn Lomborg, an academic best known for his book The Skeptical Environmentalist, had an interesting op-ed in the Wall Street Journal recently that got me thinking about cars and the costs of carbon.

I suppose I am not an environmentalist.  I enjoy being in the outdoors, particularly hiking and backpacking.  I prefer doing these in an unpolluted environment, but I'm not committed to maintaining a pristine environment regardless of the cost.  I am certainly not as committed as actress Evangeline Lilly who recently spent 32 hours travelling by airplane to attend the Forward on Climate Rally to express her opposition to the KXL pipeline, apparently without any sense of irony.

Balancing the Budget

From yesterday's Deseret News

Fiscal cliffs, sequestration, debt ceilings.  How hard is it to balance the federal budget?  While conceding that unexpected events do occur that can cause increases or decreases in revenue and expenditures, why don't we spend this column trying to set a plan that would balance the budget if nothing too unexpected happens.

A Flat Tax System

From the Deseret News, February 19, 2013.

Tax season will soon be upon us.  Wouldn't it be nice if filing taxes was not such a long drawn-out process?

Two weeks ago I mentioned the flat tax when talking about the effects of marginal tax rates.  A related tax plan is known as the negative income tax.  This gives taxpayers a refundable tax credit and couples this with a constant marginal tax rate or "flat tax".  One of the benefits of such a system is the ease with which taxes can be filed.

Marginal Taxes and Incentives

From the Deseret News, February 4th, 2013.

Taxes are in the news lately. French film star Gerard Depardieu announced in December he would be moving from France to neighboring Belgium to avoid an increase in taxes that would've taken 75 percent of any new income he earned. More recently, golfer Phil Mickelson suggested he might leave California to avoid a combined state and federal income tax that takes 60 percent of any new tournament winnings.
From the Deseret News this past Tuesday.

So we avoided the fiscal cliff.  Forgive me if I am less than impressed with our political leaders.

The temporary Bush tax cuts passed in 2001 and 2003 are now permanent for incomes less than $400,000 per year.  The increase in taxes on incomes over this threshold is expected to net $617 billion over ten year.  To be exact, that is $617 billion more in revenue than would have been collected had tax rates on higher incomes remained unchanged.  On the spending side, automatic across-the-board cuts that would have gone into effect on January first will be delayed for two months.

On Risk and Gambling

From the Deseret News on Tuesday.

This past week the U.S. Commodity Futures Trading Commission issued a complaint against the online prediction market firm Intrade. Intrade is based in Ireland, so the complaint does not shut down the company, but it does effectively lock out U.S. residents from participating in the market. The ostensive reason for the complaint is that Intrade has been offering off-exchange options, which seems to mean that it has been offering online gambling.
A great blog post from John Cochrane.

A good sample of the content:

On reflection, it's amazing that computerizing medical records was part of the ACA and stimulus bills. Why in the world do we need a subsidy for this? My bank computerized records 20 years ago. Why, in fact, do doctors not answer emails, and do they still send you letters by post office, probably the last business to do so, or maybe grudgingly by fax? Why, when you go to the doctor, do you answer the same 20 questions over and over again, and what the heck are they doing trusting your memory to know what your medical history and list of medications are? Well, this is a room full of health policy wonks so you know the answers. They're afraid of being sued. Confidentiality regulations, apparently more stringent than those for your money in the bank. They can't bill email time. Legal and regulatory roadblocks.

So, medical records offer a good parable: rather than look at an obvious pathology, and ask "what about current law and regulation is causing hospitals to avoid the computer revolution that swept banks and airlines 20 years ago," and remove those roadblocks, the government adds a new layer of subsidies and contradictory legal pressure.
from the Deseret News, Tuesday Nov. 20th.

Every time there is a significant natural disaster I eventually hear from someone that there is at least one upside: the disaster will be good for the economy.  And every time I respond, "Wrong!"  Inevitably this supposed economic stimulus is called a "sliver-lining."  To quote on of my favorite demotivational thoughts from Despair.com, "Pessimism: Every dark cloud has a silver lining, but lightning kills hundreds of people each year who are trying to find it."

Natural disasters are bad.  They destroy lives and wealth and that has no upside.  After the disaster is over, people are unambiguously worse off than before and while their quality of life inevitably recovers, on average they are not better off in the long-run for having lived through the disaster.

An excellent case study in rent seeking:

Will Supreme Court answer monks' prayers?

"In the 1960s, Louisiana made it a crime to sell "funeral merchandise" without a funeral director's license. To get one, the monks would have to stop being monks: They would have to earn 30 hours of college credit and apprentice for a year at a licensed funeral home to acquire skills they have no intention of using."

from Glenn Harlan Reynolds column at USA Today, "Katrina on the Hudson"

Then there are the gas shortages. These are primarily the result of storm damage. But they've been made worse by New Jersey Governor Chris Christie's effort -- joined by New York Attorney General Eric Scheiderman -- to crack down on "price gouging." This politics hurts victims. It's elementary economics that holding prices down depresses supply. If you could sell gasoline for $15 a gallon, lots of people would load pickup trucks with gas cans and drive to the storm area, alleviating shortages. (And at that price, people wouldn't buy more than they needed.) If doing that risks arrest, they won't. Political posturing over "gouging" leads to gas lines, further economic disruption and possibly lost lives.
A common theme in much of the political rhetoric during both this election cycle and the last four years has been complaining about China as a "currency manipulator." The truth is that China has kept the value of its currency artificially low, thereby increasing the cost of U.S. exports to China and decreasing the costs of U.S. imports from China. Just like a coin has two sides, it is clear that changes in value of the Chinese currency simultaneously helps some groups while it hurts others. The novelty is that much of the media and political focus has been on the U.S. groups that get hurt by this policy, while stories about the benefits are neglected. And it is likely that the benefits outweigh the costs--possible by a landslide.

Time to repost the most recent Deseret News article from yesterday.

As many observers expected the U.S. Federal Reserve began a new round of quantitative easing this fall in an attempt to stimulate the economy by increasing the supply of available money.  As I discussed at the beginning of August, there is no fundamental difference between quantitative easing and the Fed's normal open market operations.  In the latter case the Fed buys U.S. Treasury securities on the bond market and in the former case it buys other non-traditional financial assets.  In both cases, however, it pays for these purchases by creating money.

From the Deseret News this last Tuesday.

A few years back I volunteered at an archeological site in Range Creek, Utah.  I learned that archeology is arguably the most interdisciplinary subject in the world.  And I learned that I don't have the eyesight or the tolerance for dust needed to succeed in that field.  I also learned an interesting lesson about the interesting ways that economic thinking can inform our understanding of societies, even ones that leave no written history.

Ryan Decker is a former BYU student who worked for Kerk Phillips and me. He is now a PhD student at the University of Maryland and is on the research staff of the Center for Economic Studies at the Census Bureau. He posted this very interesting picture.

If you look at new firms, they are adding the most workers and shedding the least. But that is by definition. What is interesting is that it is the middle aged firms (Age 4) and the old firms (16+ years) that have been the source of the vast majority of the job losses over the last 5 years and in every economic downturn in the labor market back to 1988.

i-Side Economics

Ike Brannon pointed me to a great op-ed piece by Andy Kessler in the Wall Street Journal last Tuesday describing comparing the New Keynesian spending policies of the Obama administration over the last three years to what he calls "i-side economics" ("i stands for "investment"), which is just a clever rebranding of the supply-side economics. The idea is that taking government funds (that have to come from somewhere) and giving them to someone does not create anything. It is investment that creates value and permanent new jobs. Very nice piece.
Here is a great little ESPN piece in which Hall of Fame quarterback, Steve Young, describes the NFL referees lockout persisting because of "inelastic demand" for the NFL product. The only explanation for this level of economic analysis is that Steve is a BYU alum (and has a law degree).

Forecasting the Presidency

From the Deseret News, September 4, 2012

You may have noticed there is a presidential election coming up.  The Republican Party met this past week in Tampa, Florida and officially nominated Mitt Romney as their candidate.  Democrats are meeting this week in Charlotte, North Carolina to renominate President Barack Obama.  Of course all that really matters is the counting of electoral college votes, and those will be decided on November 6th.

In the meantime, however, it is at least entertaining to try and predict which candidate will win.  There is no shortage of opinion, of course.  In the past week I have read that an Obama win is a sure thing, that Romney is sure to win, and that the election is too close to call.

I'm reposting this blog entry because it illustrates nicely the difficulties in dealing with data, and data is key in understanding the economy.  Theory is necessary, but without data to check it's validity... 

Quotable Quote - "Data rarely speak for themselves. There's almost always some folklore, known to initiates, about how data should and should not be used. As the web transforms the availability and use of data, it's essential that the folklore be democratized as much as the raw data themselves."

Niall Ferguson's Mistake Makes the Case for Metadata - August 22, 2012

An interesting article on robotics today and trends for the future.  My introductory economics class this semester will have writing assignment that are partly graded by machine.

Skilled Work, Without the Worker
- August 18, 2012

Minimum Wages

from Tuesday's Deseret News

The current federal minimum wage is seven dollars and twenty-five cents per hour.  For an employee working 40 hours per week for 52 weeks that amounts to an annual before-tax income of  $15,080.  By comparison the official poverty level for a family of two is $15,130 or $23,050 for a family of four.  The minimum wage does not support a high standard of living by any stretch of the imagination.  However, just imagine how bad things would be for workers without the minimum wage.

What is Quantitative Easing?

Deseret News, August 6th

Speculation has been building of late that the U.S. Federal Reserve - or "The Fed" - will soon begin another round of quantitative easing.  The Fed has already engaged in two rounds, the first running from late 2008 to mid-2010 and now known as QE1, and again from late 2010 to mid-2011 known as QE2.  So this round, if it happens, would be QE3.  Quantitative easing is not the usual method for conducting monetary policy, but it's also not as different as most people think.

Problems with Pay-as-you-go

From the Deseret News, July 16th

The U.S Social Security system is in big trouble.  While the trust fund balance today is just over two and half trillion dollars, this amounts to about four years of benefits payments.  And while the balance on the trust fund has been rising every year since the fund was created in 1987, it will not be long before demographics cause that trend to reverse.  We need to reform Social Security and the longer we wait, the bigger the burden of reform we become.

June 11th, 2012 Deseret News

On June 4th, President Barack Obama delivered a campaign speech at the New Amsterdam Theatre in New York City.  In that speech he noted that his Republican rival in the upcoming election, Mitt Romney, "has a theory of the economy that basically says, if I'm maximizing returns for my investors, for wealthy individuals like myself, then everybody's going to be better off."

We could debate whether this statement accurately reflects Mitt Romney's views on capitalism, but for the sake of this article let's assume it does.  So what?  Is it really that bad to believe that people motivated by self-interest, even selfish and greedy self-interest, can collectively arrive at an efficient and equitable outcome?

Greed and Monopoly

From the Deseret News May 29th:

One of the basic assumptions of economic theory is that people as economic agents make decisions with the goal of becoming as well-off as possible.  Economists call this maximizing utility, where the term utility roughly corresponds to well-being, level of satisfaction, or maybe happiness.  This key assumption seems to reflect human nature, at least as an approximation.