Monthly Archives: April 2013
American banks have once again begun producing mortgage-based bonds in substantial numbers. Meanwhile, institutional investors have been buying up low-cost houses in order to rent them while speculating on the value. As a result, the housing market may be going into another bubble. Are we headed for another financial crisis? Moreover, is history destined to repeat itself, given human nature? If interested, see the following article: http://thewordenreport.blogspot.com/2013/04/return-of-mortgage-based-bonds-another.html
American banks have once again begun producing mor…
Sun, 28 Apr 2013 23:19:55 GMT
If you don’t want details read the first and last paragraph.
By James Kwak
In 1975, Isaac Ehrlich published an empirical study purporting to show that the death penalty saved lives, since each execution deterred eight murders. The next year, Solicitor General Robert Bork cited this study to the Supreme Court, which upheld the new versions of the death penalty that several states had written following the Court’s 1973 decision nullifying all existing death penalty statutes. Ehrlich’s results, it turned out, depended entirely on a seven-year period in the 1960s. More recently, a number of studies have attempted to show that the death penalty deters murder, leading such notables as Cass Sunstein and Richard Posner to argue for the maintenance of the death penalty.
In 2006, John Donohue and Justin Wolfers wrote a paper essentially demolishing the empirical studies that claimed to justify the death penalty on deterrence grounds. Donohue and Wolfers attempted to replicate the results of those studies and found that they were all fatally infected by some combination of incorrect controls, poorly specified variables, fragile specifications (i.e., if you change the model in minor ways that should make little difference, the results disappear), and dubious instrumental variables. In the end, they found little evidence either that the death penalty reduces or increases murders.
Now the macroeconomic world has its version of the death penalty debate, in the famous paper by Carmen Reinhart and Ken Rogoff, “Growth in a Time of Debt.” Thomas Herndon, Michael Ash, and Robert Pollin released a paper earlier this week in which they tried to replicate Reinhart and Rogoff. They found two spreadsheet errors, a questionable choice about excluding data, and a dubious weighting methodology, which together undermine Reinhart and Rogoff’s most widely-cited claim: that national debt levels above 90 percent of GDP tend to reduce economic growth.
I’ve never been a big fan of Reinhart-Rogoff. In White House Burning, we cited their main result but added (p. 151),
“It is hard to know what it means for the United States because even their findings for advanced economies are the averages over sixty years of twenty different countries—nineteen of which did not enjoy the particular benefits of issuing the world’s reserve currency.”
Now it turns out that the averages were wrong. To see how, you can read Herndon et al. (it’s very short and readable) or the excellent post by Mike Konczal. If you don’t want to do that, there are four basic issues:
- The 2010 Reinhart and Rogoff paper excluded data for certain countries and years that, when included, increase mean growth for debt levels greater than 90 percent. (In their response, Reinhart and Rogoff say that those country-years were not available when they did the original paper.)
- The results were averaged by country and then the country averages were themselves averaged. The problem here is that, for example, New Zealand only had debt above 90 percent in one year, and in that year its growth was –7.6 percent—but since only ten countries ever had debt over 90 percent, that outlier constituted one-tenth of the average.
- Their spreadsheet formula accidentally omitted several countries; including those countries increases the average growth level for debt levels over 90 percent.
- One figure—New Zealand’s—was mistranscribed from one spreadsheet to another; correcting that mistake slightly raises the average growth level.
Leaving aside the Excel problem for now, I think this points to a weakness of the original methodology. The paper was, technically speaking, extremely simple: take all the country-years, divide them into four groups by debt level, and average within each group. I thought at the time that if an economics graduate student tried to submit this as part of a dissertation, it would never be accepted. I remember looking at this chart and thinking: So what? Does that prove anything? How do I know that this is significant—especially since the mean and the median are so different? (Usually if the mean is very different from the median, it is being dragged up or down by some huge outlier.)
Like most people, I think, I thought they were averaging by country-year, not country. Averaging by country obviously makes the results even more sensitive to outliers. Reinhart and Rogoff claim in their response that this is a standard approach; maybe it is. But this is what the paper says (emphasis added):
“The annual observations are grouped into four categories, according to the ratio of debt to GDP during that particular year as follows: years when debt to GDP levels were below 30 percent (low debt); years where debt/GDP was 30 to 60 percent (medium debt); 60 to 90 percent (high); and above 90 percent (very high). The bars in Figure 2 show average and median GDP growth for each of the four debt categories. Note that of the 1,186 annual observations, there are a significant number in each category, including 96 above 90 percent.”
I think the most natural reading of this passage is that they were averaging individual country-year observations, not countries.
The other surprising thing, of course, is that they were using Excel (or some other spreadsheet program)—something that I wrote about recently. The attraction of Excel is that it’s visually intuitive, it’s powerful, and it’s fast. The problem is that it’s very easy to make mistakes, it doesn’t have any usable kind of versioning, and there’s no good way to proofread or test it. As Herndon et al. write with considerable understatement, “For econometricians a lesson from the problems in RR is the advantages of reproducible code relative to working spreadsheets.” And if you’re going to use Excel for anything important (like counseling economic policymakers), you’d better be damn good at it. For example, you shouldn’t be manually copying numbers from one tab to another (an error shared by Reinhart and Rogoff with the risk management department of JPMorgan’s Chief Investment Office).
This raises another issue. Programming is getting easier and easier, but it’s hard to do well. Economics these days depends heavily on programming. It seems to problematic to me that we rely on economists to also be programmers; surely there are people who are good economists but mediocre programmers (especially since the best programmers don’t become economists). If you crawl through a random sample of econometric papers and try to reproduce their results, I’m sure you will find bucketloads of errors, whether the analysis was done in R, Stata, SAS, or Excel. But people only find them when the stakes are high, as with the Reinhart and Rogoff paper, which has been cited all around the globe (not necessarily with their approval) as an argument for austerity.
More Bad Excel
Thu, 18 Apr 2013 20:17:27 GMT
(April 19, 2013 11:41 PM, by David Henderson) With permission from ReasonTV, this is Shikha Dalmia on five reasons that unskilled immigrants are good for America. If you go to this link, you can find a fairly faithful transcript…. (1 COMMENTS)
Friday Night Video: Shikha Dalmia on Unskilled Immigrants
Fri, 19 Apr 2013 23:41:25 GMT
At least one reason to not over react to the terrible events of this week.
Rick Perlstein’s take:
As ghastly, evil, overwhelming, tragic, as the events this week in Boston, Texas, the Capitol mail rooms, have been, it’s easy to forget, in our oh-so-American narcissism, enveloped in the wall-to-wall coverage that makes our present catastrophe feel like the most important events in the universe, how safe and secure Americans truly are by any rational standard. Terror shatters us here precisely because ours is not a terrifying place compared to so much of the rest of the world. And also not really an objectively terrifying time, compared other periods in the American past: for instance, Christmastime, 1975, when an explosion equivalent to twenty-five sticks of dynamite exploded in a baggage claim area, leaving severed heads and other body parts scattered among some two dozen corpses; no one ever claimed responsibility; no one ever was caught; but pretty much, the event was forgotten, life went…
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The U.S. experienced an explosion in K-12 costs over the same period that we suffered from higher health inflation, but while the health cost explosion was exacerbated by our aging demographics, the education cost explosion was hidden by them: K-12 enrollments fell through the 1970s and 80s as the baby-boom generation aged, but the reduction in enrollments was largely offset by fast growth in per-pupil spending. But the broad story is the same as in the health-care sector: fast growth in unit costs without corresponding improvement in quality.
When the subject is health care, liberals have drawn the right lessons from the last 40 years of cost growth, understanding that more money doesn’t necessarily mean better outcomes. They should apply that same lesson to education: In a cost-bloated sector with poor quality improvement, we should be figuring out how to spend money better, instead of spending more of it.
The recent results of the OECD’s Program for International Student Assessment (PISA), a test given to 15 – year-old students across the OECD, find that the United States was, once again, in the middle of the pack in reading and science and a bit below the international average in math.
These results are particularly stunning given how much more we spend than other countries. We spend more than many better achieving countries spend – the United States spends a third more than Finland, a country that consistently ranks near the top in science, reading and math testing.
With all this you could conclude that education spending should be cut, but I don’t. Education (or the lack of it) is clearly at the root of many problems. We should be willing to have world class spending on education, but how do we get world class results?
My feeling is that some way to encourage more competition and experimentation at the state and local level is key. This suggests that the Presidents new initiative for pre-schools may have potential, but I don’t think the federal government should spearhead this. James Heckman, a Noble prize winner, who provides research that supports the President’s program, notes how an attempt to create a program to utilize his research failed:
“Our esteemed Governor [Rod] Blagojevich came down to the University of Chicago and we lectured him [on our Perry research] and he got a program approved,” Heckman says. “But it had the low quality of a political program–everyone gets a little bit of something. But we knew from the data that it would have no effect, or even a negative effect. The danger is to spread yourself too thin.”
It’s hard not to think that the Obama plan will be the same on a national level.
I like the short example of changing visions of morality. When this technique appeared like much of science related to reproduction, it was pronounced to raise: “moral issues”. I’m never sure that I know that means other than it makes me uncomfortable that someone is doing this.
Robert G. Edwards Dies at 87; Changed Rules of Conception With First ‘Test Tube Baby’
“Working with Dr. Patrick Steptoe, Dr. Edwards essentially changed the rules for how people can come into the world. Conception was now possible outside the body — in a petri dish.
“The technique has resulted in the births of five million babies, many in multiple births, according to the International Committee Monitoring Assisted Reproductive Technologies, an independent nonprofit group.
“Yet, like so many pioneers of science, Dr. Edwards and Dr. Steptoe achieved what they did in the face of a skeptical establishment and choruses of critics, some of whom found the idea of a “test tube baby” morally repugnant. Denied government support, the two men resorted to private financing. And they did their work in virtual seclusion, in a tiny, windowless laboratory at a small, out-of-the-way English hospital outside Manchester.
“It was there, after outwitting a crowd of reporters, that they delivered their — and the world’s — first IVF baby, Louise Brown, on July 25, 1978. Her parents, John and Lesley Brown, had tried for nine years to have a child — a period that virtually coincided with Dr. Edwards’s research.”
Here’s my earlier post on the occasion of his Nobel, including some dissenting voices at the time:
Robert Edwards, R.I.P. Brought in vitro fertilization from repugnant transaction to Nobel prize
Sat, 13 Apr 2013 12:27:00 GMT
Just before our love got lost you said
I am as constant as a northern star
And I said, constant in the darkness
Wheres that at?
If you want me Ill be in the bar
On the back of a cartoon coaster
In the blue tv screen light
I drew a map of canada
And your face sketched on it twice
Oh you are in my blood like holy wine
Oh and you taste so bitter but you taste so sweet
Oh I could drink a case of you
I could drink a case of you darling
And I would still be on my feet
Oh Id still be on my feet
Oh I am a lonely painter
I live in a box of paints
Im frightened by the devil
And Im drawn to those ones that aint afraid
I remember that time that you told me, you said
Love is touching souls
Surely you touched mine
Cause part of you pours out of me
In these lines from time to time
Oh you are in my blood like holy wine
And you taste so bitter but you taste so sweet
Oh I could drink a case of you
I could drink a case of you darling
Still Id be on my feet
And still be on my feet
I met a woman
She had a mouth like yours
She knew your life
She knew your devils and your deeds
And she said
Color go to him, stay with him if you can
Oh but be prepared to bleed
Oh but you are in my blood youre my holy wine
Oh and you taste so bitter, bitter and so sweet
Oh I could drink a case of you darling
Still Id be on my feet
Id still be on my feet