Tuesday, December 21, 2010

An Innovative System to Combat Homelessness

Over at the New York Times Opinionator blog, David Bornstein has a post describing an innovative system to provide "permanent supportive housing" to chronically homeless individuals who are most at risk. Of note is that certain chronic homeless people are much more likely to die in their 40s and 50s due to problems related to their homelessness, such as having their medicine lost or stolen, lack of refrigeration for insulin for their diabetes, or the inability of doctors to follow up for cancer patients.

In response to such issues, an organization known as Common Ground has developed a "vulnerability index" using an algorithm that ranks homeless people by risk of death. The ranking is then used to prioritize the allocation of "permanent supportive housing."

One interesting thing noted by the article is how previous approaches to allocating permanent housing to homeless people only if they were "housing ready," meaning that they were drug and alcohol free. If you think about this, this is a completely ridiculous approach. It is nearly as though under previous approaches someone really needed to have to be perfect and have their act completely together (in a way that many non-homeless people do not; how many non-homeless people have issues with alcohol or drugs, for example?) before they can get access to a stable environment. But really, what is the probability that someone would be homeless in the first place if they didn't have difficult life issues? And why would anyone possibly think that someone will be better able to overcome problems with alcohol and drugs in an unstable environment than a stable environment? If life is unstable and harsh, as it is for homeless people, wouldn't this make the refuge of alcohol and drugs as a temporary respite more difficult to resist? It seems to me that the idea that people must be drug free and alcohol free before being offered the stability of permanent housing isn't actually based on pragmatic considerations of what is likely to work, but rather more of a morality play. In fact, this is approaching things from the wrong direction; for someone to have a higher probability of overcoming a drug or alcohol problem, they need to live in a stable environment.

Regardless, it is good to see innovative data-intensive approaches to the longstanding problem of homelessness.

Tuesday, December 14, 2010

The Tax Cut and Future Prospects for Deficit Reduction

Ross Douthat has an excellent post explaining why the tax deals has created incentives on both side that make any deals on deficit reduction less likely. I think he is basically right. Obama has to worry about his base, while Republicans are unlikely to be in the mood to accept any serious compromises given their perceptions that they caused Obama and Democrats to "cave" with the tax cut deal.

Knowledge and the Declining Marginal Utility of Wealth

Stephen Bainbridge writes:
Put less forcefully, the argument is plagued by the inherent problem that interpersonal comparisons of utility are difficult if not impossible. Hence, there is no way to know how rapidly a given individual's utility declines. A progressive tax system is thus, at best, a guess about average utility across society. And how exactly is that "fair"?
This is a pretty nonsensical objection. It is also impossible to calculate with exact precision the optimal number of miles of roads or aircraft carriers that the government should build. Are we to conclude, therefore, that it isn't "fair" for the government to build roads for transportation or aircraft carriers for national defense?

This argument doesn't even make sense. I think it is pretty obvious that basic necessities provide more benefit than extreme luxuries. For example, I think it is plainly obvious that there is more benefit to providing basic nutrition to what would otherwise be a malnourished child than providing a $1.9 million Hermes Birkin bag to a particularly vain man or woman. (Link: http://hubpages.com/hub/Top-Ten-Most-Expensive-Womens-Handbags) This is true, even though providing basic nutrition is much less expensive than the bag. Stephen Bainbridge's ludicrous response: "If you can't calculate with precision exactly how much more beneficial such an allocation is, it just isn't 'fair.'"

If we buy into this concept of fairness (fairness requires precise calculation), then it follows that it is not "fair" for the government to build roads or provide national defense. I am still not sure what the "optimal" number of roads or aircraft carriers is and do not believe that there is any purely objective way to make such a determination.

Maybe instead of unrealistic standards, some basic pragmatic sensibility is in order here?

Just as there is lack of pragmatic sensibility in the claim that redistribution should occur until everyone has exactly equal wealth, it is completely nonsensical and contrary to what everyone knows to be true to assert that the consumption of extravagant luxuries is as beneficial as the provision of basic necessities.

Or is the basic concept of "necessity" versus "luxury" just too difficult, because lines cannot be drawn with perfect precision? I would assert that a fetish with a utopian world with absolute perfection in line drawing is itself a luxury. One that is both impossible and which we could not possible afford.

I am perfectly glad to concede exceptions. Just as economists concede that, contrary to the expectation of the "law of demand" the demand for Veblen or Giffin goods actually increases with an increase in price, at least up to a point, even while emphasizing that this is an exception not the rule. In general, I don't think that the existence of declining marginal utility of wealth can seriously be doubted by anyone who does not have an ideological agenda to deny that which is plainly true.

It is also true that you cannot prove with absolute certainty that you are not actually nothing more than a brain in a vat being experimented on by mad scientists. It may be "impossible" to do interpersonal comparisons of utility in the same sense that it is "impossible" to prove that you are not actually a brain in a vat. As in all things, to some degree we just have to accept pragmatic sensibility as a guide rather than unreasonably expect the sort of absolute proof which doesn't actually exist for anything.

For example, using pragmatic sensibility, one can see that there is more value in providing basic nutrition to what would be otherwise malnourished children than an alternative of providing prostitutes to perfectly healthy middle aged men going through a mid-life crisis and cheating on their wives. I may not be able to "prove" that the prostitution provides less utility for these cheaters than basic nutrition does for what would otherwise be malnourished children to those who insist on a fantasy world with perfect line drawing, but I am nonetheless perfectly comfortable asserting it.

This reminds me of my earlier post with the quote by Bertrand Russel:
If a man is offered a fact which goes against his instincts, he will scrutinize it closely, and unless the evidence is overwhelming, he will refuse to believe it.
Why does Professor Bainbridge create an impossible standard of proof for the plainly correct observation that increases in wealth tend to have a diminishing marginal utility? I would suggest that the answer has something to do with ideology rather than truth.

Michael Dorf On Judge Hudson's Poor Reasoning

Over at Dorf on the Law, Cornell Constitutional Law Professor Micheal Dorf slams Judge Henry E. Hudson's shoddy reasoning in Virginia v. Sebelius, describing Hudson's reasoning as not merely mistaken, but "profoundly mistaken." As Professor Dorf describes it, instead of even attempting to provide some "functional explanation why regulation of economic inactivity is beyond the scope of Congressional power" Hudson instead relies "on the language of the earlier cases taken out of context."

Ouch.

Does the Constitution Protect the Smallpox Virus?

That is a question that Northwestern University Constitutional Law Professor Andrew Koppelman asks in criticizing Judge Henry Hudson's very poorly reasoned decision to overturn the individual mandate provision of the Affordable Care Act in a decision that Koppelman notes not only implicitly overturns McCulloch v. Maryland, a famous Marshall court decision that is nearly 200 years old, but also reads the Necessary and Proper clause out of the Constitution.

And Alexander Hamilton said in the Federalist Papers that the judiciary was the least dangerous branch....

Saturday, December 11, 2010

Why Thirteen Month Extension of Unemployment Benefits?

One curious thing is the length of the extensions of unemployment benefits. Right now, extended benefits were awkwardly scheduled to expire on November 30, right before the Christmas Holiday. But with the new deal, it sounds as though the future benefits will expire next year at the end of December, after Christmas.

I wonder who proposed that the extension should be 13-months instead of just a year. If you think about it, it could be either side. Republicans who really would like to see the benefits expire in the future probably wouldn't want to be in a situation of causing that expiration right before Christmas. On the other hand, the current expiration right before Christmas probably put a lot of pressure on Obama as well.

Economics and Groupthink

Arnold Kling has a very interesting and somewhat sad post on how he did not ever get tenure track position in an academic economics department because his research was not on the latest fad in macroeconomics, namely "rational expectations."

This is really pathetic. And I will say it. The academics who perpetuated and enforced this sort of conformity in thinking in their hiring practices were simply anti-intellectual. We don't want everyone doing research on the same theory. We want intellectual diversity and we want people who sharply question the latest academic fads. Insight into the truth is not fostered by groupthink... Far from it.

No wonder Paul Krugman argues in an excellent article that macroeconomics went through a "dark age." Imagine how much farther we might be in having some actual insight about how to more quickly get out our current economic mess had progress in the field of macroeconomics not been so stymied by these fads and groupthink.

Something has to change.

Smart People With Impractical Ideas

Here is a great example of an otherwise smart person saying something really silly, by Arnold Kling, who got his Ph.D. in economics from the Massachusetts Institute of Technology:
I think it will be a great day when government has to hold a bake sale to achieve any purpose whatsoever. That is, I would like to see most public goods funded by private donations rather than forced taxes. 
Lets think about this for a moment. There are two things to think about. (1) What is motivating this desire for taxes to be voluntary and (2) how practical would such a system be.

Lets talk about motives first. Basically, the motivation is a dream of living in a utopian world where autonomy is maximized. We have no duties to society; we only do as we please. In this sense, this idea is based on an extremely self-centered vision. Basically, there is a desire to free ride at the expense of society. We expect that society will protect our life, liberty, and property using coercion against private parties who would kill us, enslave us, or steal from us. But we do not think we have and duties to society in exchange for these basic protections.

As far as practicality, I don't think it needs to be discussed. If our government were funded through voluntary donations, it would have been overthrown long ago. And we would be living under another government that was not so foolish as to depend on voluntary donations. That Kling does not recognize how utterly impractical his idea is shows just how much he takes for granted.

So, the argument overall has two things going against it. First, the motivation is to avoid basic duties to society and instead act as a free rider. Second, even if the motivation were perfect, the idea is entirely impractical. No government that made taxation voluntary could survive.

Senators Spend 20-25% of Their Time Fundraising and Campaigning

According to an estimate by retiring Senator George Voinovich.

One question that I have about Citizens United, the decision that allows corporations to spend unlimited amounts of money influencing political campaigns, is whether it will decrease or increase that amount of time. Paradoxically, it is possible that the Citizens United will decrease the amount of time that Senators and Representatives have to fundraise and campaign due to the diminishing marginal effectiveness of spending on the outcome of a political campaign. (At some, more political commercials annoy more than help.) On the other hand, it could be that politicians are going to try to raise as much as possible, given the difficulty of measuring the effectiveness of campaign spending and the sense that more spending is the "safe" bet.

Great Post by Jack Goldsmith on Wikileaks

Over at Law Fare, Harvard Law Professor Jack Goldsmith has a few thoughts on Wikileaks. Highly recommended.

The Tea Party in Power

As the New York Times reports, the Tea Party-backed Nassau County Executive Edward P. Mangano has pulled a play from the Bush administration and managed to cut taxes without making sufficient budget cuts to make up for the lost revenue. This has created a severe fiscal crisis and it appears that the Nassau Interim Finance Authority may have to take over the finances of the county.

Is this what the Tea Party stands for?

Never Learning From Our Mistakes

When he took office, one of the first things George W. Bush did was turn the surplus he inherited from Bill Clinton and turn it into a deficit. When economic times are relatively good, there is a tendency to believe that economic troubles are unlikely to return. As Avinash Dixit puts it for a recent article in Finance and Development:

We shouldn’t think [economic crisis] have been abolished. Thinking that we have abolished them is an illusion and perhaps a dangerous illusion, because if you think you have abolished crises, your policymakers, business people, consumers, et cetera, will behave in more reckless ways and thereby make crises more likely. The lesson that really should be learned, and I’m afraid will never be learned, is that the time for fiscal prudence is when times are good. That’s when governments should be running substantial surpluses, so that when crises or a recession hit, they can spend freely without worrying about debt. Unfortunately, the reason the lesson will never be learned is that good economic times are especially conducive to the illusion that bad times will never return. (Bold added.)
The idea that we will never learn from our mistakes may sound pessimistic, but it may very well be true. Why don't we learn that reaching a surplus in good times is a good reason to pay down debt and even set aside some of the surplus, instead of thinking that it is very important to turn that surplus into a large deficit as soon as possible?

It is too really unfortunate that the business cycle is more severe than it needs to be, simply because people refuse to face reality and learn from the mistakes of the past.

Economic Theorist Avinash Dixit: Theory Versus Policy

Finance and Development, a publication of the International Monetary Fund, has a great profile article on Princeton economic theorist Avinash Dixit. It appear that Dixit combines both great theoretical work with great teaching ability; not only has he had a big impact on economic theorists, including some who went on to win the Nobel Prize in Economics, he has also been a great teacher. Dani Rodrik at the Harvard Kennedy School of Government has called Dixit "the best teacher I ever had" and his work has had a wide influence. 

One thing he asserts is that "economic theory came out of [the economic crisis] rather better than policy practice did." He goes on to suggest that the problem isn't theorists so much as those who tried to apply it in the political and business world without understanding its caveats:
But the real fault was not so much in economic theory as, if you like, in the political and business world, where people actually swallowed some of the simplistic views about the wonder of markets too much without recognizing the hundreds of qualifications that Adam Smith and a number of others have told us about, and we should all have known about.
This quote sounds great as a way for economic theorists to get off the hook: The problem isn't theorists; the problem is policy makers in business and politics who forget the many qualifications mentioned by economic theorists from Adam Smith onward. Except I think Dixit lets economic theorists off way too easily. If politicians and business leaders are simplifying the lessons that can be learned from economic theory in a problematic way, it should be the duty of economic theorists like Dixit to set them straight. Economic theorists have a duty to see that their work is not misused by those who misunderstand their findings. After all, if they allow policymakers in business to misuse their theories, then they are part of the problem. Policymakers who convince the constituencies that their policies are backed by economic theory but who are forgetting the important qualifications nonetheless gain false credibility. I just don't see how it is acceptable for economic theorists who are in an ideal position to set such policymakers straight to sit back in an ivory tower while Rome burns.

So contrary to Avinash Dixit, even if his assertions that "economic theory came out of [the economic crisis] rather better than policy practice" is correct, I would suggest that economic theorists still have some serious soul-searching to do. Even if the problem isn't with economic theories per se, but rather with the way those theories have been misapplied, doesn't that suggest that something must change in the way that economic theorists interact (or choose not to interact) with policymakers and those who make use of their work??

Monday, December 6, 2010

Graphing Life Expectancy and Wealth: This is How Graphs Should be Done

Don't Release Chrome OS Before It's Done

Chrome OS
According to TechCrunch, there are some indications that Google may be looking to release the Chrome OS this year, despite the existence of major bugs. This would be a really bad idea. Software is judged by the user experience, and users who have difficulty with an initial buggy version will lose confidence in the product and the company and tell all of their friends. For example, when Microsoft released Windows Vista with a myriad of problems, it damaged the reputation of Windows Vista severely. When later releases of Windows Vista fixed many of those problems, the earlier reputation tended to stick. Also, Windows Vista hurt the reputation of Microsoft overall. Google would be very wise to avoid making the same mistake. Especially since the consequences for Chrome OS are likely to be much more severe than for Windows. Given its position of dominance, it is much easier for Microsoft Windows to make a comeback with a subsequent release. It would be much more difficult for a product like Chrome OS, which does not have an established user base of hundreds of millions of customers, to recover from such a mistake.

Saturday, December 4, 2010

Holograms

There really is nothing more exciting in the world than technological advance, as things that people once thought were science fiction become reality. A great example, as reported on by the New York Times, are holograms which seem so real that people consistently try to reach out and touch them. Imagine the applications for this technology as it advances. People will be able to have meetings that feel like they are in person, with holographic projections communicated over the internet. The applications from video games or even perhaps interactive movies are stunning. (Although logistical issues concerning space seem as though they are something of a concern for the latter idea.)

Economists and Philosophers

In a recent post, Harvard economist Greg Mankiw makes a list of pros and cons of unemployment benefits:
The pros are that it reduces households' income uncertainty and that it props up aggregate demand when the economy goes into a downturn.  The cons are that it has a budgetary cost (and thus, other things equal, means higher tax rates now or later) and that it reduces the job search efforts of the unemployed.
He then explains how he is unsure about an unemployment insurance extension, because he has not done a quantitative analysis of these pros and cons. Then he talks about other economists who have advocated an unemployment extension, and says the following:
I suspect, therefore, that the foundation of their support comes not from having weighed the specific pros and cons of UI per se, but rather from a more general desire to "spread the wealth around."  That issue is, as I tell my students, more a matter of political philosophy than it is of economics. (Bold added.)
I don't think this makes much sense.

Either "spreading the wealth around" is a pro or a con. You can't complete a cost-benefit analysis without saying which and giving it some sort of weight or justify giving it no weight. That is, you cannot have a valid opinion without being something more than an economist. Even the "neutral" decision to give distributional issues zero weight is still a choice with consequences that has to be explained and justified. If Greg Mankiw is "correct" about what economics is (and I don't think there is an objective answer to the question of what economics is) then it logically follows that economists cannot have a valid opinion about UI benefits arising solely from the study of economics.

What I am saying is that, even if an economist had studied everything on Greg Mankiw's pro and con list, they still wouldn't be in a position to offer any policy conclusions. Because Mankiw's pro and con list does not account for a distributional issues, but UI benefits definitely undoubtedly have important distributional effects in reality that have to be accounted for somehow.

If this is so, wouldn't it be better for economists who do voice a policy conclusion to explain how they used "non-economic thinking" to account for the "spreading the wealth around" effect, which is a reality that has to be accounted for one way or another? Or maybe economists should just stay out of the policy conclusion business altogether, since nearly any policy is going to have important effects on the distribution of income and wealth, and economists, according to Greg Mankiw, have nothing to say about that.

In other words, if we accept Greg Mankiw's definition of the divide between economists and political philosophy, then only economists who are also political philosophers can arrive at conclusions about policy.

Friday, December 3, 2010

Constitutional Hardball

Professor Jack Balkin has a very interesting proposal regarding how President Obama could play "constitutional hardball" with Republicans, who are already playing "constitutional hardball" themselves by misusing the filibuster.

A Weak Proposal For Reforming the Filibuster

Over at Balkinization, Professor Gerard N. Magliocca makes a rather weak proposal to "reform" the filibuster by limiting delay to "only" one year.

I don't see what is supposedly accomplished by thwarting the will of a majority of the Senate for such a long period of time. First of all, our founders really did not want political parties, but we now have political parties that behave in a manner very similar to a parliamentary system rather than exercising much independent judgment. In such an environment where political parties oppose for the sake of opposing, all that Professor Magliocca's proposal would accomplish is unnecessary delay. Worse, the proposal is unprincipled, in that it actually accepts the principle that the will of a majority in the Senate should be thwarted by a minority, contrary to the design of the Senate. Also, the proposal would have the affect of making legislation supported by a majority but not a supermajority impossible to pass within a year of an election, narrowing the window of opportunity to get anything significant done to only one year after an election.

It really is an unfortunate proposal, and one that is not much of an improvement over the status quo.

Will the Economy Have to Get Worse Before It Gets Better?

Assume the following facts are true. First, the economy is not going to just get better on its own, at least not in a reasonable time period. Second, even if the economy worsens to a large degree over time, there will not be sufficient political support to do anything about the economy as long as that worsening is gradual. Finally, if unemployment simply stays around 10%, there will be no political support for action to change the situation, especially since the pain of unemployment is concentrated among lower income workers who do not vote.

If these facts are true, it follows that Democrats should not worry too much about the expiration of tax cuts for everyone or whether unemployment benefits are extended. Going back to the point of the previous post, in fact such events might even be positive, in that it would create pressure for action to actually change the situation. Our political system is currently in a dysfunctional state where there is insufficient pressure for action in the form of fiscal stimulus to get the economy going again. What is needed is a shock to the system; as long as unemployment remains steady and primarily impacts lower income workers (along with a few unlucky others) perpetually persistent high unemployment will seem to be politically acceptable.

Trading High Income Tax Cuts For Unemployment Benefits

There has been a lot of talk lately about Democrats trading tax cuts for those who make over a million dollars a year in exchange for Republican agreement to extend unemployment benefits. This is a bad deal and should be rejected. Here is why.

The first thing to recognize is that half-measures are not actually worth that much. Extending unemployment benefits will not do much to keep unemployment low. According to a new White House Council of Economic Advisers report, failure to extend unemployment benefits will cost an additional 600,000 jobs as unemployed people cut back on spending. That sounds bad; but what is actually really bad is that we already have 15.1 million people who are unemployed and can't find jobs and we are not doing anything about it. And there is no reason to think that these people will get back to work anytime soon in the absence of fiscal stimulus. Counter-intuitively, unemployment may have to get worse before it will get better. Only a further worsening of the economic situation will create the political conditions necessary in order to get Republicans to agree to do something about the economic situation.

So, I say let Republicans show their true colors. Let them cut of unemployment benefits for 7.1 million people right before the Holidays if that is what they think is the right thing to do. I don't see why Democrats should bribe them with an extension of high income tax cuts for people making over a million dollars a year in order to induce them to do the right thing. I say, let Republicans refuse to extend the benefits and then face the consequences of their choice.

Second, it has been mentioned that tax cuts are a form of fiscal stimulus. That is, failure to cut taxes is a failure to provide the economy with a form of fiscal stimulus. The likely result of not providing this fiscal stimulus is a worsening of economic conditions. However, it should be noted that tax cuts, especially for those who are already very well off, simply are not a cost effective form of stimulus. The economy is likely to worsen in any case and ultimately we need much more fiscal stimulus that is much larger and in a much more effective form. The sooner we come to that realization, the better. Letting the economy take a hit sooner is better than letting things drag out. It is like the apocryphal story about the frog that stays in water that is slowly brought to a boil, whereas it would have jumped out (taken action to change its situation) if simply dropped in hot water. One can imagine the voting public becoming more and more comfortable with worsening economic conditions, especially as the negative effects  are concentrated on lower income people who do not vote. In contrast, the voting public would be more likely to support action in the face of more sharply negative economic news.

Unemployment Increases and the Politics of Fiscal Stimulus

It looks like the unemployment rate has increased again, moving from 9.6% to 9.8%. One wonders exactly how bad it has to get before Republicans relent on fiscal stimulus. Would 15% unemployment be enough to make them reconsider their position? What if unemployment is still near 10% next year. Would that be enough to make them reconsider?

I believe the answer is probably no. I just do not think the facts matter when it comes to the Republican position on fiscal stimulus. Perhaps I am wrong about that, but as Paul Krugman points out, incorrect economic theories have a way of surviving in the face of contrary evidence.

On the upside, I think that if unemployment rate continues to get worse, the preferred Republican policy of "doing nothing" will start to become increasingly politically unpopular. On the other hand, if the unemployment rate stays at about 10%, then I think it is possible that people get used to that as the "new normal" and see inaction as a perfectly acceptable policy response.