The Reconstruction

Thomas Schelling, in an analysis of coordination, described a situation in which two people wish to meet in New York City on a given day, but cannot communicate the time or place at which they should meet. At the time, he suggested that beneath the clock at Grand Central Station at noon would be an ideal time and place– a “focal point” for coordination. He no longer believes this to be the case, as he explained in an interview with the Richmond Fed. When he originally formulated the question, rail was one of the most common ways to arrive in New York, making the clock at Grand Central Station an obvious choice. Now, with the decline of rail travel, it’s not so obvious where one should expect to meet another. Tyler Cowen asked where the new focal point might be, and has received a variety of responses. There appear to be two general categories, however– presumed focal points based on common knowledge, and those based on a personal connection.

For example, if two individuals who did not know one another were to meet in Chicago, a likely choice would be in front of the Hancock building– simple enough. But what of the case Lewis Black describes in “Nothing’s Sacred”, in which he enters a dorm at a school he’s visiting, leaving his dog Jack-Jack outside? When he returns, Jack-Jack is gone. He searches, but cannot find his dog. It was his dog, so naturally he did not communicate a time nor a place at which to meet should they become separated. Lewis panicked and searched everywhere, but could not find his dog. The next day, however, Jack-Jack returned to the spot at which Lewis had left him, at the exact time he had left him. Both knew, through common experience, that it was the ideal time and place at which to meet.

Coordination games such as this apply to more than just meeting other people. Please remember, though, if you’re ever lost in the woods, stop running around like an idiot. People really do die that way. Many different situations are similarly dependent not on the actual choices that the individuals make, but that they choose the same (or compatible) actions. Many of these are enforced by law– driving on the right side of the road (or left, in a few places), flying at certain altitudes based on direction of travel, et cetera. Many more are enforced by social convention; do you extend your left hand or right (or neither) when greeting someone in country X? Interestingly, if apply this social context to the meeting place game, we may find that people perform more poorly at it today than they would have 30 years ago. Since communications (read: cell phones) have improved so greatly in this time, the need for coordination has diminished, and thus people no longer rely on a central point for coordination. In short, the practice of meeting friends has become decentralized, and as a result, people have less practice at the coordination game.

To couch it in terms of game theory: if we imagine a repeated version of the game, in which the players are still not allowed to explicitly communicate, but are allowed to know the choice made by the other player in the previous round, we can imagine that eventually, the players would choose the same meeting point. In all successive iterations of the game, they would be best off if they continued to choose the same location, and thus a focal point would emerge. In the rounds between the first round and a successful meeting, the optimal strategy might be to choose randomly (50/50 chance) between remaining at their previous choice and choosing to meet at the other player’s previous choice. In each of these rounds, there would be a 50% that they would meet. This pattern, in which the players’ initially poor outcomes give way to a stable equilibrium, likely cooresponds to the learning process my generation would have to endure if our cell phone service were to die.

Interestingly, Poland seems to have this one down. In every city (or, at least, so it seems) there is a statue of Adam Mickiewicz, which serves as a de facto meeting place. Could this be due to the relatively slow development of their telephone infrastructure? I’m acutely aware that calling Poland can be ridiculously expensive, and according to The Economist, mobile phone subscriptions only six years ago were as low as 10.6 per 100 people. Until recently, then, social conventions had to help people find one another. Cell phone use has exploded in the intervening years– will Adam Mickiewicz be lonely?

At 1AM EDT, The National Hurricane Center issued a special advisory:

“THIS SPECIAL ADVISORY IS TO UPDATE THE INITIAL AND THE FORECAST INTENSITY OF WILMA. AN AIR FORCE PLANE JUST MEASURED 162 KNOTS AT 850 MB AND A MINIMUM PRESSURE OF 901 MB IN A PINHOLE EYE. WILMA IS NOW A VERY STRONG CATEGORY FOUR HURRICANE AND COULD BECOME A CATEGORY FIVE TODAY. NO CHANGE IN TRACK IS NECESSARY.”

At 2:30AM EDT, an update was issued, which is unusual:

“DATA FROM A RECONNAISSANCE AIRCRAFT INDICATE THAT HURRICANE WILMA HAS BECOME AN EXTREMELY DANGEROUS CATEGORY FIVE HURRICANE ON THE SAFFIR-SIMPSON HURRICANE SCALE. THE RECONNAISSANCE PLANE MEASURED 175 MPH WINDS AND ESTIMATED A MINIMUM PRESSURE OF 892 MB. THIS IS THE LOWEST PRESSURE OBSERVED IN 2005 AND IS EQUIVALENT TO THE MINIMUM PRESSURE OF THE 1935 LABOR DAY HURRICANE IN THE FLORIDA KEYS.”

For reference’s sake, that puts Wilma in a two-way tie for the second-most powerful Atlantic hurricane ever recorded, behind Hurricane Gilbert, which registered a minimum pressure of 888 mb. Typhoon Tip beat this with a minimum pressure of 870mb, so Wilma has a long way to go if she wants to set a world cyclone record, but she has a chance– the forecasting models suggest that further strengthening is highly possible.

Three of the six most powerful hurricanes ever recorded have occurred in the past three months. That’s not normal, is it?

UPDATE: Well, she did it. She’s the most powerful hurricane ever recorded, with a minimum pressure of 882 mb. It’s unlikely that she’ll strengthen much more, and will probably be “only” on the border between a Category 3 and Category 4 when she hits Florida.

Last Thursday, Tyler Cowen posed an exam question for his macro class, consisting of a passage from a Michael Mandel column in Business Week, and the inquiry, “True, false, or uncertain?” The passage in question read as follows:

“Let’s do the calculations. Over the past 10 years, the U.S. has run up an accumulated goods and services trade deficit of roughly $3 trillion. Sounds like a lot of money, doesn’t it?

Now let’s suppose those dollars had been used for good rather than evil. That is, rather than buying imported cars, toys, and handbags, thrifty Americans would have saved their money. It’s reasonable to believe that about half of that $3 trillion would have gone into financing productive purchases here in the U.S.–new factories, power plants, office computers and the like–$1.5 trillion worth.

So what would be the payoff from all that thriftiness? A reasonable rate of return on investment, after depreciation, is roughly 7%. So $1.5 trillion in extra assets would have a return of about $100 billion a year.

That $100 billion is roughly 1% of an $11 trillion economy. Over ten years, then, complete elimination of the trade deficit might–might–have added a tenth of a percentage point to growth.

That’s a good measure of the size of the virtues of savings–roughly a tenth of a percentage point on growth. That’s 0.1 percentage points.”

If the passage seems unclear, that’s because it is. As many complaints as there are about the mathematical formalism of economics, it provides a great deal of clarity– and I’ll leave it as an exercise to the reader to translate Mandel’s argument into mathematical form. Mandel’s an intelligent guy, but it seems that he’s put together an unusually muddled argument.James Hamilton tackled Tyler’s question using basic macroeconomic theory, and found that:

“If the U.S. were to increase annual investment spending by $400 billion from the current $1.9 trillion, that would represent about a 20% increase in s, implying eventually 10% higher real income per U.S. resident…

Is 10% more income per person a big deal? I would say that it is, though Mandel is certainly correct that, if we had some policy that could make even a modest change in the productivity growth rate, it could potentially have a much bigger effect over time. The problem is that I’m not sure what such a policy would be. Certainly insofar as productivity gains result from firms’ investments in new technology, the way to get those gains is through additional investment, which Pro-Growth Liberal logically sees as another reason why saving can indeed matter a great deal.”

In the process of finding a higher predicted growth rate due to savings, Hamilton corrects Mandel’s stranger assumptions, like the idea that only half of an increase in savings would go into financing productive purchases– does Mandel think that the other $1.5 trillion would go into mattresses, or was he assuming that the other half would be used to invest overseas (implying an increase in exports), or was he just not thinking when he wrote that piece?

Yesterday, Mandel wrote a rebuttal, in which his thinking becomes even stranger. He accepts Hamilton’s calculations, but argues that,

“Hamilton says that a 20% increase in the savings rate would increase real income per person by 10%. Unfortunately, he doesn’t say how long that will take. Is it going to be 10 years, 20 years, or 30 years? It makes a difference. If it’s 30 years, then the increase in growth over that stretch is roughly 0.3 percentage points.”

His insistence on expressing increases in growth in percentage points rather than in percent should ring alarm bells, because it’s a rhetorical technique, not a logical argument. The average growth rate of the U.S. economy over the past 75 years has been between 3.5 and 3.6%. Thus, a 3.5 percentage point increase in average growth is equal to a 100% increase in the growth rate of the economy. A 0.3 percentage point increase is an 8.5% increase in the rate of growth. A 8.5% increase in the average rate of growth of the economy is nothing to scoff at.

More importantly, assuming that it would take 30 years for increases in the savings rate to raise the standard of living by 10% and calculating the additional growth rate over that 30 years is disingenuous. It relies on the assumption of a long time horizon for the benefits of saving to materialize, which is a significant assumption. More importantly, phrasing the argument in this way is a dodge– if a 20% increase in the savings rate could lead to a permanent increase in real income of 10%, over a lifetime that’s a pretty good deal.

Hamilton notes that finding a policy that could make “even a modest change in the productivity growth rate” would be an even better deal, but said that he doesn’t know what such a policy would be. This is polite, to say the least. Productivity growth is largely exogenous– investments in education and technology development are probably the only ways to affect it, and these are not sure bets by any means. This isn’t to say that they’re not investments worth making; however, the gains from these investments may not materialize for several decades if at all, and their magnitude is not predictable. Mandel ignores all this and pretends it’s a sure thing that would certainly be cheaper than increases in the savings rate:

“Hamilton says he doesn’t know a policy for increasing productivity growth. I’ve got a simple one–how about increasing government spending on basic research, especially in the area of energy technologies? Or is he assuming that current levels of government R&D spending are optimal?”

In addition to calling to mind H.L. Mencken’s declaration that, “For every problem, there is a solution that is simple, neat, and wrong”, this passage should raise some eyebrows. Mandel suggests that we spend more money on basic research. This is fine, even advisable, but how does he propose paying for it? We can either cut investment or cut consumption. A decrease in investment would offset an increase in research expenditure and thus be inefficent. I would actually be highly inefficient, as traditional investment is always required to take advantage of new technologies. To put it more intuitively, even if we developed a more efficient technique for making bobble-head dolls, we would need to buy new equipment to be able to use such a technique.

Thus, Mandel must either be trying to have a free lunch, or he is clearly advocating for a reduction in consumption to cover the added research expenditure. At the same time, though, he decries the fact that added savings would require a reduction in consumption:

“Moreover, he also doesn’t point that the real consumption per person is actually reduced by the amount of additional savings…

So here’s the situation. The pro-savings people are asking us to accept a sure decline in living standards today, in exchange for the possibility of a moderate increase in income somewhere off in the future.”

He pulls this same stunt, in which he recognizes a tradeoff in a plan he dislikes, but fails to acknowledge that it exists in his own, with the aforementioned tradeoff between research expenditure and increasing savings. He assumes that when Hamilton suggests cutting the budget deficit, that Hamilton would do so by reducing government spending, not by increasing taxes. Thus, cutting the budget deficit would mean decreasing research expenditure. This is true, if we accept his assumption of a constant tax rate. However, he doesn’t note the converse, which is that increasing research expenditure without increasing taxes would increase the budget deficit (and thus decrease investment, as noted before).

If we strip away the nonsense, Mandel has some good points (which makes the nonsense that much harder to bear). His observation that the savings rate ignores investments in education and research, while not unique, is a valuable one. Macroeconomic accounting would certainly be improved if expenditure on these things were grouped as a type of investment (ideally, separate from capital expenditure– the traditional notion of investment), rather than as consumption. The primary reason it is not is probably that while education spending is easy to quantify, spending on research and development is not. Research doesn’t only occur as a result of direct research spending by the government, it also occurs as a result of traditional investment creating demand for capital improvements combined with the suppliers’ desire to differentiate their products. Many of the productivity improvements that come from this process don’t come from research labs, but rather from engineers who create better ways of doing things in the daily course of designing new products. It’s unlikely that the amount of private spending on research and development is uniform, either within or across industries, meaning that constructing a reliable measure of this form of investment is probably very difficult.

Mandel’s point about the importance of education and research, if I may stretch it a bit, is probably strongest when we consider the topic of “pure” scientific research. This is the type of research that is most sensitive to public funding, as its products may have no apparent commercial application at the time, making private firms unlikely to invest in it. Many of these innovations have turned out to be extremely valuable in the long run– making public spending on pure science a wise investment. The benefits of this relative to savings, and whether such government-directed investment should compete in areas where commercial investment is likely, are questionable. Mandel argues here that “technology-based improvements in productivity can boost productivity growth and national wealth without requiring an increase in the national savings rate,” but he neglects to mention, as stressed before, both that there’s no way to simply spend one’s way towards technology-based improvements in productivity, and that some level of savings is necessary to realize these improvements.

To quote Hayek:

“It is because every individual knows so little and, in particular, because we rarely know which of us knows best that we trust the independent and competitive efforts of many to induce the emergence of what we shall want when we see it.

Humiliating to human pride as it may be, we must recognize that the advance and even the preservation of civilization are dependent upon a maximum of opportunity for accidents to happen. These accidents occur in the combination of knowledge and attitudes, skills and habits, acquired by individual men and also when qualified men are confronted with the particular circumstances which they are equipped to deal with. Our necessary ignorance of so much means that we have to deal largely with probabilities and chances.

Of course, it is true of social as of individual life that favorable accidents usually do not just happen. We must prepare for them.”

This should provide some guidance as to optimal policy. We do not know if or how much of a gain can be provided by government-directed research. We thus do not know if investment in research is a better idea than investment in capital improvements (and thus, indirect investment in private research). We do know that individuals who see better ways of doing things can benefit from developing such improvements, and that this can occur without the role of government. We also know that the benefits from increased savings are real and all but guaranteed. Finally, we know that pure science research is something that will not occur without government support.

Thus, we can conclude that addressing national savings through cutting the budget deficit, while not something the business crowd would like to consider, is probably a good long-run idea. It’s a variable that we can control to predictable, positive effect. Likewise, government investment in pure science is a good idea. However, government-sponsored research into applications of science is a bad one– it can be accomplished more efficiently by the private sector– however much the business community might like more subsidies.

A final note: in this link, where Mandel points out that “technology-based improvements in productivity can boost productivity growth and national wealth without requiring an increase in the national savings rate,” he’s merely stating a basic macroeconomic assumption about long-run growth. The rest of his argument, with the “lots of charts and graphs” he proudly mentions elsewhere, is painfully weak. He manages to ignore lags in productivity growth and ignore every other factor– he manages only to disprove the assertion that savings are the only input to productivity growth and have an immediate effect– an assertion nobody has (to my knowledge) ever made. Most macroeconomic indicators are heavily dependent on multiple factors, so the fact that no Phillips Curve appears when one graphs two indicators should never be a surprise. That’s why we use regression analysis– it controls for other factors and makes our analyses more meaningful.

“I don’t trust books. They’re all fact and no heart.” –Stephen Colbert

“The Colbert Report” (pronounced with silent final consonants) debuted last night, and it looks like it will be worth watching, if not quite as much as its parent show, “The Daily Show“. Steven Colbert is hilarious, and some of the digs at various cable news/punditry shows are fabulous. In particular, one clear dig at Lou Dobbs’s “Outsourcing of America” segment noted that Hurricane Wilma (yes, that’s “Hurricane” Wilma, as of about 15 minutes ago) will be the last Atlantic hurricane of the season to carry a designation based on “American” letters. Any future hurricanes, Colbert noted, will be named after Greek letters. This prompted a tirade against the outsourcing of American spelling to low-wage Greek letters, one that involved a Dr. Seuss book and the declaration that Colbert’s alphabet begins with “yuzz”.

I have a few more extensive thoughts in the pipeline, but in the meantime, I present the two ways other than the amazing college football and the White Sox that I have managed to have a less-productive-than-average-weekend:

1. Pondering when Tropical Depression Twenty-Four will become Hurricane Wilma, and whether it will make landfall on the US Gulf Coast as a Category-Three storm or stronger. It’d be nice if the MAHEM Hurricane Futures Market bet on these factors as well as landfall.
2. Wu’s Riddles collection is wonderful, if you’re a nerd.

It’s halftime at the Northwestern-Purdue football game, and the Wildcats are up 28-9. Their record thus far doesn’t look at all special; assuming a win today, they’ll have a 4-2 record, 2-1 in the Big Ten. Their two losses, however, were a cliffhanger defeat by undefeated #10 Penn State and an impressive Arizona State team (that sits just outside the top 25). Last week, they racked up 674 yards to upset then-#14 Wisconsin. They’re certainly a team that can’t be written off. Yet every sports writer seems to do just that. In ESPN’s midseason review of the Big Ten, Northwestern is mentioned only in passing– in the context of Penn State and Wisconsin’s troubles with them. ESPN’s (or rather, Brian Hooley’s) predictions for bowl-eligible teams: “Penn State, Wisconsin, Minnesota, Michigan State, Ohio State, Iowa and Michigan.”

It’s a safe prediction, based on conventional wisdom. But the conventional wisdom is often wrong. ESPN’s writer has been covering the Big Ten for 18 years and hosts a radio talk show in Columbus, Ohio. This is his problem– it takes a long time to unlearn old biases and rid oneself of conventional wisdom. Up until the latter half of the 1990s, Northwestern football was the conference joke. In the past ten years, however, Northwestern has had three conference championships. In short, over the past ten years, Northwestern has been one of the top three teams in the conference with Ohio State and Michigan. One would think this would have caught peoples’ attention, but no. It’s always a surprise to them when Northwestern wins.

NU has a tough schedule ahead of them, but barring any major injuries, particularly to Sutton or Basanez, the’re bound to surprise a few more people as they head towards their next bowl appearance.

Update: It’s always a close game with NU, but at least I don’t have to eat my words yet.

Yesterday’s Washington Post reported that scientists at the Goddard Institute for Space Studies have reported a record high global average temperature during the first nine months of this year. This is a good time to note one of the best resources for discussions of the science behind global climate modeling, RealClimate. It “is a commentary site on climate science by working climate scientists for the interested public and journalists.” Wonderfully, the discussion on the site is restricted to the science of the matter, leaving the politics to others.

On one of those Monday afternoons where law is strangulation and nagging questions about the nature of the universe become an urgent priority, a gnat was flying around my desk and I realized I didn’t know if insects got tired or if their life span was too short for any kind of exhaustion short of death. If there is too much shit to do, like procreate with urgency, you’re not gonna sleep right? What is the lifespan of a bumblebee anyway? So, I decided I must investigate this question. Being a lazy scientist, and well, not being a scientist at all, I emailed my brilliant friend Adam with the question. The following is his reply for all of you out there who have also been wondering, but haven’t bothered to look it up:

“To my eternal shame, I have no idea, but I found the following in the Guardian, in some sort of ‘Ask scientists!’ article:

Q: Do insects sleep?

A: Not in the way we think of it, no. We need lots of sleep to ‘recharge’ our brains (although no one yet knows how exactly this work). Most insects will rest to conserve energy rather then ‘recharge’ and so have ‘periods of inactivity’ (either at night or during the day depending on whether they are nocturnal or diurnal).
During that time, some of them may go into a kind of short-term hibernation where all their bodily functions are massively reduced. This is more like suspended animation than sleep as we understand it, though.”

The answer to the question ‘do insects feel tired’, however, is almost certainly no, because I can say with a fair amount of confidence that insects don’t have the capacity to truly “feel” anything, which probably requires some sort of proto-self, at least. But really, who knows?”

A couple weeks ago, I said, “Of course, DDT was never banned, and has actually become far less effective due to mosquitos developing resistance to it.” This was in the context of the canard that environmentalists are responsible for malaria deaths due to the “ban” on DDT use.

One of my friends asked me about it a few days later, because it was her understanding that DDT was in fact banned.

Is it banned? It depends on how restrictive your definition of “banned” is. It is banned from agricultural use inside the United States. Its use is allowed, both in the United States and internationally, for public health reasons. From the EPA press release announcing the agricultural ban:

“Public health, quarantine, and a few minor crop uses were excepted, as well as export of the material… The peak year for use in the United States was 1959 when nearly 80 million pounds were applied. From that high point, usage declined steadily to about 13 million pounds in 1971, most of it applied to cotton. The decline was attributed to a number of factors including increased insect resistance, development of more effective alternative pesticides, growing public and user concern over adverse environmental side effects–and governmental restriction on DDT use since 1969.” 

So from 1959 to 1969, when government restrictions went into place, usage was declining steadily due in part to increased insect resistance and the development of more effective alternatives. What the anti-environmental crowd would have you believe, however, is that the ban on DDT in agricultural production in the (mostly malaria-free) United States, which primarily affected cotton crops, is somehow responsible for 50 to 90 million deaths. This post by Tim Lambert neatly eviscerates this claim, in the context of anti-environmentalists trying to use the aftermath of the tsunami to blame environmentalists for malaria deaths in Sri Lanka because of this fictitious ban on DDT:

“So we should be spraying DDT in Sri Lanka to prevent malaria? Well, no. The World Health Organization’s plan for malaria prevention in the wake of the tsunami reports: 

‘Sri Lanka

Endemic sporadic malaria close to the affected areas transmitted by An.culicifacies, which has been considered DDT-resistant for many years, but is still sensitive to organophosphates, such as malathion, and pyrethroids.’

Yes, the mosquitoes in Sri Lanka have evolved resistance to DDT. It doesn’t work any more. In fact, that is the reason why they stopped using DDT in Sri Lanka. It wasn’t because of any ban-it was because it stopped being effective.”

So much for the ban on DDT that supposedly killed more people than Hitler.

Lambert’s weblog, Deltoid, is a beautiful read on DDT, John Lott, and other topics. He’s rational, knowledgeable, and understands statistics– in short, a rare breed.

So is there a ban on DDT? Yes, in the same sense that lawnmowers are banned. There’s a ban on lawnmower use in my city after 10 PM (to be honest, I forget the actual time), but that doesn’t mean I can’t use a lawnmower anywhere, ever. So– no, there’s no ban. There’s no international ban on DDT use, and there’s not even a ban on DDT use for public health reasons in the US. It’s not used because it’s not the best tool we have, not because of a bunch of evil environmentalists.

I actually gasped when I awakened this morning and saw this. Thomas Schelling, winner of half of this year’s Nobel Prize in Economics (note to the sticklers: yes, it is technically the “Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel– it’s awarded by the Nobel Foundation, get over it), was the author of the first book in theoretical economics that I ever read. It’s a clear, easy read entitled “Micromotives and Macrobehavior”, and in it, he shows (among other things) how relatively weak preferences can lead to complete racial segregation. It certainly opened my eyes to an entirely different way of looking at problems. The Nobel announcement cited his most famous work, which addressed conflict strategy in general and nuclear deterrence specifically.

For more information about Schelling, there was a great interview with him in last spring’s Richmond Fed “Region Focus”, in which he makes a great point about dissent and agreement within economics:

“I claim that we couldn’t do without rational choice. But we don’t expect rational choice from a child or an Alzheimer’s patient or someone suffering from shock. We will better understand the uses and limits of rational choice if we better understand those exceptions. I use the example of the magnetic compass. It’s usually a wonderful way to determine which direction north is. But if you are anywhere near the actual north magnetic pole, the compass could point in any direction, even south. The same is true with rational choice. It is a wonderful tool if used when appropriate, but it may not work all the time. So I consider myself in the rational-choice school, absolutely. But I am more interested in the exceptions than many other economists tend to be. 

“As for the behavioralist critique of neoclassical economics, I would conjecture that if you walked into a classroom where a behavioralist is teaching microeconomics, that person would teach it in a straight, standard fashion. It’s something that you have to master — you can’t do without it. For instance, if a student were to ask about the effect of a gasoline tax on driving behavior, the response would likely be that such a tax will tend to lower consumption of gasoline and/or increase the desirability of more fuel efficient cars. That’s just straight neoclassical economics.

“More generally, I think that when a new idea develops, it is important that the enthusiasts are given free rein to explore and perhaps even exaggerate that idea. Once it catches on and becomes respectable, then it’s time to become more critical. Rational choice has gone through that process, and the behavioralists have emerged to challenge some of its assumptions. The behavioralists have probably overstated their case, but their ideas are relatively new and will be critiqued as well.”

Tyler Cowen also has a bunch of links up to (his former mentor) Schelling’s work in a variety of areas.