Charlatan!

My two least favourite "public intellectuals" are Niall Ferguson and Nassim Taleb. I've posted several times in response to things that Ferguson has written. After an listening to an excruciating interview with Taleb on the otherwise wonderful Planet Money podcast, I wanted to post a grand critique of Taleb to try to debunk the idea that hes' some kind of "deep thinker." Since nobody cares and I actually have real work I ought to be doing, I was very pleased to find this blog post which nails Taleb quite effectively.

Taleb is merely setting himself up as some sort of heretical alpha monkey of the quants for stating the obvious, the misleading, and occasionally the gratuitously wrong-headed and untrue.

I have no idea what an "alpha monkey of the quants" might mean, though I do like the sound of it. But if you listen to the Planet Money interview, you will see what Locklin (the blogger) means in the rest of the sentence.

Locklin also quotes Taleb as saying " Our research shows that economic papers that rely on mathematics are not scientifically valid." This might be obvious, if "rely on mathematics" means excluding any form of evidence. For example: Edward Wilson defines science as the "systematic enterprise of gathering knowledge about the world and organizing and condensing that knowledge into testable laws and theories." So math without reference to knowledge of the world is not science. It's math. But if "rely on" means to use as a necessary part, then this quote falls into the category of "gratuitously wrong-headed and untrue." Locklin has a great response:

I agree that many economics papers are silly. Since economic papers often involve math, his reasoning seems to be something along the lines of “we must do away with mathematics and instead base economic policy on chicken entrails and pixie dust.”

The Parallel Universe Machine

If you're not sure what you think of the $800 bn Obama stimulus, then this is the podcast for you to listen to. Two caveats. First, there may not be anyone who is not sure what they think. Among the people paying attention, I get the impression that everyone is pretty much 100% sure it was a big waste or money or the only thing that kept us from entering another great depression. Second, the podcast is far from conclusive. But at least you get a sense of why we should feel unsure.

The key idea is that as scientists we would like to use the stimulus as an experiment to see if Keynes was right. But quickly we realize that it's a crummy experiment because there's no control group. We need a parallel universe in which everything else was the same but the stimulus was not enacted. But the commentators point out that economists have "parallel universe machines." We use estimated models to conduct counterfactuals. If the model is right, we can say what the parallel universe would look like. According to Mark Zandy, unemployment would be 11.5% instead of 9.5%.

The Planet Money reporters rightly point out we should be skeptical about these models. But they don't get the reason right. They seem to think it's because the world keeps changing so the laws don't stay fixed long enough to figure them out. I don't accept that premise. Rather,the basic problem is that the estimates in the model were created by regressions that lacked a parallel universe. So they use observed time-series and cross-section variation instead. In some cases--my own work, for example ;-) --we can get estimates we trust this way. But for economic stimulus, the problems of holding all else equal in other periods or other places just seem insuperable. Not wanting to end on a pessimistic note, I actually got something really helpful from this podcast: a new metaphor for what I do at work. I'm a builder and operator of parallel universe machines!

Why so slow to recover?

The US economy doesn't look very good these days. What happened to the recovery that seemed to be moving at a pretty good clip last spring? Here are four theories I've been hearing.

1. It's the Greeks. According to this idea, Greece's sovereign debt problems are creating uncertainty and fear. I'm skeptical. In the past far more important economies have had just as big problems without a notable drag on the US economy (Mexico in 94' , Brazil and Russia in 99', most of Asia in '97). So how did we shrug those disasters off but not this one?
2. It's the debt. This is the idea favoured by fiscal conservatives. The idea is that the US government has spent beyond its means and everyone now recognizes that a day of reckoning approacheth. Thus we save now so we can afford to pay our taxes down the road. Yeah, maybe.
3. End of stimulus. The government boosted demand but now that the stimulus is drawing to a close; we would need the private sector to replace falling government demand with rising consumption and investment. But they're not in the mood. Why not? See 1,2, or 4.
4. Deleveraging sucks. Debt was high relative to asset values and asset values were inflated. So debt was really, really high relative to fundamentals. Now that debt has to come down and there's no easy or fast way to do it. This is the theory that makes the most sense to me. It is complementary with theory #3.

Planet Money and the Big Short

My July endorsements are both economics/crisis related. Thanks to a tip from Andy Bernard, I started listening to Planet Money, a podcast from NPR. I download it from iTunes. The reporters are excellent. It manages to be very entertaining while not sacrificing substance. I learn something from almost every episode. In the episode I'm listening to now, they track down homes in Sarasota, FL that were part of a "toxic asset" they bought during the crisis. Three of nine houses they found were investment homes. Another was a second home. I'd been expecting it to be poor, unsophisticated people who had lost their jobs and hadn't been able to make interest payments when their low "teaser" rates expired. I'm sure those victims are part of the larger story but it's interesting to hear about the other side.

I've also been listening to an audiobook of The Big Short by Michael Lewis. The characters are fascinating and you learn a lot too. Though I have to admit that synthetic collateralized debt obligations still confuse me despite Lewis' lucid explanations.

The wisdom of Esther Duflo

I just got around to reading the Ian Parker profile of Esther Duflo in the May 17, 2010 New Yorker. It's worth reading for anyone interested in development policy (which should be most people, I hope). But I found it particularly interesting because of the issues it raises for my profession. What are the central questions that economists are tasked with answering? And how should we answer them?

Here are a couple passages with Duflo quotes that I liked.

Duflo had long wanted to use experimental methods to put microfinance to the test. As she saw it, there was little beyond anecdote to support claims that the technique had a special power to combat poverty, gender inequality, and ill health. This is not to say that Duflo was committed to debunking. "One of my great assets of being in this business, or maybe I've developed it over time, is I don't have many opinions to start with," she told me. "I have one opinion--one should evaluate things--which is strongly held. I'm never unhappy with the results. I haven't yet seen a result a didn't like."

I like this attitude a lot but I often feel the opposite. There's no such thing as a likable result. Our referees at journals tell us "There is nothing surprising in this paper. Your results are obvious." Or they tell us "I don't believe your results at all. They are all spurious." It would seem that Duflo has a talent for designing questions where the results will be plausible and surprising, if only in the sense that no one knew what to expect.

There is an interesting debate over whether economists need to understand the mechanisms at work or whether it is enough simply to find out whether various "treatments" actually work. I think we were probably too much on the mechanism side. We had our theory telling us what to expect via mechanisms such as supply, demand, equilibrium, expected utility maximization, etc. And then as long as we had a supportive anecdote, or a strong introspective intuition, or maybe some observational data consistent with the mechanism we became overly confident that we really understood how the world worked enough to prescribe policies.

"It can't only be the data," Duflo said, showing a rare willingness to generalize. "Even to understand what data means, and what data I need, I need to form an intuition about things. and that process is as ad hoc and impressionistic as anybody's."

It can't only be the data, but there must be data. "There is a lot of noise in the world," Duflo said. "And there is a lot of idiosyncrasy. But there are also regularities and phenomena. And what the data is going to be able to do--if there's enough of it--is uncover, in the mess and the noise of the world, some lines of music that actually have harmony. It's there, somewhere."

That's a gorgeous expression of an inspiring thought. But don't worry I'm not going to abandon my office and take to the field, running randomized experiments. I am very glad economics has made room for and even celebrates (Clark medal) this sort of work. But I have been brought up to believe that the data is given and it is our job to find the data,, assemble it, clean it, massage it, scrutinize it, and finally interpret it (via econometrics). Nothing in my education, experience or natural aptitudes has prepared me to go out and create the data.

This Month's Endorsements

Mostly getting old is just a long (or not-so-long) bumpy road downwards. But on thing I like about getting old is my increased enjoyment of finding really good things. I feel like I have the experience to make a sound judgment of quality. So here goes a new monthly feature of my blog.

• Far From the Madding Crowd, Oxford pub on Friar's Entry, very near Borders, quite close to the central bus station. Everchanging but always excellent beer selection. Good prices (2.5 for a pint of the daily special). Well-lit. Free wireless. Quiet enough for work or conversation. Welcoming. My favourite pub in the world!
• India Pale Ales: Jaipur from Thornbridge, Mahseer from Green Jack, and Carronade from TRYST.
• The Partridge, great French food in Wallingford. The best restaurant food I've had in England. Please, please go there. It needs more support!
• Outnumbered. Funny. Painful. Painfully funny. My favourite comedy since Thirty Rock.
• New College, Oxford. Medieval walls just do it for me.
• Bath, my favourite English city, in Somerset, my favourite county.
• The Cotswold Way, especially Wotton-under-edge and Painswick.
• Robert Schumann
• Music at St Peters, Wallingford
• Nicola Benedetti, Scottish violinist

World Cup Country Rankings and Betting Odds

The ranking information:

1. FIFA ranking
2. ELO ranking
3. UBS predictions, model based on past cup performances, home advantage, and the ELO rating (which is based on recent game outcomes taking into account strength of the opposition)

The betting odds:

1. World Cup Betting Directory
2. William Hill
3. Sportsbook