The Ambrosini Critique

He’s clueless about political economy. Also, he lies. He claimed immigrants make up 1/3 of the prison population when in fact they have a lower incarceration rate than the rest of the population (they’re 6% of inmates and 7% of the total population). Also, he’s suggested immigrants are responsible for an imaginary leprosy epidemic(!). From the NYT article:

The most common complaint about [Dobbs], at least from other journalists, is that his program combines factual reporting with editorializing. But I think this misses the point. Americans, as a rule, are smart enough to handle a program that mixes opinion and facts. The problem with Mr. Dobbs is that he mixes opinion and untruths. He is the heir to the nativist tradition that has long used fiction and conspiracy theories as a weapon against the Irish, the Italians, the Chinese, the Jews and, now, the Mexicans.

Here.

In a particular school district where NCLB dictated better information about schools for parents and allowed them to choose schools, some kids got randomly assigned to better schools. Lo, they performed better.

• How big of a jerk do you have to be to not support immigration? YouNotSneaky! gives a precise definition of jerkiness and a formula for determining jerkiness
• Becker and Posner give their take on the Bill

I’ve said before that the climate change discussion reminds me a lot of macroeconomics. This similarity has driven my skepticism that the science is locked. I know we don’t have macroeconomics figured out; it seems unlikely we have the climate figured out.

Here’s a great discussion on the sensitivity of temperature to changes in CO2. The earth is absorbing energy and its emitting energy. Where these balance determines the temperature. The earth doesn’t perfectly absorb all the energy it receives and similarly it doesn’t perfectly emit energy. The efficiency of absorption is called the albedo and the efficiency of emission is called emissivity. Of course, the efficiency of absorption and emission determines the equilibrium temperature. There’s lots of factors that determine efficiency, albedo and emissivity, but a simplifying assumption is to assume they’re both constant. This is something economists are used to… “assuming all else is equal, blah blah blah.”

Assuming albedo and emissivity are constant is an ok thing to do as long as we’re talking about small changes in the climate.

Where climatologists talk about the relationship between CO2 and temperature, macro economists like to talk about the relationship between inflation and the economy’s output. The relationship comes about because prices companies charge and the wages people earn don’t change very fast to economic conditions. All else equal (!), we’d expect workers to demand higher wages the moment inflation is higher and we’d expect firms to change their prices just as quickly. But this doesn’t happen. It takes a while for workers to renegotiate their wages and it takes a while for companies to change the price tags on their goods. We call this sticky prices.

One way to model sticky prices is by assuming only a fixed percentage of firms can update their prices at a time (pdf). A random number of firms is selected each quarter. For those lucky firms the Calvo Fairy taps the firm’s managers on their shoulders and they swing in to action changing prices. They set their prices to the best prices today (to maximize profit) and they know the fairy may not visit them next time (or the time after that or the time after that) so they make sure to set the price to give them the highest expected profit in the future. The rest of the firms have to live with whatever prices they set in the past.

That the number of firms that update their prices is a constant fraction is an ok assumption as long as we’re talking about small changes in the economy.

However, as you can imagine, if inflation is really high firms will have a bigger incentive to raise their prices and the assumption that only a fixed number of companies will update their prices becomes unrealistic. Similarly, constant albedo and emissivity become unrealistic assumptions when big changes happen to the climate.

BTW, here’s another great write-up on that site about the long term connection between CO2 and temperature.

Neoclassical economics is the idea

that humans are rational, utility-maximizing agents with fixed preferences, that they make decisions ‘at the margins’ and that the mechanisms of supply and demand (operating free of government interference) will lead to a general equilibrium whereby resources are allocated efficiently

according to this article in The Nation.

I’m not sure this is right. Neoclassical economics articulates *assumptions* precisely to make certain predictions about human behavior. Historically, those assumptions have been rationality, complete markets and prices taking. The predictions generated from those assumptions can be tested. They are often verified (quantity demanded generally goes down when prices increase, for example) and when they’re not they provide a way of talking about negative results.

David Card famously found that minimum wages in New Jersey didn’t decrease employment in the fast food industry. The neoclassical framework gives us a means of discussing that result; its a sounding board. Why didn’t demand for low skill labor slope downwards? Was it because the assumption of rationality, price taking or one of the other assumptions of the theory was violated? Were prices (in this case wages) being measured correctly*?

That Card discovered data that contradicted the theory isn’t enough. We need to know *why* the theory failed. Its not enough to scream from the sidelines “the theory is wrong!” To make progress, we have to correct the theory by updating assumptions.

The neoclassical theory has traction because it has plausible assumptions, it implies tractable predictions and it has been useful. First, it seems likely that people use reason when making decisions. Obviously, that’s not strictly true and its not true that people are good at reasoning, but this is a feature of human behavior. It makes sense to try understand the implications of that feature. Also, unless you talk of certain industries, or even particular firms, the price taking assumption is the only general assumption one can make that is approximately true**.

Second, you can write out explicit models of neoclassical theory. There’s equations. They show precisely the relationships the modeler is interested in, no more and no less.

Third, neoclassical theory has delivered the goods in terms of scientific results (of which, I include Card’s).

Like any science, economics advances by identifying, precisely, the flaws in the theory and then updating the theory. More from the article:

some mainstream economists dismiss heterodox work as quackery, others claim that the mainstream has actually assimilated many of the heterodox critiques. (You’ll note that these two responses, both fairly common, are also logically incompatible.)

…but this isn’t incompatible. Real negative results from “heterodox” economics get incorporated***. Much of the inspiration for behavioral economics is from the “finding” that people aren’t rational, for example. I often feel that “heterodox” economists want to do theory-free economics. Theory-free economics is quackery.

UPDATE: Rodrik says is better: “To me [neoclassical economics] represents nothing other than a methodological predilection for deriving aggregate social phenomena from individual behavior–and as such it is a very useful discipline for any social science. You say people have some preferences, they face certain constraints, take others’ actions into account, and go from there. Neoclassical economics teaches you how to think, not what to think.”

UPDATE 2: HedgeFundGuy talks heterodox: “Like any science, there are those who think the current mainstream is really wrong about big issues. But these overbroad criticisms are lame because they offer nothing specific as an alternative, just a critique of the imperfect status quo. There’s mention of recognizing customs, norms, etc., but that’s just sociology, and that ’science’ has hardly been more successful than economics… They have never made a statue in honor of a critic.”

UPDATE 3: I think Borjas picks up the grain of truth in the Nation article. Economists are herd animals.

*I’m thinking of non-wage compensation.
** I’m not an IO expert, but there’s certain competitive structures where industries with only two firms act like price takers (i.e. not like monopolies).
*** In the article, Card’s results are given as an example of a heterodox result.

“Let are kids walk!”

Why do people feel they’re entitled to high school degrees? To good grades in college classes? To high paying jobs?

Why are people who ask these questions assholes?

I don’t get it.

Holy Crap! $55k for Edwards to talk to UCD students last year.

All I can say is, I want a raise (ed. w != MPL?).

I don’t remember seeing it when it was on TV so thanks youtube.

Some people I know are starting to think about their dissertation topics… maybe this will help them.

Me, I already know what I’m going to write. But I won’t tell you. Instead I invite you to make detailed guesses in the comments section. Please include summaries of related literature, data sources and citations to pertinent theory papers.

I’ve been chastised because I haven’t said anything about the Bill. Mostly I haven’t commented because it doesn’t seem very likely anything will come of it. The Republican Base is against it, Democrats are leaning protectionist/populist and its soon to be election season so nobody wants to piss off their voters.

But if parsing the proposed legislation is what you want, here’s a conservative’s point by point take on it. If you don’t trust that, do-it-yourself here.

My general sentiments are more close to this NY Times editorial. Immigration is a particularly American tradition that I’m proud of in the abstract. But more importantly, I’m particularly proud of my own family’s heritage as “new comers” to this country (Ambrosini’s have been here in Northern California from Switzerland for about 125 years).

Low skill immigrants compete with natives with low education, but not that much. Even to the extent Mexican immigrants (and this debate is about Mexican immigrants) compete with Americans, I’m not sure why we should be protecting low paying jobs. No one is entitled to a job and if we’re going to have creative destruction, why not have it on the low end of the skill distribution?

In my perfect world, the borders would be completely open. The Econ 101 theory tells us that immigration controls, like all restrictions on trade, are bad for society. The data basically say there is little cost to immigration, even if you think evaluating natives separate from the immigrants is an ethically ok thing to do (i.e. what’s the relevant moral community?). Mostly though the best argument for the free flow of people, especially from poor countries, is there’s a positive cultural externality to adding these people in our country. Immigrants are just cool people. They have gumption, they picked themselves up from where they were and moved far away from home. They’re hard working and they have good family values. (… I’m going to get shit for that one…)

Given there’s enough paleo-conservatives out there (e.g. 2/3rds of my family) that oppose immigration, while no doubt being sons and daughters of immigrants, open borders will never happen. So, my compromise would be guest worker program that moves people towards regular citizenship. My fear with this Bill is that we’d create second class citizens, breaking the tradition of the American melting pot.

That said, I believe in the rule of law. We have these silly laws and they should be followed until the law is changed.

More at Dani Rodrik’s blog and Tim Lee responds.