How Much Can Economists Know?

There’s been a good back and forth on the econ blogosphere lately regarding the epistemology of economics. The public perception of economists is not the greatest for a variety of reasons: we (mostly) didn’t see the financial crisis coming (despite the old saw that economists have predicted 9 out of the last 5 recessions); we underestimated the size of the ensuing recession; and whatever the policy, you can almost always find economists on both sides of the issue (in other words, there seems to be little shared agreement).

To an extent, this is unfair, and largely biased due to the outsize popular fascination with macroeconomics, which is still a very new science with little data and an inability to run experiments. Still, macroeconomics is more popular for a reason: the macroeconomy is central to our livelihoods. If the country enters recession, we may not have a job any longer. I doubt there are many people who would not be interested in making the field more scientific. But can economics ever really be a science?

This type of dialogue is what makes the economics blogosphere so interesting to follow. While I won’t say *all* are required reading, I would definitely recommend the initial Roberts piece and Noah Smith’s Bloomberg column at the bare minimum.

 

Democracy for Realists, Part V

So we’ve established that our group identities are based more on emotion than on reason. I want to expand on this notion that we get our ideology from parties, rather than vice versa, before getting to a realist theory of democracy.

The chapter in the book detailing the relevant research is titled ‘It Feels Like We’re Thinking’, and that’s about the best way to sum it up. As the authors concisely state,“Citizens’ political preferences and beliefs are constructed from emotional or cognitive commitments whose real bases lie elsewhere.” (p. 269)

A brief framework of events: parties send signals to voters to advertise their group status; voters use these signals to construct a conceptual framework about the world; voters signal the strength of their partisanship through varying intensity of views held by the party.

What’s surprising is that research shows that higher levels of political engagement actually lead to more partisan views of reality. Intuitively, we might think that people who pay more attention to politics and policy will be more informed in an objective sense, and come to similar conclusions regardless of partisanship. This is not the case. High information voters’ thinking ends up being mostly just rationalizing what is already emotionally believed to be true. (This is something I’ve come to believe we do in many, if not most, realms of life: rationalize what our emotions have already told us to do or believe.)

This is all a bit abstract, so let’s turn to an example in the book: views of the Clinton era budget by Democrats and Republicans. Those polled were asked about the status of the deficit: was it increasing or decreasing? In this instance, there is a factual answer: it was decreasing. Low information voters of both parties did about as well as chance in answering the question, as would be expected from people just guessing. But as voter information goes up, there is a remarkable divergence. Higher information Republicans answer that the deficit is increasing, while equivalent Democrats answer that it is decreasing (to a lesser extent, however). What is going on?

From the framework above, Republicans have long claimed to be the party of fiscal responsibility, and decry Democrats as irresponsible spenders of public money. The lowest information voters don’t tend to pay attention to policy debates, but more engaged voters will hear this tale often. So, when asked about the Clinton budget, these voters ‘know’ that Democrats are profligate spenders, a Democrat is in the White House, and therefore the deficit must be increasing.

Rather than continue to belabor the point, I’ll just quote the key passage from the chapter:

Continue reading “Democracy for Realists, Part V”

Democracy for Realists, Part IV

Why do we vote the way we do? So far, the authors of Democracy for Realists have shown that neither the individualist framework of the folk theory nor the managerial retrospective theory can explain historical election outcomes. What is it then? Do we vote randomly, or is there a different motivating force we have neglected?

The authors argue we need to look back to the once popular realist political tradition, which was largely discarded in favor of rationalist Enlightenment liberalism. In particular, we need a group theory of politics that accounts for “the powerful tendency of people to form groups, the ensuing construction of ‘us’ and ‘them’, and the powerful role of emotion rather than reason in directing group activity.” (p. 215)

In their view, a model of elections as being motivated by group forces will have far more explanatory power than those previously considered. Some key factors to note:

  • We are socialized into groups through family and culture; our sense of identity “serves to distinguish groups to which [we] belong that are not central to [our] self-concept from those that are a more integral part of the personality” (p. 228)
  • “Identities … are emotional attachments that transcend thinking” (p. 228), and this extends to membership in political parties. We identify with a party from an emotional level, not as the party that we agree with most on arts funding or foreign aid spending.
  • People take their views from the groups to which they belong. As such, we get our ideas on policy and ideology from political parties, not the other way around (as in the folk theory).
  • Most people “organize political thinking around social groups and their role in competing political parties. They see political and racial clashes as group conflict” (p. 221) In other words, a political fight about the marginal tax rate is not really about the appropriate level of taxation for a society; it is about Democrats versus Republicans, nothing more.

In this understanding, elections are about activating and mobilizing different parts of our identities. We all have many parts of our identity; we claim membership in many different groups simultaneously. We obtain aspects of our identity from parents, peers, regional culture, national culture, education, religion, employment, and so on.

Continue reading “Democracy for Realists, Part IV”

The Real Outsourcing Problem

An article in the New York Times the other day highlights an issue I have written about before, that of the changing nature of firms as a source of continued low wages and increasing inequality between workers.

In the eyes of the current administration, a major problem for American workers has been outsourcing. What this article points out is that most outsourced jobs actually remain here in the US; they are instead of leaving to low wage countries, they are subcontracted out to specialized low wage firms within the country.

 

As research has shown, the increase in inequality in the US is being driven mostly by interfirm inequality, not intrafirm. The latter would be appear as, within any given company, the CEOs at the top getting big raises and the entry level workers getting pay cuts. And while this is the case at the biggest firms, like large retail companies, it isn’t so for the rest of the economy. For most firms, pay structures have actually become more equal.

This change is largely a result of firms reorganizing their structure. It used to be that an organization, say a newspaper, would employ everyone who worked in their building. Yes, of course the journalists and editors and managers; but also the janitors, the electricians, the tech support, etc. This is rarely the case any longer. Instead, firms are increasingly organized around their core mission, and secondary and support tasks are spun off and subcontracted out. So now the janitor works for a separate company, as do the electricians and computer people. Even secretaries and HR are increasingly subcontracted out.

How does this drive inequality? When that janitor worked for the newspaper, he shared in the firm’s successes, and  probably out of a human sense of fairness it’s difficult to have huge differences in pay  between people who are working together daily. But when those roles are contracted out to outside firms, that is no longer the case. The janitorial subcontractor can pay far less, and isn’t subject to the workplace regulations of the newspaper firm. This isn’t trivial: the article cites research showing significant pay cuts for many roles (up to a 24% reduction for security guards, for example). Additionally, these subcontracted jobs are often temporary and lack health insurance or other benefits.

The article points to the shocking statistic that over the last decade, 94% of the jobs added to the economy were in this temporary/contracted sector. While this trend may be more ‘efficient’, in the strictly economic sense, an economy does not make a society. Many conservatives talk about the dignity of work as a positive good for people, and I’m inclined to agree. But as our economy shifts to this model, it would seem to be very hard to find dignity and purpose in a growing low wage, dead end, high uncertainty sector of the economy. Sure, if you were a janitor at the New York Times, it wasn’t particularly glamorous. But you were connected in some way to the mission of that organization. Nowadays, you’re just a janitor; probably working on demand, hours not guaranteed, maybe in a different building every week. Your work is now cleaning, nothing more.

Of course, there is no easy solution to this problem. Banning such subcontracting would be lunacy, and other types of mandates would be too heavy handed. But if the administration wants to be serious about American jobs, this is an area that demands focus, not trivial sectors of the economy like coal mining or immigrant labor.

Democracy for Realists, Part III

There are two ways of thinking of the role of politicians in a representative democracy. The first, which was previously addressed, is a vision of the politician as an avatar: they are to ‘represent’ the majority views in their constituency, and put aside any personal views that conflict with that. This is the operative view of the folk theory of democracy, which the authors of Democracy for Realists have provided ample evidence against.

For another quick example of the flaws in this view, take the recent polls showing that Obamacare, now that it’s on the chopping block, is more popular than ever. Republicans believe they were elected with a mandate to repeal it (set aside the problem that more people actually voted for Democrats). The only thing that has changed about the ACA over the last year has been who controls political power. If we were to take the folk theory seriously, it would imply that a non trivial percent of the population has simultaneously carefully considered the evidence and come to new conclusions regarding their preferred health care system. This strains credulity. Instead, it stands as testament to the fickleness of our opinions. Which beliefs should politicians represent? The one the people held when they elected them, or the ones they have a few months later?

In the accountability model, the primary way democracy operates is by holding politicians accountable for their past performance. In contrast to the folk theory, politicians are viewed not as avatars but as as trustees of districts. Voters have the power to remove politicians if they don’t like their performance, but otherwise there is no active mandate.

The accountability model, then, views voters as exercising indirect control of policy without sophisticated knowledge by assessing politicians’ performances, rewarding success with reelection, and failure with ouster. Would I need an understanding of the mechanisms of monetary policy to know that tight money leads to recessions? No, because I need only see that I lost my job because the tight money policies of the party in power led to a shrinking economy.

Through the threat of diselection, politicians are incentivized to act in the interest of the voters – if a policy were good for a politicians but bad for voters, the accountability model would predict that politicians would not implement that policy lest they are kicked out at the next election. Elections serve as a solution the principal-agent problem between constituents and their representatives.

The accountability models faces two challenges: 1) It requires voters to accurately calculate changes in their welfare between elections, and 2) Separate out the things which the government is responsible for from those that are not. If these conditions are not met, the accountability model falls apart; when a politician’s chance of reelection is no longer tied to their performance, they are free to act in their own interest without fear of assured consequences. As you might suspect, Achen and Bartels provide considerable evidence that this is the case.

To begin, it is very well established that the state of the economy (particularly income growth) has a measurable effect on election outcomes. This makes sense; the economy is central to our lives and is responsible for a great deal of our well being. Politicians that manage an economy poorly are most certainly not acting in the general interest, and should be appropriately removed from office.

However, there’s a catch: studies show that it’s only the performance of the economy in the six months before an election that matters to voters. Our memories are too short; we overweight recent performance and underweight the past. So, an economy could be in shambles for 3+ years, but if personal income begins to grow substantially in the summer before a presidential election, the incumbent party’s chance of reelection is much higher than it ‘should’ be.

The potential consequences of this fact are worse than simple unfairness. It incentivizes incumbents to intervene and juice the economy just before an election. I’m a bit skeptical as to the role this plays in American elections, though the authors do show that personal income growth is statistically significantly higher in US presidential election years, over and above the growth rate of national GDP.

That being said, the degree of control the president has in controlling of the economy is often popularly overrated. Perhaps there is tinkering around the edges, but the timing of major economic events, like recessions, is essentially random. It follows from this that the results of elections will tend to be random also. Take the 1992 election for example. It was preceded by a mild recession in 1990-91 that still lingered into the summer of ‘92 – unemployment was still rising as late as that June. If that recession had happened just one year earlier, the effects would have largely been gone by election time and George H.W. Bush would have certainly won reelection. In this instance, the policy consequences were probably not that great; Bill Clinton’s New Democrats were not that far away from the Republicans of that era. But today, the divide between the parties is wider and growing. In an era of polarization and a powerful executive, random control of the presidency seems disastrous.

Of course, there is more to the story than the economy. Achen and Bartels also cover popular punishment for natural disasters and other events that government has no plausible control over. The main example they use are droughts. They provide convincing evidence that drought leads to more anti-incumbent votes in areas that are reliant on farming and ranching. Why is this problematic for the accountability model? If voters were punishing poor responses to such events, by definition half of the time the response will be above average. But the authors show this makes no difference in people’s voting patterns: above average, below average, incumbents are punished just the same. Again, this removes the operating mechanism through which the accountability model works, namely, actual accountability.

To close, an interesting concept the authors address is the ‘social construction of blame.’ After all, it’s not as though we hold government responsible for any bad thing that happens to us; if we get into a car wreck on the way to the polls, we aren’t going to change our vote. (Though there is some evidence that events like important sports championships may influence voting by affecting mood; the Cubs did win the World Series just before Donald Trump was elected president…).

What is necessary is a popular story linking blame to the incumbents, whether accurate or not. Two examples to illustrate: Repeated plagues of locusts in the 1870s seemingly had no effect on incumbents in sparsely populated Nebraska, despite devastating effects on farmers; without clear communication and organization, there was no shared interpretation of the plague that placed blame on the incumbent Republicans. And during the 1918 Spanish Flu epidemic, which killed about half a million people in the United States, there was also no punishment effect. At that time, there was no plausible popular story linking government to a public health issue.

Again, another theory of workings of democracy is shown to be inadequate. People are simply not ‘rational’ enough in aggregate for the accountability model to be plausible. So if voters do not vote in accordance with ideology, nor do they consistent elect competent managers, then why do people vote the way they do? And can the idea of democracy as producing responsive government be saved? We’ll see next time as Achen and Bartels begin to construct a realist theory of democracy.

Hypocrisy and Nihilism

That is the subject of an op-ed in the LA Times from a couple weeks back by, again, Jacob T. Levy, which has forced a reconsideration on my part.

I’ve long considered hypocrisy one of the most unforgivable sins in all of political discourse. To see pundits rail for years against policy X while party A is in power, only to suddenly discover its merits in the second week of a November when party B takes control is unbearable, as is witnessing policy Y be justified by an appeal to the very values it abrogates. War is peace, freedom is slavery, we have always been at war with Eastasia, etc etc. 

To be sure, I’m not innocent here either; we’re all guilty to some extent of mood affiliated beliefs. What upsets me is the shamelessness of some political actors when it comes to hypocrisy, and I’ve reached a place where I tend to dismiss any sort of argument coming from a blatant hypocrite. But this is wrong and short sighted.

One example: I have long had a particular loathing of Thomas Jefferson, a man who could talk about the rights of man and rail against tyranny while also owning human beings. (Please, no arguments about how he hated slavery and wished it would disappear, but was trapped by the times. As is told in Daniel Walker Howe’s brilliant history What Hath God Wrought, as the slavery debate heated up in the early 1800s, Jefferson repeatedly wrote in support of the South’s right to slavery.) 

But what this article reminds me is that, as distasteful as hypocrisy is, it’s far preferable to nihilism. It is better to imperfectly aspire to some values than to aspire to nothing at all.

And that seems to be the situation we are currently in when it comes to our political leadership. The particular example in the article is the Trump interview with Bill O’Reilly, in which the President dismisses arguments against Vladimir Putin by insisting that we aren’t so innocent either. 

Of course, it’s true that America has a problematic history of clandestine operations and bloody interventions (when it served our interest). But we don’t gun down journalists in the street. We don’t poison political rivals with radioactivity. To equivocate the US with that type of behavior is disturbing.

I was never a fan of George W. Bush’s freedom rhetoric; I thought it was overplayed and often silly. But now we have a President who doesn’t talk about these kinds of values at all. Trump’s main themes are safety and jobs, and he rarely speaks of broader principles. These are the kind of justifications we are used to hearing from illiberal strongmen: I will keep you safe, I will keep you fed, I will give you jobs.

One of the themes of Francis Fukuyama’s work is that ideas have power. The invention of the liberal democracy was not the inevitable result of the forward march of history. It required the intersection of several independent factors, one of which was a particular idea about the legitimacy of government requiring the consent of the governed.

Imagine that the Declaration of Independence made no mention of inalienable rights or freedom; or imagine there never was any such document at all in the course of the War of Independence. After all, to some extent the document was propaganda; many of the Founders were well enough off and only wanted to increase their relative status. Would our history have played out the same?

I think the answer is no. To be sure, the values laid out in the Declaration didn’t prevent a shameful program of Indian extermination in the following decades, nor another century of slavery. But without such rhetoric, would the franchise have been extended so early in spite of the Founders skepticism of democracy? Would the Second Founding have begun in the aftermath of the Civil War?  Would the postwar liberal international order even exist if the War of Independence had been fought to the cry of ‘America First’?

It’s not enough to point to the hypocrisy of political leaders and walk away in disgust. In doing so, we run the risk of falling prey to political nihilism, which is incompatible with liberal democracy and a belief in any kind of progress. If this nihilism becomes the political mainstream, we really will be no different from Russia or any other illiberal polity.