John Quiggin

I wasn’t all that surprised that Bryan Caplan

didn’t like my interpretation of our bet on EU and US unemployment rates, which was that the combined rates of unemployment and incarceration in the US would exceed those in the EU over the next ten years. I was, however, surprised by the vehemence with which libertarian-inclined* commenters here and at Crooked Timber objected to this interpretation.

A string of them echoed Caplan’s argument that

From a labor market perspective, though, Quiggin’s incarceration adjustment would only make sense if you thought that most or all of the people in jail would be unemployed if they were released.

Caplan has missed my main point. I’m not suggesting that incarceration is disguised unemployment (though obviously it reduces measured unemployment). Rather, I’m saying that, like unemployment, incarceration should be regarded as a (bad) labor market outcome. If you want to evaluate the performance of the labor market, you need to look at both.

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It’s time again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.

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Until a few months ago, the Taliban seemed to be gaining ground in the war in Afghanistan, both militarily and in propaganda terms. The US reliance on air and drone attacks, with the inevitable civilian casualties, was proving disastrous. Most importantly, the Taliban possessed a crucial asset for a guerilla army, a safe haven across an international border in Pakistan, with surreptitious backing from the military and particularly the ISI, the secret police/military intelligence organisation that has historically dominated Pakistani politics. Just as Lashkar-e-Taiba was seen as asset to undertake deniable attacks on Pakistan’s historic enemy, India, the Taliban was an instrument to be used against rivals such as Iran.

In these circumstances, it seemed reasonable to conclude, as I did in August last year

, that “a military victory over the Taleban insurgency is now unlikely, whether or not it might have been achieved in the past”.

But the string of terror attacks and other outrages starting with Lashkar-e-Taiba’s attack in Mumbai late last year has changed everything.

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A comment reminded me that I hadn’t posted last week’s Fin article, advocating abolition or phasing out the fuel subsidy in Queensland> It’s over the fold. Also, since letters about me in the Fin usually have a heading like “Quiggin wrong”, or worse, let me thank Greg McKenzie whose letter commenting on the article was headed “Quiggin the best”. Thanks!

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Bryan Caplan and I have now agreed on the settlement conditions for a bet on US_EU jobless rates while also agreeing to differ on the interpretation. The stake is $US100 and the agreed criterion is that, for Bryan to win, the average Eurostat harmonised unemployment rate for the EU-15 over the period 2009-18 inclusive should exceed that for the US by at least 1.5 percentage points.

Since the implied difference in the proportion of the population who are unemployed is almost exactly equal* to the difference in the proportion of the population who are incarcerated, I interpret my side the bet as follows

Averaged over 2009-18, the sum of incarceration and unemployment rates in the US will exceed that in the EU-15

Caplan wants to leave incarceration out of the discussion and focus only in unemployment. Since we’re agreed on how to settle the bet, there’s no problem with differing on how to interpret the result.

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At this point in the debate over climate change, I doubt that any standard process of argument (reference to scientific research, analysis of data, refutation on Internet-derived talking points and so on) is likely to shift the views of those who accept some version of the anti-science position on this topic. Certainly, I don’t intend to try any further.

But, it seems useful for a number of reasons to try to understand why people take and hold such positions. In some cases, it may be that, where rational debate on the scientific merits has failed, some other mode of argument or persuasion might work. More generally, in any political process, it’s useful to understand the opposition.

Here’s a first attempt at a taxonomy, which I started in this Tim Lambert thread

. Looking at those who have either propounded or accepted anti-science views on this topic, nearly all appear to fit into one or more of the following categories

* Tribalists
* Ideologists
* Hacks
* Irresponsible contrarian
* Emeritus disease

Update John Mashey has a related taxonomy here

Further update The discussion has convinced me that I need to add a further category, that of irresponsible contrarian. I’d previously applied this to Richard Lindzen, see below, so it was a mistake not to have this category.

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Bryan Caplan responds to the data on US and EU-15 unemployment by offering a bet

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The average European unemployment rate for 2009-2018 (i.e., the next decade) will be at least 1 percentage point higher than U.S. unemployment rate. The bet will be resolved when Eurostat releases its final numbers for 2018.

Betting is usually unwise, but nonetheless I’m willing to take Bryan on, with one amendment. I will take the bet provided that people in prison are counted as unemployed. By my estimate, that raises the US rate by about 1.5 percentage points and the the EU-15 rate by about 0.2 percentage points. That is, assuming current imprisonment rates remain unchanged, the bet is that the Eurostat measure of unemployment (which excludes prisoners) should be no more than 2.3 percentage points higher in the EU-15 than in the US.
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According to the latest data, the unemployment rate in the US was equal to that in the EU-15 in March, and is now likely to be higher. Writing in the NY Times, Floyd Norris refers to the conventional wisdom that flexibility inherent in the American system — it is easier to both hire and fire workers than in many European countries implies that unemployment should be lower (at any given point in the business cycle) in the US than in Europe.

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Now that everyone is rushing to bone up on the late Hyman Minsky

and at least some of us are concluding that New Keynesian macro needs to be dumped in favour of something more like behavioural economics Left for Dead psp , I thought I’d trawl through the hard disk and see what I had to say on the subject in the past. It turns out I had something of an each-way bet. Here’s something from my 2006 paper with Stephen Bell, advocating controls on financial innovation as the best approach to preventing asset price bubbles.

One obstacle to acceptance of Minsky’s work has been the lack of microeconomic foundations, that is, of a rigorous formal account of individual behavior and the markets in which individuals interact. The idea that such an account is a necessary prerequisite for a coherent macroeconomic theory became popular in the 1970s and reached its high point with new classical macroeconomics in the early 1980s. Since then, however, emphasis on microeconomic foundations has declined for several reasons. First, users of new classical models have found it necessary to make ad hoc adjustments to microeconomic assumptions in order to improve the capacity of their models to match the “stylized facts” about the macroeconomy that they seek to capture. Second, it has been shown that, in important instances, modest deviations from standard neoclassical microeconomic assumptions (rational optimization in competitive markets) can produce large changes in macroeconomic outcomes. Third, evidence arising from fields such as generalized expected utility theory and behavioral finance has cast doubt on the empirical validity of the standard assumptions of neoclassical microeconomics.

As improved models of individual behavior are developed, it seems likely that microeconomic foundations for models similar to Minsky’s will emerge. Such foundations will take account of the fundamental role of uncertainty, emphasized by writers as diverse as Keynes, [Frank] Knight, and Minsky. For the moment, it is sufficient to observe that none of the competing models of asset markets combine rigorous microeconomic foundations with empirically realistic predictions about market behavior.

So back in 2006, I hoped that New Keynesianism ( modest deviations from standard neoclassical microeconomic assumptions producing large changes in macroeconomic outcomes) would help in the process of shifting macro away from neoclassical microfoundations, along with the generalized expected utility/behavioral economics approach. I’ve now shifted to the view that NK macro is part of the problem, and that the generalized expected utility/behavioral economics understanding is the right way to go.
This reflects the fact that the second approach has helped me to understand the crisis and the first has not.

After a long and bloody war, marked by disregard of civilian casualties (or worse) on both sides, the Sri Lankan military has finally crushed the Liberation Tigers of Tamil Eelam as a military force, killing most of its senior leaders in the process. As national minorities go, the Sri Lankan Tamils have at least as good a cause as many others to complain of oppression and discrimination. (Broadly speaking, the usual post-colonial story where the colonial rulers favored some members of a minority group, with the result that the whole group suffered in the aftermath of independence). But their resort to armed struggle and terrorism was a disaster for all concerned, and not just because it failed. The LTTE in their temporary period of victory were worse oppressors than the most chauvinist majority governments had ever been. And of course, all Sri Lankans have suffered hugely as a result of the original policies of discrimination and worse directed against the Tamils. Even before the war broke out, the large-scale emigration of many of the most able and best educated members of the community was a huge loss.

I hope (but don’t really expect) that the government will display more magnanimity in victory than it has shown in the prosecution of the war, and that, if only on grounds of enlightened self-interest, it will seek a settlement that gives genuine equal rights to all.

This piece by Muzamil Jaleel

is well worth reading. Key quote

AK-47s cannot defeat a state and when people and communities with genuine political grievances take up arms, it only provides the state with an easy way out to enforce a military solution.

Note:This post got misplaced somehow, putting it back now

It’s time again for weekend reflections, which makes space for longer than usual comments on any topic. As always, civilised discussion and no coarse language.

The news that banks have dramatically increased their fee income yet again St. Trinian’s ipod buy The Big Bounce

will come as no surprise to most of us. Less significant in macro terms, but far more drastic for those affected, has been the atrocious practise of selling tiny debts to loan sharks, who will then sell people’s houses from under them at sheriff’s auctions. Given that these institutions exist only by the grace of the Australian government, it’s time to give them the same kind of message that Telstra received recently.

It’s time to offer the banks an offer they can’t refuse (unless they’re feeling lucky). Either withdraw entirely from the prudential regulation system, and stand on their own credit, or accept the fact that the public, as the residual risk-bearer, is their ultimate owner, and act accordingly.

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Thanks to the rain that is still falling heavily, the water stored in Brisbane’s dams has now reached 60 per cent of their capacity. That was to have been the trigger for a relaxation of the (very stringent) water restrictions now in place, but the Water Commission has now decided* that regardless of how much water there is, the restrictions will remain until December.

This strikes me as a very foolish decision. The restrictions are socially very costly, and the risks associated with their removal very small. The construction of the water grid and the existence of a recycling plant (to be used if supplies fall below 40 per cent), combined with a sustained reduction in use, mean that the risk of a sharp decline in availability is small, and the restrictions could always be reimposed if necessary.

On the other hand, there is a significant risk that the water we are saving will end up being released to flow out to sea. The only dam in the system with any significant capacity remaining is Wivenhoe, which was built for flood control. Once it reaches 70 per cent capacity or thereabouts (that would correspond to about 80 per cent for the system as a whole) the operators will have to open the gates. More rain like we are seeing now, combined with an early and heavy wet season, would see this level reached by December or even earlier.

I’m not sure if this decision is related to the restructuring of the water industry, which has been modelled on the approach used for electricity. The electricity reforms have scarcely been an unqualified success and water is a very different commodity, so I’m dubious about the merits of this idea, which looks like a stalking horse for privatisation. Or maybe (though again I can’t see the rationale) the restrictions are being maintained to ensure that the Traveston Dam project isn’t derailed. The only other explanation for the decision is hair-shirt bloody-mindedness, which is plausible enough I suppose. I can’t really connect these dots.

*Elizabeth Nosworthy, identified with the promised relaxation, has been given the boot as Water Commisssioner.

Although I’m among the least tightly focused economists in the academic world, I’ve published almost nothing on macroeconomics – even the few things I have done have not taken a standard macro perspective. So, in the absence of blogging, I think it’s safe to say my name would never have appeared in a Berkeley Graduate Core Macro exam.

Of course, there’s a Gerschenkron-style ‘advantages of backwardness’ story here. Having learned old-style Keynesian macro, and seen it come to grief with the inflationary outburst of the early 1970s, I kept waiting for a macro research program that would both explain the Keynesian Golden Age* I grew up in and show how to restore it in a more sustainable way. None of the contenders of the past thirty years (monetarist, new classical, real business cycle, New Keynesian, central bank eclectic) seemed very promising to me, so I left the field alone.

Now, with no intellectual capital invested, it’s easy for me to pronounce the efforts of the last three decades to be largely misdirected. The harder task will be to identify and get active in the new research program that should succeed it. The work of Akerlof and Shiller is obviously a good place to start.

* Not golden for everyone, of course. Full employment really meant full employment for men, many (not all) poor countries missed out altogether, and environmental costs were often disregarded. But it was precisely during the last years of the Golden Age (the 1960s) that these issues came to the top of the agenda. In my more utopian moments, I dare to hope that, with economic liberalism behind us, we can make big progress on these and other issues.

My introduction to futures markets came in a 1960s TV show called Dobie Gillis, most notable for the ‘beatnik’ character of Maynard G. Krebs, played by Bob Denver, later the eponymous Gilligan of Gilligan’s Island*. In one episode, Dobie’s high school class was assigned to do a fantasy investment exercise, and Dobie along with a cute & smart fellow student chose the egg futures markets. The smart student’s moves always paid off, and Dobie decided to copy them all in real life, building up a huge profit. Finally, the smart student announced she was selling, but Dobie intoxicated with success, decided to keep playing. This went on for a few days of rising prices, but finally when Dobie announced he had held on yet again, the fellow student said, with some horror, “But, Dobie, today is spot day”. The final scene was of the back room of Dobie’s dad’s store, filled to the rafters with the eggs on which Dobie had been forced to take physical delivery.**

Today’s Fin, with a piece by Andrew Leigh*** praising betting markets on events like unemployment rates and so on, brought this episode to mind. It struck me that the case for weak-form market efficiency (the market price incorporates all publicly available information) is much better in a market with a spot date in the near future, as is typical of real betting markets. If you are betting on a race to be run this afternoon at 3, there’s not much point in trying to track movements in the market: you’re better off backing whichever horse is offering the best odds relative to your best estimate of winning probability. More generally, markets with a spot date in the near future ought to be relatively immune to bubbles.

While I’m on the topic, I thought I would repost a piece I wrote before the 2007 elections which, I think, puts a bit of a dent in claims that betting markets really represent the superior wisdom of crowds: in this case, the polls were right long before the pundits and the punters came in last. Of course, one data point doesn’t constitute proof, but supporters of betting markets have made strong claims on the basis of fairly limited data.

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As governments and the WHO wrestle with the decision on whether to divert resources from the production of seasonal flu vaccines to develop a vaccine against H1NI (swine) flu, I thought I’d repost this piece from 2005.

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Its time once again for Monday Message Board. Post comments on any topic. As usual, civilised discussion and no coarse language.

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No group in the community greeted the election of the Rudd government with more enthusiasm and more relief than the higher education and research sector. The Howard government had treated the sector to a decade of ideologically motivated cutbacks combined with a tribal history which reflected, in large measure, the defeats and slights its members had endured as student politicians in the 1970s and 1980s. The number of places for domestic students was effectively frozen for most of the Howard era, reflecting both a desire to pressure the universities into offering full-fee places and a belief that Australia did not really need a more educated workforce.
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If not for the drastic downward revision of expectations that has taken place since the financial meltdown of September-October 2008, the Budget’s forecasts for global economic conditions would look exceedingly gloomy. As it is, they look to be based on a fairly rosy scenario, in which advanced countries experience a GDP contraction of just under 4 per cent in 2009 before stabilising in 2010 and recovering in 2011.
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In the Sherlock Holmes story, Silver Blaze, the crucial clue was that of the dog that did not bark in the night. In the 2009-10 Budget, tax policy is surely the dog that did not bark. Despite the near-unanimous view of the economics profession that the tax cuts promised at the 2007 election, irresponsible even at the time, should now be scaled back or deferred, the government made no move in this direction, preferring to achieve a somewhat similar outcome by tightening means tests for higher income earners.
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The budget projects that, despite the effects of the stimulus package, unemployment in Australia will reach 8.5 per cent next year. It’s striking then, how little the budget contains in terms of measures specifically directed at improving the lot of the unemployed. Most obviously, unemployment benefits have not been increased, further widening the gap between these benefits and other pensions. In an environment where suggestions that unemployment is partially or wholly voluntary can no longer be sustained, it is hard to avoid a feeling of injustice here.

The direct response to unemployment in the budget amounts to $1.5 billion for the Jobs and Training Compact, much of which has already been announced or foreshadowed. The main focus is on training, which is good long term policy, but may not be all that helpful in a recession.

Most of the timing, training is the best way of making people more employable. A lengthy recession strengthens the case for participation in school, university or TAFE diploma courses.

If the labour market is weak, the option of staying in school, or of going back to university or TAFE to enhance your qualifications is more attractive. It’s safe to predict that demand for tertiary education places is going to be quite a bit higher for the next few years. Even with the expansion of places announced in the budget, it is likely that the number of qualified students unable to find a university place will increase in 20101.

On the other hand, short-term training programs directed at those who are already unemployed are of little use in recessions. When few employers are hiring, those who do so can pick and choose from a pool of experienced and qualified candidates. A training course of a few months is unlikely to move an unemployed person to the front of the queue.

In a sustained recession, there is a strong case for direct job creation, targeted at the unemployed. In addition to existing infrastructure projects the government is offering a $650 million Jobs Fund, designed to ‘support local jobs in areas hardest hit by the downturn’.

While welcome, the government’s measures represent a small fraction of the expenditure allocated to the Keating government’s Working Nation program. As with other responses to the 1989-90 recession, Working Nation was not introduced until high unemployment was firmly entrenched. The Rudd government’s limited steps in this respect contrast unfavorably with its rapid, indeed pre-emptive, adoption of fiscal stimulus policies.

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For an economist, the most striking feature of the 2009-10 Budget is the reappearance of old-time Keynesianism, after more than three decades in which fiscal policy took a back seat and monetary policy was primarily based on inflation targeting. The rhetorical change from the ‘recession we had to have’, when ‘pump-priming’ was a dirty word, is striking.

And while the response to the 1989-91 recession eventually included a significant dose of fiscal stimulus, ‘eventually’ is the operative word. In 1989 the government and the Reserve Bank kept squeezing the economy long after everyone else could hear bones breaking. This time around, the first round of stimulus money was going into bank accounts before the contraction (as measured by quarters of negative GDP growth) had even begun.
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Its time once again for Monday Message Board. Post comments on any topic. As usual, civilised discussion and no coarse language.

This post got misplaced by WordPress. Putting it back now.

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I’m back on deck, sort of, after the Budget lockup in Canberra on Tuesday. The event was quite an experience, though maybe not one I’d choose to do every year. It started with a scrum in one of the big halls in Parliament House where the assembled journos +me gathered to await our chance to look at the Budget paper. Then we were sorted into committee rooms, some equipped with elaborate preinstalled computer networks (AAP for example) and some with one power cord for two computers (Crikey!).

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Brad DeLong links to my post on the obsolescence of New Keynesian macro, and concludes

I have to call this one for Krugman, Clark, Akerlof, Shiller, and Quiggin and against Blanchard’s vision of growing knowledge and analytical convergence

I’ve been reasonably successful as Australian academic economists go, but, based on my journal contributions, I would have rated the likelihood of reading the phrase “Krugman, Clark, Akerlof, Shiller, and Quiggin” only marginally higher than that of being romantically linked with Angelina Jolie. Blogging really does have its rewards.

I wrote this pre-budget piece for Crikey, but it doesn’t seem to have appeared on their website. I’ll check on this, but in the meantime, here it is

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I’ll be incommunicado for much of Tuesday, as I’m going to be representing Crikey at the Budget lockup. This is very different from my usual Budget experience, where I spend a day or so digesting the budget and the immediate reactions, before aiming for a more considered analysis. This time, I’ll be doing the immediate reactions. Quite a challenge for me, and an interesting sign of the way in which media are evolving.

Its time once again for Monday Message Board. Post comments on any topic. As usual, civilised discussion and no coarse language. Christmas Holiday move

In the Oz of all places, a demolition of Ian Plimer so scathing, and so convincing, that it’s hard to imagine how he can salvage any kind of academic reputation, other than by a full retraction (which would be a pretty impressive move, admittedly).

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