On Observational Equivalence

The Everyday Economist

Paul Krugman explains why one should believe in the Keynesian model. There are two main points he emphasizes:

First, we’re talking about a model, not just a prediction about the impact of spending increases. So you can ask about the ancillary predictions of that model as opposed to rival models. Anti-Keynesians assured us that budget deficits would send interest rates soaring; Keynesian analysis said they’d stay low as long as the economy remained far from full employment. Guess who was right?

Ricardian equivalence predicts that policy will not effect the interest rate.

The second point:

Also, there are some features of the approach that can be tested separately. Keynesianism isn’t just about sticky prices, but it does generally assume sticky prices — and there is overwhelming evidence, from a variety of sources, that prices are indeed sticky.

Evidence that prices do not adjust instantaneously does not imply that price stickiness…

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Money and Elections

The Everyday Economist

I have noticed that there is concern, notably from my friends who are left-of-center, that the Citizens United decision will ruin the political process. Jeffrey Toobin has an excellent article in the New Yorker about the actual process through which the decision came to be. Toobin laments the decision as conservative judicial activism on the Supreme Court. Perhaps. However, I’ve noticed that among those who fit neatly into either the categories “left” and “right” an activist court ruling seems to be defined by whether or not they agree with the decision. Others, such as John Cassidy have suggested that the situation in Wisconsin highlights what is some sort of new class war in the U.S. that pits billionaires against union workers. Although he doesn’t explicitly mention it, it seems that the Citizens United case looms large. Finally, the New York Times ran a series of posts asking whether or not…

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@garethmorgannz is getting a little techie about debating optimal tax theory

All I said was “optimal tax theory including that pioneered by Stiglitz and Merrlees, economists of impeccable left-wing credentials, show that taxes on the income from capital should be low because the deadweight social costs of taxes on capital are very high”.


Aristotle, Usury, and Land in the 21st Century


Bertrand Russell, on Aristotle’s attack on usury in the Politics:

“Usury” [to Aristotle] means all lending money at interest, not only, as now, lending at an exorbitant rate. From Greek times to the present day, mankind, or at least the economically more developed portion of them, have been divided into debtors and creditors;debtors have disapproved of interest, and creditors have approved of it. At most times, landowners have been debtors, while men engaged in commerce have been creditors. The views of philosophers, with few exceptions, have coincided with the pecuniary  interests of their class. Greek philosophers belonged to, or were employed by, the landowning class; they therefore disapproved of interest. Medieval philosophers were churchmen, and the property of the Church was mainly in land ; they therefore saw no reason to revise Aristotle’s opinion. Their objection to usury  was reinforced by anti-Semitism, for most fluid capital was Jewish. Ecclesiastics and barons…

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Poverty and Cash Transfers


Academics and activists who advocate a policy of large cash transfers to combat poverty should pay attention to what happens to individual lower-income people who suddenly receive large cash transfers; for example, NFL players (from the Freakonomics podcast):

 If you follow sports even a little bit, you’ve heard many, many stories about the former multi-million-dollar superstar who’s lost everything. In a recent academic paper, the researchers Kyle Carlson, Joshua Kim, Annamaria Lusardi, and Colin Camerer analyzed financial data from all NFL draftees from 1996 to 2003. The median career length of these players was six years – which, the authors note, “will provide an NFL player with more earnings than an average college graduate will get in an entire lifetime, plus a modest pension.” And yet, the researchers found, roughly one in six players went bankrupt within 12 years of retirement — a much higher bankruptcy…

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Fade In, Fade Out


 Day in, day out, same old hoodoo follows me about. The same old pounding in my heart, whenever I think of you, and, darling, I think of you, day in and day out.

-Johnny Mercer

A foggy day, in London town
Had me low, had me down
I viewed the morning, with much alarm
The British Museum, had lost its charm

-Ira Gershwin

What happens to the effects of educational and early childhood interventions over time? Do they persist day in and day out, the same old impacts following you about?  Or do you find, one foggy day, that the British Museum has lost its charm?

For cognitive effects (ie, effects on test scores) of early childhood programs, the consensus view is that impacts fade over time- rapidly at first and then gradually. Here, for example, is the average effect size over time from a meta-analysis of 49 impact studies of pre-K programs:

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Poverty is not easy to solve


It has been fashionable in some quarters to claim that solving poverty is a simple matter of generosity and will.

A typical headline states:

We know how to eliminate poverty. So why don’t we?

The claim is that more generous cash transfers will lift families out of poverty and even relative deprivation. This is often stated based on evidence from developing countries, where a substantial portion of families are in conditions of absolute deprivation, but treated as if it applied to the (relatively) poor of the United States equally well.

This is not true.

The evidence is clear that, in keeping with the Iron Law and general patterns of fade out of social interventions, the impact of cash on family well-being is smaller than trumpeted in the short term, and unless cash transfers are permanent and continuous, the effects will be null in the long-term.

Advocates reply, then make…

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America has a Gigantic Bourgeoisie


Neither political party has much incentive to point it out (Republicans because they are in the opposition, Democrats because it weakens the argument for state action), but the United States is still a very wealthy country. Here, based on 2014 Census Data, are median incomes for 4-person households by state– above $60,000 in even the poorest states, and above $100,000 in several. 2-person and 3-person households are not as wealthy, but neither paints a picture of widespread destitution. America has pockets of poverty amid widespread affluence, not the other way around.

Median Income 4-Person Families

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@AnnCoulter on libertarians

@StatModeling @ryanmcmaken Europe sub-Reddit just can’t handle the truth about how poor they are!?


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