Secret Data

On replication in economics. Just in time for bar-room discussions at the annual meetings.

"I have a truly marvelous demonstration of this proposition which this margin is too narrow to contain." -Fermat

"I have a truly marvelous regression result, but I can't show you the data and won't even show you the computer program that produced the result" - Typical paper in economics and finance.

The problem 

Science demands transparency. Yet much research in economics and finance uses secret data. The journals publish results and conclusions, but the data and sometimes even the programs are not available for review or inspection.  Replication, even just checking what the author(s) did given their data, is getting harder.

Quite often, when one digs in, empirical results are nowhere near as strong as the papers make them out to be.

Tax Oped

Source: Wall Street Journal

An Oped at the Wall Street Journal, "Here's what genuine tax reform looks like." With a new art style by WSJ. (Ungated via Hoover. I have to wait 30 days to post the whole thing.)

 I buried the lead, which I'll excerpt here:

"...Why is tax reform paralyzed? Because political debate mixes the goal of efficiently raising revenue with so many other objectives. Some want more progressivity or more revenue. Others defend subsidies and transfers for specific activities, groups or businesses. They hold reform hostage.

Wise politicians often bundle dissimilar goals to attract a majority. But when bundling leads to paralysis, progress comes by separating the issues. 

Thus, we should agree to first reform the structure of the tax code, leaving the rates blank. We will then separately debate rates, and the consequent overall revenue and progressivity.... we can agree on an efficient, simple and fair tax, and debate revenues and progressivity separately.

We should also agree to separate the tax code from the subsidy code. We agree to debate subsidies for mortgage-interest payments, electric cars and the like—transparent and on-budget—but separately from tax reform.

Negotiating such an agreement will be hard. But the ability to achieve grand bargains is the most important characteristic of great political leaders."

This is, I think, the most novel idea in the oped. All tax reform packages mix changes to the structure of the tax code with specific rates. Then, the wonkosphere goes on a witch hunt of who pays more and who pays less, and the attempt to fix pathological problems in the structure falls apart.

I think our politicians really could negotiate a tax code in which all the rates are left blank. Then, we have a separate debate about what those rates will be.  In fact, tax rates ought to change a lot more often than the tax code itself.

Similarly,  the key to removing the pernicious subsidies in the tax code is again to separate the issues. Taxes are for taxing, then we can debate subsidies.

We need to move from the equilibrium of, I have my subsidy/deduction/credit/special deal, so I won't complain about yours, to the equilibrium of, I gave up my subsidy/deduction/credit special deal, so I'll make darn sure you give up yours too.

Institutions and experience

These are remarks I prepared for a symposium at Hoover in honor of George Shultz on his 95th birthday. Willie Brown was the star of the symposium, I think, preceded by a provocative and thoughtful speech by Bill Bradley.

Institutions and Experience

Our theme is “learning from experience.” I want to reflect on how we as a society learn from experience, with special focus on economic affairs. Most of these thoughts reflect things I learned from George, directly or indirectly, but in the interest of time I won’t bore you with the stories.

An English baron in 1342 tramples his farmers’ lands while hunting. The farmers starve. Then, insecure in their land, they don’t keep it up, they move away, and soon both baron and farmers are poor.

How does our society remember thousands of years of lessons like these? When, say, the EPA decides the puddle in your backyard is a wetland, or — I choose a tiny example just to emphasize how pervasive the issues are — when the City of Palo Alto wants to grab a trailer park, how does our society remember the hunter baron’s experience?

The answer: Experience is encoded in our institutions. We live on a thousand years of slow development of the rule of law, rights of individuals, property rights, contracts, limited government, checks and balances. By operating within this great institutional machinery, these “structures” as senator Bradley called them last night, these “guardrails” as Kim Strassel called them in this morning’s Wall Street Journal, our society remembers Baron hunter’s experience in 1342, though each individual has forgotten it.

Tilting at Bubbles

Source: Wall Street Journal

The Wall Street Journal reports on the "Fed's Unsolved Puzzle: How to Deflate Bubbles" (That's the print version headline, much pithier than online.)

I thought I was reading The Onion. There it is, a graph marked "Asset Bubbles," measured, apparently, with interferometer precision.

Luke Skywalker and ISIS

Via Marginal Revolution, I found "The Radicalization of Luke Skywalker" interesting.

Despised people -- terrorists; slaveholders; Republicans, to the New York Times -- think of themselves as good and worthy, though they do things we find unfathomably evil. Understanding how they see themselves is the first step to any sort of progress in world affairs. Understanding need not mean agreeing or condoning. The language we use -- "terrorist," "radicalize" -- puts them beyond comprehension; useful for ordering drone strikes but not for understanding why people sign up and how they might be turned. The analogy is admittedly strained, but seeing that we might have felt the same feelings that attract terrorists is an unsettling and useful experience.  Even if it's only a movie.

Smith meet Jones

A while ago I wrote up a smorgasbord of policies that I thought could increase US economic growth, at least for a few decades, in "Economic Growth" (pdf, html here.) Noah Smith took me to task in a Bloomberg View column, complaining that I confused growth with levels,

...I want to focus on one bad argument that Cochrane uses. Most of the so-called growth policies Cochrane and other conservatives propose don't really target growth at all, just short-term efficiency. By pretending that one-shot efficiency boosts will increase long-term sustainable growth, Cochrane effectively executes a bait-and-switch.

As it turns out, the difference between "growth" and "level" effects in growth theory and facts is not so strong. Many economists remember vaguely something from grad school about permanent "growth" effects being different and much larger than "level" effects.  It turns out that the distinction is no longer so clear cut; "growth" is smaller and less permanent than you may have thought, and levels are bigger and longer lasting than you may have thought.

Along the way, I offer one quantitative exercise to help think just how much additional growth the US could get from the sort of free-market policies I outlined in the essay.

Part I Growth and Levels 

A quick reply: China.

Zoning and inequality

I am always pleased when economists normally thought of on different ends of the political spectrum come to the same conclusions. So it is with zoning laws; traditionally a target of free-market and libertarian thinkers. Now joined by Jason Furman, Obama administration CEA chair. From a recent speech,

..excessive or unnecessary land use or zoning regulations... impede mobility and thus contribute to rising inequality and declining productivity growth.

How?

...zoning regulations and other local barriers to housing development allow a small number of individuals to capture the economic benefits of living in a community, thus limiting diversity and mobility. ...

Zoning and other land use regulations, by restricting the supply of housing and so increasing its cost, may make it difficult for individuals to move to areas with better-paying jobs and higher-quality schools. Barriers to geographic mobility reduce the productive use of our resources and entrench economic inequality.

and later

High-productivity cities—like Boston and San Francisco—have higher-income jobs relative to low-productivity cities. Normally, these higher wages would encourage workers to move to these high-productivity cities—a dynamic that brings more resources to productive areas of the country, allows workers in low-productivity areas to earn more, improves job matches and competes away any above-market wages (another type of economic rents) in the high-productivity cities. But when zoning restricts the supply of housing and renders housing more expensive—even relative to the higher wages in the high productivity cities—then workers are less able to move, particularly those who are low income to begin with and who would benefit most from moving. As a result, existing income inequality across cities remains entrenched and may even be exacerbated, while productivity does not grow as fast it normally would.