Friday, December 24, 2010

Surveillance Considered as a Time Machine

It would be both interesting and educational to be able to view my own past, to see how my life looked without the filter of memory. It is too late for me, but in the not very distant future the surveillance technology discussed by David Brin in The Transparent Society and by me in Chapter 5 of Future Imperfect may let other people do it.

Imagine a future where everything that happens in public spaces, and perhaps much in private spaces as well, is routinely recorded, saved and searchable. In that future, the man of thirty gets to watch himself at fifteen on his first date, judge how reasonable or otherwise the quarrel that ended a friendship at eighteen was, see how his parents treated him and he them, with perhaps useful lessons for bringing up his own children. At fifty he gets to look back at what he was doing when he was thirty, recognizing faults or errors invisible to him at the time.

It works for shorter time periods too. After the political argument or lovers quarrel in which my behavior was, as I saw it, entirely reasonable and the fault all on the other side, I get to rerun an outside view—and perhaps see how my voice tones, gestures, facial expressions conveyed a very different message than I chose to remember.

Google's usenet archive already provides a pale ghost of such an opportunity, limited to a string of text messages. The future may expand that to full motion, living color, perhaps even 3D.

Wednesday, December 22, 2010

The Future of Behavioral Economics: A Conjecture

Conventional economic theory is based on the assumption that individuals act rationally. Behavioral economics modifies that by trying to take account of various observed patterns of predictable irrationality. A recent post of mine on a different blog discussed my somewhat mixed views of the project. Thinking further on the subject, a conjecture about the future of behavioral economics occurred to me.

Most of the applications of the theory that I have seen concern decisions by individuals, employees, firms in the general area covered by price theory, more commonly and misleadingly labeled "microeconomics." My conjecture is that where behavioral economics will actually matter, if it matters, will be in disequilibrium theory, more commonly labeled "macroeconomics."

Price theory is a reasonably well understood structure of ideas that works reasonably well. Markets are observed to successfully solve the complicated coordination problem underlying any but the simplest economy; steel mills don't shut down because nobody is mining enough ore, or car companies because nobody is producing enough steel. Obvious predictions of the theory—surpluses when price is fixed above the market level, shortages when it is fixed below, increases in price when supply is restricted, market prices responding to (estimates of) future as well as present supply and demand—are routinely observed. The theory is not, of course, a perfect description of reality, and behavioral economics might improve it a little. But, at the fundamental level, there is no need to fix something that isn't broken.

Disequilibrium theory, the theory that is supposed to explain business cycles, involuntary unemployment, and similar observed phenomena, is much more of a problem. If you simply take the tools of price theory and turn the crank, you get clear answers to the relevant questions. The price of labor equates supply and demand on the labor market as on other markets, so there is no involuntary unemployment, save when minimum wage laws prevent wages from moving to their equilibrium level. Firms and employees make their decisions taking account of rational predictions of future as well as present conditions, so there is no business cycle. The analysis is straightforward. And the conclusions are wrong.

There have been a variety of attempts to solve this problem over the past century or so. Fifty years back, the Keynesian version of macroeconomics was pretty general accepted. It turned out that it too gave incorrect predictions, and academic economists largely abandoned it, although it retained its popularity with journalists, politicians, and much of the general public and was revived with great confidence in response to recent problems. A variety of other attempts to solve these problems have been made. So far as I can tell—it is not my field, so I am judging as an observer, not a participant—none of them has combined a clear, convincing analysis with a correct prediction of real world observations.

If the rational model gives, for this set of questions, the wrong answer, perhaps the solution is a model that incorporates irrational behavior. That is what behavioral economics attempts to provide. If it succeeds, that will be an important contribution to economic theory, a much more important contribution than a collection of observations about particular mistakes made by individual economic actors.

Loaded Dice Continued

A commenter on the previous post writes:

I would suggest that it's more likely that the questions were chosen because they were the most significant and common misunderstanding raised and that the fact that they are more common among rightists is not surprising in light of the literature suggesting that such misconceptions are more common among rightists.

Indeed, trying to select questions with the intention of "balancing" left-leaning and right-leaning errors rather than selecting questions impartially would really be loading the dice.”

Seen from one angle, the question is evidence of the problem pointed out in the biblical phrase about motes and beams. It apparently didn’t occur to the commenter that his view of what errors which people make might be affected by his own beliefs. I have, after all, just offered a sample of “the literature” on that subject as written by people on one side of the political spectrum and explained how they can get their result whether or not it is true.

But from another angle, it raises a legitimate question. If one side makes more errors, then isn’t an “unbiased” set of question actually biased? If so, how could one control for that problem?

The best solution that occurs to me is to test not for number of errors but for number of people who believe each error. Write a list of questions in which about equal numbers are errors popular with each side and see what fraction of people on each side subscribe to their side’s errors. There are still potential problems—you could bias the test by picking wildly implausible errors on one side and only mildly mistaken ones on the other. But at least you have eliminated the particular source of bias I discussed in my previous post.

You still have the problem of making sure that your right answers are really right, but I suspect someone who had the same biases as the authors of the survey we are discussing but was both more competent and more honest could manage it. One way would be to ask someone with the opposite biases to check over the answers and see if there were ones that he could offer legitimate arguments against.

My other response to the comment was to compile a list of questions designed to expose misinformation on the left. Here are some candidates:

According to the Congressional Budget Office, the top 1% of households pay what share of federal income tax?

Less than 10%

Between 10% and 30%

More than 30%

According to the Congressional Budget Office, the bottom 60% of households pay what share of federal income tax?

More than 20%

Between 2% and 20%

Less than 2%

After the 1929 stock market crash, Republican Herbert Hoover, during the rest of his term, responded by:

Sharply cutting government spending

Doing nothing in the expectation that the problem would cure itself

Sharply increasing government spending

The average tuition at private schools is:

Substantially lower than the average per pupil expenditure at public schools

About the same as the average per pupil expenditure at public schools

Considerably higher than the average per pupil expenditure at public schools

In the opinion of a majority of American economists, the usual effect of raising the minimum wage is:

To reduce poverty among low income workers

To increase employment by transferring income to poorer people more likely to spend it

To increase unemployment among low income workers

American K-12 teachers are paid:

Less than the average wage of American workers

More than the average of American workers but less than the average for college graduates

More than the average for college graduates

Including wages, pensions and other benefits, the average employee of the Federal Government is paid:

Substantially less than the average employee in private industry

About as well as the average employee in private industry

Much more than the average employee in private industry

Of the questions on this list, there is one which I would want to check before including it in a survey; I am pretty sure I know what the answer was a few decades back but not entirely certain that it is still the same.

Readers of this blog, even left wing readers, are a poor population for the test, since several of the questions have been discussed here. But they are invited to offer it to friends without any explanation of how it has been designed and see what the result is.

Sunday, December 19, 2010

More Loaded Dice

Several years ago I had an exchange on this blog with Professor Robert Altemeyer over his claim that authoritarianism was more common on the political right than on the political left. I argued that the survey on which his claim was based was, probably not intentionally, loaded. Questions about respect for authority consistently referred to authorities more popular on the right than the left, questions about people bravely defying authority referred to forms of defiance more popular on the left than on the right, hence people on the left would appear, by their score on his questions, less authoritarian than they were, people on the right more. I recently encountered the same problem in a different context, this time an article describing a study that purported to show that people on the right are more often misinformed about public issues than people on the left.

The obvious way to rig the results of such a poll is to select questions where the answer you consider mistaken is more popular with one side than the other. Most people who believe Obama was not born in the U.S. are on the right. Most people who believe the Chamber of Commerce used foreign money to influence the most recent election are on the left. By my count, for at least seven of the eleven questions the answer that the study's authors considered misinformed was a view more popular with the right than the left. One—the Chamber of Commerce question—went the other way.

A second problem with the study was that, for at least three of its eleven questions (whether stimulus had saved several million jobs, whether the economy was recovering, whether Obamacare increased the deficit), the right answer was unclear. In none of the three did the study's authors provide adequate support for their view—which, in each case, coincided with the claims of the Administration.

I first heard of the study via a critical piece on Reason's blog. A while later, I came across another reference to it, a Usenet post by someone who obviously approved of its conclusions. I responded and pointed out the problems.

With regard to the three questions where the study's answer was less obviously correct than its authors thought, I can easily imagine a reasonable person disagreeing with me, arguing that the study at worse mildly exaggerated how clear the right answer was. I do not, however, see how any reasonable person could fail to see the way in which the selection of questions was biased, once it was pointed out.

I am now waiting to see if there is anyone reading that particular Usenet thread who is willing to admit that the evidence for a conclusion he likes is bogus.

The Invisible Elephant: The Payroll Tax Cut

Most discussions of the tax bill that finally passed treat it as a compromise in which Obama, in order to get the bill through the Senate, had to make it more favorable to rich people than his original proposal. In fact, it may well be the opposite. Exact calculations depend on a variety of assumptions about who actually ends up paying what tax, but my guess is that what actually passed made the tax system, on net, more progressive than what was originally proposed, that high income tax payers will end up paying a larger fraction of federal taxes than they would have if the bill had simply extended the Bush tax cuts for lower and middle income taxpayers.

The federal income tax is paid almost entirely by upper income people—in 2007, almost 40% of federal income tax came from the top one percent of the income distribution, while the bottom 60% contributed just over 1% of the total (Figures from the CBO). The payroll tax, on the other hand, is a fixed percentage up to a maximum. The result is that the lowest quintile of the income distribution, which on net pays less than nothing in federal income taxes, pays about 9% of its income in payroll taxes, including (as the CBO does) both employee and employer share.

The bill held the top rate of the income tax at 35% instead of letting it go back to 39.5%. It reduced the employee's share of the payroll tax from 6.2% to 4.2%, reducing the total (employee share plus employer share) from 12.4% to 10.4%. A little arithmetic should convince you that the percentage reduction in the payroll tax is more than the percentage reduction in the top rate of the income tax. The change in the payroll tax in the bill is for only one year; we will have to wait and see whether it, like the Bush tax cuts, ends up lasting for longer than that.

While the actual incidence of the payroll tax—who really pays it—does not depend on whether it is collected from the employer or employee, it does depend on the elasticity of the supply and demand for labor, which determine how much of it ends up as a decrease in wages, how much as an increase in the cost of labor—a point ignored by the CBO in its analysis of tax incidence. Further complications would include other features of the bill—its effect on tax rates on dividends, inheritance, and the like. A full calculation would be complicated and the results would depend on assumptions, in part arbitrary, about who actually ends up paying each tax.

What is clear is that a large and under reported part of what the bill contains is a cut in the one part of the federal tax system a significant part of which is paid, at least directly, by people in the bottom sixty percent of the income distribution.

That is the elephant in the room.

Monday, December 13, 2010

The Intensive Margin: Math vs Econ

I was recently told, by an undergraduate a top school who had been planning to major in economics, that the required courses had turned out to contain a great deal more mathematics than economics. That report was confirmed by a senior faculty member at the same school with whom I raised the question, who agreed that the situation was an unfortunate one.

Presumably, the content of such courses reflects what professors believe that their students must learn in order to go to graduate school and end up as academic economists publishing articles in leading journals. That fits my not very expert impression of the current state of academic economics, that it is heavy on what Gordon Tullock used to refer to as "ornamental mathematics," advanced tools used to demonstrate the author's mathematical sophistication but contributing little to the substance of the analysis.

I have not been much involved with the world of journal submissions for a long time—I prefer to write books and blog posts—so am in a poor position to make blanket judgments. But some years back, reading an interesting article by Akerlof and Yellin on why changes that should have reduced the number of children born to unmarried mothers had been accompanied instead by a sharp increase, I was struck by the fact that they had used game theory to make an argument that could have been presented equally well, perhaps more clearly, with supply and demand curves. Their analysis was simply an application of the theory of joint products—sexual pleasure and babies in a world without reliable contraception or readily available abortion. Add in those technologies, making the products no longer joint, and the outcome changes, making some women who want babies unable to find husbands to help support them.

Assume, for the moment, that I am right, that both economics in the journals and economics in the classroom emphasize mathematics well past the point where it no longer contributes much to the economics. Why?

The answer, I suspect, takes us back to Ricardo's distinction between the intensive and extensive margins of cultivation. Expanding production on the intensive margin means getting more grain out of land already cultivated, expanding it on the extensive margin means getting more grain by bringing new land into cultivation.

In economics, the intensive margin means writing new articles on subjects that smart people have been writing articles about for most of the past century—new enough, at least, to get published. One way of doing it, assuming you don't have some new and interesting economic idea, is to apply a new tool, some recently developed mathematical approach,. It has not been done before, that tool not having existed before, so with luck you can get published.

The extensive margin is the application of the existing tools of economics, and mathematics where needed, to new subjects. Examples include public choice theory, law and economics, and, somewhat more recently, behavioral economics. The same thing can be done on a smaller scale if you happen to think of something new that is relevant to more conventional topics. I have considerable disagreements with Robert Frank, some exposed in exchanges between us on this blog a while back. But when, in Choosing the Right Pond, he showed how the fact that relative as well as absolute outcomes matter to people could be incorporated into conventional price theory, he really was working new ground and, in the process, teaching the rest of us something interesting.

My conclusion is that, if you want to do interesting economics, your best bet is probably to work on the extensive margin—better yet, if sufficiently clever and lucky, to extend it.

Saturday, December 11, 2010

The Transparent Society: v 0.1

In The Transparent Society, David Brin argued that developments in surveillance technology were leading us to a world where everything you did would be observed, recordable, and searchable. That outcome could not, in his view, be prevented. The best we could hope for was transparency in both directions, a world where the cops can watch us but we can also watch them.

Early evidence that he might be right appeared in incidents where police officers made the mistake of misbehaving when someone had a video camera—more recently a cell phone—pointed at them. Thinking about the WikiLeaks case, it occurred to me that it was a further development in the same direction. The origin of the information was a conventional leak, not high tech surveillance. But it is modern technology that makes it virtually impossible for the governments affected to prevent widespread public distribution of the leaked information.

In that sense, what we are seeing is an early stage of the transparent society.


David Brin's web site

The chapter on surveillance technology in my Future Imperfect.

Friday, December 10, 2010

Jury Nullification: True and Dangerous

I was recently involved in an exchange with a prominent jurist on the issue of jury nullification—the doctrine that jurors are entitled to nullify bad laws by refusing to convict a defendant who did something that is illegal but, in their view, should not be. He pointed out, correctly, that it is a very dangerous doctrine. If everyone believes in jury nullification and one person in five believes that it is all right to murder abortionists, someone who murders an abortionist is unlikely to be convicted. Similarly for any other target group that a significant minority believes deserves death.

He is correct that it is a dangerous doctrine. He may well be correct that we would be worse off if more people believed in it. But that does not tell us whether or note the doctrine is true. It is possible, after all, for something to be both true and dangerous. To take one obvious example, it is true that if you put together a certain mass of U235 in a certain way the result will be a very large explosion—but we might all be better off if nobody knew that it was true.

My rebuttal to his argument—which, as it happened, I did not have a chance to offer—is quite simple. Sodomy was a capital offense in England and parts of the U.S. into the second half of the 19th century. Suppose someone has been caught in the act and charged and you are offered a place on the jury. You believe that the other jurors will vote for conviction and that the defendant, if convicted, will be executed. You have three options:

1. Tell the judge that you are unwilling to decide the case according to the law, since you think the law unjust. You will be dismissed from the jury and replaced by another juror who will probably vote for conviction.

2. Agree to decide the case according to the law. Since the man is guilty, you vote for conviction and he is hanged.

3. Tell the judge (falsely) that you are willing to decide according to the law, remain on the jury, and vote for acquittal.

The first two alternatives result in the hanging of a man who has, in your view, done nothing wrong. The third is jury nullification. Which choice is morally correct?

Tuesday, December 07, 2010

Turning Behavioral Economics Around

I am currently involved, elsewhere online, in a discussion of behavioral economics. One point it raises is that arguments from behavioral economics—observed patterns of irrational behavior—tend to be used to support positions that those using them already believe in. Much the same is true of arguments from market failure. As I pointed out some time ago in the course of an exchange with Robert Frank, the argument he was making had a perfectly straightforward implication—that instead of subsidizing schooling, at both high school and college levels, we should tax it. It was not a conclusion that he drew, or even acknowledged and responded to when I drew it.

Consider the case of behavioral economics. One of the observed patterns is a status quo bias—a tendency to over weight potential losses relative to potential gains. I am not sure if it has occurred to any of those arguing for behavioral economics that two of the most striking examples of that pattern are the precautionary principle and the campaign to slow or prevent global warming.

The essence of the precautionary principle is that one ought not to do anything—build nuclear reactors, say, or create genetically engineered crops—unless all possibility of very bad results can be eliminated. The principle does not permit balancing some risk of very bad results from doing something against a risk of very bad results from not doing it. Still less does it prescribe always doing something unless one can show that there is no chance that failing to do it will have very bad results. Hence it makes sense only if bad effects from change are weighted much more highly than good.

Or consider the widely held view that global warming on the scale suggested by the IPCC reports—a few degrees C over about a century—would obviously be a catastrophe. It cannot be based on the idea that humans cannot live with somewhat higher temperatures, since humans already exist, indeed prosper, across a much wider temperature range. It cannot be based on the idea that increased temperature is inherently bad, since there are obviously lots of places that would be better suited to human habitation if a little warmer, including most of Canada, Alaska and Siberia. The world was not, after all, designed for our benefit, so there is no reason to believe that current climate is optimal for us. There has been a good deal of talk about higher sea levels, but most of it ignores the fact that the increase suggested by the various IPCC models is only a foot or so—much less than the usual difference between high tide and low.

Rapid climate change is presumptively undesirable, since our present way of doing things—what crops we grow where, where our housing is located and how well it is insulated—is optimized to present conditions. But over a hundred years, farmers will change crops several times over, a large fraction of the housing stock will be replaced or modified, we will change what we are doing for lots of reasons unrelated to climate change. Hence it is hard to argue any strong presumption that climate change at the rates suggested by current models is bad.

Yet discussions of the subject almost always take it for granted that it is not merely bad but catastrophically bad, worth bearing very large present costs to prevent. A clear case of status quo bias.

For one final example, consider the case of Social Security. Behavioral economics provides an argument in favor of it. Individuals badly underweight costs and benefits in the distant future—so-called hyperbolic discounting. Hence they will be less willing than they should be to provide voluntarily for their old age. Hence the government must solve the problem via a program of forced saving.

The problem with the argument is that hyperbolic discounting, insofar as it is real, applies to voters and politicians as well as to people saving for their old age. Hence it is predictable that the force will be real but the saving will be imaginary—there are always politically profitable ways of spending money that happens to be lying around—leaving the system with a trust fund full of IOU's.

Readers are invited to contribute other examples, other situations where behavioral economics provides arguments against the sort of things that most behavioral economists appear to be in favor of.

Sunday, December 05, 2010

Promises, Pensions, Problems: A Proposal

You are a state governor dealing with a strike of state employees. To end it, you must offer them something. One possibility is to raises their wages. Another is to agree to a more generous pension plan.

Higher wages will come, at least for the next few years, out of your budget—and there are a lot of other things you would like to spend the money on. Higher pensions will be paid, almost entirely, from the budget of later governors. It looks like an easy choice. And, since you aren't the one paying, there is no good reason for you to be stingy in your offer, especially if being generous might end the strike sooner and buy you future political support from the currently striking union. Follow out the logic of the situation and one can see why many U.S. states currently face serious budget problems, in part due to very generous employee pension plans.

There is a fairly simple solution to the problem. Change the relevant laws so that a contract with the state government as a party is enforceable against that government only until the end of the term of the present governor. The governor still has the power to pay people with promises, but only promises that are binding for his current term in office.

Suppose, however, that pensions really are the right answer, that for one reason or another the state employees would rather get a thousand dollars worth of pension than a thousand dollars worth of salary, both figures calculated properly allowing for when and with what probability the money will be paid. The solution is for the state to provide pensions—and pay for them. That could be done by putting money into a fully funded pension plan. It could be done by buying pensions from a private firm. The one way it could not be done would be by making binding promises of future state payments.

My proposal does not, of course, solve all problems. The governor may have ways of binding his successors that do not depend on legally enforceable contracts—if he agrees to a pattern of wages in the future based on number of years of employment, it may be politically costly for his successor to reneg on that promise. And it solves the problem only for state governments. I will leave to readers the problem of how one constructs corresponding rules for the federal government.

Nor is the problem limited to governments. To take an obvious recent example, GM was able to buy peace with the UAW by promises of future pension payments. When it turned out that GM was unable to make those promises good, the federal government intervened to bail them out. Presumably the UAW's willingness to accept pensions instead of pay raises in part reflected their correct prediction that, if the situation arose, that would happen.

The same issue can arise, to some degree, even without government involvement. CEO's of private corporations are limited in their ability to make their performance look good at the cost of creating future obligations for their successors by the rules of accounting, which show, or at least are supposed to show, future obligations as present liabilities on the balance sheet. But the process is, given the limits of accounting methods, imperfect.

Saturday, December 04, 2010

Concerning WikiLeaks

Listening to discussions of the case, one repeated theme is that there are some things the government should be allowed to keep secret. That is not an unreasonable view, but I do not think it has much to do with the case. If the government had kept its cables secret, they would never have reached WikiLeaks.

The question at this point is whether when the government fails to keep something secret, when it gives access to its secrets to someone who proceeds to pass them on, it is entitled to put the genie back in the bottle by making everyone whom they have been passed on to, at least everyone with the ability to publicize them, shut up.

Legally speaking, the answer is that they are not—as in the case of the Pentagon Papers. I think that's the right answer. If keeping things secret is important, the government should keep them secret, not let them out and then do its best to gag the press in order to keep the general public from learning them.

Instead, as best I can tell by public discussions, the U.S. government labels a wide range of things secret and then lets a wide range of people have access to them.

Wednesday, December 01, 2010

Open Source Stories

From time to time, I come up with an idea I like for a story that I have no interest in writing. It eventually occurred to me that someone else might want to write one of them, so I put a page of story ideas up on my web site.

As you can see by going to the page, at least three people have now sent me stories they wrote based on my ideas and given me permission to web them. What I find particularly satisfying is that in some cases the author took the story in a direction that had never occurred to me, and it worked.