Governments, Families and Deficit Worriers or How to Convince a Deficit Worrier

When it comes to talking about deficits, politicians are fond of comparing governments to families - even Barack Obama, who probably knows better.  Social disapproval of families who live beyond their means is high in any functioning society (especially from financially successful middle-class families) - so this works as a way of connecting to middle-class voters.  In other words, it's a popular position to take - something that goes beyond complicated economic theory about how it all works and feels intuitively right. 

Unfortunately, as Paul Krugman never tires of pointing out, this comparison is wrong - governments are NOT like families: they can print money, raise taxes, they can intervene in the economy in a hundred productive ways.  Therefore - while governments can't sustain deficits forever, especially when economic growth is sluggish - cutting the deficit is not going to put the economy back on the path to recovery - unlike a family, where cutting spending can indeed help a family from going bankrupt.

Unfortunately this argument never cuts any ice with deficit worriers (I'm talking about non-economists here, who, like me, have only a rudimentary and basic understanding of how the whole system works).  This is important because one of the reasons politicians - even Democratic ones - seem so perversely obsessed with the deficit is because the American public in general cares about it deeply. 

Why does the assertion of how governments and families are different not make deficit worriers change their minds?  The reason is not hard to find.  There seems to be something almost unintuitive about this - and also something that offends what I call the "protestant ethic*" of the middle-class.  Michael Kinsley expressed it well in an article he wrote:

My fear is not the result of economic analysis. It’s more from the realm of psychology. I mean mine. The last time I wrote about this subject, The Atlantic’s own Clive Crook called me a “fiscal sado-conservative.” I would put it differently (you won’t be surprised to hear). Maybe, at least on economic matters, I’m a puritan. The recession we’ve been going through did not occur for no reason. Even though serious misbehavior by the finance industry triggered it, sooner or later it was bound to happen. For a generation—since shortly after Volcker saved the country, and except for a brief period of surpluses under Bill Clinton—we partied on borrowed money. We watched a real-estate bubble get larger and larger, knowing but not acknowledging that it had to burst. Then it did burst, and George W. Bush slunk off to Texas, leaving Barack Obama to clean up the mess. Obama has done the right things, mostly, pushing through a huge stimulus package and bailing out a few big corporations and banks. Krugman says we need yet another dose of stimulus, and maybe he’s right.

But this cure has been one ice-cream sundae after another. It can’t be that easy, can it? The puritan in me says that there has to be some pain. That’s not to say that there hasn’t been plenty of economic pain. But that pain has come from the recession itself, not the cure. [Emphasis mine.]

Some of this resonates with me - and I suspect - this is one of the things that animates the deficit worriers, even if subconsciously - let's think of it as an internalization of the Protestant Ethic especially its "there is no free lunch" feature. 

Which is why I like David Leonhardt's blog-post today - it offers us reasonable people another way of convincing deficit worriers - a large percentage of the United States voting population - about why deficit-cutting is not a good idea at the moment:

Ms. Snowe and Mr. DeMint compare the federal government to a family that supposedly has to balance its budget, and the comparison is actually a useful one. If a middle-class family had to run a balanced budget every year, it would never be able to buy a house or send a child to college. 

I think this is a great argument - especially since it has the potential to appeal to the middle-class innate Protestant Ethic.  It makes the case that a deficit, or an unbalanced budget, is a productive thing - just like taking out a loan for a car, a house or college is considered a device for upward mobility and progress.

I'll let you know how it works.

*While I use the word Protestant Ethic loosely - and certainly not in the exact sense in which Max Weber  used it - I use it especially to gesture towards the middle-class tendency for delayed gratification.  The whole idea of "save now,  use later" or "work hard now, have fun later" is deeply inscribed in middle-class habits and I suspect is the reason why social disapproval of families who live beyond their means is so common and well-entrenched. 

Internal vs. External Incentives: The Case of Economics

[This is a random, off-the-cuff post, with some wild generalizations, so please let me know if you think any part of it is wrong.]

There's been an interesting debate in the blogosphere recently about what science is and whether economics is a science.  The debate is interesting not so much because it settles the issue but because it's a good data-point for looking at public understandings of what it means to do science. 

Tyler Cowen started it all off by saying:

Economics is most like a science when people do not care about the outcome of the argument.

To which Matthew Yglesias responded in agreement, adding:

In other words, social science is like science when it’s like science—disinterested. But when it’s like politics, then it’s like politics. I note that American economists are generally able to reach a much greater degree of consensus when they offer policy recommendations to foreign countries than when they offer recommendations to the US congress. That’s not because foreign countries have easier problems to solve. 

When Cowen talks about the "outcome" of the argument, he means the external outcome of the argument: in this case, specifically, the public policy that seems to be the logical consequence of a certain knowledge claim.  When a knowledge claim has no link to a public policy choice, he suggests, economics is most like a science -- a condition Yglesias calls being "disinterested."  In Ygelasias' view, when a economic knowledge claim has no obvious public policy consequences (especially for the country said economists live in), economists behave like scientists -- which is not to say that they agree, but rather, that they disagree, but in a disinterested way.

In STS, this is what I call the Internal vs. External debate on what drives science.  Do scientists accept theories because they are, in some sense, true?  Are they convinced of the validity of a certain knowledge claim because of "internal" reasons -- reasons deemed to be "proper" within the field?  Or are they influenced by what one might call "external" reasons, reasons deemed by the community to be properly out of bounds, such as the desire for money, support for a political program, etc.? 

But an interesting aspect of what it means to be a disinterested economist struck me (and correct me if I'm wrong).  As far as my reading goes, ideology doesn't count as an improper reason for being partial to a knowledge claim.  So economists will routinely proclaim that they are libertarians or progressives or egalitarians.  What they won't say is whether they are Democrats or Republicans -- and so this is often deployed in debunking someone's claim.  Thus one  is more likely to hear things like "X has nothing to say about this because he worked for a Republican president and so would rather not contradict said president's policies" rather than "So-and-so makes this claim because he is left-wing and is therefore biased"  One also hears things like (at least on blogs) "I am sympathetic to such-and-such claim because I believe in progressive causes" -- which means that ideology is arguably a more acceptable reason for being sympathetic/antagonistic to a knowledge claim, than, say, membership of a political party.

Which is, in a way, different from what counts as a proper reason for accepting a knowledge claim in the actual sciences, like physics or biology.  Here, I'd say, even ideology does not fly.  Membership of a political party, of course, is completely out of bounds.  (Note that this is an assertion about community standards and rhetoric rather than about the actual workings of the hard sciences.)

Which is to say economists should probably be comparing themselves to other social scientists rather than to the practitioners of the "hard" sciences.

Other links:

And here are two more posts about the "Is economics a science?" debate which bring out interesting rhetorical perspectives on what economists think being a science is: here and here.   Greg Mankiw's little paper on "The Macro-economist as a scientist and engineer" [PDF].  And finally, on Crooked Timber, Henry Farrell applied public choice theory to economics. 

Economics and Sociology: What Scott Sumner's defense of EMH really proves

(Photo courtesy Flickr.)

Via John Quiggin, I came across (and really liked!) this piece by Scott Sumner defending Eugene Fama's Efficient Markets Hypothesis (EMH).

I interpret him as saying the following:

1. The claim that a "bubble" exists when asset prices violate economic "fundamentals" is full of s*^#. Because there's no (algorithmic, mathematical) way of knowing what the "fundamental" price of an asset is. Hence, there's no sure-shot (again, read algorithmic) way of predicting a bubble; people who make it sound really easy (take asset prices, compare them with the "fundamental" price, find the difference, and voila, you know if there's a bubble) don't know what they're saying.
2. Yes, people do predict bubbles and they have a 50/50 chance of being right. No one has been right 100% of the time, and certainly, no algorithm. It's only in retrospect, with 20/20 hindsight that one can know a bubble exists, because it's only in hindsight that one can know the factors that went into making a bubble.
3. The reason that people do keep predicting bubbles is because a "cognitive illusion" is at work here. Because they think they can predict bubbles but they really can't because they end up being wrong 50% of the time. If they build models that predict bubbles, the models will only work 50% of the time too.
   

I think this is all fairly persuasive but to me, it points to a very different conclusion, one that he almost certainly wouldn't agree with. Here it is.

Economists are famously open* about the fact that they consider their discipline to be superior to most other social sciences, like sociology and political science. More rigorous, more empirical, etc. etc. Of course, sociologists disagree.

What Sumner's piece reveals is that simply using a lot of mathematics in your models doesn't really guarantee that your discipline is any more rigorous than, say, sociology. (I don't mean that sociology is not rigorous, I am just saying economics isn't more rigorous than sociology, like, say, physics is. Or, in other words, the social sciences and the natural sciences are different sorts of beasts and economics is a social science, despite all its pretensions to be otherwise.) Sumner seems to be saying that is impossible to construct a general-purpose algorithm (or mathematical model, take your pick) that is able to predict a bubble correctly every single time. To perceive that a bubble exists (and more importantly, to do it before it bursts and takes us all down with it) requires careful interpretation, not a derivation.

It turns out people do predict bubbles, even if they are wrong 50% of the time. Sumner thinks this is because they have a "cognitive illusion". This is wrong-headed. I think what this says is that bubble-prediction seems to be some kind of lived-in, embodied, practical skill that people acquire by living in the world and being a part of it (so of course, they think they can predict bubbles). So I can feel that housing prices are too high, and will crash, and of course I can use mathematical models to justify it to others, but that feeling (or rather, intuition) is based on far more than what that any mathematical model (or algorithm) can capture. In other words, knowing that a bubble exists is a tacit skill, to use Michael Polanyi's phrase, and therefore is something that just can't be captured in a general-purpose model that works every single time. It needs to be done on a case-by-case basis.

So consider this scenario. Person A predicts that our current situation is a bubble and person B says it is not. Person A has a model and person B, perhaps, has one too. Then it is impossible to say who is right, A or B, and be right, every single time. And the decision can certainly not be made just by looking at each model. One needs to see the assumptions the model is based on, the factors a model may overlook, or something else altogether. In other words, it is not only impossible to construct a general-purpose algorithm to predict bubbles, it is also impossible to construct an algorithm that can tell us whether A or B is right. (This, of course, is Thomas Kuhn's point in Structure, only he talks about competing scientific paradigms.)

Sumner's post, it seems to me, leads inexorably to the conclusion that economists stop looking for "generalities, principles" of the economy as a whole (or at the very least, stop pretending that they possess some methodology that is superior to the other social sciences). That a "unified social science" is not really going to materialize and we (all of us social scientists) are all better off looking into issues (in this case, bubbles) on a case-by-case basis. Seems to me that this is something that sociologists and anthropologists have long acknowledged.

Would this be a completely wrong interpretation?

* Yes, even that anti-EMH Paul Krugman):

As for social sciences other than economics, I am interested in their subjects but cannot get excited about their methods -- the power of economic models to show how plausible assumptions yield surprising conclusions, to distill clear insights from seemingly murky issues, has no counterpart yet in political science or sociology. Someday there will exist a unified social science of the kind that Asimov imagined, but for the time being economics is as close to psychohistory as you can get.