Statistical Optimism: Mortgage Finance and Depressions, Retro Edition

Let’s coin a new phrase: “statistical optimism.” Statistical optimism refers to the belief that if only we had better statistics about X, and that everyone was made aware of those statistics, then we would make better decisions about X and some set of problems would go away without any major changes in the institutions actually making decisions. It’s a practical, quanty version of the classic Enlightenment-style idea that more knowledge always makes things better. Note that by statistics, here, I mean the production and distribution of quantitative data, the old sense of statistics (vital statistics, censuses, national income statistics, etc.), and not the inferential field we know and love today.

This phrase came to mind today as I was reading through a March, 1932 interview with Senator La Follette* about the need for better economic statistics to improve economic planning in the midst of the depression. The interview is chock full of great quotes that give you a flavor of what it was like to live in a time before the CPS, NIPA, and all the other routine, standardized, official data we take for granted. For example:

It is a sad commentary on our statistical information that in the third winter of the depression we have absolutely no authoritative official figures on unemployment. The only data we have are those collected by the census in 1930 for the country as a whole and for certain cities in January 1931.

The authoritative bit here was to be important, too, as FDR and Hoover fought in the 1932 campaign over whose (partial, non-standardized) unemployment figures were better.

The belief that gets me, though, and that seems to be widely shared across the political spectrum at this point, is that just having good data will fix all kinds of ideological disputes. It was this belief, in part, that motivated the founding of the NBER, and it was this belief that animated Hoover to work to produce all kinds of economic reports in the 1920s and early 1930s in concert with economists and businessmen (e.g. Recent Economic Trends, Recent Social Trends, etc.). La Follette was a Republican also, but later founded the Wisconsin Progressive Party, and clearly believed in less business-led solutions to economic problems than Hoover, but he had the same attitude of statistical optimism. A quote from the end of the interview about the potential for authoritative statistics to prevent future depressions struck me as especially relevant and, from a post-2008 perspective, ironic:

Suppose late in 1928 some authoritative body in Washington had publicly emphasized the fact that there was an excess of private houses on the market. Suppose it had pointed out that construction figures showed an appreciable falling off in the building of new houses. Surely in the light of such warnings people would not have continued investing their hard-earned savings in first and second mortgage real estate bonds thus increasing the supply of new capital for speculative building which continued into 1929.

If only it were so.

FRED New Housing Starts 2006 to 2011

Though, I suppose, in fairness to La Follette, what he called for was not simply the creation of better data but also the creation of an institution – a national economic council, somewhat of a precursor to what ended up being the Council of Economic Advisers – that would have the authority to interpret data, not just collect it. Still, the optimism is palpable, and from our vantage point, tragic.

* La Follette is important in my work because he introduced a resolution in 1932 which called for the creation of the first** official US national income estimates.
** Well, he thought they were the first, and so do most people. The FTC actually produced an estimate in 1926, but almost no one knows about it, and no one did much with it then either.


GDP is important, but it’s not that important

Given that I’m writing a dissertation on the history of national income accounting, I hate to say this, but… GDP just isn’t as important as some people want to make it out to be. Some of the worst offenders in this genre of claim seem to be, unsurprisingly, GDP’s biggest critics. Let’s take an example from an op-ed in this week’s New York Times*, Our Mismeasured Economy by Lew Daly at Demos. The editorial follows in a nearly 100-year old tradition of criticizing how national income statistics handle hard to measure, non-market production, in this case government output. Daly argues, sensibly enough, that the way we handle government is ad hoc and arbitrarily rules out the possibility that government could actually add value (we explicitly assume that the value of government output is equal to what we pay for it, no more, no less).

That’s all well and good, but what bothers me is the over-the-top way in which Daly motivates his critique. Here’s the opening line:

Today’s polarized debates about the role of government often boil down to a single issue: the size of government compared with the size of the overall economy, as measured in gross domestic product.

Really? Are we following the same debates? Because although I’ve certainly seen reference to the size of government (and in fact, we see examples of these claims as far back as the early 1930s), they do not seem to me to be a dominant mode of debate at the present juncture. To be fair to Daly, I have not done a systematic content analysis of contemporary ‘debates about the role of government’, but I would be shocked if even a small percentage of these debates (5%?) explicitly or implicitly referenced the size of government as measured in the national accounts. And far fewer “boil down to a single issue” in those terms. Think, for example, of the recent Hobby Lobby case, and other debates around the Affordable Care Act. This debate is about ‘the role of the government’, but it’s not about the ‘size’ of the government but about its intrusiveness: can the government mandate that private companies provide certain kinds of care to their workers? Think also of the NSA wiretapping scandals. Again, the proper role of the government is at the center of the debate, but not the government’s size as a percentage of GDP.

Daly’s op-ed makes a number of sensible points about what we miss if we focus our debate on the productivity of government on the national accounts (though I’m not sure I agree that the fix is to change how we measure GDP as opposed to, say, coming up with alternative measurements of government productivity and restricting our analysis of GDP to where such a number makes the most sense – GDP is built on a bedrock of “market epistemology”**, and I doubt it will ever move far from that principle). But there’s no need to tee those claims up with an overblown one about the centrality of GDP to contemporary political debates about the role of the government.*** GDP is important because of its diffuse implications for how we think about the world, as well as some more narrow technical uses (such as the World Bank’s categorization of “least developed” countries, see, e.g, Jerven’s work) – but it’s not quite so woven into technical systems as, say, inflation statistics, which directly determine wage increases and social security benefits. And so I get that it’s a bit tougher to talk about why getting GDP ‘right’ is so important. But maybe that means we should be having a different debate, about what the right ways to measure and think about the productivity of government are, rather than a narrow technical one about GDP. Somehow I doubt that the Tea Party is going to stop complaining about the Affordable Care Act if the government’s share of GDP goes down a point.

* H/T to Beth Berman for sending this piece along.
** I define market epistemology as the belief that markets provide the best or only definitive information about economic value. Market epistemology shapes debates about the production boundary and in turn the boundary of the economy – that is, it shapes what we decide to count and how we decide to count it, especially for difficult cases like unpaid housework, government output, and owner-occupied housing. See, e.g., chapter 4 of the dissertation I should be writing instead of this blog post!
*** At this point, I’d also like to fully embrace the irony of using a single editorial as a case to motivate a more general argument about the perils of motivating a general argument about discourse from a handful of cases. I can dig up more if you’d really like, I read this stuff for a living.

Regulating Better, Not Regulating Less: Occupational Licensing Edition

Today, I came across an interesting-looking NBER working paper on occupational licensing, Relaxing Occupational Licensing Requirements: Analyzing Wages and Prices for a Medical Service by Kleiner et al. The paper, which I have only skimmed, examines the consequences of relaxing restrictions on what kinds of services nurse practitioners can offer to patients (as compared to services offered by doctors). Here’s a big chunk of the abstract summarizing their findings:

We find that when only physicians are allowed to prescribe controlled substances that this is associated with a reduction in nurse practitioner wages, and increases in physician wages suggesting some substitution among these occupations. Furthermore, our estimates show that prescription restrictions lead to a reduction in hours worked by nurse practitioners and are associated with increases in physician hours worked. Our analysis of insurance claims data shows that the more rigid regulations increase the price of a well-child medical exam by 3 to 16 %. However, our analysis finds no evidence that the changes in regulatory policy are reflected in outcomes such as infant mortality rates or malpractice premiums.

So, to summarize: letting nurse practitioners do more decreased the cost of care to patients without sacrificing quality. Assuming for a moment that the results hold up, this paper clearly strikes a blow against the current system of occupational licensing which puts such restrictions on nurse practitioners. Keen.

I posted the above paper to Facebook and was amused to see quick responses from two libertarian friends who read my posting of the paper as an endorsement for a general end to occupational licensing (as called for e.g. here).* But this paper contributes virtually nothing to our understanding of the possible consequences of eliminating licensing. The point of the paper is that some kinds of care can be done by a larger set of licensed professionals than currently do them – there’s not much evidence here (for or against) abandoning licensing entirely. And I think it’s telling that this paper drew such a reaction, where evidence of a regulatory imperfection is read as strong proof that the entire idea is flawed, even when the proposed alternative (i.e. no licensing) has not actually been tested.

More generally, to make social democracy work means regulating better, not (necessarily) regulating less.** It’s very much in keeping with social democratic principles to argue that particular rules should be reformed, and even better, to draw on evidence to make those arguments. But that’s a far cry from abandoning a whole class of regulation because we have evidence that they’re not perfectly implemented, especially when we’ve just been given tools to make those regulations work better.

*Some of this may have been in mocking jest, i.e. “Dan <3s neoliberal schemes for deregulation:-)".
**Regulating better has been made especially difficult lately by the performative insistence of half the political class that government as a whole must be incompetent.

Commentary on the New Affirmative Action Supreme Court Case

The Supreme Court heard oral arguments this week on a new affirmative action case starring Michigan (this time the state, not the University). Beverly Mann at Angry Bear has written up some excellent coverage, including an insightful account of the Court’s (and especially Scalia’s) shifting invocation of the 14th Amendment (is it only for minorities who lack political power? Or does it protect everyone?). As we learned in the current oral arguments, at least in this case, Scalia is certain that the 14th Amendment is not “only for the blacks.”

I left a long comment on one of the Angry Bear posts about the current state of the University of Michigan, and in particular the shifting class makeup of the student body in comparison to the UC system, which Mann was kind enough to promote up to its own post. Beyond that, I don’t yet have a lot to say about the current case except that it will be interesting to see how it all plays out.

“Compromise” and the Affordable Care Act

One of the strangest narratives in the current shut down debate is the idea that Democrats won’t compromise. This narrative is funny to me because the Affordable Care Act itself seems like one of the biggest examples of compromise in modern politics. Yes, the final act passed with no Republican votes, but the bill itself was the product of decades of compromise dating back to the failed 1990s health care reforms. Brad DeLong (among others) has been writing about this issue since the ACA was enacted, e.g. The Curious Triumph of Romneycare:

It has been a long slog, since those days in the early 1990s when right-wing policy analysts proposed an individual mandate to purchase health coverage as a respectable, market-oriented, responsibility-based alternative to either government-provided health care (the nanny state) or mandated employer-provided health care (the boss state). In November, 2004, Republican Governor Mitt Romney of Massachusetts followed through on that conservative proposal, and in April, 2006 he signed into Massachusetts law a health reform plan based on it.

Having conquered Massachusetts, RomneyCare is now the law of the land. But how did Republican RomneyCare become Democratic ObamaCare?

In addition to the obvious structural parallels between Romney’s health reform, the 1990s conservative proposals, and the ACA, a group of political scientists have identified even more Republican ideas in the final text of the ACA. Here’s the Economist’s coverage:

On the surface, it looks totally partisan. Not a single Republican voted for the Patient Protection and Affordable Care Act, aka “Obamacare”. But the law is filled with concessions to them. A new computer analysis counts the GOP policy ideas that overlap with other bills that made it into the law: 3% from the House and 8% from the Senate. In fact, when “markup” bills are excluded—basically, amendments and legislative re-writes—11% and 28% of policy ideas from Congressional and Senate Republicans, respectively, align.

The underlying paper is here. Long story short: The ACA was already a massive compromise at every level.

But Republicans since 2008 have not been interested in compromising, no matter how hard the Democrats tried to bring in their ideas. Instead, Republicans have single-mindedly focused on torpedoing Obama’s presidency. “Let’s just say it, the Republicans are the problem.” And the media have enabled this strategy. As Al Jazeera puts it, “Shutdown coverage fails Americans”:

So, no, the shutdown is not generalized dysfunction or gridlock or stalemate. It is aberrational behavior by a political party that is willing to take extreme and potentially damaging action to get its way. And by not calling it what it is, the political press is enabling it.

The culture of false equivalence enables extremists to look less extreme, and masks the extensive compromises Democrats made in the vain attempt to secure any Republican support for ACA from the very beginning.

Shut it Down.

In March, I went to the National Archives in Maryland, just outside DC, to do some research on the official national income statistics of the United States from the 1930s-1970s. In the middle of my one week visit, DC was threatened with a massive snowstorm, which led to the humorously named “Snowquester” where government offices were closed and employees told to work from home. The snow didn’t materialize, and for some reason the Smithsonian museums were open even though the Archives were closed, so I spent the day wandering the Mall. Fortunately, I had enough time on the following days to catch up on my boxes and make through the records I was searching.

I know it’s not the most important government function that’s going to be undone tomorrow, but my heart goes out to all my fellow graduate students trying to write dissertations at the various federally-run archives right now. Good luck.

For excellent coverage of the shutdown itself, I recommend these two articles. Read them back-to-back.

First, Slate asks how the shutdown would be covered if the US were other people in If It Happened There … the Government Shutdown:

WASHINGTON, United States—The typical signs of state failure aren’t evident on the streets of this sleepy capital city. Beret-wearing colonels have not yet taken to the airwaves to declare martial law. Money-changers are not yet buying stacks of useless greenbacks on the street.
But the pleasant autumn weather disguises a government teetering on the brink. Because, at midnight Monday night, the government of this intensely proud and nationalistic people will shut down, a drastic sign of political dysfunction in this moribund republic.

Second, the BBC covers the shutdown like it is actually happening to other people, in US shutdown has other nations confused and concerned:

For most of the world, a government shutdown is very bad news – the result of revolution, invasion or disaster. Even in the middle of its ongoing civil war, the Syrian government has continued to pay its bills and workers’ wages.

For leaders of one of the most powerful nations on earth to willingly provoke a crisis that threatens to suspend public services and decrease economic growth, then, is astonishing to many. American policymakers “are facing the unthinkable prospect of shutting down the government as they squabble over the inconsequential accomplishment of a 10-week funding extension”, Mexico’s The News writes in an editorial.

May the shut down be short, and the final budget stripped of nonsense like cutting food stamps. This country…

In other, completely unrelated news, happy 100th birthday to the US Federal Income Tax. And happy first birthday to the Obamacare exchanges.

Bhutan’s new rival in public happiness measurement: Lithuania

As readers of this blog may know, Bhutan has long produced a Gross National Happiness indicator as an alternative measure of welfare to more traditional economic indicators (e.g. GDP). Happiness measures have gained some traction elsewhere, and research on the economics of happiness (starting from the Easterlin paradox and its critics) has gotten quite mainstream. But official, public measures of happiness are still the exception rather than the norm. But not, it seems, in Lithuania:

Lithuanian capital to install public ‘happiness barometer’
The mayor of Vilnius plans to install a huge screen on the town hall to broadcast a real-time “happiness barometer” that will monitor the mood of the Lithuanian capital.

The giant display will monitor the level of happiness among the city’s 520,000 residents by showing a number on the scale of one to 10 that reflects tabulated votes sent in by locals from their mobile phones and computers.

“This barometer is a great tool for politicians. If we take a decision and see a sharp fall in the mood of the city, then we know we have done something horribly wrong,” mayor Arturas Zuokas said.

I’m not sure how I feel about this. On the one hand, most citizens aren’t that tapped into government activity, and so real-time reactions are likely to be more noise than signal. On the other hand, I’d rather CNN report on the noise-like fluctuations of happiness than to hear another billion stories about why the Dow was up or down ten points today (or, why various mostly clueless pundits think the Dow was up or down ten points, anyway).

What would such a story look like? “Happiness was up 5% today on strong sunshine, moderated by a predicted storm this weekend and reports of possible cost overruns in the new Defense Department IT overhaul…”? Try writing your own fictional happiness trend story in the comments!

Retrospective Economic Voting in the 19th Century?

A quick blog request as I listen to Larry Bartels give a summary talk on economic voting and the recent recession*: does anyone know of any studies on economic voting / retrospective voting in the 19th century? Bartels mentioned that a few papers attempted to test the idea that voters focus primarily on recent economic performance back into the 19th century, but didn’t give any names, and I’m having trouble tracking them down via Google Scholar.


* The answer is: economic voting models do really well, the 2008 and 2012 elections were very close to the historical trend line and not unusual in any way, and the same findings hold more or less across Europe.

Regnerus: Not Just for the Supreme Court Anymore!

Right now, the Minnesota State House is debating a same-sex marriage bill. According to this liveblog coverage from Minnesota Public Radio, one opponent of marriage equality invoked Mark Regnerus’s controversial/discredited study on the House floor, describing its results as “conclusively proven.” The study was apparently also cited in a Minnesota Senate hearing by an academic.*

I’m not sure how much it would matter, but the fact that Regnerus is still getting a lot of political play suggests that calls for a retraction might still be a reasonable political move for sociology. Opponents can, and are, calling out the study’s flaw in the MN House debate, but it’s a lot easier to point to the journal and say, the study was so flawed it was retracted.

Update: The bill just passed the House!

H/T to MM for the pointer.

*Does anyone know who the University of Minnesota faculty member that cited the Regnerus study in the Senate hearing is? There’s not much information in the MPR story. Update: The Regnerus study appears to have been discussed in the senate by Dr. Thomas Nevins, a University of Minnesota Pediatrician speaking in his individual capacity. Here’s the meeting minutes. If you go in the associated audio clip to about 1:24:35, you can hear his talk entirely about the Regnerus study, as “the most scientifically sound study” and “published in a peer-reviewed journal.”

Debating the Wrong Reinhart + Rogoff

On April 15, three UMass Amherst economists (a graduate student Thomas Herndon, and his advisors Ash and Pollin) published a critique of an influential paper, “Growth in a Time of Debt,” written by Harvard economists Carmen Reinhart and Kenneth Rogoff (R+R 2010 for short). Since then, basically everyone has weighed in on the debate – even Stephen Colbert, in this hilarious bit (and a follow-up interview with Herndon). Here’s one of many summaries of the affair.

Much of the subsequent debate has attempted to assess the original paper and the critique. I want to argue that, in some sense, this is the wrong debate. There was nothing wrong with the original R+R 2010 piece. Oh, sure, there were Excel coding errors and a questionable weighting scheme, but as many commenters have since noted, these are common in lots of early-stage research. You try things out, make mistakes, show it to your colleagues, go back and improve your methods, and science progresses. This is the argument advanced by defenders of R+R on all sides, from Greg Mankiw to Betsey Stevenson and Justin Wolfers to Jeff Smith (and even some sociologists). On a purely academic level, I agree with this argument.

But Reinhart and Rogoff didn’t just write a short conference paper. They wrote op-eds in prominent places. They spoke to policymakers. They argued that because of what they’d found in that short, not peer-reviewed piece, policymakers should fear a 90% debt/GDP threshold or cliff. They drew on their academic credibility – both personal, and in the research they had published – to try to influence policy quite directly. And for that reason I disagree strongly with Jeff Smith when he argues that Herndon, Ash, and Pollin should have shared their critique with Reinhart and Rogoff before going public and given them a chance to respond. And similarly, in some sense I agree with Greg Mankiw when he (and many others) write that the spreadsheet errors have gotten too much attention. At least, I would agree if this were purely an academic debate. But if this is a political fight, then Reinart and Rogoff’s credibility as policy experts is exactly what’s at stake. They are tenured economists at Harvard, so they start off with a lot of credibility. The spreadsheet error is important because it shows just how sloppy was the research they were shilling in 2010-2011. At the time, Krugman wrote of R+R 2010, “this just isn’t careful work.” The Excel spreadsheet error is the smoking gun proof of that.

So, yes, Herndon, Ash, and Pollin (HAP, for short) were explicitly critiquing R+R 2010, but the critique matters because of the editorials and policy tracts that R+R wrote in 2010-2012 that explicitly invoked R+R 2010 to argue for cuts in government spending or at least more attention paid to rising debt. These editorials, and similar advice given by R+R themselves directly to policymakers, shifted the terrain of the debate: this is not just an academic dispute that can take place on the usual academic time scales and with the usual academic norms, but rather an explicitly political fight about government spending in a time of recession. Here’s one example that will hopefully serve as a case-in-point, a 2011 editorial published by Bloomberg titled Too Much Debt Means the Economy Can’t Grow. Here are the key invocations of the 2010 paper:

Our empirical research on the history of financial crises and the relationship between growth and public liabilities supports the view that current debt trajectories are a risk to long-term growth and stability, with many advanced economies already reaching or exceeding the important marker of 90 percent of GDP.


In our study “Growth in a Time of Debt,” we found relatively little association between public liabilities and growth for debt levels of less than 90 percent of GDP. But burdens above 90 percent are associated with 1 percent lower median growth. Our results are based on a data set of public debt covering 44 countries for up to 200 years. The annual data set incorporates more than 3,700 observations spanning a wide range of political and historical circumstances, legal structures and monetary regimes.

We aren’t suggesting there is a bright red line at 90 percent; our results don’t imply that 89 percent is a safe debt level, or that 91 percent is necessarily catastrophic. Anyone familiar with doing empirical research understands that vulnerability to crises and anemic growth seldom depends on a single factor such as public debt. However, our study of crises shows that public obligations are often hidden and significantly larger than official figures suggest.

“Growth in a Time of Debt” was a brief, not peer-reviewed paper. That’s their evidentiary basis. And yes, they back somewhat away from the strong threshold claim – but in terms of sensitivity, as in, we know high debt somewhere around here kills growth, but we aren’t sure it’s exactly 90%. And, as they later note in defense of themselves, they do emphasize the median claim (which is robust to the Excel and weighting critiques of HAP). But the causal claim is right in the friggin’ title* and it had already been disputed by many prominent critics who read the original paper (e.g. Krugman here). Suppose you’re a Harvard professor – would you publish an op-ed which relied this heavily on a not peer-reviewed study that had already received substantial critiques for overstating its causal claims? If you did, would you expect the same kind of courtesy from your colleagues as if you’d just posted a paper on SSRN or NBER?

To me, Herndon, Ash, and Pollin are responding to this op-ed (and others like it) as much or more than they are responding to R+R 2010 itself. Responding to an academic working paper may have some norms of fair warning associated with it. Responding to a series of hackish op-eds drawing legitimacy from a working paper that looks like a publication doesn’t have the same norms or goals. It’s about destroying credibility, not improving flawed methods. Social science always has an element of politics – we are, after all, making knowledge about people. But R+R, much like the equally contentious Regnerus affair, was politicized in a more transparent, more partisan way. Regnerus at least somehow managed to get his study through the normal peer-review process, and left it to others to make fools of themselves citing it in public for political effect by playing up a (questionably derived) correlation into a strong causal statement, leaving himself in a somewhat defensible position of never having taken a position on the political issue in public, nor of having made the bad causal claim (later undermined somewhat by behind the scenes evidence). Reinhart and Rogoff did no such thing – they took their preliminary results straight into the heart of an important political debate and made (academic) fools of themselves.

There’s always something messy and frustrating around these explicit interweavings of high-stakes politics and “normal” social science that twists everything up. But in the end, I think Mankiw, Stevenson and Wolfers, Smith, and other academics, give Reinhart and Rogoff too much credit by treating this incident as a purely academic, normal science debate. The error wasn’t (just) in the spreadsheet, it was in the attempt to claim policy relevant expertise based on the spreadsheet.

* As Mike argues in the comments, op-eds receive their final titles from editors rather than authors, so it’s hard to know who picked that title out. That said, R+R make the causal version of the claim in various places in this piece and elsewhere. As O’Brien notes, “R-R whisper “correlation” to other economists, but say “causation” to everyone else.” (This footnote was added after Mike’s comment.)