Monday, December 29, 2014

A picky, cranky, wonky blog post. Nice cloudy, cool afternoon, though.

I had leave time to burn up at the end of the year, so I’m still home and at my leisure on the Monday after Christmas, looking out my window at a beautiful drizzly gray day   So it’s curious and a little discordant that I’m slightly bugged about something.  And it bugs me that I’m bugged.  And what’s more, it bugs me that being bugged about this bugs me.

I’ve just read a Center on Budget and Policy Priorities report by Dean Baker, part of a more general CBPP discussion on full employment, in which I encountered a use of accounting that I think is just wrong, and for which I’ve chastised others.  To be clear, I agree with almost everything in the Baker paper; I almost always like Dean Baker’s posts and papers.  He’s one of the economists I go to when I find myself adrift and want a quick whack of reality.  And this paper is saying some very basic, very true stuff.  I agree with his premise, which is that the level of employment and the wage rate for workers in the United States would both improve if we could reduce or eliminate our trade deficit.  I agree with his primary conclusions, which are first, that the most direct and best way to do that is to reduce the value of the dollar against the currencies of our trading partners, and second that this is going to be politically difficult to do because there are a lot of vested interests against it.  And I agree even with his secondary conclusion, which is that the most obvious way to counter a large trade-deficit depressant is with a large budget-deficit stimulus.  

But along the way he uses accounting identities in a way that I think is misguided, and that seems to me to imply a misunderstanding of the word “identity”.   I know I have to be wrong about this, because almost every economist alive and most of the smartest economists in history seem to do the same thing that Baker does in this paper.  But the process he uses seems dangerous to me; if it’s accepted it seems to me as though we can prove a lot of things that are completely false, and that can lead us to harmful policy choices.  And for the life of me, I can’t figure out why I’m wrong, and why what he does is reasonable.  Please, if you know where my mistake is, write a comment.  

Here’s what he does that crosses my eyes. (I’m going to write these things so they look like algebra, but what they are really is just columns of figures that are summed---there’s nothing abstract or mysterious here, and nothing terribly mathematical.  This is accounting, not fluid dynamics.)  He lays out the usual absolutely elementary macro equations, starting with the first and foremost, which is precisely table 1 (or more specifically, table 1.1.5) from the National Income and Product Accounts:

(English translation: total national income, Y, is the sum of income from the sale of consumer goods C, the sale of investment goods I, sale of goods and services to the government G, and net export sales, meaning exports minus imports.  In the NIPAs those are all the recognized sources of income---and the result of this sum is generally reported as GDP.)

So far so good.  I like that part.  It’s unassailable.  In fact it should be written like this:

 Which makes it clear that this isn’t an accidental equality, not an equilibrium point that we’re trying to achieve: Y, national income, is defined to be the sum of the incomes received from all sources.  We measure all the variables on the right, and then we calculate Y by adding them up.  I want to emphasize this, because somehow everyone appears to lose sight of this about identities.  These accounts are tables; Y is the thing that appears at the bottom where you write “total”.   (The NIPA table puts it at the top just to confuse everyone.)  So no matter what the values on the right side of this equation do, the equation is always true, because Y is always just the sum of all the other variables.  If all the other variables magically double in an instant, the only result in the accounts is that Y doubles too.  

Having said that, I should hasten to add that there might be real world constraints that make it impossible for all the other variables to double at once; we have limited resources, limited existing plant and equipment, a limited population of workers.  But the constraints are in the world, not in the fact that this is an accounting identity.

Then Baker offers the other half of the equation we all saw the first day of macro-econ class:

Which actually doesn’t directly show up in quite that simplified form anywhere in the NIPAs.  It’s there, but is pretty spread out through the other tables.  I leave the equality sign as it is because this isn’t the definition of income.  It is the definition of something else, but I’ll come to that in a moment.

Then he rearranges these two equations this way:

This follows by simple algebra from the equations above, and it gathers the accounts into groupings that we read about all the time in the news.   The first term in parentheses is the trade surplus, and the last term in parentheses is the government budget surplus; both of these have been significantly negative in recent years, so they’re usually called deficits---the trade deficit and the budget deficit.  But my eyes are already beginning to cross, because it seems to me that this form already implies a bit of misdirection.  Because with this as a basis he tries to show that the X-M term, the trade deficit, somehow pushes around the T-G term, the budget deficit.  Here’s how he starts: 

“Let’s imagine for a moment that…all of the private sector’s savings is devoted to private sector investments.”

Now, why would we imagine such a thing?  More later on this, because this particular imagined equality is a very common motif in economics, and one with a long history, but let’s follow the logic here first.  Clearly he wants to say that the term (S-I) is zero, or at least fixed, so any change in (X-M) must be matched by an identical change in (T-G) in order to maintain this “identity”.  Voila!  The trade deficit creates a corresponding government budget deficit.  

The trouble with this argument is that we don’t get to specify what is fixed and what is not in this accounting equation.  At least not due to the accounting.  Because the second equation up there, the other half of the basic-macro-class lesson, should be written something like this:

and substituting for Y in this, we can restate Baker’s equation above like this:

But the accounts only specify that S will change when the other variables change, not that the other variables must bear any specific relationship to each other.  Because savings is just whatever is left over after all expenditures are taken out of current income.   It’s what you would put at the bottom of the column of figures and call something like “net income” or “residual income”.  The NIPA accounts don’t see it as something we do, or a decision we make, it’s just the final result, the difference.   As far as I can recall without actually looking it up, there are only two kinds of things the NIPAs just define from their internal arithmetic: totals like Y, or residuals like S.  In fact all the totals are some variation of Y (GDP, GNP, NDP, NNP, etc), and all the residuals are some variety of S (corporate retained earnings, household savings, government surplus, etc.)

(A quick aside---notice that in the equation above, income is represented by I, G and X---income from selling investment goods, selling goods and services to the government, and selling goods and services abroad---and the subtractions are only T, taxes, and M, expenditures to sellers outside the country.  Why aren’t other expenditures included?  Because my expenditure is your income: every purchase from a domestic supplier subtracts that income from the purchaser’s account, but adds it to the seller’s account.  Total national savings doesn’t change.)

To be fair, I’m certain that Baker knows all of this very well; better than I do, I’m sure, since he gets to do this stuff all the time, and I can usually only do it in the evenings after work.  He knows that he needs some additional arguments outside the accounts to justify any relationship he asserts between the variables, and he’s careful later to specify that the trade-off between government deficit and trade deficit is implied only if we want to maintain full employment.  But the accounting sleight of hand is there, whether he really believes in it or not, even if he’s just using it as a way to introduce his topic. 

My point is that the belief that the trade and budget deficits are linked may be true, but it can’t be drawn as a conclusion from the accounting equation alone.  This may sound picky, but it matters; if we accept this logical process of using the accounting identity as a forcing economic function as valid then it would be possible to create a claim, from the accounting identity, that any one of the variables is “forcing” a change in any other.  Just fix everything else by assumption, and danged if the variables you have in mind aren’t the only ones that change! For example, let’s go with Baker’s assumption that S-I is fixed, or at least very sticky, and then assume that we’ve passed a balanced budget amendment so that the government deficit is always zero.  Then we have proved, from the accounting identity---haven’t we?---that any change in exports must always and instantly be matched by an exactly equal change in imports, and in the same direction.  If exports increase, then imports, by this logic, would also increase by an identical amount.  How on earth would that happen?  In any short run, I don’t have any idea.  It pretty much violates the usual views of how exports and imports change in the short run; they generally change in opposite directions due to a change in exchange rates.  But if we were allowed to fix everything else in the accounting identity above, it would have to be true.

I said above that this process of thought is dangerous.  Here’s why.  This kind of argument is very familiar; it’s exactly the kind of argument that makes people claim that budget deficits “crowd out” investment due to this same accounting identity.  To make that argument, you would rearrange the terms like this:

Then the “crowding-out” crowd would say, “Let’s imagine that the trade deficit (X-M) is fixed and savings S is fixed---then an increase in the budget deficit (G-T) must come out of investment!  Where else could it come from?  Those are the only two things we are allowing to change.  If all the other variables are fixed, how else can the equality, the identity, be maintained?”
But as I explained above, within the accounting we don’t get to decide what variables are fixed.  If we declare that any are fixed, or that there are relationships among them we have to add behavioral equations or other forces outside the accounting framework to explain those things.  The crowding out argument doesn’t get to say that S is fixed, unless they can show some reason that it should be: as we saw above, within the accounts S is whatever it needs to be to balance the equations; it is just the difference between income and outflow.

And what’s unfortunate in this case is that everything Baker needed to make his argument is in the first equation right at the top.  We have to add a “full employment” level of Y to get there, like this:

Where Y-hat is a fixed goal, full employment income, and to get Y to equality with Y-hat, the other variables have to be prodded into line.  If the trade deficit (X-M) gets “bigger” (more negative, but bigger in absolute value), then one or more of the variables on the right must be made to grow, not because the accounting says so, but in order to satisfy our desire to achieve the fixed Y-hat goal. This is straightforward demand management, which is where Baker was really going.  It’s where he did go, in fact.  But he could have stated that at the outset, and then proceeded to discuss how we could make the other variables cooperate with our goal.  There are alternatives.  For example: we could simply have the government spend more (increase G directly), but we have to take into account what that increase in income from a low Y might do to consumption or investment---as a matter of behavioral response, both of those might depend on total level of income.  Or we could decrease taxes, and depending on how we do that our action might increase investment, or consumption, or both.  

Or we could do what Baker is suggesting: try to lower the value of the dollar, so that we export more and import less, and the increase in net exports helps to push our domestic income toward full employment....

The comment on S=I that I promised will wait until another post.  It’s time to take a walk in the cool afternoon, and start thinking about what to make for dinner.

Sunday, November 9, 2014

Plaid butterflies and other political visions

Like all good liberals I’ve been in mourning for the last few days.  I thought I was recovering, but I guess not.   So even though I generally try to stay largely rantless, I’ll allow myself this one rant as therapy.   

“Still in mourning” may not be quite right; it’s more that I’m still very concerned about what may happen in the next few years.  In fact I’m uncomfortable about some of the early things we’re already hearing from the new majority in the Senate---Mitch McConnell saying, for example, that if Obama uses his legal authority as President to do anything sensible about immigration that would be like “waving a red flag in front of a bull” to the newly elected Senators.   I’m shaking my head in utter flabbergastion, if that’s a word: Senator McConnell, what, exactly, has not been a red flag to Republicans over the last 6 years?  Your entire careers have been built on purple-faced rage, spittle-filled bellows and gnashing teeth.  If Obama bent over and kissed your---um, feet---that would be a red flag to you.  Why is it, Mr. McConnell, that Obama always has to please you, whether you win the election in 2010 or 2014, or lose it in 2008 or 2012?  Why do you never have to worry about waving red flags in front of the rest of us, which you do constantly? 

And there was a letter to the editor in the Washington Post yesterday, wondering if this election would mean we could come to some kind of “compromise” on the Keystone XL Pipeline.  What did this letter writer have in mind?  This is basically a binary decision, yes or no.  Build it or don’t.  What does a binary “compromise” look like? Is he suggesting that we build half of the pipeline?   Perhaps we should build segments in alternating states---maybe build the segments through Montana, Nebraska and Oklahoma, and leave out the segments through Texas, Kansas and South Dakota?  Or maybe he’s thinking the Republicans will offer something the Democrats want in return for building the full pipeline.  What is he thinking the Republicans are likely to offer?  My guess is: nothing.  To Republicans, nothing but complete collapse from the other side is acceptable, and real compromise is not an option they will consider. 

Frankly, I do expect the pipeline to be approved.  Obama has been waffling on it for years, which means that he won’t fight against approval when Congress sends that bill to his desk.  So the Post’s letter-writer will get his way: Obama will accept a Republican-style one-sided “compromise” on the pipeline, and get nothing in return.  

Of course what bothers me most is my expectations about what a Congress dominated by modern Republicans will do to the economy, and to government.  I expect them to decimate both.  Their economic beliefs seem to me to be so wrong-headed, so blind, that they will almost inevitably blunder us into a new recession.  The Fed is looking forward to raising interest rates next year, because they expect that we are finally returning to what they think of as a normal, fully employed economy.  I think that would be a little optimistic even if we did not have this group of budget-slashers about to take control of the Senate.  The next round of sequester budget cuts are to be enforced in January, and I expect the Republicans to insist on them---except, of course, for defense spending, where they will want sequester relief.   I expect Obama to accept this “compromise” as well, since his inner heart has always tended toward fiscal hawk, and that dose of austerity will slow what looks like a still meager recovery.   And of course we will face a new round of debt-ceiling negotiations somewhere around next March.  So my hazy expectation is that by the end of next year the steady fall in the unemployment rate may have stalled.   The numbers will still be much better than they were two years ago, so it won’t cause panic.  But by the middle of 2016, after the full impact of a new Republican budget, we may be where Europe is now: stalled completely and facing a possible new recession.   The Fed’s hopes for a “normal” economy, where they can once again use a positive interest rate to restrain corporate investment exuberance in excess of our potential production limits, may be gone.

That’s what I expect, to be honest.  But I may be wrong.  I hope I am.   In 2008 a large number of conservative economists made terrible predictions about what would happen if the Fed continued with monetary stimulus too long, or if we tried a fiscal stimulus.  They predicted soaring interest rates and inflation.  They were wrong, or at least they have been wrong so far, but I believe they were sincere in their beliefs.  Like Yogi Berra said, “predictions are tough, especially about the future.”    And these expectations I have are really no more than mood right now; I haven’t even done so much as a back-of-the-envelope calculation.  We don’t yet know what the Republican budget will really be, so we have no basis for a calculation even as rough as that.

So maybe, hopefully, my predictions are wrong too.  Maybe the recovery is stronger than it seems.  Maybe it’s truly robust, a surging tide that can’t be stopped.  Maybe the new Republican Senate will want real compromise, rather than one-sided collapse from Democrats. Maybe their budget cutting zeal has been sated, at least a little, by sequester and all the rest, and they will pass budgets that actually get things done.  Maybe the whole capital will soar into the blue, blue sky carried by a flock of paisley butterflies.

But it will be entertaining to watch the Senate struggling with the inevitable Ted Cruz bill to repeal Obamacare.  In order to pass it they need 60 votes, unless they eliminate the need for cloture---in effect, eliminate the filibuster in the Senate, by some parliamentary maneuver, for this bill.  But if it’s possible for this majority to do that for this bill, it’s possible for any majority in the future to do it for any bill.  McConnell is not so blind that he can’t see the danger for himself, and for his own party, in that.  At least maybe he’s not.  And maybe he can control Ted Cruz and the rest of the Senate Republicans.

Maybe the butterflies will be plaid.

Sunday, November 2, 2014

Malala Cakeonomics

So.  This is supposed to be an economics blog, so I promised to turn yesterday's cake into economics somehow.  What on earth are the economics of cake?  Well, let’s see.  Actually, there are a lot of directions I could go with this, but I think I’ll write about a topic that I’ve been meaning to talk about anyway: the problems with GDP as a measure of economic production.  These are all well known, but they get buried in the political fluff that passes for front-page news these days, and even economists generally just dismiss them and continue to uncritically treat GDP as the whole truth in discussions.  I do it too.  And GDP is the best measure we have.  But it’s wrong, or at least incomplete.  So how do we get to that from cake?

To start with, we need to notice that the cake we’re talking about is not just cake, but cake made from scratch at home.  That gives us an excuse to get into the issue household non-market production  by observing that rather than buy a cake ready-made, I produced a cake from raw materials that I bought from a relevant input supply vendor---that is, from a grocery store.  We could notice that a huge fraction of the production of any nation takes place like this, by households buying raw materials and performing the final production tasks themselves, and that production inside the household, which is really the basics of everyday life, never shows up in the GDP.  How much this matters is hard to measure; here’s a Bureau of Economic Analysis (BEA) study on it that reports on a number of different attempted measures of household production in the United States, and finds that the estimated value of that household production is somewhere between 12% and 58% as high as the measured value of market based GDP (see section 8, particularly the top of p.9).  That's a lot:  GDP is around $17.5 trillion this year.  The lower figure is what we get if work in the house is valued at the minimum wage; the higher figure is what we get if household work is valued at the average hourly wage of professionals doing the same kind of work---in the case of my cake, for example, chefs or professional bakers.  But in either case, that means that the measured GDP that’s reported in the newspapers is actually pretty far off from the real total product of our nation.  And having observed that fact, we could take one more step and observe that not only GDP but also measures of economic growth are impacted by this, because some measured economic growth might result from simply moving existing production from households into the market economy: the same amount of production takes place, but what used to be invisible is suddenly revealed to the National Income and Product Accounts.  That’s what would have happened if I had gone out to buy a cake on the market instead of making one at home. 

The proportion of total production that takes place within households, rather than in the market, varies widely across cultures and countries, which is one reason you might want to take strange statements like “the average Ziltonian peasant lives on $3 a year”, or whatever, with a very, very big grain---maybe a boulder---of salt.  What it really means is that the average Ziltonian peasant lives almost entirely outside the market economy: he hunts, farms, gathers, builds, makes his own tools, cooks and so on without buying much of anything from a store.

And that’s just the economics of what did happen.  But here’s something that could have happened but, in my house in this instance, didn’t.   As an inexperienced cake maker, I could have made some horrible mistake.  I could have gotten my tie tangled in the egg beater, and in the resulting chaos of physics ended up with an injury that induced a trip to the emergency room.  Or I could have forgotten the cake until my smoke alarm alerted the local fire department, and caused them to send fire trucks to my house.  Or I could have actually started a fire that burned down my house with all that’s in it.  In every one of these cases the GDP would record the response from the market---my treatment at the emergency room, the construction of a new house, the cost of sending a fire truck and all manner of emergency responders to my house---as a positive thing, an increase in the GDP.  They are all things the market did, products the market provided.  But none of the losses would have shown up in the GDP at all.  Think about that a bit: wherever there is destruction, the GDP records the replacement of whatever was lost, but does not deduct the loss itself.  A hurricane, a volcano, even an accident on the highway, all add to the GDP.  But they aren’t the kind of thing we think of as an improvement in our lives.

I have a book to recommend on this if you’re interested in the topic: Mis-Measuring our Lives, edited by Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi, with a introduction by Nicolas Sarkozy---yep, that’s right, the former President of France.  Here’s a quote from that introduction:

“We have wound up mistaking our representations of wealth for the wealth itself, and our representations of reality for the reality itself…We have built a cult of data, and are now enclosed within.”

It’s a little overstated, perhaps, but he’s a politician and should be forgiven for drama.  It’s basically true.  And it’s good to constantly keep in mind not just that our data misrepresents reality, but how: that among other flaws with the GDP is the flaw that omits our “leisure” time (the time we spend pursuing our own goals, or with friends or family), our household work, our hobbies; these are simply not counted, but they are important parts of our real economic product.  And the repair of our disasters are counted as adding to economic good, rather than simply restoring what was lost.  And finally, a corollary of the last point, is that damage that is done and never repaired---like environmental damage from smokestacks or car exhaust---are never subtracted from the value of the market processes that produce them. 

Ok.  Finally, I can’t ignore this.  I know this recipe is not just homemade cake, it’s homemade Malala cake, and the issue she’s known for is not the household production function, but women’s right to education. So in keeping, perhaps, with Ms. Yousafzai’s focus on women, I should point out that a very big fraction of household production is performed by women---how big varies across countries and cultures and is just as hard to measure, and for the same reasons, as the total amount of household production, but at least in the United States two-thirds seems like a reasonable first rough guess from Table 2 of the BEA study linked above.

On the issue of women’s education, or more generally, gender differences in education around the world---that would take a book to explore, not a blog post, and it’s not a topic on which I have any expertise at all.  I’ll leave the explanation of that topic to Malala.  But here’s a starter book: the UNESCO Atlas of Gender Equality in Education.  This is a very accessible book, mostly graphics showing various comparisons, and the problems it depicts are not always those faced by young women: some are problems faced by young men.  From the book:

“An important theme is that although girls are still disadvantaged in terms of access to education in many countries and regions, they tend to persist and perform at higher rates than boys once they do make it into the education system. Another theme is that all countries face gender equality issues of some sort, including situations where boys are disadvantaged in one way or another.”

Why is this education issue in an economics blog?  Well, because it’s my blog and I can put whatever I want in it.  But it shouldn’t take a lot of thought to realize that any nation that simply refuses to educate a significant part of its population, or mis-educates them, or damages their ability to learn by pushing them into classrooms that don’t suit their natures or capabilities, or educates them and then under-employs that education---any nation that does those things is seriously hampering its prospects for economic growth. 

But that’s a blog post for another day.

Saturday, November 1, 2014

Malala Cake

Ok, so this is the agenda for this post: A) Cake excuses, B) a recipe for Malala cake so far, such as it is, and C) Cake economics.  

Yep, you read that right.  Malala cake.  That’s my story, and I’m sticking to it.

Cake excuses:

The 2014 Nobel Peace Prize was shared by Malala Yousafzai and Kalish Satyarthi.  I had never heard of Mr. Satyarthi, but I knew about Malala, and I was so charmed and so uplifted by the fact that she won the Nobel Peace Prize at the age of 17 that I pulled over to the side of the road---I was on my way to work in the morning---and sat there for a few minutes smiling.  I called my wife to share the good feeling. 

Malala herself says that she doesn’t deserve the prize, but if other people in the world had a reaction anything like mine it may not matter whether she deserved it: the fact that she was awarded it brought a lot of gladness into the world, and that may be enough justification.  And while I understand her reluctance to accept a prize before she’s succeeded in achieving her goal, I don’t agree with her on this: she does deserve it.  She is a startling example of why those of us who have become older, and in the process have become jaded, tired, and bruised by life, need in the end to pass the torch to others who are still young, still eager, and filled with hope for the future of the world. 

So I decided to make a cake for Malala. 

That’s really a pretty odd response for me. I don’t usually like cakes very much.  I rarely eat them, and I have no particular skill in making them.  I generally find the cake part too clingy and the frosting too sweet.   

Celebrations are generally cake-events, though, so I was stuck.  I had to bake a cake.  But I have a problem here: since I don’t generally make cakes, I don’t have a go-to cake recipe to pull out for special occasions.  I can never follow recipes anyway.  I mean, I guess I could follow recipes if I really had to, but usually if I’m going to spend time in a kitchen I figure I might as well spice up my time with at least a little bit of adventure.

So by deciding to make a cake, I had sort of decided to invent a cake. 

I had to do some research on cakes, but I know where to start any research project: Google.  I looked up a lot of cake recipes, took a bit from here and a bit from there, and added some flavors that seemed to me in my cake ignorance to be very distantly appropriate, and invented my cake.  It didn’t occur to me until much later that maybe I should put it out here on my blog, partly to see if anyone has suggestions, and partly as an invitation to my friends to come over and try some while it lasts.  I wanted to wait until it was perfect but---well, that would have been a long time, I think.  

And then I read that Malala had donated all of her prize money to rebuild schools in Gaza. 

I can’t wait for perfection.  That much youthful altruism has to be celebrated now.

The recipe is below giving you all the extremely small benefit of what little cake expertise I’ve managed so far. 

The cake:

I’ve made this cake three times now, with slightly different methods each time.  Every time the cake fell after it got out of the oven---not drastically, but it did fall.  It still tasted great, and the texture was acceptable, but it didn’t manage the lightness I had intended.  So, back to the web to figure that out.  After some effort and research I discovered that flourless, egg-risen cakes like this one are kind of thermally monogamous; their instinct is to mate for life with whatever temperature they’re with at any moment.  It’s not that they can’t change.  But they become attached to their temperature of the moment and are reluctant to abandon the relationship even when they know it’s not good for them in the long run.  Unless they are treated gently they’re not at all comfortable moving to something thermally new to them.  For example, when the cake is done baking in a hot oven, don’t just yank it out and put it someplace cool: it’s guaranteed to sulk about that.  The cake knows that if it remains in that high oven heat it will eventually become charcoal, but it still has to be gently coaxed to leave.  Turn the oven off and leave the oven door ajar for a few minutes to let it get used to the idea of moving on.  Then open the oven door wider, and leave the cake for another few minutes.  Then, when you think it’s ready, take it from the oven and put it on top of the stove where it’s warm from the air released from the oven below it, and let it cool there for a while before moving the whole thing to a wire rack.   Your kitchen might be arranged differently, but you get the idea: slowly cajole the cake, one step at a time, to accept the new temperature. 

In a way, this starts even before you even start mixing the batter: take the eggs and butter out of the refrigerator half an hour ahead of time, so that they are warmish when you start.

Here’s what I did, which I guess I should call a recipe. 

(your name here)’s Malala Cake:

So I called mine Stuart’s Malala Cake because it’s a cake and I’m Stuart and I made the cake, but I don’t feel all that possessive about it; if you are like me and can’t stop tinkering around with things, come up with a variation and call it your own Malala cake.   You could put flaked almonds on top.  Or you could use marmalade instead of apricot jam, then you could call it marmalade Malala cake, which is not only charmingly alliterative, it actually sounds pretty tasty…I may have to try that.  But here’s my version, so far. 


5 eggs, separated
2 Tbsp lemon zest
1 Tbsp lemon juice
1/2 teaspoon ground cardamom
1/8 teaspoon ground coriander
pinch cinnamon
¼  cup raw cane sugar (because I like it better---it has a hint of molasses flavor),
¼ cup refined sugar (for the egg whites---dissolves better)
¾  cup almond flour   
¾ cup almond meal
1 teaspoon baking powder
2 teaspoon vanilla
1 teaspoon almond extract
Pinch of salt


Separate eggs into yolks and whites. 

Preheat the oven to 350°F.  

Place a round of parchment paper on the bottom of a 9-inch springform pan, and grease it and the sides of the pan with butter.

In a large bowl, beat together the egg yolks, lemon zest, and 1/4 cup raw cane sugar and the vanilla and almond extract until good and thick.

In a separate bowl, whisk together the nut flour, nut meal, spices, baking powder and salt.  

Beat the egg whites to fairly stiff peaks, but don’t keep beating beyond that.  As the egg whites begin to increase in volume, gradually sprinkle in the ¼ cup of refined sugar and the 1 Tbsp of lemon juice into them.  This last, lemon juice, is experimental; I read on the internet (here) that an acid like vinegar, lemon juice or cream of tartar helps maintain the loft of beaten egg whites.  It’s worth a try.


Add the nut flour mixture to the egg yolk mixture and beat until smooth. 

Fold the beaten egg whites into the almond mixture a third or so a time.  The first third can be mixed pretty vigorously; it’s basic purpose is to make the batter more liquid so that it’s easier to fold the rest of the egg whites into it.  Be a bit more gentle with the second third, trying to make the result pretty fluffy and light.  The last third should be folded in quite gently, just until incorporated and no more, to blend but to still preserve the lightness and airiness of the beaten egg whites as much as possible.

Gently pour the batter into the prepared springform pan and place in the oven. Bake for 40-50 minutes.  It will be dark on top, don't let that scare you.

Remove from the oven gradually (see above) and let it mostly cool. If necessary---it probably won’t be, because the cake will probably retract slightly from the side of the pan on its own---but if necessary, run a sharp knife around the edge of the cake to help separate it from the side of the pan.

Release the springform pan side, and gently move the cake (on parchment) to a serving plate.

For the soaking liquid or glaze:

Put ½ cup of really good apricot jam into a pan, and heat together with ¼ cup Cointreau, if desired.  If you’re really trying to make it for a 17 year old Muslim girl, you might want to use something non-alcoholic instead (maybe orange juice). That’s it.  Heat until it dissolves.  While it’s warm it should be pretty liquid.  Let the hot dissipate from everything, both cake and glaze, and pour the slightly warm glaze over the slightly warm cake.  Brush some of the glaze around the sides of the cake too, just to make it shiny.

That’s the cake I made.  As I said, I’m not an accomplished cake maker, and this cake tends to fall a bit.  If any bakers out there reading this, anyone who is actually good at cakes and wants to explain how I should have done it in the first place, I would honestly appreciate that.  Just go to the bottom of the blog post and click on the tiny print that says “comments”, or if you’re the first one here it will say “no comments”.  Or alternatively, you can go to the very top, to the title of this post, where it says “Malala Cake”, click on that, and then scroll down to the bottom and there should be a place for you to enter any suggestions you have.  I’d like to get this right.

Cake economics:

Naahhh…I’ll do that tomorrow.  Instead of economics, I’ll use this space to ask any of you out there who know Malala, or who have the chance to meet her somewhere, to thank her for me for inspiring me to make a cake.  It turned out pretty well, to my nearly unbounded surprise. 

And tell her also that she does deserve the prize. Alfred Nobel’s will says the prize should go to “the person who shall have done the most or the best work for fraternity between nations, the abolition or reduction of standing armies and for the holding and promotion of peace congresses.”  It doesn’t’ say the winner has to have actually achieved peace forever.  The purpose of this prize is not just to celebrate already accomplished goals: it’s to inspire the world toward peace, and to celebrate people who are pressing the world toward peace instead of conflict. 

I said something at the top of this post about the older among us being wounded by life, and the young being eager and hopeful.  I don’t really know whether that’s always true; there are counterexamples.  Ghandi, who never did win the Peace Prize because he was killed the year they were probably going to award it to him, and Mandela, and Mother Theresa.  They all managed to save some hope well into old age, and all of them were plentifully bruised by life.  And there are some young people who are filled with other things than hope: bitterness, or anger.  But Malala, in spite of living through a terrible assault, is not bitter, and not angry.  She was young, and strong, and would not allow bitterness to deflect her.  So I don't know.  But there’s any truth to the idea that the young are more resiliently idealistic than the rest of us, please tell Malala that I hope she stays eager, stays hopeful, and stays young forever.  

Thursday, October 16, 2014

Nessun Dorma Part 2

A few days ago there was a review by Steven Pearlstein of several books, one of which, “We Are Better Than This” by Edward D. Kleinbard,  I have already ordered from Amazon because of this quote in the Pearlstein review:

“Both our native talents and our good fortune are distributed through processes that we cannot fathom and do not ‘earn.’ Our loud proclamations that what we take from the market is our just deserts is just noise made against the darkness, trying to still the voice inside that asks, why me and not them?”

Yes!!  Exactly.

In my last post I wrote about the limits of information, the fact that because information is widely distributed and always changing, and because human beings are constantly striving and pushing and working toward their own ends, unexpected and unpredictable change is not the rare departure, the “exogenous shock”, that is envisioned by modern model-bound economists, but instead is the steady, constant economic norm.  Because of this shoving and pushing we can’t really make long run economic forecasts, and that the agents in our models cannot predict the future any better than we can.  They can’t know their own futures with any security: all of what I called the “the restless magma of human dedication” is bubbling under them, and it can bury them or it can push them to great heights.  They can’t really know which it will be.  They have to live their lives to find out.

 And that should form at least part of the ground on which our economic models stand; the agents in our models should not be rational agents who trade present against a simplistic future in which all possible outcomes are known to them well enough to attach probabilities to each, because in the real world all possible out comes are not known at all, to anyone, and in small or large ways the future will always be something we haven’t even imagined until it gets here.   I don’t know how to create models like that, but if we want our economic models to depict the way the real world works it has to be done.

And that brings us to a dangling thread that needs to be tied up from my last post.  It ended with the sense that economic models can’t be used to forecast very far into the future.  So we might ask: what good are they?  What are they for?  And this relates to a question that I have to answer from time to time, when I admit in some social setting that I do sometimes read the economic blogs.  People ask: what are they forecasting, what are they saying will happen?  Because, of course, that’s what everyone really wants to know, probably because it’s what no one actually can know.  And I have to tell them: they aren’t.  The economics blogs, and economists in general, usually don’t make forecasts.  Oh, just before the release of some new economic statistic, they’ll play the forecast game about what the new release will say---but that’s actually “forecasting” what has already happened, which is what those statistics report.

So if economists don’t forecast the long run, except for those few courageous people who make their living doing nothing else, what on earth do they do?  Why study economics at all?

The answer, I think, is that that we create economic models for at least three purposes.  First, We should recognize that our simple models are parables only, and like any parables they present basic ideas to help us understand the world we find ourselves living in, as humanity has tried to do for thousands of years.  They help us know how people are able to work together, in a sense as cooperative strangers, in a country or in a culture, or on a planet, to provide (or fail to provide) a good standard of living for everyone.  Perfect competition doesn’t exist in the real world, but understanding how it would work tells us some very powerful things about some of the forces that act on us and around us.  Second, models help us figure out the less obvious implications of assumptions we make, or simple things we believe to be true: by embedding those assertions in mathematics, and in models, we can derive implications that we would never find by just contemplating the assertions on their own.  And third, while we may not know what the long run future will be we know what the present is and what the recent past has been.   We can, if we are successful in understanding something about how the world works, still make strong arguments about what will make the near future in some way better, and even what will make the more distant future better or keep it from getting worse, no matter what its exact features will be.  We can do this in the same way that we can say that providing oil will make your car last longer and run better, but adding too much oil can damage seals.  I can’t really forecast what will happen to your car in the future.  You might run over a nail, or get a dent in a parking lot, or there might be some deeper mechanical problem waiting to emerge next week or next month or next year. But I can make conditional predictions about the impact that certain actions might have: put oil in, or the situation will get worse; don’t put in too much or the situation will get worse in a different way.  Similarly in economics we can make conditional forecasts: policy X will have impact Y.  In my view, stimulus will stimulate, which may be good or bad depending on the situation (stimulus during a boom is bad; stimulus in a recession is good).  Austerity will depress, which may be good or bad depending on your situation.  Investing in infrastructure will make the future economy more affluent, in part by making future businesses more productive and perhaps even more profitable.    In making these predictions about the impact of various policy actions, simple economic models help if they depict something true about the world. And if they depict something false, they may mislead us into policy actions that are dangerous, or outright harmful.  That’s why there are so many arguments about the foundations of economic theory: it matters, and our future welfare depends on finding simple models that are true, and avoiding simple models that are false.

And similarly, in each “agent’s” life, he or she has to accept the fact that his or her future can’t be known exactly, and that the farther away the future period is they’re looking at the less can possibly be known about it.  But we do all care about the future, and so the agent in our models still has to make choices about actions in the present that may impact the unknown and unknowable future.  So the agents have to decide what they believe about the future, and they have to decide what present actions will give them the best chance to prosper, or at least survive.  We may not know what the future will be, but we know we’ll have more flexibility to deal with it if our debts are all paid and current, and if we’ve saved something.  We will be better able to deal with whatever comes along if we are more educated, or we have good friends and a strong family to help us through, than if we aren’t or don’t. 

But no one makes present decisions based on any real knowledge of what their taxes will be in some imagined distant future.  They have no idea what their taxes will be, partly because they have no idea what their income will be in that future, and they have no idea what the whole country’s income will be either: their share of future taxes will depend on both.  People save to give themselves a better future, period.  It makes no sense to build a simple economic model, as, for example, the modern version of Ricardian Equivalence does, that assumes that people save today in order to pay taxes in the future, taxes that they can’t know will ever be imposed, and can’t know, even if the taxes are imposed, what portion of those taxes will fall on them.   That is a simple model that seems to me to be false, and so I think that depending on it will lead us to national actions that might cause actual damage to the future we are trying to achieve.

I once read an interview with a multimillionaire who (of course) was asked how others could achieve wealth.  His very honest response was: “I don’t know”.  But later he did amend that.  He said something like this: “Save your money.  Everyone gets a couple of opportunities in their life.  If you have money saved you have one more tool you can use to pursue an opportunity when it comes.  Who knows?   It might succeed, and make you richer than you are.”

Doesn’t that sound more like the life we all lead than the models that assume we all can calculate our expected futures with mathematical precision?

Friday, October 10, 2014

Nessun Dorma

This post will be long, partly wonkish, and partly just odd.  I have to work up a little courage to write this, because in a way it’s a minor assault on the dominant economic paradigms of recent decades.

I’ve been trying to figure out how to comment on a quick exchange that took place a few weeks ago that included blog posts by Mark Thoma, Simon Wren-Lewis, Paul Krugman, Robert Waldmann and David Glasner, among others. It’s over an issue that has come up before, and which I think will come up again and again over the next few years, because I think we’re at a shifting point in economic theory, partly due to the complete failure of macroeconomists to foresee the severity of our recent mini-depression, and partly due to the disastrously wrong predictions that flowed in rivers from the neoclassical economists about the possible impacts of macroeconomic policies.  Investors will flee from U.S. debt soon, soon, soon!! Hyperinflation is just around the corner!!  Interest rates through the roof!! Austerity will solve all of our problems!!  Really?  Well---no. Not really.  The real world did not behave anything like that. 

The question in this blog exchange is: what the heck happened forty years ago when the old Keynesian economics many of us older folks were taught in school more or less vanished from the journals and conferences and textbooks, and was replaced by rational expectations and neoclassical micro-founded macro models?  In this now forty-year-old counterrevolution to Keynes, macroeconomics starts with agents at the micro level who rationally, with infinite mathematical precision, select a present action that maximizes their overall welfare by trading off their welfare in the present time with their expected welfare in future times.  This trade of present against future is an absolute in these models: it has to be there, or the model is suspect.  All of the bloggers above see this wholesale expulsion of meso-Keynesian theory from the academic respectability as a bad thing, although some seem to approve at least part of the neoclassical vision.  Simon Wren-Lewis, for example, starts by saying that “intertemporal theory is the right place to start in thinking about consumption, and exploring the implications of time inconsistency is very important to macro policy.”  Waldmann disagrees, and to some extent I do too, for reasons I’ll talk about below.  But it was Glasner, whose blog posts are almost as long as mine, who wrote openly and eloquently what I have been feeling for forty years, but was too intimidated to say out loud:

the New Classicals chose to use microfoundations as a methodological justification for the extreme unrealism of the rational-expectations assumption…
Meekly and unreflectively, modern macroeconomics has succumbed to the absurd and arrogant methodological authoritarianism of the New Classical Revolution. What an embarrassment.”

Wow.  And yes, exactly.

There is one point I want to add to the excellent blog exchange from a few weeks ago, but I’ll start obliquely, because it was this personal experience a few days ago that reminded me of it:

From time to time, when I find myself idly staring at the walls in the evening, too groggy to write a blog post or even read one but still too awake to retire altogether, I wander to YouTube to see what I can find.  Usually I’m looking for some kind of classical guitar music, or old acoustic blues, but the column of related videos down the right hand side of the YouTube web site is a grand choose-your-own-adventure book.  Once I lose control and click on one of those links, because it seems to point to something adventurous, I end up spending an hour or two following link after link.  (Be patient.  I know the wait is making you fidgety, but I’ll get to the economics of all this in a minute.)

I try to avoid anything that has the phrase “got talent” in the title; I’m not a big fan of watching people embarrass themselves in public, and that’s what those shows display much of the time.  But every now and then I slip, and end up watching the YouTube versions of a “got talent” performance.  And so, late in the evening, in a quiet and pleasant mood after a glass or two of Sauvignon Bordeaux at dinner, I ran across a video from 2007 of the very first session of the very first winner of Britain’s Got Talent.  His name is Paul Potts.  Since I don’t follow these shows I had never heard of him; maybe you have. 

The performance was astounding.  But I don’t really want to talk about Mr. Potts.  I want to talk about the reactions of the judge named Amanda.  Because the point of all of this is to comment on her description of Mr. Potts once he had finished performing.

So here’s the link.  Take a look, and watch Amanda.

What did you think of her, and how she acted and what she said?  She was clearly enormously moved by him; it was all she could do to keep her eyes dry toward the end.  She had to breathe heavily during the last phrases of the aria that he chose to sing, Nessun Dorma (“no one sleeps”) from Turandot, and finally she had to press her cheeks with her palms to keep the tears from launching from her eyes, flooding the desktop and ruining her TV makeup. I don’t blame her.  Sitting ten feet from a voice like that must feel like standing at the far end of a jetty when the typhoon hits.

And when she said what she said---that he was “a little lump of coal that is going to turn into a diamond”---I could hardly do anything but completely agree.  (I don’t know if you’re an opera fan, but if not, trust me: that was an awe-inspiring performance for a Welsh mobile phone salesman, as you could see toward the end when the entire panel of judges was staring open mouthed at the stage.) 

Later in the video she talks about finding frogs that are going to turn into princes. 

It was not for half an hour, and another few links down the evening’s chain of music---and I admit, a few returns to watch Mr. Potts perform again---that I finally thought: wait a minute.  Turn into a diamond?  He already was a diamond, wasn’t he?   She was visibly moved by the voice he already had, the performance he could already give.  What was she thinking was going to change?  Was she forecasting that his performance that night would bring him fame and fortune, and that those things, fame and fortune, would make him a diamond or a prince?  No.  I don’t really believe that.  I don’t think she had really thought through what she meant.  If presented with this argument, I think she would agree that he might have been a frog at some point, but he had already turned himself into a prince long ago.

Because that voice didn’t just emerge from his mouth that evening by spontaneous generation. Somewhere along the road, probably in his early childhood, he fell in love with opera, and spent long, long hours working at it, working at it, and yes, performing.  He had to have had training, as well.  Lots of it.  Years of it.  He may have been the lead in his high school musical, and sung in choirs, and done some community theater musicals or something, and probably been part of an amateur opera company.  Amateur: for free!  I think the rules of entry to the “got talent” shows is that you haven’t made money with your talent in the past.  But even without being paid for it he sang, and sang, and sang, and trained and trained and sang scales and sang arpeggios, and sang phrases, again and again, to achieve that voice.  Some of the singing was undoubtedly fun for him, but much wasn’t; it was hard practice, and he did it when he was tired.  He did it after long days at Carphone Warehouse.  Doing all of that, and having the driving desire in him to stick with all of that, made him a prince long before he entered “Britain’s Got Talent”.  That show was just the first time the rest of us had been given an opportunity to notice that there was a prince living among us, selling mobile phones in Wales.

And that, of course, is why there are competitions like Britain’s Got Talent: we know that the world is full of things we haven’t seen, and full of people working hard, alone, often for free, to do things that may someday amaze us.  This hidden world of dedicated work is like a current deep under the surface of the ocean, like magma deep under the ground, invisible to us, but moving and pushing until, sometimes, it breaches the surface and changes everything.

Which made me think about the nearly universal assumption in labor-leisure trade-off models that we are all so abysmally lazy that we can only be induced to work by offering us a wage that is worth more to us than our leisure time.  Leisure time?? How do these models explain Paul Potts, and the fact that he worked so hard for so long, working to exhaustion without ever being paid, and training at his own expense?   Why did he do that?  But more relevant to this post, it also made me think about the distribution of information in a market economy and about Hayek and the role of prices, and, yes, about the ubiquitous, insistent use of macro models based on every agent’s ability to rationally, precisely, trade present and future welfare.  If we are all so good at seeing the future, and basing present actions on their present and future impacts, how do we explain the fact that Mr. Potts could suddenly appear in front of us fully trained, a magnificent opera singer?  You understand that in order to form a present expected value of future outcomes we have to be able to define all the possible future outcomes, and attach a probability to each of them.  Where is Mr. Potts in our rational deliberations?  How can we attach a probability to something we don’t even know could ever exist?  Did the price system really convey to us all the information that we could possibly find useful about his existence? 

I don’t mean to dismiss Hayek here; just the opposite.  As far as it goes, his paper is right.  He explained his point very well in the link above.  Hayek was trying to compare a price mechanism in a competitive economy with a central authority that simply imposed an answer.  His point was that the economy is so complicated, and the actors so local, that no central authority could possibly know enough to solve the complete problem of proper behavior, proper production and consumption, by every possible consumer and business, and of every possible resource and product.  Importantly, it’s not just that the problem is too big for us to calculate.  Maybe a bigger computer could fix that.  It’s that the required information is just too obscure and far too widely distributed, and constantly changing.  No individual, and no central authority, can possibly weigh one change against another, and allocate resources to accommodate them all, simply because only the few people involved in the changes are really aware of them.  A price mechanism manages to convey just exactly enough information, if we want to call it that, or enough incentive, so that each local actor everywhere will react in more or less the right way to adjust current demand and supply to distant changes he or she cannot possibly know about, simply because scarcity causes prices to rise, and so induces each actor to use less or produce more, and abundance causes prices to decline, and so induces each actor to use more or produce less of whatever it is.  We never have to know why a scarcity or abundance has happened.

And I agree with that completely---in the instant.  Paul Potts is an opera singer who was hidden from almost all of us until he performed in Britain’s Got Talent, and to the extent that his long solitary efforts to achieve his skill made some resources more scarce or abundant, we, in some infinitesimally small way, all helped to adjust the economy to that change, even though we had no idea he existed.  But we couldn’t predict his skill.  The price mechanism may help us adjust in the instant, but it can’t help us adjust to the long run emergence of something we can’t foresee.

Our inability to forecast Mr. Potts’ skill may not strike you as important.  If not Mr. Potts, then some singer will come along; we can forecast that.  Right?  But Mr. Potts is not the only person out there working from sheer dedication to something, and far from our awareness.  There are people who are inventing new technologies, or new methods, or new science that will change not only what is, but what is even possible; or new methods of attack or destruction (not all invisible change is good).  We may not need to know what they are doing to adjust our consumption or production to materially accommodate them, but when their efforts suddenly thrust their way into our worlds they will transform us.  And because their activities are hidden from us we cannot possibly predict their impact on our lives.  Seemingly from out of the blue one technology is tied to another, the clunky text based internet is enhanced with hyperlinks, and then with a print media markup language, and the World Wide Web explodes into a tech bubble in the 1990s.  From out of the blue an obscure group of discontents across the world decides to use commercial airliners as a weapon of terror, and crashes them into towering buildings in New York and squatty pentagonal buildings near Washington DC, and our political world is transformed utterly.  We can’t possibly plan “rationally”, in the way that many microfoundation-based macroeconomic models use that word, for a future filled with events like these that we can’t predict, at least partly because things from distant places or distant minds, things that Hayek’s paper says we don’t ever need to know about, will appear to us like miracles or catastrophes when they finally reveal themselves to us fully formed.

There are undoubtedly events in the future that no one on earth can predict, at least not yet: acts of God or human genius, sheer incalculable accidents, chaotically emergent “shocks” to our economic system.  But there are thousands upon thousands of events, huge and tiny, that are created by human effort, events that are part of the solid ground of economic life, but that only a few, only those that are working on them directly, can really predict; and because there are so many of them there is no one who can predict all of them.  And because there are so many of them, it’s absurd to act, as the modern models require, as though each “representative agent’s” economic future were stochastic but subject to predictive calculation, and dully reducible to “rational” expectations. 

Defenders of the modern economic faith will reply that the models may not incorporate them, because they can’t, but everyone is aware of the possibility of rare “external” economic shocks---external to their models.  But I’m saying that these shocks are not rare, not unusual, that they are part of the core and constant fabric of economic life, and that everyone who is not steeped and vested in economic theory knows it.  Can we predict 6 months out?  Possibly, unless there is a major “external” shock in the next 6 months.  But we expect to be at least a little wrong, in part because there will, without any question, be a vast array of minor external shocks that no central planner, and no economic forecaster, can possibly predict.  And our forecasts out 5 years, or 10 years, are the best we can do, but they will, with absolute certainty, be wrong. 

Our economics should acknowledge this fact: the general public doesn’t try to make forecasts out that far, because unlike us they understand that it’s an impossible task.  Even those who are working hard on one of these hidden things can’t be sure what the reaction will be, how it will interact with other things happening at the same time, how it will really impact the world.  And they can’t predict what reactions their ambition will cause, creating new ambitions in others.  The world is busy.  Nessun dorma, nessun dorma, no one sleeps.  Or rather, more accurately, we don’t all sleep at the same time; there is always someone awake.  Twenty-four hours a day someone, somewhere on earth, is devoting long dedicated hours to creating a future event, large or small, that will astonish the rest of us when it emerges.  We see the economic surface, but far under that the magma flows, the restless magma of human dedication, for good or evil, presses against the world, and when the world cracks to release it all of our prior expectations are scattered across the ground, and a new future covers them.  And that, among many reasons, is why the perfect-world, rational-expectations, Euler-equation dominated macroeconomics that assumes a stochastic general equilibrium future that we can reduce to a current expectation, simply doesn’t work, and never will work no matter how much we refine it.    Others out there are awake, and moving and working, invisible to the workaday wage economy, and they are creating a future the representative agents in these models can’t even imagine, much less assign a probability to and reduce to some bland “present value”.

Nessun dorma: and for economic forecasts, including the forecasts we attribute to the representative agents that we embed in our models, that ground truth matters.