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    Maxine's Essays

    • 21st Century Regress
      Sometimes it seems like the world is going to hell and there's absolutely nothing a girl economist can do about it.
    • What Exactly Are We Crowding Out?
      The current economic downturn isn't a random draw of a black ball from an urn containing white balls and black balls. There's no sampling distribution. Very specific policies and actions landed us here. Now we must decide not only what policies need to be put in place to prevent it happening again, but also what policies would best drive us out of the ditch faster and sustainably.
    • I Wish It Were Only Butter
      We should be giving up some butter if we must. We should not give up education or health investment (or infrastructure or the environment (hello, BP). They may be the only legacies of any value that we pass on to our children and grandchildren.
    • Rational Health Investment?
      The obvious "market solution" is to improve the long run return on investments in health among the disadvantaged through meaningful and effective publicly funded education. The obvious short run "market solution" is to reduce the costs of investment and the shadow price of health for the disadvantaged by providing health insurance cover and reduced out-of-pocket costs.
    • The Socrates Parameter
      To the extent that our limbic systems respond to such engineering by over-riding the judgment of our frontal lobe and to the extent that our frontal lobe is deprived of the information it requires to make a rationally self-interested judgment, we are not only pigs and fools, we are slaves.
    • The Economic Rewards of Virtue
      If individual virtue tempers our "piggy" desires and conditions our choices to something that is both individually and socially better, then the economic rewards of virtue as embodied in and promoted by societal norms and institutions are far greater than we have ever suspected. As economists, we would do well to recognize this when we teach U max.
    • The Market for Morals
      Markets then are places where more is exchanged than goods and services, labor and product, credit, and interest. They are places where we also develop the personal virtues of temperance and prudence and the social virtues of benevolence and justice. When they function well, they produce trust, loyalty, and sympathy among those who trade there.
    • Post-Modern Applied Economics: It’s the Error Term, Stupid
      Maxine believes it’s time to refocus attention and discussion on the error term. It is often where much of the action is in our models. It is where unexpectedly catastrophic events dwell resulting in fat tails. It is where our animal spirits manifest and cause us to do the right thing or the wrong thing or the thing everyone else is doing rather than the self-interested, fully-informed rational thing. It is where God and miracles and chance dwell.
    • Intergenerational Win-Win: Health Insurance, Education, Environment, Infrastructure
      So when we’re talking about fiscal stimulus packages and we’re borrowing from our grandchildren to finance them, we should be thinking about how to use stimulus monies to create value for those grandchildren AND stimulate our economy.
    • Short-term Private Payoffs, Long-term Social Costs
      The real health reform discussion, the one we should be having, is “What must we do to create a health system that is both efficient and fair?” The answer will almost certainly include relegating the private sector to markets where market forces or regulation are effective at aligning short-term private incentives and goals with long-term societal interests. If such markets are scarce or non-existent in health, then the private health sector will be of limited value.
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    Very well put, Maxine. I'd wonder not just about the stagnation of average income, but the extent to which increased inequality has made it look like progress is still being made, thereby creating the sense that a lot of people were being left behind.

    In responding to a rich guy who feels poor, Brad DeLong breaks down in detail how rising inequality can make even the rich feel maltreated:

    Given the extent to which people measure their prosperity relative to others rather than absolutely, I figure that also has to work against people taking the reasonable, productive gambles, and instead going for wild speculation.

    300baud, exactly. Having many family and friends in small businesses -- the downturn has been financially devastating to them, and even more so, to their former employees that they've had to let go.

    Who has been level, or done better? Government workers or businesses who do much business with government.

    So total personal incomes may not have gone down, but for well over half, they went not just down a little but by a lot.

    But since government spending doesn't produce government revenues, this trend too will come to an end.

    One of my favorite games is to imagine that incentives do work, always and absolutely, and that the society that we see around us is the result of all of those incentives playing out completely with every subtle externality fully factored in. It may not be possible to look at the amalgam and determine the exact cause of any given component of the whole. It is a much different problem to look at the whole and try to determine whose incentives are dominating the aggregate outcome, and the mechanisms by which that has came to pass. Any individual homeowners' willingness to engage in speculation would have never become an issue had not someone on Wall Street first figured out how to make a boatload of money from it. The big mystery that I struggle with is: Why? What motivates the rich and the powerful to strive for extra zeros at the end of their net worth at the expense of living in a society where the wheels are coming off.

    Econ major. Read every word. When are you going to join the revolution, Maxine? ;)

    "Economists may not always get things right or agree on everything, but one thing I'm pretty sure we all agree on and that we are right about is that incentives matter. If we as a country want productivity, prudent risk-taking, and creative (and productive) innovation, we had best start rewarding it."

    Or, not.

    I pretty much think economists are, as a group, wilful ignoramuses. Their doctrine depends on assumptions, that parse the economic problem in ways that leave them ignorant of what is often the main event.

    The obsession with "aligning" incentives is a case in point. Clearly, people in the economy do look around to see how they can best butter their bread, and they take in a lot of information, while doing so, including a lot of financial information. Focusing on "incentives", though, is severely parsing this information processing function. This is true, both for the economist-philosopher-queen, observing from afar; it is also true for the economic actor-agent.

    The practical problem with incentives is that people do respond to incentives, . . . and (this is the part economists seldom grasp) it is not socially desirable that they do so.

    Clear incentives make the economic agent-actor's decision-making too simple. Most of the time, people, in confronting their little piece of the economic problem, dilemmas and conundrums: multifarious considerations, which have to be balanced and managed. Clear incentives allow them to resolve these dilemmas and conundrums too cleanly, more cleanly than is realistic, from the perspective of the socially useful.

    Maybe . . . maybe, it makes sense to give people with simple tasks, clear incentives. People, who pick cucumbers in the field, or sew garments in a sweatshop -- maybe these people can be given a piece-work rate, and it will all work out well. A little monitoring of quality to keep them "honest" is all that is necessary to keep behavior focused on speed.

    But, most people do not have such simple jobs, and no one has such a simple mind. People will game the system -- any system. Make the rewards large enough, they will score points, and ignore every other consideration. You think that if you reward "A", you will get behavior, "r", but someone else will figure out that behavior, "s" gets more "A", even if it is at the (unexpected?) cost of some "B".

    It is not enough to offer the "right" incentive, and just passively wait for the magic of the market to deliver emergent behavior. That kind of wilful ignorance is stock-in-trade of economists, who always think that "markets" are a magical process from which an optimal solution will emerge, without the economist bothering his pretty little head.

    In sports, the whole game has to be elaborately contained with rules, and still innovative coaches and players manage to find new ways to play, some of which turn out to be destructive in one way or another. So, the rules get tweaked.

    I would submit that most people at work in the economy are working in a bureaucracy, and their incentives are deliberately set to induce them to responsibly follow instructions, when given, and to manage complex situations with discretion, when the rules do not quite cover the situation.

    People don't just have disembodied incentives. They are set to play games. Some people are in charge of creating games for other people to play, and managing those games -- meaning managing the rules of the games.

    People play the game they are set, and only some people have responsibility for how the game fits into a larger architecture of games that make up a bank, or a real estate sector, or a finance sector, or an economy.

    I expect that people, who are at a stage of life where they want to buy a house feel that they do not have a lot of discretion about "what to do next". If general conditions have driven up the price of houses, then they kind of have to find a way to buy a house, that takes advantage of the opportunities posed by the game, as it exists. To paraphase the disgraced (but still rich) Citibank CEO, we have to dance, as long as the music is playing.

    "Increased demand for houses, all else held equal, should drive up the price of houses. Glaeser's study is complicated because he finds some evidence that reduced interest rates and lower down payments probably increased housing prices, but not by enough to account for the dramatic rise in prices between 1996 and 2006. It's further complicated by the fact that after 2006, even as interest rates fell, demand for housing did not rise as theory would predict (all else held equal)."

    Not those weasel words - "all else held equal" (appears twice). All else is NEVER equal. Economics unfortunately deals with a closely interrelated system. That is why it is difficult and contentious.

    reason, that's why the ceteris paribus caveat is so important in making statements about the relative movements of variables in a complex system. Without it, with other variables also shifting, there can be little confidence that the statement, applied to the whole system, is true. Throw in some interdependencies between shifting variables and it gets even more complicated. But, I'll bet that was your point. :-)

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