Super Models

May 21st, 2015 at 6:20 pm

Sorry, nothing prurient. Just a quick observation and reading/listening assignments for serious OTE’ers on some material that I will return to shortly with the necessary time and attention.

Over the past few days, in three separate (though intimately connected) debates in which I take part, I’ve come across writers emphasizing the critical importance of getting the economic models right. I too cannot over-emphasize the importance of this.

I know: “all models are wrong.” They’re distillations of reality that we cast in order simplify complex phenomena. But that’s the point–the second half of the quote is “…but some models are useful.” When they’re useful, it’s because the filter out the noise such that we can glean an important truth–or, given that this is econ, not physics, an important tendency–that should inform our diagnostic and prescriptive work.

On trade, Harold Meyerson points us away from Ricardian comparative advantage and towards more nuanced models of international competition associated with Samuelson and Ohlin, both of whom consider distributional outcomes of trade driven by differences in factor endowments (e.g., how trade with lower-wage countries can affect workers in higher wage countries).

On the minimum wage, Till von Wachter and Jeff Wenger explain why neo-classical models of the labor market fail to explain the empirical evidence around minimum wage increases, specifically the inaccuracy of the simple prediction that large numbers of workers affected by the mandated increase will lose their jobs. They cite “efficiency wage” models, where increased productivity generated by the wage increase becomes its own absorption mechanism, and “search” models, wherein the higher wage reduces “frictions,” such as turnover and vacancies.

Finally, I’m deeply ensconced in the absolutely masterful new book by British scholar Anthony Atkinson, Inequality: What Can be Done? I don’t have it in front of me, but early on in the book, as well as in this excellent lecture, Atkinson stresses, and I’m paraphrasing, “you know, there’s more than one economic model…” Much like my own models, his include the critical components of bargaining power, political power, as well as their roles in shaping not merely inequality, but more fundamentally, the way other dominant economic forces, like globalization and technological change, play out in the real world.

If you’re not up to reading the above, please at least give the Atkinson lecture a listen. I did so while jogging–learn while you burn!

Bottom line, like it or not, the models through which we interpret the economy matter a great deal, and more often than not, powerful people employ the wrong one.


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2 comments in reply to "Super Models"

  1. Smith says:

    I briefly skimmed Eduardo Porter’s review (linked to on this blog) of British scholar Anthony Atkinson’s, Inequality: What Can be Done which you reference.
    Briefly, and mixing the order, R&D need not be targeted at employment saving vs employment destroying. However R&D should be increased, especially on basic research. The trend has been the opposite, with long term effects on the economy, and that doesn’t include the massive technology transfer going to China whereby US companies trade our technology lead for short term profits. (also reverse the idiotic change to IP law from first to invent to first to file). Raising marginal tax rates is nothing new, it’s a restoration to the Eisenhower era. 70% was there even in 1980. Capital gains and corporate tax need to be restored and no tax holiday or reduction for foreign profits, but close that loophole and others. No capital distribution is required, but state usury laws should be restored. (see Supreme Court decision 1978 and banking bill of 1980). Finally, guaranteed employment is a bad idea. Temporary government employment in recessions or depressions, fine. Minimum wage increase to $15 is great and not radical due to inflation and productivity increases, it restores previous level.

    The lack of understanding on the left constantly plays into the hands of the right. The right reversed the New Deal and then further attacked the economic rights of the non-elite. Instead of coming up with strange programs that are too socialist and won’t work or corporate welfare (like EITC, and immigration without labor rights), just restoring the New Deal should be tried first. A year or more ago when I started out countering arguments for higher EITC by suggesting a $2.50 minimum wage increase, it seemed like a pipe dream. Today it’s a reality (to be phased in) in America’s second largest city and counting. For a full time worker, $2.50 * 40 hours * 52 weeks = $5,200 which is near the maximum allowed for existing EITC, so the program’s cost seems destined to drop dramatically, which is a good thing.

  2. Wondering says:

    Thanks for the reading pointers. I plan to start reading ferociously in the near future, such that I can try not to miss anything obvious when I build my computer models.

    My goal, as I’ll state on the blog, will be to create computerized, visual models for the masses. I’m not sure if I’ll start with domestic macro or international finance/trade/macro. The main point, however, is that I won’t claim to have everything right. Everything will be up for discussion, and anyone is free to disagree with anything I do. They’ll also be able to change the models themselves, because it will be distributed in source code.

    I tend to agree the the models you have created, such as those regarding labor slack and upward wage pressure. Some of these finer details will have to wait until later though.

    I believe voters have the right to understand the world economy.