conversableeconomist

Spring 2017 Journal of Economic Perspectives Available On-line

For the past 30 years, my actual paid job (as opposed to my blogging hobby) has been Managing Editor of the Journal of Economic Perspectives. The journal is published by the American Economic Association, which back in 2011 decided–much to my delight–that the journal would be freely available on-line, from the current issue back to the first issue in 1987. Here, I\’ll start with Table of Contents for the just-released Spring 2017 issue. Below that are abstracts and direct links for all of the papers. I will almost certainly blog about some of the individual papers in the next week or two, as well.

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Symposium: Recent Ideas in Econometrics\”The State of Applied Econometrics: Causality and Policy Evaluation,\” by Susan Athey and Guido W. Imbens

In this paper, we discuss recent developments in econometrics that we view as important for empirical researchers working on policy evaluation questions. We focus on three main areas, in each case, highlighting recommendations for applied work. First, we discuss new research on identification strategies in program evaluation, with particular focus on synthetic control methods, regression discontinuity, external validity, and the causal interpretation of regression methods. Second, we discuss various forms of supplementary analyses, including placebo analyses as well as sensitivity and robustness analyses, intended to make the identification strategies more credible. Third, we discuss some implications of recent advances in machine learning methods for causal effects, including methods to adjust for differences between treated and control units in high-dimensional settings, and methods for identifying and estimating heterogenous treatment effects.
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\”The Use of Structural Models in Econometrics,\” by Hamish Low and Costas Meghir

This paper discusses the role of structural economic models in empirical analysis and policy design. The central payoff of a structural econometric model is that it allows an empirical researcher to go beyond the conclusions of a more conventional empirical study that provides reduced-form causal relationships. Structural models identify mechanisms that determine outcomes and are designed to analyze counterfactual policies, quantifying impacts on specific outcomes as well as effects in the short and longer run. We start by defining structural models, distinguishing between those that are fully specified and those that are partially specified. We contrast the treatment effects approach with structural models, and present an example of how a structural model is specified and the particular choices that were made. We cover combining structural estimation with randomized experiments. We then turn to numerical techniques for solving dynamic stochastic models that are often used in structural estimation, again with an example. The penultimate section focuses on issues of estimation using the method of moments.
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\”Twenty Years of Time Series Econometrics in Ten Pictures,\” by James H. Stock and Mark W. Watson

This review tells the story of the past 20 years of time series econometrics through ten pictures. These pictures illustrate six broad areas of progress in time series econometrics: estimation of dynamic causal effects; estimation of dynamic structural models with optimizing agents (specifically, dynamic stochastic equilibrium models); methods for exploiting information in \”big data\” that are specialized to economic time series; improved methods for forecasting and for monitoring the economy; tools for modeling time variation in economic relationships; and improved methods for statistical inference. Taken together, the pictures show how 20 years of research have improved our ability to undertake our professional responsibilities. These pictures also remind us of the close connection between econometric theory and the empirical problems that motivate the theory, and of how the best econometric theory tends to arise from practical empirical problems.
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\”Machine Learning: An Applied Econometric Approach,\” by Sendhil Mullainathan and Jann Spiess
Machines are increasingly doing \”intelligent\” things. Face recognition algorithms use a large dataset of photos labeled as having a face or not to estimate a function that predicts the presence y of a face from pixels x. This similarity to econometrics raises questions: How do these new empirical tools fit with what we know? As empirical economists, how can we use them? We present a way of thinking about machine learning that gives it its own place in the econometric toolbox. Machine learning not only provides new tools, it solves a different problem. Specifically, machine learning revolves around the problem of prediction, while many economic applications revolve around parameter estimation. So applying machine learning to economics requires finding relevant tasks. Machine learning algorithms are now technically easy to use: you can download convenient packages in R or Python. This also raises the risk that the algorithms are applied naively or their output is misinterpreted. We hope to make them conceptually easier to use by providing a crisper understanding of how these algorithms work, where they excel, and where they can stumble—and thus where they can be most usefully applied.
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\”Identification and Asymptotic Approximations: Three Examples of Progress in Econometric Theory,\” by James L. Powell
In empirical economics, the size and quality of datasets and computational power has grown substantially, along with the size and complexity of the econometric models and the population parameters of interest. With more and better data, it is natural to expect to be able to answer more subtle questions about population relationships, and to pay more attention to the consequences of misspecification of the model for the empirical conclusions. Much of the recent work in econometrics has emphasized two themes: The first is the fragility of statistical identification. The other, related theme involves the way economists make large-sample approximations to the distributions of estimators and test statistics. I will discuss how these issues of identification and alternative asymptotic approximations have been studied in three research areas: analysis of linear endogenous regressor models with many and/or weak instruments; nonparametric models with endogenous regressors; and estimation of partially identified parameters. These areas offer good examples of the progress that has been made in econometrics.
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\”Undergraduate Econometrics Instruction: Through Our Classes, Darkly,\” by Joshua D. Angrist and Jörn-Steffen Pischke
\”The past half-century has seen economic research become increasingly empirical, while the nature of empirical economic research has also changed. In the 1960s and 1970s, an empirical economist\’s typical mission was to \”explain\” economic variables like wages or GDP growth. Applied econometrics has since evolved to prioritize the estimation of specific causal effects and empirical policy analysis over general models of outcome determination. Yet econometric instruction remains mostly abstract, focusing on the search for \”true models\” and technical concerns associated with classical regression assumptions. Questions of research design and causality still take a back seat in the classroom, in spite of having risen to the top of the modern empirical agenda. This essay traces the divergent development of econometric teaching and empirical practice, arguing for a pedagogical paradigm shift.\”
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Symposium: Are Measures of Economic Growth Biased?

\”Underestimating the Real Growth of GDP, Personal Income, and Productivity,\” by Martin Feldstein
Economists have long recognized that changes in the quality of existing goods and services, along with the introduction of new goods and services, can raise grave difficulties in measuring changes in the real output of the economy. But despite the attention to this subject in the professional literature, there remains insufficient understanding of just how imperfect the existing official estimates actually are. After studying the methods used by the US government statistical agencies as well as the extensive previous academic literature on this subject, I have concluded that, despite the various improvements to statistical methods that have been made through the years, the official data understate the changes of real output and productivity. The official measures provide at best a lower bound on the true real growth rate with no indication of the size of the underestimation. In this essay, I briefly review why national income should not be considered a measure of well-being; describe what government statisticians actually do in their attempt to measure improvements in the quality of goods and services; consider the problem of new products and the various attempts by economists to take new products into account in measuring overall price and output changes; and discuss how the mismeasurement of real output and of prices might be taken into account in considering various questions of economic policy.
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\”Challenges to Mismeasurement Explanations for the US Productivity Slowdown,\” by Chad Syverson
The United States has been experiencing a slowdown in measured labor productivity growth since 2004. A number of commentators and researchers have suggested that this slowdown is at least in part illusory because real output data have failed to capture the new and better products of the past decade. I conduct four disparate analyses, each of which offers empirical challenges to this \”mismeasurement hypothesis.\” First, the productivity slowdown has occurred in dozens of countries, and its size is unrelated to measures of the countries\’ consumption or production intensities of information and communication technologies (ICTs, the type of goods most often cited as sources of mismeasurement). Second, estimates from the existing research literature of the surplus created by internet-linked digital technologies fall far short of the $3 trillion or more of \”missing output\” resulting from the productivity growth slowdown. Third, if measurement problems were to account for even a modest share of this missing output, the properly measured output and productivity growth rates of industries that produce and service ICTs would have to have been multiples of their measured growth in the data. Fourth, while measured gross domestic income has been on average higher than measured gross domestic product since 2004—perhaps indicating workers are being paid to make products that are given away for free or at highly discounted prices—this trend actually began before the productivity slowdown and moreover reflects unusually high capital income rather than labor income (i.e., profits are unusually high). In combination, these complementary facets of evidence suggest that the reasonable prima facie case for the mismeasurement hypothesis faces real hurdles when confronted with the data.
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\”How Government Statistics Adjust for Potential Biases from Quality Change and New Goods in an Age of Digital Technologies: A View from the Trenches,\” by Erica L. Groshen, Brian C. Moyer, Ana M. Aizcorbe, Ralph Bradley and David M. Friedman
A key economic indicator is real output. To get this right, we need to measure accurately both the value of nominal GDP (done by Bureau of Economic Analaysis) and key price indexes (done mostly by Bureau of Labor Statisticcs). All of us have worked on these measurements while at the BLS and the BEA. In this article, we explore some of the thorny statistical and conceptual issues related to measuring a dynamic economy. An often-stated concern is that the national economic accounts miss some of the value of some goods and services arising from the growing digital economy. We agree that measurement problems related to quality changes and new goods have likely caused growth of real output and productivity to be understated. Nevertheless, these measurement issues are far from new, and, based on the magnitude and timing of recent changes, we conclude that it is unlikely that they can account for the pattern of slower growth in recent years. First we discuss how the Bureau of Labor Statistics currently adjusts price indexes to reduce the bias from quality changes and the introduction of new goods, along with some alternative methods that have been proposed. We then present estimates of the extent of remaining bias in real GDP growth that stem from potential biases in growth of consumption and investment. And we take a look at potential biases that could result from challenges in measuring nominal GDP, including those involving the digital economy. Finally, we review ongoing work at BLS and BEA to reduce potential biases and further improve measurement.
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Articles
\”Social Media and Fake News in the 2016 Election,\” by Hunt Allcott and Matthew Gentzkow
Following the 2016 US presidential election, many have expressed concern about the effects of false stories (\”fake news\”), circulated largely through social media. We discuss the economics of fake news and present new data on its consumption prior to the election. Drawing on web browsing data, archives of fact-checking websites, and results from a new online survey, we find: 1) social media was an important but not dominant source of election news, with 14 percent of Americans calling social media their \”most important\” source; 2) of the known false news stories that appeared in the three months before the election, those favoring Trump were shared a total of 30 million times on Facebook, while those favoring Clinton were shared 8 million times; 3) the average American adult saw on the order of one or perhaps several fake news stories in the months around the election, with just over half of those who recalled seeing them believing them; and 4) people are much more likely to believe stories that favor their preferred candidate, especially if they have ideologically segregated social media networks.
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\”Yuliy Sannikov: Winner of the 2016 Clark Medal,\” Susan Athey and Andrzej Skrzypacz
Yuliy Sannikov is an extraordinary theorist who has developed methods that offer new insights in analyzing problems that had seemed well-studied and familiar: for example, decisions that might bring about cooperation and/or defection in a repeated-play prisoner\’s dilemma game, or that affect the balance of incentives and opportunism in a principal-agent relationship. His work has broken new ground in methodology, often through the application of stochastic calculus methods. The stochastic element means that his work naturally captures situations in which there is a random chance that monitoring, communication, or signaling between players is imperfect. Using calculus in the context of continuous-time games allows him to overcome tractability problems that had long hindered research in a number of areas. He has substantially altered the toolbox available for studying dynamic games. This essay offers an overview of Sannikov\’s research in several areas.
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\”Recommendations for Further Reading,\” by Timothy Taylor
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conversableeconomist

Adam Smith on Beggar Thy Neighbor

Beggar-my-neighbor is a simple card game which according to reference in the Oxford English Dictionary dates back at least to the early 1700s. In 1776, Adam Smith applied the expression to trade policy. The often-quoted short passage from Book IV, Chapter III of the The Wealth of Nations reads.

\”[N]ations have been taught that their interest consisted in beggaring all their neighbours. Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity.\”

Here\’s some of the broader argument surrounding Smith\’s particular comment. A key underlying theme for Smith is that attempts to limit trade are, pretty much by definition, attempts to limit competition. As a result, such attempts favor the producers (Smith calls them \”monopolists\”) who have less need to face competition, but impose costs on consumers of goods. Smith also discusses that the economic strength of a neighboring nation may be \”dangerous in war and politics,\” but beneficial economically because it offers more opportunity for trade. Finally, Smith points out that dire warnings of the dangers of international trade were prominent, then as now, but when you look across countries, the places more open to international trade typically tend to be better-off, not worse-off. Smith wrote:

\”Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false. A trade which is forced by means of bounties and monopolies may be and commonly is disadvantageous to the country in whose favour it is meant to be established … But that trade which, without force or constraint, is naturally and regularly carried on between any two places is always advantageous, though not always equally so, to both.

By advantage or gain, I understand not the increase of the quantity of gold and silver, but that of the exchangeable value of the annual produce of the land and labour of the country, or the increase of the annual revenue of its inhabitants. … 

It is a losing trade, it is said, which a workman carries on with the alehouse; and the trade which a manufacturing nation would naturally carry on with a wine country may be considered as a trade of the same nature. I answer, that the trade with the alehouse is not necessarily a losing trade. In its own nature it is just as advantageous as any other, though perhaps somewhat more liable to be abused. The employment of a brewer, and even that of a retailer of fermented liquors, are as necessary divisions of labour as any other. It will generally be more advantageous for a workman to buy of the brewer the quantity he has occasion for, than to brew it himself, and if he is a poor workman, it will generally be more advantageous for him to buy it, by little and little, of the retailer than a large quantity of the brewer. He may no doubt buy too much of either, as he may of any other dealers in his neighbourhood, of the butcher, if he is a glutton, or of the draper, if he affects to be a beau among his companions. It is advantageous to the great body of workmen, notwithstanding, that all these trades should be free, though this freedom may be abused in all of them, and is more likely to be so, perhaps, in some than in others. Though individuals, besides, may sometimes ruin their fortunes by an excessive consumption of fermented liquors, there seems to be no risk that a nation should do so.  …

By such maxims as these, however, nations have been taught that their interest consisted in beggaring all their neighbours. Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity. … 

That it was the spirit of monopoly which originally both invented and propagated this doctrine cannot be doubted; and they who first taught it were by no means such fools as they who believed it. In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind. Their interest is, in this respect, directly opposite to that of the great body of the people. As it is the interest of the freemen of a corporation to hinder the rest of the inhabitants from employing any workmen but themselves, so it is the interest of the merchants and manufacturers of every country to secure to themselves the monopoly of the home market. Hence in Great Britain, and in most other European countries, the extraordinary duties upon almost all goods imported by alien merchants. Hence the high duties and prohibitions upon all those foreign manufactures which can come into competition with our own. Hence, too, the extraordinary restraints upon the importation of almost all sorts of goods from those countries with which the balance of trade is supposed to be disadvantageous; that is, from those against whom national animosity happens to be most violently inflamed.

The wealth of a neighbouring nation, however, though dangerous in war and politics, is certainly advantageous in trade. In a state of hostility it may enable our enemies to maintain fleets and armies superior to our own; but in a state of peace and commerce it must likewise enable them to exchange with us to a greater value, and to afford a better market, either for the immediate produce of our own industry, or for whatever is purchased with that produce. As a rich man is likely to be a better customer to the industrious people in his neighbourhood than a poor, so is likewise a rich nation. A rich man, indeed, who is himself a manufacturer, is a very dangerous neighbour to all those who deal in the same way. All the rest of the neighbourhood, however, by far the greatest number, profit by the good market which his expence affords them. They even profit by his underselling the poorer workmen who deal in the same way with him. The manufacturers of a rich nation, in the same manner, may no doubt be very dangerous rivals to those of their neighbours. This very competition, however, is advantageous to the great body of the people, who profit greatly besides by the good market which the great expence of such a nation affords them in every other way. Private people who want to make a fortune never think of retiring to the remote and poor provinces of the country, but resort either to the capital, or to some of the great commercial towns. They know that where little wealth circulates there is little to be got, but that where a great deal is in motion, some share of it may fall to them. The same maxims which would in this manner direct the common sense of one, or ten, or twenty individuals, should regulate the judgment of one, or ten, or twenty millions, and should make a whole nation regard the riches of its neighbours as a probable cause and occasion for itself to acquire riches. A nation that would enrich itself by foreign trade is certainly most likely to do so when its neighbours are all rich, industrious, and commercial nations. 

It is in consequence of these maxims that the commerce between France and England has in both countries been subjected to so many discouragements and restraints. If those two countries, however, were to consider their real interest, without either mercantile jealousy or national animosity, the commerce of France might be more advantageous to Great Britain than that of any other country, and for the same reason that of Great Britain to France. France is the nearest neighbour to Great Britain. In the trade between the southern coast of England and the northern and north-western coasts of France, the returns might be expected, in the same manner as in the inland trade, four, five, or six times in the year. The capital, therefore, employed in this trade could in each of the two countries keep in motion four, five, or six times the quantity of industry, and afford employment and subsistence to four, five, or six times the number of people, which an equal capital could do in the greater part of the other branches of foreign trade. …
But the very same circumstances which would have rendered an open and free commerce between the two countries so advantageous to both, have occasioned the principal obstructions to that commerce. Being neighbours, they are necessarily enemies, and the wealth and power of each becomes, upon that account, more formidable to the other; and what would increase the advantage of national friendship serves only to inflame the violence of national animosity. They are both rich and industrious nations; and the merchants and manufacturers of each dread the competition of the skill and activity of those of the other. Mercantile jealousy is excited, and both inflames, and is itself inflamed, by the violence of national animosity: And the traders of both countries have announced, with all the passionate confidence of interested falsehood, the certain ruin of each, in consequence of that unfavourable balance of trade, which, they pretend, would be the infallible effect of an unrestrained commerce with the other.

There is no commercial country in Europe of which the approaching ruin has not frequently been foretold by the pretended doctors of this system from an unfavourable balance of trade. After all the anxiety, however, which they have excited about this, after all the vain attempts of almost all trading nations to turn that balance in their own favour and against their neighbours, it does not appear that any one nation in Europe has been in any respect impoverished by this cause. Every town and country, on the contrary, in proportion as they have opened their ports to all nations, instead of being ruined by this free trade, as the principles of the commercial system would lead us to expect, have been enriched by it. …

Some years back I was giving some talks in South Africa, and found myself in a back-and-forth with a group of sharp and thoughtful students about whether the US was better off if other countries of the world, like South Africa, were poor or rich. The sense of many of the students was that the US wanted other countries to remain poor, so that the US could import goods produced by low-cost labor. I argued that for all the back-and-forth of US policy over time, the main thrust of policies like leading the way in the GATT and the WTO was an underlying belief that the US economy benefited when other countries were better off. Channeling Adam Smith, I found myself asking the group: \”If you want to be economically successful, would you prefer to live in a rich neighborhood or a poor one?\” I doubt that I changed anyone\’s mind, but at least the question led to a pause in the conversation, in which I could almost hear ideas being recalibrated and reframed.