Conversable Economist

Everyone knows the two countries in the world with the largest populations: China and India. But what countries are next on the list? The United States is third, with 331 million people. And fourth in total population is Indonesia, with 265 million people. When it comes to total size of economy, Indonesia is now about 9th, similar to UK and France (using the purchasing power parity exchange rate). By 2050, Indonesia could also be the fourth-largest economy in the world, behind China, India, and the United States.

If this is making you feel as if you perhaps should know more about Indonesia\’s economy and prospects, a useful starting point is Realizing Indonesia’s Economic Potential, a 13-chapter book edited by Luis E. Breuer, Jaime Guajardo, Tidiane Kinda for the IMF (August 2018).  To wet your whistle, here are a few comments from the opening chapter, \”Realizing Indonesia’s Economic Potential: An Overview,\” by Luis E. Breuer and Tidiane Kinda. As they explain, the country has carried out a number of economic reforms since the East Asian financial crisis back in 1998:

\”A deep decentralization program replaced the system of centralized government and development planning, giving greater direct authority, political power, and financial resources to regencies and municipalities. Local governments’ responsibilities were expanded in health, primary and middle-level education, transport, agriculture, manufacturing industry and trade, capital investment, land, and infrastructure services. …

\”A wave of reforms reduced the dominant role of the government in the economy—a legacy of the postcolonial period—and began a shift toward a more market-based economy. Policy frameworks and toolkits were upgraded, including adoption of a floating exchange rate, fiscal rules that limited the deficit and capped public debt, and an inflation targeting regime. The banking sector was also restructured, and regulation and supervision were overhauled … Various sectoral reforms were implemented to open up the economy and improve the business environment, including privatization of some state-owned enterprises, elimination of monopolies in some sectors, and reduction of general subsidies. More recently, fuel and electricity subsidies were more effectively targeted to low-income households; the land acquisition process for infrastructure projects was streamlined and made more flexible; the foreign direct investment (FDI) regime was partially liberalized, including for logistics, tourism, and agriculture; and the setting of the minimum wage was made more transparent and predictable …\” 

When it comes to regulate gun ownership, the ratio of confident predictions to actual research evidence can be distressingly high. A substantial report from the RAND think tank, which I wrote about last spring, spells out this theme in some detail (\”The Distressingly Weak Lessons of Research on Gun Control\”, March 12, 2018).  The Regulatory Review, A Publication of the Penn Program on Regulation, has entered the fray with a series of nine short essays on \”Bringing Expertise to the Gun Debate.\” which ran from November 5-15, 2018. Here are some points that caught my eye:

If the public policy goal is reducing gun violence and saving lives, it may be that direct regulations on guns are not the most cost-effective method to success. From \”Gun Regulation Is Costly—and Not the Only Option,\” by Jennifer Doleac:

But, in general, the effect of gun regulations on public safety is less clear than many advocates on either side think … It is difficult to disentangle the effects of gun laws from the effects of a community’s feelings about guns, from a community’s motivation to reduce gun violence, or from an increase in gun purchases that often comes before the laws take effect. …   The significant time and money required to pass gun regulations—not to mention the time and money needed to enforce such laws through policing and incarceration—could be spent advocating for and implementing other programs. Are there other life-saving programs more deserving of these resources?

Several programs are at least worthy of consideration. Summer jobs programs for teens reduce mortality by 18 to 20 percent among participants. This effect is driven by a reduction in young men killed by homicide or suicide. Cognitive behavioral therapy for at-risk young men lowers violent crime arrests by 45 to 50 percent for participants. Access to Medicaid in early childhood decreases suicide by 10 to 15 percent later in life. Mandating that health insurance cover mental health benefits at parity reduces the suicide rate by 5 percent. Access to antidepressants also reduces suicide rates: An increase in antidepressant sales equivalent to one pill per capita reduced suicide by 5 percent.

In addition, repealing duty-to-warn laws for mental health providers—which require that they report a patient’s violent threats, perhaps causing patients to be less honest—could reduce teen suicides by 8 percent and decrease homicides by 5 percent. Repealing juvenile curfews could lower urban gunfire by two-thirds. And if the goal is to reduce mortality in general—not just gun deaths—then there are many more options policymakers should consider.

Some people will argue that policymakers can and should pursue all of these policy options—that pursuing gun control does not mean advocates cannot also lobby for summer jobs and mental health care—which may be true. But … [i]n the war over gun deaths, vast armies have gathered to contest gun regulations, a territory of uncertain value. Meanwhile, other zones of clear value are available and virtually unguarded.

Guns are in some ways a magnifier of intentions. Thus, if you try to commit suicide, a gun means your attempt will be more likely to succeed. If you are involved in a violent altercation, a gun (and a larger-caliber gun) makes it more likely that the violence will cause death. From  \”Reducing Information Asymmetry in the American Gun Market,\” by Amanda LeSavage:

Suicides constitute two-thirds of annual gun deaths in the United States. Individuals who live in homes with guns are approximately five times more likely to commit suicide by any means and approximately 17 times more likely to commit suicide with a gun than individuals who do not have guns in their homes. Despite these enhanced risks, gun owners and their family members are not more likely to engage in suicidal ideation or planning. This finding indicates that individuals who commit suicide with guns typically do not purchase their guns with the intention of committing suicide.

Suicide usually results from an impulsive decision that can come as a surprise even to the victim. If an individual has access to a gun in a moment of such crisis and attempts suicide with that gun, there is an 85 percent chance of death. But less than 10 percent of people who attempt suicide by any other means actually die. That statistic is why the United States, which possesses almost half of the civilian-owned guns that exist worldwide, suffers from an alarmingly high suicide rate.

From \”Guns Do Kill People,\” Anthony A. Braga and Philip J. Cook:

Fifty years ago, law professor Franklin Zimring demonstrated that serious knife assaults are similar to shootings in many respects, including apparent determination to kill or injure the victim, yet the gun assaults had a much higher “case fatality rate.” In 1972, Zimring followed with an analysis comparing attacks with different types of guns. Once again, he demonstrated that nonfatal and fatal shootings were similar with respect to the circumstances and observed characteristics of the victims and assailants. He further found that the likelihood of death increased sharply with the caliber of the shooter’s firearm, as would be expected if the intrinsic power and lethality of the weapon mattered. Zimring concluded that there was a large random component to the outcome of gun assaults and that the firearm caliber was a systematic factor that influenced whether the victim lived or died. … 

There was a time, less than 20 years ago, when a major concern for the US government was how it would deal with the problems of paying off all government debt, which was projected to happen by about 2010. Alan Greenspan, then chairman of the Federal Reserve, made it a major point in his \”Outlook for the federal budget and implications for fiscal policy\” when he testified before the US Senate Budget Committee on January 25, 2001. 

Here\’s Greenspan on what the budget projections looked like at that time:

\”The most recent projections from the OMB indicate that, if current policies remain in place, the total unified surplus will reach $800 billion in fiscal year 2011, including an on-budget surplus of $500 billion. The CBO reportedly will be showing even larger surpluses. Moreover, the admittedly quite uncertain long-term budget exercises released by the CBO last October maintain an implicit on-budget surplus under baseline assumptions well past 2030 despite the budgetary pressures from the aging of the baby-boom generation, especially on the major health programs. The most recent projections, granted their tentativeness, nonetheless make clear that the highly desirable goal of paying off the federal debt is in reach before the end of the decade.\” 

But this good news of an unending future of budget surpluses did bring some issues to address. For example, when the federal government reached zero debt and stopped borrowing and became instead a holder of an ever-growing pile of financial assets, how would the decisions be made about which assets the government should hold?

\”At zero debt, the continuing unified budget surpluses currently projected imply a major accumulation of private assets by the federal government. … I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government\’s investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise.\”

One possible option was to allow individual privatized accounts for Social Security, so that individuals rather than government would hold the growing mountain of these assets. In addition, the government would be wanting to pay off its long-term borrowing before the bonds were actually due–which might mean  paying a premium to bondholders.

The Trump administration imposed tariffs on imported steel back in March 2018, using the implausible excuse that it was necessary for national security (for some countries, the tariffs were later changed to import quotas with similar effect). The results are utterly unsurprising: profits for US steel companies have risen and some jobs for US steelworkers have been gained, but at an exorbitant cost for US consumers and for other US workers. Gary Clyde Hufbauer and Euijin Jung lay it out in \”Steel Profits Gain, but Steel Users Pay, under Trump’s Protectionism\” (December 20, 2018, Peterson Institute for International Economics).

A protected industry benefits from less import competition. It uses that protection to raise prices for consumers and to earn higher profits. It should be emphasized that these higher price and profits are not an unexpected outcome–they are the mechanism through which import tariffs help domestic firms. To put it another way, if tariffs didn\’t help domestic companies charge more and raise their profits, there would be no point to having such tariffs in the first place.

Hufbauer and Jung write:

\”Calculations show that Trump’s tariffs raise the price of steel products by nearly 9 percent. Higher steel prices will raise the pre-tax earnings of steel firms by $2.4 billion in 2018. But they will also push up costs for steel users by $5.6 billion. Yes, these actions create 8,700 jobs in the US steel industry. Yet for each new job, steel firms will earn $270,000 of additional pre-tax profits. And steel users will pay an extra $650,000 for each job created.\”

Many studies over the years find that trade protectionism saves jobs, but at a high cost to consumers (For example, here\’s an example of how the Obama administration tariffs on imported tires cost consumers about $900,000 per job saved in that industry.) The underlying issue is that consumers aren\’t just paying higher prices to save US jobs–if that was the tradeoff, we could argue over whether it might be worth doing. But the higher prices are part of higher revenue for steel companies, which maybe used for purposes ranging from robots and automation to research and development, or higher profits for shareholders and higher bonuses for managers.

In addition, any jobs saved for US steelworkers are not a net gain for the US economy. The higher costs of steel are then passed along to products, leading to lower sales for those industries. The Whirlpool company offers a vivid example. The company strongly supported the Trump administration when it put tariffs on imported washing machines, which helped Whirlpool. But then when the Trump administration put tariffs on steel, driving up the price of making a washing machine in the US, it hurt Whirlpool. As the head of Whirlpool said: \”the net impact of all remedies and tariffs has turned into a headwind for us.\” 

Hufbauer and Jung mention (without endorsing) some estimates that the steel tariffs could be a net loss in US jobs by the time that the effects of higher steel prices are passed through industrial supply chains, making many products more expensive to make within US borders.  And of course, these calculations don\’t take into account the economic effects of retaliation from other countries, and how that costs US jobs in other industries.

Again, this dismal cost/benefit calculation for the steel tariffs is utterly unsurprising. Steel tariffs are just an indirect subsidy to the steel industry. Sure, US steel tariffs also make foreign steel producers unhappy, but the happiness or unhappiness of foreign producers is not a useful goal for US economic policy.  The main costs of the steel tariffs are imposed on US firms that use steel (and will have a harder time selling inside and outside the US) and ultimately on US consumers (who will pay more than consumers around the world for products containing steel). 

\”Hence it is that, though in every age everybody knows that up to his own time progressive improvement has been taking place, nobody seems to reckon on any improvement during the next generation. We cannot absolutely prove that those are in error who tell us that society has reached a turning point, that we have seen our best days. But so said all who came before us, and with just as much apparent reason. … On what principle is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?\”

Those of us who write about economics can only nod knowingly at a comment from John Maynard Keynes in 1934, in a a fragment of writing that was probably part of a draft of the preface for the General Theory. He wrote:

\”[A]n economic writer requires from his reader much goodwill and intelligence and a large measure of co-operation … In economics you cannot convict your opponent of error; you can only convince him of it.\” 

Happy New Year. And thanks to all the regular, semi-regular, occasional, and one-time readers for your goodwill, intelligence, cooperation–and for taking a look at this blog now and then. I published this same quotation a year ago on New Year\’s Day, but it still echoed in my mind this year.

The quotation from Keynes appears in volume XIII of the Collected Works of John Maynard Keynes, edited by Donald Moggridge and published in 1973 (pp. 469-471). Here\’s a fuller quotation from the passage, both worth reading for itself, and also to give some context:

When we write economic theory, we write in a quasi-formal style; and there can be no doubt, in spite of the disadvantages, that this is our best available means of conveying our thoughts to one another. But when an economist writes in a quasi-formal style, he is composing neither a document verbally complete and exact so as to be capable of a strict legal interpretation, nor a logically complete proof. Whilst it is his duty to make his premises and his use of terms as clear as he can, he never states all his premises and his definitions are not perfectly clear-cut. He never mentions all the qualifications necessary to his conclusions. He has no means of stating, once and for all, the precise level of abstraction on which he is moving, and he does not move on the same level all the time. It is, I think, of the essential nature of economic exposition that it gives, not a complete statement, which, even if it were possible, would be prolix and complicated to the point of obscurity but a sample statement, so to speak, out of all the things which could be said, intended to suggest to the reader the whole bundle of associated ideas, so that, if he catches the bundle, he will not in the least be confused or impeded by the technical incompleteness of the mere words which the author has written down, taken by themselves. 

This means, on the one hand, that an economic writer requires from his reader much goodwill and intelligence and a large measure of co-operation; and, on the other hand, that there are a thousand futile, yet verbally legitimate, objections which an objector can raise. In economics you cannot convict your opponent of error; you can only convince him of it. And, even if you are right, you cannot convince him, if there is a defect in your own powers of persuasion and exposition or if his head is already so filled with contrary notions that he cannot catch the clues to your thought which are trying to throw to him. 

The results is that much criticism, which has verbal justification in what the author has written, is nevertheless altogether futile and maddeningly irritating; for it merely indicates that the minds of authors and reader have failed to meet. ….

I ask forgiveness, therefore, if I have failed in the necessary goodwill and intellectual sympathy when I criticise; and to those minds to which, for whatever reasons, my ideas do not find an easy entry, I offer the assurance in advance that they will not find it difficult, where the country to be traversed is so extensive and complicated, to discover reasons which will seem to them adequate, for refusing to follow. Time rather than controversy … will sort out the true from the false.

When I think about appropriate thoughts for launching this blog into another calendar year, I often find myself considering the mindset most appropriate for participation in public debate and disagreement. Here are some thoughts along those lines from Ralph Waldo Emerson, in his journal entry for November 8, 1838.

\”Let me never fall into the vulgar mistake of dreaming that I am persecuted whenever I am contradicted. No man, I think, had ever a greater well-being with a less desert than I. I can very well afford to be accounted bad or foolish by a few dozen or a few hundred persons, I who see myself greeted by the good expectation of so many friends far beyond any power of thought or communication of thought residing in me. Besides, I own, I am often inclined to take part with those who say I am bad or foolish, for I fear I am both. I believe and know there must be a perfect compensation. I know too well my own dark spots. Not having myself attained, not satisfied myself, far from a holy obedience,— how can I expect to satisfy others, to command their love? A few sour faces, a few biting paragraphs,—is but a cheap expiation for all these short-comings of mine.\”

I have not achieved Emerson\’s acceptance of criticism here. The words of those who criticize, even when I don\’t know them personally and when their tone seems overheated, often ring louder in my mind than those who write to me with support and encouragement. Frankly, I\’m not at all certain that Emerson had achieved this level of transcendence, either.

But mostly, I do manage to avoid the trap of feeling persecuted when someone just disagrees with me. And viewing critics as part of the \”perfect compensation\” that I am due for my own indisputable imperfections seems a useful perspective on my attempted contributions to public discourse.

Anyone who says to you: \’Believe me, I have no prejudices,\’ is either succeeding in deceiving himself or trying to deceive you. … [I]n the social sciences, first, the subject-matter has much greater political and ideological content, so that other loyalties are also involved; and secondly, because the appeal to \’public experience\’ can never be decisive, as it is for the laboratory scientists who can repeat each other\’s experiments under controlled conditions, the social scientists are always left with a loophole to escape through – \’the consequences that have followed from the causes that I analysed are, I agree, the opposite of what I predicted, but they would have been still greater if those causes had not operated\’.

This need to rely on judgement has another consequence. It has sometimes been remarked that economists are more queazy and ill-natured than other scientists. The reason is that, when a writer\’s personal judgement is involved in an argument, disagreement is insulting.

Robinson then turns to quoting Adam Smith on poets and mathematicians:

Adam Smith [in the Moral Sentiments] remarks upon the different temperaments of poets and mathematicians:

\”The beauty of poetry is a matter of such nicety, that a young beginner can scarce ever be certain that he has attained it. Nothing delights him so much, therefore, as the favourable judgements of his friends and of the public; and nothing mortifies him so severely as the contrary. The one establishes, the other shakes, the good opinion which he is anxious to entertain concerning his own performances.

\”Mathematicians, on the contrary, who may have the most perfect assurance, both of the truth and of the importance of their discoveries, are frequently very indifferent about the reception which they may meet with from the \”public. . . .

\”[They] from their independency upon the public opinion, have little temptation to form themselves into factions and cabals, either for the support of their own reputation, or for the depression of that of their rivals. They are almost always men of the most amiable simplicity of manners, who live in good harmony with one another, are the friends of one another\’s reputation, enter into no intrigue in order to secure the public applause, but are pleased when their works are approved of, without being either much vexed or very angry when they are neglected.

\”It is not always the same case with poets, or with those who value themselves upon what is called fine writing. They are very apt to divide themselves into a sort of literary factions; each cabal being often avowedly and almost always secretly, the mortal enemy of the reputation of every other, and employing\’ all the mean arts of intrigue and solicitation to preoccupy the public opinion in favour of the works of its own members, and against those of its enemies and rivals.\”

 Robinson then sums up:

Perhaps Adam Smith had rather too exalted a view of mathematicians, and perhaps economists are not quite as bad as poets; but his main point applies. The lack of an agreed and accepted method for eliminating errors introduces a personal element into economic controversies which is another hazard on top of all the rest. There is a notable exception to prove the rule. Keynes was singularly free and generous because he valued no one\’s opinion above his own. If someone disagreed with him, it was they who were being silly; he had no cause to get peevish about it.

The personal problem is a by-product of the main difficulty, that, lacking the experimental method, economists are not strictly enough compelled to reduce metaphysical concepts to falsifiable terms and cannot compel each other to agree as to what has been falsified. So economics limps along with one foot in untested hypotheses and the other in untestable slogans.\”

Maybe this image is only relevant those who manage academic journals, like me, and who are thinking about the tasks and hopes for the next year. But it made me (in no particular order) wince and smile. From EBP Memes:

It\’s easy to think of reasons why humans might be hard-wired to pay more attention to bad news and downside risks than to good news and encouraging signs. Bad news may require quick reactions in the name of self-preservation; good news may be more likely to arrive in gradual small doses, and doesn\’t require any reaction at all. But whatever the underlying reason, the doomsayers and the naysayers often attract an audience, even if the worst of their predictions don\’t happen on time or with the predicted force. Meanwhile, extreme optimists seem naive. And those who predict middle-of-the-road scenarios, whether leaning toward optimism or pessimism, just seem boring.

As in the case of many human biases, it\’s worth pushing back against this one, just for the sake of intellectual equipoise. But back in 1828, in a \”Speech on Perfectability,\” John Stuart Mill argued a stronger case. In his view, this common focus on bad outcomes, negativity, and despair isn\’t just a judgement bias–it\’s also a sign of foolishness, lack of imagination, dullness, and even guilt. Mill pushes this line harder than I would. But the broader point is worth consideration.

Of course, \”expecting to find mankind wiser and better than they are\” is naive and foolish. But overcorrecting to believe in nothing but \”knavery and folly\” commit an error of judgement, too. And those who overcorrect most severely should not be presumed wiser because of their greater negativity and cynicism–just misguided in a different way and for different reasons. In some cases, maybe even many cases, a moderate degree of hope and positivity are more perceptive, more honest, and wiser than striking an attitude of poseur pessimism.
Here\’s part of what Mill had to say:

\”I know that among all that claim of persons who consider themselves to be par excellence the wise and the practical, it is esteemed a proof of consummate judgement to despair of doing good. I know that it is thought essential to a man who has any knowledge of the world to have an extremely bad opinion of it, and that whenever there are two ways of explaining any fact, wise and practical people always take that way which attributes most folly or most immorality to the mass of mankind. …

\”[I]is it really a mark of wisdom to deride all grand schemes of human amelioration as visionary ? I can assure hon. gentlemen that, so far from being a proof of any wisdom, it is what any fool can do as well as themselves, and I believe it is the fools principally who have attached to that mode of proceeding the reputation of wisdom. For an I have observed that if there is a man in public or private life who is so impenetrably dull that reason and argument never make the slightest impression on him, the dull people immediately set him down as a man of excellent judgement and strong sense; as if because men of talent and genius are sometimes deficient in judgement it followed that it was only necessary to be without one spark of talent or genius in order to be a man of consummate judgement. In the same manner because people are sometimes deceived by rash hopes I think I have observed that not the man who hopes when others despair, but the man who despairs when others hope is admired by a large clan of persons as a sage, and wisdom is supposed to consist not in seeing further than other people, but in not seeing so far. ….

\”I am persuaded that a vast majority of those who laugh at the hopes of those who think that man can be raised to any higher rank as a moral and intellectual being, do so from a principle very different from wisdom or knowledge of the world. I believe that the great majority of those who speak of perfectibility as a dream, do so because they feel that it is one which would afford them no pleasure if it were realized. I believe that they hold the progressiveness of the human mind to be chimerical because they are conscious that they themselves are doing nothing to forward it, and are anxious to believe that great work impossible in which, if it were possible, they know it would be their duty to assist. I believe that there is something else which powerfully helps many persons to the same conclusion — consciousness that they do not wish to get rid of their own imperfections, and a consequent unwillingness to believe it practicable that others should throw off theirs. I believe that if persons ignorant of the world sometimes miscalculate from expecting to find mankind wiser and better than they are, those persons who most affect to know the world are incessantly miscalculating the opposite way, and confidently reckoning upon a greater degree of knavery and folly among mankind than really exists.

Homage: I ran across a portion of the quotation from John Stuart Mill in Matt Ridley\’s article \”Why Is it So Cool to be Gloomy?\” which appeared in the Wall Street Journal on November 16, 2018. An ungated version is available here.