Econometric Ventriloquism

If you want to know what people believe, ask them. If you want to know what they believe about a complex and controversial policy issue, ask them lots of questions specifically about what their beliefs are about that issue.

Asking lots of people lots of questions is a lot of work. Wouldn't it be easier if we could infer their answers to other questions from their answer to one question? That's where econometrics comes in. By making a bunch of assumptions and calling some variables "control variables," you can get the survey respondents to give you answers to questions they were never asked. It's magic!

You've heard of "dummy variables"? Well, these are dummy survey respondents. And the econometrician gets to be the ventriloquist!

The other day, I ranted about an article by Achim Kemmerling, which purported to wring lump-of-labour blood from a Eurobarometer survey turnip about early retirement. Achim corresponded with me and he seems like a nice enough guy with good intentions. In my reply to him, I mentioned a survey of sympathizers and skeptics of work-time reduction I had done back in 1997 and offered to try to dig up a copy. Thanks to the Wayback Machine, I found my write up of the survey results, Sabbath of the Land, which I have converted to a pdf file and uploaded to Scribd. Re-reading it after nearly two decades, it impresses me as a substantive rebuttal to claims that support for policy "A" implies belief in idea "B".

Why Gossip Trumps Ideas

Nick Rowe kvetches:

"What bugs or puzzles me is that this rather unoriginal and not very great post, which I nearly didn't bother publishing at all, is getting all the attention in the econoblogosphere, while my following post, on red money, which (I think) is far more original, and far more interesting, and a far better post, is getting almost none."

Every once in a while I post something worthwhile that grabs a lot of views, sometimes even a few comments. Often, though, the views and comments are in inverse proportion to the originality and importance of the post. Sometimes I deliberately post trash talk just for the thrill of getting a few extra hits. Everything is data.

I'm sure you could find a scientific paper on this but why bother. It's obvious. Gossip trumps ideas. You don't see scholarly publications on sale near the supermarket check out counter. What is that telling us? It tells me that people are more interested than anything else in what other people are saying about what other people are doing. Keynes's beauty contest. Mimetic desire.

Where do "expectations" come from? They come from hearing what other people are saying about what their expectations are. Or thinking you've heard what other people have said...

The Luddites Had a Time Machine! (and other claims the truth or falsehood of which is not relevant)

According to Achim Kemmerling, a political economist at Central European University in Budapest, the truth or falsehood of claims is irrelevant ("The end of work or work without end? How people’s beliefs about labour markets shape retirement politics," Journal of Public Policy, Published online: 12 January 2015).

Now, I have taken Kemmerling's statement somewhat out of context. His original statement, with emphasis added to the parts left out, was:

For the purposes of this article, however, it is not relevant whether the claims are true or false, as long as (some) people believe in them.

Kemmerling is dead wrong. Whether the claims are true or false is relevant for the purposes of his article -- no less than the context of his claim about its supposed non-relevance.

What are those claims? The claims Kemmerling says he is investigating are:

1. "that there is an upper limit to the total number of jobs in a society" and/or 
2. "that this upper limit of total jobs will fall as time passes due to processes of globalisation or technological change."

A rash of subsidiary claims follow from those. The most important (for the purposes of Kemmerling's article) is that "some people believe in them." The second is that the claims are fallacies. A third is that the assertion that "some people" believe in these ideas is itself false or at least grossly exaggerated. The truth or falsehood of the claims being investigated is thus relevant at least to the extent of its bearing on these subsidiary claims.

Kemmerling extrapolates belief in the lump-of-labour idea from agreement with Eurobarometer survey question 68.1: "People in their late 50s should give up work to make way for younger and unemployed people." As he admits, the survey question "imperfectly proxies the idea of a trade-off between these two types of workers." Although he concedes "there is no perfect remedy" for this discrepancy, he maintains, "one can arguably control for alternative explanations such as norms."

That's nonsense. The word "arguably" must be construed as referring to plausible arguments. Kemmerling presents none. Instead, he reports on variations in responses from different sub-groups and speculates on norms that might account for those differences.These are not controls. These are excuses.

One can only marvel at the heroic lengths Kemmerling goes to to coax the sought after answer out of the recalcitrant data. But why on earth would he even bother if "it is not relevant whether the claims are true or false"? Despite that discrete disclaimer, Kemmerling assumes that the lump-of-labour is indeed a widespread belief and a fallacy and implies that it is an obstacle to presumably (from his perspective) more rational policy reform. More crucially he assumes that not just some but many people believe in the fallacious, obstructive idea. The tell-tale appears in his reference to the nineteenth century Luddites:

The causal belief investigated here is the lump-of-labour idea... This idea is far from new. In the early nineteenth century, the Luddite movement destroyed factory machines as technical progress threatened to make workers redundant.

How did the Luddites answer Question 68.1 of the 1811 Eurobarometer survey? There was no Eurobarometer survey in 1811! There also was no Eurobarometer in 1753 when Peter Kay, inventor of the flying shuttle, had his house burnt down by Luddites EVEN THOUGH LUDDITES DIDN'T EXIST UNTIL THE NINETEENTH CENTURY!

From Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu, James Robinson. page 85:

How did the nineteenth century Luddites burn down a mid-eighteenth century house? The obvious answer is they must have had a time machine (assuming that it is not relevant whether or not Acemoglu and Robinson's claims are true or false).

The claim about the Luddites is a historical claim, as is the claim about belief in a lump-of-labour fallacy. No amount of agnosticism about the truth or falsehood of claims or appeal to control variables for alternative explanations will enable a researcher to arrive at conclusions regarding subjects' beliefs about A from their answers to questions about B, especially if the researcher isn't aware that "beliefs about A" is an old, old fable with propagandistic origins.

Some more context:

Hence, the question of the lump-of-labour fallacy is a controversial one even among academics (Walker 2007). For the purposes of this article, however, it is not relevant whether the claims are true or false, as long as (some) people believe in them.

Walker 2007 challenged the authenticity of the fallacy claims. More specifically, Walker 2007 challenged the assertion that support for certain policy proposals implied an underlying and motivating belief that there is a fixed amount of work.

Walker 2015 regrets that he was not aware at the time that Pigou (1913) and Dobb (1928) had beaten him to the punch with their respective ignoratio elenchi critiques of the supposed fixed work-fund fallacy (another name for the lump-of-labour). A.C. Pigou argued that it would:

...be unwarrantable to conclude that, because the reasons which popular thought offers in defence of any thesis are invalid, therefore, that thesis is untrue. If it were a good ground for rejecting an opinion that many persons entertain it for bad reasons, there would, alas, be few current beliefs left standing!

He concluded that some (though not all) restrictions on the supply of labour can expand employment on the condition that they "succeed in rendering the labour and capital of the rest of the community more effective in production."

Maurice Dobb's critique was more direct and decisive. He pointed out that even under the assumption that restriction of the supply of labour would decrease aggregate income per worker it could still "increase wages in proportion to the worker's expenditure of energy and his 'wear and tear,' and it can increase Relative Wages, or wages as a proportion of the total social income."

In short, it's not only about how much you can get for your labour but also how much you have to work to get it. "Opportunity cost," in economist jargon. There may indeed be more jobs and more total income if older workers stay in the work force longer but that could also mean everyone was working more for proportionately less pay.

The more elaborate answer to the presumed lump-of-labour idea is the analysis of the social cost of labour as articulated by John Maurice Clark and K. William Kapp. As Robert Prasch has pointed out, analysis of the social cost of labour:

...presents us with an underlying logic of labor market regulations. Laws concerning wages, hours, health, or safety may still, of course, be criticized for being misspecified or ineffective. However, acknowledging the existence of a social cost of labor means that they can not be considered, ipso facto, to be "distortions." On the contrary, they represent a civilized society's response to the inevitable limitations of relying solely on market prices to ensure the sustainability of the economy, society, and polity. 

It would be presumptuous to attribute subjects' answers to Question 68.1 of the 2001 Eurobarometer survey to a sophisticated grasp of the social cost of labour. However it would be no more presumptuous than attributing the answers to a belief in a lump-of-labour idea. And a lot less preposterous.

UPDATE: Further evidence of Luddite time travel from Crandall, Parnell and Spillan, Crisis Management: Leading in the New Strategy Landscape, 2010:

History is full of examples of those who have shunned technology. For some, technology itself was the crisis. The Luddites, for example, carried out violent attacks on technology in the early 1800s by smashing machines in industrial settings. However, the attacks, which originated in England during the Industrial Revolution, were actually more of a social protest against falling wages, unemployment, and rising food prices (Malcolm. 1970; Wren. 1987). In such an environment the threat that machines would displace jobs seemed realistic. Unfortunately for the Luddites. their actions went too far, even to the point of burning down the houses of machine inventors John Kay and James Hargreaves (Wren, 1987). --.

Interestingly enough, Crandall et al. get the story right about the Luddites actions being "actually more of a social protest against falling wages, unemployment, and rising food prices." I can't confirm whether or not the claim that Luddites burned down John Kay's house came from "Wren 1987."

The Hours of Labour and the Problem of Social Cost

From The Hours of Labour and the Problem of Social Cost

In "The Problem of Social Cost," Ronald Coase (1960) examined one variety of presumed market failures – outcomes that Cecil Pigou (1952) had described as “incidental uncharged disservices” (or uncompensated services) but are now commonly referred to as "externalities." The incidental quality of these effects makes them a social cost. The economic analysis Coase challenged and the standard examples he re-examined were taken from Pigou's discussion in part II of The Economics of Welfare. Coase argued that the suggested courses of action in the Pigovian tradition – liability, taxation or regulation – were inappropriate and often undesirable.

Coase claimed that the traditional approach to the problem of social cost "tended to obscure the nature of the choice that has to be made" (1960, 2). He characterized the question posed by the approach as "one in which A inflicts harm on B and what has to be decided is: how should we restrain A?" He objected that the problem was really a reciprocal one and the real question should be "should A be allowed to harm B or should B be allowed to harm A? The problem is to avoid the more serious harm."

However, Coase didn't consider the full range of Pigou's examples and analysis. While Coase’s restatement of the problem may have been appropriate to the specific externality problems discussed by Pigou in part II, it entirely overlooked the radically different labour market problem encountered in part III, in which competitive pressure compels an employing firm to inflict harm on both itself and its employees and thus regulatory restraint of the firm (and competing employers) may benefit both.

Along with the majority of the preceding Pigovian tradition, Coase evaded the thorny questions of working conditions and unemployment. Whatever gains in tractability may be accomplished by such a maneuver are more than offset by a forfeit of realism and of insight into the complex interdependency of economic factors in the long period. The determination of the hours of work provides a particularly compelling example of a circumstance in which mutual benefit could result from an imposed non-market restraint.

continued at: http://www.disei.unifi.it/upload/sub/pubblicazioni/msb/vol_12_2011/walker2011.pdf

Eleventh Dimensional Chess for Beginners

Jared Bernstein at Post Everything:

At the heart of the president’s new plan is the closure of a big loophole that benefits the wealthy and inefficiently skews the tax code. When an asset (like a stock) you own appreciates, that income is known as capital gains (what’s that? you depend on your paycheck, not your cap gains? that’s kinda the point…read on). If you sell that asset, you’re taxed, and taxed at a preferential rate, on the so-called “realized” gains. 

But if you hold onto that asset you pay no tax on the “unrealized” gains. That income currently escapes taxation, even when—get ready because here comes the loophole, one the White House says is “the largest capital gains loophole – perhaps the largest single loophole in the entire individual income tax code”—you check out of this crazy thing called life, i.e., you die, and you turn those appreciated assets over to an heir.

As Jared notes,  "progressive policy makers have decided that 'can we get this through the current Congress?' is not a useful question for crafting the necessarily [sic] policy agenda in our age of inequality." Well, yeah, but... sounds like a good idea with populist appeal. I mean, what a scam sweetheart deal for the .01%. So why didn't the Democrats propose this and campaign HARD on it in last November's midterm elections?

Kapp-and-Trade Unions

In her essay, "On Working Class Environmentalism," Stefania Barca highlighted the formative contribution of K. William Kapp to a conceptual framework of social costs that integrates occupational, environmental and public health research. In his The Social Costs of Private Enterprise  (1950), Kapp advanced the thesis later summarized by Joan Martinez-Alier that, from a business perspective, "externalities are not so much market failures as cost-shifting successes." As Barca explained:

The core idea of the book was that social costs are produced by the internal logic of private business, that is the principle of investment for profit at the individual unit level. In order to maximize profit on a given investment, entrepreneurs need to minimize relative costs: in the existing legal and political structure of the US economy, Kapp observed, entrepreneurs found it possible and profitable to shift the real cost of human and environmental health and safety on third parties, namely the workers and society as a whole.

Barca described Kapp as a "non-orthodox economist." It is useful to pay close attention to precisely which orthodox premises Kapp was deviating from. In  Environmental Disruption and Social Costs: A Challenge to Economics," objected to the treatment by economic theory of "allocation, production, exchange and distribution as if they occurred in an essentially closed and autonomous 'economic' sphere with only minor effects on man’s natural and social environment." Introducing the the concept of "externalities" as an after-thought to this fundamentally flawed analytical framework only serves to create a "false impression that the theory has adequately incorporated the interdependencies at work.":

In short, simplifying assumptions and empty terms create the impression of adequacy but do not solve the problem. They will give us empty conclusions such as that rational allocation and optimal efficiency will be the outcome provided that important external diseconomies (and economies) are absent. Neither the assumptions nor the concepts nor the conclusions can lay claim to any of the virtues of which neo-classical and 'positive' economics have traditionally boasted. They are neither neutral nor objective; they are misleading and apologetic if not consciously so at any rate in effect. Such assumptions and concepts do not reveal but conceal what is actually happening. Moreover, they distract our attention from what is really important and what needs to be investigated. Thus they are preventing us from formulating the problem in an adequate fashion and hence from developing adequate criteria of action and appropriate methods of control.

This ad hoc treatment of social costs as incidental to the feature attractions of economic production, exchange and distribution is only aggravated by the Coasean abstractions of zero transaction costs and comprehensive assignment of property rights. Social costs appear "external" to market exchange precisely because they involve intractable transaction costs and assets for which it difficult or impossible to assign property rights. Wishes are not horses and prisoners do not have angels' wings. Calling a tail a leg doesn't make it one.

It would be easy, though, to overstate Kapp's deviation from orthodoxy and arguable that he does so in the above excerpt. Alfred Marshall was himself critical of the over-reliance on and misuse of static analysis. At the time Kapp's Social Costs of Private Enterprise was published in 1950, Institutionalist and Keynesian economists where influential both academically and in policy. Kapp's notion of cost-shifting was adopted from John Maurice Clark, who considered himself "enough of an 'institutionalist' (whatever that may mean) to have more than a lurking distrust of formulas and equations. But not enough of an institutionalist to ignore their importance..." Clark was the son of John Bates Clark, one of the pioneers of the "orthodox" marginal productivity theory.

In the years since Clark and Kapp were writing the lurking distrust has dissipated and the orthodoxy has become more rigid (in the name of "rigor"). Formerly, Robert Prasch has pointed out, the "divergence between the firm's and society's perspectives on the cost of labor was once widely understood and discussed in the economics literature." Today, however, "economists have simply dropped the concept of labor's social cost." Under idealized assumptions of perfect information, completely defined property rights and costless transactions "cost-shifting without compensation can not readily occur." In short, Kapp's caricature of the orthodoxy has become a reality.

The collective-bargaining implications of the social cost of labor are profound and far reaching. If only the wages, benefits and working conditions of currently-employed workers are on the bargaining table, then social costs and cost-shifting are expressly excluded. On the other hand, bargaining with a single employer over social cost shifting threatens to undermine that employer's competitiveness. This would appear to raise the necessity for some form of sectoral bargaining that addresses environmental and social justice issues.

Breaking: Milton Friedman Wins Debate!

"Don't know much about history." -- Sam Cooke 

"Milton Friedman won the debate, and John Kenneth Galbraith lost." -- Nick Rowe

Actually the military-industrial complex won the "debate" in 1950 but had to keep it secret. Friedman was just some guy with a broom sweeping up the droppings after the parade.

Members Only Unionism

While doing some background research on non-majority collective bargaining for the labour studies class I teach I discovered there was a conference just yesterday in Washington at which Catherine Fisk presented,  "In Defense of Members-Only Unionism." In Canada, Roy Adams has written about collective bargaining as a human right, outside of the administrative union certification model. The canonical source in the U.S. is Charles Morris's The Blue Eagle at Work: Reclaiming Democratic Rights in the American Workplace.  John True offered the following useful summary in his review of Morris's book:

The fundamental principle animating the Wagner Act is that working people are supposed to be able to act in democratic concert, to get together, to talk with each other about the issues that concern them on the job, and to engage their employers in some constructive pushing and shoving about those issues. This right given to workers to combine, so the theory goes, will produce fairness and justice in the workplace by counteracting the innate strength of capital. Workers' institutions were supposed to prosper, to integrate themselves into the political fabric of the nation and to provide a counterweight in the market and in political discourse that was to inure to the benefit of society as a whole. 

The NLRA also contemplates that employers -- though they have a First Amendment-based right to push and shove back against these workers' institutions -- are to permit, indeed respect, their workers' collective activities. Not only that, they are affirmatively obliged to respond in good faith to -- to bargain over -- their employees' proposals. The Wagner Act, modeled explicitly on the concepts underlying American representative democracy itself, requires nothing less than that workers be given the basic right to participate in discussions about the terms and conditions of their employment. 

Why, then, does this almost never happen anymore? Why does the American labor movement-with union membership plunging below ten percent of the private-sector workforce-seem more and more "flat on its back" every time we look at it? Union leaders, members, supporters and activists ask themselves these questions incessantly, of course, and Professor Charles J. Morris is one of several eminent labor scholars among those doing so. His latest inquiry, The Blue Eagle At Work: Reclaiming Democratic Rights in the American Workplace, slaps down a dramatic and provocative challenge in the middle of this discourse. Charting a new approach (that is not so new), he proposes that democratic rights have atrophied in the workplace because unions have fallen into self-defeating, addictive reliance on elections conducted by the NLRB as the way to organize workers. They have forgotten the remarkably broad promise set out in Section 7 of the Act: that all employees -- not just those who work for an employer where a union has won an election -- have the right "to bargain collectively through representatives of their own choosing." 

Ignoring the elegant simplicity of this proposition, unions have swallowed the intoxicating potion contained in the election/certification procedures provided for in Section 9 of the Act. Under its influence, they have opted to confront employers only when and if they become the certified or recognized representatives of a majority of those in "appropriate" bargaining units. Though this "all or nothing" approach led the union movement to spectacular successes in its early days, it has resulted more recently in increasingly futile attempts to win the hearts and minds of workers in situations where the odds are impossibly long. The annals of the union movement in the late twentieth century are full of bitter stories of struggle and defeat in National Labor Relations Board (NLRB)-supervised, set-piece battles in which employers hold all or most of the power.

In other news: Earth Still Global!

2014 Hottest Year on Record

Profit Sharing on the Plantation and the Social Cost of Slavery

Following up on my previous post, the thought occurred to me:  what if someone proposed that instead of abolishing slavery (which would be detrimental to GDP growth), a system of profit-sharing should be introduced to enable the slaves to buy their freedom? The profit-sharing plan would be optimized by gradually ramping up the profit share over the span of, say, fifty years, given a discount rate of "x" determined by the projected GDP growth rate.

Then some Stanford researchers come along and point out that the social cost of slavery is actually six times as high as estimated by the standard models and that a much more stringent slavery mitigation policy is warranted.

Would it be too moralistic of me to point out that the quantitative casuistry is obscene? John Brown's body lies a mouldering in the grave.

Circular Social Cost of Carbon Reference

Frances Moore and Delavane Diaz's nature climate change letter, "Temperature impacts on economic growth warrant stringent mitigation policy" rightly points to the static nature of the standard assumptions of climate change Integrated Assessment Models, which capture only the transient effects of climate change on the economy. They point out that such assumptions leave total factor productivity (TFP) unchanged and thus ignore cumulative impacts on GDP growth rates.

They then go on to tweak the model to produce alternative estimates. They probably had to do this kind of thing to get any attention to their critique of the standard model. But the problem with the model is more fundamental than can be fixed by inputting better assumptions. The model is a colossal tinker-toy of indices, some of which are aggregates of disparate outputs expressed in money units and others of which are formulas that refer to the results of formulas that depend on the original formula's value: circular references.

Deeply embedded within the mare's nest of unacknowledged, unrecognized assumptions is an 86-year old "simplification" introduced to enable the calculation of otherwise indeterminate returns to factors of production. Eighty-six years is a long, long time in simplification shelf-lives but I suppose that if you don't know which direction your destination is, it doesn't matter how long it takes to get there. This missing link is "the economic effects of variations of hours of labour."

If we assume that there is some average length of the working day (week or year) that maximizes output, then variation above or below that optimum will reduce total output. Technological progress and changes in climate are also likely to effect the optimum length. Furthermore, changes in income effect preferences for leisure and consequently labour supply. It doesn't help that this indeterminate labour supply is both the denominator and an input into the numerator of the ratio that is supposed to determine the rate at which the ratio's numerator grows... Not to mention the social cost of labour.

It's a Rube Goldberg contraption with feedback loops.

Update: The "point" is that there is no basis for assuming that the given hours of labor maximize output. There is no basis for assuming  that the hours that maximize labor output would maximize utility of the workers. There is no basis for assuming that the hours that maximize output today would maximize output 50 years in the future or that the hours that maximize worker utility would maximize utility 50 years in the future. There are plenty of reasons for assuming that the answer to each of those questions is "indeterminate." In short, the interactions here are "so ramifying, involved and conjectural" as to render omniscience a prerequisite for making quantitative projections.

"F" is for Formula; "M" is for Magic

Formula n. 1. fixed form of words as definition; statement prescribed for use on ceremonial occasion; rule unintelligently followed; infant's food made up from recipe.

In Magic, Science and Religion, anthropologist Bronisław Malinowski discussed the interplay between the systematic rational knowledge and the magical pseudo-science of the Trobriand Islanders, observing that "even with all their systematic knowledge, methodically applied, they are still at the mercy of powerful and incalculable tides, sudden gales during the monsoon season and unknown reefs."

It is in dealing with these formidable uncertainties that magic comes into play. "Science," Malinowski explained, "is founded on the conviction that experience, effort, and reason are valid; magic on the belief that hope cannot fail nor desire deceive." In contrast to the reliance of science on "observation, fixed by reason," the domain of magical pseudo-science is "hedged round by observances, mysteries and taboos."

The "mainstream/heterodox" distinction in economics is otiose (and odious). The demarcation that matters is between observation of economic regularities, which is limited, and the proliferation and persistence of economic pseudo-science in the face of "powerful and incalculable tides" and "sudden gales." "Theorists have a natural urge toward precise and determinate theorems or laws," John Maurice Clark wrote 65 years ago. "But..." he continued:

"...the facts of economic life show little consideration for this urge, and remain, to a large extent, perversely and persistently indeterminate. This is the skeleton in the closet of economic theory. What is a proper attitude for a would-be science, forced to deal with such refractory material? One thing economists do is to construct hypothetical simplified 'models.' These can be used in two ways: as an approach to reality or as an escape from it. My problem is how to promote the first kind of use and set up safeguards against the second." 

Would Clark's attitude toward this "skeleton in the closet of economic theory" make him "heterodox"? How has the bureaucratically-imposed conventional cost-benefit analysis and the Kaldor-Hicks criterion that justifies it achieved its canonical status? How about the notion of shirking in New Keynesian models of sticky wages? The ritual invocation of the lump-of-labor fallacy claim? Ceteris paribus? General equilibrium?

The urge for formulas in economic analysis is strong, especially from official "deciders" who yearn for guidelines, criteria or rules-of-thumb that will immunize their decisions from criticism for favoritism, arbitrariness or bias (all the more convenient if favoritism and bias are non-transparently built-in to the formula!). In an article also published in 1950, Paul Samuelson wrote:

"Improved measurement of national income has been one of the outstanding features of recent progress in economics. But the theoretical interpretation of such aggregate data has been sadly neglected, so that we hardly know how to define real income even in simple cases where statistical data are perfect and where problems of capital formation and government expenditure do not arise."

In his article, Samuelson warned that "the last word on the subject will not be uttered for a long time." Not that anyone would still be listening when that proverbial "last word" (or even the next word) was uttered. Hedged in by observances of bureaucratic standards and procedures, mysteries of discounted net present value and taboos on interpersonal comparisons of utilities, the aggregate data of national income came to ritually stand in for its own interpretation.

Usage and custom have shifted the burden of proof from the believers in economic magic to the skeptics. Disproving the magic is impossible. As Malinowski explained:

First of all, magic is surrounded by strict conditions: exact remembrance of a spell, unimpeachable performance of the rite, unswerving adhesion to the taboos and observances which shackle the magician. If any one of these is neglected, failure of magic follows. And then, even if magic be done in the most perfect manner, its effects can be equally well undone: for against every magic there can be also counter-magic [ceteris paribus]. 

Report of Panel of Consultants on Secondary or Indirect Benefits of Water-Use Projects, Part III

Introduction to Part III of the panel of consultants' report:

Part III of the consultants' report, "Some principles, and some of their consequences," runs to nearly 10,000 words and, in effect, "buries the lede." Section eleven, the last section, states in its underlined, topic sentence:

"Qualitative factors would become increasingly important in proportion as computations of quantitative secondary benefits might be scaled down in the ways here suggested and might become dominantly important."

Indeed, the gist of the entire report may be summed up as that there is only a limited case for quantitative estimates. I have taken the liberty of editing the following "executive summary" of the panel's main argument:

We believe in the importance of secondary benefits, but find them so ramifying, involved and conjectural that the attempt to compute them as a national total, in dollar terms, by the methods of the Manual or any other methods that appear at present available, cannot properly be regarded as "measurement," though computations of pertinent items may be useful as guides to judgment in rating the importance of these benefits. 

Accordingly, we are able to "set forth a recommended basis for the evaluation of secondary benefits and costs" as directed in instruction (2) only on the assumption that "evaluation" can include, for important parts of these benefits and costs, ratings by the exercise of judgment which are not precise enough to justify regarding them as quantitative measurement.

This being the nature of our judgment, we are hardly in a position to recommend an alternative formula purporting to measure these secondary benefits. The inescapable difficulty, even for the quantitative differences, is that, for the ramifying secondary effects, accurate and definitive answers require omniscience. 

Democracy has to rely on technicians in matters inscrutable to the non-specialist, but preferably where the specialist is following a well-authenticated technique. In this case, the disagreements among the specialists are evidence that they do not possess such an authenticated technique, for the results of which a representative government can safely take their word. It needs to be able to tell what they are doing, and what their procedures mean. 

As to qualitative and intangible benefits and costs, our study has led us to look toward diminished reliance on quantitative computation and toward attaching greater relative importance to qualitative effects of the alterations in distribution of population, types of community, etc. We therefore suggest that these matters are worth increased attention and study, including sociological aspects. These are, of course, matters that can be described and appraised only by judgment.

By contrast, the thrust of Budget Circular A-47 was to mandate a quantitative formula that effectively excluded consideration of those "ramifying, involved and conjectural" secondary benefits "[u]ntil standards and procedures for measuring secondary benefits are approved by the Bureau of the Budget." Until when? Until never! The panel of consultants had concluded that evaluation of secondary benefits could not be "precise enough to justify regarding them as quantitative measurement."

Below is a summary of the eleven principles presented in Part III of the consultants report. The Scribd file that follows contains the full text of Part III:

1. Demand for the product is a prerequisite condition. 

2. Quantitative or tangible benefits constitute total differences in national real income, with and without the project. 

3. Increased national real income however caused, can be embodied in three and only three forms. 

4. For an increase of national real income, both increased supply and increased demand are necessary, and full national computations of the two should not be added.  

5. In a national with-and-without comparison, dollar-costs are important only insofar as they usefully represent the foregoing of primary and saleable products (for which their creator could collect a price) from alternative resource-uses that would otherwise have been made. 

6. The "stemming-from" hypothesis, crediting production of raw products with acting as a "trigger" and causing the chain of subsequent processes, has limited validity which does not warrant carrying the computation through to the ultimate consumer in all cases. 

7. One important effect of a successful project may be to raise the marginal productivity of resources in the economy or avoid a reduction but we know no present means of reducing this to calculation, beyond what is already represented in primary benefits. 

8. Allowance for calling unused resources into use needs different treatment for original investment and for subsequent operation. 

9. Local gains need not all be regarded as mere transfers, cancelling out from the national point of view. 

10. Determination of the proper scope of projects should be governed by the principle of equal productivities of marginal increments. 

11. Qualitative factors would become increasingly important in proportion as computations of quantitative secondary benefits might be scaled down in the ways here suggested and might become dominantly important.

Part III

Below are links to Parts I and II of the report:

Part IA. Instructions of Michael W. Straus, Commissioner, Bureau of Reclamation, to Panel of Consultants on Secondary or Indirect Benefits

Part IB. Summary Response to the Commissioner's Instructions

Part IIA. Conclusions and Recommendations: Introduction

Part IIB Conclusions and Recommendations: Summary of Principal Recommendations

Dynamic Scouring

Mark Thoma and Edward Kleinbard both have op-eds about Republican proposals for "dynamic scoring" of tax cut legislation. It would be helpful to point out that dynamic scoring is a euphemism for "secondary and indirect benefits" -- particularly those arising from what is known as the Keynesian multiplier.

Sandwichman has been documenting the controversy over secondary and indirect benefits in the early 1950s that eventually resulted in their virtual exclusion from standard cost-benefit analysis, as per Bureau of the Budget Circular A-47. Implementing dynamic scoring for tax cuts would, in effect, declare "multipliers for me but no multiplier for thee."

As the panel of consultant's report from 1952 outlined in excruciating detail, there are limits to the usefulness and transparency of incorporating secondary and indirect benefits in a quantitative cost benefit analysis. There are also huge pitfalls in disregarding these difficult or impossible to quantify outcomes. Familiarity with the panel's discussion could inform deliberation over the dynamic scoring proposal.

I have so far posted Parts I and II of the report. I have scanned in and proof read Part III but its considerable length poses some formatting challenges for posting on the blog.

Part IA. Instructions of Michael W. Straus, Commissioner, Bureau of Reclamation, to Panel of Consultants on Secondary or Indirect Benefits

Part IB. Summary Response to the Commissioner's Instructions

Part IIA. Conclusions and Recommendations: Introduction

Part IIB Conclusions and Recommendations: Summary of Principal Recommendations

Part III. Several Principles, and Some of Their Consequences

About that memo, Professor Summers...

Let this be the year when we put a proper price on carbon is the theme and headline of an op-ed by Lawrence Summers at the Financial Times. There is indeed a compelling case for a carbon tax, as Summers argues. The case could be even more compelling were it not for the persistence of an "impeccable economic logic" that never was.

That  "impeccable logic" made a cameo appearance in an infamous World Bank memo that went out over Summers's signature some 23 years ago: "the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable." Take it as given that Summers did not write the memo, that the infamous passage was taken out of context and that the intention of the author, Lant Pritchett, was ironic and not making a serious proposal.

And yet... Satire has an object. The full memo is a chapter-by-chapter commentary on the outline for the 1992 World Bank publication, "Global Economic Prospects and the Developing Countries." Chapter 3 of the outline was presumably the target of the infamous excerpt. Note that chapter 3 in the final version is titled "Interlinkages, human capital and export competitiveness" and has nothing to say about pollution. In fact, the entire document has nothing to say about pollution.

Where is the rest of the infamous memo? Pages one and five of the original memo are posted on the internet but searching phrases from those pages turns up nothing. Daniel Hausman and Michael McPherson used the provocative toxic waste passage as exhibit "A" in their Economic Analysis, Moral Philosophy and Public Policy. But they are silent on the broader context of the full memo and the Global Economic Prospects outline.

Hausman and McPherson do, however, delve into the matter of cost-benefit analysis, which they conclude "is not a scientifically valid or value-neutral procedure for social decision making." This is sort of the argument I have been making here but not entirely. My argument, though, is that the "economic logic" is extraordinarily "peccable" -- its logical fallacy concealed behind an impenetrable veil of incongruity.

Whether conventional cost-benefit analysis is merely "not scientifically valid or value neutral" or is downright incongruous and "unacceptable nonsense," the Interagency Working Group on Social Cost of Carbon relied on it in 2010 to estimate the social cost of carbon to be $21 per ton of CO2 (in 2007 dollars). If Summers is serious about "letting this be the year when we put a proper price on carbon," perhaps he could nudge things along a bit by showing that the "impeccable economic logic" of not doing so is an abysmal sham and a swindle.