Posted 8:41 AM by Robert

The Gas Man, Again

When pondering Al Gore's "An Inconvenient Truth" it is perhaps worth remembering that this is not the first time the former vice president has waged a campaign to impose gigantic costs in the service of correcting a problem of dubious reality (that in fact turned out not to exist nearly to the extent he insisted) and was not substantially ameliorated by anything he proposed.

The reader will recall that Mr. Gore headed the Clinton administration's campaign against the "Y2K Bug," sometimes known as the "millennium bug." There are striking parallels between Mr. Gore's two crusades. As with potential major human-caused global warming, the larger number of Y2K Bug "experts" were predicting that the bug was a huge problem that would have cataclysmic consequences if not aggressively and expensively corrected. Indeed, in 1999 The National Journal reported:

[A] survey of industry and government executives and programmers concerning potential fallout from the millennium bug, showing that 70 percent anticipated a negative effect on the economy, with 10 percent of respondents not ruling out the possibility of economic depression and civil insurrection.

Things didn't quite turn out that way on January 1, 2000. Not even countries (including Russia and other countries of the former Soviet Union, Romania and other countries of the old Soviet bloc, Brazil and South Africa) that had made few efforts to ward off the Y2K Bug suffered more than a few glitches:

[T]he Y2K bug had threatened to set off an epidemic of computer failures affecting everything from lights and water to aviation and nuclear power as the machines failed to recognize the new millennial date.

But as the headline in the Singapore Straits Times reported, "It was all bug and no bite." Governments all over the globe have reported few glitches and no disasters caused by computers meeting up with the year 2000. ….

Romania ... reported even fewer incidents than usual in the country's ill-equipped computer industry. ….Brazil's financial markets, the biggest in Latin America, passed Y2K tests with flying colors … In the meantime, planes are flying, toilets are flushing, phones are ringing and lights are shining.

The Y2K bug did not cripple a single power plant. Even the nuclear generators in the former Soviet Union kept running hours into the new year. …. Key oil production facilities were also unaffected, and there were no reports of widespread gasoline or food hoarding ....

"Throughout the world I think you'll find that almost a trillion dollars was spent on Y2K work. ... No one has argued credibly that the Y2K bug -- the legacy of programming in which years were expressed with just two digits -- was a scam .... "I was monitoring some radio stations yesterday. People were calling in and saying, `I didn't do anything to my computer, and it's working,' " said Faizel Dawjee, a South African government spokesman.

The Y2K Bug was not a "scam" - and the possibility of serious adverse consequences of global warming is not a "scam." There were some glitches: A few satellites went out, Al Gore had problems on his campaign web site computer because it wasn't DeBugged properly, that kind of thing. But the world of economic decisions does not consist of binary decisions between "scams" and the need to spend trillions of dollars! Was it worth spending a Trillion Dollars to ward off the Y2K Bug - even though countries that did not make systematic efforts suffered few consequences, and no serious consequences at all? I very much doubt it. It is not hard to think of very good uses of One Trillion Dollars, far better uses than remorsely chasing a software bug that did little damage even where nothing was done to fix it. Of course, a Trillion Dollars would be a small down payment (peanuts, really) in comparision with the costs that An Inconvenient Truth implicitly or explicitily demands be born by the world's economy ... much of it by the world's poorest people.

And the costs of the excessive Y2K DeBugging programs spearheaded by Mr. Gore were by no means limited to excessive spending on corrections. Y2K DeBugging expenditures during the Clinton-Gore administration were probably a major cause of the internet bubble of the late Clintonian Era:

To see what other veteran investors thought about the lessons learned -- or unlearned -- from the [1990's internet] bubble bursting, I checked with Ray Rothrock, managing partner of Venrock Associates. ... Venrock, founded with money from the Rockefeller family fortune, has been evaluating young tech companies for three decades from its offices on Sand Hill Road. Its past investments have included tech titans such as Apple Computer (AAPL) and Intel Corp. (INTC).

Rothrock believes that the bubble "was a perfect storm on two fronts -- Y2K and the Internet." Corporate zealousness to prepare for a Y2K disaster "inflated IT budgets well beyond normal growth rates," Rothrock said.

The graph of U.S. corporate IT spending growth from 1960 to 2005 shows a pretty steady line, except for a spike in advance of Y2K, Rothrock explained.

That caused investors to overestimate future tech spending and see "an infinite demand for tech products" that was an illusion, Rothrock said.

There is something about Mr. Gore's speech patterns, intonations, body movements and thought processes that suggests, even insists, that he is actually a character from some old Firesign Theater album. One such album, Everything You Know Is Wrong, posited the arrival of conquering Gas Men of Jupiter, who employed reasoning and intonation strikingly similar to those of Al Gore in An Inconvenient_Truth. Humanlings and earthloids were apprised by the gassy invaders that for too long we had been the "cruel masters" of our planet, and therefore (in logic strikingly similar to that undergirding the Kyoto Accord) now everyone must learn to play the piano! In many ways An Inconvenient Truth is in spirit a retelling of the Firesign classic, sometimes veering uncomfortably close to what might be termed spiritual plagiarism. But when contemplating the similarities between the thought processes of Mr. Gore and those of the alien invaders posited by the stoned-out Firesign zanies, this is not the most important point! As the former vice president wages his campaign to impose gigantic costs on mankind in the service of correcting a problem that may not exist and (if it does exist) would almost certainly not be substantially ameliorated by anything now proposed by him, it is more interesting to remember that this is not the first time he's done that kind of thing. And it is also worth remembering that Mr. Gore had lots of opportunistic Republicans and putative conservatives egging him on in his Y2K excesses.

Al Gore appears to be a seeker of ersatz political myths posing as quasi-religious truths, and he's always looking for others of like mindset. That mindset was a product of the benighted 1970's, which also produced the Firesign Theater classic now emulated in spirit so faithfully by the former vice president's new movie. As that classic points out: There's a seeker born every minute!

Posted 10:19 PM by Robert

A Good And Convenient Answer To A Recurring Question

From time to time one sees posed a question along these lines:

Has any work of art substantially changed history?

What normally follows is a series of answers and observations along the lines of "well, I don't know about changing history, but such and such piece of art changed my life" or "I don't know of any particular work of art that changed history, but so-and-so was an artist who had a personal effect on histoy." But these are not what the question asks.

There is a good example of a work of art that probably profoundly changed both American and world history, and whose effects continue to be felt today: Uncle Tom's Cabin by Harriet Beecher Stowe.

It was widely believed in 1860, and is still widely believed by American historians today, that Uncle Tom's Cabin was a highly material cause of the election of Abraham Lincoln to the presidency of the United States. Of course, there is never a single cause of such an event. But Ms. Stowe's book was and is believed to be an important cause.

The election of Mr. Lincoln, of course, directly precipitated the American Civil War, the ultimate end of American slavery, and the consolidation of the American federal republic into a vastly more unified state than the semistable near-confederacy that prevailed antebellum.

Posted 9:48 AM by Robert

Bad Economist? IV

As always, I enjoyed Arnold Kling's TCS article/review of David Warsh's fine new book Knowledge and the Wealth of Nations. And I also enjoyed the book itself - although I have some reservations with regard to the basic academic works of both Paul Krugman and (to a lesser extent) Paul Romer which are celebrated by Mr. Warsh. My reservations are for the most part not original, but they are serious, especially with respect to Herr Doktorprofessor Krugman's contribution. That's why I was a little surprised that Arnold's review does not mention, for example, Don Davis's very serious criticisms of Krugman's original papers, as I discussed here (for example). And although Professor Davis is now Chair of the Columbia economics department and was a professor of economics at Harvard at the time he issued his original criticisms, he does not even get a mention in Warsh's index!

It is true that Krugman to some extent recovered from the Davis criticism, but at the expense of having to make a great many concessions in the sweep of his original conclusions while concocting his (in my opinion) pretentious "New Geography." Krugman has admitted that his approach has a lot more to say about inter-regional trade issues than it has to say about true international trade. I discuss more of these reservations and developments here and here. I also mention that, in private correspondence with me, one economic Nobelist who knows something about international finance has rather openly disparaged Krugman's work. So, if Herr Doktorprofessor is correct to claim in his own review of the Warsh book (a review that Arnold correctly points out can barely conceal Herr Doktorprofessor's resentment that Romer gets top billing in the book), that "an intellectual revolution, largely invisible to the general public ... swept through the economics profession ...[in which] I was a prominent player," it would appear that not all sovereigns have yet recognized the new "revolutionary" government.

Of course, no one has an obligation to share any of my reservations about Krugman or Romer, but I think there is one aspect of their works that must be addressed in any meaningful evaluation of them: What significant predictions and policies flow from them. Consider Krugman's trade theories, for example. It is obvious that Ricardo's comparative advantage theory (supposedly displaced by the Krugmanian "revolution) has had tremendous predictive and policy consequences over the past two centuries - it is not necessary to list any. But can any reader provide one single example of an application of Krugman's theory to the creation of a policy that has clearly resulted in an increase in general wealth? Or of anyone's wealth (besides Krugman and his academic acolytes)? I can't. But every single day I notice many things in my life that were manufactured in countries with big comparative advantages to the US in doing so!

Similarly, what about real predictions - and I don't mean the silly game of testing Krugman's theory against "traditional" theories by doing comparative country analysis (as noted above, even that doesn't do Krugman much good - by his own admission). I mean predictions that help the society or someone make real money, or help some policy maker take a significant decision. Is the reader aware of a single currency trader, commodities trader or corporate CEO, COO or CSO or any other such professional who uses Krugman's theories to make predictions or plans in this period of intense globalization in which trade plays an ever larger role?

Similarly, is the reader aware of a single example of Krugman's work influencing anything relating to the EU Constitution debate - or the EU at all? Does the reader know of any politician who was alarmed or comforted by something from Krugman's work in connection with the greater integration of Europe? I'm not - and I was there when the French were deciding to vote it down! The arguments then and there were all about comparative advantage and input costs (Polish plumbers) within the EU region. Yet it is exactly in the zone of "regional" trade that Herr Doktorprofessor claims his insights have their greatest significance.

What about the ongoing Doha Round? For that matter, does any reader know of any significant WTO policy or concern or dispute that has been clearly influenced by the distinct trade economics insights of Herr Doktorprofessor Paul Von Krugman? I don't.

More generally: What example, in the real world, is a single meaningful application of Paul Krugman's trade insights anywhere outside of academe and academic journals? I am aware of nothing.

At least to my understanding, there is a lot more to - and remaining of - Paul Romer's work than Paul Krugman's work. That may be why Warsh concentrates on Romer. But Romer's work is not without its serious problems. Robert Solow - who is largely responsible for the very existence of the field of growth economics and won his own Nobel Prize for that work - has expressed serious reservations about Romer's contributions to "endogenous growth." Solow has made the uncontroverted point that it is trivial to make growth "endogenous" to a growth model, and that the trick is to make it endogenous in a way that is meaningful - which is what Romer and his people may (or may not) have done. I personally have reservations about Romer's assumptions concerning the nature of intellectual property, but such of my thoughts are not at issue here. Solow follows up his observation with more serious concerns, as the Economist's review of the Warsh book points out:

Mr Romer's theory, by contrast, calls for a more worldly response: educate people, subsidise their research, import ideas from abroad, carefully gauge the protection offered to intellectual property. But did policymakers need Mr Romer's model to reveal the importance of such things? Mr Solow has expressed doubts. Despite the caricature, he did not intend in his 1956 model to deny that innovation is often dearly bought and profit-driven. The question is whether anything useful can be said about that process at the level of the economy as a whole. That question has yet to be answered definitively. In particular, Mr Solow worries that some of the “more powerful conclusions” of the new growth theory are “unearned”, flowing as they do from powerful assumptions.

Professor Romer has not absented himself from all policy involvement by any means - as noted by Mr. Warsh. But in my opinion, Romer's involvement in the Microsoft case - and the case itself - was and remains a disaster. More generally, I am again aware of no meaningful policies or predictions from Professor Romer's work that have resulted in a clear gain for the economy or for any real-world players in it. Mr. Warsh seems to provide none. Can any reader help?

I very much want to like Paul Romer and his work (I confess that my sentiments towards Herr Doktorprofessor Paul Von Krugman are more complex, but the reader already knew that). Heck, I used to be a mathematician, and I love a good functional analysis/game theoretic riff as much as the next guy. So I would be very much in the debt of any reader who could help clarify my thinking with a few choice examples or rebuttals of my concerns.

My e-mail address appears above. Operators are standing by!

In truth, it appears that Arnold is trying extra hard to be nice in his review - which is not surprising since Arnold Kling is generally an extra-nice sort of person. Since he is being nice, he would probably have highlighted any clear benefit or application of these theories. That he didn't mention any such benefit or application speaks volumes about his likely true sentiments. But there is room for ambiguity in comments like this:

I have to separate my views of Krugman the New York Times columnist (execrable) with my views of Krugman the research economist (original and significant).

The economic models on which both of Professors Romer and Krugman have made their reputations employ rather involved (but not cutting-edge) mathematics. Such models are hugely hard to construe intuitively - one needs to first crank through the mathematical calculations they disgorge. In contrast, people like, say, Becker, supply mathematically rigorous arguments to back up their intuitive arguments, but the intuitive arguments make perfect sense before the mathematics is trotted out. That's not true of models of the Romer/Krugman type. That makes the fine structure of their mathematics much more central to the whole process - and makes it very easy for the mathematics to obscure intellectually weak (that is, overly powerful!) assumptions that support the model.

My guess is that models of the Romer/Krugman type have lots of mathematical eccentricities and mathematically obscured weaknesses. Davis' assault on Krugman's work is one example. It's interesting that Warsh focuses on Krugman's and Romer's efforts to address "transversality" as an effort to establish that their models are in a particular manner "stable." Ironically, Davis showed that Krugman's model was highly unstable in a totally different manner! That is, Davis showed that Krugman's initial results depended on what Krugman presented as a faux innocuous simplifying assumption - an assumption that was both seriously wrong and anything but innocuous.

The Krugman/Romer generation of economists is not the first to employ fancy mathematics. It looks like some people think that even the fine structure of now-venerable general equilibrium is wrong - or at least not economically meaningful. Observations available here and here and here argue that some of the basic papers in general equilibrium theory have also obscured the weaknesses of the theory with a cloud of mathematics, as in this summary:

[O]ur findings show that the existence results [of general equilibrium theory] are mathematical theorems devoid of any economic sense. As a consequence, this paper implies a direct criticism of dominant economic theory from two points of view. The first one being the theoretical soundness and rigor of neoclassical theory. The second criticism is more general, as it concerns the relationship between mathematics and economic theory.

I do not endorse such criticisms of general equilibrium theory, nor do I fully agree with the significance that these critic assign to it. General equilibrium theory is an odd part of economics. Often praised as "the most important this or that of 20th century economics...," it often just sits there. Sometimes it seems mostly to form the "foundation" of the Arrow/Debreau reputations. As the critical papers note, nobody seems to have spent a lot of time picking apart even the basic functions that the models use to see how they square with supply and demand requirements.

But what might be a "leave it alone as a sacred cow" attitude may be changing with the dawn of the new hyper-mathematical models of the Romer/Krugman type. Even the willingness to closely examine the mathematical fine structure of general equilibrium as may be such an early effect.

UPDATE (June 2): Don Luskin gets results! In response to Don's link to my post an astute reader provides a clear example of how one can make money with Herr Doktorprofessor's thinking (if not his trade theories):

Dear Robert,

(I need to remain anonymous, but please feel to share with your many readers. And thank you for your work. I've CCed Donald, as I know he'd enjoy this letter to you.)

Paul Krugman and his theories and beliefs have made me money. Seriously. That's because I'm a Paul Krugman contrarian.

I remember a lesson from a finance professor at Wharton. He stated that the most useless person in the world is someone that is right half of the time. Those that are right more often than chance should be watched carefully, and mimicked. And those that are wrong more often than chance should be watched VERY carefully. The person that is consistently wrong will provide you with opportunities to create wealth again and again.

Paul Krugman is such a person.

I have made money by betting the opposite of what Paul thinks, both in legitimate financial markets and "illegal" betting sites. For example, when he became convinced that Dean was the man to win the election, I made money on Kerry winning the primary. When Paul was convinced that Kerry would win the whole election, I bet on Bush. Paul last year said the bubble in the housing market would burst. I knew that I could wait a year, and any bursting would be very slow than very sudden. Paul is convinced that growth is slow and that unemployment is high -- I've been long the market (and very happy) since he turned into a sourpuss.

I conservatively estimate that Paul Krugman has earned me an 'excess return' of about $25,000 on my capital over the past five years, adding about 5% more to my portfolio annually.

The Times Select fee is well worth the price, as it lets me know what Paul thinks. So I can bet the opposite.

Regards,

"Anonymous"

There you have it! Found money!

And, as a bonus, the reader is invited to steal (er, "use") this valuable contra-Krugmanian recipe as a consequence of Professor Romer's finding that the world is a better place because we can all work the same recipe at the same time without getting in each others' way.

So, Grasshopper, may your economies of scale increase without limit .... even in the long run!

Posted 2:42 PM by Robert

The Almost Inconceivable Incompetence Of The New York Times

The rank incompetence that is now standard operating procedure at the New York Times is often obscured by the paper's overwhelming political bias and selectivity as to what it will report. But not always. Case in point: The Times has been running an article for the past two days under the headline Report Shows AIDS Epidemic Slowdown in 2005 by Lawrence K. Altman that contains this amazing passage:

India, for example, is at about the same level as South Africa as the country with the largest number of H.I.V. infections. India has 5.7 million infected people and South Africa 5.5 million, but India's population is far greater. Showing no sign of decline, South Africa has a prevalence rate of about 19 percent of 47 million people. In India, the rate is less than 1 percent of its population of 1.1 billion.

How difficult is it for the Times and Mr. Altman to figure out that 19 percent is about 20 percent, and 20 percent of 47 million is 4.7 million times 2, which is 9.4 million - not anywhere close to the 5.5 million the Times claims? Apparently, very difficult, since the Times has been running the error continuously for two days. Are they ever going to figure it out?

Good grief. And some (foolish) people actually rely on this rag as more than just a tell-tale of what the liberal world is thinking.

Update (June 1): Now three days.

Update (June 3): Still no correction. The reader can do the math to find the number of days this ridiculous error has been up, even though the New York Times is incapable of something so involved.