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September 26, 2015

Latest Posts from Economist's View

Posted: 15 Sep 2015 12:06 AM PDT
Posted: 14 Sep 2015 10:44 AM PDT
Brad DeLong:
Thoughts on Dynamic Scoring: Last Thursday two of the smartest participants at last Friday's Brookings Panel on Economic Activity conference--Martin Feldstein and Glenn Hubbard--claimed marvelous things from the enactment of JEB!'s proposed tax cuts and his regulatory reform program.
They claimed it would boost economic growth over the next ten years by 0.5%/year (for the tax cuts) plus an additional 0.3%/year (for the regulatory reforms).
That would ... mean that over the next ten years faster growth would produce an average of $210 billion a year of additional revenue to offset more than half of the $340 billion a year "static" revenue lost from the tax cuts... And that would mean that in the tenth year--fiscal 2027--the $400 billion "static" cost of the tax cuts in that year would be outweighed by a $420 billion faster-growth revenue gain.
The problem is that if I were doing the numbers I would reverse the sign.
  • I would say that, on net, deregulatory programs have been very costly to the U.S. economy in unpredictable ways--witness the subprime boom and the financial crisis.
  • I would say that the incentive effects would tend to push up growth by only 0.1%/year, and that would be more than offset by a drag on the economy that would vary depending on how the tax cuts were financed.
    • If they were financed by issuing debt, I would ballpark the drag at -0.2%/year.
    • If they were financed by cutting public investment, I would ballpark the drag at -0.4%/year.
    • If they were financed by cutting government programs, there might be a small boost to growth--0.1%/year--but any societal welfare benefit-cost calculation would conclude that the growth gain was not worth the cost.
And there is substantial evidence that I am right:
  • You cannot find a boost to potential output growth flowing from either the Reagan or the Bush tax cuts.
  • You cannot find a drag on growth from the Obama tax increases.
  • You can find an effect of the Clinton tax increases--but it is that, thereafter, growth was faster, because the reduction in the deficit powered an investment-led recovery.
Over the past thirty years, the agencies that do the government's accounting have tried to reduce their vulnerability to the imposition of a rosy scenario by their political masters by claiming as a matter of principle that they do not calculate positive growth impacts of policies. This is clearly the wrong thing to do--policies do affect growth rates. But is overestimating growth effects in a way that pleases one's political masters a less-wrong thing? ...
The problem is that when I look at the example of "dynamic scoring" that was on the table at Brookings today--the 0.8%/year growth boost that I really think should be a -0.1%/year growth drag...
Yet the near-consensus of the meeting was that dynamic scoring--done properly--was a thing that estimating agencies like JCT and CBO (and Treasury OTA) should do.
If there were to be a day less favorable to such a consensus conclusion, I do not know what that day would have looked like...
Posted: 14 Sep 2015 10:05 AM PDT
Not sure what to say about this:
You're not irrational, you're just quantum probabilistic, EurekAlert!: The next time someone accuses you of making an irrational decision, just explain that you're obeying the laws of quantum physics. ...
According to Zheng Joyce Wang and others who try to model our decision-making processes mathematically, the equations and axioms that most closely match human behavior may be ones that are rooted in quantum physics.
"We have accumulated so many paradoxical findings in the field of cognition, and especially in decision-making," said Wang, who is an associate professor of communication and director of the Communication and Psychophysiology Lab at The Ohio State University.
"Whenever something comes up that isn't consistent with classical theories, we often label it as 'irrational.' But from the perspective of quantum cognition, some findings aren't irrational anymore. They're consistent with quantum theory--and with how people really behave."
In two new review papers in academic journals, Wang and her colleagues spell out their new theoretical approach to psychology. One paper appears in Current Directions in Psychological Science, and the other in Trends in Cognitive Sciences.
Their work suggests that thinking in a quantum-like way--essentially not following a conventional approach based on classical probability theory--enables humans to make important decisions in the face of uncertainty, and lets us confront complex questions despite our limited mental resources.
When researchers try to study human behavior using only classical mathematical models of rationality, some aspects of human behavior do not compute. From the classical point of view, those behaviors seem irrational, Wang explained.
For instance, scientists have long known that the order in which questions are asked on a survey can change how people respond--an effect previously thought to be due to vaguely labeled effects, such as "carry-over effects" and "anchoring and adjustment," or noise in the data. Survey organizations normally change the order of questions between respondents, hoping to cancel out this effect. But in the Proceedings of the National Academy of Sciences last year, Wang and collaborators demonstrated that the effect can be precisely predicted and explained by a quantum-like aspect of people's behavior. ...
With the quantum approach, Wang and her colleagues argued, many different and complex aspects of behavior can be explained with the same limited set of axioms. The same quantum model that explains how question order changes people's survey answers also explains violations of rationality in the prisoner's dilemma paradigm, an effect in which people cooperate even when it's in their best interest not to do so.
"The prisoner's dilemma and question order are two completely different effects in classical psychology, but they both can be explained by the same quantum model," Wang said. "The same quantum model has been used to explain many other seemingly unrelated, puzzling findings in psychology. That's elegant."

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