Correlation and Causality

I just posted this on the blog I write for my 1st year undergrad students in Birmingham, but as I finished up, I realised how appropriate it was to be posted here also, as it shows yet again the kind of dangerous deception put forward by right wingers. In that blog I'm pointing out an article by John B Taylor, who has recently become a staunch proponent of government austerity. He's supported/encouraged by Greg Mankiw, who is another Republican poster child.

For those more averse to all things US, the Republicans are much more right wing than any of the mainstream UK political parties, although their closest equivalent would be the Conservative Party.

John B. Taylor is the man who proposed the Taylor Rule, a rule that monetary policymakers should follow when setting monetary policy. He strongly believes the sole cause of the Financial Crisis was that monetary policy was too loose, according to his model (scroll through old posts on his blog and you'll get a sense of this, I can't find the original article).

In the main linked article though, Taylor takes us through some scatter plots. Now these are interesting scatter plots - they show that government purchases are positively correlated with unemployment, and that investment is negatively correlated. From this, Taylor draws the conclusion that austerity is fine and should be encouraged (since it means lower government purchases) while at the same time investment should be encouraged.

This is all well and good, but a scatter plot shows correlation and not causality. Why does this matter? Well, Taylor proposes austerity (cutting back government purchases drastically) because in his mind it will cause lower unemployment. But what if the causality is the other way? What if high unemployment causes higher government purchases? Now this is hardly controversial really, since if people become unemployed, the government will have more to do: Higher benefits, likely higher other costs too, and naturally we might see some attempt by government to stimulate the economy by increasing purchases (data is 1990 on). If this happens, the purchases happen at the same time as the unemployment exists, hence we get a correlation like in the plot.

So does Taylor's plot really tell us much? Even if the government purchases worked, this plot wouldn't tell us that since it's a dynamic picture - i.e. the reduction in unemployment wouldn't necessarily come instantaneously! So the plot has ignored causality and also the dynamic nature of cause and effect in the macroeconomy.

It's another example of why it's very hard to know who to trust when doing/reading economics. Blogs are great - they contain the opinions of top economists who can comment on real world events as they are happening. But they are not what we call peer reviewed. For a paper to get into a journal, it must be read by a number of referees who decide on its quality. Shoddy data work like that shown in this blog post, would not get past the referees and editors at a top journal.

The conclusion to draw - be careful, and in particular if you do read blogs (and I'd recommend it!) try to read a balanced selection of them. There is little doubt that those on both sides of the debate will try to twist and distort things to suit their prior prejudices - the kind of shoddy data work used in Taylor's blog post is not something confined to the right by any means.

More Dubious Right Wing Matter

The usual person I read has again put forth a number of the assertions that are simply plain wrong and deceptive, as I've pointed out before using genuine, actual data as opposed to unlinked assertions. The main thing is the usual blather about the deficit - apparently, to run a deficit in the largest economic downturn in 80 years is not Christian. That's right: To refuse to pay benefits to unemployed because it will lead to a budget deficit.

Apparently, Christians should be all for the current government's "more targetted" reforms, which actually mean simply having a tighter budget and imposing cuts, making many more mistakes along the way. The current government's more targetting immigration strategy (a cap, often zero for individual firms regardless of their multinational status, on non-EU immigrants) is keeping out Christian missionaries from settling in the UK I found out last weekend on the St Ebbes Church Weekend Away. So that's the Christian response is it? The more botched targetted EMA will likely also cut out plenty of people the previous system would have covered.

I'm not going to object to every cut, but instead I'll say that the Christian should be in favour not of what the Conservatives propose (some cuts here and there but the essential framework unchanged), but nor should the Christian be simply trying to uphold the status quo. Education and health probably should be done differently than we do in the UK, and in doing them differently we can improve efficiency - but not in the way the Conservatives think. I will try and write a little more on this in the coming weeks - right now I have to prepare lectures and meet students.

But the fundamental thing Cranmer always misses out on is that charity will not be up to scratch for the kinds of things he and the Big Society are supposed to provide. Yes you can go on about, and assert without any supporting evidence, how the state has crowded out charitable giving and activity, but the fact is the kinds of things charities do tend to have positive externalities (when providing, like health and relief) and negative externalities (when trying to discourage, like homelessness and prostitution). This means that the private sector outcome of simply relying on charitable giving will be underprovision of healthcare and education amongst other things, and an overprovision of other less desirable things like homelessness. This is basic, simple economics, the kind the right wing tends to ignore - instead they blithely (and again without any supporting evidence) insist that poverty is defined by absence of flat screen TVs and BS like that.

Hence these are the kinds of cuts to government provision that Christians should think a lot more about instead of simply (a) going out and protesting and (b) writing blogs like Cranmer does. Think about how the government provides and whether the government is the best provider but in finding solutions recognising these externalities. This is why economics is so central to thinking about these matters.

Zombie Economics

John Quiggin of Crooked Timber has published a book and more, and often talks about Zombie Economics - bad economic theories that just won't die.

He's been taken to task by David Henderson, a prominent libertarian, recently, over his faith in government - Henderson asking well, isn't that a zombie idea that won't die - that governments can be benevolent? 

The easy retort of course is that equally, the belief that governments are always and everywhere malevolent, which underpins all libertarian dogma thinking on anything, is equally a zombie idea by that logic - both points of view are essentially beliefs and some evidence has to be discarded to support each.

Today marks 100 years since a horrific fire at a factory in New York which killed over 100 workers. In the account linked, the horrifying part is that workers couldn't get to the stairway because the doors were locked by factory owners unwilling to let them take breaks for fear of shirking. The more modern practice of timing call centre workers taking pees is kind of similar. In the years since, as the linked article points out, regulation has increased, but attitudes of owners of workplaces hasn't. Limiting pee time may be a whole lot less deadly than locking the only exits from a workplace with flammable materials, but it exposes the same kind of attitude of managers and owners of businesses - a callous disregard for the humanity of this particular input called labour.

So I challenge the libertarians and right wingers around regarding your blind assertion that markets do best and governments are always evil. How are such work practices not evil also? What makes a government so much more malevolent than this? Of course I'll hear a response about health and safety (though maybe I won't since right wingers don't really like that concept any more), but even if you pass legislation on health and safety, it still needs to be enforced. What is the hope of that when Cabinets are filled with MPs with clear corporate ties and interests, exactly?

More Right-Wing Nonsense

I really should avoid reading what he says as this blog might become simply a responding to the imposter Cranmer blog, which I don't want it to be. But he is the epitome of the right-wing Christian that needs to be countered. Not with left-wing nonsense but with some simple economic facts.

So today Cranmer goes on about Portugal, which looks set to have to accept an EU bailout package. It's one of Cranmer's favourite topics, the Eurozone.

He tends to spout the usual stuff about how because various parts of the PIGS consortium (Portugal, Ireland, Greece, Spain) are in the Eurozone, they can't change interest rates to deal with domestic problems and hence let the currency in their country depreciate (careful non-use of the word devalue there).

As usual, it's the EU that is the bad guy in all of this. It's not, by any means, the same bankers all around the world that acted on the moral hazard created the world over by the "too big to fail" mantra that caused the Portuguese mess. Nope, the EU is entirely to blame. But that's an aside.

Cranmer goes on in usual right-wing style, about economic sovereignty, which apparently Portugal surrendered to the EU. By sovereignty he means ability to make decisions on one's own without interference from outside one's borders.

But what is he proposing instead? Does the UK have sovereignty? Does Japan? Does the US even? Probably the only country that has sovereignty in the world is the one that shuts itself out of all global financial movements, notably North Korea.

Because simple economic relationships like covered and uncovered interest rate parity make it abundantly clear that in a world of free capital markets, interest rates in any country are not determined within that country alone - if that country wishes to maintain a steady exchange rate. In other words, had Portugal still its own currency, then had it decided to cut interest rates (in a sovereignty manner) to respond to this crisis then like the UK, it would have seen a dramatic currency depreciation (we've lost 25% in two years).

Now, you may say, that's just great. Imports more expensive, exports cheaper, the trade balance will improve and we'll head towards an export led recovery. But that didn't happen for the UK. The problem is that any country is heavily dependent on all its trading partners in such a strategy: To export, you need buyers, and if those buyers aren't there (as they generally aren't right now since few economies are growing strongly) then you are in trouble. You still have a stagnating economy, and worse still, you have higher inflation from those higher import prices - just what the UK has.

Yet again, and I've repeatedly made this point whenever Cranmer, as the representative of wrong-headed right-wing Christianity, spouts on the EU and the PIGS, it's just not that simple. It's a globally inter-dependent world Had Portugal been out of the Eurozone (and even the EU), there is no guarantee it would have avoided this. The blatantly obvious case in point here is Iceland. Need I really say any more? At least Portugal has a chair at the table in the ECB, which is more than it had before joining when it simply followed Germany.

I just wish anti-EU right-wing Christians would stop using bogus arguments that just don't stack up to try and support their prejudices. The only way any country can recover sovereignty is to cut itself off from the rest of the world and go for autarky - and I think we all know the general, not particularly pleasant, results of that...

More Right-Wing Libertarian Straw Man-ism

Brian Caplan has been reading up on North Korea, which sounds like hell on earth. He finds it hard to grasp that those who got out of the North still hanker for their homeland and thinks socialised medicine (so anything less than a free market in healthcare) is the reason. But he draws, as I think libertarians almost always do, inferences for state intervention from the most grotesque distortions of economic activity that simply cannot hold in less extreme cases. He is also probably misguided in thinking it was just the healthcare system that they hankered for.

Who doesn't hanker for home? Many Brits can't stand the NHS and we constantly moan about dirty hospitals, waiting lists and the like. And I doubt when ex-pat Brits think about home that the NHS is the main thing on their mind. You think about friends, places etc when you think of home. Free healthcare at the point of use is nice, but that's about it.

But there is little reason why socialised healthcare doesn't work given other than this unrepresentative example, and Caplan doesn't pull any examples from Western Europe, funnily enough. As Paul Krugman points out though, mocking such proponents of a free market in healthcare, over here we do actually also have decent standards of healthcare (arguably better than they have in the US).

For me it's typical. Libertarians try to find the most grotesque distortion of something and say "look how terrible it is!", "we shouldn't have that!", etc. What they should instead do is argue why a free market is better for healthcare. They should try and explain why the imperfect information issues (hard to understand procedures, high cost of mistaken choice) are not that important that they need some intervention, and why the insurance problems (adverse selection meaning that premiums for all are higher, moral hazard meaning that there is over-consumption) which essentially make a free market in health insurance impossible aren't so important (and more than just "market solutions" for the latter problem). Maybe they already do; I'd be delighted to be pointed in the direction of some of these cases.

Christians who happen to fall into this camp of proposing to cut the state back savagely from all involvement in the economy ought to be thinking particularly carefully about these issues since they are precisely social justice issues. The kinds of people that suffer from what happens to health insurance premiums tend to be those most ill (who actually would not be insurable since their probability of claiming is near certain) and those least well off. Often such Christians say charity will do the business and we should let charitable giving fill the gap. The problem is that it won't fill the gap because of our sinful hearts - we free ride, and we don't give as much as we should. In economic theory terms there are positive externalities to a good healthy population, and this means the market (including charitable methods) will underprovide.

Right Wing Christians Have Utter Disregard for the Truth

Well, particularly the person sullying the name of the legitimate Archbishop Cranmer, who died 455 years ago, long before this imposter began writing such false tosh as this. In particular, the insistence often put by right wingers that currently we're paying more in debt interest than we are on health and education.

It's simply false and shows a total disregard for the truth. This website contains all numbers regarding government spending, even back to 1692.

You can play around with the numbers as you wish, and look at how numbers related to spending have changed over the years.  You can even construct interesting plots like the following:

Blue is debt interest, red is health care and green is education. All are expressed as a percentage of GDP to give some scale of the numbers. It should be fairly clear that not since around the early 1970s has debt interest been even near to the size of healthcare spending, and not on education since the early 1960s. It is also noteworthy that debt interest payments were falling into the middle part of the last decade and were flat until 2010, but even with the last few years, interest is much less than either health or education.

Why do right wing Christians like this seek to misrepresent reality so often? I seriously do not understand it. I don't quite get how it can be part of a Christian witness to the Lord Jesus.

Back to Libertarians

As I've said, I often read what these guys are saying, usually since I disagree with them, but because I'd like to know why they think what they do.

They tend to accuse non-libertarians of following dogma, but the quote in this post suggests that they too are under the heavy influence of dogma:

federal insurance had the benefit of further entrenching the power of small banks, which would otherwise be a competitive disadvantage relative to their larger banking peers. We adopted the FDIC not as a part of a well-thought out plan to stem banking problems based on past evidence; but rather to satisfy the small bank lobby responsible for banking fragility in the first place. 

Deposit insurance only came in because of the small banks lobby? Got some evidence for this as opposed to your suspicion given the dogma you adhere to religiously?  There's further evidence to support this if you read the actual article that the quote is taken from; it rails on from stupid US regulation restricting the geographic cover of US banks to basically suggest banks would be ok without regulation and that deposit insurance only came from that botched regulation.

Is it possible (optimistic I know) that actually governments operated on an economic efficiency basis? The free market will perfectly well provide insurance if a number of conditions relating to the risk being insured against are in place. If not, then it might be that government intervention of some form is necessary. Those conditions are that the probability is:

• Known and estimable.
• Less than one.
• Independent between policy holders.
• Exogenous to the policy holder.

Of these, I think it's fair to say none hold. This doesn't justify intervention, since moral hazard will exist regardless of who provides the insurance - banks will still take more risk once insured than they would if not insured.

However, adverse selection says that in this case, insurance premiums rise and hence small banks may not be able to afford them - perhaps why they lobbied in the first place. A simple intervention here would be to make insurance compulsory. Most libertarians seem to think everyone else jumps on the boat of state production at every opportunity, kind of forgetting that as economics we are aware of many possible solutions, and would like the one that distorts outcomes as little as possible.

Is it also possible, taking the economist's hat off again, that governments simply provided insurance in a simple fashion because they were interested in the little man whose deposit might be lost? That governments were actually representing their constituents as opposed to businesses when making these decisions? Not in the dogmatic libertarian mind: Governments only exist to be lobbied by big (and small!) business, and are always and everywhere malevolent beasts in their minds.

Nope, I just don't understand this man.

Try as I might, I just cannot fathom the odd person parading as a long deceased Anglican archbishop. He criticises anything to do with Labour (usually using the blatant lies coming out of the right), particularly related to religious matters, yet gives the Conservative party a ridiculously wide berth, justifying the worst of their liberal tendencies against Christians.

In the linked article he goes on about Libya, and how we need to intervene. But I don't understand it. He criticised to the hilt Blair and his "ethical foreign policy", yet it seems that a Blairite foreign policy is exactly what he is arguing for here?! He talks about the similarities with allowing Saddam to surpress an uprising in the early 1990s yet I'm sure he's well aware that his beloved Conservatives were in power back then. Nonetheless, he unwaveringly backs David Cameron in his bleatings in recent weeks regarding Libya - yet as far as I can see, Cameron has done nothing other than talk. He's cut back the military meaning we couldn't intervene there anyway (he'd say we can't afford it when actually we can). Cameron is powerlessly waiting for others to do something as a humanitarian disaster unfolds, yet the person Cranmer can't stop criticising, Blair, for right or wrong, went to war in Iraq without waiting for UN approval.

The man seems seriously confused...

Liberalise Bone Marrow Market?!

Very typical libertarian suggestion here from Cafe Hayek: Liberalise the bone marrow market.  I think most folk regard the idea of a free market in body parts somewhat abhorrent, but that's not actually what gets me most.

It's that Don Boudreaux likens the market for bone marrow to that of journalists, showing the usual libertarian disregard for aspects of markets that make them less suitable to be left unrestrained.  I find it incredible that he thinks this comparison reasonable.

Lets think about a few things to do with information in the bone marrow market, or other health-related markets. Are sellers of their body parts well informed about what selling these parts will do?  Probably not. Would they understand the information, were someone to tell them about it? Likely not, too. Furthermore, what would the costs of a bad selection be for sellers? In the newspaper world, we just buy a different newspaper if we read some junk that we identify to be bogus/propaganda, and we've lost, say £1 tops. With health, it may be the effects of getting rid of that body part aren't yet known but are actually very bad. It may be you choose the wrong person to chop that bit off, and you die. The costs of a wrong choice are potentially massive. Hence at least one side of the market is not at all well informed, and given the other side (buyers of parts to then sell on to other needy folk) likely has much more information than the sellers of parts, there is a really big potential problem of adverse selection, where the buyer does not reveal the extent of the harm removing the part might do.

All in all, I think it's pretty damn clear that the market for trashy journalists is a very different place to markets for body parts, and I find it truly stunning that Boudreaux is unable to see this or unwilling to entertain it.

In this case, Christians should certainly not be libertarians (hence right wing)...