Thursday, September 16, 2010

Good Questions From My Students

I've been teaching two introductory classes, and my students have asked me some really good questions, which is part of what makes teaching worthwhile. For example:

Why are there price supports for milk, but not for, say, steak? I don't know; the just-so story I suggested was that milk is sold primarily directly to consumers, who are a very dispersed interest group (so they find it difficult to organize to oppose the regulation). Steak is an important input for many restaurants, so perhaps they form an effective counter-lobby against ranchers. Bryan Caplan's answer to why such a clearly inefficient regulation would exist would be (in part) "voters are rationally irrational and support the policy", but I don't think that's true here. I don't think most voters are even aware milk price supports exist. It has to be some sort of classic lobbying battle.

Is there regional variation in minimum wage laws that correlates with homelessness rates? One student said that she had lived in Hawaii, where the minimum wage exceeded the federal wage and homelessness was rampant. I guessed that if one were to run the data, one would not find a relationship (although I don't think there'd be a causality problem--how would high rates of homelessness cause a higher minimum wage?), but it sure would be interesting to check. 

Why do some cities have rent control, but not others? Why New York and Santa Monica, but not Atlanta? I don't really have any good answer here. Anyone have any ideas I could run by the students?

Friday, September 03, 2010

David Friedman On Macro

I am teaching an introductory Macro class this semester, and it always makes me feel like a snake-oil salesman. David Friedman has a great new blog entry on Macro. I have two additional thoughts on the subject.

1) I have another objection to Macro: we cannot see the counterfactuals; there are no good natural experiments to test hypotheses. When some states do one thing, and others do a different thing, we end up with lots of different observations that can be used to test a hypothesis. We can see how two similar states that do two different things differ from each other, and this tells us something about the effects of policy. With the U.S., however, there are no other data points--different countries are too dissimilar to make direct comparisons. As a result we cannot know what would have happened if macro policy had been different. What would have happened without TARP, or the stimulus bill? We don't know. There's no way to know. Combine this with the poor predictive power of macro theory in its current state and you get something that is of dubious scientific value. Aside from "Inflation is always and everywhere a monetary phenomenon," there's not a lot of Macro that I would be willing to stand behind firmly.

2) Friedman suggests that insufficient attention has been paid to regime uncertainty--the reluctance of individuals and firms to make costly economic decisions when policy is uncertain. Bob Higgs has been writing about this topic for some time. I blogged about it once. Here's Jerry Jordan, former Fed bank president, making the same point. Here's Don Boudreaux reading James Madison on the subject. Here's Russ Roberts (after an interview with Higgs) on the subject, and again here. Here's Scott Sumnerdismissing the idea. Finally, here's Tyler Cowen on regime uncertainty (he calls it "policy uncertainty"), and not atypically, he takes a muddy position. My point here is that I'm not sure if insufficient attention has been paid to this topic. Lots of economists are aware of it. How much attention should the topic receive? I don't know. Given that it's so very difficult to test macro hypotheses, would paying attention to the topic of regime uncertainty make any difference at all?