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Archive for November, 2009

Bush/McCain Economic Advisor Sez: Raise Taxes

November 27th, 2009 2 comments

Douglas Holtz-Eakin was Chief Economist for the Council of Economic Advisers from 2001-2002. He was Director of the Congressional Budget Office from 2003-2005. He was John McCain’s chief economic advisor during the presidential campaign.

In the WSJ, he says Obama “should call on Congress to pass a comprehensive reform of our income and payroll tax systems that would generate revenue sufficient to fund its spending desires in a pro-growth and fair fashion.”

I couldn’t agree more.

GDP and Corporate Profits: Smoke and Mirrors?

November 24th, 2009 No comments

Justin Fox has pointed out tellingly that not only was Q3 GDP growth overstated–it’s already been revised from 3.5% (annualized) down to 2.8%, and is likely to be re-revised again some more (downward, of course)–it also includes some profound anomalies regarding corporate profits.

In short–surprise!–it’s the financials that are doing all the moving and “improving.” And we know where their “profits” are coming from. (Got a mirror handy?) Corporate profits by nonfinancial companies (you know–the ones who make things and provide real services) are still down, and essentially flatlined.

Here’s what’s those profits look like in nominal terms (excuse the wacky temporal scaling–it’s how the BEA provided the basic data and you can still see what’s happening):

nominal

But this gives an even better picture:

index

Profits for the financials have gone up 258% since Q4 (after dropping 78%).

Profits for nonfinancials have gone up 5.5% (after dropping 22%).

Who you gonna believe?

Reason and Intuition: Is There Really Any Difference?

November 22nd, 2009 1 comment

My sister just sent me the link to this discussion by Razib Khan on reason and intuition–timely, because it refers to Denialism: How Irrational Thinking Hinders Scientific Progress, Harms the Planet, and Threatens Our Lives by Michael Specter, who I just saw (and spoke to briefly) when he spoke at University of Washington last week on his book tour. (I found him engaging, interesting, and well-armed with fascinating facts and anecdotes, but he didn’t deliver any aha! moments for me–I’m definitely the choir, and he’s definitely preaching.)

My sister thinks Khan “gets it just about right,” and I certainly hesitate to question her sagacity. (She is older hence certainly wiser, after all.) But I came away from the post distinctly less satisfied. My basic problem: Khan–like almost everybody else that I hear discussing this subject–doesn’t seem to have any idea what he actually means by “intuition.” It’s tossed around generally in contradistinction to logical, syllogistic thinking (which is often referred to–in another example of poorly or un-considered thinking–as “linear” thinking).

To put the parenthetical aside first: logical thinking about any reasonably complex subject or problem is rarely linear. While portions of the thinking will certainly include “A leads to B which leads to C,” it also almost always includes some type of recursion and (I haven’t studied this so can’t give a good list) a variety of other decidedly nonlinear cognitive tools.

Returning to intuition, though: a definition by negation (“it’s non-logical, non-linear thought”) is useless even if “logical” and”linear” were accurate and clearly understood, because intuition can then encompass anything that isn’t that one thing. Khan exhibits this in spades. He suggests that intuition might be:

  • Innate knowledge: “These stances encapsulate the wisdom of evolution (e.g., aversion to sibling-sibling incest) and/or society (again, aversion to sibling-sibling incest).”
  • Surmise based on casual observation: “folk physics”.
  • Easily understandable explanations that are in accord with everyday experience: “Science allows us to stand on the shoulders of giants, no matter how bizarre or counterintuitive their theories are.”
  • Knowledge so ingrained through practice as to feel automatic: “Specialists in technical fields often develop domain-specific intuitions through long experience.”

There are almost endless other possibilities. (Ones you hear often involve “humaness,” “empathy,” “holism,” etc., all of which seem to grope toward something that does seem right for the definition.) Some may stand up as good definitions of intuition. But if the writer/thinker hasn’t done the thinking to even know what he’s talking about when he uses the word–or has only employed wooly, half-hearted noodling without nailing down what he means–the writing doesn’t yield much light.

I’ve always thought of intuition–in an almost equally useless definition–as “back-brain processing.” It’s the stuff we’re all familiar with, embodied in the phrase “lemme sleep on it.” We know that the mind (and the brain, though in a different way) is made up of a whole lot of semi-autonomous modules that are good at particular things. Consciousness–which is sometimes (inaptly) called “the executive function”–is only one of those modules. The operations of those modules are most often completely opaque or downright invisible to other modules–including the “conscious thought” module. For instance, we can’t perceive or much control the modules that handle various types of visual or spatial processing, even though (see Pinker’s How The Mind Works and The Stuff of Thought) those very modules and a whole lot of others are being turned to task for us (even) when we think we’re thinking consciously and “logically.” A lot of thinking, of any type (including logical thought), is farmed out to the back brain.

And those back-brain modules are no slouches. They use the same kind of complex, recursive, and yes, linear cognitive techniques that the “logical” mind does. (They may only use one or two techniques each–some use this a lot, some use that…there’s a big toolbox to draw from.) All that processing may emerge in the consciousness module with the appearance (to us) of logic and linearity, or it may appear as a flash of “intuition.” But it’s the same mass of modules that’s doing the grunt work down deep.

Now maybe “intuitive thinking” refers to a method that employs particular mind modules more, or in different ways from, those that are used for “logical thinking.” Fair enough. But I don’t know what those methods and modules might be, and I’m quite certain that 99.999% of people who talk about “intuition” don’t know either. Also fair enough–you shouldn’t be required to know intimately how the mind works to think about the issue–especially as we (even cognitive scientists) still have very little understanding of how the mind works.

But scientists are, finally, learning a hell of a lot these days–actual knowledge, tested by controlled experiments that can overcome our innate predilection for self-delusion, as opposed to the armchair surmise that has constituted the stuff of psychological “knowledge” since Freud started the courageous effort to plumb our deepest mystery. (As Steven Pinker has pointed out, the brain/mind is actually going from the status of “mystery” to the status of “problem that can potentially be solved, at least in parts.”)

It was some of that experimental knowledge–delivered in a talk by Jonah Lehrer that I attended, and in his book How We Decide–that started to crystalize the fuzzy notion I’ve always had of intuition as back-brain processing. He explains that we learn through a dopamine-feedback system. We make predictions and when they turn out right, we get a little dopamine hit. Feels good. When we get them wrong, though, the pusher holds our fix, and it feels really bad. (This goes a long way toward explaining why humans will go to such extraordinary lengths–destroying relationships with loved ones, etc.–to avoid [the self-perception of?] being wrong.) Our decisions are always based–at some fundamental level–on how something feels. (This is not an endorsement of “just trust your feelings”; see “fundamental level” in the last sentence.)

Lehrer also points to a set of experiments that seem to show that when we think we’re making a decision in our frontal cortex, in fact the decision has already been made, milliseconds before, elsewhere in the brain. (Though Daniel Dennet does a fairly convincing job of discrediting these experiments in Freedom Evolves.) The message that goes to our so-called “executive function” is not in the form of a thought, it’s a feeling: feels good, or feels bad. That’s how the back brain communicates the already-made decisions to the front brain–through pleasure and pain. (How else could we possibly know what we “want”? How could a nematode know that it wants food, or learn how to get it, aside from a pain/pleasure feedback system?)

In short, what feels like conscious decision-making really isn’t. We feed the problem back into our back brain, and ask it, essentially, “how do ‘I’ feel about this?” It responds with a “Tarzan feel bad” or “Jane feel good” signal strong enough to emerge into, be felt by, our consciousness module.

This does not negate the value of logical thought, but it casts our control over that process in a very different framework. We don’t (just?) control our “impulses” on their way out of the back-brain/id/reptilian brain/whatever you want to call it, as in the Freudian and other psychological models. Quite the opposite really: Our real power is in what we feed back into that massively multimodular brain. We can deliver it the information, experience, and experimental results (including feelings that emerge from that back brain itself, further processed consciously) that it needs to make smart decisions, or we can feed it pablum and pap, well-processed or not. It’s a true garbage-in-garbage-out situation. We can, to some extent, manage the process that sometimes looks (to us) like logic and sometimes looks like intuition, but that is mostly made up of the very same back-brain stuff.

In other words: intuition is reasoning. And logical reasoning–except of the simplest sort–inevitably relies on intuition.

At this point I think I should throw the baton to a writer who has done his thinking damned carefully (though without the benefits of experimental knowledge that we have). In a long-favorite passage of mine, Milton in Paradise Lost has the Angel Raphael (speaking to the as-yet-unfallen couple of their blissful state) comment on two types of reason:

Discursive, or Intuitive; discourse
Is oftest yours, the latter most is ours

Raphael knows: humans aren’t very good at intuitive reasoning. It’s the stuff of angels. (Partly because we’re forever polluting it with various combinations of the stuff that Khan vaguely thinks of as “intuition.”) We should should stick to the the lowly, earthly discursive stuff that our measly frames are fit for.

But when we do achieve it, that divine intuitive reasoning, the results are downright angelic. Even heavenly.

This is all still feeling like pretty loosy-goosy thinking to me. But I hope it at least shows an effort towards actually knowing what I mean when I talk about “intution.” I think I’m gonna have to sleep on it.

Will the Right Kill the Republicans? Ask the Whigs.

November 22nd, 2009 2 comments

I’m as curious as anyone about the long-term effects of hard-right Republicans on the Republican party. Will their zealotry result in the party’s rupture and collapse?

This led me to look at the two significant national parties from America’s history that have collapsed and disappeared: the Federalists and the Whigs.

The Federalists came apart because they advocated a policy of appeasement and peace with the British during the War of 1812. They actually sent ambassadors to negotiate a peace. In the meantime Andrew Jackson won the Battle of New Orleans, and America won the war. That left the Federalists discredited and embarassed in the electorate’s eyes, and they never recovered.

This seems to have no parallel with the current situation in the Republican party.

The Whigs, on the other hand, might have some very telling lessons to impart. They split over the issue of slavery, and collapsed when they failed to nominate their own incumbent presidential candidate (Millard Fillmore) for re-election in 1852. The anti-slavery faction became the Republican Party (with the notable participation of Abraham Lincoln), while the pro-slavery/laissez faire adherents grouped into splinter parties or defected to their former rivals, the Democrats.

The parallels? There’s no incumbent presidential Republican, of course, but down the food chain we see far-right Republicans garroting prominent incumbent party stalwarts like Senator Lindsey Graham of South Carolina, Governor Charlie Crist of Florida, and New York Assemblywoman Dede Scozzafava (who, after she was savaged and effectively replaced by the ultra-cons, endorsed the Democratic candidate–who proceeded to win).

Will the Republicans go the way of the Whigs? I’m sure not going to predict it. But the pattern’s in place.

Does Having Kids Make You Happier?

November 21st, 2009 1 comment

I can’t even begin to match the thinking and research that Bryan Caplan has done on the subject of kids and happiness (he’s writing a book titled Selfish Reasons to Have More Kids), but I can add my two bits, which generally support everything he says.

Short story, the research generally says “no.” Over large population samples, having kids makes people slightly less happy. But Bryan discusses a new (and very well-executed and convincing) study by Luis Angeles that contradicts that consensus.

The results in brief: overall, having two or three kids makes parents happier. Having one, two, or three kids makes married parents happier–but especially two or three.

This is totally in keeping with what I’ve said for a long time: The second kid makes parenting much easier, because single children want your constant and undivided attention, and it just gets wearing. My best piece of evidence is the wonderful line that one mother I knew reported from her child:

“Momma, look at me with your whole face!”

Kids are attention sponges/black holes. Two kids provide each other with much of the attention that each craves.

Angeles’ study supports this. A jump in reported life satisfaction (actually going from negative to positive for the full sample) comes when the second kid arrives. There’s another big jump with the third, then satisfaction drops with four or more.

Correlations Between Number of Children and Parents’ Reported Life Satisfaction (Fixed Effects)

Full Sample Married Couples
One child -0.027 (0.024) 0.017 (0.030)
Two children 0.009 (0.031) 0.074** (0.036)
Three children 0.059 (0.049) 0.197*** (0.057)
Four or more children -0.007 (0.094) 0.184* (0.105)

(*, **, and *** denote statistical significance at 10, 5 and 1% levels. Note that with one exception–widows with one child, which hit 10% significance–these married-couple results are the only ones in Table 4 with statsig below the 10% level.)

Hypothesis: having two parents provides a sufficient baseline quantity of adult attention (for three or fewer children), at which point the attention provided by one or two siblings goes a long way toward satisfying the the children’s (seemingly bottomless) attention needs/wants.

This takes a big load off the parents, increasing their life satisfaction.

With four or more children, even two parents can’t provide the baseline level of sufficient adult attention–the other kids’ attention doesn’t suffice to replace that, and the load lands back on the parents who can’t satisfy it, resulting in reduced life satisfaction for the parents.

An old family friend told me and my spouse when we had our first child, “You can’t give them too much attention. You can give them the wrong kind of attention, but not too much. Kids act up when they’re not getting enough attention.”

My experience and observations bear that out in spades.

Another piece of advice based on all this (along with Bryan’s very wise “get a nanny if you can afford it” suggestion): have lots of play dates.

To claim “objectivism” at 20 is predictable. To claim “objectivism” at 60 is plain idiocy.

November 19th, 2009 No comments

Apologies to Churchill for the ripoff. No apologies to Ms. Rand.

I remember quite clearly at age 13 saying to my mother and my sister, “why can’t people just be objective?”

Pretty amusing in hindsight.

Teenage Moms and Welfare Incentives

November 9th, 2009 No comments

Bryan Caplan has done yeoman’s duty for us all by reviewing “all the major research on the response of fertility to economic incentives.”

He finds a “striking contrast” between two types of literature:

In the “birth subsidy” literature, researchers usually find fairly large effects in the expected direction.  In the welfare literature, in contrast, most researchers find little or no evidence that welfare increases fertility–or that welfare reform reduces it.

Turning to what he calls the “single best piece in both literatures put together: Kevin Milligan’s ‘Subsidizing the Stork’,” (which devises a natural experiment based on Quebec subsidies for having children from 1988 to 1997), he reports Milligan’s finding that financial incentives have a big impact on fertility choices: “up to a 25% increase in fertility for families eligible for the full amount.”

But perhaps even more interesting: young, unmarried women are far less responsive to incentives.

…both findings suggest that, as a rule, young unmarried women get pregnant by mistake.  They’re far from affirmatively wanting a baby, so modest financial incentives don’t change their plans.

This suggests that policy efforts and government funds are best directed toward sex ed and encouraging/subsidizing contraception for teenage girls, rather than taking away benefits that supposedly encourage them to have children.

Musings on Efficient Market Theory

November 5th, 2009 1 comment

Justin Fox, author of The Myth of the Rational Market, is in an interesting interchange with Eugene Fama, patriarch of efficient-market theory.

Which led me to some musings on the subject.

I find that a great deal of the discussion of EM theory is befuddled because the discussors don’t distinguish clearly between different but related statements:

1. You can’t know whether the price is right.
and
2. The price is right

or

1. Individuals are rational actors
and
2. In aggregate, individuals’ actions effect the market as if they were all rational actors.

Another thought:

While all (or enough) first-order information might be “in the market” to set prices “efficiently,” what about the potentially more profound effects of second-order information: “I believe that you believe”? Or even more, “I believe that you *will* believe.” (See “Greater Fool.”)

This information obviously cannot be known, or known with any accuracy or certainty. And it is arguably far more powerful–at least in the short term–than first-order information.

And yet another thought, re: herd behavior. It’s been shown that groups of individual actors, with each actor operating under very simple algorithms, can create very complex (and generally unpredictable) behavior by the whole group.

So each bird in a flock operates with rules like “if I’m on the outside of the flock (no bird on one side of me) and the bird next to me moves away, move towards that bird.”

The result is the quite remarkably cohesive behavior of bird flocks.

Now, assume that our investing algorithms are based largely on people’s (inherently unreliable) second-order beliefs. (“If I think you think the market will go up, I should invest.”)

Life gets very, very complicated…