The State Of The Union

The State of the Union is bad and the union is weak.

Another day has passed and the tyrants are still in power.

Trump is still issuing unconstitutional and illegal executive orders, which is absolutely infuriating. 

RFK, Jr. is busy trying to make sure that more Americans die by ending medical research and promoting dangerous junk science about vaccines and more. 

Texas is trying to cheat by redistricting for the 2026 election. 

The courts have slowed it down a little, but only so much. The 10th Circuit let Oklahoma ban medical care for transgender children. The Republican packed U.S. Supreme Court in encouraging Trump's illegal conduct. 

Congress has smoothed the edges mildly, but the razor thin and factious Republican majority is full of cowards who aren't brave enough to look out for our country even when they know that what they are voting for is wrong.

The U.S. was a global leader in science, medical research, and higher education. Trump 2.0 is doing it's best to kill that. He's also radically defunding K-12 education and undermining academic freedom and a commitment to truth at all levels.

Biden left Trump a U.S. economy that was in great shape. Trump has ravaged that in less than seven months with tariffs, with a resort to illegal immigration enforcement actions, with tax cuts that hurt the economy, and with a budget so fiscally irresponsible that the credit rating of the U.S. has suffered. His attacks on the independence of the Fed, and the integrity of economic statistics also undermine the U.S. economy.

Trump's budget deprives more than ten million people of access to health care, makes health care more expensive (especially for the working class and for self-employed people) and less available for almost everyone (especially in rural areas), deprives millions of food aid, and will kill tens of millions with cuts in foreign aid.

Wars are won by the side with the most and strongest allies, and Trump has alienated almost all of them. Previously allied countries are cancelling F-35 orders or like Spain, deciding not to make them, because of his actions.

So much harm has been done so fast. No one in all of history has ever done more damage to the United States than Donald Trump.

Is There Hope?

While all of this is grim, and irreparable damage has already been done, the cause is not hopeless. 

The U.S. economy, even for the Trump base, is nowhere near the tatters that Weimar Germany was, which suggests that far right radicalism will have less steam.

The U.S. is a federal system and blue states are actively resisting.

Trump and the GOP did not win a decisive victory in 2024. They secured the thinnest of majorities in the House, thin majorities in some key swing states in the Presidential election, and a thin majority in the Senate with several (but not enough) moderates parting ways with him on key votes in the Senate. A few percentage point shift in public opinion from their November 2024 high water mark could dramatically swing control to the Democrats. In Texas, only 53% of voters backed Republicans for Congress, although gerrymandering provided them a far larger share of the seats, and the proposed Texas gerrymander to remove five Democrats seats could backfire by making many of the Republican seats in the new map much more vulnerable.

Trump's approval rating is at record lows, even compared to his previous term. The Epstein scandal continues to eat away at Trump and is undermining support for him even in his base. His budget is wildly unpopular on a bipartisan basis.

SCOTUS has never had a lower approval rating, is at record or near record lows of support from Democrats and unaffiliated voters, and is more divisive on partisan lines than ever before (as is Congress), and this may mobilize action to pack it or reform it. SCOTUS may not be formally beholden to politics, but it isn't indifferent to its waning legitimacy either.

The markets have responded poorly to Trump's idiotic on again, off again tariff policies and his threats to Fed independence.

Trump has made enemies of the entire medical establishment, almost all of higher education, school teachers everywhere, and the Catholic Church. His open racism and xenophobia may cost Republicans some of the black and Hispanic support that Trump secured in 2024. And, even a fair number of Republican politicians and former members of his administration, when they are retiring or otherwise less vulnerable, have shown little loyalty to him. Trump rules by fear and transactional deals alone.

Swing states like Nevada are suffering badly as a result of his policies. Farmers are suffering. Small business people are getting hurt. Manufacturing is in bad shape despite the fact that boosting this industry was one of his main goals. Inflation, especially for groceries, is surging. The haughty indifference of his cabinet members cost many people their lives in the central Texas floods. Trump's refusal to provide disaster relief has mostly hurt his own voters. His budget did much more harm to red states than the blue states. The more Trump's policies are implemented, the more skeptical conservatives are being forced to admit that they are worse off because of them.

Democrats are decisively over-performing in almost every vacancy election, and elections around the world are swinging decisively to the left in reaction to Trump. If the 2026 midterm elections proceed without too much GOP mischief, they could be a Republican bloodbath with even many lean GOP seats falling to Democratic challengers.

People are in the streets countering ICE abuses and protesting Trump's many abuses.

Trump has somehow finally discovered that Putin is the bad guy in the Ukraine War and is supporting Ukraine again after seriously wavering. European support is also keeping Ukraine in the fight in an ongoing war of attrition where it is holding its own, despite casualties and slight continued losses of its territory. Putin is increasingly worried about Russia breaking apart, and Russia's economy is struggling. Russia's military, especially its ground forces, have seen immense losses with more than a million casualties, a very large share of all of its army's tanks and armored vehicles and artillery forces destroyed, and its navy and air forces bruised (although not absolutely ruined like the army). In another year, it will be worse. Ukrainian attacks deep in Russia are damaging its oil and gas infrastructure, its transportation infrastructure, and its military resources and has forced Russia to worry about attacks far from the front line. Many of Russia's best and brightest young men have emigrated. North Korea is strengthening its military ties with Russia, but its "elite soldiers" are at least as mediocre as the ill-trained Russian conscripts that they are fighting alongside, and the quality of the military supplies that they are providing is, on average, inferior.

Trump is 79 years old and is not in good health, mentally or physically, and he's only getting worse in the face of the stress of actually governing and his advancing age. There is a very real possibility that he could die of natural causes while in office. 

The list of folks who would like him dead is a geopolitical version of Murder on the Orient Express, and the list will only keep growing. He's made enemies of Canada, Denmark, Western Europe, Panama, Mexico, Brazil, Iran, India, China, and islands inhabited only by penguins. For immigrants, small business owners who are ruined by his attempts at mass deportations without due process, people denied disaster relief, people who will lose their hospitals, federal workers and grant recipients who have lost their jobs, transgender soldiers discharged without pensions despite doing nothing wrong, soldiers who have had spouses deported, people and law firms he has targeted for revenge, and women who have had their reproductive health compromised because of his court appointments and policies, it is personal and dire. 

Elon Musk, the richest man in the world and Trump's hatchet man early in his current term, is seeing his companies from Tesla to SpaceX to his AI venture crumble, even though the stock markets haven't fully caught up to how bad the situation is for his businesses, not just now, but in their future prospects in which he is baggage that is dragging them down. Musk has no realistic chance of reversing the drag he is on his businesses, even though he beat back a host of federal government attacks on them in the short run by cozying up to Trump. But, Musk's threat to start a new political party, which would take voter support almost entirely from Republicans, could be devastating for the GOP in 2026 if implemented.

And, one shouldn't forget that the inevitable force of demographic change is against them. New younger voters who first vote in a federal election in 2026 are very decisively left leaning, much less Christian, and much less white. Elderly voters who are the most conservative and the most prone to be white Evangelical Christians will die before then. Two years doesn't make for that much of a difference, but it is one more little weight on the scale against the GOP.

Republicans have made a huge bet on a stupid, vengeful, psychopathic mad man, and if their bet doesn't pay off, they face an existential crisis. They could go the way of the Whigs. Their collapse could be worse than it was in the wake of Herbert Hoover and could last as long.

Macroeconomics Is An Art Not A Science And Is Influenced By Politics

Don't trust Republican economists when it comes to GDP during Republican Presidencies or the benefits of tax cuts.

Using a novel dataset linking professional forecasters in the Wall Street Journal Economic Forecasting Survey to their political affiliations, we document a partisan bias in GDP growth forecasts. Republican-affiliated forecasters project 0.3-0.4 percentage points higher growth when Republicans hold the presidency, relative to Democratic-affiliated forecasters. Forecast accuracy shows a similar partisan pattern: Republican-affiliated forecasters are less accurate under Republican presidents, indicating that partisan optimism impairs predictive performance. This bias appears uniquely in GDP forecasts and does not extend to inflation, unemployment, or interest rates. 

We explain these findings with a model where forecasters combine noisy signals with politically-influenced priors: because GDP data are relatively more uncertain, priors carry more weight, letting ideology shape growth projections while leaving easier-to-forecast variables unaffected. Noisy information therefore amplifies, rather than substitutes for, heterogeneous political priors, implying that expectation models should account for both information rigidities and belief heterogeneity. Finally, we show that Republican forecasters become more optimistic when tax cuts are salient in public discourse, suggesting that partisan differences reflect divergent beliefs about the economic effects of fiscal policy.

Benjamin S. Kay, Aeimit Lakdawala, and Jane Ryngaert, "Partisan Bias in Professional Macroeconomic Forecasts" SSRN (2025).

Modern Conservatism Is Morally Bankrupt

Glenn C. Loury’s new book, “Late Admissions,” is unlike any economist’s memoir I have ever read. Most don’t mention picking up streetwalkers. Or smoking crack in a faculty office at Harvard’s Kennedy School — or in an airplane at 30,000 feet. Or stealing a car. Or having sex on a beach in Israel with a mistress and attracting the attention of the Israel Defense Forces. Or later being arrested and charged with assaulting her. Or cuckolding a best friend.

From the New York Times.

A libertarian leaning academic economist nonetheless observes that "even given all this, Loury has a good career as an economist and as an public intellectual."

I remember a time when part of conservatism involved a commitment to the rule of law, and a strict traditional moral code. It was also an ideology that believed strongly that if you couldn't conform to the moral code, or just messed up, that you shouldn't brag about it, and instead should keep it a closely guarded secret to protect your reputation. But that doesn't seem to be the case anymore, and black conservative academics are no exception to this trend.

DSGE Models Are Garbage

The crowning achievement of modern macroeconomics is an incredibly detailed dynamic model of the U.S. economy that is used by governments and big businesses alike to make all sorts of important economic policy decisions. 

I've felt this since I took 300 level macroeconomics in college back in the late 1980s that this model is basically bunk. It turns out that I was right.

It is really, really bad. Worse than even I would have guessed. Delete everything and start over from scratch bad. Deny macroeconomists the right to testify in court as expert witnesses because their models are junk science bad. As Marginal Revolution, a group blog of academic economists put it:

Imagine if you were trying to predict the motion of the planets but you accidentally substituted the mass of Jupiter for Venus and discovered that your model predicted better than the one fed the correct data. 

The paper and its abstract are as follows: 

Dynamic stochastic general equilibrium (DSGE) models have been an ubiquitous, and controversial, part of macroeconomics for decades. 

In this paper, we approach DSGEs purely as statstical models. We do this by applying two common model validation checks to the canonical Smets and Wouters 2007 DSGE: (1) we simulate the model and see how well it can be estimated from its own simulation output, and (2) we see how well it can seem to fit nonsense data. 

We find that (1) even with centuries' worth of data, the model remains poorly estimated, and (2) when we swap series at random, so that (e.g.) what the model gets as the inflation rate is really hours worked, what it gets as hours worked is really investment, etc., the fit is often only slightly impaired, and in a large percentage of cases actually improves (even out of sample). 

Taken together, these findings cast serious doubt on the meaningfulness of parameter estimates for this DSGE, and on whether this specification represents anything structural about the economy. 

Constructively, our approaches can be used for model validation by anyone working with macroeconomic time series.

Daniel J. McDonald, Cosma Rohilla Shalizi, "Empirical Macroeconomics and DSGE Modeling in Statistical Perspective" arXiv:2210.16224 (October 31, 2022).

Twelve Sins Of Economics As A Discipline

What does economics as a discipline do poorly?

1. Fails to make clear that maximizing efficiency and aggregate output are not the only or most important goals for economic policy.

2. Fails to clarify the extent to which there are important differences between GDP and aggregate well being.

3. Fails to clarify the extent to which different components of economic theory are more or less strongly validated empirically (e.g., to explain the high levels of inaccuracy involved in macroeconomic models).

4. It overemphasizes the importance of monetary policy.

5. It overemphasizes the value of mathematical models (especially in macroeconomics).

6. Fails explore the pervasiveness of price discrimination in a laissez faire economic system and the implications of this realty.

7. Focuses too much on theory and too little on a descriptive account of how the economy, in general, works in reality. This has many dimensions to it.

8. It fails to develop a sound understanding of how important classes of business transactions are conducted in reality.

9.  It underemphasizes economic history and comparative economics.

10. Fails to adequately develop the interplay between culture, technology, policy and access to resources in economic development.

11. It underemphasizes the importance of economic decision making not made in markets conducted in price denominated transactions; in particular underemphasizing decisions made within households and families, within large firms, and between firms acting in an oligopoly context.

12. Fails to sufficiently explore the ways in which a rational actor model of economic decision making is flawed in systemic ways, and the implications of these facts.

There are some people who are economists who don't fall prey to any one of these particular shortcomings, but the discipline as a whole has these biases and introductory economics instruction has these flaws.

Venezuela's Economy A Disaster. Why?

Venezuela's Economy is among the worst in the world, despite having been one of the strongest in Latin America until the early 1980s.

One of its problems was massive over dependence on oil revenues. It also hasn't dealt well with downturns, frequently seizing private property and imposing price controls, while letting hyperinflation get out of control, and ending free market currency exchanges with the outside world. Labor law reforms undermined workplaces. Outside investors upon whom its economy relied heavily were spooked and left en masse. Cut off from the trade that financed half of its GDP, the economy has collapsed resulting in immense misery in a country that was the most affluent in Latin America into the early 1980s.

The economy of Venezuela is largely based on the petroleum sector and manufacturing. In 2014, total trade amounted to 48.1% of the country's GDP. Exports accounted for 16.7% of GDP and petroleum products accounted for about 95% of those exports. Venezuela is the sixth largest member of OPEC by oil production. Since the 1920s, Venezuela has been a rentier state, offering oil as its main export.

From the 1950s to the early 1980s, the Venezuelan economy experienced a steady growth that attracted many immigrants, with the nation enjoying the highest standard of living in Latin America. 

During the collapse of oil prices in the 1980s, the economy contracted the monetary sign, commenced a progressive devaluation and inflation skyrocketed to reach peaks of 84% in 1989 and 99% in 1996, three years prior to Hugo Chávez taking office. The nation, however, has experienced hyperinflation since 2015 far exceeding the oil price collapse of the 1990s. . . . When world oil prices collapsed in the 1980s, the economy contracted and inflation levels (consumer price inflation) rose, remaining between 6 and 12% from 1982 to 1986 The inflation rate peaked in 1989 at 84%, the year the capital city of Caracas suffered from rioting during the Caracazo following the cut of government spending and the opening of markets by President Carlos Andrés Pérez. After Pérez initiated such liberal economic policies and made Venezuelan markets more free, Venezuela's GDP went from a -8.3% decline in 1989 to growing 4.4% in 1990 and 9.2% in 1991, though wages remained low and unemployment was high among Venezuelans.

Since the Bolivarian Revolution half-dismantled its PDVSA oil giant corporation in 2002 by firing most of its 20,000-strong dissident professional human capital and imposed stringent currency controls in 2003 in an attempt to prevent capital flight, there has been a steady decline in oil production and exports and a series of stern currency devaluations, disrupting the economy. Further yet, price controls, expropriation of numerous farmlands and various industries, among other disputable government policies including a near-total freeze on any access to foreign currency at reasonable "official" exchange rates, have resulted in severe shortages in Venezuela and steep price rises of all common goods, including food, water, household products, spare parts, tools and medical supplies; forcing many manufacturers to either cut production or close down, with many ultimately abandoning the country as has been the case with several technological firms and most automobile makers. In 2015, Venezuela had over 100% inflation—the highest in the world and the highest in the country's history at that time. According to independent sources, the rate increased to 4,000% in 2017 with Venezuela spiraling into hyperinflation[ while the population poverty rate was between 76% and 87%.

At first, the economic decline was due to low oil prices, but it was fueled by the turmoil of the 2002 coup attempt and the 2002–2003 business strike. Other factors of the decline were an exodus of capital from the country and a reluctance of foreign investors. . . . The inflation rate as measured by consumer price index was 35.8% in 1998, falling to a low of 12.5% in 2001 and rising to 31.1% in 2003. Historically, the highest yearly inflation was 100% in 1996. In an attempt to support the bolivar, bolster the government's declining level of international reserves and mitigate the adverse impact from the oil industry work stoppage on the financial system, the Ministry of Finance and the central bank suspended foreign exchange trading on 23 January 2003. . . . The housing market in Venezuela shrunk significantly with developers avoiding Venezuela due to the massive number of companies who have had their property expropriated by the government. . . . Venezuela had the weakest property rights in the world . . . with expropriation without compensation being common. . . . 

According to the misery index in 2013, Venezuela ranked as the top spot globally with the highest misery index score. The International Finance Corporation ranked Venezuela one of the lowest countries for doing business with, ranking it 180 of 185 countries for its Doing Business 2013 report with protecting investors and taxes being its worst rankings. In early 2013, the bolívar fuerte was devalued due to growing shortages in Venezuela. The shortages included necessities such as toilet paper, milk and flour. Shortages also affected healthcare in Venezuela, with the University of Caracas Medical Hospital ceasing to perform surgeries due to the lack of supplies in 2014. The Bolivarian government's policies also made it difficult to import drugs and other medical supplies Due to such complications, many Venezuelans died avoidable deaths with medical professionals having to use limited resources using methods that were replaced decades ago. . . . 

The Economist said Venezuela was "[p]robably the world’s worst-managed economy". Citibank believed that "the economy has little prospect of improvement" and that the state of the Venezuelan economy was a "disaster". The Doing Business 2014 report by the International Finance Corporation and the World Bank ranked Venezuela one score lower than the previous year, then 181 out of 185. The Heritage Foundation ranked Venezuela 175th out of 178 countries in economic freedom for 2014, classifying it as a "repressed" economy according to the principles the foundation advocates. According to Foreign Policy, Venezuela was ranked last in the world on its Base Yield Index due to low returns that investors receive when investing in Venezuela. In a 2014 report titled Scariest Places on the Business Frontiers by Zurich Financial Services and reported by Bloomberg, Venezuela was ranked as the riskiest emerging market in the world. Many companies such as Toyota, Ford Motor Co., General Motors Company, Air Canada, Air Europa, American Airlines, Copa Airlines, TAME, TAP Airlines and United Airlines slowed or stopped operation due to the lack of hard currency in the country, with Venezuela owing such foreign companies billions of dollars. . . . 

President Nicolás Maduro reorganized his economic cabinet in 2016 with the group mainly consisting of leftist Venezuelan academics. . . . Maduro's new cabinet was expected to tighten currency and price controls in the country. . . . Analysts believed that the Venezuelan government has been manipulating economic statistics, especially since they did not report adequate data since late 2014. . . . the Central Bank of Venezuela delayed the release of statistics and lied about figures much like the Soviet Union did. . . .

By 2016, media outlets said that Venezuela was suffering an economic collapse[ with the IMF estimating a 500% inflation rate and 10% contraction in the GDP. In December 2016, monthly inflation exceeded 50 percent for the 30th consecutive day, meaning the Venezuelan economy was officially experiencing hyperinflation, making it the 57th country to be added to the Hanke-Krus World Hyperinflation Table. On 25 August 2017, it was reported that new United States sanctions against Venezuela did not ban trading of the country’s existing non-government bonds, with the sanctions instead including restrictions intended to block the government’s ability to fund itself. . . . the price increase for a cup of coffee to have increased by 718% in the 12 weeks before 18 January 2018, an annualized inflation rate of 448,000%. The finance commission of the National Assembly noted in July 2018 that prices were doubling every 28 days with an annualized inflation rate of 25,000%. 

The country was heading for a selective default in 2017. In early 2018, the country was in default, meaning it could not pay its lenders.. . .

In November 2010, workers spent a week protesting outside factories in Valera and Valencia following the expropriation of the American bottle-maker Owens-Illinois. . . . In recent years, a barrage of pro-worker decrees have been passed. The most significant could be the 2012 labor laws known as the LOTTT. These laws included the virtual ban on dismissal, shorter work week, improved holidays and enhanced maternity benefits. The LOTTT offers job security to most workers after the first month. Employers have reported an absenteeism rate of up to 40% which they blame on the leniency of these labor laws. As expected, employers have been less willing to recruit. On 17 November 2014, President Maduro issued a decree to increase the minimum salary for all workers by 15%. The decree became effective on 1 December 2014. As part of the May Day celebrations in honor of workers' day, President Maduro announced on 28 April 2015 that the minimum wage would increase 30%; 20% in May and 10% in July, with the newly announced minimum wage for Venezuelans being only about $30 per month at the widely used black market rate. In September 2017, the National Union of Workers (UNETE) announced that Venezuela had lost 3,345,000 jobs since the election of President Maduro. By December 2017, the number of lost jobs increased by 400,000 to over 3,850,000 lost jobs since the start of Maduro's tenure.

Via Wikipedia.

Quote of the Day

In most sciences, models with poor out-of-sample fit are labeled "wrong." 

In macro[economics], "all models are wrong."

- Noahpinion (at slide 29 in the link).

Quote Of The Day

It is hard to think of a more obvious recent public-policy failure than the tax cuts that Kansas Gov. Sam Brownback championed in 2012. The state has been mired in a perpetual budget crisis ever since the package passed, forcing its residents to swallow painful spending cuts in essential areas like education. Kansas' credit rating has been downgraded, as well. The financial wreckage has been so severe that Brownback's fellow Republicans are now staging a rebellion; in February, the GOP–run legislature voted to undo the cuts, and came close to overruling the governor's veto.

Somehow, the sharpest minds in the Trump administration have gazed upon the smoldering ashes of this misbegotten experiment and decided that they should imitate it.

- From Jordan Weissmann at Slate.com

State Business Climate Indexes Are Worthless Or Worse

State business climate indexes are a political tool, not a meaningful economic indicator.

This study submits 11 business climate indexes to tests of their ability to predict relative economic performance on either side of state borders. Our results show that most business climate indexes have no ability to predict relative economic growth regardless of how growth is measured. Some are negatively correlated with relative growth. Many are better at reporting past growth than at predicting the future. In the end, the most predictive business climate index is the Grant Thornton Index which was discontinued in 1989.

From here.

Macroeconomics Is Broken And Mathiness Is A Big Culprit

Macroeconomics engages in gross abuse of the tools of mathematics by using them when they are not empirically supported.

Bad Economics, Sovereign Debt, The Irish Mortgage Crisis And More

* Ireland apparently does not have, or almost never uses, a foreclosure process to repossess homes. Instead, involuntary bankruptcy is pretty much the exclusive means of owner occupied residence repossession - at least until this month, when a new insolvency process similar to Chapter 13 bankruptcies in the United States, was put in place. About one in eight Irish mortgages are more than ninety days overdue, mostly as a result of an economic collapse including a 50% drop in housing prices when a housing bubble there collapsed.

This stark difference from the debt collection practices of other countries with a common law legal tradition is notable.  Commentators at the BBC attributed this policy to the weighted political history of unjust evictions by absentee British overlords on the Irish consciousness.   (Source: BBC radio news broadcast heard on radio.)

* The European economy is almost certainly headed into a double dip recession (and a deep one) in the wake of the sovereign debt crisis if it isn't already there. Ireland's sovereign debt crisis has mostly been worked through, but now it has a massive private debt crisis.

The hard question is whether this will slow the not yet quite complete recovery of the U.S. from its financial crisis, or worse yet, plunge the U.S. into a double dip recession. So far, this doesn't seem to be happening because domestic demand is pushing the U.S. economy back, but it is still a serious worry.

It doesn't help that China's growth is slowing dramatically.

China and the E.U. are the two biggest non-U.S. economies in the world and import-export based revenues are important to the U.S.; on the other hand, bleak investment prospects in those countries make make the U.S. more attractive to foreign investors thereby giving the U.S. economy some private stimulus.

* The academic economic study by Carmen Reinhart and Ken Rogoff that was a main respectable justification for austerity policies in Europe and elsewhere turns out to have been deeply flawed in a manner that has created a major scandal.

The increasing consensus of informed opinion led by Krugman and others economic commentators, is that the resort to austerity measures both by U.S. states and in Europe, as well as the failure to the U.S. to take sufficiently bold stimulus measures at the federal level, has made the series of recessions that started with the U.S. financial crisis and continues into the European sovereign debt crisis, far worse.  If macroeconomists had been clear about this fact, which apart from the R&R work didn't have nearly as solid academic support, perhaps this serious misstep could have been avoided. 

Reinhart and Rogoff paper showed empircally that debt loads in excess of 90% of GDP greatly harmed long term economic growth.  But, it turns out to that they reached that conclusion based on spreadsheets that accidentally omitted key data points, mistranscribed data and because they added up the data incorrectly.  They correctly determined that austerity imposes short term pain.  But, they were wrong in concluding that the short term pain of austerity measures imposes immense penalties in terms of long term growth when economies have high public debt levels relative to their GDP.

They weren't the only economists to reach this result, but without this paper, the argument for it would have been far weaker.

If their methodology had been applied without clerical or arithmetic errors, it would have reached the opposite conclusion. The poignant question is How Much Unemployment Was Caused by Reinhart and Rogoff's Arithmetic Mistake?, by Dean Baker (via Economist's View blog):

The most important of these errors was excluding four years of growth data from New Zealand in which it was above the 90 percent debt-to-GDP threshold..., correcting this one mistake alone adds 1.5 percentage points to the average growth rate for the high debt countries. This eliminates most of the falloff in growth that R&R find from high debt levels. (HAP find several other important errors in the R&R paper, however the missing New Zealand years are the biggest part of the story.)

This is a big deal because politicians around the world have used this finding from R&R to justify austerity measures that have slowed growth and raised unemployment. In the United States many politicians have pointed to R&R's work as justification for deficit reduction even though the economy is far below full employment by any reasonable measure. In Europe, R&R's work and its derivatives have been used to justify austerity policies that have pushed the unemployment rate over 10 percent for the euro zone as a whole and above 20 percent in Greece and Spain. In other words, this is a mistake that has had enormous consequences.

This debacle has renewed the debate across a host of academic and scientific disciplines over whether published academic research should routinely include raw data and computer code, something that only rarely happens now.

It has also lead to hand wringing among economists over the sad state of empirical validation in macroeconomics and the lack of consensus in the field.

I personally believe that macroeconomics is a discipline in dire need of a transition from a narrow focus on theoretical models of monetary policy and government spending levels, in favor of a far broader descriptive orientation.

I once went so far as to take the GREs and request applications for graduate programs in economics, but did so only with trepidation because I lacked confidence in the academic discipline's serious problems (ultimately, children on the way caused me to continue practicing law instead of going to graduate school).  I was deeply dissatisfied with the quality of the scholarship in the discipline every since I took an intermediate macroeconomics class at Miami University while I was a senior in high school.

Miami University shouldn't be faulted on this score, despite the fact that the particular instructor in question wasn't very good. I considered the discipline at all, in part because of the excellent teaching I received in my honors microeconomics course the semester before from Professor Gerald E. Flueckiger (who died in 2000, far too early) and an equally able high school economics instructor my sophomore year at Talawanda High School, both of whom powerfully demonstrated the relevance and intuitive power of economic thinking and the potential breadth of the discipline even though it was rarely realized.  

The macroeconomics class I took at Miami University was typical of the discipline and graduate instruction at many institutions in macroeconomics, and a learned a lot in it about mainstream macroeconomic models even though I don't respect them very much.  We used Robert J. Barro's classic equilibrium equation market clearing model based textbook that epitomized everything that is wrong with the discipline but did so competently, albeit with a dry approach that was utterly detached from reality.  Our instructor was humorless trees for the forest kind of wonk, even worse than the textbook he taught from, who was busy fighting subdiscipline battles we were barely aware of over monetary policy in our classroom to the unseen audience of his discipinary peers.

(Full disclosure, I got in "B" in the class, but that was only because I overslept the day of the final exam and only arrived to take it a half an hour late, barely dressed, unshowered, and flustered, a reality reflected in my performance on that exam, but that didn't reflect how much I learned and absorbed from the class.)

How Important Is Monetary Policy?

Krugman's Case That Macroeconomic Policy Matters

[I]t’s quite possible for economies to get into a snarl that can be solved by printing more money, or having the government spend more.

I know that this is a conclusion many people hate. They really, really want to believe that bad things must have good causes — that if you are suffering from high unemployment and low output, it must be because there is something deeply wrong, probably the fault of liberals. But what was deeply wrong with the US economy in late 2008 that wasn’t true of the US economy in late 2007? Recessions happen, and any halfway plausible story about how they happen is likely to suggest that non-fundamental government interventions, like printing money, can make things better.

It’s important to emphasize the conditionality here. The haters love to claim that people like me view more demand, more money printing, as the solution to all problems. But of course that’s not true. Aggregate demand won’t solve a problem of low productivity, or inadequate productive capacity, or for that matter extreme inequality due to technology or market power. But it can solve certain problems, which happen to be the problems we have now.

- Paul Krugman (February 4, 2013 post).

Economists Focus Too Much On Monetary Policy And Fiscal Policy

The issue the Krugman presents in the post quoted above goes to the core of the validity of the work done by applied professional economists and their academic counterparts.

I don't disagree that microeconomics has some very solid analytical and quantitative insights that have held up time and time again in the face of tests of their empirical validity.

But, macroeconomists have a far less solid empirically validated track record of making correct consensus predictions, and offering consensus policy prescriptions for a given set of facts that consistently work, despite making up a very large share of all applied professional economists, despite dominating a large share of the academic publications in the field.

In a nutshell professional macroeconomists are inappropriately obsessed with monetary policy and fiscal policy at an aggregate amount level.

Despite the theoretically broad scope of their mandate, in practice, macroeconomists devote a very large share of their efforts to a very small number of big issues: (1) the impact of the money supply of GDP and employment, (2) the impact of government intervention in relation to interest rates on GDP and employment, and (3) the impact of aggregate levels of government spending and aggregate government budget deficits on GDP and employment.

Economists, in real life, are extremely oriented towards the role of government intervention in the financial and investment sectors on the health of the real economy. It is something of an article of faith among them that monetary policy, interest rates and fiscal policy at the grossest level are instrumental to the course of wise management of business cycles in a national economy.

But, this article of faith simply isn't true.

Monetary Policy Is Not Very Important

My general predisposition is to say that two-thirds of that isn't true, that the other third requires more fine tuned analysis to handle sensibly, and that many factors that are critically important to the wise management of business cycles are virtually ignored by mainstream professional economists.

I am deeply skeptical of the proposition that government involvement in managing the aggregate money supply and interest rates is particularly important to the management of business cycles.

These tasks aren't completely irrelevant to the health of the economy.

It is possible to really screw up the economy with unexpected extreme expansions of the money supply (hyperinflation) or unexpected extreme reductions in the money supply (deflation) relative to the size of the GDP. Basically, the value of the dollar is through a highly involved and diffuse process a function of how much money (the aggregate money supply) is chasing how many goods and services (GDP) and unexpected serious price level shocks of either kind are bad in an economy like that of the U.S. whose history of relatively stable monetary policy in recent decades has given rise to transactions in the private sector that aren't well tuned to be adapted to anything other than historically expected fairly steady low levels inflation that are incorporated via interest rates into deals structured in nominal dollars rather than more inflation sensitive benchmarks.

Likewise, government intervention that successfully distort interest rates from the natural inclination of the private market participants, can screw up the economy by leading to inappropriate levels of investment and debt, and can be very costly to maintain while providing few benefits to the economy.

But, it is my contention that within a wide range of "reasonable" choices regarding monetary policy and interest rate interventions, these decisions are merely secondary or tertiary contributors to the course of business cycles, at best. These are the two-thirds of the factors that economists obsess about are vastly overrated in importance.

Fiscal Policy Is Considered In Too Little Detail And Is Useful Mostly To Prevent Economic Resources From Being Underutilized During Recessions

Fiscal policy is another matter. Unlike monetary policy and interest rates, which basically just set units of economic exchange in a way that has slight incidental impacts when the rate of change in prices is unexpected, making these tools basically irrelevant to non-financial sector sourced woes in the economy, fiscal policy involves intervention in the "real economy." Government pays people to generate genuine goods and services that actually do directly impact GDP and employment.

In a nutshell, good fiscal policy, which is to say government spending and tax expenditures that cause goods and services to be produced with idle resources, and cause people who would otherwise not be engaged in gainful work to be working in a way that creates goods and services, clearly is valuable any time that a failure of the private sector entrepreneurs to find worthwhile activities for idle productive resources to be devoted to, is present.

As long as the goods and services that the government pays for have any value, dead weight waste in the economy arising from a failure to but economic factors of production that are available to use have been avoided by this public sector entrepreneurship. Value of those goods and services relative to their price could be lower than it is in private sector economic activity during economic booms. But, almost by definition, during a recession the private sector doesn't have worthwhile ways to employ idle economic resources so some value is better than no value, especially if the goods and services produced are of a kind that won't cut into future private sector production, for example by tying up the relevant resources through the next economic boom.

So, well managed fiscal policy, i.e. government stimulus spending during a recession to address a genuine shortage of aggregate demand does work, although insufficient attention is devoted to what particular kinds of government stimulus spending provide the most value in terms of goods and services produced and people employed for the money spent. The how is often almost as important as the how much, yet professional economists tend to be over focused on the how much question.

What Caused The Great Recession?

Going back to Krugman's question about the relevance of the pillars of macroeconomic policy, "what was deeply wrong with the US economy in late 2008 that wasn’t true of the US economy in late 2007?"

As someone who is focused on the non-fiscal aspects of the macroeconomy, my answer would be that:

1. The housing bubble collapsed.  The collapse was inevitable once a bubble developed.  Bubbles almost always collapse dramatically, rather than gradually wrecking havoc in the process if they are big enough.  The root problems were the factors that allowed the housing bubble to develop.

Macroeconomists should know this as a matter of repeatedly proven empirical fact.  But, they often seem baffled by this reality.

2.  Why was there a housing bubble (which was the real problem that its collapse only made us feel)?

a. The housing bubble was primarily a defect in a particular set of commodity prices in a fairly small number of states that either had de facto non-recourse mortgages pursuant to particular state laws, or derived most of their real estate financing from states that had non-recourse mortgages whose existence led to real estate sector investment policies for investors based on non-recourse state analysis that was applied injudiciously to state without non-recourse lending.  This created a heads I win, tails you lose approach to risk taking by thinly capitalized residential real estate buyers. 

Economists should have sounded the alarm and identify this key source of risk but didn't.  Few economists even after it all fell apart have any sense of how important a factor this was in giving rise to the housing bubble and as a result, the problems caused by the bad incentives this creates remain and could return in the future to cause future housing bubbles.

b. The housing bubble was also facilitated by the availability of inadequately regulated securitized financing sources for which a broken system of complexification and poor disclosure of loan risks which who industries bought into as sufficient via industry group think and self-dealing incentive. In other words, finance professionals developed elaborate ways to finance real estate at rates that did not reflect the real risk by obscuring the risks.  This was basically a case of regulatory capture and its private sector equivalent in securities ratings agencies and due diligence firms. 

Macroeconomists should have been far more concerned about the effectiveness of the functioning of national economic institutions beyond Congress, the OMB, and the Federal Reserve.

c. Another factor was that tax incentives encouraged high risk leverage structures over equity investments and encouraged loosely underwritten second liens to low equity borrowers over better underwritten mortgage insurance policies where firms recognized and more accurately assessed the risks and priced their products appropriately. 

A highly leveraged economy is far less robust than a less leveraged economy, something that macroeconomists should be acutely sensitive to, but were not sufficiently alarmed by in the actual fact.

d. In short, the real estate financing with bad incentives and regulations produced obviously excessive real estate prices that in turn produced bad allocations of resources in the real economy to housing construction that wasn't needed and starved investments that really were needed of funds at the margins. 

Macroeconomists spend to little time connecting the dots to realize that the real villain in most collapsing bubbles that cause huge economic downturns is market failure in the pricing of something that is important in the economy, which leads to a massive misallocation of resources.  It is the misallocation of resources, and not the intermediate mechanism that cause this misallocation, that is the ultimate problem.

e. The price bubble was unsustainable and like all price bubbles, it built up over a much longer period of time than it collapsed.  Basically, we all woke up one day and realized that our economy was stupidly paying people to construct unneeded real estate developments and then stopped doing that all at once.

One of the extremely important concerns in the business cycle which is a uniquely macroeconomic problems that microeconomists largely assume away in their models, is that group think in an industry can have catastrophic consequence for the economy as a whole; overcoming the usual protections that market forces provide in an economy against inappropriate pricing of goods and services.

3. The collapse of the housing bubble in these markets financed via national securities markets and financial institutions produced such huge losses that a financial crisis from overleverage and poor valuation of these financial assets resulted, and these losses together with housing losses, led to a recession as misallocations of resources caused by inappropriately prices real estate and real estate financing investments were corrected when the prices returned to normal. The imbalance was so massive and pervasive that it has had a global impact and a long duration.

Macroeconomists devote too few resources studying what circumstances cause isolated problems in one part of the economy to propagate across the entire economy.

4. The financial collapse and housing bubble bust caused the collapse of aggregate demand which reduced spending and thus caused the Great Recession. 

Aggregate demand is the mechanism by which price bubble collapses led to generalised recessions.  People reduce their spending on goods and services when their wealth declines in a way that seems permanent.

5.  Decline aggregate demand wasn't adequately compensated for by the right kinds of stimulus and was aggravated by inappropriate and counterproductive government austerity programs. So, a failure of entrepreneurs to come up for new uses for economic resources that were misallocated at the wrong prices caused economic resources to be wasted and thus caused GDP to contract and unemployment to rise.

Knowing that aggregate demand shortfalls translate asset price collapses into recessions should led economists to devote more resources to devising "automatic stabilizers."  This is one of the most generalized ways that policy makers can respond to early signs of a recession. An aggregate demand means of translating industry woes to economy-wide woes provides a natural point of genetic intervention akin to prescribing ibuprofin for a fever, regardless of the cause.

A lack of consensus among economists regarding the relative desirability of austerity and fiscal stimulus when the conclusion should be obvious to them did not reflect well on the macroeconomic profession.  Politics triumphed over good empirically based social scientific analysis here, and it continues to do so.

Thus, in 2007 the economy was rotten but the shoe hadn't dropped, and in late 2008 the house of cards based on unsustainable commodity prices and excessively low interest rates for risky real estate investments collapsed.  And, professional economists, collectively, weren't doing the right things to prevent it or address it.

There Was Nothing Wrong With The Parts Of The Macroeconomy Economists Obsess Over

What is the take away point here?

Yes, government produced a horrible disaster in the economy.  Dispropoprtionately, the problems were poor state and local government regulation of the real estate markets in key states, deficient securities market regulation, and poor federal income tax incentive, which acting together created massive systemic risk in the U.S. economy.  These risks were eventually and inevitably realized.

But, none of the core matters that professional economists worry about: the money supply, risk free interest rates in the economy as a whole, or aggregate levels of federal spending and deficits prior to the housing market bust, played meaningful roles in causing the Great Recession. And, neither management of the money supply, nor the risk free interest rates in the economy as a whole, were particularly relevant to getting the U.S. economy out of the Great Recession. This task is nearing its end but is still not completed as we still haven't returned to the pre-collapse, pre-bubble baseline.

If economists had been looking at the right things, instead of the things that they are in the habit of worrying about even though they are rarely important, they could have done us some good.  But, the big problem in the profession of macroeconomics leading up to the Great Recession was that macroeconomists were overwhelmingly focusing on the wrong things and not paying attention to what was really important.

The Fundamental Problems That Caused The Great Recession Solved Themselves, For Now

The fundamental problems that lead to the Great Recession were (1) excessively high pricing of real estate in selected important markets, and (2) excessively inadequate pricing of the returns on the financial investments that financed real estate purchases.   Together these led to a massive misallocation of resources and extremely high levels of leverage in the U.S. economy.  But, through market forces, these fundamental problems solved themselves almost immediately, at least in the short to medium term.  (It isn't clear that the legislative remedies that address the root causes of these problems were adequate.)

The investment of investors in firms contributing most heavily to the problems (real estate finance companies and investor owed investment banks and AIG) were promptly obliterated in a market driven punishment.

New legislation enacted by Congress has partially, although probably not sufficiently, addressed some of the regulatory failures and incentives that brought about the housing bubble and financial crisis that caused the Great Recession. The last mop up operations in the aftermath of these huge losses to enforce the debts created and defaulted upon during the bubble period are in their final stages with just a few years to go.

We Still Need Stimulus Spending Rather Than Austerity Right Now

Krugman notes that "Aggregate demand won’t solve a problem of low productivity, or inadequate productive capacity, or for that matter extreme inequality due to technology or market power."

Stimulus spending can still address inadequate aggregate demand in the economy and fiscal cliff legislation that did the opposite by enforcing austerity measures was probably a case of doing the right thing at the wrong time. But, risk free interest rates and the money supply have never been the problem and thus, not surprisingly are not very relevant to the solution.

But, we have also been dragging our feet another measures that can address inadequate aggregate demand.  For example, liberalizing immigration laws for individuals who can generate aggregate demand in the economy by making positive economic contributions with their intellectual resources and willingness to work, that could address aggregate demand problems in the same ways that stimulus spending does.

Bottom Line: The Economics Profession Hasn't Learned Its Lessons From The Recession

One of my big concerns is that economists, as a profession, still haven't internalized the reality that they spend most of their collective resources paying attention to the wrong problems. 

They continue to obsess over the money supply and risk free interest rates.

They continue to turn a blind eye to far more important issues like how to address herd behavior in financial and commodity markets, how to reduce systemic risk so that our economy can be made more robust, and casting a wide net to identify all economic indicators in the real economy that suggest that something is out of whack and needs to be address before it sows the seeds of the collapse and resulting recession.

Unless macroeconomists can start to develop a much more detailed descriptive understanding of the national and regional regulatory and policy choices that collectively drive the macroeconomy, they are doomed to deny us the value of wise macroeconomic guidance that they claim to be in the business of dispensing.  And, there is little to no indication that the profession is inclined at all to move in this direction.

National Taxpayers Union Not A Serious Think Tank

Any think tank that can recommend that Colorado voters give the thumbs up to Propositions 60, 61, and 101, as the National Taxpayers Union does in its voting guide this year, is not a serious think tank of people with any clue about public finance. The organization also opposes every single local government mill levy or bond issue in the state.

In the view of this organization, spending money on government services, no matter what the benefit or need, is always a bad thing. It believes in "starve the beast" even if you're riding it.

Economist All Wet On CA Judicial System Costs

Sometimes people who can be perfectly sane and rational about some concepts can lose all sense of proportion and reality in others. A post at Econbrower by James Hamilton, a professor of economics at the University of California, San Diego, about an 63% increase in judicial branch expenditures in California's general fund budget, which implies that class action lawsuits are at fault, is such a case.

He asks:

In the Governor's proposed 2009-2010 budget, $3.4 billion dollars, or 2.5% of the total, is allocated to state trial court funding. That's a 63% increase over the $2.1 billion that was spent in 2001-2002. Which led me to wonder: when, and in what manner, did California voters express a desire for a big increase in consumption of judicial services provided by the state over the last decade?

Then, he provides a blockquote from a class action settlement notice that he received recently and goes on to state:

I receive something like this on a pretty regular basis these days-- someone has sued, allegedly on my behalf, a company for something that I in fact do not acknowledge to be a serious transgression against me personally. The award is significant dollars for the lawyers who file the case, and some trinket offered to me.

I'm sure some of our lawyer readers can offer spirited arguments for why this growth in the role of the courts has been most helpful and beneficial. But here's what I really wish they'd tell me. If California voters desired a decrease rather than increase in the consumption of judicial services provided by the state, exactly how, under our current system of governance, could we achieve it?

Of course, it is never that simple. As the budget document he cites explains the vast majority of the judicial branch budget in Califonia goes towards funding trial courts, an expense that is also partially paid for by county government and filing fees.

But, a 1997 law adopted in California "capped the counties' general purpose revenue contributions to trial court costs at a revised 1994-95 level." And, a 2002 law in California transferred "responsibility for court facilities . . . from the counties to the state by July 1, 2007."

In other word, the state general fund budget tells you almost nothing about California's consumption of judicial services. Funding has simply been transferred from one level of state and local government to another. It could have gone up overall, but it also could have gone down. The state's consumption of judicial services at the trial court level doesn't appear in the state budget, only the amount of funds transferred from the state government to California's counties to provide judicial services does. Trial court judges in California are local employees, not state employees.

Class action lawsuits filed in California's superior courts, as opposed to federal court (where federal law has mandated that most national class action lawsuits be filed since 2005) are a tiny part of the docket. As someone else making a comment on the blog post noted:

The statistics show that of all California superior court cases, only 2% are unlimited civil cases (greater than $25,000). The vast majority, 85%, are criminal felony and misdemeanor cases.

If you just look at all civil cases, only 12% are unlimited civil. The rest are motor vehicle injury, marital law, family law, probate and small claims.

Now of the unlimited civil cases, only 27% are torts. The other 73% are contract disputes, companies suing each other. More interesting are the trends. Torts are down 30% in the last 8 years while contract disputes are up 17%.

The vast majority of tort cases (about 0.5% of the cases handled by judges in the state), of course, are not class action lawsuits. The number of class action lawsuits filed each year in California is not large. From 2000-2005 combined there were probably fewer than 5,000 class action lawsuits filed in the state (based upon a survey of 75% of all civil lawsuiits seeking $25,000 or more of damages in the state), an annual average of about 900 per year, statewide.

It isn't that class action lawsuits aren't more common in California. In Los Angeles the number filed went from 500 to 800 in the past few years. But, the base number is so small it doesn't make much of a difference. About half of cases which settle are either employment (often wage and hour claims) or breach of contract cases.

The reality of judicial system costs is that the costs on the judicial system itself are heavily backloaded. Judicial involvement in the month or two before trial is often significant, and a trial of a class action lawsuit would typically take the full time efforts of a trial judge, a law clerk, a court reporter, about eight jurors (including alternates) and the part time services of court officials who provide security and supervise the jurors.

But, class action lawsuits almost never go to trial. The California judicial department study cited above notes that only 9 out of 1,294 class action cases in its study that were closed in a six year period were resolved with a trial, about 0.7% of the total. There are a couple of class action trials a year in California.

By comparison, in the time frame during which there was 9 class action trials, there were 7,235 trials in non-class action civil trials in California in unlimited damage civil actions, including 1,064 jury trials. Non-class action cases were twelve times as likely to go to trial as class action cases were to go to trial. There is one class action trial per 100 civil jury trials in unlimited damages civil cases in California, and there was one class action trial per 700+ civil trials of any kind in such cases. While class action case trials are longer than an average civil trial, they aren't that long, and the vast majority of trials in California (like every U.S. state) are in criminal cases.

The vast majority of cases are settled (31%), dismissed in motion practice (33%), transferred to another court (12%), or merged or coordinated with another case (20%). Notably, "The percentage of settlement dispositions skyrockets to 89.2% if the analysis is confined to cases with a certified class (258 out of 289 total certified cases with a disposition) with 88.4% of these certified as part of the settlement itself (n=228)." The average class action case is closed in sixteen months.

About 95% of California class action cases were either certified as a class in connection with a settlement or not certified as a class at all. Only 5% of these cases (62 over a six year period) were certified as class actions involuntarily by a court. The public gets notice only of cases that were meritorious enough to settle and have a settlement approved by a judge.

Dismissals, transfers, coordinations and consolidations happen on average five to seven months after a class action case is filed. The nine of cases that did go to trial were resolved in an average of two and half years in what is widely acknowledged as one of the most complex kinds of cases to take to trial.

Typically, a low level court official with computer assistance makes sure that the papers in the case are filed properly and alerts a judge only when action is required. An initial scheduling conference in a civil case, even a class action, can often be completed with less than a hour of judicial time. The balance of the time devoted to a class action case that is fairly protracted will involve rulings on a class certification motion, one or two dispositive motions, a couple of discovery motions, and a settlement motion accompanied by a brief hearing. Much of the time consuming legal research is often done by a law clerk with the benefit of the full briefing from the parties to the case. Many motions, once fully briefed and reviewed by a law clerk, while they take time, don't take all that much time. The vast majority of the costs in a class action case fall on the parties to the case (often hundreds of thousands of dollars in litigation costs per party alone).

The filing fees assessing in a class action case ($350 to file a class action lawsuit, and $350 per defendant to respond to one), go a long way towards covering the costs that these cases impose on California's judicial system.

In short, the evidence is absolutely overwhelming that class action cases have virtually nothing to do with the increasing California state budget line item for trial courts. The predominant factor is a transfer of funding from the local to the state level, and an increase in the burden posed by the criminal docket probably explains all or most of the rest.

These kinds of rants undermine the credibility of academic economists, whose stock in trade is being able to sort out important from unimportant economic impacts at a quantitative level. Alas, the shallow analysis in the post, that jumps to a foregone conclusion before really understanding the problem or the factors involved, is all too common in academic economics. It is a pre-disposition of the discipline.

The Laws of Elbonia

A substantial body of comparative legal scholarship considers statements applicable to large, conceptually infinite numbers of countries. Such statements gain in credibility if they are supported by evidence from large samples of countries. Processing such vast evidence requires quantitative methods. Designing the requisite numerical measures of law is not straightforward, but an important insight from statistics suggests that this problem can be overcome by appropriate research design. While in practice considering more countries comes at the expense of less information per country, on balance large sample, quantitative research designs promise to yield interesting insights for comparative law.

From here (Holger Spamann of Harvard Law School, American Journal of Comparative Law, Forthcoming, Harvard Law and Economics Discussion Paper No. 32 "Large Sample, Quantitative Research Designs for Comparative Law?").

The (sad?) truth is that there are only a couple hundred countries in existence, not an infinite number of countries, and that due to historical ties and processes of legal development, there are far fewer real life examples of law in any area. No amount of statistical massaging can cure this reality.

UPDATED: The post title is a reference to a fictional country that frequently appears in the comic strip "Dilbert." It is a reference to the alleged "conceptuallly infinite number of countries" mentioned in the abstract of this paper.

While the state of affair claimed by the author in the abstract would be bad, in fact, the body of the paper and the footnotes it uses to support it assertion in light of the statements made in the body of the paper, undercut this claim. Instead, it recites that a large amount of international law studies actually only purport to compare two or three countries. The papers, several of which I have read, which are cited in support of the claim that they make "statements applicable to large, conceptually infinite numbers of countries," don't really support that assertion in anything but a tortured interpretation given to those papers by the author.

Of course, what I say in the original post in another way of saying that the data from the countries in the sample are not independent. For example, many of these countries used to be part of the same country and have since split up. Korea and Japan both made more or less literal translations of large parts of the German civil code into their own vernacular for their own civil codes.

The data points are also not comparable even when superficially similar. One of the main conclusions from projects attempting to strengthen international legal institutions is that rules and laws that a superficially the same don't act that way in the field; law's impact is deeply context specific. As the author notes in the study, two of the most widely cited examples of this kind of analysis have been discredited upon reanalysis.

Also, many countries have bad statistical data collection. For example, tax data and banking statistics may be far more accurate in some countries than others. GDP data are often wildly inaccurate in undeveloped economies, for example, because so much of these nations' economic activity takes place in the gray or non-monetary economy. Sample bias in regard to questions used as examples in the study, such as the relationship between how many words are put into contracts and legal environments, are highly vulnerable to sampling bias, and to country specific issues like word length (e.g., the German language compresses what would be phrases or sentences in English into single words). The bigger the sample, the more likely it is that bad data is introduced into the sample. This means that large samples pose a grave risk of increasing, rather than increasing error, but reducing average data quality.

Even seemingly high quality data sets, such as surveys of international business executives about corruption levels in particular countries, can mask bad data problems. Small countries with small economies and little international trade will be the subject of fewer informed data points than large countries with large economies and a great deal of international trade. This makes the sampling error much greater in smaller countries, but often this isn't disclosed. Indeed, some papers in comparative law that rely on survey data don't even consider issues of statistical significance at a country by country level at all. Likewise, even when the number of responding business executives in a survey like that is large enough to be statistically significant, the number of transactions or incidents that the business executives may be relying on for an assessment of a country that engages in little international trade may itself be very small.

Even relatively superficial international legal information, like determining citation forms for large numbers of countries (a project I worked on while on the Michigan Journal of International Law in law school) is much more difficult in practice, even with a premire international legal library, than one might suspect. Outside the OECD, even for countries as large and economically important as China, when using a library with a collection of legal resources reportedly as good as any library actually in China, the quality of the information available is depressingly poor, and hard to place in context. Amnesty International, for example, doesn't even purport to be able to accurately determine how many executions are carried out in China each year.

The paper does not meaningfully raise serious questions like weighting issues. Treating each country as an equal separate country gives disproportionate weight to small, economically insignificant countries. It also means that an event like the breakup of the Soviet Union or Yugoslavia significantly changes the sample size even when the underlying data may not have actually changed at all with regard to a particular issue. But, using GDP or population, for example, to give increased importance to a small number of big countries that dominant the sample, undermining the statistical benefits of having a larger sample size. For example, more than 40% of the world's population lives in India or China. A sample of twenty countries, carefully chosen, can easily include a supermajority of the world's population and GDP, but, of course, is harder pressed to capture issues like systemic difference between large and small countries.

When, independence, lack of comparability, weighting issues and data accuracy issues are considered, a larger sample may actually increase error.

For example, while civil law codes theoretically apply in Sudan, there are so few lawyers there, particularly in Southern Sudan which is only marginally under the control of the central government anyway, that any inclusion of quantitative data about Sudan into a sample of countries with a civil law code, would reduce the accuracy of the study.

Another subtle but fairly common quantitative data comparison between countries that is frequently misleading is a number of attorneys' per capita measure, because attorney means different things in different countries.

The kinds of impacts are frequently subtle yet serious. For example, one could do a quantitative study on comparative letter of credit law (a specialized form of bank guarantee often used in international trade) that would look very convincing until one knew that the vast majority of letter of credit instruments provide for arbitration and opt out of local law by agreement in favor of international chamber of commerce rules, and that the situations where local law on letters of credit were used differed greatly from country to country.

The concern about data quality is particularly great in large sample comparative law research because these studies are very often domestic policy driven. Many are indexes of "economic freedom" or "transparency" of some similarly vague concept prepared to a great extent for use in political debates.

The only pertinent publication in his biography is a 2006 paper concerning the "Anti-Director Rights Index." His 2008 paper on SSRN on the topic acknowledges that this leading example of large sample comparative law was so grossly inaccurate that its original results are basically meaningless.

How can we trust him to be any more honest or accurate than the original study author? Keeping the author honest is frequently a genuine concern in these studies; no one is pure in their academic interests here. It is hard enough to monitor data analysis in an in depth, small sample comparative law paper. Monitoring data quality with large samples is much harder. It also doesn't go without mention that the particular paper in question is sponsored by a foundation with a strong conservative policy agenda in its own work, which is characteristic of the law and economics subdiscipline that its funds generally. This doesn't help the paper's credibility.

And, since when did some subset of 180 data points become "vast evidence" incapable of analysis without quantitative statistical methods? Moreover, many comparative law questions, such as relative allocations of federal power, or differences in voting laws, have a total data set that is even smaller, because relative few countries have federal states, and not all countries conduct elections. When the actual data set is incomplete, the concerns about gains in statistical power from large data sets, relative to reduced statistical power from reduced data quality is a very serious concern. The statistical power of a study is also reduced if one is seeking to compare two incomplete subsamples of the total data set to each other, rather than simply determine some statistical quality of the entire world.

Even an expanded sample size is too small to seriously reduce experimental error unless is it very nearly complete. While a survey sample of 3,000 data points can provide very simple levels of accuracy whether the total population is 300,000 or 300,000,000, very small samples (say, those of 100 or less), very quickly become almost inaccurate as similar sample sizes drawn from a large population, even if the total data set is quite small. For example, in a truly statistically random survey of 100 members of a population of 180 on a yes or no question, the random sampling margin of error is +/- 6.55%. This low resolution of accuracy can capture only the most gross discrepancies.

His work advancing the same thesis for the American Association of Law Schools in the area of crime and punishment is similarly weak; the sociological literature on the subject treats the same issues much more rigorously. He admits this problem in his crime and punishment work he admits that this kind of study can never show causation because of a small sample size, but fails to quantify just how big the inaccuracies involved can get or the seriousness of the non-statistical sources of error that can't be cured by the law of averages (which doesn't apply in this context) are in this type of study.

When the only way you can do a job is poorly, it may be better not to do it at all. Studies with high margins of error can convey a misleading sense of accuracy and knowledge, when the most useful fact may actually be knowing that we don't know. If anything, this paper casts doubt on the desirability of every conducting large sample, quantitative research in comparative law. If this is the best case that can be made for it, maybe it isn't worth doing.

Holger Spamann's paper as found on the Social Science Research Network, which I cite above in the original post, is alarmingly sloppy and has a remarkably shallow analysis for a fifth year PhD student at Harvard Law School, even for a mere twelve page discussion paper. It doesn't engage the literature about law and economic development in a meaningful way, despite the fact that this is what the research method he is using is mostly used to address and despite the fact that this is his core area of PhD research. Most of the most serious issues, which are basic considerations in any undergraduate social science research design class, aren't even acknowledged. Indeed, given his academic background, it isn't obvious that he had this kind of field research design background as an undergraduate; his undergraduate degrees, which appear to be in economics and in law, both often omit that subject. Yet, surely has has at least a social science research design class in graduate school.

If I were teaching a undergraduate class where his paper was submitted, I might give it a B- at best; for a student at this level of his education, I wouldn't consider it passing work. This is hardly what one would expect of a Phd/SJD graduate student who is a specialist in this area at one of the nation's most prestigious law schools.

N.B.: Spamann's recent work as a junior author in a paper on banker's compensation may be much better. It has received national media and policy maker notice, and its basic conclusion is a sound one, although I haven't examined the details of that paper. I came to a similar conclusion as part of my recent conference presentation at the Law and Society Conference in Denver this year. Co-authorship also makes it hard to figure out whose work is whose. At any rate, economic analysis at this single individual's incentives levels in the well understood and measured American financial sector, is a very different matter than research design. One can be brilliant at one and a dismal failure in another.

Famous Economist Makes Fool Of Self On CNN

Arthur Laffer is a former advisor to President Reagan and the creator of the Laffer Curve, the notion that if tax rates get high enough that tax revenues will go down. It is a nice intuitive theory, but empirically, like a lot of macroeconomics, it is wrong. ("According to Nobel prize laureate James Tobin, '[t]he 'Laffer Curve' idea that tax cuts would actually increase revenues turned out to deserve the ridicule with which sober economists had greeted it in 1981.'"). Mr. Laffer also warned CNN viewers yesterday (via Krugman's blog):

[J]ust wait till you see Medicare, Medicaid ... done by the government[.]

I guess he didn't get the memo. You know, the one about Medicare and Medicaid being the primary government run health plans in the United States.

He was in graduate school at Stanford getting his MBA and PhD when the programs were created (in 1965) and in the six years that followed when the government agencies that created the plan were set up and the regulations were drafted, around time my dad was getting PhD in civil engineering there. Maybe he didn't get out much. It happens. And, maybe, when he was an advisor to President Reagan in the White House office on public finance issues, he never looked at the federal budget. This would explain a lot about his public finance work.

Fool or fraud? We report, you decide. Does the fact that I remember the days when CNN was a credible news source make me old?

Denver Post Distorts Estate Tax Headline

Associated Press article headline: "Estate Tax Hits Few Ordinary People."

Denver Post headline for same article: "Estate tax can hit ordinary people."

Who are those ordinary people?

Folks receiving inheritances from estates of $3.5 million or more ($7 million or more in the case of married couples with a simple trust arrangement). Serious planning can considerable increase the amount the passes tax free and can reduce the effective estate tax rate. Small business almost never have to be sold to pay estate taxes.

Needless to say, the AP headline provides a more accurate description. The Denver Post headline creates unjustified fear.

Estate tax issues aren't that common (certainly not ordinary) for people who are merely relatively affluent members of the middle class (perhaps because they are retirees), but could be a particular problem in a divorce of a same same couple with unequally owned assets, of only modest wealth, or large gifts to a spouse who is same sex or not a U.S. citizen.

A gay spouse or non-citizen spouse receiving a spousal gift during life in excess of $1,013,000 (gay spouse) or $1,133,000 (non-citizen spouse), or in excess of $3,500,000 (for either) from a spouse via inheritance or bequest (in either case reduced by certain large gifts made during life to people who are not charities) could be subject to the gift or estate taxation, but even this is an uncommon upper middle class issue that can be resolved with tax planning (one solution is a type of trust called a QDOT).

Colorado has the cheapest, easiest probate system in the nation, which provides a fairly high degree of privacy, so that is rarely the worry it is made out to be either.

The far more ordinary money issues at death are (1) taxes due on never taxed traditional IRA and 401(k) assets, and (2) the Medicaid estate recovery system's application to people who needed publicly assisted nursing home care in the final days.

The key point made in the article, however, is that:

In 2010, the federal tax as it currently stands will expire; if Congress does not change the law, there will be no estate tax next year. In 2011, the old exclusion of $1 million returns, and the top rate for holdings above that amount would jump back to 55 percent, where it was in 2001.

Several bills have been proposed in Congress to address the issue, but none has passed yet.

Conventional wisdom is that the final deal for 2010 and thereafter will be a $3.5 million exclusion and a 45% rate on the balance, just as under current law, with a few tweaks that make estate planning less important and close some loopholes in the way minority interests in closely held businesses are valued (basically, President Obama's proposal). But, a proposal to do this narrowly failed in the U.S. Senate where some Senators would prefer a larger exclusion and/or lower tax rate.

Rich Dad, Poor Dad

My wife has started reading up on investing and all things financial and entrapreneurial. One of the starting points was one of the "Rich Dad, Poor Dad" books, which she'd read quite a bit of. I'd seen them prominently displayed at book stores. It was folksy and a bit unorthodox. I put a little entry on my "to check out" list to see if there was any merit to what he had to say. She then did a little internet looking into the topic.

I hadn't know was that Robert T. Kiyosaki’s book "Rich Dad, Poor Dad" is a fraud, as in almost everything described in the book as fact is really just made up and false, even best seller status apparently was achieved largely via a quasi-Ponzi scheme.

This is bad for two basic reasons. First, the books are on the non-fiction shelf. Second, the argument for following Kiyosaki's financial advice is basically ad hominem. To paraphrase: "I got rich this way, my friend's dad got rich this way, my own dad failed to get rich because he didn't do it, it works." An ad hominem attack is a legitimate way to question an ad hominem argument.

This isn't to say that there aren't any nuggests of wisdom in 18 books of financial cliches, but given that the book urges readers to leverage and similar high risk approaches to get rich quick, caution is in order when you know that the man who wrote it is a fraud.

Kiyosaki and Education

I don't give Kiyosaki quite as hard a rap for scorning conventional education as some writers do.

While education is valuable in fields where you rely on your ability to reason and draw upon a wealth of received wisdom (law, medicine, engineering, academia, theology), in much of business too much reasoning ability can be a bad thing.

First, it tempts you to do things yourself instead of delegating tasks to an expert. Good business people trust their professional advisors.

Second, outside some select fields, education is largely a sorting tool which isn't that important when you are in business for yourself. Many jobs that require a B.A. or other degree, don't actual involve using the skills you acquire in that education in any meaningful way. The fact that you got into a good college (which shows that you are smart), and that you had enough self-disicipline to graduate, are far more important.

Third, many business people get rich by doing something that logically should be stupid and never the less sticking with it and getting lucky -- education and reasoning ability breeds doubt in these schemes. FedEx was based on a business plan that the professors at Harvard's M.B.A. program frowned upon.

Indeed, even in the professions, big economic sucess is rarely simply a matter of being very smart and very good at what you do.

My father-in-law was a financially successful radiologist not exclusively or even primarily because he was far better than his peers at reading a chart. His financial success had a lot to do with some savy business decisions he made and with his artful management of his business colleagues.

While the straight and narrow path can lead to financial success in law, by getting you hired at a big firm and pushing you along the partner track, many lawyers secure financial success outside this track using very non-academic negotiating and marketing skills to bring and win major class action and personal injury cases.

Edison invented the light bulb thorough brute force trial and error.

Put another way, education and a good job and conventional wisdom are great, proven, reliable tools to becoming upper middle class, but aren't necessarily the best tools for becoming truly rich. Entrapenurial success (or success in the arts and entertainment world) is the main way to achieve great financial wealth, and this involves a set of qualities very different from those rewarded in the traditional good student path.