Goolsbee - Obama's Economic Adviser - It's All in Your Head

Guess what folks, there is a new economy!    I'll bet you didn't know that just as much as stock evaluations and profit didn't matter in the dot con era.

 

It's All in Your Head

At the helm of the Obama plan is the Chicago School of Economics, heavily promoting behavioral economics..

Aha, if we all just made the right choices, none of this bad shit would be happening right?  A new article, Obama's Geek Economist, in the MIT Technology Review, gives some foreboding hints at what we could expect in economic policy for an Obama administration.  We're being told (sold), we need a new economist for the new economy.

As I recall our economy is a very old story and it's called labor arbitrage.

Obama subscribes to a distinctive set of economic theories developed at the university [of Chicago], and to a corresponding set of policy prescription

Some accomplishments of Alan Goolsbee's so called "new economics":

  • How Taxes depress buying crud on the Internets
  • With his colleagues, advancing behavioral economics

Here is the new Chicago school of economics.

When our tendencies to make irrational decisions are understood, the Chicago econo­mists argue, we can design "choice architectures" (Thaler and Sunstein's phrase) so that people default to better choices about matters like investment or taxation.   Hence Obama's proposal that companies offering 401(k) retirement accounts should enroll their workers automatically, making participation the default option and opting out a conscious choice.     Thus, too, Goolsbee's plan to simplify income tax filing for that majority of Americans who take only the standard deduction: under Goolsbee's scheme, the IRS would send all those taxpayers a return with the relevant information, so that signing the prepared form would become the default choice--saving taxpayers 225 million hours and $2 billion in preparation fees

Behavior economics, especially that based on neuroscience has been criticized as Mindless Economics (large pdf).   All of our concerns about the United States, manufacturing and trade is all in our heads according to Goolsbee. Again, more behavioral science and not facing the trade deficit.

Economic research hasn't pointed at globalization as the main culprit," Goolsbee says. For example, he explains, Chinese and American manufacturing barely overlap: the total of all imports into the U.S. amounts to only 16.7 percent of American GDP, and imports from China amount to just 2.2 percent. "In fact, the losers to China have been nations like Mexico," he says; likewise, if Americans stopped buying cheap toys from China, the manufacturing jobs would return to nations like Mexico, not the U.S. Goolsbee adds, "Trade has helped the economy grow. Simultaneously, a sizable number of Americans haven't shared in that bounty, and if we don't pay attention to their concerns, all the political favor for open markets will dry up

You see that? Quite a piece of dancing footwork to deny the fact China is exceeding the United States in manufacturing alone.   Our trade agreements are just fine and dandy.  Simply a matter of adding some useless, not enforceable labor and environmental standards.  Oh, it's just a matter of political capital to continue down the same path we are on with trade policy.

 

It gets worse. Goolsbee points to health care as the growing industry and how we have simply Creative Destruction of jobs.

Creative Job Destruction is the idea that if your job if offshore outsourced, magically a new and better job will appear due to innovation and technological advances.

One small problem with this one, another nations are catching and surpassing the United States in these areas, so the creation of jobs may be happening....just not in the United States.

This explains the completely weak trade and manufacturing policy positions and also explains the idea to give startups (ahem, define a start up and why do they need this if they are building value, services and products?) zero capital gains.

Even worse, while they promote education and training(the ultimate blow off response, the United States has the highest educated Professionals in the world), they ignore the rapid acceleration of Research and Development offshore outsourcing! 

Ask yourselves this behavioral question:  why should anyone go into debt, spend years obtaining degrees and experience to have their careers cut short and their job offshore outsourced?

Charlie Rose (our favorite corporate agenda sales guy) with Goolsbee:

Obama is not in favor of abolishing NAFTA but merely putting in environmental and labor standards

If we are not mindful of those people's concerns, political capital will dry up

We can clearly see Obama's economic team do not acknowledge our trade deficit, how the United States is losing on trade policy and how we need major renegotiation on trade agreements. Goolsbee only sees the trade issue, behaviorally to the point he seems to not be able to analyze his own behavior of denial. China is going to exceed the United States economically in about 5 years. That's not behavior, that is absolute hard numbers. Ya know, that pesky thing called collective reality.

 

More on It's all in your head.

 

Note in the article Obama went shopping for an economic adviser simply by going to university where he had established connections and picking up the phone.

Meta: 

Comments

Somebody write on McCain

I keep focusing in on Democratic policy because McCain all I can think of is saying he's a lettuce head.

I mean it's so bad but frankly I'm finding the differences here to be on the fringe and that's not good when the entire nation wants dramatic change, especially on trade.

This is simply John Kerry plan from 2004 in so many words.

I've got something more CT, supposedly Goolsbee is a member of Skull and Bones.

But on that score supposedly it's Goolsbee who advised Obama to not consider any sort of a freeze for homeowners in terms of the mortgage foreclosures. They give a $500 dollar tax credit. Right o, that will do a lot.

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Behavioral economics is a vast improvement

over traditional neoclassical economics.

I think in this diary you have picked the wrong target. Goolsbee's support for behavioral economics (explored in the first part of theMIT article), is in no way tied to his support for "free trade" (explored in the second part of the article).

I wrote a diary entitled Calling BS on Right-wing Economics exploring in great detail how behavioral econ was a potent challenge to traditional Milton Friedman style economics, so much so that even the U of Chicago has had to acknowledge its relevance. Here's just a small part of that diary:

The defects of an exclusively mathematical approach, where simplistic assumptions are substiuted for actual, complex human behavior, which is ignored, ironically was set forth nearly a century ago by another University of Chicago professor, John Maurice Clark:

“The economist may attempt to ignore psychology, but it is sheer impossibility for him to ignore human nature,” Clark wrote in a 1918 Journal of Political Economy. “If the economist borrows his conception of man from the psychologist, his constructive work may have some chance of remaining purely economic in character. But if he does not, he will not thereby avoid psychology. Rather, he will force himself to make his own, and it will be bad psychology.”

Mathematical neoclassical economists refused to even consider reality-based testing....:

The neoclassical economists refused to perform even the simplest tests. These aren't really that complicated, pyschologists were running similar tests (though of course focused on physchological theory, not economics) 50+ years ago. The neoclassical economists literally could have walked less than 25 feet in some cases, and learned how to do these experiments in a very short time.

Not only was there not even the most minimal effort to try to test neoclassical micro-economics, the issue had to be forced by folks like Kahneman, Tversky and Thaler, who actually started releasing test results and were promptly considered as nutcases by the economic high priesthood.

When tests started actually being run, very few of the neoclassical principles actually were sustained by the experimental results.

In an article entitled The Marketplace of Perceptions, Harvard Magazine explained how "Behavioral economics" offers a scientifically and experimentally valid counter to the "rational man" Chicago school economic theory. Behavioral economics "typically integrate insights from psychology with neo-classical economic theory", and "apply scientific research on human and social cognitive and emotional biases to better understand economic decisions and how they affect market prices, returns and the allocation of resources." Brain MRI scans have "also been used to determine which areas of the brain are active during various steps of economic decision making.... Experiments are designed to be incentive compatible, with binding transactions involving real money"

In other words, behavioral economics takes the insights of experimental psychology, and challenges the bullshit "rational man" assumptions of traditional economics.

The pdf article you cite, "In Defense of Mindless Economics" shows exactly why traditional neoclassical economics is so deserving of the challenge. Here's a few excerpts:

Neuroeconomists share with many other critics of economics the view that individual rationality is an empirically invalid assumption. Over the years, critics of rationality have identified various economic assumptions as ‘rationality.’....

Neuroeconomists criticize both standard positive economics and standard normative
analysis....

[But] Evidence of the sort cited in neuroeconomics may inspire economists to write different models but it cannot reject economic models.....

[Rather, W]e argue that these criticisms typically underestimate the flexibility revealed preference methodology

Economists use the revealed preference of individuals as a welfare criterion because it is the only criterion that can be integrated with positive economic analysis.

The dominant role of revealed preference analysis in economics has little to do with technology. Economic phenomena consist of individual choices and their aggregates and do not include hedonic values of utilities or feelings. Therefore, it is not relevant for an economic model to explore the feelings associated with economic choices.

In summary, argues "In defense of Mindless Economics", because we neoclassical economics use "revealed preferences", we don't need no stinkin' information about what is actually happening!

Let me put that in math terms. I as a neoclassical economist say that x + y = z. When you make an economic decision that results in the answer of "7.5", that must mean that whatever x + y was, that was your preference, because you made "z" decision at 7.5 . My equation, "x + y = z" is never falsifiable, because you will always "reveal" some number z in your actions. So I never have to define "x" or "y", let alone prove my conjecture about their proportion. My equation cannot be falsified.

This of course is exactly why neoclassical economics is not really a science. Its paradigm can never be falsified. Behavioral economics calls BS on this idea, and says, not only are x and y relevant, x and y are testable, and x + y, when tested, might not add up to z at all.

Personally, I think behavioral economics is a necessary but not sufficient correction to economic theory. More is necessary. Too much of economic results depend on the power of the actors at any given starting point, their knowledge at the starting point, and their relative intelligence or stupidity. But behavioral economics is a terrific advance over traditional econ, and in no way inherently leads to Goolsbee's conclusions about free trade.

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fringe

What I am trying to get to is instead of looking at x+y=z they are focused in on why and how x+y != z or say x+y + Δ = z

That's just not mathematics. I'm sorry that's probability and predictive analysis, markov models at best and when one takes out the probability and puts in absolutes...ya just ignored the realities of mathematics in a behavioral world. What happens is one takes the focus off of quantities x, y and results z and disproportionately weights Δ

Just as their example, on the 1040EZ. So, they are going to fill the entire thing out to modify behavior so people do not take itemized deductions, do not use accountants. They point to $2B in savings and hours of time.

What is the assumption in this idea? Why would they not instead encourage people to itemize on their tax forms?

Why would they not create an automated system, perhaps in collusion with VISA, MC (since they are already profiling people and know every dime, where you spent it and why) to automatically calculate out one's tax bill....or create some other behavioral modification system beyond the one presented?

It is just assumed that their behavioral model is the good one. Where is the mathematics which states this is so?

Who made that behavioral choice? What about all of those CPAs losing income, revenue? Who decided that was a good idea?

So, instead of looking at the issue holistically a decision on what was the correct behavior was decided and a correction is prescribed.

That removes the entire equation on how much overtax people will pay or any analysis on how to get people to itemize themselves more easily.

Why have deductions at all if one is going to steer people away from them? Is that because one cannot get the tax law changed or ?

Even worse, human behavior is not a linear system. One might be able to model some actions based on probability and "zones" of convergence as well as prediction models. But to assume that behavior has an absolute mathematical result, even with a series of experimental trials at a moment of time is incorrect. One cannot say that human behavior is time invariant. In other words, one cannot say what man did in the year 1700 is necessarily what people will do in 2008 and the reason for that is the societal conditions and so many factors it's not a linear system.

So, of the objects that are quantifiable, that is where the real focus needs to be. One can assuredly weight in these other factors but that's not what I'm getting in their focus.

Now surely in modeling that's fine to take into account human behavior but to focus in on behavior instead of the hard line mathematics that are well proved ....sure one can test models and so forth but to well, put the focus on the nebulous and take away the focus on the quantifiable.

You just messed up the weighting in a mathematical model in a nutshell.

Of let me put it another way. Instead of focusing on the reality that free trade theory by the calculus itself and differential equations will show that under certain conditions it is not a financial "win-win" and there are losers. Right there in the math.

So, ok, we have Goolsbee focusing in on people just behaviorally (supposedly) are just not willing to adjust, instead of looking the hard cold numbers from the mathematics of free trade theory...which show the United States is screwed and we should be modifying US trade policy accordingly.

Is it if you don't like the math you make up a new science?

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bad math - crux of the issue for me

I just reread your blog post and I think the crux of the issue is those right wing economists have bad math. So, for example those who claim free trade is just great have never even read one United States trade agreement to see it's clearly not free trade by the theory.

Then, in Global Trade and Conflicting Interests they show, by the mathematics that there are multiple outcomes and that is when one is actually using the theory of free trade, it's not a win-win or necessarily a net win. It completely depends on a series of conditions.

So, those right wingers ya know, many of them suffer from bad math in just making sweeping assumptions and generalizations.

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I'm not sure how much we disagree

Traditional neoclassical economics assumes people make "rational" choices. Confronted by experimental results that it just isn't so, you can either stick your hands in your ears and pretend its not so (what the authors of "In Defense of Mindless Economics") do, or else you can try to take into account how people actually behave.

So, for example, we know that due to inertia a plurality if not most employees will take the "default" 401k selection offered them. Why not then make the "default" selection one that maximizes the employer match? Note the difference between traditional neoclassical economics and behavioral economics: traditional economics assumes people will make the most rational choice, behavioral economics assumes the tendency of people to accept the choice offered them which may or may not be the best choice, and so tries to maximize the number of people making the best choice (maximizing the employer match).

Behavioral econ isn't a question of "liking" or "not liking" the math; it's a question of trying to integrate actual reality, something traditional economics patently does not do. Does it make the math far more complicated? Absolutely. Is it messier because people's behavior is messier? Sure. Is it better than assuming "homo economicus"? You betcha.

For example, one place where experimental psychology has literally thousands of studies in support (all vetted mathematically), that completely contradicts traditional economic theory is, what is the best reward system to use to maximize a behavior? Econ says, simply increase the reward. Experimental psychology says, vary the reward -- sometimes give more, sometimes less, sometimes nothing at all. It's called "variable reinforcement" and it leads to lots more of the desired behavior than simply increasing the reward. Experimental psychology has also demonstrated, again by means of thousands of studies, properly mathematically vetted, that once a behavior is established, it can be continued by ever less reward. Traditional economics has no such concept.

This is not debatable, the studies have been done, with actual human subjects: experimental psychology is right, the traditional economic equations are wrong.

If you want to use those traditional economic equations because you feel that's all you can do mathematically, you will get a nice mathematical result. Unfortunately it will have only a random relationship with reality.

I do not see anywhere that behavioral economics mandates one particular trade policy over another. Goolsbee may believe there is a set of policies that can best mold behavior to a particular policy, but if he does, I didn't read it in the MIT article. I saw two unconnected parts, the first describing his relationship to behavioral econ, the second his support for free trade. I saw no attempt to say that the first automatically leads to the second. In fact there is plenty of evidence that without compensation, a majority of people in a polity may be made worse off by "free trade" and that majority may therefore "rationally" vote to restrict such trade. There is nothing in behavioral econ that contradicts such a "rational" choice by the majority.

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vary the reward

Yes and it's also a torture technique. ;)

Taken to the extreme it's called crazy making treatment, psychological warfare.

Keyword here is control.

So, let's say you have a human from an abused background and you try "vary the reward"....well, it's possible one would instead trigger PTSD and they just walk away from the entire event.

Even in behavioral there are not absolute outcomes and especially over time. There are some general rules sure but people are not Pavlov's dog.

Back to the math, sure you can put some probabilities into behavior but here is my point. Instead on focusing in on the fact that free trade theory says we're in trouble or how it is in the national interest, especially on security to ensure certain sectors remain in the United States...
and that's by neoclassical math in part...

we're focusing in on default paths on 401ks. Well, that's just behavior. It's well known the path of least resistance in most things is the action taken. In computer science graphical user interface and UI design it's known as the 3 button rule or the 1-click action.

So, ok, hey great, let's analyze behavioral paths and try to quantify the human condition...I believe Citibank, Visa, MC are already doing this btw!

So, to me economics has to focus in on the big picture, which is the raw data, the absolutes of the economy.

So, one can focus in on the default state of beginning employee in 401k participation but here's the real damn question...what the hell happened to traditional pensions and how is that affecting retirees and the middle class. What kind of effect did the move from traditional pensions to 401ks (even with the correct most maximizing state now as the default selected) do?

I also note a subtle thing....oh, the reason their poor policy won't work...well, people just are not rationale, they just make the wrong choices...that's a real condescending blame the victim belittlement buried within.

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To see variable reinforcement in a business setting

go to a high-end casino. Everything, including of course the payouts, is designed to draw in players, create a social atmosphere, stimulate the senses, and cause people to bet over and over again.

I happen to think that "Pavlov's dogs" as in receiving a painful negative reinforcement, explains a lot about the views of the economy by those who have firsthand experience of downsizing -- and nowadays that is damn near everybody.

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Casinos, Campaigns and Crisis

Lest we not forgot the "use/create a crisis to enact bad economic policy" doctrine came form the University of Chicago.

That's pure psychology, mass psychology, sociology.

Campaigns are riddled with symbolism, timing, media control, sound bytes.

Casinos are the ultimate psychological manipulation and they also tap into that addictive buzz, so do video games.

But all of this is in the realm of psychology, crowd control, manipulation, marketing, advertising, propaganda (oops, public relations) and so on.

Whereas economics to me at least is much more of a hard science which often is presented as soft.

I mean when Krugman whips out the real economics so everyone says "oh that must be right", well the basics of what he presents is correct but he may for example, be missing something in his assumptions, let's say hidden oil inventory or maybe there is something with oil trading futures where oil inventory in the real world doesn't need to exist.....

matter of tweaking the model conditions. or people assume one thing from his model that actually isn't implied because the interpreter suffers from bad math.

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The powers of credit card companies are vastly overrated

Having worked in the credit card division of Citi and having had American Express as a client, I can assure you that the state of their infrastructure is not conducive to the kind of consumer behavior analysis that privacy zealots are convinced is possible. Transaction data sits in disparate boxes in non-standard formats, and none of it resides in the hands of MasterCard or Visa (in response to an earlier comment).

Would I have liked it, when I was marketing for either of them, to have been able to upsell customer A with product B if we noticed a purchase of product C? Sure. But it's simply not feasible; the cost-benefit for building in the database requirements and business operations processes for that kind of stuff just isn't there.

And believe me, it wasn't for a lack of trying, but the numbers just didn't make sense.

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can't find it at the moment

but there is some company doing massive scalable databases with AI engines who were predicting customer call behavior to determine which interest rate to offer and then there are news reports where credit card companies are lowering people's credit score based on purchase behavior.

I believe you in terms of the massive scalability of doing such a database, esp. in real time, but in terms of trying,
they appear to be!

I just read that IBM is now going to work on behavioral profiling on every single keystroke, movement, communication data point they collect.

So, the technology is advancing. Database structures optimized for queries is advancing as is plain CPU load (in super computers which they would have to use to run such a platform).

The categorization of purchases for tax purposes I believe is somewhat available akin to the user purchase profiles given on some accounts. I think that would not have to be real time and one could also do a Q&A similar to TurboTax online to help.

(I know I did stretch the claim in this post but it's more for sarcastic rhetoric, I guess I should correct that to state clearly advanced profiling on the level I allude to is in research, but doesn't exist yet in commercial applications).

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NDD this might interest you

I noticed you pointed to those neoclassical economists who claim raising the minimum wage has a negative effect on jobs.

Here is George Borjas talking about this as well as immigration models on wage and employment effects.

He is pointing again to some "bad math" because it leads to results inconsistencies. (He's considered "on the right" but I find his math to be pretty solid generally)

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Your focus on "bad math" is the correct one

Economists of all stripes can engage in it.

What I find most frustrating is when economists explain a totally unexpected, contrary result, by the "revealed preferences" dodge. As in, aha, the consumer revealed their strange preferences (so of course our model which until now we thought predicted exactly the opposite, is still correct).

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bad math/bad logic

That's why I put the behavioral focus in this piece. The bottom line is they have the data, they have the statistics, they have the theory and they have some very good policy recommendations to reform trade so it actually can be a win-win or more importantly the United States (on all levels not just workers) wins.

So, we're getting this defocusing in on what should be heavily mathematical, statistical and data focused policy adjustments as a result.

In trade, I've read opinion piece after opinion piece but my overall impression on the gang of bad math is they often are not economists or they have some philosophical agenda.
For example, think tanks. Sometimes they write studies that actually have merit but so often one can read the assumption flaws....but one has to read the paper on a case by case. I think at best most read the abstract or executive summary only.

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speak of the devil of what reward does what

Via a WSJ op-ed, we have McCain's plan to incrase jobs (uh huh, see the corporate lobbyist wish list on both on how they plan to increase jobs for US citizens).

He's got a butt load of tax cuts and R&D investments tax credits.

So, by going down this road of all things lead to the tax code by basically both parties (have you noticed this, now economic policy being reduced to the tax code?)....seemingly all of this is to change behavior of corporations with the idea they would maximize profits and so on so ya know does it add up by the math? Can any tax cut come close to capital arbitrage, manipulating exchange rates and labor cost ratios of 100:1?

Next topic for me.

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