Am I being unreasonable?

See the back-and-forth here.

Generally, I try to be as civil as possible when it comes to internet debates. (Often is the time that I've rewritten a response simply to tone down the rhetoric and eliminate any implied derision.) Certainly, I think that it is a good thing to try and interpret your opponent's arguments in a generous light.

There are limits, though. Life's too short to spend it endlessly rebutting non sequiturs and side issues.

Monetary regimes and economic outcomes

Eric Rauchway has a post over at Crooked Timber that's generating a fair bit of interest, since it compares real economic growth and inflation for the "G7" countries over various monetary regimes.

His data is taken from a 1993 paper by Michael Bordo and consequently doesn't cover information from the last two decades. ("I made you some charts. Because I love you that much. (But not enough to extend the floating exchange rate regime data down to the present; that’s actual work.)")

Well, that sounds like a challenge. And if anyone is fit to do mind-numbing compilation of data[*], that would be your typical economic graduate student...

Behold: I give you Rauchway's charts brought forward to the present day!

Fig. 1

Fig. 2

Compared to Rauchway's charts, the updated versions bring both good and bad changes from the perspective of floating (fiat) currency proponents. On the positive side, inflation has come down quite a bit. On the negative side, so has real GDP growth -- although to a lesser extent. You can better see this by looking at the next two charts, which compare the 1974-1989 (i.e. as in Bordo's paper) and 1990-2011/12 periods of the post-Bretton Woods era.

Fig. 3

Fig. 4

Of course, this is more or less as one would have guessed. We know that late '70s and early '80s were a period of high inflation -- with various shocks and loose monetary policy to blame. On the GDP side, it's interesting to note that Japan appears to be the primary driver of slower growth in the latter part of the post-Bretton Woods era (Fig. 3). Given that it's stalling economy is probably suffering from a lack of monetary accommodation to drag it out of liquidity trap conditions -- Note: recent events may provide the decisive policy experiment to prove whether this is the case or not -- it's far from obvious to me that the strictures imposed by the alternative monetary regimes would have yielded better outcomes. (I've had my say at various times on this blog as to why I think returning to a gold standard is a rotten idea, so I won't go into that now.)

And, on that note, I should say that I fully agree with the various commentators in the Crooked Timber thread, who have been pointing out that these don't charts don't nearly suffice i.t.o. counterfactuals, etc, etc. Still, these eyeball comparisons remain an intriguing bit of blogosphere fun. 

___

[*] It actually wasn't that much work thanks to our friendly FRED friends.

Energy Collective post - Natural gas and long-term climate goals

I should perhaps have mentioned this last Friday when it was published, but my new post for The Energy Collective is up: Bridging the Gap? Natural gas and long-term climate change goals.

As the title suggests, my aim is to explore whether the scientific evidence supports the much-touted notion of gas as a "bridge fuel" (i.e. towards a low-carbon economy). This a hotly debated topic, with a lot of excited rhetoric and dubious assertion clouding the issue. Luckily, I've read it all so that you don't have to! A snippet:

However, even this is not to say that natural gas lacks credibility as the most viable, climate-friendly alternative to coal. Unpalatable as it will be for some people, the unavoidable conclusion from my perspective is that achieving very stringent emissions targets will always depend on a hefty slice of fortune… It is certainly no accident that studies which demonstrate hypothetical pathways towards achieving such targets must inevitably make fairly heroic assumptions – whether that be in the form of changes to economic behaviour and institutional reform, or in the presumption of substantial technology breakthroughs. In that light, it is not entirely obvious to me why CCS-enabled gas plants should be regarded as more unlikely than, say, thorium nuclear. And it certainly isn’t obvious to me that climate activists are best serving their cause by demonizing the one fuel source that has provably shaken coal’s grip on the global energy system.

PS - My post on Hugo Chavez and Margaret Thatcher has also been reposted at TEC -- with an updated intro in light of recent events.

New writing gig - The Energy Collective

Some exciting news for yours truly is that I'll be writing a series of articles for the excellent energy and climate website, The Energy Collective, as part of their Future Energy Fellows initiative.

I will be focusing on particular sub-topic that has aroused a lot of interest recently; namely, the economic and environmental impacts of natural gas.

My first post concerns the role that the North American shale boom has played in bringing U.S. carbon emissions to a twenty-year low, and the question of whether these climate gains are undermined by increased coal exports to Europe. (Short answer: not really.) The article expands on some earlier musings that I have presented here at the Corral and at the Recon Hub. Here's the opening gambit, which I use to set up the problem:

U.S. Shale Gas Meets European Climate Policy

Economists are suckers for a good paradox. Few things are more intellectually appealing to the practicing economist than a result which runs counter to his or her immediate intuition. Indeed, some of the most enduring ideas in history of economic thought have surprising implications at the heart of their allure; from the paradox of thrift to Ricardo's law of comparative advantage. For their part, the specialized fields of energy and environmental economics are not immune to the charms of counter-intuitive theories either. This includes textbook favourites like the green paradox and the rebound effect.

Beyond the intellectual appeal, it is clearly sensible to be mindful of such factors when designing policy. However, our inherent affinity for paradoxes is also problematic in that it can cause people to overstate their role in real world situations. To illustrate using the aforementioned rebound effect, Nature recently published a comprehensive literature survey on the subject by Gillingham et al. (2013). The authors show that the rebound effect’s significance is much overplayed, being typically only in the region of 10% (with an upper bound of about 30%). Hardly a compelling objection to improved efficiency standards then.[...]

Click through to read more!

Noonday Tune

I get quite a bit of flack from (non-economist) friends and family whenever this blog goes too long without a music intermission... or some other distraction from the usual fair of "mundane econo-mese". (Thanks guys!)

The good news then, is that I recently joined Noonday Tune as a contributor. As the name suggests, this is a very cool website that posts a new song everyday at noon.

My first three contributions are a mix of stuff that I've been listening to lately and then some Scandinavian bands that I feel deserve a wider international exposure:

1. "Augustine" - We Are Augustines
2. "Hjerteknuser" (Heartbreaker) - Kaizers Orchestra
3. "Sister to all" - Real Ones

Well, don't just sit there. Hit the links and indulge your ears with aural satisfaction.

Climate science is pseudoscience(?)

So says Ivo Vegter in his latest column, calling up the spirit of Karl Popper.

I drop by in several places in the comments, saying that this pretty much utter nonsense according to any reasonable definition of the falsifiability criteria. For example:

[...]As it happens, Ivo has also beautifully misconstrued the application of Popper's insights, by consistently conflating the actual science with the response to that science by various parties.

[...]At its heart, falsification is about using an underlying set of theories to make predictions that can be tested against the relevant evidence. The theory of (man-made) climate change satisfies the falsifiability criteria across multiple dimensions. The fundamental pretexts of climate science are rooted in physics that has been understood and tested since the early contributions of Fourier, Tyndall and Arrenhuis in the nineteenth century. For their part, modern day climate models absolutely meet the Popperian standards. Not only do they forecast how climate phenomena will evolve under conditions of continued emissions, but (crucially) they have been extremely successful in hindcasting previous changes to the climate. Indeed, this accurate replication of past events is how they are selected in the first place…

As part of his reply to this comment, Ivo made the strange assertion that the ability to hindcast models is weakened by the fact that these models can be "tweaked" to accurately match the observed data. I respond:

How is it a case against climate scientists that they were able to benchmark their theories against against a historic record with "perfect hindsight"? Speaking as someone with a fairly considerable amount of scientific training, that actually sounds pretty ideal. Models were back-tested, refined and then discarded in favour of ones that better fit the data... pretty much in exact accordance with the scientific method.

For the record, I am well aware that Popper's falsification doctrine is not without its problems. Still, and at the very least, if someone is going to invoke his authority to make specific claims, then they should at least make sure they are accurate within that framework.

UPDATE: Oh God, it gets worse. Someone responds to me with the immortal line: "I have not done the research but from my own basic calculations..." *headvice*

UPDATE 2: See this excellent 2005 post by NASA's Gavin Schmidt: Is Climate Modelling Science? It concludes: "So, in summary, the model results are compared to data, and if there is a mismatch, both the data and the models are re-examined. Sometimes the models can be improved, sometimes the data was mis-interpreted. Every time this happens and we get improved matches between them, we have a little more confidence in their projections for the future, and we go out and look for better tests. That is in fact pretty close to the textbook definition of science."

Chavez, Thatcher and the oil that binds them

Daniel Yergin (one of the world's foremost energy experts) tweeted yesterday: "Too soon to say what Hugo Chavez’ death means for oil prices but it is certainly true that oil prices are what made Hugo Chavez possible."

I fully agree with this statement, but one could also say the same for leaders from all ends of the political spectrum. I expand on this idea in a new Recon Hub post, using Maggie Thatcher as an ideological foil to Mr Chavez.

In Thatcher's case, the (then newly discovered) North Sea oil and natural gas reserves played a key strategic role in her fight against the coal mining unions, as well as enabling her government to pay down Britain's national debt.

Read more here.

Hardship on the slopes

The posts may have dried up a tad here at the Corral, but things have been busy for yours truly back in the real world. Most notably going away for our department's annual "strategy meeting" (ahem) in Geilo. It was terrible as the following image will testify to:



And, if having to break up our invaluable strategy meetings for regular skiing breaks wasn't bad enough, the enigmatic Ms LB arranged for a surprise birthday trip (to a different resort) upon my return. Is there no mercy! The view from our hotel room was equally depressing.



I know that I tried to plug the Norwegian PhD previously, so I feel it is only fair to share some of the downsides as well.

More on inflation, violence and identification

Chris has responded to my previous post, which he frames as a criticism of his research. I should state upfront that this does not strike me as entirely accurate, since I emphasized at various points that my concerns lay in the possible journalistic interpretation of his work. Some email correspondence between the two of us suggests that I am not alone in expressing such trepidations, but I digress. On then, to Chris’s response…

1) He begins by taking issue with my decision to focus on food prices, politely suggesting that I “may have missed” the fact that his non-discretionary index of living costs includes various other components (including rent, electricity, water, etc).

As it happens, I don’t think that I missed this at all. My reasons for focusing on food prices are quite simple. First, they provide relevant context to the real effects that I highlight in my post, i.e. agricultural shocks stemming from massive drought. This was done deliberately with the aim of illustrating the overriding message of my post: Attributing causation to any particular event is often very difficult, and we certainly have to bear real effects in the front of our minds when discussing the sources of inflation. (To reiterate, this is something that the Business Day article failed to do entirely.) Second, food prices provide an obvious segue to the other article that I discuss in my post, which concerns the role that monetary expansion had in driving up food prices and thus precipitating the Arab Spring. Such matters notwithstanding, however, I did happen to include the following passage in my original post:

To be clear, South Africans have also experienced sharp increases in the cost of amenities like electricity and water provision due to some boneheaded policy decisions and as a legacy of inefficient parastatal monopolies.

Chris may have missed that, though. (wink)

2) His second objection is that I am unfairly interpreting his research as a suggestion that food hikes are the only cause of violence. He quotes his references to “political grievances” as evidence that I haven’t read the article properly.

Again, however, this seems to be a misunderstanding of what I have written and the major point of my post. In the passage that he quotes, I'm not concerned with alternative causes of violence, but rather the underlying drivers of one particular cause, i.e. inflation. At the risk of repeating myself: To the extent that inflation does act as a trigger for social unrest and violence – and irrespective of whether that occurs alongside other factors such as political grievances or not – we need to understand what the underlying forces behind that inflation are. Any analysis that focuses only on the nominal effects of (quote unquote) “delinquent” monetary policy is simply misleading. Why? Well, because there may be very significant real price drivers occurring at the same time! This is something that the Business Day article completely failed to mention, and the same is true for The Telegraph article that I quoted in the second half of my post. I see nothing wrong with taking exception to such slipshod analysis.

3) Next issue: On my suggestion that one might baulk at the definitive description of this research as “proof” of the relationship between inflation and violence...  Well, I don’t have much to add here, since – again – this is a criticism of how the journalist chose to frame his article. “Proof” is simply too strong and simplistic a word to use given all this issues that I have raised. (Note: I see that this has happened elsewhere.)

4) The penultimate point that Chris makes in his reply extends beyond the article featured in Business Day.  I will summarize his argument as saying that the South African Reserve Bank (SARB) should abandon its focus on the headline CPI, because a) Non-discretionary inflation has been rising much faster, b) It cannot control which specific goods rise and fall in price, and c) It would better facilitate an environment of civil harmony by stabilizing the Rand against a basket of commodities.

Now, interestingly enough, subsequent to yesterday’s post I found this column that Chris has penned himself. (I’ll take it that we can safely assume away possibility of incorrect interpretation by a third party here.) He produces the below graph and proceeds to write: 

Seeing as Non-Discretionary goods price inflation has averaged well above the SARB’s price inflation target of 6% for most of the past seven years, low income groups’ standards of living are falling at a compounded rate relative to high income earners. [Emphasis mine.]

I don’t have the raw data to hand, but eye-balling the chart it doesn't seem at all obvious to me that non-discretionary goods have “averaged well above” the 6% inflation target. (Does it seem obvious to anyone else?) In fact, I’d hazard a guess that it averages a shade below the 6% mark. Certainly, the strongest statement that we can probably make about this series is that it fluctuates around that general level.

We all agree that no single measure of price changes is perfect. Indeed, it is precisely for this reason that we have constructed so many different indices in the hopes of getting a better sense of how “inflation” is playing out in the economy. Central banks like the SARB choose to follow a preferred metric – like the CPI – for a number of reasons, most of them very sensible. As it happens, the sheer volatility of commodities is a key reason why some CBs prefer “core” to “headline” inflation measures. Trying to conduct monetary policy in response to a simple basket of commodity prices would not only be incredibly difficult due to the inherent volatility (and the fact that the CB is more or less powerless to  stop these short-run swings), but potentially counterproductive because of the amplifying effect that it could have on consumption cycles. (For more discussion, see Matt Rognlie’s excellent posts on this subject: here, here, and here.)

5) As for his final point, that peer review is not superior to insights that bring in paying clients… Well, clearly that is not what I meant by “cracking” the problems of identifying a causal link between price increases and the uprisings in the Arab world. (Mind you, if he did accurately predict these events in advance of them happening then I certainly am impressed.) So, while I regard the profit mechanism as essential as the next economist, that has nothing to do with my concerns about getting to grips with some very obvious identification problems. That said, allow me to make a broader concluding remark: Just as no-one should suggest that peer-review is infallible, we should never confuse profitability with validity. Even psychics have been doing a roaring trade for centuries. It doesn't make them right.

Did monetary expansion cause the Arab Spring?

South Africa's top economic and financial daily, Business Day, ran an article yesterday referring to research conducted in part by my old school friend and occasional commentator on this blog, Chris Becker.

Proof that high inflation leads to more public violence 

NEW research appears to show a direct link between inflation and social violence. In the months before the Marikana massacre, in which more than 30 miners died, there was a spike in nondiscretionary inflation — the inflation the poor experience — from 3% to more than 10%. The same is true of the xenophobic attacks in 2008. Just before these attacks, nondiscretionary inflation surged to 20%. The recent violence in Sasolburg was also preceded by an acceleration in inflation.

One might blanch at the definitive description (i.e. "proof") given to an in-house research document that, as far as I can tell, is unscrutinised by outside review. Certainly, I can immediately think of a host of problems that would need to be accounted for before we even begin to talk about proper causation.

That said, I don't doubt that food shortages and price hikes can, and do, trigger civil unrest and social upheaval. The idea is eminently plausible and there have been many attempts to quantify this relationship (more on this below). I commend Chris for trying to establish a more systematic understanding of the issue in the South African context.

However, I find it striking that this particular article makes no mention whatsoever of the real factors that have been driving high food prices in recent years. You know, massive crop failures due to historic droughts in the former Soviet Union, North America, and elsewhere... That kind of thing. In fact, here's a timely case study on South Africa that pinpoints these exact issues, which is itself part of a broader research programme linking food riots and political instability to agricultural supply-side shocks (in particular, those related to climate).

In contrast, the singular premise of the above BD article seems to be that food hikes -- and subsequent violence -- are entirely the fault of "delinquent" monetary policy.[*] I'm certainly not suggesting that loose monetary policy can't lead to inflation. Rather, the failure to acknowledge these severe real shocks makes any kind of simple analysis very misleading. (I should say that I am going strictly on the article here; Chris and his co-authors may well try to account for real factors in their actual research. At least, I sincerely hope so.) 

However, my faith in journalistic competence is somewhat shaken by the inevitable reference to -- you guessed it -- Shadowstats, the preferred purveyor of hyperinflation statistics for conspiracy theorists freedom lovers everywhere!™ Furthermore, statements like "The conclusion[...] is inescapable: inflation leads to violence" are more or less misleading in the same sense as the suggestion that increasing the temperature of your bath water will lead to you being boiled alive. There may may a kernel of truth therein, but it is clearly important to recognise that this is a matter of degree.

The passage that really caught my eye, however, was the following.

Becker conducted similar research internationally and found that countries experiencing the highest levels of social upheaval, such as Syria, Tunisia, Egypt and Algeria, embarked on huge monetary expansion in the months before the outbreak of violence. This monetary expansion translated into sharp increases in inflation just before the outbreak of violence. In Egypt and Tunisia, the violence culminated in the overthrow of the previous governments.

Woah. Let's just back up there a bit. We are now treading very dangerous territory as far as correctly identifying causation goes. It strikes me as as borderline irresponsible to intimate that the proximate cause of the "Arab Spring" was loose monetary policy. There are a myriad, interwoven factors at play and it would take a highly skilled statistician, armed with reams of data, to tease out the underlying drivers from concurrent symptoms. The fact is I've yet to see a paper on this subject make it through the peer-review process to journal publication... and I'm pretty certain that this is precisely due to the difficulties in attributing causation. With respect to my friend, I'm not convinced that he has managed to crack the problem that has stymied so many others.

I'll leave you with a final thought on this question of monetary expansion and the Arab Spring. A quick Google search on the topic throws up an article by Andrew Lilico that appeared in The Telegraph: How the Fed triggered the Arab Spring uprisings in two easy graphs (4 May 2011).  After demurely suggesting that most analysts are simply too afraid or short-sighted to "join the dots between the Federal Reserve’s second phase of quantitative easing and these revolutions [in the Middle East and North Africa]", Lilico bravely plunges forth to do exactly that. True to his word, he also produces two graphs, the most important of which appears below.

Now, I don't know about you, but that graph seems to show a rise in food prices that precedes the Fed's sharp increase in asset purchases... by several months. I am glad to report that this discrepancy wasn't lost on readers at the time. One commentator sardonically observes: "In my experience causes occur before effects."

It is a matter of some debate among economists how inflation manifests itself in the economy during times of monetary expansion. (E.g. Some of you may recall the rather heated discussions on Cantillon Effects that occurred in the blogosphere only recently.)  Well, it is a relief to know that the issue has been resolved thanks to the careful work of Mr Lilico. It turns out that expansionary U.S. monetary policy is so potent that it can positively impact the price of global commodities with a negative lag of several months!

Note (13/02/13): Follow-up here.

___

[*] To be clear, South Africans have also experienced sharp increases in the cost of amenities like electricity and water provision due to some boneheaded policy decisions and as a legacy of inefficient parastatal monopolies. I've covered these issues numerous times before on this blog and elsewhere.