Krugman: prediction problems in economics due to the “sociology of economics”

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Looking at the predictive abilities of macroeconomics, Paul Krugman suggests there is an issue with the “sociology of economics”:

So, let’s grant that economics as practiced doesn’t look like a science. But that’s not because the subject is inherently unsuited to the scientific method. Sure, it’s highly imperfect — it’s a complex area, and our understanding is in its early stages. And sure, the economy itself changes over time, so that what was true 75 years ago may not be true today — although what really impresses you if you study macro, in particular, is the continuity, so that Bagehot and Wicksell and Irving Fisher and, of course, Keynes remain quite relevant today.

No, the problem lies not in the inherent unsuitability of economics for scientific thinking as in the sociology of the economics profession — a profession that somehow, at least in macro, has ceased rewarding research that produces successful predictions and rewards research that fits preconceptions and uses hard math instead.

Why has the sociology of economics gone so wrong? I’m not completely sure — and I’ll reserve my random thoughts for another occasion.

This is an occasional discussion in social sciences like economics or sociology: how much are they really like a science in the sense of making testable predictions (not about the natural world but for social behavior) versus whether they are more interpretive. I’m not surprised Krugman takes this stance but it is interesting that he says the issue is within the discipline itself for rewarding the wrong things. If this is the case, what could be done to reward successful predictions? At this point, Krugman is suggesting a problem without offering much of a solution. As a number of people, like Nassim Taleb and Nate Silver, have noted in recent years, making predictions is quite difficult, requires a more humble approach, and requires particular methodological and statistical approaches.

How related are home sales and car sales?

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Americans like big houses as well as cars. But, are sales of homes related to sales of cars?

Driving to work the other day I heard a radio analyst assert that the recent increase in home sales is responsible for the increase in automobile sales (McMansions come with at least two car garages you know!) The short piece didn’t offer much in terms of quantitative information and this made me wonder what data was used to support such a claim. The analyst could have looked at SEC (Securities and Exchange Commission) filings, the equities and derivatives market, or perhaps research from industry associations such as the National Association of Realtors; the latter would prompt me to consider confirmation bias.

If only considering home sales, Federal Reserve Board economist Andrew Paciorek recently published an engaging paper describing the effects of household formation on housing demand. Paciorek asserts that in the past 30 years the aging population has moved into smaller homes, which is intuitive from the practicality it offers seniors. Paciorek also postulates that the poor labor market has depressed the headship rate, which is defined as the percent of people who are heads of household via U.S. Census population projections.

According to the S&P/Case Shiller Home Price Index report, the average U.S. home is now worth approximately 10 percent more than it was a year ago, marking the largest annual improvement since the market turned south in 2006. What of the automobile market though? American popular culture paints home and car ownership as inseparable in the “American Dream”. The most recent J.D. Power report projects August sales to increase 12 percent compared to last year, the highest monthly sales volume since 2006.

It would be easy to paint a picture of recovery for these industries based on sales revenues, although there is no indication of a casual relationship between the two. These reports are meant for the average consumer only in a sense to stir up positive sentiment, which in turn spurs more discretionary spending. It is more plausible that these reports are meant for the real stakeholders: shareholders and potential investors. We can surmise that in a world of algorithmic high frequency trading and complex derivatives based on yet other derivatives, that the common equities market does not always correlate to the real-world P&L performance. I recall a former boss’s retort of traditional value investing: ‘The market can stay irrational longer than you can stay solvent’.

The conclusion here is that this is a “common sense explanation” without much merit in data. And, I wonder if this is a classic case of the casual observer making a spurious association: both car sales and home sales go back in a better economy.

This is also interesting because of the number of times in the last decade or so when journalists and commentators have linked the building of McMansions to consuming other large objects, particularly SUVs. The idea behind these comparisons is that Americans in general have learned to consumer more bigger items. However, I’ve never seen any data that the same people who purchase McMansions are necessarily the same people purchasing SUVs, super-sized fast food, bulk items at big box stores, and other large items that fit into a category of excessive consumption.

“The U.S. is now a country where many people live alone in a land of 3-bedroom houses”

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Putting together recent data on household type and housing supply in the United States, Emily Badger comes to this conclusion:

As we’ve written before, American households have been getting smaller as our houses, conversely, have actually been getting bigger. But the disconnect between those two trends may be felt the most strongly by people who live alone, whether they’re 22-year-old women who aren’t yet married, or 70-year-old retired widows. As more Americans are opting to live alone than ever before, that now seems like an entirely unremarkable choice. But for years we’ve been building houses for that big nuclear family that’s now less common. And housing data released earlier this summer by the Census Bureau, illustrated at right, suggests that the U.S. is now a country where many people live alone in a land of 3-bedroom houses.

Interesting claim but without knowing exactly if the single-person households are living in the three bedroom homes, it is difficult to support.

A thought: I wonder if household types/family life can change much more quickly than the housing stock. That housing supply data includes a lot of homes built in past decades, both in eras when homes were smaller with larger families (pre-1960s) and when homes have been larger (the last few decades). It will take a long time for the housing market to fully adjust to more people living alone. Micro-apartments may be catching on in a few big cities but smaller housing for solo households is still limited.

But, it would also be interesting to ask single-person households how many bedrooms they would prefer to have if they could. Three bedrooms allows for space for guests as well as other kinds of rooms (used as storage/closets, hobby rooms, etc.). Two bedrooms does the same thing but with less space and four bedrooms probably provides too much space.

“The Best Map Every Made of America’s Racial Segregation”

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This is a lofty claim about a map but these maps clearly show racially divided neighborhoods in American cities. What makes these maps so good?

1. Data and mapping software that allows for mapping at smaller levels. Instead of focusing on municipal boundaries, counties, or census tracts, we can now get at smaller units of analysis.

2. The colors on these maps are visually interesting. I don’t know how much they play around with that but having an eye-popping map doesn’t hurt.

3. Perhaps most important: there are clear patterns to map here. As documented clearly in American Apartheid twenty years ago, American communities are split on racial and ethnic lines.

Aircraft carriers sailing off the shores of Chicago in World War II

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Chicago may be inland but during World War II, aircraft carriers sailed in its waters. See lots of pictures here.

Chicago has a history of military production and training, though it is hard to tell this now.

Born into digital lives: average newborn online within an hour of birth

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The newborns of today arrive online very quickly:

The poll found that parents were the most likely to upload pictures of the newborns (62 per cent), followed by other family members (22 per cent) and friends (16 per cent).

The most popular platform for displaying these first baby images was Facebook, followed by Instagram and Flickr…

Marc Phelps of baby photo agency http://www.posterista.co.uk, which commissioned the survey, said: “The fact that a picture of the average newborn is now online within an hour just goes to highlight the enormous impact social media has had on our lives in the past five years, and how prevalent these pages are in helping to keep loved ones informed on the special occasions in our lives, such as the birth of a new child.

Some more on the survey:

The poll by print site http://www.posterista.co.uk, which surveyed 2,367 parents of children aged five and under, aimed to discover the impact social media have had on the way new parents share information and images of their offspring…

The top five reasons cited for sharing these images online included keeping distant family and friends updated (56%), expressing love for their children (49%), describing it as an ideal location to store memories (34%), saying it is a great way to record children’s early years (28%), and to brag to and “better” other parents’ photos (22%).

It sounds like complete digital immersion. The most common reason given for this practice mirror the main reasons users give for participating in SNS like Facebook: to remain connected with others. But, the next four reasons differ. The second and fifth reasons suggest posting photos about newborns is about social interactions, first with the new baby (positive, though the baby doesn’t know it – plus, this could be part of a public performance of how love is shown in the 2010s) but then also in competition with others (negative). The third and fourth reasons are more about new digital tools; instead of developing film or printing pictures, SNS can be online repositories of life (offloading our memories online).

Thinking more broadly, what are the ethics of posting pictures of people online who haven’t given their permission or don’t know they are online? This could apply to children but this could also apply to friends or even strangers who end up in your photos. Some have suggested companies like Facebook have information on people who don’t have profiles through the information provided by others. Plus, if you don’t go online, others might think you are suspicious. So, perhaps the best way to protect your content online is not to withdraw and try to hide but rather to rigorously monitor all possible options…

Long tail: 17% of the seven foot tall men between ages 20 and 40 in the US play in the NBA

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As part of dissecting whether Shaq can really fit in a Buick Lacrosse (I’ve asked this myself when watching the commercial), Car & Driver drops in this little statistic about men in the United States who are seven feet tall:

The population of seven-footers is infinitesimal. In 2011, Sports Illustrated estimated that there are fewer than 70 men between the ages of 20 and 40 in the United States who stand seven feet or taller. A shocking 17 percent of them play in the NBA.

In the distribution of heights in the United States, being at least seven feet tall is quite unusual and at the far right side of a fairly normal distribution. But, being that tall increases the odds of playing in the NBA by quite a lot. As a Forbes post suggests, “Being 7 Feet Tall [may be] the Fastest Way To Get Rich in America“:

Drawing on Centers for Disease Control data, Sports Illustrated‘s Pablo Torre estimated that no more than 70 American men are between the ages of 20 and 40 and at least 7 feet tall. “While the probability of, say, an American between 6’6? and 6’8? being an NBA player today stands at a mere 0.07%, it’s a staggering 17% for someone 7 feet or taller,” Torre writes.

(While that claim might seem like a tall tale, more than 42 U.S.-born players listed at 7 feet did debut in NBA games between 1993 and 2013. Even accounting for the typical 1-inch inflation in players’ listed heights would still mean that 15 “true” 7-footers made it to the NBA, out of Torre’s hypothetical pool of about 70 men.)…

And given the market need for players who can protect the rim, there are extra rewards for this extra height. The league’s median player last season was 6 feet 7 inches tall, and paid about $2.5 million for his service. But consider the rarified air of the 7-footer-and-up club. The average salary of those 35 NBA players: $6.1 million.

(How much does one more inch matter? The 39 players listed at 6 feet 11 inches were paid an average of $4.9 million, or about 20% less than the 7 footers.)

Standing as an outlier at the far end of the distribution seems to pay off in this case.

Homelessness went down in last decade but not much coverage of this policy success

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Here is a story you may not have heard: homelessness in the United States has gone down in the last decade.

The National Alliance to End Homelessness, a leader in homelessness service and research, estimates a 17% decrease in total homelessness from 2005 to 2012. As a refresher: this covers a period when unemployment doubled (2007-2010) and foreclosure proceedings quadrupled (2005-2009)…And what about the presidents responsible for this feat? General anti-poverty measures – for example, expanding the Earned Income Tax Credit — have helped to raise post-tax income for the poorest families. But our last two presidents have made targeted efforts, as well. President George W. Bush’s “housing first” program helped reduce chronic homelessness by around 30% from 2005 to 2007. The “housing first” approach put emphasis on permanent housing for individuals before treatment for disability and addiction.

The Great Recession threatened to undo this progress, but the stimulus package of 2009 created a new $1.5 billion dollar program, the Homeless Prevention and Rapid Re-Housing Program. This furthered what the National Alliance called “ground-breaking work at the federal level…to improve the homelessness system by adopting evidence-based, cost effective interventions.” The program is thought to have aided 700,000 at-risk or homeless people in its first year alone, “preventing a significant increase in homelessness.”

Since then, the Obama administration also quietly announced in 2010 a 10-year federal plan to end homelessness. This is all to say that the control of homelessness, in spite of countervailing forces, can be traced directly to Washington—a fact openly admitted by independent organizations like the National Alliance to End Homelessness.

The article goes on to suggest why there hasn’t been much coverage of this success: homelessness is not much of a social problem in Washington or the national media. The social construction of homelessness as a social problem that should receive a lot of public attention either hasn’t been very successful, was never really attempted, or other social problems (like various wars on crime, poverty, terrorism, etc.) have captured more attention.

But, if all the numbers cited above are correct, it seems a shame that a positive effect of public policies regarding a difficult problem is going relatively unnoticed…

“The McMansion Man” builds larger houses in the Hamptons

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The Hamptons have long been known as a retreat for the wealthy but the recent actions of one builder suggest the houses are getting bigger and nicer:

“We’re as busy as we’ve ever been,” said Joe Farrell, the president of Farrell Building, during a recent interview and tour of his $43 million, 17,000-square-foot home here. The estate, called the Sandcastle, features two bowling lanes, a skate ramp, onyx window frames and, just for fun, an A.T.M. regularly restocked with $20,000 in $10 bills…

With a customer base composed largely of Wall Street financiers, Mr. Farrell has more than 20 new homes under construction, or slated for construction, at a time, making him the biggest builder here by far. He has plans for more, many of them speculative homes built before they have buyers…

“Houses have gotten smaller over all but not entirely: 8,000 square feet was the norm, now 6,500 is,” Mr. Farrell said. “Everyone wants six or seven bedrooms and their pool and their tennis.”

Where Mr. Farrell built speculative homes that sold for as much as $20 million before the recession, he now specializes in properties that sell for between $3 million and $10 million. “Mostly, though, $3 million to $6,” he said. “I love that market — there are probably 10 times as many people in that market than to buy an eight- or nine-million-dollar house, right?”

I’m not quite sure what the issue is. The Hamptons are for the wealthy and this man builds houses for the wealthy (though they are smaller and cheaper than a short time ago). But, the article suggests there might be several things going on:

1. Even the wealthy in the United States have to be careful to not completely flaunt their wealth. In particular, when economic times are bad it doesn’t look great to keep spending at high levels when other people are struggling.

2. There is an ongoing tension between old money and new money. The older homes, associated with older money, have more character and have been part of the community for decades. The new homes, associated with new money from the finance sector or from celebrities, are seen as gauche.

3. The construction of more spec/mass housing means the whole area will suffer by appearing more generic. Any historic architecture will disappear under a flood of mass-produced McMansions.

These are interesting arguments in themselves but I suspect (1) many Americans can’t relate and (2) there is enough money involved that it doesn’t really matter – just help pave over the issues with some more money. In other words, this provides a small window into how the wealthy view change within their own neighborhoods.

Four reasons more Americans are downsizing

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Pollster John Zogby gives four reasons he thinks more Americans are downsizing:

“There is a downsizing and downscaling and re-evaluation of values,” asserts John Zogby, a pollster and author of The Way We’ll Be: The Zogby Report on the Transformation of the American Dream. “It’s not always taking people down to a 600 square foot apartment and wearing a loin cloth, quitting their job and growing your own organic food.”…

• A growing number of Americans are working for less, voluntarily or involuntarily — but mainly involuntarily. In 1991, 14 percent told Zogby’s survey that someone in their household was earning less. By 2007, it was up to 27 percent and it reached 37 percent last year. “Suffice it to say, there is a sort of enforced simplification. People can’t afford to chase that whole American Dream.”

• Upwards of 11 million Americans in the higher income brackets are saying that conspicuous consumption “isn’t what cracked up to be, it’s not producing the satisfaction that I want my life to be about.”

• Baby Boomers, who are coming of age, “are looking for a second act in their lives, those who can’t retire and those who want to make a difference. In effect, they’re saying I want my life to be about something larger than me. I call it secular spiritualism.”

• And the fourth source of this cultural shift, Zogby maintains, is the latest iteration of a tendency among Americans that he says doesn’t get enough attention: “Our tendency to sacrifice to a higher cause.”

There are a variety of reasons here, suggesting this isn’t a monolithic movement. Some people might want more but can’t afford it. Others have lived into middle age and want more. It is one thing to downsize because of economic scarcity or an economic downturn; it is quite another thing to do so because of “secular spiritualism.”

Zogby isn’t alone with this fascination with this trend. This seems to be a popular topic, particularly when contrasted with American materialism and consumption. In a country where people generally want more and the accompanying hyperbole about everyone wanting McMansions, SUVs, and super-sized meals, people who try to make do with less are often looked at positively, especially by vocal critics of consumerism. For example, see the coverage of tiny houses.