Shortly after the European bigwigs announced their plan to save the euro I made a wisecrack about their determination to believe that if they ignored the incentives they were creating long enough that they thought they would go away, implying that forgiving half of Greek debt would impel Ireland, Portugal, etc. to expect the same deal. It’s happening.

Ireland:

Greece’s failure to cut spending and boost revenue by enough to meet targets set by the European Union and International Monetary Fund prompted bondholders to accept a 50 percent loss on its debt. While Ireland won’t seek debt discounts, the government might pursue other relief given to Greece, including cheaper interest payments on aid and longer to repay it, according to a person familiar with the matter who declined to be identified as no final decision has been taken.

Give ’em time.

Portugal:

Portugal asked Mexico on Saturday to tell fellow G20 members next week that the United States should offer “financial help” to resolve the euro zone sovereign debt crisis, describing it as a “systemic and global” problem, a Portuguese government source said.

Portuguese Prime Minister Pedro Passos Coelho asked Mexican President Felipe Calderon to convey the message during the G20 meeting in Cannes next week, the source told reporters after the two leaders met at the Ibero-American summit in Paraguay.

“The crisis isn’t in the euro zone. It is a systemic and global crisis and we hope that other big G20 countries intervene,” the source told reporters in the capital Asuncion, speaking on condition of anonymity.

The source added that Washington should help resolve the crisis “by boosting trade and also with financial help.”

This is more like a 12 step program than it is like a natural disaster. The first step on the road to recovery is genuinely wanting to change and that won’t happen until they’re hit rock bottom. They still don’t want to change—their attention is focused on saving French and German banks. I think we’d be better off reducing the extent to which that’s a “systemic and global problem” rather than ensuring that it is one. Also, I have complete confidence in the ability of the Europeans to deal with the problems in their financial system themselves.

The picture above was posted to the mayor’s official Facebook page today. Now you supply the caption.

From Article II, Section 4 of the U. S. Constitution:

The President, Vice President and all civil officers of the United States, shall be removed from office on impeachment for, and conviction of, treason, bribery, or other high crimes and misdemeanors.

From Article I, Section 2:

The House of Representatives shall choose their speaker and other officers; and shall have the sole power of impeachment.

The archetypal “high crime and misdemeanor” is abuse of power. When the Speaker of the House says:

The Speaker went on to caution that Republicans in Congress were keeping “a very close eye on the administration to make sure they are following the law and following the Constitution.”

Obama announced a series of programs this week that would enable those with mortgage or student loan debt to refinance to more favorable terms and repayment plans. The administration says such action was necessary after Republicans blocked the president’s jobs plan proposal to stimulate the economy.

“We can’t wait for Congress to do their job, so they won’t act, I will. I told my administration, we’re going to look every single day to see what we can do without Congress,” Obama told students Wednesday at the University of Colorado-Denver.

But Boehner said that “committees of jurisdiction” in the House would be examining the proposals “to make sure that the president isn’t exceeding his authority.”

The article goes on to talk about limiting the scope of presidential action via the appropriations process but I take Speaker Boehner’s remarks as a shot across the bow.

Imagine my disappointment on reading President Obama’s op-ed in the Financial Times, captioned “A firewall to stop Europe’s crisis spreading” that nothing resembling a firewall is actually discussed. Here’s the dictionary definition of a firewall:

a barrier inside a building or vehicle, designed to limit the spread of fire, heat and structural collapse

The op-ed on the other hand consists of a pitch for the president’s economic plan and a plea for the Europeans to get serious about addressing the euro’s problems. The problem with the euro is the euro. I will be greatly surprised if in ten years time all of the countries presently participating in the euro still are. Additionally, the Europeans are apparently of the opinion that if you ignore incentives long enough they will go away. If Greek debt is written down, why won’t Ireland, Portugal, Spain, and Italy demand the same?

Limiting the exposure of U. S. banks to the collapse of French and German banks would be a firewall. Constraining the IMF’s responses to addressing the euro’s problems would be a firewall. Passing the American Jobs Act? Not so much.

Quite a few of the men in my wife’s family are firefighters. My wife’s great-nephew is training to become a firefighter and, if he persists as I expect he will, he will represent the fourth generation of firefighters in my wife’s family. With such a family connection to firefighting I found Greg Easterbrook’s post on the political evergreen of increasing the number of firefighters interesting, to say the least:

With stricter building codes, built-in sprinkler systems and the near-universal use of smoke detectors, incidence of structure fire in the United States has declined dramatically in the past generation. In 1985, there were about 2.5 million reported fires in the U.S. Since then, fires have declined steadily, down to 1.3 million last year. The report also shows that fire deaths are down from 6,000 in 1986 to 3,100 in 2010. That’s a 48 percent decline in both fires and deaths caused by fires.

Over that same period, the number of career (not volunteer) firefighters has risen from 238,000 in 1986 to 336,000 in 2010. That’s a 41 percent increase in publicly paid firefighters during the same period that safety technology has been able to decrease the occurrence of fire.

When that’s considered per 100,000 population the results are even more striking. Since 1986 the population has increased about 30% so the number of fires per 100,000 population is about a third of what it was in 1986 while the number of firefighters is more than 30% more. Since more firefighters are only marginally related to the total number of fires, the increase sounds pretty hard to justify.

Fire departments aren’t the only public institutions increasing in size to questionable advantage. Skipping over the contentious issue of the relationship between the number of police officers and crime, it can hardly be argued that the explosion in the number of public school administrators has resulted in improved education for public school students. I won’t even bother dredging up the statistics. The number of public school administrators is a multiple of what it was just a decade ago, there are more per 100,000 population, and there are more per 100,000 students (here in Chicago the number of public school administrators has grown even as the number of public school students has shrunk, an instantiation of one of Parkinson’s laws), while the graduation rates have remained stubbornly high and achievement has struggled at best.

I think we need a more thoughtful approach. Not only is right-sizing the question that we should be considering, maybe we should give more consideration to something that’s a repeating theme around here: not just do more or do less but do differently.

I ultimately found this article at Scientific American from David Freedman (hat tip: Glenn Reynolds) about the shortcomings of models a bit unsatisfying. The article is about the experience of, presumably, geology grad student Jonathan Carter:

Carter wanted to observe what happens to models when they’re slightly flawed–that is, when they don’t get the physics just right. But doing so required having a perfect model to establish a baseline. So Carter set up a model that described the conditions of a hypothetical oil field, and simply declared the model to perfectly represent what would happen in that field–since the field was hypothetical, he could take the physics to be whatever the model said it was. Then he had his perfect model generate three years of data of what would happen. This data then represented perfect data. So far so good.

The next step was “calibrating” the model. Almost all models have parameters that have to be adjusted to make a model applicable to the specific conditions to which it’s being applied–the spring constant in Hooke’s law, for example, or the resistance in an electrical circuit. Calibrating a complex model for which parameters can’t be directly measured usually involves taking historical data, and, enlisting various computational techniques, adjusting the parameters so that the model would have “predicted” that historical data. At that point the model is considered calibrated, and should predict in theory what will happen going forward.

Carter had initially used arbitrary parameters in his perfect model to generate perfect data, but now, in order to assess his model in a realistic way, he threw those parameters out and used standard calibration techniques to match his perfect model to his perfect data. It was supposed to be a formality–he assumed, reasonably, that the process would simply produce the same parameters that had been used to produce the data in the first place. But it didn’t. It turned out that there were many different sets of parameters that seemed to fit the historical data. And that made sense, he realized–given a mathematical expression with many terms and parameters in it, and thus many different ways to add up to the same single result, you’d expect there to be different ways to tweak the parameters so that they can produce similar sets of data over some limited time period.

The reason I found the article unsatisfying is that, far from explaining why economic models in particular fall short, the article actually asserted that regardless of what you’re modeling incorrect models can’t be corrected by recalibration. However, since solid models do, in fact, exist and are employed successfully every day something else must be going on in economic models.

I think there are several key takeaways from this. First and foremost the model must be right and you determine that a model is right by its predictive power without recalibration over time. Repeated recalibration doesn’t make a flawed model better.

However, accurate, reliable models exist and are used every day. How can this be? The answer is that the models were solid to begin with and we know that by their predictive power. Producing sound models requires judgment, experience, and the elusive thing called insight.

The perihelion precession of the planet Mercury does not follow the Newtonian principles. The Newtonian model does not predict its orbit correctly. It could not be accounted for by recalibration (they tried). Accounting for the deviations from the Newtonian model required the then-new insight of Einstein’s general relativity.

Why aren’t economic models, the models attacked in the title of the article, better? The early political economic philosophers like Adam Smith and David Ricardo had something that mathematical notation and mountains of data can’t provide: they had insight, in Ricardo’s case earned by working practically since infancy at the London stock exchange. But, importantly, they weren’t trying to produce quantitative results but qualitative explanations for behaviors.

Another problem is that the monetary and political stakes are very high and preferred outcomes may overwhelm analytical rigor.

In the final analysis I think we’re getting ahead of ourselves in demanding quantitative results from economics and there are good reasons to believe, since economics deals with purposeful actors rather than mechanical phenomena, that determinative, accurate, quantitative predictions may remain elusive forever. At the very least we’ll need considerably more insight than we have right now and, as I noted above, insight is elusive, too.

In the light of the “Occupy” protests going on around the country and around the world the CBO report of income trends has received considerable attention, at least in the media and in the political blogosphere. This chart of the growth in real after tax income from 1979 to 2007 is receiving particular notice. I’m rather surprised that I’ve seen so little commentary about what jumped out at me from the chart: real incomes have grown in all sectors over the last thirty years. I would have thought that real income in the lowest quintile would actually have shrunk.

I also wonder what the chart would look like if it accounted for total real compensation rather than real income (or the CBO’s rather peculiar definition of compensation).

Felix Salmon remarks:

And yet — I’m still in the (upper quintile of the) 99%, and if you boil things down to just their income and wealth numbers, the 1% is as far away from me as I am from a struggling working family with an onerous mortgage and a highly uncertain employment outlook. And there’s no need for them to shower themselves with that kind of money. From me on out, it’s pure avarice. Which is human, and natural, and probably even helps in terms of economic growth. But given the amount of misery and poverty in America, it’s simply unconscionable that I and the people earning vastly more than me — including all of the 1% — are getting such an enormous share of the income and wealth so desperately needed elsewhere.

All of which is to say that my taxes are too low. If my taxes went up and the money was used to reduce poverty and unemployment in America, my standard of living would still be glorious — and millions of lives would be improved. And as for the 1%, their taxes could double and they would still be fabulously well off. I’m not proposing that as a policy solution. But I am trying to put things in perspective here.

I wonder what his perspective would be if his taxes went up and, rather than using the money to reduce poverty or unemployment, the bulk of the money went to other people in the top income quintile or was handed over to key constituencies to ensure re-election for incumbents. That’s largely what happens when we increase spending on healthcare, education, firefighters and policemen, or bailing out banks and auto companies.

That’s my main gripe about fiscal policy these days. I see a lot of irresponsible, profligate, and unreliable stewardship. To my mind the solution for that is more responsible, less profligate, and more reliable stewardship rather than more funds to be irresponsible, profligate, and unreliable with. It may well be more funds are needed but it’s darned hard to trust the same scoundrels over and over again. New scoundrels aren’t much of a solution, either.

Meanwhile, I’m mulling over what a fair income is and how that can be accomplished. I think I’d agree that stacking the deck and using your wealth and power to accumulate more wealth and power is unfair. As I’ve written before I don’t think that particular sport is limited to the top 1% but is to a large degree why the top quintile is in the top quintile. Further, I think the more power and wealth is concentrated in a federal government that determines what a fair income is the worse that will become. Rent-seeking increases because it pays off.

I’m not sure I see any way outside of a Benedictine monastery with vows of poverty, chastity, silence, and obedience to accomplish real equality. That hasn’t caught on in 1500 years so it probably won’t catch on now. Are equality and fairness the same thing? I don’t think so.

John B. Taylor remarks:

If you think that it shows our economic theory—especially our macroeconomic theory—was wrong, and thereby gave the wrong policy prescriptions, then you have to think about massive changes. If you think the crisis shows that our economics was basically correct and that policy deviated from the recommendation of the theory, then you want to revise the text differently, and show with example after example how this happened. It is a unique teaching moment.

See especially his presentation for an upcoming economics teachers’ convention.

And while I’m on the subject of houseguests on Sunday evening our friend ran out and brought back a couple of bottles of wine, some cheese, and a bottle of Glenmorangie Lasanta single malt whisky.

My tastes run more to the island scotches so I tend to go for Talisker or Highland Park but this was very nice, indeed. A bit more sherry than the regular Glenmorangie.