Fight for Our Principles!

Principles of Macroeconomics, that is, since it is under attack from Noah Smith, who argues for eliminating introductory macroeconomics classes.  In a blog post, he writes:

Why should undergrads learn macro in their first year of econ? If they go on to be econ majors they can easily start out with intermediate macro and not miss anything important. If they just take the first-year econ sequence and then go into the business world, what do they really need to know?

I think this badly misunderstands what we're trying to accomplish in a introductory level course - principles of macroeconomics is not about preparing students for business careers (though business students certainly should take it - as should everyone else).  The two main benefits of taking an introductory macroeconomics course are:

First, it prepares students to be more knowledgeable and effective citizens.  Among other things, students come away from the class able to interpret data like unemployment, inflation and GDP that they read about in the news.  They learn some basic facts about taxation and government spending that can help them evaluate claims made by politicians.  The Federal Reserve is pretty mysterious to most people - students learn what it does and how monetary policy works and the basics of how a banking/financial crisis can occur.  This seems particularly valuable in a time when the Fed is facing political criticism which is at least partly based on its widely misunderstood response to a financial crisis.

Second, working with economic models develops thinking and mathematical skills.  Smith makes the point that the models we teach in an intro class have their flaws (as do the models we teach in PhD-level classes...), though I still think they're quite useful for thinking about a number of issues.  But the act of manipulating a model and working out how assumptions are linked to conclusions helps students become sharper thinkers, and this stays with them long after they've forgotten the specifics of any particular model.

At my current station, I'm teaching a one-semester introductory course that covers both micro and macro topics, but I had a full-semester macro principles course at my previous stop - an outline of what I did is posted here.  The time students have in college is a very scarce resource, and the opportunity cost of any college class is very high, but I think principles of macroeconomics is almost always a good choice.  Though perhaps I'm a little biased...

Hysteresis and Monetary Policy

In the Washington Post last week, Larry Summers wrote about some new research finding evidence of "hysteresis."  This is a term borrowed from the natural sciences for when temporary occurrences have lasting effects - e.g., when you hold a magnet up to a piece of metal, the metal remains magnetized even after you remove the magnet.  In macroeconomics, hysteresis occurs when an economic downturn has a lasting effect on economic capacity (i.e., reduced "potential output"); that is, lack of demand creates its own lack of supply.

Hysteresis could occur through a number of channels. Consider an economy described by an aggregate production function Y* = AF(K,N*) where potential GDP (Y*) depends on productivity (A),  capital (K) and labor at its "natural" or "full-employment" level, N*.  A recession occurs when output falls below Y* and labor is below N* (i.e., there is unemployment in excess of the "natural rate").  Hysteresis implies that there is a lasting impact on Y* - this could occur through technology, capital or labor.

All three channels could be operative. In the past several years, productivity growth has been sluggish, though its not clear if this is linked with the recession (productivity trends are always somewhat mysterious).  The recovery of investment (the rate of flow into the stock of capital) from the recession has been less than spectacular, even taking out housing - the share of GDP devoted to nonresidential fixed investment is somewhat below its peak in previous expansions. 

Here, I want to focus on labor, where the hysteresis effects are pretty evident, and raise an interesting policy dilemma. 

Although the unemployment rate has fallen to what we might consider a reasonably healthy level of 5% (the normal turnover of a healthy labor market generates some unemployment so we never expect it to get to zero), the labor market still clearly bears the scars of the 2008-09 recession.

The duration of unemployment spells rose to unprecedented levels and has remained elevated (a useful comparison is to the 1981-82 recession - the unemployment rate peaked at 10.8% at the end of 1982, but the dynamics of duration were not nearly as severe).

People with spells of long-term unemployment have a harder time finding jobs.  But looking at the unemployed leaves out those who left the labor force entirely.  The last several years have seen a significant drop in labor force participation rates, even among people aged 25-54 (focusing on this group is a rough way to control for the drop in overall participation due to an aging population, though as this Calculated Risk post notes, there is a composition effect even within the 'prime age' group).

The labor market clearly is not as robust as the headline unemployment rate suggests.

What are the implications for monetary policy of having a high proportion of long-term unemployed, and possibly a substantial latent group of unemployed who have left the labor force?  One answer is suggested by this St Louis Fed blog post by Stephen Williamson:

[I]f we think of the long-term unemployed as being subject to the mismatch problem and highly likely to leave the labor force, then these unemployed workers are not contributing much to labor market slack. They are unlikely to be hired under any conditions. 

That is, the unemployment (and presumably the depressed particpation rate, too) is "structural" in nature, and not amenable to any improvement in aggregate demand that might be generated with expansionary monetary policy.

An alternative view is that the long-term unemployed, and some of those who have exited the labor force, could be brought back into employment by particularly strong aggregate demand - what used to be called a "high pressure" economy.  This would be possible if the forces of hysteresis work in both directions, as this 1999 paper by Laurence Ball suggested.

That seemed to me to be what Janet Yellen was hinting at in her September speech at UMass-Amherst when she said:

Reducing slack along these other dimensions may involve a temporary decline in the unemployment rate somewhat below the level that is estimated to be consistent, in the longer run, with inflation stabilizing at 2 percent. For example, attracting discouraged workers back into the labor force may require a period of especially plentiful employment opportunities and strong hiring. Similarly, firms may be unwilling to restructure their operations to use more full-time workers until they encounter greater difficulty filling part-time positions. Beyond these considerations, a modest decline in the unemployment rate below its long-run level for a time would, by increasing resource utilization, also have the benefit of speeding the return to 2 percent inflation. Finally, albeit more speculatively, such an environment might help reverse some of the significant supply-side damage that appears to have occurred in recent years, thereby improving Americans' standard of living.

It seems to be that doing this would likely entail the Fed overshooting its 2% inflation target.  I have my doubts about their willingness to do this (and Yellen certainly did not suggest it).  And for it to work, inflation expectations would need to remain anchored (i.e., if any additional inflation just ratched up expectations, it would not bring unemployment down).

One of These Things is Not Like the Others

Among the steps the Fed has taken to increase transparency in recent years is the release of projections by the board members and regional bank presidents.  This includes the "dot plot" indicating each participant's belief about what the appropriate federal funds rate target will be at the end of this year and the next three years.

One of the dots from the latest release (I've indicated with a red arrow) shows a preference for a negative fed funds rate this year and next, and a much lower rate than everyone else expects at the end of 2017.

People on twitter seem to think its most likely Minneapolis Fed President Kocherlakota's dot.  It called to mind this, from the deep recesses of childhood memory:
(That's from Sesame Street). 

Of more serious interest, the projections also included a reduction in the median "longer run" federal funds target, to 3.5%, from 3.8% at the last release in June, and also a lower estimate of the "longer run" unemployment rate, which might be taken as a proxy for a NAIRU estimate (see Krugman).

Rodrik on Economic Models

There is an an excellent piece by Dani Rodrik on economic methodology at Project Syndicate:

Economics is not the kind of science in which there could ever be one true model that works best in all contexts. The point is not “to reach a consensus about which model is right,” as Romer puts it, but to figure out which model applies best in a given setting. And doing that will always remain a craft, not a science, especially when the choice has to be made in real time.

The social world differs from the physical world because it is man-made and hence almost infinitely malleable. So, unlike the natural sciences, economics advances scientifically not by replacing old models with better ones, but by expanding its library of models, with each shedding light on a different social contingency.

Or, as Keynes put it, "Economics is the science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world." 

Rodrik goes on to discuss Borges' story "On Exactitude in Science" - a parable about cartographers who make a map on the same scale as the world it was meant to represent.  This story, which was our reading for Econ 110 yesterday, illustrates the point that "more realistic" isn't necessarily better.

A Note on "Credibility"

Fed watchers are speculating that the FOMC meeting later this month might be the occasion to raise the federal funds rate target off the "zero lower bound," where it has been since December 2008.  In a column arguing against such a move, Larry Summers writes:

From the Depression to the Vietnam War to the Iraq war to the euro crisis, we surely should learn that policymakers who elevate credibility over responding to clear realities make grave errors. The best way the Fed can maintain and enhance its credibility is to support a fully employed American economy achieving its inflation target with stable financial conditions. The greatest damage it could do to its credibility would be to embrace central-banking shibboleth disconnected from current economic reality.

At the Fiscal Times, Mark Thoma writes:

The inflation problems of the 1970s, the loss of Fed credibility that came with it, and the need to impose the Volcker recession in the early 1980s to bring inflation down to tolerable levels made an indelible impression on policymakers who lived through that time period. The Fed’s trigger-happy response to any suggestion of an inflation problem is directly related to the desire to never let such an inflation outburst happen again.

But it has been more than four decades since the beginning of the inflation problems of the 1970s, and the economic environment in which monetary policy operates has changed considerably since that time. Those changes support patience, particularly in response to increases in wages, wages that have been stagnant since the 1970s even as labor productivity has been increasing.

The "credibility" argument in monetary policy is based on the idea that the central bank will be tempted to use inflation to "overheat" the economy and bring unemployment down below its "natural" (or equilibrium) levels for political reasons - e.g., to help the incumbent party in an election year.  Any gains would be, at best, short-lived, as people would incorporate a higher level of inflation into their expectations and set wages and prices accordingly.  Based on this logic - which seems helpful for interpreting how we got into the "stagflation" of the 1970s - economists look for policies and institutional structures to correct this perceived inflationary bias.

In the past several years, this logic seems turned on its head.  If anything, the biases of our monetary policymakers appear to be in the other direction.  Inflation continues to be subdued, as this plot of one of the Fed's preferred measures, the "core" deflator for personal consumption expenditures, shows:

The red line is drawn at 2%.  Measures of expected inflation are also below 2%.  David Beckworth recently argued that the Fed is acting as if 2% is a ceiling, not a target - he suggests the Fed's behavior is consistent with it aiming to keep inflation between 1% and 2%.

But the the Fed declared in 2012: "The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate." If the goal is to "anchor" expectations at 2%, the Fed is at risk of failing, but the greater threat to its credibility seems to be too little inflation, not too much.

China and the Solow Model

Last month, just before China let its currency deprecate and its stock market crashed, the San Francisco Fed published a nice Economic Letter by Zheng Liu, "Is China's Growth Miracle Over?"

China's rapid, but decelerating, growth is broadly consistent with the implications of the classic Solow growth model we teach our intermediate macroeconomics students.  This model predicts that low-income countries should grow quickly, but growth will slow down as they approach the leading countries, whose per-capita growth is constrained by the rate of technological progress. That is, there should be "convergence" in per capita GDP.

As this chart from the letter shows, China is following a similar path to Korea and Japan.

The basic intuition from the model comes from the idea of diminishing marginal product of capital - i.e., where capital (machinery and equipment) is scarce, the increase in output from adding an additional unit is greater than where it is already abundant.  This diagram of output per capita (y) as a function of capital per capita (k) illustrates,

where the slope is the marginal product of capital (MPk).

The idea can be extended to include "human capital" (i.e., knowledge and skills), as Mankiw, Romer and Weil did in a 1992 paper.

While the Solow model gets the broad contours of the growth experiences of Korea, Japan and (it seems so far) China correct (and does pretty well for the US as well), it does miss a couple of big things:

(1) A diminishing marginal product of capital implies that the financial rewards to investing in a low income country should be vastly higher than in high-income countries.  In a world where people can invest across borders, this implies a huge incentives for financial flows from high-income to low-income countries, but we do not observe such large net flows.  This was the puzzle Robert Lucas noted in a 1990 paper.

(2) While the experiences of some low-income countries is consistent with the convergence hypothesis; in many cases, low-income countries have fallen further behind (or, as Lant Pritchett wrote, "Divergence, Big Time.").  From the standpoint of the Solow model, growth "miracles" like those of Korea are to be expected, and the real puzzle is the fact the failure of so many countries to converge.

As Moses Abramovitz pointed out in 1986, it is usually a subset of the low-income countries that are growing fastest.  This would suggest there are forces for convergence, but something is preventing them from applying everywhere.  Current thinking is that the answer lies in "institutions" - the set of legal rights, culture, and governance which shape the economic environment and incentives for people to take actions within it, including to accumulate capital.

This is where assuming that China will continue to follow in the convergence footsteps of Korea and Japan may be questionable.  While China's institutions have gotten it this far, there are reasons to doubt whether they are appropriate for achieving levels of GDP per capita comparable to Korea, Japan and Europe, as this column by Brad DeLong and this by Eduardo Porter discuss.  That said, the institutions in the US during its late 19th century industrialization were hardly what an economist would recommend (in particular, corruption was rampant), and yet it somehow managed to take over leadership in per capita GDP from Britain.

Economics is More Than You Think

and it helps you learn how to think....

One of the challenges in teaching economics is that many come to it with incorrect expectations - people seem to view it as akin to accounting or finance.  In a liberal arts setting, the students (and their parents) may believe it is the closest thing they can get to a business major (this paper provides evidence on this point).
This short video from the American Economic Association - "A Career in Economics - It's Much More Than You Think" - does a nice job of correcting some of these misconceptions.

However, I think the video misses one of the main reasons for studying economics: the habits of mind - "critical thinking skills" - it helps students develop (I wrote more about this here).  Most of our students aren't going on to careers in economics, and they will forget many of the specifics, but being able to think coherently about tradeoffs and the linkages between assumptions and conclusions is a lifelong benefit.

So, yes, people who are interested in business should study economics, as should people who are interested in a career in economics (my own advice about that is here), but so should everyone else!

Opportunistic Flexibility

Last week, China moved to allow more flexibility in its exchange rate.  In this case, that meant a downward movement - headlines about a "devaluation" were rather overstated, though, as the depreciation from Monday to Thursday was about 3% (followed by a slight rise on Friday).  Last week's change is at the end of the graph:

Note, the graph is the yuan price of a dollar, so a downward movement is a yuan appreciation.

China has been criticized over the years for keeping its exchange rate undervalued to support its exports.  The graph shows that it has allowed the yuan to rise quite a bit since 2005, though it has done so in a controlled manner and took a pause for about two years starting in mid-2008.  Its appreciation has helped China make progress on one aspect of "rebalancing" - reducing its dependence on exports.  China's current account surplus is considerably smaller relative to GDP than it was in 2006-08:

So, does this move represent a return to China's old ways of undervaluing its currency to gain a competitive edge for its exports?

Well, yes and no...

As it has followed the dollar, and the dollar has risen, the yuan has appreciated in real terms.  This chart shows a trade-weighted average of the dollar:

During the last year the dollar has appreciated significantly and the yuan has been along for the ride.  Currency appreciation - which makes Chinese goods relatively more expensive on world markets - combined with a slowing economy led to political pressure for a change of course.  The Times' Keith Bradsher writes:

In a little-noted advisory to government agencies, the cabinet said it was essential to fix the export problem, and the currency had to be part of the solution.

With the government keeping a tight grip on the value of the renminbi, Chinese goods were more expensive than rivals’ products overseas. The currencies of other emerging markets had fallen, and China’s exporters could not easily compete.

Soon after, the Communist Party leaders issued a statement also urging action on exports.

However, China has also been moving in the direction of greater financial openness; this entails allowing freer exchange rate movements (as I discussed in this previous post), particularly if it wants the yuan to become an international reserve currency (a status Krugman rightly notes is highly overrated).  At Project Syndicate, Yu Yongding writes:

From now on, China’s government declared, the renminbi’s central parity rate will align more closely with the previous day’s closing spot rates. This suggests that the devaluation was aimed primarily at giving the markets a greater role in determining the renminbi exchange rate, with the goal of enabling deeper currency reform.

So, yes, China has other reasons for moving to a more flexible exchange rate, but it is convenient for them to take a step in that direction at a moment when doing so means a fall in the yuan that will boost demand for Chinese goods.

See also: Ambrose-Evans Pritchard, Gavyn Davies, Michael Klein, David Beckworth, Michael Pettis.

Stories from the Macro Wars

Ian Parker's recent New Yorker profile of Yanis Varoufakis included this nugget: "He has written of his hope, as a professor, to present economics as 'a contested terrain on which armies of ideas clash mercilessly.'"

That may be an apt description of macroeconomics in the 1970s and 1980s.  On his website, Paul Romer has offered an interesting take on the methodenstreit between the dynamic general equilibrium approach (so-called "freshwater" macro, championed by Robert Lucas) and Keynesian macro-econometric models (the "saltwater" camp).  Romer is particularly critical of Robert Solow, arguing that his dismissive attitude towards Lucas et al., contributed into a counterproductive hardening of differences. He writes:

Solow also seemed to be motivated to attack harshly because he was concerned that the type of model Lucas was developing might undermine political support for active countercyclical policy. To his credit, there was a legitimate basis for this concern. The new Chicago school of macro eventually did oppose an active response to the financial crisis and its aftermath. But the type of response that Solow exemplified may actually have contributed to the emergence of this new Chicago school. In retrospect, if the goal was to maintain support for active macro policy, the better course would have been to take seriously what the rebel group that was forming around Lucas was saying. This might have kept the rebels from cutting off contact with all outsiders, even those who were taking seriously the issues they were raising.

Brad DeLong and Paul Krugman responded in defense of Solow. DeLong writes:

And, at this point, Romer ought to say that Solow’s and Hahn’s criticisms were (a) no more biting in their rhetoric than the criticisms that Stigler, Friedman, and company had been inflicting on their victims at Chicago for a generation, and (b) correct and accurate.

Romer has more interesting detail in his response, including this summary of the main points:

In the summer of 1978, Lucas and Sargent were making three claims:

(a) Existing multi-equation macro simulation models were not identified. That is, these models summarized correlations in the data but did not yield reliable statements of the form “if the government does X, this will cause Y to happen.”

(b) It was time to use SAGE models to address such fundamental questions about economic fluctuations as why changes in the supply of money influence economic activity; and

(c) SAGE models will imply that an active monetary policy cannot stabilize economic fluctuations.

Solow thought that Lucas and Sargent were wrong about the policy ineffectiveness claim (c). DeLong, Krugman, and I all agree. In the 2013 introduction to his collected papers, Lucas uses some asides about the Great Depression and the Great Recession to admit that now even he agrees. Claim (c) is what DeLong and Krugman have in mind when they say that  Solow was right and Lucas was wrong.
Yet all macroeconomists now agree that Lucas and Sargent were correct about the fatal problems with the large simulation models. Much of Solow’s response amounted to an implausible denial that there was anything wrong with them. So on this point, the roles are reversed. Lucas and Sargent were right and Solow was wrong.

[Romer uses "SAGE" to refer to general equilibrium models].  See also: this from Krugman, and this from DeLong.  David Glasner has a thoughtful post putting things in a broader context.

In his post, Romer cites several papers, including Lucas and Sargent's "After Keynesian Macroeconomics," from the 1978 Boston Fed conference.  Perhaps it should be known as "the throwdown in Edgartown."

Fascinating stuff... but fortunately for contemporary macroeconomists - particularly those of us with conflict-averse midwestern temperaments - things aren't nearly so rancorous now.  There certainly are differences of inclination and opinion, and economists can be blunt in expressing their differences, but the "saltwater" vs. "freshwater" cleavage is largely a thing of the past, as this Steven Williamson post explains.  Since the wars of the 1970s and 80s, there has been some convergence: macroeconomists have developed a class of models - sometimes called "New Keynesian" - which respond to Lucas' methodological critique but also allow for a stabilizing role for macroeconomic policy.  That's not to suggest we've figured it all out, of course; this recent Mark Thoma column highlights some of the weak points of contemporary theory.

NPR Visits Keynes' (Sister's) Grandchildren

One of the pleasures of teaching is the opportunity to re-read the articles I assign to my students; one particular favorite that I look forward to each semester is Keynes' essay "Economic Possibilities for Our Grandchildren."  NPR's Planet Money recently did an episode about it, focusing on Keynes' famously incorrect (thus far) prediction of a 15-hour workweek.  Although Keynes had no progeny, they did check in with his sister's grandchildren, as well as Harvard economist Richard Freeman - all of whom seem to be hard workers. I discussed some ideas about why we're not enjoying so much leisure in a post last year.  Tim Harford also has some thoughts on his blog.

The prediction about leisure was part of Keynes' more general forecast that economic growth would solve the "economic problem" of scarcity (and his guess about the rate of growth was pretty accurate), and speculation about the social change that would result.  In a similar spirit, in his Bloomberg column, Noah Smith suggested that a post-scarcity world might be like Star Trek: The Next Generation.  He concludes:

In other words, the rise of new technology means that all the economic questions will change. Instead of a world defined by scarcity, we will live in a world defined by self-expression. We will be able to decide the kind of people that we want to be, and the kind of lives we want to live, instead of having the world decide for us. The Star Trek utopia will free us from the fetters of the dismal science.

Or, as Keynes put it in 1930:

Thus for the first time since his creation man will be faced with his real, his permanent problem- how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.

Pushing on a String

One for the footnotes: Timothy Taylor has tracked down the origin of the "pushing on a string" metaphor for expansionary monetary policy in a depressed economy.  It looks like we owe it to Maryland congressman Thomas Alan Goldsborough, who used it in a 1935 hearing with Fed Chairman Marriner Eccles.

2Q GDP

The BEA released the advance estimate of second quarter GDP growth today: the good news is that US output grew at a 2.3% annual rate in the period - a healthy, though unspectacular, pace.  The growth was largely driven by consumption (about 70% of GDP), which grew at a 2.9% rate.  Also, the BEA revised up its estimate of growth in first quarter to an 0.6% rate, from -0.2% in the previous release.

The more disappointing news came in the "annual revision" of estimates for 2012-2014 which were included in today's release.  The new estimates indicate that the agonizingly slow recovery has been a little more sluggish than we previously thought - GDP growth was revised downwards 0.1pt for 2012 and 0.7pt for 2013.

The red line shows the revised figures, the blue line is the previous estimate.  The lower estimates of output growth also imply that labor productivity - output per unit of labor - growth was a little slower than previously thought.  Since labor productivity is the main determinant of changes in living standards over time, further evidence that it has shifted to a lower trend is a discouraging indication about long-run prospects.

This release also had an interesting wrinkle: the BEA is also now releasing the average of the standard expenditure-based GDP figure and the income-based measure (which it calls Gross Domestic Income).  In principle, they should be the same, but, in practice, there is usually a "statistical discrepancy."  This issue brief from the Council of Economic Advisors explains why the average - which its calling "Gross Domestic Output" (we'll see if that sticks...) might be a better indicator.

Professor Keynes is Optimistic

An archive of British Movietone newsreels has been added to YouTube, including one of John Maynard Keynes commenting on Britain's departure from the gold standard in 1931: Another newsreel discusses leaving the gold standard and includes footage of Sir Josiah Stamp explaining the decision: This Telegraph article describes some of the correspondence between the bank and the government about the crisis.  Britain's exit - after painfully resuming the gold standard at its prewar parity in 1925 - was one episode in a series of sterling crises in the 20th century. Last year, I posted some newsreels from the 1949 and 1967 devaluations.  

Note: An earlier post from 2011 had a fragment of the same Keynes newsreel, but now we are fortunate to have it in full.

Greek Tragedy, European Farce

It looks as though Greece is staying in the euro, after all (for now at least...).  The terms of the deal - pending approval by the Greek parliament - are not very favorable to Greece.  Essentially it means more of the same - additional financing from the EU in exchange for more austerity, "structural reforms" (in some cases absurdly detailed) and a EU supervised privatization of state-owned assets.  There is a vague promise to consider debt restructuring, but nothing concrete.

The reports from the negotiations over the weekend reinforced the impression that Germany, along with some of the other smaller countries, really wanted to push Greece out, but the French and Italians worked to prevent this outcome.

From the viewpoint of Germany, the issue is making sure that euro membership entails following associated rules and obligations: a more forgiving treatment of Greece would create a "moral hazard" problem, inviting more deviations in the future.  However, the rules they are enforcing do not make economic sense: they force procyclical fiscal policies and fail to confront an unsustainable debt burden.  (Some sympathy for the Germans, though: as this VoxEU piece by Kang and Mody illustrates, they were reluctant about the euro from the beginning).

The response to the deal has been highly critical: see Barry Eichengreen, Martin Sandbu, Wolfgang Munchau, Christian Odendahl and John Springford, Paul Krugman, Ambrose Evans-Pritchard, John Cassidy, Eric Beinhocker, Neil Irwin.  This interview with former finance minister Varoufakis is also interesting.  Simon Wren-Lewis has a nice post on "trust," a word which has been thrown around alot lately.

The FT's Gideon Rachman has a somewhat different take, emphasizing that Germany backed off its evident desire to force a "Grexit".

One condition of the deal was continued IMF involvement.  While Greece objected to this, it may ultimately prove to be in their favor - the IMF has the capacity to act as a voice of sanity, and they have said that Greece's debt is unsustainable (much of the criticism of the IMF is that they haven't pushed strongly enough for a debt writedown, as they ordinarily would).  IMF chief economist Olivier Blanchard discussed Greece in a blog post (and Ashoka Mody offered a critical response).

Although some of us think Greece might be better off outside the euro, their willingness to sign on to an agreement of the sort the Syriza govermnment came in to power promising to end (and essentially what they voted "no" on in the referendum a week ago) demonstrates how badly they want to stay in.  As long as Greece is saddled with an unsustainable debt, the prospect of a rerun of this drama will remain.  But the removal of the immediate threat of a euro exit hopefully will give a short-run boost (Daniel Davies gives some reasons for short-term optimism).

As for the euro, the last several years have laid bare the institutional shortcomings - some of which are discussed in this Simon Tilford column - underscoring the reasons many economists were skeptical of the project from the outset.  Although political solidarity and continued moves towards integration might have overcome these flaws, the last several weeks have demonstrated that, as a political matter, the sense of commonality needed to make the euro work does not exist.

Update: IMF to the rescue (?!):

The International Monetary Fund threatened to withdraw support for Greece’s bailout on Tuesday unless European leaders agree to substantial debt relief, an immediate challenge to the region’s plan to rescue the country.

On this, see also Ambrose Evans-Pritchard and Josh Barro.  A few hours ago I said they had the "capacity to act as the voice of sanity" but I didn't expect them to use it so soon...  This made me laugh:

Object to IMF involvement so spite-crazed Germans will insist on it. Then reveal that the IMF agreed with you! pic.twitter.com/IO4DTpdPJC

— Matt! (@mattyglesias) July 15, 2015

Hmm... at this point, hard to say if this will lead to a better deal, or just blow it up, as Gideon Rachman suggests:

IMF may not realise it, but they are effectively calling for the break-up of the euro. No way creditor parliaments will buy this

— Gideon Rachman (@gideonrachman) July 14, 2015

Europe's Final Countdown to "Grexit"?

The "no" vote in its referendum last Sunday seems to have accelerated the momentum towards a Greek exit for the euro.  While there is plenty of room to second-guess the negotiating strategy, I think the Syriza government and Greek voters were right to reject continuing on the same policy path.  If they are forced out of the euro (which looks likely), it will be traumatic and disruptive, but the experience of Argentina in 2002 suggests a fairly quick rebound (from a very low starting point) is possible. 

Ultimately, this may be worse for the rest of Europe - not only does it open up the possibility of future crises by demonstrating the reversibility of the euro, it also demonstrates a fundamental lack of solidarity: the "ever closer union" isn't really that close (see Dani Rodrik and Peter Eavis).

Some of Europe's leaders seem recognize this; the main stumbling block in the last-ditch negotiations appears to be on whether some of Greece's debts will be written off (i.e., "restructuring" or "haircut").  The IMF has publicly said that Greece's debt are not sustainable (debt writedowns are part of standard IMF interventions), and the US is urging a writedown.

Politically, it is easy to see why this is a nonstarter in many of the creditor countries.  Some "leadership" is badly needed, particularly in Germany, and doesn't appear to be forthcoming: in the Times, Bruce Ackerman calls out Germany's "failure of vision."  Clive Crook argues that the Greeks are being deliberately pushed out.  Eduardo Porter notes that Germany seems to be forgetting that it has been a beneficiary of debt relief (see also Thomas Piketty).  The German stubbornness may be more than just politics - Simon Wren-Lewis argues part of the problem is that they (naturally) do not want to acknowledge the failure of their economic ideology.

Last minute negotiations are ongoing... when Syriza first came to power, the idea of GDP-linked debt was raised.  This seems to have fallen off the table, but it might provide a "face saving" way out: the IMF's knack for optimistic projections could be helpful in making the value to the creditors appear initially large.  Since they would have some equity-like characteristics, replacing the debt with GDP-linked bonds would have some passing similarity to what normally occurs in a corporate bankruptcy, where creditors receive equity stakes (and perhaps this would help make a "fairness" argument).  And it actually might work: if the chances of future austerity and/or a euro exit were substantially reduced, Greece should have a chance at some rapid "bounce back" growth.  I don't know anything about Greek politics, but I would think that, in the long-run, a government led by an "outsider" party like Syriza might have a better shot at implementing structural reforms like better tax collection.

See also: a good "tick-toc" on the negotiations from the Times' Landon Thomas on the breakdown of negotiations last week; Ambrose Evans-Pritchard; Ashoka Mody is very harsh on the creditors and the IMF, Daniel Gros is a bit more sympathetic.

More Greek Notes

perhaps Greece should be printing some notes this weekend...

Recently, Christian Odendahl had a sensible take on what should be done in Greece, but reasonable advice from economists is being overtaken by politics and events.  Catherine Rampell:

Greeks are hoarding cash and sending their savings abroad; by a conservative estimate, Greek bank deposits have fallen by about 45 percent since their peak in 2009. Recent talk of capital controls and bank closures has only accelerated this bank run (or, as some have dubbed it, a “bank jog”), making the banking sector weaker, and, by the day, even more in need of European assistance. Last week alone, Greeks withdrew an estimated 4 billion euros. For those keeping track, that’s two-and-a-half times what the country owes the IMF at the end of the month. 

Karl Whelan discusses the connection between a Greek government default, the ECB and a euro exit -- in theory, the ECB could help Greece stay in the euro even if the government defaults, but it doesn't appear inclined to.  Ultimately, if the euro is to avoid similar crises in the future, it needs to be robust to a sovereign default.

Reports over the deal terms being discussed are hardly encouraging.  Wonkblog's Matt O'Brien writes:

Europe is making life so difficult for Greece with such specific demands for austerity that it almost seems like Europe is trying to get Greece to leave the euro now. Before this latest showdown, Greece had actually cut so much that it had a budget surplus before interest payments...

But Europe isn't interested in that. It's interested in making Greece run bigger and bigger budget surpluses, without much regard for the economic consequences. Not only that, but Greece has to run surpluses the way Europe wants them to. Never mind that Greece has already cut its spending a lot, already cut its pensions a lot, and already reformed its labor markets a lot. There are always new cuts and new reforms that Europe says will make Greece grow at some point in the future.

If this is how it's going to be, why should Greece stay in the euro? It sure seems like Europe is trying to force Syriza to do what Syriza said it wouldn't just to prove a point: don't underestimate the power of the ECB. It's a not-so-subtle message to the anti-austerity parties in Spain and Portugal that they have nothing to gain and everything to lose from challenging the budget-cutting status quo.

Although its the EU that deserves most of the blame, the IMF's role has been controversial, too: see this Politico article and this Ambrose Evans-Pritchard column.  At the IMF's blog chief economist Olivier Blanchard explains what the IMF believes a "credible deal" requires.

See also: James Galbraith on "reform", and Branko Milanovic on what this means for Europe.

Update (6/29): The Greek government has called a referendum and imposed capital controls.  See Eichengreen, Krugman and Stiglitz (and Tony Yates for a take somewhat more critical of the Greek government) Charles Wyplosz on the ECB,  Francisco Saraceno and Matt Yglesias on the politics, and Hugo Dixon on how the referendum may play out.

A Theory of Production

Economists often use the word "technology" to mean the relationship between output and factors of production such as capital and labor.  The Cobb-Douglas production function, which is a ubiquitous description of technology has its origin in a 1928 AER article, "A Theory of Production," by Charles Cobb and Paul Douglas.

Using C to denote capital, L for labor and P for production, the production function makes its first appearance:

Although the description of technology is a theoretical contribution, much of the article is empirical in nature, as they construct indexes of capital and labor in order to test their model.  They compare the production implied by their function and estimates of capital and labor, P', with a measure of actual production.

To a contemporary macroeconomist reader, the striking thing about the article is the extent to which it anticipates how we analyze business cycles today.  Cobb and Douglas, separate out cyclical and trend components (using 3 year moving averages) and show that the deviations of actual production and the production implied by changes in capital and labor are procyclical.

The article includes a chronology of business cycles which aligns with the NBER chronology; the NBER recessions during this period are

• June 1899 - Dec. 1900
• Sept. 1902 - Aug. 1904
• May 1907 - June 1908
• Jan. 1910 - Jan. 1912
• Jan. 1913 - Dec. 1914
• Aug. 1918 - Mar. 1919
• Jan. 1920 - July 1921

Cobb and Douglas' estimates are annual, but several of these do line up with points where P' (implied production) exceeds actual production, P.

Today these deviations of actual output from the amount implied by changes in factors of production are known as "Solow residuals" after work by Robert Solow in the 1950s and interpreted as measures of technological progress (i.e., our ability to wring more output out of given amounts of capital and labor).  Although Solow was mainly concerned with long-run growth trends, in the 1980's, Real Business Cycle theorists interpreted short-run fluctuations as "technology shocks".  In Real Business Cycle models these shocks drive economic fluctuations, and the same pattern identified by Cobb and Douglas - using postwar data and newer detrending techniques - was cited in support of this theory.  One weakness of this argument is that short run movements in the Solow residual are at least partly due to utilization - "factor hoarding" - rather than changes in technology.  This, too, was anticipated by Cobb and Douglas:

The index does not of course measure the short-time fluctuations in the amount of capital used.  Thus, no allowance is made for the capital which is allowed to be idle during periods of business depression nor for the greater than normal intensity of use int he form of second shifts etc., which characterizes the periods of prospertity.

Overall, this article would fit very well into a syllabus for a current course on business cycle theory.  Hmm...

Greek Notes

A key point about "bailouts" - we say that a borrower got rescued, but the real beneficiary is usually the original creditors.  In the case of Greece, Ashoka Mody reminds us, Europe and the IMF got German and French banks off the hook:

Greece's onerous obligations to the IMF, the European Central Bank and European governments can be traced back to April 2010, when they made a fateful mistake. Instead of allowing Greece to default on its insurmountable debts to private creditors, they chose to lend it the money to pay in full.

At the time, many called for immediately restructuring privately held debt, thus imposing losses on the banks and investors who had lent money to Greece. Among them were several members of the IMF’s board and Karl Otto Pohl, a former president of the Bundesbank and a key architect of the euro. The IMF and European authorities responded that restructuring would cause global financial mayhem. As Pohl candidly noted, that was merely a cover for bailing out German and French banks, which had been among the largest enablers of Greek profligacy.

Ultimately, the authorities' approach merely replaced one problem with another: IMF and official European loans were used to repay private creditors. Thus, despite a belated restructuring in 2012, Greece's obligations remain unbearable -- only now they are owed almost entirely to official creditors.

This complicates the politics: the citizenry of Europe feels that Greece has already gotten a rescue at their expense, and now any restructuring is a hit to government finances (including to those of the US, as the largest shareholder of the IMF).  But since the debt has been transferred from the private to the official sector, it is tempting to believe that a Greek default - and an exit from the euro - are less likely to spark a financial crisis (though I wouldn't be so sure about this; people thought markets were "prepared" for Lehman's bankruptcy after all...).

The Greek government's handling of the situation has been less than smooth - I'm not sure what to make of the complaints about their negotiating style, but raising old war reparations claims and playing footsie with Putin do not seem like constructive steps.  Still, the fundamental position articulated by Greek finance minister Varoufakis in this Project Syndicate piece seems very reasonable (much more so than that of the EU finance ministers sniping at him).

As Paul Krugman wrote last week:

[E]xiting the euro would be extremely costly and disruptive in Greece, and would pose huge political and financial risks for the rest of Europe. It’s therefore something to be avoided if there’s a halfway decent alternative. And there is, or should be....

The shape of a deal is therefore clear: basically, a standstill on further austerity, with Greece agreeing to make significant but not ever-growing payments to its creditors. Such a deal would set the stage for economic recovery, perhaps slow at the start, but finally offering some hope.

But right now that deal doesn’t seem to be coming together...

And as Antonio Fatas points out:

What the European partners want is much less clear. They would love to get paid back on all the current Greek government debt that they hold but that's unlikely to happen. Some would love to see Greece outside of the Euro area so that they do not have to deal with this again. There is a sense that whatever agreement is found now will not be the last one. The lack of trust has reached levels that has made it clear to some that Grexit is the best long-term outcome. But they are afraid of the consequences, both in the short run and in the long run in terms of credibility of the membership that would be left after Greece was gone. 

This will be a test of the wisdom and statesmanship of Europe's leaders; Roger Cohen reminds us why - despite how lousy it looks at the moment - the European project is worth saving.  Things look set down to go down to the wire: the Greek government is scrounging all the euros out of its couch cushions but at some point it will miss a payment, which will force some difficult decisions.  Here's hoping Angela Merkel, Mario Draghi et al. rise to the occasion.

Update (5/5): The FT's Gideon Rachman makes a case for Grexit.

TPP and Developing Countries

One of the claims about the Trans-Pacific Partnership (TPP) agreement is that it will benefit developing countries.  At Vox, Dylan Matthews spoke with Kimberly Ann Elliot of the Center for Global Development about how it will affect Vietnam, which has the lowest income among the countries negotiating the treaty.

Their discussion highlights a number of broader issues which arise with these regional (or "preferential") trade agreements:

• Trade diversion: part of the perceived benefit for Vietnam would be that its exports would get more favorable treatment than those of other developing countries, like Cambodia, that are not members of the TPP.  This is not necessarily a gain in terms of overall economic efficiency.
• Preference erosion: once countries in an agreement have preferential treatment for their exports, they may resist multilateral reductions in trade barriers with bigger global benefits (i.e., agreements through the WTO), because that would reduce their advantage relative to nonmembers.
• Rules of origin: in an age of multinational production chains, defining whether a good exported from a particular country is eligible for preferential treatment is less than straightforward. Rules of origin (ROOs) are meant to prevent trans-shipment, e.g., bringing Chinese goods to the US through Vietnam, but doing so creates a great deal of complexity in these agreements as questions like how should a shirt made in Vietnam of Indian cloth be treated need to be hammered out.

Overall, this is a further reminder that assessing the economics of these agreements is much more complex than simply applying our findings about the gains from trade.

Q1 GDP

From the BEA, a disappointing first estimate of first quarter GDP: they have the annualized growth rate at a mere 0.2%.

Consumption, the largest part of GDP, was a bit stronger at 1.9%, but government purchases were a drag, falling at a -0.8% rate.  The strong dollar helped reduce net exports; exports fell at a 7.2% rate.  Another worrying note is that there was a substantial positive contribution from inventories - while this adds to GDP, it also means a greater stock of unsold goods which could lead firms to cut back production in the future. 

This isn't the first time in recent memory that first quarter GDP has seemed weak.  As Justin Wolfers notes, it seems like something may be off with the seasonal adjustment (i.e., the government attempts to take out the normal seasonal patterns, like the decline in retail after the holidays).  While the seasonal adjustment should take into account typical effects of weather, White House economic advisor Jason Furman notes that this winter was harsher than usual.

Another major indicator of economic activity is growth in payrolls, which averaged a reasonably healthy 197,000 during the first three months of the year.  So I don't think the GDP estimate - which is, as always, subject to substantial revision anyway - is cause for panic, but it is a cautionary signal to the Fed as it contemplates when to start raising the federal funds rate target.

Noah Smith's PhD Advice

Noah Smith's latest Bloomberg column about the pros and cons of going for a PhD is a worthwhile corrective to the increasing tendency to assume "more education is better."  He concludes:

So make no mistake: graduate school is no picnic. Yes, there are modest financial rewards. But unless you’re one of those people who absolutely loves being a scholar, you’re probably going to pay heavy costs in terms of your lifestyle and mental state. These are things I wish I had known about before I did my own Ph.D. Think twice before jumping on the grad school train.

I think "modest" may overstate the financial rewards.  Conditions vary widely by discipline, so its hard to generalize.  My own advice - tailored to economics - is here.

Economics Needs More Women

that's the headline on this Wesleying post by econ major Kerry Nix '16 (and in the post there is a link to a longer report that is well worth reading).

First of all: yes.

Overall, as the report notes, about 25-30-ish percent of Economics students at Wesleyan are female; this is pretty consistent with national averages.  So, its not just us, but that doesn't mean that we can't do some things locally.

My colleagues are an extraordinarily conscientious group of people and I have no doubt that this will get careful consideration.  In the meantime, however, here are a few scattered thoughts on some of the issues raised:

There is quite a bit of concern about whether the atmosphere in classrooms with a relatively large number of students and a lopsided gender ratio is particularly off-putting to women.  I think this is plausible, though this is one of several concerns where it might be helpful to have some survey research to back up (or not!) our anecdotal impressions. 

Many of our classes rely primarily on lecture-based pedagogy; there are some suggestions in the report that other approaches - e.g., in-class problem-solving or inverted classrooms - might be more appealing to female students.

In this regard, at present, I think the situation at Wesleyan is that we're very constrained by class size: our enrollments (and majors) per FTE are among the highest in the university.  While the size of the department has increased slightly, it hasn't remotely kept up with the growth in enrollments.  What that means is that our sections of Econ 110 (our intro class for majors) typically have 40-50 students; sections of the lower-level electives and the core intermediate sequence for majors have enrollment caps of 35 (and are very often at or near this cap); it is only the upper-level electives that could be considered "small," and even these have 25 students per class.  While these numbers don't seem high in the universe of American higher education overall, this is in the context of an institution where 72% of class sections have an enrollment of 19 or fewer and where many of the incoming students have chosen a liberal arts college with the expectation of small classes.

In a large class, it will be inherently less comfortable for most to participate and ask questions and the report suggests this might disproportionately affect female students (though I think it's a concern for everyone).  As instructors, it also limits our pedagogy, and the preponderance of lecturing in economics is partly a reflection of our class sizes.  I have been able to integrate some in-class problem solving in Econ 270 (a lower-level international economics elective) and Econ 110.  In Econ 302 (the core macroeconomics course), I experimented with an inverted classroom in the fall; I think it went quite well, but I happened to have a section with a smaller enrollment - I doubt it will be as successful when (if) I have a more typical enrollment of 35.

Another issue raised is the mathematical intensity of our curriculum and how this might interact with lower levels of mathematical confidence in female students.  As a factual matter, I don't think a confidence differential is warranted; there's no lack of math ability in the women coming into our classes - this is true both relative to men and in an absolute sense.  However, I suppose stereotypes that mathematical stuff is "hard" and "softer" topics are better suited to women are deeply embedded in the broader culture - hopefully fading over time, but not quickly enough.  Overall, I believe the mathematical rigor of our program is a strong suit - Wesleyan is very unusual in utilizing calculus from the outset (Econ 110).  One of the most valuable things that students take away from studying economics is the habits of mind - i.e., a particular type of critical thinking - that come from the discipline imposed by thinking in terms of models, expressed and manipulated in mathematical language.  Moreover, economics as it is practiced is a very mathematical discipline - while some may not like this (and I was a very math-averse economics undergraduate myself at one point) - I think our introductory class more honestly represents what studying economics involves than the more typical style of university "principles" courses which try to minimize using math.

Relatedly, the report discusses concerns about relevance -

Caroline finds disconnectedness between Econ and the real world, saying “it does seem like just learning how to crunch numbers right now, but I think learning...what sort of policy differences you could make if you learned about Econ, and I think that would encourage more people to take Econ.”

I'm not sure this is gender-specific; as an instructor, I need to guide my students through the theory - this is, for most, the hardest part, and where they most need the help of a professor (one of the reasons I majored in economics was that I perceived I needed this as a student).  We're time-constrained in class, but I've tried to use reading assignments to enhance students' sense of how the theory applies.  Over the course of the curriculum, the students learn about how we test theory against data and develop an understanding of how we choose which models (and therefore what simplifications) are appropriate under alternative circumstances.  But this all rests on groundwork we build in the introductory class and I think it is worth thinking about whether there might be changes we could make in its structure that could address some of these concerns.

The report also mentions grades, citing Claudia Goldin's research that women are more likely then men to be put off further study by low grades in introductory classes (summarized in this Washington Post column by Catherine Rampell, which I discussed in an recent post).  Economics does have one of the lowest grade point averages at Wesleyan - our grades are inflated, but less so than those in most other departments.  I think this is a serious issue - this effort at Wellesley to impose common grading standards demonstrated how much grading differentials across departments distort students' choices.  To the extent that women's choices are more affected then men's, grade inflation is a gender equity issue.  However, I think the culprit is not the economics department, but others where the grade inflation has gotten out of control (which I think is an unsurprising symptom of the reliance on student evaluations in promotion and tenure).

Another issue raised by the report is whether men are more likely to be attracted to economics because they believe it suits their vocational goals.  The misperception that an economics major is a proxy for studying business or finance runs deep.  I should write more about this sometime; for now, I'll simply say that this reflects a fundamentally incorrect view of what economics is about.  To the extent that this is disproportionately bringing more male students into economics, they're coming for the wrong reasons and the implication would be that "economics needs fewer men."

There's quite a bit more in the report that is worth thinking about.  Some of the issues are fundamentally about student culture - Wesleyan students seem to mostly be pretty good at maintaining their culture and supporting each other, so I am optimistic that the students can make progress, as well as the faculty.

Minimum Wages and Economics

Tim Harford writes on the minimum wage:

The UK minimum wage took effect 16 years ago this week, on April 1 1999. As with the Equal Pay Act, economically literate commentators feared trouble, and for much the same reason: the minimum wage would destroy jobs and harm those it was intended to help. We would face the tragic situation of employers who would only wish to hire at a low wage, workers who would rather have poorly paid work than no work at all, and the government outlawing the whole affair.

And yet, the minimum wage does not seem to have destroyed many jobs — or at least, not in a way that can be discerned by slicing up the aggregate data. (One exception: there is some evidence that in care homes, where large numbers of people are paid the minimum wage, employment has been dented.)

The general trend seems a puzzling suspension of the law of supply and demand. One explanation of the puzzle is that higher wages may attract more committed workers, with higher morale, better attendance and lower turnover. On this view, the minimum wage pushed employers into doing something they might have been wise to do anyway. To the extent that it imposed net costs on employers, they were small enough to make little difference to their appetite for hiring.

An alternative response is that the data are noisy and don’t tell us much, so we should stick to basic economic reasoning. But do we give the data a fair hearing?

At its best, economics is a fruitful dialogue between theory and empirical (data) work.  All economic models are, by nature, simplifications.  One of the judgments we have to make is whether some of the simplifcations we've made are inappropriate.  Testing our models against the data helps us do that.

The first tool an economist will reach for in trying to analyze a market is supply and demand; in that context, a minimum wage is a price floor, which creates an excess supply of labor (i.e., unemployment):

(the equilibrium wage and quantity of labor are labelled with superscript e's, and the m's mark the minimum wage and corresponding amount of labor).

We like supply and demand because it is simple and works well in many context; but the labor market is one case where its simplicity can lead us astray.  As Paul Krugman recently put it:

[B]ecause workers are people, wages are not, in fact, like the price of butter, and how much workers are paid depends as much on social forces and political power as it does on simple supply and demand.

Indeed, some empirical research has demonstrated that minimum wages do not have the effects implied by the supply and demand framework.  This NYT Magazine piece by Annie Lowrey summarized David Card and Alan Krueger's classic paper on the subject and some of the subsequent dispute.

Economic News on TV

A nice bit of parody, "Every TV News Report on the Economy in One"

STEM versus Liberal Education?

In a Washington Post column headlined "Why America's Obsession with STEM Education is Dangerous," Fareed Zakaria writes:

This dismissal of broad-based learning, however, comes from a fundamental misreading of the facts — and puts America on a dangerously narrow path for the future. The United States has led the world in economic dynamism, innovation and entrepreneurship thanks to exactly the kind of teaching we are now told to defenestrate. A broad general education helps foster critical thinking and creativity. Exposure to a variety of fields produces synergy and cross fertilization. Yes, science and technology are crucial components of this education, but so are English and philosophy. When unveiling a new edition of the iPad, Steve Jobs explained that “it’s in Apple’s DNA that technology alone is not enough — that it’s technology married with liberal arts, married with the humanities, that yields us the result that makes our hearts sing.” 

There is much to agree with in the case he makes for liberal education, but the way he (and the Post's headline writers) frame it is problematic.  We don't face a tension between science, engineering and mathematics and liberal education; science and mathematics are part of liberal education, and engineering should be too.

Zakaria is right that liberal education is concerned with "critical thinking and creativity."  To be effectual, these require a set of intellectual tools to understand the world around us.  Liberal education as it is practiced does fairly well through the humanities and social sciences of expanding students' capacities to think about the human and social world.  But the social world is shaped by the physical and biological, the mechanical and computational.  And here I worry we aren't doing such a good job - we seem too ready to declare that we're not "math people" (and, it mostly follows from this, not science or engineering people).  Doing so early in a child's academic life means that they will later find many areas closed off to them.  At the college level, we accommodate this with science for non-scientist courses - every college has its "physics for poets" and "rocks for jocks."   Some of them are likely fantastic classes, but there is a worrying asymmetry - we don't seem to feel a need to offer "poetry for physicists" or "social theory for biologists".  To some extent, this reflects what we're given - too many of our incoming students have already "tracked" away from serious studies in math and science (or turned off to them).  But it raises a question of the seriousness of our commitment to science and math as a real part of liberal education.

The importance of science and math in liberal education is not just in knowing "stuff," or "how stuff works" - though I think knowing stuff, and how it works, is often underrated - but in learning other modes of thought which can extend our mental capacities and give us another perspective.

While Zakaria picked up on our current STEM-mania (much of which is misguided, even on its own terms), and his column's headline puts science and liberal arts in a false opposition, his real target - a narrow vocationalism - is a valid one.  Economic insecurity and the wage premium for college graduates have helped entrench the belief that a college degree is some sort of golden ticket. This is a far too circumscribed view: a good education should enhance one's working life (regardless of how remunerative) - but it should also enrich our lives as citizens and people.  That is, it should help us, as Keynes put it, to "live wisely, agreeably and well."  We would be better able to do this if we took science and math education a little more seriously.

Update (3/31): At Forbes.com, Union College's Chad Orzel has a nice response - "science is essentially human" - to Zakaria's piece.