Methods of causal inquiry [feedly]

Dan Little is kind of a wonky Marxist. He is deep into sociological lingo in this this (also wonky) piece. Nonetheless the techniques of proving, or at least making strong arguments, about causation in social sciences is an important and provocative subject, including in economics.

Methods of causal inquiry
http://understandingsociety.blogspot.com/2020/02/methods-of-causal-inquiry.html

Methods of causal inquiry

47UnderstandingSocietyby Dan Little / 13h

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This diagram provides a map of an extensive set of methods of causal inquiry in the social sciences. The goal here is to show that the many approaches that social scientists have taken to discovering causal relationships have an underlying order, and they can be related to a small number of ontological ideas about social causation. (Here is a higher resolution version of the image; link.)

We begin with the idea that causation involves the production of an outcome by a prior set of conditions mediated by a mechanism. The task of causal inquiry is to discover the events, conditions, and processes that combine to bring about the outcome of interest. Given that causal relationships are often unobservable and complexly intertwined with multiple other causal processes, we need to have methods of inquiry to allow us to use observable evidence and hypothetical theories about causal mechanisms to discover valid causal relationships.

The upper left node of the diagram reviews the basic elements of the ontology of social causation. It gives priority to the idea of causal realism -- the view that social causes are real and inhere in a substrateof social action constituted by social actors and their relations and interactions. This substrate supports the existence of causal mechanisms (and powers) through which causal relations unfold. It is noted that causes are often manifest in a set of necessary and/or sufficient conditions: if X had not occurred, Y would not have occurred. Causes support (and are supported by) counterfactual statements -- our reasoning about what would have occurred in somewhat different circumstances. The important qualification to the simple idea of exceptionless causation is the fact that much causation is probabilisticrather than exceptionless: the cause increases (or decreases) the likelihood of occurrence of its effect. Both exceptionless causation and probabilistic causation supports the basic Humean idea that causal relations are often manifest in observable regularities.

These features of real causal relations give rise to a handful of different methods of inquiry.

First, there is a family of methods of causal inquiry that involve search for underlying causal mechanisms. These include process tracing, individual case studies, paired comparisons, comparative historical sociology, and the application of theories of the middle range.

Second, the ontology of generative causal mechanisms suggests the possibility of simulations as a way of probing the probable workings of a hypothetical mechanism. Agent-based models and computational simulations more generally are formal attempts to identify the dynamics of the mechanisms postulated to bring about specific social outcomes. 

Third, the fact that causes produce their effects supports the use of experimental methods. Both exceptionless causation and probabilistic causation supports experimentation; the researcher attempts to discern causation by creating a pair of experimental settings differing only in the presence or absence of the "treatment" (hypothetical causal agent), and observing the outcome.

Fourth, the fact that exceptionless causation produces a set of relationships among events that illustrate the logic of necessary and sufficient conditions permits a family of methods inspired by JS Mills' methods of similarity and difference. If we can identify all potentially relevant causal factors for the occurrence of an outcome and if we can discover a real case illustrating every combination of presence and absence of those factors and the outcome of interest, then we can use truth-functional logic to infer the necessary and/or sufficient conditions that produce the outcome. These results constitute JL Mackie's INUS conditions for the causal system under study (insufficient but non-redundant parts of a condition which is itself unnecessary but sufficient for the occurrence of the effect). Charles Ragin's Boolean methods and fuzzy-set theories of causal analysis and the method of quantitative comparative analysis conform to the same logical structure.

Probabilistic causation cannot be discovered using these Boolean methods, but it is possible to use statistical and probabilistic methods in application to large datasets to discover facilitating and inhibiting conditions and multifactoral and conjunctural causal relations. Statistical analysis can produce evidence of what Wesley Salmon refers to as "causal relevance" (conditional probabilities that are not equal to background population probabilities). This is expressed as: P(O|A&B&C) <> P(O).

Finally, the fact that causal factors can be relied upon to give rise to some kind of statistical associations between factors and outcomes supports the application of methods of inquiry involving regression, correlation analysis, and structural equation modeling.  

It is important to emphasize that none of these methods is privileged over all the others, and none permits a purely inductive or empirical study to arrive at valid claims about causation. Instead, we need to have hypotheses about the mechanisms and powers that underlie the causal relationships we identify, and the features of the causal substrate that give these mechanisms their force. In particular, it is sometimes believed that experimental methods, random controlled trials, or purely statistical analysis of large datasets can establish causation without reference to hypothesis and theory. However, none of these claims stands up to scrutiny. There is no "gold standard" of causal inquiry.

This means that causal inquiry requires a plurality of methods of investigation, and it requires that we arrive at theories and hypotheses about the real underlying causal mechanisms and substrate that give rise to ("generate") the outcomes that we observe.

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World’s Most Innovative Economies [feedly]

World's Most Innovative Economies
https://ritholtz.com/2020/02/worlds-most-innovative-economies/

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Source: World Economic Forum  

Interview with Angus Deaton

This week, Project Syndicate catches up with Angus Deaton, the 2015 Nobel laureate in economics and a professor emeritus at Princeton University.

Project Syndicate: Before the US midterm elections in 2018, you challenged claims that President Donald Trump had been good for the economy, highlighting, among other things, that strong stock-market performance reflects the redistribution of income from labor to capital, at the expense of the vast majority of Americans. Trump’s defenders would no doubt point to low unemployment and rising wages, even for those at the bottom, in defending the president’s performance. In advance of November’s presidential election, what should American voters understand about the Trump economy?

Angus Deaton: The US has undergone a long and very slow recovery from the Great Recession. But that recovery is attributable mostly to the actions of previous administrations, though Trump’s tax cuts also played a role. And while the employment rate has risen (as it always does when the economy is doing well), and unemployment is low, the employment rate remains lower than before the Great Recession, and substantially lower than in 2000.

In fact, the long-run trend of less-educated Americans dropping out of the labor force shows no sign of having abated. The quality of jobs is deteriorating as large firms outsource many of their operations. Meanwhile, the stock market is booming in response to giveaways to corporations.

1. 

   The White Swans of 2020

   NOURIEL ROUBINI

   Financial markets remain blissfully in denial of the many predictable global crises that could come to a head this year, particularly in the months before the US presidential election. In addition to the increasingly obvious risks associated with climate change, at least four countries want to destabilize the US from within.

   9

PS: You’ve highlighted the correlation between US counties with elevated mortality rates for white people – especially owing to what you and Anne Case call “deaths of despair,” caused by suicide, drug overdose, and alcohol abuse – and counties that voted for Trump. You’ve also pointed out that deregulation, which Trump has fervently embraced, can literally kill – the opioid crisis being a case in point. In other words, Trump’s policies are simultaneously deepening and capitalizing on his voters’ misery. The same goes for the gutting of US environmental regulations. What would Trump’s successor, whenever he or she arrives, have to do to break this cycle?

AD: I’m not sure that it is a cycle that feeds into itself, or that is in any way inevitable. It is just bad policy. The opioid crisis should not have happened. (It has not happened in other countries.) US regulators allowed it. Those regulatory failures were not introduced – or ameliorated – by the Trump administration.

Corporate interests are not the only ones that matter. There is nothing stopping a new administration from recognizing that and working for others.

PS: Information and communications technology “need not doom us to a jobless future,” you argued last year; “enlightened policymaking still has a role to play.” What policies – or policy goals – should top the list?

AD: New technologies have been the primary source of prosperity for more than 200 years, but they often cause disruption, sometimes for a long time. A more comprehensive social safety net would be a good start. In my view, one key is to reduce the incredibly high costs of health care in the US, and to break the link between health care and employment. What I do not think would solve the problem – or even help – is a universal basic income.

PS: As someone who argues for economic policies that look beyond growth, what do you think of alternatives to GDP, such as Bhutan’s Gross National Happiness index, the UN’s Human Development Index, or the US-based Genuine Progress Indicator? Are such broader metrics useful, or are they, like US poverty data, too vulnerable to manipulation to underpin real-world change?

AD: Some such broader metrics have proved their usefulness as supplementary information, but they are not alternatives to GDP. In my view, the priority should be to improve GDP itself, excluding many of the things that do not improve human wellbeing (like useless but profitable medical procedures), and ensuring a much better account of distribution – in particular, how personal disposable income is spread across different groups.

That said, the pre-eminent position of GDP is undeserved. In fact, if GDP is interpreted as a measure of how well the economy is serving its people, it is often extremely misleading.

BY THE WAY . . .

PS: When it comes to addressing rent-seeking in the US, you’ve identified policies that would help – such as reframing and enforcing antitrust laws – but noted in 2018 that you are “not very optimistic” about their implementation. Do any of the Democratic presidential contenders give you more hope? Alternatively, are there other less-than-ideal, but still useful policies that seem more feasible?

AD: One key step would be to improve the public’s understanding of the extent of rent-seeking – for example, through investigative journalism of particular cases. News organizations such as The Washington Post and CBS News did a terrific job of exposing the abuses around opioids.

But the bad guys are still extremely powerful. The health-care industry has five lobbyists for every member of Congress, and those who do their bidding rarely seem to suffer electoral consequences. Little wonder so many young people think American democracy is broken.

All of the Democratic contenders give me more hope than Trump does. But change will be difficult for anyone.

PS: Using money as a proxy for utility simplifies things when building formal economic models, but philosophers, as you’ve noted, reject the equation of financial gain and wealth with happiness. Assuming that the economics profession and society alike would benefit if economists were familiar with the relevant philosophical arguments, which works should be required reading?

AD: Amartya Sen is always worth reading. I particularly like Development as Freedom and The Idea of Justice.

Another excellent book by philosophers who think hard about economics is Economic Analysis, Moral Philosophy, and Public Policy, by Daniel Hausman, Michael McPherson, and Debra Satz. In it, they work through a number of different philosophical and ethical systems and show how they would apply to a series of ethical questions in economics. I think all economists should read it.

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PS: The US federal government recently reported that Americans’ life expectancy rose for the first time in four years in 2018. The increase was only a month, but it was driven by the first decline in drug-related deaths in 28 years, including in hard-hit states like Ohio. Has the US turned the corner?

AD: I certainly hope so, especially as far as bringing the opioid epidemic under control is concerned. But there is a long way to go, and the other deaths of despair – suicides and deaths from alcoholic liver disease – continue to rise, especially among those without a college degree. A one-month increase in life expectancy is a terrible outcome, compared with the two-year increase that the US used to achieve every decade, and that other rich countries continue to come close to achieving, albeit somewhat more slowly.

PS: You’ve described the immediate aftermath of winning the Nobel Prize in Economics as “being transported to a fairyland.” What was most surreal, and most rewarding, about that experience?

AD: The Swedes have been giving these prizes for more than a century, and they have perfected the process. The Swedish people – from ordinary working people to the royal family – have embraced the Nobel prizes, so winners become guests of the entire country, standing at the center of a glittering and magical winter festival that lasts a full week.

You get to bring your co-authors, your friends, and your family. My grandchildren will remember it all their lives. It really was like being in one of the fairylands that I read about in books or saw in theaters as a child in Edinburgh.

Health check: US manufacturing is in trouble [feedly]

Health check: US manufacturing is in trouble
https://economicfront.wordpress.com/2020/02/18/health-check-us-manufacturing-is-in-trouble/

President Trump is all in, touting his success in rebuilding US manufacturing.  For example, in his state of the union address he claimed:

We are restoring our nation's manufacturing might, even though predictions were that this could never be done. After losing 60,000 factories under the previous two administrations, America has now gained 12,000 new factories under my administration.

Apparently, it is a family achievement.  Joe Ragazzo, writing at TPM Café, reports that:

In a towering act of sycophantry, the National Association of Manufacturers announced Friday that it will be giving Ivanka Trump the organization's first ever Alexander Hamilton Award for "extraordinary support of manufacturing in America." The organization made the outrageous claim that "no one"  — no one! — has ever "provided singular leadership and shown an unwavering commitment to modern manufacturing in America" like she has.

Unfortunately, US manufacturing is far from healthy.

Production

The reality is that manufacturing output has been relatively flat over the last two decades, thanks in large part to the globalization of US production.  In 2019, despite the growth of the overall economy, the manufacturing sector actually fell into recession.  In contrast to Trump's claim, manufacturing output fell 1.3 percent over the year.

The figure below shows real manufacturing output indexed to 2012.  We see slow but steady growth from 2000 to 2007, relatively flat growth from 2010 to 2018, and then a decline in real output in 2019.

The manufacturing sector's woes in 2019 are on display in the following figure.

Investment

In line with these trends, as we can see below real investment in new structures by manufacturing firms has also been falling.  Real investment fell from $73.7 billion in 2015 to $56.4 billion in 2019.

Productivity

Manufacturing productivity is at a standstill.  The following figureshows manufacturing output per worker hour, indexed to 2012.  As we can see, it was largely unchanged from 2010 to 2014.  Since then it has trended downward.

Employment

The employment story is even worse.  As the next figure shows, manufacturing employment, in millions of jobs, took a nose dive beginning in the late 1990s and has yet to make a meaningful recovery.

Some 5 million manufacturing jobs have been lost since the late 1990s.  Nearly 90,000 U.S. factories have been lost as well.  And in line with manufacturing's current recession, manufacturing employment, as we see below, is again falling.

Earnings

Equally alarming, the average hourly earnings of production workers employed in manufacturing has now fallen below the average hourly earnings of private sector production and nonsupervisory workers.  Thus, even if US policy were to succeed in bringing back or spurring the creation of new manufacturing jobs, they likely won't be the living wage jobs of the past.

As the Monthly Labor Review explains:

Although manufacturing industries had a reputation for stable, well-paying jobs for much of the 20th century, shifts within the industry in the last several decades have considerably altered that picture. Since 1990, average hourly earnings trends in the various manufacturing industries have been disparate, with a few industries showing strong growth but many others showing growth rates that are lower than those of the total private sector. In fact, average hourly earnings of production and nonsupervisory workers in the total private sector have recently surpassed those of their counterparts in the relatively high-paying durable goods portion of manufacturing.

As we can see in the following figure, in 1990 average hourly earnings of production workers in manufacturing were greater than those of production and nonsupervisory workers in the total private sector (by about 6 percent.)  However, by 2007, average hourly earnings in the private sector had surpassed average hourly earnings in manufacturing.  And by 2015, average hourly earnings in the private sector surpassed average hourly earnings of manufacturing workers in the more highly compensated durable goods sector.  In 2018, the average hourly earnings of private sector production and nonsupervisory workers was approximately 5 percent greater than those of their manufacturing counterparts.

Workers in the auto industry have especially taken a big hit.

Trade

The overall trade deficit, which reflects the combined balances on trade in goods and services, slightly improved in 2019—falling by 1.7 percent or $10.9 billion.  So did the deficit in the trade of goods, falling by 2.4 percent or $21.4 billion. However, those improvements were mostly driven by the rapid growth in US exports of petroleum products.  The trade deficit in non-oil goods, mostly manufactures, actually increased by 1.8 percent in 2019, as can be seen in the following figure.

As Robert E. Scott remarks,

The small decline in overall US trade deficits follows an 18.3 percent increase in the goods trade deficit in the first two years of the Trump administration. Taken altogether, the US goods trade deficit increased $116.2 billion (15.5 percent) in the first three years of the Trump Administration. . . .

Meanwhile, the deficit in non-oil goods trade has nearly tripled since 2000, rising from $317.2 billion in 2000 to $852.3 billion in 2019, an all-time high. For the past two years, the non-oil goods trade deficit also reached record territory as a share of GDP, reaching or exceeding 4.0% of GDP. This growing U.S. trade deficit in non-oil goods is largely responsible for the loss of 5 million U.S. manufacturing jobs since 1998.

 

As we can see, talk of a manufacturing renaissance is nonsense.  And there is no reason, based on Trump administration's economic policies, to expect one.

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Piketty: Social-federalism vs national-liberalism [feedly]

The rotten  fruits of austerity 'liberalism'

Social-federalism vs national-liberalism

Thomas Piketty

https://www.lemonde.fr/blog/piketty/2020/02/11/social-federalism-vs-national-liberalism/

The United Kingdom officially left the European Union a few days ago. So now, make no mistake; along with the election of Trump in the United States in 2016 this is a major upheaval in the history of globalisation. The two countries which had the choice of ultra-liberalism with Reagan and Thatcher in the 1980s and which, since then, have witnessed the highest rise in inequalities, have decided three decades later to opt for nationalism and a form of return to frontiers and national identity.

This change in direction can be viewed from different angles. In its way, it expresses the failure of Reaganism and Thatcherism. The British and American middle and working classes have not experienced the affluence promised by absolute liberalism, laissez-faire policies and economic deregulation. Over time they have felt themselves increasingly under pressure from international competition and the world economic system. Culprits had to be found. For Trump it was the workers from Mexico, China, and all those cunning people in the rest of the world who are reputed to have stolen the hard work of white America. For the Brexiters it was the Polish workers, the European Union and all those who attack the grandeur of Great Britain. In the long run, withdrawing into nationalism and identity-based politics will in no way resolve any of the major challenges of our times which are associated with inequality and global warming. This is all the more true as the Trumpists and the Brexiters have added a new layer of fiscal and social dumping in favour of the wealthiest and the most mobile which will only increase the inequalities and frustrations. But in the immediate future, the nationalist-liberal discourse often appears to those voters who do still vote as being the only new and credible answer to their sense of unease, for lack of any convincing alternative discourse.

De facto, this risk of ideological drift extends far beyond the English-speaking world. The temptation of nationalism and xenophobia exists in many places, in Italy and in Eastern Europe, in Brazil or in India. In Germany, in Thuringe the "right-wing centre" party has just elected a regional government with support from the extreme right for the first time since World War Two. In France, the Arabophobic hysteria has grown to epic proportions. An increasing share of the press seems to imagine that the "left" is responsible for the rise in Islamism at world level as a result of its permissiveness, its support for the Third World and its electoral politics. In reality, if voters of North African or sub-Saharan origin vote for the left-wing parties, it is primarily due to the violent hostility expressed toward them by right wing and extreme-right parties; the same applies to black voters in the United States or Muslims in India.

Over and above national specificities, Brexit must be analysed in the first instance for what it is: the consequence of a collective failure in the way in which economic globalisation has been organised since the 1980s, particularly within the European Union. All the European leaders in turn, in particular the French and the Germans bear their share of responsibility. The free circulation of capital, goods and services with no collective regulation or joint fiscal or social policy functions primarily to the benefit of the richest and the most mobile, and undermines the most disadvantaged and the most vulnerable. It is not possible to define a political project and a model for development by relying simply on free trade, everyone competing with everyone else and market discipline.

True, the European Union has added two elements to this general scheme of organisation of the world economy: free circulation of persons and a small joint budget (1% of European GDP) maintained by contributions from States and financed by small transfers from the richest countries (approximately 0.5% of their GDP) to the poorest ones. Along with the shared currency (which we also find in West Africa) this is what distinguishes the E U from other free trade areas in the world, like for example North America (Mexico, the United States and Canada), where there is neither free circulation of persons nor a joint budget or joint regional structural funds.

The problem is that these two elements are not enough to bond these countries together. The Brexiters gamble is simple: the present rate of globalisation enables access to free trade in goods, services and capital, while at the same time, maintaining control over the flow of people and does not involve contributing to a joint budget.

This trap which spells death to the European Union can only be avoided by radically redefining the rules of globalisation with a "social-federalist" type of approach. In other words, free trade must be conditional on the adoption of binding social aims enabling the wealthiest and most mobile economic actors to be obliged to contribute to a model for sustainable and equitable development. To sum up: the nationalists attack the free circulation of people; social federalism must deal with the circulation of capital and the fiscal impunity of the wealthiest. Karl Polanyi and Hannah Arendt in 1944 and 1951 denounced the naiveté of the social democrats in the face of capital flows and their federal timidity – a lesson that still applies today. To go in this direction, a revision of the European and international treaties is required, beginning with a few countries. In the meantime, we can and must all take new unilateral and incentive measures, for example by taxing imports from countries and firms which practice fiscal dumping. If we do not oppose national-liberalism with a resolute alternative, it will sweep everything aside in its path.

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