Economist-Speak

I try to keep up with the current economics literature, which means reading quite a few papers and a whole lot of abstracts. Most of the literature isn’t very interesting or meaningful to me (this is simply a matter of preference); and some of it might be interesting or meaningful but I am unable to tell. Why? Because the language of economists is often – not always, certainly, but often – deeply obtuse. Now, again, this is my problem, having to do with my preferences and my skills. Research economists, like most academics, are writing for their peers, not the laity. And as much as I might like their research to be written in plainer English – especially since it is subsidized in part by my tax dollars and yours – I understand that technical language is sometimes vital and that all guilds have their own dialects that reside beneath the very big tent that is American English.

That said, sometimes I just have to laugh. Here, from the National Bureau of Economic Research, is the abstract of a recent paper by James H. Stock and Mark W. Watson, who I assume are very smart people and good economists. The paper is called “Heteroskedasticity-Robust Standard Errors for Fixed Effects Panel Data Regression,” and is summarized thusly:

The conventional heteroskedasticity-robust (HR) variance matrix estimator for cross-sectional regression (with or without a degrees of freedom adjustment), applied to the fixed effects estimator for panel data with serially uncorrelated errors, is inconsistent if the number of time periods T is fixed (and greater than two) as the number of entities n increases.

Like I said, I don’t think this paper is for me. (But if it’s for you, please check it out here.)

So imagine how delighted I was to see another recent paper, “On the General Relativity of Fiscal Language,” by Laurence J. Kotlikoff and Jerry Green, which admits that the language of economists (well, the ones who write about finance at least) is essentially meaningless. From the abstract (emphasis added):

A century ago, everyone thought time and distance were well defined physical concepts. But neither proved absolute. Instead, measures/ reports of time and distance were found to depend on one’s reference point, specifically one’s direction and speed of travel, making our apparent physical reality, in Einstein’s words, “merely an illusion.” Like time and distance, standard fiscal measures, including deficits, taxes, and transfer payments, depend on one’s reference point/reporting procedure/language/labels. As such, they too represent numbers in search of concepts that provide the illusion of meaning where none exists. This paper, dedicated to our dear friend, David Bradford, provides a general proof that standard and routinely used fiscal measures, including the deficit, taxes, and transfer payments, are economically ill-defined. Instead these measures reflect the arbitrary labeling of underlying fiscal conditions. Analyses based on these and derivative measures, such as disposable income, private assets, and personal saving, represent exercises in linguistics, not economics.

I’d like to thank Kotlikoff and Green for daring to tackle, even if in a narrow measure, the language of economics. While I don’t have a pressing need to be able to understand heteroskedasticity-robust standard errors, it might be fun to try.