Tuesday, May 19, 2015

Jon Chait helps me Defend Paul Krugman

Jon Chait on (among others) Paul krugman Jon Chait critiques Paul Krugman
Liberal critics reject the honest-mistake explanation. “The Iraq war wasn’t an innocent mistake, a venture undertaken on the basis of intelligence that turned out to be wrong,” replies Paul Krugman, “America invaded Iraq because the Bush administration wanted a war.” And the liberal critics are correct that the war was not merely an honest mistake. But they have framed their indictment of the Bush administration’s intelligence manipulation in such a way as to help it, and its defenders, evade the truth.
Thus far, Chait agrees that Krugman's claim is true, but also criticizes Krugman. He does this in such a way as to help Krugman's defenders demonstrate the truth and the invalidity of his criticism. In substance, he argues that Krugman is playing into Bush defenders hands by denying tht honest mistakes were made. To the extent there is any substance to his critique it is here
It is true that western intelligence agencies badly overestimated Iraq’s weapons capability before the invasion. The Clinton administration, France, Hans Blix, among other sources, all suspected Saddam Hussein of continuing to harbor weapons of mass destruction. They all suffered from a widespread intelligence failure.
I find his choice of pronouns odd. I believed Saddam Hussein continued to harbor VX nerve gas. I would have written that "We sufered from an intelligence failure." I also opposed the invasion (and reconsidered (but eventually stuck with) my opposition when I learned that there were no WMD in Iraq). Why does Chait, who supported the invasion, use "they" when I use "we" ? Isn├Čt his case that people honestly believed that there were WMD in Iraq strengthened by the fact he was one of those people ? But back to his critique of Krugman. He argues that Krugman leaves himself vulnerable to those who argue that honest mistakes were made by setting up a dichotomy between the claims that no one made honest mistakes and the claim that everyone, including Cheney, made only honest mistakes. What would happen if someone were to respond to Krugman's op-ed by writing "chemical weapons (which many people did think Saddam had) " Chait argued that, in the op-ed Krugman left himself vulnerable to an argument based on noting a fact which he mentioned in that op-ed. Jon Chait is a brilliant polemicist and I'm sure he can defend himself against the accusation that he critiqued Krugman by quoting him while suppressing necessary context. I am not a brilliant polemicist and I can't imagine any possible defence of Chait's post against my claim that he quoted Krugman out of context. On the other hand, I do like his feature "Today in ‘Paul Krugman Is Definitely Not Arguing With David Brooks" and, though of it while looking for Krugman noting the fact which Chait claims he overlooked. I just went to the times and found that David Brooks is definitely not arguming with Paul Krugman when I read the title of a Brooks op-ed headline "Learning From Mistakes" (I didn't read the op-ed).

Ed Kilgore does it again

I have a very high opinion of Ed Kilgore. However, I strongly disagree with one post he wrote in which he crticized critics of the 1996 welfare reform bill. Now I have another strong disagreement about the policy debate of the 1990s. Again, I disagree with his claim about what Bill Clinton did, that is about facts in the public record.

This time the issue is the 1994 Crime bill

Kilgore wrote "Beginning in 1992, Democrats led by Bill Clinton argued for less of the lock-em-all-up mentality of the 1980s, but for more police officers deployed more intelligently."

I comment

I do not recall Bill Clinton arguing for "less of the lock-em-all-up mentality of the 1980s," I recall him saying "three strikes and you are out."


He signed a crime bill into law (passed by a congress with a Democratic majority) which mandated locking more of em up than any Federal law of the 80s.

Yes he also called for hiring more police and the bill also mandated that. But he absolutely argued for longer prison sentences, including life without parole for a third serious violent crime (including assault and battery) as required by the bill he signed into law.

https://www.ncjrs.gov/txtfiles/billfs.txt (search for three strikes).

Yes I am grinding old axes, but historical fact is historical fact.

update: Kilgore aknowledges that Clinton signed a crime bill with a 3 strikes and you're out provision. He argues with Rand Paul. I am in the very uncomfortable position of more nearly agreeing with Rand Paul than with Ed Kilgore.

update II: I am not alone. Kilgore's latest "Engaged in a pretty long, pretty interesting listserve debate over Bill Clinton’s responsibility for policies that led to mass incarceration. But it didn’t change my mind that Rand Paul is flat out lying by pretending it didn’t all start with his own GOP." Which is pretty far from the claim that Clinton argued for "less of the lock-em-all-up mentality" isn't it ?

Saturday, April 25, 2015

Red State Blue State

A comment that ran away with me. Ed Kilgore has a good post which you should read. He notes that blue states have better outcomes than red states and begins to discuss how hard it is to derive useful conclusions from this pattern. Read his post. I think this excellent post is also important. The Rosenberg article and Wise post are also important. Your criticisms of Wise are valid (I'm sure Wise would agree). I'd add another -- which came first the goose or the golden egg ? I think it very likely that economic under development and social dysfunction cause conservatism. In particular, I think that dysfunction causes fear and disapproval of the poor which causes hatred of welfare. I also think that social dysfunction causes people to think they (and others) should get right with God and traditional morality.

I think conservative policy causes poor economic performance and social dysfunction. But I don't think the effect can be measured by looking at correlation, because I think there is a vicious cycle of bad outcomes causing conservatism which causes bad outcomes.

The possibly unsolveable problem is that the two valid criticisms imply opposite strategies. If one is worried about reverse causation, one must control for the state of the state in the past -- that is look only at short run changes. If one is convinced that short run changes have a lot to do with, say, the price of petroleum, one must look at long term averages.

I think the solution is to look at long run effects of policy shifts especially if it is hard to see how local conditions caused the shift. One example is different effects of a Federal shift based on the interaction of a new Federal law with old state choices (the ARRA (Obama stimulus) medicaid provisions sent different amounts of money to different states because of their existing programs -- this makes it possible to show that the ARRA stimulated the economy ( http://economics.mit.edu/files/7102 pdf and cites in it) .

It is now known that food stamps to parents of baby girls (and female fetuses) cause reduced obesity when the girls grow up http://angrybearblog.com/2013/12/food-stamps-obesity-and-dependency.html

Here the point is that valid statistical analysis points us just where we want to go -- it is possible to evaluate the effects of policy (including long term effects). It is not possible to evaluate the effects of a pro-moonlight and magnolias ideology in general. Evidence about specific policies is more useful, because maybe we can reach agreement about specific policies while we will never agree about exactly how one gets right with God.

Saturday, March 14, 2015

Michael Gerson Unclear on Current events

I've finished reading the Gerson op-ed. I also read "Nicaraguan dictator Daniel Ortega in the 1980s". Gerson doesn't mention that, at the moment, Daniel Ortega is the democratically elected president of Nicaragua, and not even Tom Cotton has made any objection to that lately.

Gerson describes Obama's approach: "The exact shape of a possible Iran deal remains unknown. I’m on record predicting that it may be a bad one — a very unlikely throw of the dice that a terror-sponsoring, clerical regime will become a minimally responsible regional power."

I contest the analogy. When one throws dice one risks somethign which would have been safe if one didn't throw the dice. I agree that, if there is an agreement, the world will be a risky place and one of the risks will be that Iran makes an atomic bomb. But, Gerson certainly doesn't describe a less risky approach.

His proposal is: "The alternative to a bad nuclear deal is not war; it is strong sanctions and covert actions to limit Iranian capacities until the regime falls (as it came close to doing in 2009) or demonstrates behavior change in a variety of areas. " This would be a throw of the dice. It is clearly a high risk strategy for two reasons. First, while tough sanctions and cover operations might work eventually, there is no reason to think they will work before Iran has the bomb; Gerson's approach gives Iran no incentive to stick to their current policy of not working on a bomb (as their policy is assessed by the US intelligence community). Second, pressure on Iran might cause the current regime to fall, but it doesn't mean the replacement will be preferable.

I also note the dishonesty in the first sentence I quoted. Note that Gerson doesn't consider a good nuclear deal a possible alternative to a bad nuclear deal. His proposed strategy has nothing to do with the details of a nuclear agreement. the "may be" asserts that there is a conceivable agreement which would satisfy him. This is clearly not true. He is lying, because he wants to argue that his rejection of an agreement (if there is one) is the fault of the Obama administration which could conceivably have negotiated an agreement he supported.

Also note the unseriousness of "behavior change in a variety of areas". One can't obtain concessions without making clear demands. Even in a pure hypothetical fantasy, Gerson doesn't explain anything the Iranian regime could do to convince him to accept a relaxation of sanctions. I'm quite confident there is nothing they could do and sure that they would believe this if Gerson were President.

Gerson assumes that Iranians would perceive tough sanctions as the cost of Iranian irresponsibility. I think that most Iranians (including Ayatollah Khameini) have the impression that Iran is trying to normalize relations with most of the rest of the world by making concessions. To me it seems obvious that Gerson's approach will convince them that President Rouhani's approach failed. The effect of tough sanctions depends on whether they are perceived to be the price of Iranian intransigence or the pointlessness of Iranian concessions. I am sure that Gerson's approach would lead, in the short run, to a much more confrontational Iran. I dont guess what would happen in the long run, but I am willing to guess that they would have atomic bombs when it arrives.

Gerson perceives his point to be that the US can't impose tough sanctions unilaterally, so his approach requires convincing other countries that we negotiated in goood faith (while also not reaching an agreement -- in other words we shouldn't negotiate in good faith but we should trick the naive French, inexperienced English and the Americanophilic Putin). I agree with him that the Cotton approach is excellent news for Iran, since it makes it much more likely that they will only have to deal with US sanctions which the Islamic Republic has endured for almost all of its history.

Here I think part of the problem is 700 words per op-ed. Gerson can't explain an approach to Iran other than Obama's or bombs, because he is mostly writing about the folly of the 47. But I think most of the problem is that he arrived at a terrible proposal by the process of elimination. He can't agree with Obama. He doesn't think bombing will work, He doesn't support an invasion. So he's left with stick with sanctions and hope for the best.

Friday, March 13, 2015

Michael Gerson unclear on history

Same day same opinion pages more ignorance.

Michael Gerson denounced Cotton et al. He added a to be sure paragraph. To be sure, this paragraph demonstrates ignorance as well as intellectual dishonesty.

It is true that President Obama set this little drama in motion. Major arms-control treaties have traditionally involved advice and consent by the Senate. Obama is proposing to expand the practice of executive agreements to cover his prospective Iranian deal — effectively cutting senators out of the process. By renewing a long-standing balance-of-powers debate — in a way that highlights his propensity for power-grabbiness — Obama invited resistance. And there is a practical argument for Senate approval of arms-control agreements: It strengthens and empowers the president in punishing violations. The whole U.S. government is placed on record promising consequences for infractions (if, of course, the Senate concurs).
All treaties, by definition, require the approval of two thirds of the senate for ratification. However, it is very unusual for negotiations to lead to a treaty, and unusual for the US Senate to ratify signed treaties (the Senate did ratify an arms control treaty in 2011). It is absurd to suggest that it is normal practice for negotiations to eventually lead to ratification.

Ratified cold war arms control treaties ... is an error -- the bolded s implies a false claim of fact. There only was one such treaty during the cold war -- the ABM/SALT I treaty of 1972. The SALT II treaty of 1979 was never ratified. It is true that when Gorbachev and Shevernadze said yes to every demand then to every added demand, there were post cold war arms control treaties which were actually ratified.

But Gerson's real problem is with the interim agreement signed by Gerald Ford in Vladivostok November 24, 1974. That was an arms control agreement signed without extensive consultation of congress. It came as a genuine surprise. It was the not legally binding communique regulating strategic arms until the Salt II treaty was signed in 1979. Neither the Vladivostok "joint communique" nor the Salt II treaty ever had the force of law. Gerson's claim about arms control treaties is irrelevant, but it is also false. Treaties with friendly countries are ratified (hard as it is to remember the USA and Russia were friendly in 2011). Arms control agreements with hostile countries have hardly ever been ratified. Accepting an deal and not demanding a better one is politically costly. It is best for everyone for the President to have sole responsibility.

The proposed deal with Iran is not like arms control treaties, because it will impose no limits whatsoever on any country other than Iran. The offer is to relax sanctions in exchange for iranian concessions. Current law authorizes Obama to do this. It makes no sense to impose sanctions such that approval from congress is required to remove them (which doesn't mean it hasn't been done). Sanctions are coercive measures along the lines of twisting someone's arm until they say uncle. It does not make sense to twist someone's arm and say "I will keep twisting until you say uncle at which point I shall ask congress to consider when to begin marking up a bill which may auhorize me to cease to twist your arm unless it is voted down, filibustered or any senator decides to put a hold on it."

The unprecedented power grabbiness is the insistance by Republicans in congress that Obama may not exercize authority granted to the President by an earlier congress without asking them to repeat that he has permission.

Of course, Cotton et al, do not want an agreement negotiated with the active participation of Congress (can anyone even imagine how such negotiatoins would work) nor do they want a treaty ratified by the Senate. They oppose any possible agreement with Iran. I'm sure Gerson knows this and is just pretending that a ratified treaty is conceivably possible.

To be sure, the nonsense is in a to be sure aside. I'm sure Gerson considers his op-ed to be a bold denunciation of Cotton et al. Since the paragraph is the minimal concession which might be sufficient to allow him to remain a Republican in good standing, he can't be expected to notice the fact that it uses made up nonsense pseudo-history to criticize Obama.

General Eaton Unclear on the Concept

The normally sane Jonathan Capehart quotes an clearly confused retired General who is clueless about the constitution he swore to protect and defend.
I turned to retired Major Gen. Paul D. Eaton for perspective. He wouldn’t say Cotton and Co. were “traitors,” either. He had a better word. “I would use the word mutinous,” said Eaton, whose long career includes training Iraqi forces from 2003 to 2004. He is now a senior adviser to VoteVets.org. “I do not believe these senators were trying to sell out America. I do believe they defied the chain of command in what could be construed as an illegal act.” Eaton certainly had stern words for Cotton.

“What Senator Cotton did is a gross breach of discipline, and especially as a veteran of the Army, he should know better,” Eaton told me.

I will try to explain this using simple little words. No chain of command whatsoever has anything to do with the US Senate. The President does not outrank senators. They are not part of the same hierarchy. He has authority over employees of the executive branch, especially uniformed military personel.

An act is either legal or it isn't. If one claims something can be defined as an illegal act, one should cite and quote the law, and, if challenged explain why it is constitutional. I don't think General Eaton does not have a law in mind. I think he uses the series, good idea, bad idea, terrible idea, highly improper, could be defined to be illegal. If he is thinking of a law, it can only be the uniform code of military justice which is totally irrelevant.

In any case if the Senators did break a law by writing a letter, the law is unconstitutional violating the first amendment, "Each House may determine the Rules of its Proceedings, punish its Members for disorderly Behaviour, and, with the Concurrence of two thirds, expel a Member." article I section 5, and "they shall in all Cases, except Treason, Felony and Breach of the Peace, be privileged from Arrest during their Attendance at the Session of their respective Houses, and in going to and returning from the same; and for any Speech or Debate in either House, they shall not be questioned in any other Place." article I section 6.

Finally veterans are ex-military and not subject to military discipline. Cotton should remember that, in the past, he was not allowed to do what he just did, then take a drink and laugh at General Eaton who can't shoot a fish in a barrel.

What's the Matter with Wall Street ?

In his widely read (but not read by me) book "What's the Matter with Kansas" Thomas Frank asks why lower middle class people in middle America vote for Republicans against their own self interest. I wonder why wealthy investors vote for Republicans against their self interest. Brad DeLong wonders why they favor tight money and austerity against their self interest.

It should be clear that rich investors have done poorly when the president is named Bush and very very well when Clinton or Obama were if office. In general the rich get richer even faster when a Democrat is president.

Brad writes

It made sense for those of my great-great grandfathers who were rich back before World War I to be hard-money guys. The investment vehicles open to them were land that pretty much had to be rented out at fixed nominal rents, bonds that paid fixed nominal yields, and equities where–unless you ran the business–you were quite probably a fool soon to be parted from his money by financial engineering. But it made no sense for my rich grandfather after World War II to be a hard-money guy. He had a much bigger portfolio of assets to invest in: equities backed by more-or-less honest accounts, land that the coming of automobiles and superhighways and the move to the sunbelt meant could be developed as suburbs, as well as leveraged resource speculations. He profited immensely from investments in all of these. Yet, in his heart of hearts, he remained a hard-money guy.

And it really makes no sense for my contemporaries to be hard-money believers. Yet an astonishing share of the rich among them are.

A great and enduring puzzle…

He disagrees with his grandfather. This is what his "we are the 100%" photoshop effort means.

There are two separate issues actually three "fear, surprise, ruthless efficiency, and near fanatical devotion to the Pope!" No I mean support for hard money, austerity, and Republicans. I will try to focus on hard money (but I will fail). It seems likely that the Fed open market committee (FOMC) will raise the target federal funds rate some time this summer. This is an odd choice since inflation is below target and the dollar is rapidly appreciating. Why would the FOMC even consider doing something so odd ?

It is reasonably clear that financiers and policy makers who are in constant contact with financiers support tight money. Here I give up on finding an excuse to type "high priests" and link to these excellent posts.

Why ?

1. Economics as a morality play. The market is our judge and rewards virtue -- no pain no gain. I think this view is most frankly expressed by Michael Kinsley when he says we should eat our vegetables. Kinsley provides a valuable service, because he doesn't present any argument related to the effects of policy.

Here I think it is clear why the rich are eager to assume that the market rewards virtue -- they have been rewarded by the market and wish to believe they are virtuous. It must be tempting to assume that wealth is the result of effort and then tempting to apply the logic to countries as well as individuals. If there is an easy painless way to create more aggregate wealth, then it is harder to believe that the wealthy earned their individual wealth through great effort.

2. Sub sub class interest. Within the 1%, there is an organized, energetic subset who benefit from tight money. There is a very strong nominal rigidity at zero on returns on deposits. This is based on norms and people's sense of what is fair and reasonable. it is not the zero lower bound (I get negative nominal returns on my 2 bank accounts). But it means that bankers have a safe source of income roughly equal to the interest rate on T-bills. It has been argued, for example by Jeremy Stein, that the FOMC must guarantee bankers safe returns high enough to cover administrative costs or else bankers will gamble. The argument appears to be that bankers are telling us that we have a nice looking economy and it would be a shame if anythign were to happen to it, so how about we guarantee them 2% safe or else it might get blown up again.

It is true that tight money makes it easier for depository institutions to obtain profits. They have a good thing going in which they provide depositors liquidity and maturity transformation in exchange for paying a very low (or zero) interest rate. It only works if returns on the money obtained paying zero interest are higher than the cost of maintaning bank branches ATMS and all that. At current interest rates, they can earn those returns by taking risks or, change their whole business plan, and charge depositors for the services (as Italian banks do). Switching from no fees to fees can make people angry (although my US bank did informing me by mail I assume and I am only mildly irritated).

This does not make tight money good for investment banks, broker dealers, hedge fund managers or, obviously, industrial firms. Yet the fairly narrow interest group of commercial bankers has a clear common interest. They also have a very explicit role in influencing Fed policy through the selection of Federal Reserve Bank presidents.

3. partisanship. To discuss tight money, I must discuss Wall Streets unsurprising but marked Republican slant. Here the strange thing is that it has markedly increased during the Obama administration while markets are going through the roof. I suppose the even stranger thing is that, not so very long ago, many hedge fund managers and all of the top management of Goldman Sachs were Democrats. In any case, it isn't odd that rich investors tend to favor the GOP, since Republicans are very dedicated to attempting to serve their interests (incompetently) and sincerely praise them. Republicans favor tight money and austerity if and only if the President is a Democrat.

Notably, two salt water economists who advocate austerity and tight money, Martin Feldstein and John Taylor, are extremely partisan Republicans (click the link to Brad again).

Loose money increased the probability that Obama would be re-elected and that Clinton will be elected. Therefore, loyal Republicans must oppose it.

I think it is very possible that financiers favor their flatterers over those who actually make them richer.

Wednesday, March 11, 2015

Falling off the Ballance beam

My head is spinning,because the Washington Post appears to have abandoned Ballance. The letter to Iran signed by 47 Republican senators seems to have gone too far for the most dedicated equilabrist to claim that both sides have a point.

They person who writes the headlines sticks to the rule of not siding for Democrats v Republicans or reality v spin "In wake of GOP letter to Iran, battle erupts over blame for dysfunction" but Greg Jaffe and Juliet Eilperin do not quote a single defender of the letter. The closest they come is to quote one of the signatories - Mitch McConnell blaming Obama for the actions of Mitch McConnell -- he claimed that Congress hasn't been consulted, but wasn't quoted arguing that the letter had any redeeming social value. I thought they had found a second non critic of the letter "Rep. Adam Kinzinger (R-Ill.), an Iraq war veteran," until I read the quote which began "'“I’m not going to sit here and defend the Senate letter,'” .

The points awarded to the Republican side are that Obama is responsible for the actions of Republicans because he made them really mad and that the breach of norms is not unprecedented. The second Republican claim is fairly firmly rejected in the concluding paragraph.

I am pleased by the shift, but I do think it is sad that an open letter went too far for ballanced reporting while torture and wars of choice didn't. Ballance took a breather, but the principle that words speak louder than actions didn't.

Quote of the Day

"This leaves modern macro people in the odd position of saying that it's crucially important to model agents' decisions, but totally unimportant to model them in a realistic way." Quote of yesterday Assume that all equilibrium-selection and coordination problems are automagically solved. Also put much less well three years ago.

The Islamic State and the End Days

Graeme Wood received a lot of attention when he tried to understand the Islamic State (aka ISIS aka ISIL aka Daesh). He argued that their actions more nearly make sense given their belief that IS is "a key agent of the coming apocalypse." So how's the End of Days coming ?

Looks to me that they are well on their way. IS has managed to make de facto allies of the USA, Iran, the Assad regime, Hezbollah and the al Nusra front. Yes that would be al Qaeda in Syria. When the USA and al Qaeda agree on something, can the apocalypse be far ?

But, to me, the final proof was the following: The one and only Charles de Gaulle is under US command. The one and nuclear powered ship in the French navy, not President General Charles de Gaulle, who is rolling over in his sovereign grave.

Repent repent for the day of judgment is at hand.

Tuesday, March 03, 2015

On Chait on Yglesias on Our Possibly Doomed Presidential System

Jon Chait tries not to give in to Matt Yglesias council of dispair. His post has the otimistic title There’s a Chance American Democracy Is Not Doomed
During the Obama era, a number of liberal writers, including this one, have grown fascinated with the prophecies of the late political scientist Juan Linz. Noting that presidential systems (as opposed to parliamentary ones) have a persistent tendency to collapse into coups, Linz argued that failures were endemic to their design. They created two elected bodies, both of which could claim popular legitimacy, without any strong mechanisms for settling power struggles between them.

Matthew Yglesias surveys American political history and its rising polarization through the prism of Linz’s analysis, and concludes that our political system is doomed. The U.S. was the exception to the otherwise-universal worldwide trend of presidential systems falling apart only because its unusually loose parties lacked the motivation and partisan willpower to push their powers to the limit. Now it is only a matter of time until a crisis brings it down.

I don't want to sound naive, but I think that we should consider all conceivable possibilities, and, therefore, even the possibility that the public will actually pay attention to what politicians do. I don't think it is a necessary implication of the presidential system that people blame the president for obstruction by the other party in Congress.

The chutzpa strategy worked fairly well for Republicans so far. but that doesn't mean that it will continue to work when they have majorities in both houses of congress.

Also a horrible recession is a good time to be in opposition. The logic of Yglesias's rather convincing argument depends on his belief that politicians will believe that obstruction was the key to mid term victories. If the Republicans two land slides were due to economy dependent disatisfaction, the pattern of apparantly rewarding obstruction might not endure long enough to destroy the constitution.

OK now I want to sound naive. Most politicians aren't one hundred percent focused on their party's chances of winning the next election. Some want power to use it to change the world. Others want to be favorably described by future historians. Mitch McConnell is extraordinarily focused. In a way he is selfless -- he doesn't seem to mind being called the epitome of everything wrong with Washington by the Washington Post Editorial board so long as Republicans win the next election. The desire for elite approval from the very serious village centrists at least makes politicians pay attention to the perceptions of people who pay attention to what they do.

I'm not sure if I can pin my hopes on Fred Hyatt, but I do want to end this comment with the phrase to save the presidency it takes a village.

Sunday, March 01, 2015

Benjamin Netanyahu Peacemaker

I'm not kidding. I think that Benhamin Netanyahu has found the only way to achieve US-Iranian peace.

One risk was that Iranian hardliners would block a deal with the 5+1. Now what are they going to say ? Yes Netanayahu says it's a terrible deal, however it actually is a terrible deal ?

Another risk was that AIPAC fearing congressional Democrats would vote with Republicans to override Obama's inevitable veto of the inevitable deal sabotaging bill. Now that Netanyahu has made the negotiations with Iran a partisan issue, that is much less likely.

I have no idea what will happen, but if things do work out, Benjamin Netanyahu deserves the credit.

Quality Premiums and GDP growth

I am still thinking about the working paper (which has since been revised) by Marco Del Negro, Marc P. Giannoni, and Frank Schorfheide of the New York Fed (pdf warning -- also not light reading). Del Negro, Giannoni and Schorfheide manage to fit the huge and persistent decline in real GDP of the great recession using a combination of the standard new Keynesian Smets Wouters 2007 (SW) model and the Bernanke Gertler and Gilchrist (1999) (BGG) financial accelerator model. The paper is mathmatically difficult.

BGG 1999 isn't all that mathematically simple either, but the BGG story is simple: there are periods of financial distress when firms have to pay high interest rates to borrow. This causes low investment which exacerbates the financial distress. The story is very old (BGG added the not so simple math). In fact old old business cycle analysts used differentials on corporate bonds with different ratings (and treasury notes) to forecast. The crisis of 2008-9 made people focus on that issue and that type of variable.

I had some fun playing with data today. I think there might be two useful lessons which I should state before the long wandering vague post. First it is very hard for me to resist the temptation to fiddle with specifications until I like the fit if I play with data with no discipline from theory or standard empirical practice. Second, it is easier to fit the severity of the downturn than its duration. I actually have a question for Del Negro, Giannoni and Schorfheide. They show forecasts for GDP and inflation, but not for the interest rate differential. I think their model might imply a forecast of a persistently high differential not the huge spike and then rapid return to near normal. This is not at all typical. To me the mystery of the sluggish recovery is that GDP remained far below trend when the initial shock was long over. My guesses of the reasons aren't related to their model at all -- I guess they are low residential investment largely because of low expected house price appreciation and low public spending. The point of this post (if any) is that a financial frictions based explanation of the sluggish recovery requires evidence that severe financial frictions lasted during the recovery. This evidence does not appear in interest rates (including the mortgage interest rate)

OK off to play with data.

To start I show Moody's Seasoned Baa Corporate Bond Yield (c) minus Moody's Seasoned Aaa Corporate Bond Yield (c)

Clearly the differential rises during recessions. There isn't much evidence that sudden fear of corporate default is the cause of recessions -- the differential rises during the recession. If anything it peaks at the trough (as if fear of a wave of bankruptcies is what causes the Fed Open Market Committee (FOMC) to relent and reflate). This is why the model is called the financial accelerator. The idea is that, generally, something else causes low GDP and financial distress and the risk premium effect makes the decline in GDP worse.

I see two cases in which an increase in the differential was, arguably, the result of something other than a general downturn (maybe because I have vivid memories of both). One, of course is the gigantic spike when Lehman failed. The other occurred when Enron failed. If you look closely at the tiny 2001 recession, you can see that the differential spiked during the recovery.

For some reason I decided to do some embarrassingly primitive calculations related to the differential and real GDP growth (the motive was it's fun to play with data and I wanted to decide how impressed to be with Del Negro, Giannoni and Schorfheide 2013). I think the exercize is useful for two reasons.

First it is a warning about what can go wrong if one starts playing around with numbers completely unrestricted by any theory. It is very hard to resist data dredging and cherry pickign while looking at time series and fiddling with ad hoc specifications. In any case, I can't resist and just don't take the results of the fiddling seriously.

First a regression of the annualized percent growth rate of real GDP on the interest rate differential (in percent)

. reg grgdp00 idiff

Number of obs = 267

R-squared = 0.0961

grgdp00 | Coef. Std. Err. t

idiff | -2.715849 .5115451 -5.31

_cons | 5.712052 .5345035 10.69

A very large t-statistic. I should stress that this isn't really a forecasting equation as the interest rate data aren't lagged -- the idea is that people observe interest rates immediately long before real GDP has been calculated. Also I use all the available data for the regression including data from the great recession

Now I predict the annualized growth rate of GDP using the simple regression and see that it doesn't fit the great recession well

| qtr pgrgdp00 grgdp00 |


242. | 2007.25 3.240629 3.056305 |

243. | 2007.5 3.322104 2.677107 |

244. | 2007.75 3.050519 1.456368 |

245. | 2008 2.208606 -2.70417 |

246. | 2008.25 1.937021 1.972044 |

247. | 2008.5 1.475327 -1.989932 |

248. | 2008.75 -2.489813 -8.796125 |

249. | 2009 -2.272546 -5.63592 |

250. | 2009.25 -.9960956 -.423468 |

251. | 2009.5 1.937021 1.266436 |

252. | 2009.75 2.643142 3.788124 |

The prediction is of a brief mild recession.

So I decided to play with the specification (or rather played with the specification because I can't resist). I added a lag of the interest rate differential (I expected a negative coefficient)

. reg grgdp00 idiff lidiff

Number of obs = 267

R-squared = 0.1338

grgdp00 | Coef. Std. Err. t

idiff | -6.371246 1.18959 -5.36

lidiff | 4.027055 1.18828 3.39

_cons | 5.362076 .5343076 10.04

This is what happens when you add 2 similar variables. I used this silly regression to predict real GDP growth and find that it matches the severity of the 2008 4th quarter downturn 2008 but not the fact that it continued in 2009 and also predicts a dramatic recovery in the third quarter of 2009.

Totally losing all intellectual self discipline, I couldn't resist regressing real GDP growth on the current quarter's interest rate differential and the differential lagged two quarters

. reg grgdp00 idiff l2idiff

Number of obs = 266

R-squared = 0.1800

- grgdp00 | Coef. Std. Err. t

idiff | -5.906914 .7877269 -7.50

l2idiff | 4.026046 .7861379 5.12

_cons | 4.941499 .5353582 9.23

. predict p2grgdp00

(option xb assumed; fitted values)

(2 missing values generated)

The blatant trick makes the effects of a spike in the diffential last two quarters so 2009q1 is fit as well.

The only point of this last bit with the differential lagged 2 quarters is as a warning about the temptations t data dredge. Looking at the graph, I realized I had gone too far.

update: I need help. Stop me before I regress further. For what it's worth I did regressions using only data from before 2008. The coefficients are a bit larger. the predicted values over fit the great recession and include a very dramatic recovery.

But the thing that really alarms me is that I estimated

reg grgdp00 idiff ddiffsilly l2idiff lidiff lgrgdp00

Where lgrgdp00 is the lagged growth rate of real GDP and ddiffsilly is idiff minus idiff lagged two quarters if idiff is greater than idiff lagged two quarters or zero if idiff is less than idiff lagged two quarters. Here I went back to using all available data for the regression. The regressions before the update are silly because they don't include lgrgdp00 or any recognition of the univariate dynamics of the GDP time series. However including ddiffsilly is obviously just a way to avoid predicting a dramatic recovery.

Here is a graph Finally I estimate that last crazy regression using only data from before 2008 (so 3rd quarter 1947 through fourth quarter 2007). reg grgdp00 idiff ddiffsilly l2idiff lidiff lgrgdp00 if qtr<2008

Saturday, February 28, 2015

Lucas Critique upside down

I think this is even more Noah Smith bait than Mark Thoma bait.

First the twitter version of the Lucas critique. Lucas argued that if one wishes to control some variables (say inflation and unemployment) it is a mistake to look for an equation which predicts them as a function of variables which you can control then assume that the function will stay the same if you manipulate the variables. The reason is that estimated coefficients are typically not discoveries of natural laws which always hold. Typically, the effort to use the estimated function to manipulate the system will cause the coefficients to change.

A very simple example is the statement that correlation is not causation.

In particular to the extent that people's behavior depends on expectations about the future and that policy affects the probabilities of future outcomes as a function of past data, relations which depend on expectations as a function of past data will change when policy makers attempt to exploit them.

Lucas stressed that he wasn't the first to worry about this problem. The critique is sometimes called the Marshack critique.

One proposed solution is to write down models in which agents' objectives and knowledge are modelled explicitly and add the assumption that they know the joint distribution of all variables (have rational expectations). I find this proposal totally unconvincing. In particular, it is not argued that the assumptions about objectives have to be accurate. I believe that the argument is that, while the model is not reality, it is important that, if the model were reality, statistics would be consistent estimates of deep structural parameters which are policy invarint. I am totally 100% unconvinced.

People who accept this argument will often make a concession to the other approach (reduced form modelling, atheoretic empiricism, in macroeconomics vector autoregressions (VARs)). The concession is that such models are useful for forecasting. If one is just trying to predict what will happen and don't have the power to change it, then the Lucas critique doesn't matter. The parameters are invariant to what you do as you have no power.

So the view which I don't accept is structural models with optimizing agents are required for valid policy evaluation by the strong who do what they will, but other models may be just as good or better for forecasting by the weak who suffer what they must.

In fact, I partially disagree with the Lucas critiquers' concession too. It is just not true that it is best to be completely open minded if one only wants to forecast. Imposing assumptions on the data is required for forecasting too. The imposition of false assumptions may produce lower expected squared forecast errors.

I think if one is attempting to forecast using very little data to estimate parameters of the forecasting rule (or in other words if one is a macroeconomist attempting to forecast) then one must impose a lot of assumptions (to estimate at all) and it is better to impose a lot more than are needed to come up with an estimate and a forecast.

So, I think that if one is attempting to forecast using aggregate time series, it is best to impose assumptions. first if you think they are more likely to be roughly close to true than alternative equally assumptions and second it is often better to impose more. I mention the Akaike information criterion in passing.

I might sometimes accept an argument along the following lines: actual behavior is more like the behavior of this type of rational agent with simple objectives than anything else I can think of, so I will assume that we are all rational agents of that type when using the few data I have to develop a forecasting rule.

I might sometimes accept the same argument when the aim is to evaluate policy and advise policy makers. I find it about roughly equally convincing in each case. Stories about how expectations matter, and will change in a predictable way, might convince me that some assumptions are better than others (including weaker assumptions) but I don't see anything especially special about them.

In contrast, arguments about how stronger assumptions should be made when one has fewer data make a whole lot of sense to me. There are mathematical examples in which the argument is entirely valid. I find it very plausible that it is generally valid.

Old Keynesian Financial Frictions

I had forgotten this passage from The General Theory which may be Brad DeLong's favorite.

Brad made very good use of

Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks.[4] For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy.
But I am interested in a paragraph which I forgot entirely until I just read it. I now suddenly find it interesting because it is Keynes on risk premia (and so financial frictions) and Keynes's view is notably different from that of the New Keynesians I discussed in my last post.

The only radical cure for the crises of confidence which afflict the economic life of the modern world would be to allow the individual no choice between consuming his income and ordering the production of the specific capital-asset which, even though it be on precarious evidence, impresses him as the most promising investment available to him. It might be that, at times when he was more than usually assailed by doubts concerning the future, he would turn in his perplexity towards more consumption and less new investment.
After long consideration I have decided to be honest (as I would have been caught anyway) and admit that Keynes is discussing the strange country in which financial intermediation is absolutely banned so individual income must be divided between consumption and investment. However note that he assumes that, in this strange case, risky returns cause high consumption. This doesn't have to be true (it is easy to come up with a model in which risky returns on capital cause more precautionary saving or in Keynestopia precautionary investment). But it is completely unlike the disturbance term which is called epsilon superscript b in Smets Wouter 2007 and "b" in Del Negro, Giannoni, and Schorfheide (2013 last revised 2014). This is justified as a risk premium but appears in the Consumer's problem as an increase in a totally safe interest rate.

Friday, February 27, 2015

New Keynesian Financial Frictions

Over a year ago, Noah Smith wrote a blog post with an excellent illustration of the first extremely unsuccessful attempted machine gun. The hint was that if at first you don't succeed plausibility might be right around the corner. The post mainly reported a working paper (which has since been revised) by Marco Del Negro, Marc P. Giannoni, and Frank Schorfheide of the New York Fed (pdf warning -- also not light reading). I didn't click the link. I had read a note on the web by Del Negro, Giannoni, and Schorfheide and come to the silly conclusion that they had done something silly. Now 20 months late I finally clicked the link and found the working paper very impressive. As Noah explains
The model they use is a combination of two existing models: 1) the famous and popular Smets-Wouters (2007) New Keynesian model that I discussed in my last post, and 2) the "financial accelerator" model of Bernanke, Gertler, and Gilchrist (1999). They find that this hybrid financial New Keynesian model is able to predict the recession pretty well as of 2008Q
4. Importantly, the forecasts (of the current version) are based on parameter estimates using data available December 2008, so not including 4th quarter 2008 GDP but including the differential between Baa corporate bonds and the Treasury 10 year rate. The model correctly forecasts a deep recession followed by a sluggish recovery. I want to raise a quibble mostly with Smets and Wouters (SW) . In Smets and Wouters (2007) (SW 2007) they assert that they have already considered financial frictions as in Bernanke, Gertler, and Gilchrist (1999)
Finally, the disturbance term [epsilon^b] represents a wedge between the interest rate controlled by the central bank and the return on assets held by the households. A positive shock to this wedge increases the required return on assets and reduces current consumption. At the same time, it also increases the cost of capital and reduces the value of capital and investment, as shown below.3 This shock has similar effects as so-called net-worth shocks in Ben S. Bernanke, Gertler, and Simon Gilchrist (1999) and Christiano, Roberto Motto, and Massimo Rostagno (2003), which explicitly model the external finance premium.
The paragraph explains a FOC for optimal consumption (an Euler equation). It it the real interest rate considered by consumers is the federal funds rate minus the expected inflation rate plus this disturbance term epsilon^b. That would be correct if this were a safe real interest rate. A risk premium which has something to do with risk would not appear in the Euler equation that way. IIRC the risk premium in Bernanke Gertler and Gilchrist doesn't affect consumption at all -- it is the difference between interest charged on loans to firms and interest paid to consumers (consumers get the risk free rate). In fact, consumers do not need to bear the risk of possible bankruptcy of firms. Optimization implies that the Euler equation holds for all assets including Treasury bills or, once they were introduced TIPS. It implies expected return differentials on all assets via the consumption CAPM. The SW 2007 risk premium is also paid by firms as in Bernanke, Gertler, and Gilchrist (1999). But if SW already consider a risk premium motivated by reference to Bernanke, Gertler, and Gilchirst (1999) what do Del Negro, Giannoni, and Schorfheide write about the epsilon^b disturbance in SW 2007 which also appears in their model relabeled simply "b"
The exogenous process [b_t] drives a wedge between the intertemporal ratio of the marginal utility of consumption and the riskless real return [R_t - ��Et[ pi_(t+1)]], and follows an AR(1) process with parameters [rho_ b] and [ sigma_b].
This is in section "2.1.1 The SW Model" the term b_t is justified simply because it appears in SW 2007. No explanation for whey there is such a wedge is given (nor is it easy to imagine one when presenting a model with a non-liquidity constrained representative consumer). In contrast the interest rate paid by firms includes a term which really does correspond to the external finance premium in Bernanke Gertler and Gilchrist (1999). I can't manage the notation with plain ascci it is The expected nominal interest rate paid by firms minus the safe interest rate is equal to b_t plus a constant times the (debt+equity) to equity ratio plus the dispersion of ability across entrepreneurs. Or in other words the differential is equal to a log linear approximation of the external finance premium as modelled in Bernanke Gertler and Gilchrist (1999) plus the disturbance term which Del Negro, Giannoni, and Schorfheide call b and which SW call epsilon^b and which SW justify with a reference to Bernanke, Gertler and Ghilchrist (1999). There is still no explanation of why it appears in the Euler equation. OK I trust no one has read this far [text deleted] update: Mark Thoma did it again. I am no longer confident that no one will read this far. I deleted the rest of of this post because it wasn't polite.

Tuesday, February 24, 2015

Can Someone Help me Balance the Japanese National Income and Product Accounts ?

I was sincerely shocked to read that the Japanese household savings rate was negative. "The savings rate in the year through March was minus 1.3 percent, the first negative reading in data back to 1955" I had always thought of Japanese as high savers (as they used to be). But the reason I was shocked is I can't get the national income and products accounts to balance. By my calculations, total effective demand is about 7% higher than total supply (this is impossible). I get household savings of about -1% of GDP (correspondind to the -1.3% of personal disposable income plus pension distributions) government savings famously -7% of GDP and Japan must have positive net exports mustn't it ? Well actually no. Another shocking fact is that Japan has suddenly shifted from the usual trade surplus to a trade deficit. Why has nobody told me ? However, the deficit is only about 1.5% of GDP. The only remaining category I can think of is corporate saving, which I get at around 6.5% of GDP. How can that be ? I can't find Japanese corporate profits at FRED (the first time it has failed me so no link for you today FRED). In the USA corporate profits net of taxes and depreciation are roughly 7% of GDP. The ratio must be much higher in Japan. Corporate savings would be net profits minus the sum of net investment and dividends paid by corporations. It's almost as if Japanese corporates were investing only to replace depreciated capital and not paying dividends. Or very profitable. Can someone explain to me what is going on ?

Monday, February 23, 2015

Time for a Drum head trial

Uh oh the usually solid front of Political Animals is divided. Current animal Ed Kilgore appreciates the DNC's appreciation of narrative
The one nugget in the DNC report that I found both valuable and amusing is this:
It is strongly believed that the Democratic Party is loosely understood as a long list of policy statements and not as people with a common set of core values (fairness, equality, opportunity). This lack of cohesive narrative impedes the party’s ability to develop and maintain a lifelong dialogue and partnership with voters. The Task Force recommends creating a National Narrative Project to work with party leaders, activists, and messaging and narrative experts to create a strong values-based national narrative that will engage, inspire and motivate voters to identify with and support Democrats.
In contrast animal emeritus brother Benen singled out the narrative nugget for criticism.
While some of the ideas in the document seem to have real merit, including an aggressive emphasis on voter registration, others seem considerably less valuable, such as the “creation of a National Narrative Project to work with party leaders, activists, and messaging and narrative experts to create a strong values-based national narrative.”
I know they share the same values but they really need to sit down and have a talk about narration. I think the judicious judge and moderate moderator of the Political Animal v Political Animal debate really has to be original Political Animal Kevin Drum.

Friday, February 20, 2015

Old Keynesians on Monetary Offset of Fiscal Policy

This is an ultra pointless "someone is wrong on the internet" post. I think I read somewhere the suggestion that Keynesians had to be told by market monetarists that fiscal stimulus can (at least usually) be offset by monetary policy. I think Keynesians have made this point for a while. Here I cut and paste from Samuelson and Solow (1960) "Analytic Aspects of Anti-Inflation Policy" pdf warning also known as the Phillips curve paper.

Wednesday, February 18, 2015

Republicans Worst Idea Ever ?

With the sarcastic hyperbole that won him millions of fans (OK that makes me read everything he writes) Jon Chait declares "Poll Confirms the Republican Immigration Shutdown Plan Is Their Worst Idea Ever". The proof

"Today, CNN has a poll about who to blame in the event of such a shutdown. Fifty-three percent of Americans would blame the Republican Congress, and only 30 percent would blame Obama."

Oddly he claims that 30% is the hard core base crazication factor, when it is well known that it is 27% but I'll spot him 3%.

I think Chait may be right (although the competition is fierce) but that doesn't mean that the DHS shutdown is clearly and by a wide margin the worst idea to which they are currently committed. It doesn't even mean that it is the idea that fares worst by a wide margin in the poll which Chait cites.

There is also the Netanyahu speech.

Josh Marshall (who clearly despises Netanyahu more passionately even than I do) reports with scarcastic delight (and the headline of the week)

"Great Times for Bibi-Boehner Bund!"

click his self link (Josh Marshall is wonderful but TPM links to itself too much)

The CNN/ORC poll found that 63 percent of Americans disagreed with Boehner's decision to extend the invitation without consulting the White House, while 33 percent said it was the right thing to do

Note how I strategically spotted Chait 3% above. Now I want my 3% back so I can claim that 33% = 30% ( to be honest, subtracting the 27% crazification factor, 3% of Alan Keyes resistant US adults would blame Obama and twice as many, a ful 6% think inviting Netanyahu was a good idea).

Continuing with the B-list, I recall that the rarely interesting and otherwise never snarky David Brooks once said that he sometimes wonders if George Bush is a Democratic mole.

There has been some discussion of whether Boehner is in an impossible situtation, incompetent or both. There is another possibility -- that he is a political genius Democratic mole.