Sunday, October 04, 2015

The Two Minutes Chait of the Day

David Atkins warns "Ignore the Angry Middle Class at Your Peril"

he wrote

Democrats hurt themselves in this respect through their rhetoric. Especially for neoliberal politicians, Democrats all too often speak as if the economy and government were working fairly well for everyone, but needed to be adjusted to “take care of those left behind.” Voters who hear that rhetoric assume that Democrats are going to take money out of their pockets to give to the poor.

I commented twice. The second comment I typed is

"Especially for neoliberal politicians, Democrats all too often speak as if the economy and government were working fairly well for everyone, but needed to be adjusted to “take care of those left behind.” "

Who are you quoting ? When did this person say (or write) "take care of those left behind".

Are you debating with a straw man ?

I do think that if you put words in quotation marks that you should be able to provide a citation.

Back to google I didn't find any neoliberal Democrats when I googled "take care of those left behind"

I conclude you are debating with a straw man.

The first was less rude

I'm sure you know more than I do, but I definitely don't have the impression that Democratic politicians focus on helping the poor not the middle class. I think they know of the anger you describe (as people like you describe it to them). "Middle class" is one of the phrases I recall hearing most often from Obama and both Clintons.I'm sure you know more than I do, but I definitely don't have the impression that Democratic politicians focus on helping the poor not the middle class. I think they know of the anger you describe (as people like you describe it to them). "Middle class" is one of the phrases I recall hearing most often from Obama and both Clintons.

Bill Clinton campaigned on welfare reform, higher taxes on the rich and a middle class tax cut. Obama on higher taxes on the rich and a making work pay tax cut (and he actually delivered).

Note that Obama has not proposed reversing welfare reform (which he praised in "The Audacity of Hope". Also he doesn't argue for increased foreign aid. I'm pretty sure that all elite liberals think the foreign aid budget should be increased (for one thing because they know how small it currently is). But I also think that they know not to admit this in public

Hell Bernie Sanders is a self described socialist and he talks about the middle class all the time.

You definitely unerstand US public opinion. But I think that Democratic candidates got the message no later than 1972. It is clear that they haven't managed to convince the people Judis and you talk to, but I don't think this is for lack of trying. This includes both an obsessive focus on the middle class when campaigning and also a strong focus on the US lower middle class when legislating.

I will now google hillary clinton


"Hillary's economic plan: raise middle class incomes"

"middle" and "class" are the 5th and 6th words under issues and the 16th and 17th words on the web page.

Next issue "The New College Compact" a middle class concern (also and perhaps especially for parents who don't have college degrees).

OK how about Sanders

"middle" and "class" are the 18th and 19th words under issues.

The first 3 clickable issue headings are for the middle class




Neither mentions foreign aid or welfare.

They know what you know. They are doing what can be done.

I'm pretty sure I shouldn't type a third comment as I might get really rude.

Thursday, October 01, 2015

Quote of the Day

QOTD pulled back from Brad's comments "With notably rare exceptions, economics is a scientific discipline, rather than an unholy chimera of un-applied math and un-acknowledged political philosophy." -- Cosma Shalizi

Sunday, September 27, 2015

The Hunting of Snark

who and what provides the best snark on the internet ? I say (uh type) Daniel Davies Matt Yglesias McSweeney's Internet Tendency The Onion (of course) The Rude Pundit Fafblog (even though the lazy bums haven't posted in almost 4 years)

Sunday, September 20, 2015

General Concludes that Bergdahl just went Galt and Should not be Jailed.

hard core Obama fans such as myself must be pleased that an investigating General has concluded that Bowie Bergdahl (the US prisoner of the Taliban for whom Obama exchanged 5 Guantanamo prisoners) should not be jailed. However, some heads might explode when we read more about Bergdahl's other than legal problems. "General Dahl testified that Sergeant Bergdahl had grossly unrealistic and idealistic expectations of others, and even identified with John Galt, the hero in Ayn Rand’s novel “Atlas Shrugged.”" Now I stress that, under the 14th amendment, US citizen Randroids have full rights and immunities, including the 9th amendment right to be a very high priority if they are taken prisoner by Islamic terrorists. Sergeant Bergdahl's political views are completely irrelevant to the question of whether his freedom was worth the cost of the exchange. But my as yet un-exploded head is spinning.

Thursday, September 17, 2015

Smart and Smarter

I linked to this Ezra Klein post just for the quote of Carly Fiorina being a fool, but actually reading it I am amazed by something which shouldn't be amazing. The post says two things -- that Fiorina won the debate in the sense that her chances of becoming President increased and that much of what she said was false or nonsensical. I was unsurprised then surprised that I was unsurprised. Of course I knew that Klein can keep both concepts in his mind at the same time -- that claims can be both false and politically useful. But I realize that it is amazing for a prominent commentator to admit this. I can't think of the last time I read both claims in the same mass circulation essay. I think one of the rules is to not insult the public -- it isn't OK to say that no one should be convinced but that most people will be convinced. I think another is that even relatively honest pundits aim to become aids to politicians, and they can't if they say the politician is a liar or a loser. But I don't understand -- obviously no one with Klein's general orientation is going to be hired by a Republican. Why don't pundits ever contrast the honesty and effectiveness of arguments by politicians with whom they disagree so strongly that they can't be angling for a job ?

Dumb V Dumber

Carly Fiorina decided to contrast her knowledge with Donald Trump's ignorance. He said the 14th amendment doesn't establish birthright citizenship (dumber) Fiorina said "The truth is, you can't just wave your hands and say 'the 14th Amendment is gonna go away.' It will take an extremely arduous vote in Congress, followed by two-thirds of the states," Uh Ms Fiorina, Article V of Constitution begs to differ
The Congress, whenever two thirds of both Houses shall deem it necessary, shall propose Amendments to this Constitution, or, on the Application of the Legislatures of two thirds of the several States, shall call a Convention for proposing Amendments, which, in either Case, shall be valid to all Intents and Purposes, as Part of this Constitution, when ratified by the Legislatures of three fourths of the several States, or by Conventions in three fourths thereof, as the one or the other Mode of Ratification may be proposed by the Congress;
Yet she was the relatively knowledgeable Republican candidate.

Saturday, September 12, 2015

House Republicans Attempt Kabuki and Trip Over Mask

Being upset that Democrats managed to filibuster the resolution disapproving the Iranian Nuclear deal, House Republicans decided to take three symbolic votes. First they voted on whether to approve the deal (which does not need congressional approval). For some reason this difference was important to them. On that vote 25 Democrats voted yes along with all but one Republican (one voted present). This means that there would not be enough votes against the agreement to overturn a veto of a resolution disapproving the veto (which will not pass the Senate because of the filibuster or the House because of the weird theatrics). Then they insisted on voting on a resolution suspending the President's authority to relax sanctions until January 21 2017 (that is exactly so long as Obama is the President). It is not clear to me why Conservative House Republicans demanded a vote on this resolution. It will not be proposed in the Senate and would obviously be vetoed if it passed the Senate.
On this vote two (2) Democrats voted with the Republicans. The roll call might be the closest to purely partisan in the recent history of the House of Representatives[nope see update]. So Republicans can now boast that their effort to block Obama has bipartisan support, because two (2) Democrats voted with them. If they hadn't insisted on the second resolution, they could have claimed the support of 25 Democrats.
Losing is always painful, but losing mid term elections to these buffoons is humiliating. The two Democrats are Representatives Graham and Vargas. I don't know what districts they represent, but I hereby promise to donate no less than $100 to anyone who primaries either of them (if you do primary them demand that I pay up in a comment to this post). The crazy and/or cowardly Democrats' names are in italics
Update: My mistake. On Thursday there was an even more perfectly partisan vote with 0 Republicans voting no and 0 Democrats voting yes on a motion claiming the Obama administration hadn't sent congress enough information so the 60 day clock never started. I am confident that there has never been a more purely partisan vote (that's safe to say) So why did Republicans insist on getting a record that no (0 (zero)) Democratic representatives agree with their absurd claim ? Does anyone there know how to play this game ?

Wednesday, September 09, 2015

Tuesday, September 08, 2015

Paul Romer has 3 Questions

Paul Romer has questions which should enable me to self assess my economic tribalism. I am very tribal (but in a fairly small tribe.
Consider these two statements:

1. The model in Lucas (1972), Expectations and the Neutrality of Money, made a path breaking contribution to economic theory. It is comparable in importance to the Solow model and the Dixit-Stiglitz formulation of monopolistic competition.

2. The model in Prescott and Kydland (1982), “Time to Build and Aggregate Fluctuations”, has no scientific validity.

Next, consider these two statements:

3. Einstein’s model of the universe based on his theory of General Relativity, made a path breaking contribution to theoretical physics, even though in his first application, Einstein built a model of a steady state universe.

4. Models of a steady state universe have no scientific validity.

In each case, the first statement in the pair is about the contribution of a mathematical model to scientific progress. The second is about the empirical validity of a specific model.

[skip] Here I want to point to a different indicator. Set aside the question of whether or not I am right that 1 and 2 are true. Think of some macroeconomist X that you know. Consider these questions:

A. Would X agree that there is an objective sense in which statements 1 and 2 can be said to be either true or false?

B. Would X agree that a reasonable person could conclude that statements 1 and 2 are both true?

C. Would X be able to examine dispassionately the evidence for and against these two statements and evaluate them independently?

A useful indicator of the degree to which macroeconomics has been infected by tribalism might the fraction of macroeconomists for whom the answers to at least one of the questions A, B, and C would be no.

First and in passing, I note that, after Einstein was introduced, "economic theory" was replaced by "scientific progress" . The implicit assumption is that there is some overlap between economic theory and scientific progress -- that economic theory has progressed. This view is not universally accepted. I am pretty sure that I have a problem with question A. For statement 1 to be true, "path breaking" has to be well defined.

regarding Romer's statement 1, I agree that, when originally presented, the Lucas 72 model, the Solow growth model and the Dixit Stiglitz example had similar scientific status. They were "path breaking" in that they left the existing path -- they were new and different. They were path breaking in that they were highly influential. My problem is that I don't see how that relates to "scientific progress". It was definitely scientific change, but only time could tell if it was an improvement or a worsening.

I also certainly agree with Romer's statement 2. I agree that a reasonable person could conclude that statements 1 and 2 are both true (I don't but I can see how a reasonable person might think that). I can evaluate the second independently from the first, but I need to understand what "path breaking" means to evaluate the first.

Before going on, I'd like to stress that Romer definitely did not compare Lucas '72 and Dixit-Stiglitz to General Relativity -- he compared it to the Solow growth model and the Dixit Stiglitz example of imperfect competition. However, I will contrast them. General Relativity explained an anomaly -- the precession of the perihelion of Mercury. It implied a prediction about how much gravity caused light to curve which was striking shocking and soon confirmed. Since then it has yielded a huge number of predictions which fit the data exactly (so far). It was easily modified to correspond to an expanding universe as the first formulation did, when this was pointed out Einstein added a fiddle factor to reconcile the theory with a steady state universe. Pysicists are quite sure general relativity is not the truth (because it is inconsistent with quantum mechanics and therefore a lot of data). But it is a very empirically successful theory.

In contrast, the Dixit-Stiglitz example did not attempt to explain anomalies not fit by earlier models of imperfect competition. The aim was to make models with imperfect competition tractable. The formulation is an example, and not one considered unusually plausible. They made a modelling choice not a hypothesis (neither would guess that people might actually have Dixit-Stiglitz preferences). Here I think the key cause of the enormous influence of the example was that it meant there was a standard way to handle imperfect competition.

Unfortunately, this is important not because other models are all intractable but because there are no general results. Models with imperfect competition can have a sunspot equilibrium with fluctuations which are not caused by shocks to taste and technology (this can occur if different goods are strategic complements). The set of equilibrium can be huge -- a multidimensional continuum. Together the assumptions of imperfect competition and Nash equilibrium imply almost nothing. The example made it possible to have the illusion that economic theorists understood imperfect competition, but this was discovery by assuming we have a can opener.

The example was fruitful because, once a lot of people decided to explore the same special case, they could discuss its interesting behavior. The fruits however, do not include any good reason to exclude the other problematic cases in which different goods are strategic complements. Theory can grow if people agree on core assumptions. This is progress if the assumptions are useful approximations. Once a field of economic theory has developed, its core assumptions are no longer vulnerable to data. I do not think the the development of a new branch of theory is necessarily scientific progress.

I think economic theory was massively improved by the Dixit-Stiglitz example, because it made economists outside of industrial organization willing to consider imperfect competition. But I think this can be seen as an accidental trick. It gave the impression that there were simple elegant results based on assuming imperfect competition similar to those based on assuming perfect competition. There aren't. Here I cite major Dixit-Stigitz user Paul Krugman

After a while, the new approaches came to seem too liberating; by the early 90s the joke was that a smart graduate student could devise a model to justify any policy. And while some important new theoretical work continued to be done, for example the Melitz work on heterogeneous firms or the Eaton-Kortum work on bilateral trade flows, I think you have to say that the field got tired of clever theorizing and wanted data instead.

I think the point is that this excessive liberation was already implicit given the acceptance of imperfect competition (and the emptiness of theory without data could conceivably have been recognized as soon as economists admitted that they couldn't prove that competition really is perfect, that is over a century ago). By the way, I heard that joke told by Robert Barro in 1988 or 1989 so before the early 90s.

There have been dead ends in natural science. Organic chemistry was once defined as the consideration of how the laws which governed chemical reactions inside living things were different from the laws which governed chemical reactions outside of living things. A Nobel prize in physiology and medicine was awarded for a theory of cancer propagation which is now believed to have no relationship to reality. Lamarckian evolutionary biology survived into the 20th century (and not just in the USSR).

A new branch of mathematics must be a contribution to mathematical progress (perhaps a small and boring one). But a radically new hypothesis which turns out to be totally false was not a contribution to scientific progress. Finding out that it was false was and such dead ends are inevitable in science. But in science development of new theory is not necessarily progress.

OK what about the Solow growth model and the Lucas supply function ? Like Dixit and Stiglitz, Solow mainly made a large number of extreme assumptions yielding a tractable model. Here I think Solow's assumptions were fruitful also in that they fit the data surprisingly well. There are excellent arguments for why one shouldn't be able to treat capital and labor as scalers (single numbers). But empirically, the Solow radical simplification fits the available data surprisingly well. There was no reason to think that the concept of disembodied technology would be useful. But it helps economists fit the data.

Lucas formalized an argument about price level missperception and fluctutations which had been made many times (for example by Keynes in "The General Theory" as Tobin explained to Lucas in 1971). Here again the theoretical change was to assume everything else away. In particular the Lucas model abstracts from the wage system and is population by self employed "suppliers" -- this was an extreme assumption at a time when trade unions were powerful even in the USA. Lucas definitely did not identify a previous conceptual error of treating the expectations unaugmented Phillips curve as a stable relationship -- this is a myth. He added a focus on expectational errors alone and the insistence that economists assume rational expectations. I think this too is unlike Dixit-Stiglitz. The reason is that, in 1972, the Lucas model was obviously grossly false -- it implies that output is a white noise and it was well known that economic fluctuations aren't. it requires that agents have very limited information on the price level when, in fact, they have a lot of information. I think it was clear that Lucas's new research program would be sterile. I think it was entirely sterile. I count new Keynesian models as part of Lucas's intellectual legacy (even though he never recognised the bastards). Here I think nothing was explained by the new models which hadn't been explained by the old models and economic theory did not progress at all. It grew and is a richer branch of applied mathematics, but I think the right direction to go now is back to before Lucas 1972.

I certainly don't think this of the Solow growth model or imperfect competition with a Dixit-Stiglitz preferences or a Dixit-Stiglitz aggregator.

Yes Lucas 1972 was path breaking, but the new path Lucas blazed lead to a dead end.

Tuesday, September 01, 2015

Ed Kilgore Libsplains how to get Wingnuts to put Your Name in Their Headlines

Kilgore noted that a Bozellian bozo put "Martin Longman" in a headline but didn't put "Ed Kilgore" in another headline the day before because Kilgore isn't edgy enough. OK so so newsbusters this little blog aint --it gets 100 page views a day. But I thought I really had to put "Ed Kilgore in another headline (and this one has nothing to do with welfare reform).

Thursday, August 20, 2015

Begging for even more attention from Paul Romer

I have recently been delighted to find comments on this blog from someone named Paul who seems to be Paul Romer himself. He seems to have taken the time to answer my "Question for Paul Romer" even after writing "Solow's Choice" which makes the answer very clear. In that post, he suggests that, in 1978 Solow should have written a simple, applied general equilibrium (SAGE) model with downwarnd nominal rigidity instead of mocking Lucas and Sargent. I just remembered that I have written (but not type set sorry) a SAGE model with downward nominal rigidity -- it's behavior is strange with secular stagnation and sunspots and stuff. I wonder if it is worth a look Also, given the success of my question for Paul Romer, I have two similar ones What about Thomas Sargent ? Does he display Feynman integrity ? I sometimes think he does and sometimes think he's just discovered a spectacularly successful rhetoric of false modesty. Brad DeLong named Alan Blinder as a model of intellectual integrity (sorry can't find the link). Does Alan Blinder display Feynman integrity ?

Tuesday, August 18, 2015

Romer, DeLong and Krugman on Solow and Lucas

I can't resist typing this post. I am very sure it is not worth reading (that's why it's here not at

Paul Romer, Paul Krugman and Brad DeLong are having a polite inside baseball discussion of what went wrong with Macro in the 70s and early 80s. I agree with all three that it is probably time to move on to how to fix macroeconomics in the 2010s. Also civility is good. In particular, I think it would be useful to the reality based community to make sure Paul Romer feels welcome (I note that I get paid largely for trying to explain Paul Romer to students). However, I feel free to be as rude as I want to be on this blog. I don't share Romer's beliefs about the history of thought including his beliefs about the very recent thoughts of Paul Krugman and Brad DeLong.

I am to comment Romer's post brilliantly entitled "Solow's Choice".

update 2: Paul Romer himself was kind enough to answer my question for Paul Romer in a comment on that post ! I am thrilled.


Re your question, I hope that my posts about Solow's remarks in 1978 answer your question. But to be specific, I think that Solow did depart from the role of the scientist by using debating tactics to dismiss the critique by Lucas and Sargent. And I suppose he did not live up to Feynman's mandate in the sense that he does not acknowledge the problems that the big simulation models suffered from. But so did Lucas and Sargent, I suppose, by pushing the policy ineffectiveness result prematurely. Feynman integrity sets a pretty high bar.


end update 2

update: Romer has uploaded the conference volume here so you can read Solow's chapter as I just did.

end update:

Before wasting the time of the reader (if any) I state my conclusions.

1) I think that Solow made the right choice. It is true that academic macroeconomists (including those at MIT) almost all disagreed. I think subsequent events show that Solow was right.

2) I think that Brad DeLong absolutely agrees with Solow. I don't know much about much, but I know a lot about the thought of Brad DeLong. I think Romer's guesses about DeLong's beliefs are incorrect.

3) Romer makes guesses about Solow's motivation. I make different guesses (knowing much less).

Romer wrote

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.

Romer agrees with (b) but doesn't explain why he thinks that macroeconomic models must be SAGE models. I don't know if he considers the assumption that the economy is in general equilibrium a falsifiable hypothesis or not. I think if he thinks it is, he must consider the possibility that it shall be falsified (he wrote that theories must bow to facts). If it isn't, I don't see what is gained by assuming it. I think that GE implies the assumption of rationality. this is certainly true of the DSGE model presented by Arrow and Debreu 1954 and it is also assumed in all contemporary applied DSGE models of which I am aware. But this is an assumption which we can be sure is false and which is defended because it might be useful. I have never understood how anyone can argue that one must assume something because it might be useful. Lucas certainly insisted on the assumption of rational expectations. Solow certainly thought that it was a very bad idea to make that assumption (as did Friedman).

Personally, I think that the new Keynesian SAGE program has been sterile and that it was a mistake to start on it back in the 1970s.

I am quite sure that DeLong thinks Solow was right in rejecting (b). I am not expert on much, but I am quite expert on the thought of Brad DeLong. In 1983 he said that he was going to do fields exams in economic history and econometrics and not macroeconomics because he thought that macroeconomics had headed down a blind alley which it wouldn't leave for decades. I think subsequent events suggest he was right. Importantly, he knew about early new Keynesian work at MIT. He didn't like the rational expectations hypothesis (he is quite famous as a critic of it). Also more recently he wrote

But then Mike Woodford and company lost sight of the goal. Yes, New Keynesian models with more or less arbitrary micro foundations are useful for rebutting claims that all is for the best macro economically in this best of all possible macroeconomic worlds. But models with micro foundations are not of use in understanding the real economy unless you have the micro foundations right. And if you have the micro foundations wrong, all you have done is impose restrictions on yourself that prevent you from accurately fitting reality.

Thus your standard New Keynesian model will use Calvo pricing and model the current inflation rate as tightly coupled to the present value of expected future output gaps. Is this a requirement anyone really wants to put on the model intended to help us understand the world that actually exists out there? Thus your standard New Keynesian model will calculate The expected path of consumption as the solution to some Euler equation plus an intertemporal budget constraint, with current wealth and the projected real interest rate path as the only factors that matter. This is fine if you want to demonstrate that remodel can produce macroeconomic pathologies. But is it a not-stupid thing to do if you want your model to fit reality?

Krugman recently wrote

I’m actually mainly with Waldmann on this one, although Wren-Lewis’s analysis is nonetheless very useful. For the point he makes about the implications even of perfectly well-informed and rational consumers was and as far as I know still is totally misunderstood by freshwater economists [skip]

But aside from exposing the intellectual decline and fall of the Chicago School, is this the way we should go about modeling such things? Well, yes, sometimes, because rigorous intertemporal thinking, even if empirically ungrounded, can be useful to focus one’s thoughts. But as a way to think about the reality of spending decisions, no. Ordinary households — and that’s who makes consumption decisions — have no idea what the government is spending, whether it is temporary or permanent, whatever.

This is absolutely a critique (indeed a contemptuous dismissal) of claim (b) and not at all a comment on claim (c) .

I note that Wren Lewis agrees

I think it is clear that DeLong rejects the SAGE program and not just the policy ineffectiveness proposition. I don't claim to completely understand Krugman's view, but it seems to me to be very different from Lucas's and quite different from Romer's

Romer guesses that Solow dismissed Lucas and Sargent because he was worried that policy makers would take the policy ineffectiveness proposition seriously. I must stress that this is just a guess. Solow might have just had the impression that Lucas's approach was crazy. I my experience, most people do have that reaction.

Romer criticizes Solow for not writing down a model where fear of worker's anger prevents employers from cutting wages. In particular, he asks for a SAGE model with downward nominal wage rigidity. Solow did re-introduce the idea of efficiency wages and explicitly motivated the assumption that wages affect productivity through morale. I think Romer criticized Solow for failing to do what, in fact, Solow did (or perhaps for failing to work out a model during a conference).

Journal of Macroeconomics Volume 1, Issue 1, Winter 1979, Pages 79-82

Another possible source of wage stickiness


A number of hypotheses have been advanced to explain wage stickiness. This article explores another reason why wage stickiness might be in an employer's interest: the relationship between productivity and the wage rate. If the wage enters the short-run production function, a cost-minimizing firm will leave its wage offer unchanged, no matter how its output varies, if and only if the wage enters the production function in a labor-augmenting way.

A free pdf is available here

In the text of the paper, Solow explicitly refers to morale

Romer's problem might be that Solow didn't put his model of wage stickiness in a SAGE model but cited Malinvaud instead. Note the article is published in 1979 a very brief delay after 1978. Solow did send it to a low ranking journal (it wasn't rejected by a higher ranking journal -- decades later Solow had not ever had a manuscript rejected).

really pointless stuff after the jump

Saturday, August 08, 2015

AIPAC gall is amazing

Here members of AIPAC (often for attribution) assert that it is improper for Barack Obama to criticize AIPAC. It is very important that they don't just contest the (obviously accurate) criticisms, but argue that criticizing them is something he must never ever do. The amazing thing is that it is clear that they wanted this article to be published (I think it is clear that they contacted The Times). In the USA there is a powerful bunch of people who think that they must not be criticized, are willing to say so, and don't imagine that their denunciation of lese AIPAC will anger anyone who can cause them any problems -- that is they assume that they are so powerful that they can be as arrogant as they want. I think that no country with any self esteme would allow any group to treat it that way. The quotes directly that it is unacceptable for a President to (implicitly) criticize AIPAC (without naming it).
“It’s somewhat dangerous, because there’s a kind of a dog whistle here that some people are going to hear as ‘it’s time to go after people,’ and not just rhetorically,” said David Makovsky
That is criticism (without naming people or groups) is an incitement to violence. Or what else can "not just rhetorically" mean. Makovsky directly said that it is unacceptable to criticize AIPAC (what other interpretation is there ?). and
Words have consequences, especially when it’s authority figures saying them, and it’s not their intent, perhaps, but we know from history that they become manipulated,” said Malcolm Hoenlein, executive vice chairman of the Conference of Presidents of Major American Jewish Organizations, repeating a concern he had raised directly with Mr. Obama during the closed-door session. “Of all political leaders,” Mr. Hoenlein added, “he certainly should be the most sensitive to this.”
How can this be interpreted as other than the claim that it is not acceptable for Obama to participate in a debate about his policy by saying that criticisms of his policy are inaccurate ? The cheek the gall the arrogance faccia di bronzo prepotente haughty and you know the word I am not willing to type in this context.

Living in the Real World

I think it is almost possible that the Editorial Board of the Washington Post may have decided to stop ignoring reality. To me the editorial entitled "Only a handful of GOP candidates are living in the real world" is news. My general impression is that the WaPo unsigned editorials have been well right of center for decades with a strong focus on how it would be good to invade Iraq and cut Social Security. I might have just missed other reality based editorials, but I don't recall such a frank assertion that the GOP has gone nuts. To be sure, the editorial is a compromise; it is a polemic written by a committee. They looked hard for traces of Republican sanity. Given their influence inside the beltway, I think it would actually make a difference if they continued to frankly note Republican craziness. To be more specific, I think they influence spineless moderate Democrats who won't get to the left of the WaPo editorial board.

Wednesday, August 05, 2015

What Wouldn't be a Dynamic-Stochastic General-Equilibrium model?

In Which I Try to Answer a Question asked by Larry Summers as a Joke

The LSE held a discussion on Reconstructing Macroeconomics. Brad DeLong posted a transcript , the video is here.

Larry Summers opened with a joke

Larry Summers: You know I was tempted to blast off at Dynamic-Stochastic General-Equilibrium models. That is, actually, my inclination. But on the other hand it occurred to me to ask the question: "What wouldn't be a Dynamic-Stochastic General-Equilibrium model?" That would be a Static-Certain Partial-Equilibrium model. It is hard to see how that represent any kind of an improvement. So I can't be against DSGE on principle.

I have a sense of humor, but I am going to suppress it and pretend to take the joking answer literally. I note that the diametric opposite of a Dynamic-Stochastic General-Equilibrium model would be a Static-Certain Partial-Disequilibrium model. Even in jest, even Summers has trouble separating the concepts of model and equilibrium -- which in context means Nash equilibrium. Also the joke is a joke, a Dynamic-stochastic-partial equilibrium model is not a Dynamic-Stochastic General-Equilibrium model. It is also easy to answer the question, because there are models older than any DSGE model -- Summers can propose we go back to using those models. For one thing, he clearly does use those models (as do DeLong and Krugman). They weren't equilibrium models. Bernanke and Blanchard (who have made huge contributions to Reconstructing Macroeconomics) assume in their answers that they are required to start with a standard new Keynesian DSGE model and modify it to reconcile it with reality. Blanchard said

Suppose you are writing two textbooks, one undergrad, one grad. In the undergraduate textbook, it seems to me that when teaching the IS-LM, [skip]

At the graduate level, we now have this explosion of DSGE models which put one friction and another into the model. Again, targeting pedagogy, it seems to me that there are two mechanisms which are central. The first is leverage, which starting with Ben [Bernanke's] work and earlier work we have, I think we know how to deal with it. The second is liquidity. And I think there we are much less far along the way. Again, I am hoping that someday we will put it together and have a simple way of thinking about leverage and a simple way of thinking about liquidity. These two things will come into our New Keynesian model, and we will be able to tell a simple story. We are at the stage at which the DSGE models have much too much in them to be fully understood.

Blanchard is not joking. He takes it as a given that the IS-LM model is for undergraduates and that graduate teaching and research should be based on new Keynesian DSGE models. He also notes a problem -- current DSGE models do not clarify thought, because we don't understand what is going on in the computer as it simulates them. He neglects another problem -- DSGE models are based on extremely strong assumptions (including rational expectations but also including say the assumption that there is no housing sector or inventories) which we are all sure aren't literally true. The only defense of the approach is that we should think about simple things which we understand which might give us insights into the much more complex real world. I find it hard to accept the assumption that macroeconmics must be based on incomprehensible models which fundamentally rely on assumptions we are sure are false in ways which seem to have been critically important and which yield, at best, mediocre forecasts.

I'd like to see a debate where Summers (or Krugman or DeLong) argues for the resolution "Old Keynesian models from the 60s and 70s are a more promising starting point for macroeconomic research than New Keynesian DSGE models". Someone would have to argue contra. Oddly, I find it extremely difficult to think of (and impossible to find) anyone willing to do this. I can't recall hearing or reading a defense of the NK DSGE approach. It is just assumed that this is what macroeconomics is and must be, but I honestly can't recall an argument for why it should be (hmmm am I too young to be senile?).

Starting this post, I had planned to argue for the resolution, but this is getting long and I want to type about how we got where we are. Senile or not, I am too young to remember, Old-Keynes had been abandoned already when I arrived in economics in 1985. But this is a blog.

Tuesday, August 04, 2015

A question for Paul Romer

Professor Romer, do you think that Robert Solow has Feynman integrity ?

I do.

I quote and question "Lucas and his colleagues interpreted the hostile reaction they received from such economists as Robert Solow to mean that they were facing implacable, unreasoning resistance from such departments as MIT."

Whatever Lucas thought, I wonder if Romer thinks that Solows resistance was "unreasoning". He used humor as did Stigner (and Lucas) but does that mean he felt "Stigler Conviction".

Now it is certainly possible for someone to dismiss the rational expectations hypothesis and without serious thought as soon as he hears what it is and to consistently consider it absurd from then on (I am an example). I heard of the concept of Nash equilibrium when I was 17 and immediately thought that some related idea might be useful, but the hypothesis that actual play is in Nash equilibrium is clearly false.

Since then, I have never doubted that the Nash equilibirum hypothesis is fundamentally wrong. I am a methodological individualist, so I have no time at all for the idea that it is useful to characterize the set of Nash equilibria, because an outcome being a Equilibrium tells us anything about how likely it is.

Update: Paul who seems to be Paul Romer himself kindly took the time to answer my question. The answer is no as indeed I guessed from his post "Solow's choice"

Robert, Re your question, I hope that my posts about Solow's remarks in 1978 answer your question. But to be specific, I think that Solow did depart from the role of the scientist by using debating tactics to dismiss the critique by Lucas and Sargent. And I suppose he did not live up to Feynman's mandate in the sense that he does not acknowledge the problems that the big simulation models suffered from. But so did Lucas and Sargent, I suppose, by pushing the policy ineffectiveness result prematurely. Feynman integrity sets a pretty high bar.


Monday, August 03, 2015

When did the Freshwater School Adopt the "Adversarial Method"

Paul Romer and Paul Krugman write that Lucas, Prescott et al had great intellectual integrity back in the 70s but then turned to sophistry. I think there is a very eminent eyewitness account of the shift.

I think a very interesting contribution to this discussion is an interview of Sargent by Evans and Honkapohja.

"my recollection is that Bob Lucas and Ed Prescott were initially very enthusiastic about rational expectations econometrics. After all, it simply involved imposing on ourselves the same high standards we had criticized the Keynesians for failing to live up to. But after about five years of doing likelihood ratio tests of rational expectations models, I recall both Bob Lucas and Ed Prescott telling me that those tests were rejecting too many good models. The idea of calibration is to ignore some of the probabilistic implications of your model, but to retain others. Somehow, calibration was intended as a balanced to professing that your model, though not correct, is still worthy as a vehicle for quantitative policy analysis."

So they took the wrong turn after about five years. I note two things -- Sargent said this soon after being awarded the Nobel memorial prize.

The other is that the Lucas critique is a critique of exactly what Lucas did after "about five years". assuming that a model is useful as a vehicle for quantitative policy analysis by looking only at the fit of the variables policy makers care about.

Human Capital Spillovers

Paul Romer proposes that economists try to think like physicists. I think he means the same thing Sargent means when he talks about taking models seriously.

I am going to treat his post as a challenge. Romer wrote

1) There is a crucial distinction between human capital (stored in neurons), and codified information (stored in some external form, such as printed text or bits on a hard drive.) 2) Anything stored in neurons is a rival good. 3) A person’s human capital is fully excludable as long as people have legal control over their own bodies. So there are no human capital “spillovers” and no human capital “externalities.”

His discussion goes on, but I want to challenge the third claim.

For one thing, I think the post is, for the purposes of growth theory, just like a human capital spillover. I learned from the post. I didn't pay for it (nore did Romer expect any payment). The fact that something is excludeable doesn't mean that others are, in fact, excluded. People voluntarily share knowledge as Romer did in his post including the claim that there are no human capital spillovers.

I agree with Romer that ESP doesn't exist, so we can't steal knowledge from each other's brains. We don't learn just by being around someone who knows something. But I think there are human capital spillovers and externalities.

The reason is that we can learn by watching someone use their human capital (I really mean watch with our eyes).

This is a very inefficient way to learn. It is much more efficient for the knowledgeable person to explain things, sometimes it is necessary for the learner to attempt a task and be critiqued by the teacher or coach. But "no" is a strong word.

Someone who wants to prevent this can use knowledge only in private and prevent others from watching (as someone can lock up a document). But someone who is indifferent about the knowledge of others will use skills when being watched and the others will learn (slightly) more than nothing.

Human capital is invisible when it just sits there, but more than exactly none of it can be inferred by watching someone use it.

I think there are much more important processes which aren't true spillovers but which can be usefully modeled as if they were spillovers.

1) altruism. In standard models agents are selfish but actual people aren't. People teach other people without demanding payment or negotiating. The effect on the spread of information is like a spillover. Pretending it just happens while using standard utility functions is an almost harmless shortcut.

2) Gift exchange. People can have a norm or custom that they teach each other (so long as it isn't too hard). This is an exchange not a spillover. However, I think in the real world there is a lot of this going on without cash payment, negotiation or checking how much each is teaching and how much each is learning. The macro effects are similar to those of a spillover and quite different from purchasing of education. This is not a spillover, but modeling it as a spillover is a more useful approximation than modeling it as a market exchange.

3) people with complementary skills work together in teams. In the process, with the sole aim of getting the task done, they explain what they are doing. This is learning and teaching by doing. The fact that both end up learning from the others is a by product of the effort to perform a task together.

4) some people enjoy teaching. I had a lot of knowledge pretty much forced on me by people I knew in college. This is a case of how you can get models to do anything by playing with utility functions. But it is reality. Consider blogging. Some people do it without expecting any reward. Romer is very clear that he expects costs not benefits from his posts on mathiness. This is not at all like market exchange of education services. The post on how human capital doesn't spill over is a human capital spillover.

5) When learning it is best to expose ones imperfect knowledge to criticism. One kind of non spillover teaching is the lecture where someone knowledgeable talks and learners listen. Another is the presentation with criticism, the problem set with correction etc where someone who is learning talks or writes and someone knowlegeable comments critiques and corrects. In the real world, the roles are not always clear. If I think I understand something but am not sure, it is useful to me to try to explain it to a critical listener who doesn't know about it already. Who is the teacher and who is the student? This isn't a spillover (we are both expending effort) but it is better modeled as a spillover than as a market exchange.

So I think there are minor unimportant human capital spillovers and also extremely important social interactions which spread knowledge which aren't spillovers but which have similar implications for the spread of knowledge and economic growth and all that, while they don't have anything like the same implications as the purchase of teaching services with tuition.

So I think models with human capital spillovers are useful even if actual human capital spillovers are unimportant.

Monday, July 27, 2015

Daniel Davies and Brad DeLong Debate Deutschland

As usual the posts to which I link are more interesting than this post. Brad DeLong discusses German economics and totally fair uses Kevin Baker's excellent explanation of the origins and nature of Ordoliberalism (please click the link to Baker's post).

Davies discusses one vigorous striking sentence in Brad's post

Just consider what the state of Germany’s export sector would be right now if Germany were not part of the euro, and had the real exchange rate of Switzerland.
Davies writes

I’ve considered it, and I think the answer is actually “more or less the same”.

Looking at the actual current account of Switzerland suggests that a Germany which had fixed to CHF wouldn’t have necessarily done any worse …

[figure skipped]

And the story of the 00s in German exporting (the 90s, of course, were when Germany ran quite sizeable deficits) is one of the bilateral trade between Germany and China. German industry makes “the thing that makes the thing that makes the thing”, notoriously, which makes its exports very price-insensitive to a country like China, which has a huge export market for things, which ensures a massive domestic market for thing-making things, and a consequent import demand for thing-making-thing-making things.

The "any" in "wouldn’t have necessarily done any worse worse" is clearly rhetorical hyperbole .

Davies convinces me that Brad's focus on the export sector was unfortunate. I would ask what the state of Germany's current account would be. Even if German exports were totally price insensitive, Germany can import more. If Germans had spent the money they get from China on Mediterranean goods and services rather than lending it to Mediterraneans, things would be different.

> Germany was very good at making things which make things which make things back in the 90s when they had a current account deficit. World wide demand for such things has not growth extraordinarily (it doesn't matter for the German export sector whether they export to China or some other country). Also, German firms were building factories in other countries to avoid paying the enormous German real wages. The equipment making technology is German, but the production doesn't have to be. Germany's strength in this sector doesn't make total German exports insensitive to real exchange rates and has no effect on imports -- it is a statement about the level of exports not the slope of net exports/GDP as a function of exchange rates.

Davies also wrote

Everyone wants to find a version of history under which all the problems of the Eurozone are Germany’s fault, because everyone knows that all the solutions involve Germany paying. But it’s not really true; Germany spent the early years of ERM/EMU paying far more than anyone else was prepared to in order to smooth the adjustment path for the former Communist states. And after fifty years of structuring everything in Europe to prevent German hegemony, is it really a big surprise that Germany isn’t well set up to act as a hegemon? Imagine if the USA had lost the war in the Pacific and was today being blamed for its failure to ensure the economic development of the Phillippines.
Here both "all"s in the first sentence are, again, hyperbolic. I would say that the Eurozone has two huge problems. One is that Greece has debts it can't and won't repay. The other is that aggregate demand is too low. One perfectly fine solution to the aggregate demand problem would be for Germany taxpayers to grit their teeth and accept a tax cut. This would stimulate German demand including demand for imports. If Germans were feeling incredibly generous, they might also consider accepting an increase in wages. What the Euroblock needs most is higher aggregate demand -- self indulgence, the illusion of wealth of those who think government bonds are net wealth and all that. What we need is less German self sacrifice not more.

There is nothing about the efforts to prevent German hegemony which would interfere with this policy. It is banned by rules which the German government demanded.

Even on Greek debt, Germany isn't the only Euroblock country which won't get its money back, and they won't get their money back no matter what (even with flows discounted at an interest rate far below market rates). The debate on debt is over how long the Troika should extend and pretend and how much Greeks should be punished and humiliated.

Finally I think that, while the DeLong Davies debate is brilliant, it is tainted by mixing economics and moralism. German's huge contributions to smooth the adjustment path for former Communist states were very admirable, but they are not affect the currently optimal German budget deficit.