I don't think much has been accomplished by the effort to base macroeconomics on microeconomic models of rational agents. On a couple of occasions, I have claimed that something major was accomplished in this way long ago by Milton Friedman. That was the example of how the approach could be useful and a major inspiration for the whole research program. Right now I am struck by painful doubt about that one key example.
The example of how previously mysterious facts were actually explained by an economist once is the permanent income hypothesis. Basically this is a model of rational consumption in which Friedman noted that optimal consumption depended not only on current income and wealth but predicted future labor income -- in particular it should depend on the expected present discounted value of future income. The model explained some puzzles.
1. in the cross section consumption increases less than one for one with income -- people with higher incomes save a larger fraction of that income. Based on this, many economist really predicted that with economic growth the share of consumption in GNP would decline. It didn't.
2. There are odd patterns in the cross section of income and consumption. One is that African Americans consume less than White Americans with the same income. There are many other interesting patterns which I can only remember by remembering that they are explained by the PIH.
The explanation is that permanent income increases less than one for one in current income, people with high income now might have just gotten lucky this year. Similarly with race, average African American income is lower so if an African American has the same income as a white American it is likely that the African American had an unusually good year or that the white American had an unusually bad year.
Now, to my dismay, I notice that this evidence just shows that Friedman's model is better than Hick's model of the consumption function in the IS-LM model which makes consumption a function only of current income. In itself, it doesn't show much more.
Let me make a very very different model. Consumption depends only on wealth. One way of imagining this is that people are trying to maximize the discounted value of the logarithm of consumption (so interest rates don't effect consumption as a function of wealth) and irratinally predict that their future labor earnings will definitely be zero. That's pretty pessimistic. Can Friedman's facts show that, even if people aren't fully rational, at least they aren't that irrational ?
Not at all. In the time series national income and wealth grow proportionally. This is the strange fact that growth theorists are constantly trying to explain. The constant times wealth model works fine.
Income and wealth are, of course, correlated. However they aren't perfectly correlated. The regression slow of wealth on income could easily be less than one. If so the pattern in the cross section is explained.
It is plain true that African Americans have lower wealth than white Americans with the same income.
There is proof that consumption depends on some sort of smoothed of income. I haven't mentioned any evidence that this is smoothed future income not smoothed past income.
Now there is such evidence, but it is relatively subtle compared to the facts which I mentioned (a punch in the nose is relatively subtle compared to the fact which I mentioned). It is of the form of my hard to understand estimates reject the total myopia model and not "yes of course. Why didn't I see that ?"
Now at the moment I really should begin to worry about Friedman's critique of the Phillips curve, but if there is as much less to that as there is to the triumph of the hypothesis that permanent income matters (not the PIH which says only permanent income matters) then I will be upset.
I will just note that Keynes very firmly and clearly warned people not to look for a Phillips curve in The General Theory. posted by Robert
permalink and comments2:27 AM
Friday, September 18, 2009
What would it take for Say's law to hold
Say thought that aggregate demand had to equal aggregate supply. This is true in the simplest model in which people trade non durable consumption goods (always called apples and oranges). Add up individual budget constraints and you get that planned spending can't be higher than planned sales unless someone made an arithmetic mistake.
John Cochrane appears to believe in Say's law. Many people have pointed out that he forgot about the existence of money. If people want to increase their money holdings then planned spending can be less than income.
It's not just about money II
Cochrane's error is not just that he forgot about money. For one thing, less liquid financial instruments invalidate Say's law too. Cochrane has to assume that people have no wealth of any kind. Anything durable, not just money invalidates his argument.
Let's say we all plan to sell our shares (commmon stock) to buy goods and services. That way planned consumption plus taxes plus investment plus net exports can be greater than GNP. The distinction between money and other financial assets is very important in many ways, but it is not relevant to Say's law which would be invalid even if we bought and sold stock with non-durable consumption goods (apples) and not with money.
But it isn't enought to assume no financial instruments (which is odd for a finance professor but hey ...). The demand for currently produced goods can be greater (or less) than production of goods, because people can trade durable goods made long ago for currently produced goods and services.
Cochrane is right in a Walrasian model with one period or in a Walrasian model in which nothing nothing at all lasts from period to period. So a model where we trade apples for oranges is a model in which my yearly planned consumption must be roughtly equal to my yearly income. However, if the model also includes apple trees and orange trees, then this is no longer true.
If I own apple trees then my demand can be greater than my income. I have wealth (the trees). I can buy apples and oranges by selling my trees. If everyone wan't to sell trees (not made this period) to buy fruit (made this period) then planned consumption of goods produced this period will be greater than production of goods produced this period.
The value of trees does not appear in GNP unless they just matured (the value of pruning trees does). The budget constraint includes, at least, current income plus wealth (with perfect financial markets it also includes the expected present value of future labor income).
Cochrane is assuming that income = wealth. This is a much stronger assumption than that there is no money or no financial instruments. posted by Robert
permalink and comments5:50 AM
Tuesday, September 15, 2009
Opinions on directions on Earth Differ
Matthew Yglesias writes "But when it finally did come up for a vote only six northern senators voted against it—Byrd of West Virginia, Hickenlooper of Iowa, Goldwater of Arizona, Mechem of New Mexico, Simpson of Wyoming, and Cotton of New Hampshire."
I decided to object when I read that West Virginia was in the North (next Yglesias will claim that he personally lives in the North even though he lives South of the Mason Dixon line. But I mean two, not one but TWO, Northern states which border on Mexico.
Look I understand that kids these days don't know jack about geography, but that is weird.
Now it is very simple Matt. Without going down into anything really deep, "South" is a direction, "deep South" is a state of mind. posted by Robert
permalink and comments8:53 PM
A tale of 5 Katharines
My mother is named Katharine. As an expression of love of her, my younger daughter is named Katharine. The Italian cousin of my Italian wife is married to an Argentino-Englishwoman named Katharine Graham. Yes just like that other Katharine Graham who showed the world how good a newspaper publisher could be.
As far as I'm concerned, she doesn't have to quit, but it would be nice if she had her name legally changed. posted by Robert
permalink and comments8:38 PM
Sunday, September 13, 2009
Oh Fuck I think I better not visit the God Damned USA until I learn to discipline my fucking tongue.
What the hell is going on ? First people who remained calm while Republicans invaded the wrong country, locked up a US citizen arrested in the USA indefinitely without trial, declared the Presidenta above the law and tortured now are in a total clusterfuck because some representative shouted "you lie" while the President was speaking (and, not that anyone cares, telling the truth).
Now Kim Clisters is awarded a victory in the semifinals of the fucking US open, because Serena Williams said [explitive] twice (from context I'm fucking sure the explitive was "fucking") and mentioned the possibility that she might shove a ball down the line judges [explitive] throat (see since said line judge is a real live identifiable human being, I deleted the fucking explitive].
The only redeeming feature of the whole clusterfuck is the idea of John McEnroe commenting on the events. posted by Robert
permalink and comments4:40 PM
Friday, September 11, 2009
Glad I Didn't Write That
Washington Post Wiff of the day. Seems that Shailagh Murray and Paul Kane haven't been paying attention.
One gathered a group of centrist Democrats who have been opposed to a key plank of the legislation, and the other was with party liberals who have been the loudest proponents of that proposal, known as the "public option," a government-funded insurance program that has served as the biggest fault line in the debate so far.
The proposed public option would be funded by premia paid by consumers who choose the public option. The source of funds would be exactly the same for the public option and for private health insurance. The terrible problem is the amount of funds paid per policy holder would be lower.
The public option would will be publicly managed but privately funded. The idea is that the public sector is more efficient than the private sector and will be able to provide the same service at a lower price to the customers of the public option, who will be the people paying for it, since it will not be puplicly funded.
If this idea were absurd, because the private sector is clearly more efficient, then there wouldn't be such ferocious opposition to the public option.
Of course I don't really think that Shailagh Murray hasn't been paying attention. I think it's just that her brain refuses to accept the fact that everyone seems to agree that private insurance companies can't compete with the public sector. Private sector inefficient ... does not compute. posted by Robert
permalink and comments3:09 AM
Perhaps we’d get better proposals and a more useful final bill if President Obama would channel his Inner Authoritarian a little more, but his gift for seeking consensus seems to be why Obama is President and certain other people are not.
Click the fist link and the post will be comprehensible.
Pearlstein shifts back and forth from politics to policy to dodge counter arguments. He begins by discussing the political problem of vested interests and continues by discussing political strategy -- how could Obama have avoided the current difficulties and how can he get a bill passed "Obama gave up the moral and political high ground that would have made the opponents of reform look "small" by contrast".
By the end of the essay, he discusses "what the president needs from congress" and not how to get it. Basically he proposes that congress disempower itself. This is not realistic. Senators like the fact that each has enormous power. Legislators in general like the fact that special interests are begging for their support.
It is odd to start with a discussion of legislative strategy, then switch to pure fantasy.
Of course the reason is that the initial discussion presents pundits fallacy strategy -- Pearlstein thinks radical reform would be good and so he argues that it would be politically successful by making opponents seem small. He doesn't note that 41 senators who seem tiny plus a scared majority leader can block reform.
Seems to me that reform opponents seem to be totally dishonest and/or insane. I don't see how they could look any worse. So ?
To be specific Pearlstein accuses Obama of kowtowing "to organized labor by backing away from a reasonable cap on the favorable tax treatment of health benefits. When exactly did Obama do that ? He absolutely opposed taxing health benefits during the electoral campaign. Alternative sources of funding were proposed in the House tricommittee deal without detected White House input. I think Pearlstein wants to cap the favorable tax treatment of health benefits, assumes that Obama is responsible for everything that happens under the Sun and blames Obama for the fact that things aren't working out the way Pearlstein wants.
I think the preceding sentence proves my case "From a business community that wants to preserve the employer-based system, he failed to get a commitment that all employers should participate." Oh and he failed to make the Republican party a responsible opposition party and it was too damn hot in August.
Also, like many commentators , Pearlstein asserts that his priority (bending the cost curve) is so important that, without it, health care reform is worthless. Hence we get
the United States... the only rich country to ration medical care on the basis of income. [skip] If reform doesn't "bend the cost curve," ... then it's not worth doing.
Literally this means "it is a fact that the US is the only rich country to ration medical care on the basis of income, but eliminating that aspect of the US health care system is not worth doing unless we get something else too." Does Pearlstein really not care at all about the uninsured ? Does he consider their problem to be trivial and not worth bothering with unless he can get what he wants ? Is there some other possible interpretation of "not worth doing" that I missed ? I think that "not worth doing" was just sloppy hyperbole -- a statement which Pearlstein absolutely doesn't believe and which should have been caught by an editor.
The views on political strategy expressed in the essay are fairly consistent -- volere potere (roughly where there's a will there's a way) that is, lets assume the problem away.
I think there is a better essay screaming to get out of this just rather good essay. It is a discussion of policy without the pretense that congress might reform itself out of power. The problem with that is that the time for such essays was years ago and they were written then (by Pearlstein among others I'm sure). posted by Robert
permalink and comments2:38 AM
Friday, September 04, 2009
I get e-mails
I quite enjoy the writings, but the top of the page has this ad:
At least I sure hope he's being played. Klein is in contact with the White House. Unsurprisingly, he reports that there is a bitter debate over health care reform inside the Obama administration. There are clear hints of this including a leak to politico by someone eager to triangulate the lefty blogs.
However, I think that someone has managed to convince Klein that the right wing if the Obama administration is way waaaaay to the right of any place sane. The aim would be to threaten us with insanity and make us relieved when the Obama administration just moves as far right as anyone thought possible yesterday.
The second camp is not universal at all. This camp believes the bill needs to be scaled back sharply in order to ensure passage. Covering 20 million people isn't as good as covering 40 million people, but it's a whole lot better than letting the bill fall apart and covering no one at all. It's also a success of some sort, and it gives you something to build on. What that sacrifices in terms of structure it gains in terms of political appeal. This camp is largely headed by members of the political team.
This would be insane. As Klein mentions further up in his post the health insurance companies want universality. In fact they demand it. Universality was the condition on their support for health care reform. The first key step in Obama's humpble strategy (based on the sound principle of look at what Ira Magaziner did and do the opposite) was letting Baucus add universality. Removing it would be a huge slap in the face of Baucus, Ignani (head health insurance industry lobbyist) the Senate HELP committee and the three house committees and the people of the US who consistently support universality in polls.
It would be crazy.
The only possible explanation is that they read this post by me and are sending a terrible threat to the health care industry. Get the bill passed or we will bankrupt you.
Now if this is 11 dimensional chess it is brilliant (well except a bit transparent). Leaking a truly awful, terrible very bad idea might make some lefties, insurance company executives and all relevant chairmen intensely relieved when Obama doesn't endorse it publicly.
I'm sure the political team also wanted to include a killing puppies plank in their proposal, but Obama told them that he's afraid to drive the crazies crazier. posted by Robert
permalink and comments2:42 AM
Good thing that Klein admitted that he doesn't read Greenwald "religiously." All I can say is that he was warned. Greenwald made it perfectly clear on his blog which is available to the public including Klein, that all communications with Greenwald are on the record unless he agrees that they are off the record.
In response to media criticism I wrote, a well-known journalist emailed me out of the blue, unsolicited, with very petulant, whiny objections to what I had written. At the top of his email, he wrote "OFF THE RECORD," and he did the same with a subsequent exchange. I had never communicated with him before and never agreed to any such arrangement. But that's a common practice among journalists and many political figures; they think that they can unilaterally slap an "off the record" label on whatever they say and expect that it will be honored.
I ended up not publishing that exchange solely because the probative value was minimal
If Klein genuinely doesn't understand the difference between quoting an e-mail addressed to oneself and tapping a phone then his level of understanding of FISA is even lower than I imagined. Also he is an idiot.
A letter sent to Greenwald belongs to Greenwald and he is perfectly free to post quotes if he wants. He has no obligation to warn his correspondents in advance that all communications will be considered to be on the record. Nonetheless he did make exactly that warning. Now Klein thinks Greenwald is "dishonorable" and a "stone hypocrite" because Greenwald actually did what he had previously publicly written that he felt free to do.
When I read Klein's post, I vaguely recalled and immediately looked for the Greenwald post which I am stone hypocritical enough to quote without Greenwald's permissoin. It was second hit of first google search and I did not need to click the first hit, because the identifying phrase was visible in the google results (you do know what google is Joe don't you ?).
Reading Greenwald's post, I couldn't help but wonder if the "well-known journalist" "with very petulant, whiny objections" might by any chance be named Joe Klein. Probably not. I'm sure there are lots of petulant whiny journalists, but I just can't get the thought out of my mind.
update: Greenwald's position is perfectly consistent. He feels that communications from public figures including a "well-known journalist" are on the record and may be quoted unless there is an explicit prior agreement that they are off the record. He also feels that it is wrong, not to mention illegal, to wiretap without warrants.
Klein's views are less coherent. He feels it is OK to wiretap without warrants and that it is wrong for the intended recipient to quote an e-mail without permission. How does he reconcile these views ? I think the true explanation of his statements is that he finds if fine to do things to people who aren't Joe Klein and unacceptable to do them to Joe Klein. I'm sure that he will be asked if this is the cause of his statements and that he will try to come up with another explanation. I can't imagine what he'll come up with, and I can't wait to read it.