Robert's Stochastic thoughts: 3/1/11

Wednesday, March 30, 2011

Update:

Oh my this post is very rude. I will delete some of the more extreme parts (with indication). In general, I wish I hadn't written it (plus comments at blogs which I can't delete). I will type new text using italics, because I don't want to type update dozens of times.

Karl Smith seems not to know the referent of the acronym GDP and to feel free to redefine "productivity" at his whim.

~~Economics can not survive economists who redefine terms at will.~~
Wow what was I on yesterday ? (answer nicotine withdrawal). It's not like I think economics is in such great health to begin with.

He wrote

"The only way to get GDP wrong is either to miscount the number of goods and services sold in the US or to misestimate the price index of final goods – not intermediate goods."

And

I don't agree with one of your claims at all "The only way to get GDP wrong is either to miscount the number of goods and services sold in the US or to misestimate the price index of final goods – not intermediate goods." This can't be true, since not all intermediate goods are domestically produced.

The BEA starts with nominal quantities. To calculate real value added by sector, in manufacturing it double deflates. I am going to assume it hasn't changed since I last checked, my information is out of date, but I am sure that the range of sectors for which it uses double deflation has increased or remained the same, since double deflation is the method it considers best.

I tried to look this up yesterday. I think they double deflate everything now, except for flahs estimates. I might be wrong. I am not going back to BEA methodological notes today (the thought makes me gag)

it calculates nominal final production and nominal materials inputs. It divides nominal final production by a price index and it divides materials inputs by a price index. then it subtracts the second quotient from the first. Then it adds the resulting numbers up over sectors.

An error in a materials price index implies incorrectly measured GPO and incorrectly measured GDP. If one person at BEA were responsible for a sector and typed in the wrong number for materials prices for that sector, then reported GDP would be incorrect.

I can't understand how you can imagine that only final production deflators affect calculated GDP. Calculated GDP is, in principle, a funcition of nominal quantities by sector, final product deflators, and materials deflators. In sectors other than manufacturing the BEA has in the past made absurd assumptions in order to come up with value added numbers without double deflating. For some sectors they have made assumptions about labor productivity so, in fact, and directly contrary to what you said, GDP is calculated from assumptions about labor productivity. The preceding two statements are true, but irrelevant, if I understand correctly that this is all in the past. They do help explain my mistrust of the BEA, but I think they've cleaned up their act.
Please check my note in the Journal of Polit
ical Economy vol 99 no 6 pp 1315-1321 in which I explaining how BEA measured GDP is systematically wrong for references to explanations of how they got the numbers http://www.jstor.org/pss/2937732 (I did admit that my information was out of date ).

Note that the parenthetical comment isn't in italics. I wrote that yesterday when in a huff but not freaked out enough to assume that 20 year old information is current. I now don't think there is any point looking up that old note (which is hardly ever cited) because, as far as I know, the BEA has improved it's approach.
But their best numbers are created by double deflation and are to incorrect if they use the wrong materials price index. This is clearly explained by the BEA.

This may be a shock, but it isn't unusual at all for an economist to have no idea how the numbers we use (such as GDP) are calculated. It is shocking that an economist dismisses a detailed argument about the numbers which demonstrates unusual knowledge on the basis of the assumption that the method is obvious and there is no need to look it up.

Oh my I left all of the substance of the argument out of my post yesterday. My comment at modelled behavior explained that a key problem with materials prices is imported and exported materials. Imported materials are not domestic products and overestimating the increase in their prices implies underestimating the change in the quantity and overestimating production and productivity growth. Also net inventory investment is part of GDP including inventories of materials. On average inventory investment is a tiny share of GDP (and most inventories are of retailers of what we generally considered finished goods even though they are really some of the materials used by retailers). However net inventory investment is huge and negative in recessions and huge and positive early in recoveries. This means that getting the price of inventories wrong implies large errors in recent calculations.

Finally, and my main problem with the claim, the correct price index for intermediate goods sold by sector A to sector B is typically different from the correct index for goods sold by sector A to say consumers or to the government or to firms which are investing. As far as I know, the BEA just assumes that all of these indices are the same. This is an approximation which makes the numbers they generate different from the theoretical quantity true GDP. I try an example, say sector A makes equal amounts A1 sold to consumers and A2 sold to sector B which makes B sold to consuers. I think the BEA calculates (price A1 + price A2)/2. If the price of A1 goes up and the price of A2 goes down, then the BEA will report a spurious increase in GDP. Here the point (if any) is that "the price of final goods"
isn't determined from producer price indices unless the price of materials is known, so this point (if worth anything) is an argument that Smith's claim doesn't refute Mandel and not that it is false as written.

But that is far from the worse thing that Smith did. He decided that he can redefine productivity as he pleases. To him, evidently, it means "something good." He wrote

To the extent Apple can squeeze it suppliers while producing really high valued products this seems like the essence of productivity growth. We have both lower input costs and higher value for the consumer.

This seems to me to be a rejection of any thought that economics might be a semi serious intellectual effort in which technical terms are used with agreed meanings. I think that economists should not tolerate such an abuse of our language. Now I am not discussing violence or revocation of tenure or anything, but I don't think that any economist shouls refer to Karl Smith as an economist until he has abjured his offence against economics. Wow I was totally off my nut yesterday.

I can explain my extreme distress. The word which bothered me was "squeeze." To me, to squeeze suppliers is to drive a hard bargain and pay a low price. In increase in such squeezing is a change in a price. A change in a price with no change in quantities is not a change in production or productivity according to the standard definition. I wouldn't object to "if Apple invents a new product which is valuable and made of cheap materials then productivity has increased." My objection is entirely based on my interpretation of "squeeze". Now this is not an economists term of art. If Smith uses "productivity" the way I use it and "sqeeze" with a different meaning, then we can communicate just by avoiding slang.

If the BEA over under estimates the increase in the price of imported intermediate goods, then it underestimates the growth of GDP.

Of course it is very likely that a fall in price of goods exported from China to the USA is made possible by an increase in productivity *in China* (it could also be reduced profits for the Chinese manufacturer or reduced wages for the workers or something). But increased productivity in China has nothing to do with US productivity or GDP.

He who knows and knows that he knows is a teache. Learn from him.
He who knows not and knows that he knows not is a student. Teach him.
He who knows not and knows not that he knows not is a menace. Avoid him.

The above three lines still seem relevant, but they don't seem to me to refer to Smith.

Sunday, March 27, 2011

Andy Harless pulled back from comments

quotes of my old post in quotes. His comments in plain text. My replies in italics.

"QE2...had no measurable effect on anything"

Yes, because it was just coincidence that every single economic indicator turned around and started giving positive surprises instead of negative ones almost the very day QE2 was announced.

what very day was QE2 announced ? You will note that Janet Yellen said that there was almost no sign of any effect on the day of the official announcement because it was anticipated. I believe that QE2 can only affect the economy via real interest rates (either lower nominal rates or higher expected inflation). So, since real interest rates went up when it was officially announced in November and are now at the same level as they were in August when Bernanke first publicly mentioned QE2, I believe it has had no measurable effect on anythying
http://research.stlouisfed.org/fred2/graph/?graph_id=37641&category_id=0
.

My prior is that the effect isn't exactly zero, but after looking at the data, I can't believe it is large. Your claim about indicators should be specific. In particular tell me who was surprised. I certainly haven't been plesantly surprised in the past 14 months

"a 'more expansionary' monetary policy...is not feasible....it would require the ability to precommit to making inflation high when unemployment is low and there is no way anyone can convince anyone that he will do that."

Nonsense. Bernanke has already convinced many people (admittedly almost all lunatics) that he will do that. On the margin, the easier his policy now, the more near-lunatics will be convinced that he will let the inflation rate rise. There is a wide range of opinions about the likely future course of monetary policy, and there are plenty of things the Fed can do to influence the mean of that distribution. In this respect, recent Fedspeak constitutes a drastic tightening of monetary policy at a time when Yglesias and Drum rightly suggest that a drastic loosening would be in order.

hacks not lunatics. Republicans claim they believe that, but they don't put their money where there mouths' are. Forecast inflation can be read off by comparing TIPS and regular treasuries. Bernanke hasn't convinced anyone that there is going to be higher than declared target (2%) inflation. The green line in the FRED graph is the implied average expected inflation over the next 7 years from Treasury notes and TIPS. People say all sorts of things, but no one with serious money is betting on inflation

"current Fed policy is...extremely radically expansionary..."

Until one agrees on a measure of policy ease, this question is completely subjective.

Long long ago in 2007 people agreed on measures of policy ease. They include the Federal funds rate (can't be negative and is now zero or pedal to the metal) and open market operations. The Fed's liabilities are triple what they were then. The fact that some people say that monetary policy is not radically expansionary just shows that they have decided to redefine terms with well established meanings. Imagine going back to distant distant 2006 say. If you went back in time and told an economist, any economist that $500,000,000,000 in open market operations aren't radically expansionary, you would convince that economist that you were insane.

Certainly if you fit a regression of the federal funds rate to the core inflation rate and the unemployment rate, you will find that recent residuals have been strongly positive. Perhaps this was unavoidable because of the zero constraint, but given your contention that QE is ineffective, the amount of QE necessary to be consistent with past policy (i.e. to simulate the impact of the negative federal funds rate predicted by the regression) must be much larger than what we have actually seen. By this criterion, current Fed policy is extremely radically contractionary.

You just said that the unemployment rate is a measure of Fed policy. You declare your faith that monetary policy is always effective *and* that it is the only thing that affects the economy. Since the entire debate is over how effective monetary policy is right now, your assuming that you are right and I am wrong in your redefinition of a standard term is not responsible debate.

Or if you prefer to use quantities rather than interest rates as your basic criterion, we can look at money. To be properly interpreted, measures of the money stock have to be adjusted for changes in velocity. Therefore, ultimately, the only proper quantitative measures of monetary ease are measures of nominal spending. Of course all such measures plummeted in early 2009 and have not since recovered (indeed, they have diverged further from the earlier trend). So in terms of velocity-adjusted monetary aggregates, monetary policy has again been extremely radically contractionary.

What ? Why is velocity part of a measure of monetary policy. The money supply expanded enormously. That's what the Fed can do. When you say that a change in velocity is a change in Fed policy, you assume again that the Fed must always have complete control over the economy. You are attempting to prove your claim by redefinining terms such that it is tautological.

If "the standards of all central bankers post Rudolf Havenstein" indicate otherwise, then there is a problem with those standards, and perhaps we need to appoint central bankers who are better at measuring the ease of monetary policy.

5:57 PM

Andy Harless said...
"Economists tend to agree that monetary policy can't affect the unemployment rate averaged over a long period of time"

Umm...greasing the wheels effects? What are Tobin, Akerlof, etc., chopped liver? Not to mention the recent PLOG evidence from the IMF, which indicates that, as an empirical matter, large output gaps can persist for long periods of time (and person-years of unemployment thus accumulate) when inflation rates are low.

Akerloff is a founder of New Keynesian economics in which the effects of monetary policy are short lived. The statement about what economists generally think is absolutely conventional. Note for example Krugman
http://www.pkarchive.org/economy/042203Follow2.html

OK Akerlof. I googled "Akerlof" "long run neutrality of money" I got a pdf

The claim is the absolutely standard way of declaring that one is a new Keynesian. For example see Brad DeLong quoted by Markos Moulitsas
http://www.dailykos.com/story/2004/04/22/25222/-Brad-DeLong-versus-Robert-Reich.

You will note that I don't agree with Akerlof, Krugman, DeLong and Mankiw on this one.Moreover, even if we pretend that the actual long run Phillips curve is the vertical one about which they teach in Ec 10, most evidence (as well as the fact that the unemployment rate is bounded below at zero) suggests that the short run Phillips curve is convex. Over time, a monetary policy that misses the NAIRU will result in a net employment sacrifice even if the inflation rate at the end of the time period is the same as at the beginning.

Note again that I am not a New Keynesian and I don't agree with Akerlof, Krugman, DeLong and Mankiw on this one. For convenience models are used in which the short run Phillips curve is linear or linear approximations are used. I agree with you that this is a silly mistake. Non quadratic loss functions imply that stabilization policy can affect long run growth. However, most economists consider this negligible. This is simply a fact. Like you, I don't agree with most economists. Actually the non linearities aren't what convinces me. I believe in Hysteresis. I also am sometimes convinced that endogenous growth models have something to do with reality and the long run short run dichotomy breaks down (there is no convergence to what might have been in such models). I just said that almost all economists divide macro into long run and short run and claim that monetary policy affects short run (and so can affect welfare but not growth). Now they don't literally believe this -- it is a standard assumed because everyone assumes it thing. But it's just the way the profession is. I think I made it clear in my most that I don't agree.

Anyhow, it isn't clear that 30 years is really "a long period of time" for this purpose. The inflation rate has been trending downward that whole time -- which is to say, we have been mostly on right side of the long-run Phillips curve. I met a lot of people in 1981, and we are not all dead yet.

Well nothing is clear if you want to contest everything. It is very clear that 30 years is treated as a long period of time for that purpose. This widespread belief is used to identify time series models. The conventional meaning of long run and short run (as used by economists) are clear enough that no one can honestly claim that 30 years is not the long run to a conventional salt water New Keynesian macroeconomist. The models are simulated numerically. The time unit is defined when justifying parameters. New Keynesian models give an impulse response which fades to negligible in much much much less than 30 years. You must know this.

"Monetary policy...is currently perceived to be about as loose as it can possibly be"

And yet there are trillions upon trillions of dollars worth of debt instruments that the Fed is legally allowed to hold and that are not currently in the Fed's portfolio. How is it that those instruments are somehow invisible?

Here I concede that what I wrote was, at least, unclear. I really honestly don't consider anything that the Fed is allowed to do to be monetary policy. Bailing out big banks was Fed policy, but not monetary policy. There is more to central banking that monetary policy. To me we are at the limit of monetary policy, because the Fed funds rate is essentially zero. The Fed can still intervene in financial markets, but it would affect the eocnomy by affecting say Treasury bonds outstanding or AIG debt in the hands of private agents or something. It's liabilities are not at the moment anything special -- they are treated as perfect substitutes for T-bills.

I generally oppose voting for third party candidates (especially those named Nader) as I consider such votes wasted. But every rule can has exceptions

http://www.murphycanhascongress.com/

It's to late to stop it. It's on facebook and twitter. Oh Christ with 115 followers You could be number 116 -- nah too late ha ha.

Ezra Klein wonders why Lawrence Kudlow can't understand why Obama might sincerely disagree with him.

I'm not sure my comment appeared there.

This isn't exactly your topic, but this is a very strange time to discuss a corporate tax holiday. Large US corporations are flush with cash and don't know what to do with it. They aren't investing because they have spare capacity.
www.angrybearblog.com/2011/03/its-not-structural-unemployment-its.html

The effect of repatriation of profits on investment would be unusually low if it happened about now -- the fraction going to share buybacks and dividencs would be high. If anything we want them to keep the profits overseash now and bring them back later, when their investment is constrained by the cost of capital (as it usally is).

Of course this just means that, for Republicans, it is always time to cut taxes on corporations, and since all they have is a hammer all problems look like nails and well we know all of that.

Actually I have just come up with an on topic question. You find it odd that Kudlow can't seem to understand why Obama might disagree with him even if Obama doesn't want to hurt US capitalism. Ballance* says that you should claim you understand the logic of Republicans policy arguments. I say you are very very smart, but you can't think of a rationale. I repeat my admiration for you, but I don't think it is humanly possible. Heeeyyyy maybe the reason they think Obama is trying to destroy US capitalism is that they are (takes one to know one). That's crazy but you have to admit that it sure seems to fit the facts.

*that would be then former congressman Jack Ballance (D of course) who was listed in this paper on a scorecard of corruption to achieve a balanced result by breaking the rules laid out in that very article.

Saturday, March 26, 2011

Prof. Leila Hudson U Arizona wrote what seems to me to be an excellent article on the anti-Gadaffi Coalition of eager vs not so eager

I don't know if she knows the risk of unknown unknowns, but she sure writes well. For example, she is confident that the Turkish military is currently effectively under civilian control. The article isn't ballanced. It is clear that Prof. Hudson wants Gadaffi out of power. But I don't remember the last time one of the usual background analysis pieces impressed me so much.

I have been compulsively surfing english.aljazeera.net (even to the level of correctly typing aljazeera on the first try) to find out what is going on in Arab countries. The original reason was that they care a lot and had boots (OK shoes) on the ground at Tahrir square.

The University of Arizona is far from Libya, so I have to reassess the strengths and other strengths of Al Jazeera. How did this happen ? At a time when formally good news sources (cough CNN cough) have turned dumb, how is al Jazeera possible?

Note to self. If Tbogg ever leaves a comment here, do not delete it.

The web is a rude place and it is common to call people total idiots.

This is an insult, not only to those people, but to the ~~racists~~ idiots themselves who have put in the exhausting effort it takes to claim that not publishing someone on the front page is censoring him without collapsing in laughter and pissing themselves*.

I have no idea who this Lee Stranahan is, but I want to thank him for indirectly making my day.

* I should not make casual claims of fact from ignorance. I admit, I have no proof that the treatment of Breitbart did not cause Lee Stranahan to piss himself. He does seem quite alarmed.

Friday, March 25, 2011

Today's rant about Matthew Yglesias and Ben Bernanke is indirect.

Kevin Drum decided to quote Matthew Yglesias, so I left my usual tirade in his comments section.

Here it is

I tend to freak out when Matt Yglesias writes that stuff. He is unwilling to distinguish Greenspan and Bernanke. He assumes that all Republicans are just the same. This is definitely his methodology and it is utterly insane. Greenspan is an acolyte of Ayn Rand (part of her tiny inner circle) Bernanke is a brilliant moderate. The unquestioned assumptino that they are just the same is insane nonsense.

Much much worse, Yglesias simply assumes that a "more expansionary" monetary policy would have lead to lower unemployment. Now he is debating Paul Krugman who claims that such a policy is not feasible (it would require the ability to precommit to making inflation high when unemployment is low and there is no way anyone can convince anyone that he will do that).

In fact during the long period in which Yglesias has been criticizing Bernanke, the Fed instituted QE2. This is not a huge intervention compared to other interventions by the Fed under Bernanke, but it is a much huger expansion of high powered money than any ever under any previous chairman. It had no measurable effect on anything.

Yglesias just refuses to consider the possibility that monetary policy might be less effective when the Federal funds rate is essentially zero than when it is over 10%. He doesn't argue that there is something more which would have worked (more than $ 500,000,000,000 created by fiat as no one ever had done before Bernanke). He just assumes that he understands monetary policy better than Paul Krugman. Now I am no expert, but I can tell that Yglesias is much less an expert than I am. His belief that current Fed policy is not extremely radically expansionary by the standards of all central bankers post Rudolf Havenstein shows that.

I notice two very different assertions : That since the 70s the Fed has placed more emphasis on low inflation than low unemployment and that since 1987 the chairman of the Fed has been a Republican. Notice the difference. Just as Bernanke has been the most radical stimulator in the Fed ever, Paul Volker was the most ruthless inflation fighter. The shift from aiming for full employment to ignoring unemployment and considering only inflation occured on the day when registered Republican G. William Miller was replaced by Volker. Inflation phobia does not correlate with party affiliation among economists. Fed policy now is of different importance than Fed policy in 2008-9 (when Bernanke and Paulson saved the world economy and it was very very critical) and from normal times when the Fed isn't pedal to the metal.

I generally admire Yglesias, but on this topic he reminds me of a supply sider. They said tax cuts would cause wonderful things. They got the tax cuts and nothing wonderful happened. This didn't boether them at all. Yglesias calls for expansionary monetary policy. There was more expansion that ever under any fed chair before Bernanke. Nothing wonderful happened. Yglesias is not disturbed in the slightest.

What could possibly convince you guys ? I ask for information. I just can't see how your statements about montary policy now can possibly be influenced by evidence given your apparent indifference to the data.

Look at real interest rates. When did QE2 occur ? 500,000,000,000 in fiat money is a LOT. Total liabilities of the Fed were only 800,000,000,000 when Bernanke took over. So far he has tripled them. You conclude that he is a class enemy who only cares about inflation and doesn't care about unemployment.

End of comment over there.

Now I realize one of the reasons that the Drum/Yglesias view seems so odd to me. Economists tend to agree that monetary policy can't affect the unemployment rate averaged over a long period of time. There are new classicals who now assert that monetary policy has no effect and new Keynesians who think it can affect the spread of unemployment around its long run average. The belief that there isn't a long run unemployment inflation tradeoff is very very strong. This is what would be needed for the Drum/Yglesias hypothesis to be valid.

Also when Greenspan was Fed chairman we had very low unemployment and very rapid employment growth for a while. It was widely argued that inflation was about to increase so the Fed should tighten. Grennspan didn't tighten. He was wetter, more expansionary and better for workers than the average registered democrat macroeconomist.

The story of progressives passively accepting tight monetary policy just doesn't fit the facts. Monetary policy was perceived to be very loose by everyone who had an informed opinion on the subject (as it is currently perceived to be about as loose as it can possibly be).

Totally aside from the claims about Bernanke (which seem totally insane to me) the claims about Greenspan don't fit the facts as perceived by anyone who was paying attention at the time.

I think very very highly of both Drum and of Yglesias and I am totally befuddled.

Wednesday, March 23, 2011

Economics and Biology

Mike the Mad Biologist explains how they differ. I can't resist commenting. The mad biologists post is brilliant and I entirely agree with it. So much so that I won't bother excerpting and just ask you to click this link.

I comment.

I am an economist and an ex biologist (BA and began PhD in Biology). I do think that Roberts has a point -- economists have to get over physics envy. It is a plain fact that the only natural science which comes to most econmists minds is physics (this is my experience basically without exception).

This means that economists identify scientifit thought with thought involving math. I'm not sure if Roberts knows enough to understand this, but he chose examples from fields of biology in which math is used. In contrast much work in molecular and cellular biology isn't mathematical at all -- the models are drawings not equations. Some economists just don't grasp how rigorous can be separate from mathematical.

Very importantly economic theory has status in the profession totally aside from its relationship with data. It is taught as math and appreciated as math. The question of whether it corresponds to reality is considered by some to be naive. "Theory" is identified with "models" and models are false by definition. A prediction is derived from a hypothesis of interest and some auxiliary hypotheses. It is tested. It is rejected by the data. This has no effect on anything. It is concluded either that the problem is with the auxiliary hypotheses (which are still regularly assumed when developing models including models used to guide policy). Or econmists just note that the alleged hypothesis of interest isn't really a hypothesis since we all were always sure it is false and so what ?

As far I as can recall, that hasn't happened in biology in centuries (that is since it was based on the four humors).

Now here I can see some good coming from Roberts's analogy. The theory which is used in spite of total empirical failure is considered necessary for rigor (meaning mathematical not scientific). The invalid reasoning is that looks sort of like physics, so economics has to be like that to be a science.

Biologists have achieved great things empirically step by step (with the occasional BS speculation about evolution, because that gives the work theoretical dignity). There are economists doing the same, with empirical work using assumptions (sometimes that an experiment is related to a real world phenomenon sometimes that a real world pheonomenon is a natural experiment) which seem obviously true to non economists (and economists including me). Their status in the profession is rapidly rising. I mean economics is getting to be a lot more like biology than it was 25 years ago. It's beginning to have the feature that you can't get published for being cleaver and you have to actually work (yes I am thinking of moving on to some less scientific field).

The stuff below is really boring.

Roberts also is very wrong as you note. Here I am ignorant too (I was a microbiologist not an ecologist or evolutionary biologist -- I used no math at work which is part of why I couldn't stand it (biological research that is-- I like math)). Also I am just agreeing with length with what you wrote.

Roberts clearly doesn't know much about research in ecology. You bet that "Darwinism" is a warning sign. He doesn't have a clue about what one can predict using the theory of evolution by natural selection, how much has been predicted, the confrontation of those predictions and data or just how utterly nonsensical to compare evolutionary biology to economics. Here a large part of the problem is that the predictions concern trivial things (hence analogous not homologous). Enough to prove that Darwin was on to something, but who cares about the sequences of introns.

Also, Gould was a rhetorical genius. The key success of punctuated equilibrium theorists was setting up straw men. They really were debating Darwin (Huxley was on their side -- I learned this from one of Gould's books). Economics hasn't failed in the sense that something written over 100 years ago is no longer believed. It has failed in the sense that things which are obviously inconsistent with the data are being published.

pulled back from comments

"Comments:
"Some economists just don't grasp how rigorous can be separate from mathematical."

Could you please expand on this?"

OK. First I explain how rigorous can be separate from mathematical.

I guess I start first with biology. I decided not to drop names in the original post, but I note that Salvador Luria was not embarrassed to say that he had forgotten all about math "except for the simplest things." He was a Nobel Laureate and MIT institute professor. Robert Weinberg (one of the leaders of one of the three or so teams which simultaneusly discovered what makes cancerous cells cancerous (somatic mutations)) did a bit of algebra (or took a derivative) in class saying "exhausting my mathematical knowledge." Look in "Science" or "Nature" you will find many articles without one equation. A model is presented. It is a drawing.

Molecular biology includes counting and measuring so it is quantitative. But it doesn't all include any sophisticated math at all. Something like RNA polymerase transcribes the lactose operon except when a repressor protein is stuck to the operator. The repressor is inactivated when lactose binds to it. There is no equation there. That is the model. It has been tested. One can doubt that model just as one can suspect that the earth is really flat. And no more. And no math.

Consider, for another example, a court of law. A rigorous examination of the evidence includes rules that no claims of fact can be made by people not under oath (unless they refer to claims made earlier by people not under oath) that witnesses are cross examined, that the claim to recognise the defendant must be based on picking him or her out of a lineup (this is not really rigorous -- the rigorous approach is to show one person after another each time asking "is this the one ?" This gives lower false positives and the same number of correct identifications). All of this sounds to me to be rigor. But none of it involves math.

OK so what about economists ? Well you wouldn't necessarily be surprised if a very cloistered mathematician defined rigor as clearly stating all definitions, axioms and other givens then making only statements which are logically implied by those definitions, axioms and givens. That is "mathematical rigor" and a mathemeticisn might be excused for not knowing that the word "rigor" is used with a quite different meaning -- one in which a photograph can be introduced rigorously in evidence even though it is not an axiom or implied by axioms.

Many economists absolutely use rigor to mean mathematical rigor. They consider the statement of givens and definitions followed by proofs of theorems rigorous economics. I would say that it is rigorous mathematics which might or might not be up to levels expected in math departments (sometimes it is, but the person doing the proving is often as not employed by a math department) but it isn't rigorous social science. In the sciences, rigor is a statement about basing claims on evidence, not about clearly stating assumptions.

Now when the mathematicians who think they are economists are asked about real world relevance, many make some sort of claim of relevance. But when arguing for real world relevance, rigor of any kind is not required. The arguments can be total BS, presented as math like reasoning but such that counterexamples can be obtained. Others say that that's not their problem.

Tuesday, March 22, 2011

Department of "Huh ?" meets obligatory daily link to Matt Yglesias (who is well over half my age so there)

"Leon Wieseltier, plumping for war per usual, asks: 'Did our inaction in Rwanda reduce the frequency of malaria in Africa?'"

I took a triple take at the Weiseltier quote, because I think that the answer is obviously yes. Malaria's main enemy is our sense of guilt. Failure to help Rwanda made us feel guilty. The US massively increased spending fighting infectious diseases in Africa not all that long after the Rwandan genocide. I never considered the possibility that it might be a coincidence. So also did Bill & Melinda Gates and Warren Buffet. Not to mention Bill Clinton who has been working on helping Africa and not, say, mothers who used to get AFDC.

OK the Justice department played an important role first by making Bill Gates eager to do good sooner rather than later and second by maybe convincing him that Microsoft the huge firm being watched by the anti-trust division would be better off if he spent more time trying to beat AIDS Tuberculosis and Malaria and less time trying to beat Google and Apple.

The point is that Americans feeling good about ourselves for bombing Qadaffi loyalists reduces the already low support for foreign humanitarian aid. It's not the money. We really have plenty of money in the USA, even if it doesn't seem so. It's the sense of responsibility towards foreigners, of which we have very very little and none at all to spare.

Sunday, March 20, 2011

Look Matt Yglesias is *not* half my age, he is almost 60% as old as I am, so the fact that most of my random thoughts are responses to his posts is ... really pathetic. But facts are facts.

He reviewed a book -- Getting Better by Charles Kenny also on Kindle-- that notes that things have gotten better this century even in Africa, at least compared to the other 20,000 centuries of human existence in Africa.

He notes a semi-relevant aside

One section close to my heart (though somewhat distant from the core point of the argument) wonders why it is that mustering some optimism about the trajectory of human history is considered a “right-wing” view when “a century of unprecedented global improvement in quality of life was also one of unprecedented growth in the size of government.”

So why is optimism considered right wing ? I have three explanations

1) "It's a terrible problem and it's getting better" just doesn't work psychologically. People don't feel the difference between "bad" and "getting worse," so advocates for doing something about a problem feel the need to claim it is as least as bad as it ever was.

Thiis caused the most outspoken advocates for racial equality to deny that the 64 civil rights act had an effect on Black/White wage differentials and agreed on that point with the Chicago type economists who claimed that, like all regulation, the act had not had the intended effect (so I was taught by Richard Freeman who was the principal author whose work was cited by those who noted the overwhelming evidence of a dramatic effect) . It is a crazy rhetorical strategy. In fact, one of hte reasons people in the USA hate foreign aid is that they are sure it hasn't worked (MY's last and very key point).

2) The world economy is basically capitalist with state intervention on the side. One would be surprised if it turned out that Marx were still alive (he'd be getting on and who was that guy with a beard they buried in London). One would not be surprised if he were inclined to deny the evidence that things are getting better. His policy proposal (in case the kids here never heard of it, it was public ownership of the means of production) is not important to the non-right anymore. But habits of special pleading die hard and the idea that the current system is basically right wing (since most factories are privately owned) influences people who haven't thought of eliminating capitalism in decades *and* their children.

3) The environment. There is an insanely right wing and also optimistic view of global warming, that it isn't happening, that if it were happening it wouldn't be due to human activity, that if it were happening and were due to human activity it would be good for Montana, and that there's nothing we can do about the human activities causing global warming. This gives optimism a bad name among the non Tea partying set.

Now the serious issue. The fact that "even in the parts of Africa where people haven’t gotten richer, quality of life has improved. Child mortality rates have plummeted, education is more widespread, political systems are freer, there’s less violence, diseases have been cured, etc." should "bolster morale about the fact that foreign aid has been successful at promoting public health in the past and can continue to make even more progress in the future."

Since the stingy US foreign aid program is under assault again, that seems to me to be a very pressing issue. But I think another book would be useful. The question is whether there are foreign aid programs systematically associated with those improvements in health ? That requires looking closer at when and where such programs are large. George Bush's good deed, Pepfar, is also a natural experiment. AID has a geographic distribution based on colonial history. It is possible to make a convincing case that up until about 10 years ago aid in general historically had been partially correlated with government consumption and not with private investment (as Peter Boone). This helps explain why it was not significantly partially correlated with rapid growth.

It is very true that government spending on health is partially correlated with good health (you can ask my student Tilman Tacke (honest search result -- he's the one to the right) but he's out of your price range since he works for McKinsey like all of my students named Tilman). So ? Shouldn't be that hard.

It won't change public opinion. If people in the US are stubbornly convinced that foreign aid is 26% of the Federal budget, they won't be swayed by mere facts. But policy elites might at least feel guilty about surrendering to public ignorance and/or indifference to the interests of foreigners.

I won't violate the NY Times copywrite if they tear down their paywall.

I will unfairly use alll of Paul Krugman's latest post and dare them to sue me.

Disagreement Among Economists
Henry Farrell has an interesting “model” — as he says, more of a sketch than a fully-worked-out thesis, but provocative all the same — of disagreement among economists. The core of it is that when there are powerful political interests that want certain economic conclusions, and which believe that voters will be influenced by what economists say, economists who are politically aligned with one faction or another get suborned into providing analysis that backs that position.

It’s a good story, which I’m sure contains a good deal of truth. So I’ve been trying to think about how it applies to the debate over macroeconomic policy.

What makes the story a bit tricky, I’d say, is that until 2008 there was a slightly peculiar situation in macroeconomic theory and practice — namely, there was sharp division over theory, but broad consensus over practice.

On the theoretical side, there was a huge gulf between economists who insisted that business cycles reflected technological shocks, and denied any role for demand-side policies — so-called “freshwater” economists, a term Bob Hall coined reflecting the fact that they tended to dominate departments in the nation’s interior — and those who continued to hold a more or less updated Keynesian view of how the world worked — “saltwater”, because they tended to be in coastal schools.

On the practical side, however, everyone was more or less happy with the job the Fed was doing, and was prepared to leave stabilization of the economy up to Uncle Alan.

There was a clear but imperfect correlation between politics and theoretical views here. I’d venture to say that almost all freshwater economists are conservative, while most saltwater economists are liberal. But there are a significant number of economists who combine conservative political orientation with a saltwater view of the way the economy works: Martin Feldstein, Greg Mankiw, John Taylor are the obvious examples.

What Henry Farrell’s model would suggest is that faced with a conflict between their economic views and their political orientation — which would happen if a liberal Democratic administration was trying to use saltwater-type theory to support its policies — many of these conservative saltwater types would find ways to reject the implications of their own previous analysis.

And my sense is that this is indeed what happened. Brad DeLong often suggests that if a President McCain had proposed the very same fiscal policies President Obama did, in fact, propose, he would have received support from many of the Republican economists who found all sorts of reasons to find fault with the Obama plan. And I’d add that quantitative easing has been received with far more skepticism than it would have if Bernanke were operating under a GOP administration.

All in all, this has not been the profession’s finest hour …

I disagree entirely with Farrell (I commented over there). I think that economists still hide how fundamental our disagreements are. I think that economists only agree on claims which are policy relevant in the cases in which we happen to agree on the policy.

I comment on Krugman.

I agree with the first part of this post and disagree with the second. First you say that there are extremely profound disagreements among macroeconomists of which non specialists are completely unaware. That is the opposite of Farrell's hypothesis. And don't even get me started on game theorists and general equilbrium theorists.

Then you speculate that some economists would say different things if McCain were president. This is a radical shift from the assertions in the first part of the post. First I note that petition against TARP which circulated when Bush was President. Second I note that right wing Fresh water economists (except for Casey Mulligan IIRC) made concessions to Keynes when they entered the policy debate. They did not assert that the current level of employment is the optimal result of consumption-leisure choices. I think their odd assertions are based on the fact that they decided to keep the very extreme views expressed in their peer reviewed published work private and tried to concede enough that Op-ed readers wouldn't conclude they were crazy without changing their policy recommendations.

That is, I think the true width of the yawning chasm which divides economists is still largely hidden from the view of non economists.

John Taylor might be an exception. He is a founding New Keynesian and very partisan. Greg Mankiw has generally refused to particupate in the policy debate when the economist Mankiw disagrees with Republicans. Your efforts to force him to say if he thought the stimulus bill was better than no bill were unsuccesfull. In sharp contrast, I think that Lucas, Fama, and Cochrane were trying to moderate their true views in order to communicate with the public and that this is what caused some slip ups.

Prescott was frank. He confidently asserted in around January 2009 that there was no major problem. I don't think that statement can be explained as a partisan effort to help Republicans, but, of course, I don't claim to have any clue at all to what is going on in Prescott's mind.

By the way, I don't get to hang out with top economists, but I would certainly list Hall himself as a very conservative salt water economist. I think he came up with the terms to explain how his saltiness didn't imply he was a lefty or left of far right. Again I don't know what I'm talking about but Thomas Sargent and Lars Hansen are very very very fresh and, if I understand correctly, politically left of center.

Is Economics One Science ?

Below I argue that most of economics isn't scientific and that it isn't one field of enquiry, because there are fundmantal disagreements among economists about what economics is and should be. I will try to summarize.

Some economic research (not mine) is empirical and generally convincing. The non economist skeptic will accep their conclusions as probably to almost certainly true and say "so wha?".

There is a core of thought on economics with which everyone who claims to be a trained economist must be familiar.

There is no overlap.

Some people disagree with me. I haven't explained myself well. Maybe that's why no one has presented an example of a statement which is both part of the canon of economics and based on data.

I will now quote something a very prominent economist said long long ago when I was still I a biologist

"What you mean you can win the Nobel prize in biology for discovering a fact ?"

Stated with shock and horror.

Saturday, March 19, 2011

Hey I didn't know that half of the Federal Reserve Board are women

I admit that I have no clear idea who Kevin Warsh, Daniel Tarullo and Elisabeth Duke are and I only heard about Sarah Bloom Raskin when she was appointed (although I did go to high school and college with her husband Senator Jamie Raskin (D Montgomery County).

Also the board is one third Italian American. Ahhh I remember the 500,000 lira note (I only ever owned one). But I don't want to be racist or Fazio-so.

Jonathan Chait is a very smart guy. He is also very stubborn. He refuses to reasses his views of what was going on in Iraq in 2002-3 in light of new evidence. He simply asserts "Saddam Hussein apparently remained in total denial about U.S. intentions to depose him." What evidence is there to support that claim ? Chait concludes that Saddam Hussein must have been in denial, because his response to US ultimata was not to make concessions which satisfied Bush. Chait simply assumes that he could possibly have done this. Bush demanded that Saddam Hussein surrender WMD. Not having any WMD to surrender, Saddam Hussein could not concede, say uncle or give in to the demand.

Somehow Chait has managed to overlook the little detail that Saddam Hussein had complied with all UN resolutions at the time of the invasion.

Now it was pretty clear to me that Bush was determined to depose Saddam Hussein so that even if he had WMD and surrendered WMD, we would still have invaded. But if Saddam Hussein was in denial of that, he had company as Bush vehemently denied that too. I think that Saddam Hussein believed, correctly, that if he surrendered power he would be killed. It isn't as if he wasn't widely hated. So he may have thought he was damned if he did and damned if he didn't. that isn't necessarily denial or reality. That quite probably was the situation.

Chait is, as ususal, very charitable towards Chait. His actual position was that we had to invade, because if we didn't it was quite likely that they would develope nuclear weapons. Now he conceded that he couldn't read Saddam Hussein's mind. However, he could have read Muhammad El Baredei et al's report. He chose not to. He assumed that he understood nuclear weapons even though he clearly has no clue how hard they are to make. He didn't bother to try to ask any experts at the DOE about anything (they were all forbidden to talk to reporters which should have made it clear that the Bush administration was lying about all things Iraqi and nuclear).

Chait made gross errors due to his refusal to perform due diligence before making influential proclamations on issues about which he knew very little and understood less.

If his problem was an inability to guess what was going in the mind of a strange and evil person, then he wouldn't be so discredited. Therefore he concludes that was the problem in spite of the fact that anyone who knows anything can tell that his claim is self serving nonsense.

By the way, I think very highly of Chait and read him regularly. But, like most pundits (Kevin Drum not included) he will write any sort of nonsense if the alternative is to admit that he was wrong wrong wrong due to arrogance and laziness.

Another Neo Austrian Rant

Nick Rowe notes that Keynes was very monetarist compared to his teachers and his confused followers (or shold I say the heretics who take his name in vain). Brad brings up the shortage of safe instruments argument again.

I respond with my usual semi-neo-Austrian rant

Here I am making the same comment I always do. I agree that a shortage of safe assets caused the current recession. I don't think that this is the reason unemployment remains high. As far as I know, quality premia are back to normal, banks are flush with cash and real interest rates are microscopic (the 5 year rate is negative). I think the only things the current state has in common with 2008-9 are unemployment and an excessive stock of housing.

Starting with Rowe's triangle, I note that he stuck to the service sector. This is not innocent. There is no stock of massages and nails and hair grow rather quickly. Can he deal with, say, a bloated housing stock created by the irrational belief that house prices must always rise 20% ? How about excess productive capacity ? He doesn't consider either.

Just before moving on, I'd like to note that the game he describes can change from a coordination game to a prisoners' dilemma due to changes in other sectors. Let's say that the spouses of the three subjects he considers used to work one in construction and two in manufacturing. Now what the unemployed manicurist would like best is to manicure then spend the money of food. Even if she were employed, she wouldn't buy a massage, because she is hungry what with the unemployed spouse (note how carefully I avoid both gender stereotypes and dismissal of same sex marriages). My point is that trouble can spill over from construction and manufacturing to services due to income effects, so the fact that employment in services has declined isn't proof that money matters right now.

So I will attempt a not at all Keynesian explanation contradicting Rowe and you. It will be, I admit, fairly Austrian. I add one assumption things -- labor market rents -- I assume that it is better to have a job in manufacturing or in construction than in services and better to have a job in equipment manufacturing than in consumer goods manufacturing. I assume this because it is obviously true and everyone knows it.

Could employment in construction declinei in a barter economy ? Well obviously yes if there can be irrational housing bubbles (I assume people are not rational, because that is obvious and everyone knows it). How about manufacturing ? Sure if perceived wealth declines due to the end of irrational exuberance or due to irrational pessimism then demand for durables consumption goods falls more than demand for non durables and service but less than demand for capital goods. It is theoretically possible for nominal interest rates on 30 year bonds to be zero, but for optimal investment to be zero too. It is realistically possible that for any dynamically consistent monetary policy, investment will be far below what it was in 2007.

So far no problem. Since I allow irrationality, I can easily get investment (including investment in structures that is construction) and durable goods consumption to bounce around.

So why don't the construction and manufacturing workers get jobs cutting hair or manicuring nails ? I propose asking people in any bar in the world. They will be highly amused. It is clear that shifting to services would be costly. For one thing it would require leaving Las Vegas. For another what the hell to manicurists actually do ? They know but I sure don't. Then the worker would get a much lower wage. Oh and lose contact with his or her friends in construction or manufacturing so when population growth and depreciation and such caused new demand for construction or equipment manufacturing or durable goods manufacturing, he or she wouldn't get the jobs.

I think the explanation is that to get people to move from good jobs with good wages to bad jobs at bad wages requires enormous unemployment. So much so that the economy recovers before there is much of a shift.

Notice no money, no risk nothing like that. If you have labor market rents, then unemployment can fluctuate.

On the history of thought, Rowe has a point. His view is shared by someone who is generally considered an expert on Keynesian economics -- Keynes.

In "The General Theory ..." Keynes explaines that New Keynesians are, in fact, Pigouvians writing (actually mostly quoting) "The difference in the conclusions to which the above differences in assumptions and in analysis lead can be shown by the following important passage in which Professor Pigou sums up his point of view: 'With perfectly free competition among work people and labour perfectly mobile, the nature of the relation (i.e. between the real wage-rates for which people stipulate and the demand function for labour) will be very simple. There will always be at work a strong tendency for wage-rates to be so related to demand that everybody is employed. Hence, in stable conditions everyone will actually be employed. The implication is that such unemployment as exists at any time is due wholly to the fact that changes in demand conditions are continually taking place and that frictional resistances prevent the appropriate wage adjustments from being made instantaneously.'[2]"

Oddly some people suggest that Keynes was unfair to Pigou, because he didn't admit taht Pigou made the observation about "frictional resistance" which Keynes quoted word for word. I often feel that most Keynesian economists haven't actually read "The General Theory ..." but of course what I really think is that they read it long ago and don't remember all of it.

Friday, March 18, 2011

Pulled back from comments

For some reason which I can't understand Adam Ozimek courteously comments on my rude post insulting Ryan Avent and economics (not in that order).

Comments:
Robert,

As always, I take your point of view seriously. But I disagree with you here. I think a simplified but reasonable approximation of a "real" science paper is that it has 3 parts: lit review, theory + hypothesis, and empirical test. I take the role of theorists to be specializing in one part, a crucial part, of the scientific method, while not necessarily producing work that in and of itself constitutes science. The same could be said of lit reviews. In short: if you break up the scientific method and intensely specialize, then parts begin to look like not science, but they are.

Is that reasonable?

Also, for an economic hypothesis that has been abandoned because they did not fit the data, how about one of the most famous: the Phillips curve? (At Modeled Behavior I also pointed to 80s RBC models with no money, but Krugman claims people are still doing that, so I'll leave that aside for now).

And as time goes on it becomes increasingly difficult to view economics as a coherent field, but I don't think we're there yet. Most economists come from a grad program that covers a reasonably similar core. What % of programs use Varian, Mas-Collel Whinston and Green, or something similar for the micro core?

I agree certain subfields are largely engaged in un-scientific, but often worthwhile endeavors. Normative pursuits obviously fit here. But I think when critics say econ isn't a science, they're talking about when it's trying to be a science, e.g. when it's making positive statements. So before saying "parts of econ are unscientific", I think it's important to emphasize that the parts that try to be generally are, and some parts that appear not to be (e.g. theory) are part of the scientific process.

# posted by Adam Ozimek : 2:34 PM

Ah, I see you have replied to the Phillips curve in your post below!

# posted by Adam Ozimek : 2:52 PM

Dear Adam Ozimek

Thanks for coming by. I also admire your polite tone (especially given the very rude tone of my post).

Relatively briefly look at the argument that economics as a whole is scientific and that it is one thing with a common core. Yes it has a core "What % of programs use Varian, Mas-Collel Whinston and Green, or something similar for the micro core?" Yes some economists are scientists. However, there is no link between the scientists and the core. Below I ask how Varian has revised Microeconomic Analysis since the first edition in the light of new data. I don't know the answer. Those books are certainly part of the core of modern economics. They do not discuss much the confrontation of testable implications of the theory and data. I am quite sure that they don't point to any empirical successes in which the theory was used to make surprising but correct predictions. Yet it is, indeed, a key part of the core of modern economics.

An aside. Economists always talk about physicists. Why indeed there are many physics textbooks now in use which present theories which have been refuted by the data. People are taught Newtonian Mechanics before they are taught about relativity. People are taught classical physics before quantum mechanics and non-relativistic quantum mechanics before semi-modern quantum mechanics etc. But these are steps in a teaching program. Before becoming a physicist graduate students are explosed to unfalsified models *and* the fact that existing theory is fundamentally not there yet is stressed. Economics graduate students have neither experience.

OK now my long reply to the comment.

I agree that theorists have a role in scientific enterprises. Obvously the classic example is theoretical physicists who do math all day, never conduct and experiment and play a vital necessary role in a very successful scientific enterprise (an aside -- I think one of the worst problems with economists is that the only natural science most of us consider is physics).

But the interaction of theoretical physicists and data is completely different from the interaction of economists and data. In physics, elegant models which contradict the data are abandoned. Many (perhaps most) theoretical physicists look down on experimental physicists (who they rank above non physicists who they rank above sheep). They clearly resent the fact that their brilliant model development is not appreciated, because it happens to not correspond to this universe. But the field moves on.

This just doesn't happen in economics. The theory basically stays the same no matter what the data say. Consider your example -- economists are taught from Varian or Mas Colell Whinston. The first edidtion of Varian's microeconomic analysis was published long ago (I studied from it). How have the data caused later editions to differ from the first ? (I ask for information I have only opened two editions of the book).

The key point is that economists identify the set of theory with the set of models and note that models are false by definition. Testable implications are developed, tested and rejected and nothing happens. The model with false implications is still used. It's status isn't diminished, because economic theory was never a set of scientific hypotheses.

Consider Lakatos's idea of a degenerative research program. Oddly I can't find a good link. The general view is that all research programs have cores and auxiliary hypotheses and rejection of a testable implication generally leads to abandoning an auxiliary hypothesis. The distinguishing feature of a degenerative research program is that, once the core belief is reconciled with the data that rejected the joint core and auxiliary hyotheses, the matter is settled and nothing else changes.

Each confrontation with the data is local and once the core belief is reconciled with that bit of data, no implications for other phenomena are developed. The new auxiliary hypothesis has served only to protect the core belief from the data.

I read something like this somewhere. I thought it was a perfect description of econmics after the death of Lakatos. He was thinking of Ptolomaic astronomy and epicycles, but that is *exactly* what we do.

So when testing the life cycle- PIH we note that the hypothesis does not implay a representative consumer nor utility functions which are separable in consumption and everything else nor time separable utility functions. But when we put consumption into a macro model, we almost always put in a utility function wich is log(c_t) plus other things. That part of the model is rejected, but so what. The auxiliary assumptions are only a problem when the PIH is confronted with data on consumption and not when it is used to develope models which are used to advise poicy makers.

What could possibly be more degenerative than that ?

Wish I'd written that

Mike Kimel

As an aside... ever notice how countries that adopt policies favored by right wing or libertarian think-tanks tend to have a few very successful years (with much crowing by those think tanks) followed by disaster? Be it Japan, Argentina, Russia, much of Eastern Europe, Ireland, Iceland, etc., it does seem that there's a pattern. Heck, that pattern even applies to the US. I think even some of the promoters of those policies are starting to see that pattern. Its to the point where a lot of folks in those circles are trying to convince the public that Singapore, a country where the government's role in the economy is larger and more intrusive than in most other countries, is an example of a libertarian paradise

I have noticed the pattern of praise from right wing think tanks followed by disaster. I too am amazed that people are trying to convince other people that Singapore as a libertarian paradise. Evidently they don't understand that the "Sovereign" in "Sovereign wealth fund" means "publicly owned" and politically directed, that is socialism.

I do have a question -- when was the Russian (and much of Eastern Europe) good years. I recall catastrophe followed by recovery. I think the examples there are Estonia and maybe Latvia.

The pattern is clear. Financial deregulation can lead to speculative bubbles. AEI, Heritage and Cato assert that they are sustainable booms. Then the crash comes.

Here I go again. Matt Yglesias assumes that monetary policy must be effective when in a liquidity trap. I object.

Here is a very brief summary of his post.

In the latest issue of Democracy: A Journal of Ideas I have a piece about progressives, the Federal Reserve, and the need to confront the centrality of monetary policy to economic issues:

[skip]

The members of the Federal Reserve Board of Governors and the presidents of the regional Federal Reserve banks, by contrast, are specifically tasked with the job of preventing giant recessions. They’ve failed. Utterly. And it’s a big deal.

Good proposal, bad appeal to evidence. The Fed is very important. It is not democratic. democrats* should address the issue. So should Democrats.

But the current recession does not prove that the current Fed is no good. You can equally argue that the stimulus failed so we should blame the Democrats. In each case, the relevant question is counterfactual. The sensible answer is that things are bad, but they could be much worse -- rich country industrial production was following the exact same path as in the great depression.

The current Fed is by far the most aggressively expansioinary Fed in history. You simply assume that they could have prevented the recession entirely.

Look another analogy. Medical doctors are no good at all. Their job is to keep us alive and we all die. Therefore the current approach to health care is no good at all and we should try something heterodox.

As far as I can understand from reading every word written on this blog, your proposal is quantitative easing. Your complaint is that the $900 billion in open market operations in 2010 weren't enough (even though they were larger than all pre-Bernanke open market operations put together).

So not enough of a good thing (like your critique and mine of the stimulus). There is a difference however -- the stimulus was followed by a dramatic turnaround in GDP growth. Output following the stimulus was higher than the forecast baseline. This is true also when the forecasts are based on VARs and atheoretical. The data show the stimulus worked as expected. The current state of the economy shows it was not enough of a good thing.

In contrast, there is no evidence (0 (zero)) that QE2 worked at all. The idea is that QE causes lower real interest rates either by causing lower nominal interest rates or by causing higher expected inflation. Real interest rates are now what they were last August (QE1.1 and Bernanke's statement that there would be some QE2). They are higher than they were when the actual QE2 purchases started.

My reading of the data
http://research.stlouisfed.org/fred2/graph/?graph_id=37641&category_id=0

is that some people believed that QE2 would work, so they drove TIPS yields down expecting to profit when it was actually implemented. When QE2 was actually implemented, they took a bath and now everyone with money on the line is betting that QE is ineffective in the current liquidity trap. In other words, Paul Krugman was right and Milton Friedman was wrong (knock me over with a wrecking ball).

It is true that most people who are not bankers pay a whole lot more attention to congress than the Fed (and more to the President than to Congress). This is almost always a mistake, since the Fed is almost always very important. But not now.

* I think it is more important to distinguish supporters of democracy (small d democrats) from one party (large D democrats) than to conform to standard rules of capitalisation -- also "a rose is a rose is a rose."

Ryan Avent is the source of the conjecture that economics is a science.

Read his post.

I tried to be polite at his site and wrote "I think you are totally absolutely wrong" but I honestly think that he is psychotic. I don't know how any sane person could write what he wrote. The only explanation that I can think of is that he has decided to evaluate the economics profession without reading the top ranked journals.

That is I think he only looks at economic research which he considers scientific and then asserts that it is typical of economic research in general out of lazy ignorance.

The rest of my comment.

I think that your claim that economics is based on data is nonsense. For one thing, your claim that economics is one field is nonsense.

Yes there are many economists who test theories with data. Many of them, by the way, perform experiments. Others look for natural experiments. Many change their views because of the data. Many admit they were wrong when their predictions are contradicted by the data.

But that is only one part of the profession. There are also economists who consider economics a branch of mathematics. They do not speculate as to whether their economic results correspond to the real world. That's not the point.

You can look at top economics journals and find many articles which make no reference to data. They are contributions to a theoretical literature whose origin is not based on empirical success. This is simply a fact. I have mystified economists by suggesting that theories should be testable.

Then there is a whole huge literature based on drawing testable implications from a model, testing them, rejecting them and sticking with the model. This is always a problem -- it is impossible to test a hypothesis of interest without auxiliary hypotheses. But in this case, the false model is used and its implications are used to advise policy makers. That is the whole model (with auxiliary hypotheses) which has been rejected by the data.

Rejection of a model leads many (probably most) economists to say that models are false by definition and that a false model can nonetheless be useful. What economic hypotheses have been abandoned because they did not fit the data ? I'd like a complete list. It won't be long. I claim it is empty.

Notice I have avoided the topic of fresh water macroeconomists. They are another breed apart. Their views are much much further from those of Krugman than the average news consumer would ever guess. Their views are so extreme that it is not possible for non economists to believe that they mean what they say (and they rarely say it in public).

Uh Oh Mathew Yglesias suggests that Economics is more nearly a science than the guy in the street would imagine given the public debate among economists. I think his view is totally backwards and our disagreements are much stronger than those which we present, basically because the economists who have views which would strike the man in the street as absurd don't frankly state them.

I think you are totally wrong. I am regularly dumfounded by things that other economists say. The issue is rarely macroeconomics. The problem is that there is a fundamental disagreement among economists as to what "science" means. Some think they key to science is that it is empirical and that theories bow to facts. Others think they key is that it is mathematical.

I translate something a colleague said in a deparment meeting "it is doctrine !" This was not used in a pejoritive sence. The claim was that we must teach something to our students, because it is doctrine.

Many economists are mystified by the idea that I question whether standard models correspond to reality. They do not have the impression that corresponding to reality has anything to do with the point.

Economists are very far from stressing disagreements and ignoring areas of agrement. Most economists tend to try to avoid mentioning the views which they consider crazy, since they don't want to discredit the profession (for sound economic reasons). In private, economists are much less polite about each other. For example I know a new Keynsian who is only says very polite things about fresh water economists in public and who casually referred to them in private as "the crazies." What's worse is I keep mentioning this on the web and no one ever asks me to name that new Keynesian.

You are aware that economists from Chicago and Minnesota have said lots of silly things about the recession. What you don't understand is that they are saying silly things, because they are winging it. They don't base their pronouncements on their academic work, because if they ever explained it to the public, the public would laugh in their faces. Their academic work is much much crazier than anything they say in a way such that it is comprehensible to the general public.

Noted Economist Paul Krugman asks if economics is a Science.

Mainly he critiques Adam Ozimecs argument that it is.

I think that economics isn't a science yet (although lots of economists working with micro data and either prforming experiments or finding natural experiments are acting as scientists).

The claim is that economic theories have bowed to facts. The one example presented by Ozimek in which this actually happened is the abandonement of the Phillips curve by academic ecnomists (actual policy makers still use it all the time).

The example of the Phillips curve is always presented. I think this is because it is unique. I might be wrong, but I don't think that there was ever a Phillips curve hypothesis -- that the Phillips curve was an economic law. Such a hypothesis was inconsistent with data available in 1960 -- basically all data from hyperinflations. The conjecture was that it was likely to be a useful relationship for the US and UK assuming things stayed about the same. This just isn't the sort of thing whose rejection is the sign of a science.

I note that those who call the event a scientific revolution tend to quote extremely brief statements from Solow and Samuelson. In fact IIRC always the same one. And it includes weasel words.

The counterargument was very definitely and precisely made by Keynes in "The General Theory of Employment Interest and Money." You will note I omit my customary adjective "clearly". It is in the chapters in which Keynes derived no interesting insights from fiddling around with algebra and just sent the algebra to the publisher.

I explain this at lengthe here http://bit.ly/aWS5PS . "quit hire" should be read as "quit hire" and unfortunately there is a redundant "unfortunately" in a sentence fragment due to rewriting and posting without ever reading.

The claim that economics is a science is fundamentally based on the one hisorical episode in which the evidence was so overwhelming that it convinced Keynsians that Keynes had been right all along.

Newton wept.

The decision (which was very widely shared) that the Phillips curve hypothesis meant that economists had to assume rational expectations doesn't follow. It is a logical fallacy. The argument is that if they had assumed rational expectations, they wouldn't have made that conjecture.

In any case, the reaction of economic schools of thought to rejection of their current model is twofold. First "models are false by definition" and second "OK here is a new model with the same policy implications." This holds in Cambridge MA too. It didn't take long for new Keynesians to get the conclusions they wanted out of models with rational expectations. Scientists do not always reach the same conclusions no matter how many hypotheses are rejected by the data.

Thursday, March 17, 2011

Ballance in a Cold Climate

Amy Gardner reports on Ohio Governor John Kasich's budget proposal. This is a challenge, since Ohioans seem to have unballanced views of Kasich -- a recent poll suggested he would lose a rematch election by 15%.

In fact, Gardner doesn't quote any Ohioan who has anything good to say about Kasich's proposal except for Kasich. But she is a Washington Post reporter so she just won't give up. There are two sides to every question. If the unballanced Ohioans just won't give the right answers, she knows who to ask

Frank Luntz

I kid you not. He is asked to interpret the public mood

“You have a public opinion that I think is at best chaotic,” said Frank Luntz, a Republican pollster and message-crafter. “It’s this really dangerous cocktail of cynicism and immediacy. They recognize there’s a crisis out there, and they want politicians to solve it. But they don't like any of the solutions.”

I think I might just have to retire Ballance at the Washington Post. It's going to be hard to top this.

By the way the chaos in a national poll is a very clear kind of chaos

Fewer than four in 10 of those surveyed would support reduced spending on roads and infrastructure, increases in state income or sales taxes, or layoffs of state employees. Only about two in 10 would support cuts to Medicaid, closing or limiting access to parks and recreation areas, or reducing aid to public schools. And there is virtually no support for laying off teachers, police officers or firefighters.

[skip]

There is, however, wider support for limiting pay and benefits for state workers. Fifty-five percent of survey respondents support freezing wages for state employees, and 51 percent back reducing pension benefits for new state workers.

Kasich proposes to "reduce overall spending on Ohio public schools by more than $3 billion over two years." It seems to me that the poll results are catastrophic for Republicans not chaotic.

I would like to see the result of polling on a proposal to increase state income taxes only on family incomes over $ 250,000 per year.

Wednesday, March 16, 2011

DeLong and Cowan Debate

The question is should the US Federal Government spend more than was previously optimal because of the Japanese earthquake. Cowan argues that both sides have a point. DeLong says obviously yes.

Here is DeLong's latest

The stylized fact is that the yield on US Treasuries has fallen (that is their price has risen). Brad refers the question to McCulloch's parrot which says "Supply and Demand." If the price of something has gone up, one should make and sell more of it.

Cowan has a moderately interesting counter argument

1) My post and question is about spending, but Brad has shifted the discussion to borrowing. It’s easy enough to borrow more without increasing spending, if that is needed.

With the third (actually fourth) mover advantage, I have phrased the original question so that this argument is weak. I carefully wrote "more than was previously optimal" not "more than was previously planned." I think this is the source of the disagreement. Cowan is convinced that US Federal spending is generally much too high. DeLong thinks this is true only of military spending and agricultural subsidies. This disagreement about optimal spending levels should not spill over to a disagreement about changes in optimal spending levels. But I'm absolutely sure that it does.

With the clever inclusion of "optimal" (which is the question in) Brad's reply is valid

"Unless there is something really weird going on, a government that borrows more should both tax less and spend more."

Cowan has arguments for lower spending.

2) The countervailing forces which might favor lower government spending simply aren’t mentioned. Those include lower wealth and higher tail risk ...

Here I think Brad doesn't understand Cowan's argument. He replies

"Which, if they were of first-order importance, would show themselves as higher interest rates on government debt."

Cowan is talking about the lower level and higher spread of private consumption. If we weren't in a liquidity trap, this would increase the social cost of government spending. Brad's claim is not in general true. An increase in risk can cause higher prices of safe assets and a higher cost of government spending. Basically people want to get out of real estate investments in North Eastern Japan (which real estate might be radioactive soon) and into something else including T-bills. To the extent that US government spending comes at the expense of consumption by those people, the optimal level declines. The interest rate on Treasuries is not relevant to the question of whether this is an important issue. It obviously isn't.

Destruction of wealth will affect interest rates via the marginal product of capital which should increase assuming market clearing, that is no excess capacity, that is ignoring current reality. Here I think Brad is right. There is a story for how total consumption (public plus private) should decline as the world invests in damage repair (with a high return). Again if nothing weird is going on, that means both public and private should decline. Clearly there is no sign of that as huge amounts of wealth are sitting around earning tiny returns right now.

But here I think the word "optimal" which I snuck in creates a huge problem for Brad. His view (which I share) is that the social cost of government spending is very low right now. If the current multiplier is greater than one, it might even be negative. If the multiplier is 1, the cost is the cost of leisure of the unemployed. It is likely this is negative (ask them how happy they are). In any case, the effect of a loss of wealth is that some retired people whose wealth was destroyed will want to return to paid work, so the cost of government spending is lower.

But this means that current spending was not optimal. We are in a liquidity trap with 9% unemployment. The US government should spend more than it is. But that doesn't mean that optimal spending increased.

Friday, March 11, 2011

Another post on Yglesias and the Liquidity Trap

Here I go again. Yglesias refuses to recognise that a nominal interest rate of zero is special. He refuses to notice that some economists think it is crucial. I get irritated as always.

He wrote

much like the voters themselves, many politicians and political staffers are not that savvy about New Keynesian macroeconomic models.

I comment

One doesn't need any familiarity with *new* Keynesian economics to understand the views of Black, DeLong, and Krugman, since they are clearly explained in "The General Theory of Employment Interest and Money." On the other hand, the key point (which is not stressed in that book) has largely been lost in the New Keynsian literature. Also I think you don't get it.

He wrote

Black, Paul Krugman, Brad DeLong, and I all believe that with unemployment high and interest rates and inflation low that a larger short-term deficit will help post real output and reduce unemployment.

I comment

Sorry to be rude, but Krugman does *not* believe that when nominal interest rates are "low" then fiscal stimulus is in order. He believes that when the monetary authority can't push nominal interest rates any lower, then, and only then, fiscal stimulus is a good idea. If nominal interest rates wer exactly what they are, and the FOMC thought GDP and unemployment were fine and dandy, then there would be no point in fiscal stimulus, since the FOMC would cancel its effects on GDP and unemployment by raising interest rates.

The key condition (according to Krugman who explained it all very clearly) is that the monetary authority is constrained by the zero lower bound. That means that interest rates and inflation do not have similar roles in the argument. It means that low interest isn't enough. What is needed is a FOMC which won't cause an increase in the federal funds rate even if there is a fiscal stimulus but which can't reduce the federal funds rate, because it can't be below zero.

Monday, March 07, 2011

Brad's at it again, claiming that 2011 is 1826 all over again. My problem is that, while I think he was right about 2008-9, I also think things have changed.

He writes

The history also seems to be telling us that the recovery from (ii) is slow: the problem was that certain financial assets were grossly overvalued, and once they come back to reality there is an overall shortage of financial assets as savings vehicles or of safe financial assets that induces a shortfall of aggregate demand. A return to full employment requires that something happen to boost the economy's supply of financial assets as savings vehicles or of safe financial assets--whichever was the cause of the downturn in the first place. Only then will households and businesses be comfortable spending at a full-employment pace.

I comment

You exlain your Millian view very clearly and not (quite) for the millionth time. I remain unconvinced.

It is clear that an excess of assets which were perceived to be risky and a shortage of safe assets was a key problem (maybe the key problem) in late 2008 and very early 2009. This was shown by the tanking of the prices of assets which turned out to be risky, the TIPS spread, lots of things. Those patterns are gone.

In particular, common stock is very risky (in the short run) and yet stock market indices are at high levels. The problem just isn't the same problem it was 2 years ago.

I think the current problem is either irrational underestimates of future growth (an incorrect guess on the mean not a correct guess on the variance of returns), multiple equilibria and coordination on a bad equilibrium, or just the liquidity trap.

My first claim is that too little safe assets doesn't fit the data. The medium and long term TIPS rate isn't negative. Medium term nominal rates are well above zero. That's what should matter for investment.

My second is that firms aren't investing because they have spare capacity and their managers expect them to continue to have spare capacity -- so why invest. It could be that the managers are just wrong, roughly trend chasing. That they don't believe that the sysem is stable around a random walk *or* a trend and don't forecast normal growth. If we allow irrational pessimism (what is the antonym of exuberance intuberance esuberance ???) then we can decide not to reconcile that cliam about expectations with the implications of the model (when did either of use believe in rational expectations?).

Second just the liquidity trap. It could be that the only problem is that the inflation rate is only 1% so real interest rates can't be low enough to make firms invest even though they have spare capacity. The fact that low inflation is consistent with full employment doesn't mean that low inflation isn't consistent with high unemployment. The fact that moderate inflation has not proven to be consistent with a path with prolonged high unemployment doesn't mean that low inflation isn't consistent with such a path.

So the story is we have spare capacity so we need negative real interest rates and we can't get there.

Finally coordination. It is possible that with very low inflation, it only makes sense for firms to invest if other firms are investing (you know like implementation cycles or Cooper-John models or there are tons of them). This is really the same as explanation 2. Again I claim there is a bad equilibrium that wouldn't exist if we had 4% inflation in 2007.

None of these is a story about a shortage of safe assets. Each imply that the solution is expansionary fiscal policy (as does your model).

Saturday, March 05, 2011

Dana Milbank seems to have recently changed from an inside the beltway wiseguy to an angry populist. I wondered what happened. Now I think I know.

Loyalty to the village is weaker than hatred of the Citi.

Some loan officer at Citibank has been messing up so bad (because his laptop was in the shop) that Dana Milbank just closed a column with

"it will continue, with its resulting drag on the economy, unless and until the big banks can be brought to heel."

Surely some kamikaze leftist can infiltrate the bank which handles Fred Hiatt's mortgage. I mean that loan officer "accidentally" (riight) did more to weaken the banks than Elizabeth Warren has managed so far.