Sunday, March 20, 2011

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.

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