Who will be quickest on the draw ?

Manchination (noun) an clever action violating logic decency and, especially, partisan loyalty leading to Senatorial election. The etymology is a reference to then gov and as a result sen J Manchin shooting the draft cap a trade bill showing his love of guns and coal. The Obama administration is about to publish regulations on carbon emissions from existing power plants. Which Democratic Senate candidate will be the first to make a point firing a bullet through it ? Betting pool open -- put your bragging right tokens on Allison Lundargan Grimes (who has already fired a gun in contrast to her opponent who just bench pressed one) Natalie Tenant (in the Manchin electing state of West Virginia) Mary Landrieu (the only currently serving Democratic Senator whose campaign antics ever made me blush) Mark Begich (who has no Hulk to smash) or Mark Pryor I hope they all blast away. This is a time to be Machivalian non Manichean and I'm all for unscrupulous Manchinations.

Only Kynect

Alternative Title Kentucky Lied Chicken Grammatically correct alternative alternative title Kentucky Chicken Lied. Did you know that Mitch McConnell said that a discussion of Obamacare had no connection with the question of what to do with Kynect (as Obamacare is called in McConnell's Kentucky) in a press conference he called to denounce Allison Lundargen Grimes dodging the question of whether she would have voted for the PPACA (aka Obamacare aka Kynect in Ky )? Yes the candidates in the already bitter battle agree entirely. Neither has anything bad to say about Kynect or anything good to say about Obamacare. They are likely to keep debating Kynect V Obamacare for a while, because Kynect is popular and Obamacare isn't Ignorance has had serious consequences even before election day. "Only 26 percent of those who didn’t enroll (in Obamacare) were aware that there were government subsidies available,"

The two seconds Chait

QOTD "Should Republicans start endorsing plans to give poor people more money? Well, sure, that would be great. It would also be great if Boko Haram came up with some new policies to help educate girls. "

Jon Chait is Obsessed with someone named Reines (not Reince not Raines, Reines)

Chait just wrote a post entitled "Lanny Davis Defending Clinton With Innovative New Media Strategy: Print-outs" "They are prone to scoff at any form of new media (Clinton media-handler Phillip Reines writing to Buzzfeed: “I typically don’t respond to BuLLfeed inquiries”) nd to dismiss even old media reporting they don’t like as somehow corrupted by new media (Clinton 2008 staffer Burns Strider: “I think it's horse[hockey]. I think The Washington Post is acting like some kind of an Internet blog or something instead of doing real reporting”)" Earlier this May (OK on May day) Chait wrote a post on "Why the Clintons Can’t Handle the Media" "Former Clinton adviser Philippe Reines ...(Reines responded to questions from BuzzFeed like so: “Thank you for the opportunity to answer BuLLfeed’s inane questions. I typically don’t respond to BuLLfeed inquiries, but given the extra special inanity BuLLfeed put into today’s inquiry, I’ve answered each of BuLLfeed’s inane questions with as much specificity as possible.”)" Notice how Reines's status as a "former" staffer was mentioned in the former post but not the current post. Did Reines run over Chait's dog ? I don't speculate that Chait might be suffering from late onset Clinton Derangement Syndrome, becuase it is beyond obvious that he has excellent reason to scoff at anyone who scoffed at internet bloggers He most recently denounced political blogs (in 2007 note the "2008" in his recent post) by dividing them into progressive and non, then progressive blogs into the wonkosphere (defined as analysts) and the netroots (evidently defined as advocates, making the 3000 word argument that those bloggers who are advocates and not analysts are advocates and not analysts which is totally tautological trash talk) . I noted that the May day post get around to addressing the question of "Why" at all and that Chait seems to have considered there to be no need to provide actual evidence for the assertion that two failed politicians (who only won two Presidential elections and are way ahead in polling for a third) can't handle the media. I neglected to speculate about how successful they might be if the could handle the media because the thought of any couple that powerful causes me to "[hockey]" in my pants. I also seem to suffer from a bit of Reines fixation myself because I typed "Reines" when I meant to type "Raines" as in the NY Times Editor who obviously was and still is out to get Bill Clinton.

Drum beats Rubio to a pulp

Keeping up his usual standard of being a better economist than the vast majority of PhD economists, Kevin Drum has an absolutely brilliant first back of the envelope score of Marco Rubio's pension reform proposal. Just read it. I have a pointless comment on one point here

so let's read Rubio's plan. It contains a grand total of four policy proposals: 1) Allow workers to invest money in the federal Thrift Savings Plan. 2) Eliminate the payroll tax for anyone over age 65 who continues to work. [skip] Item #1 may or may not be a good idea, but it has no impact on Social Security. Item #2 reduces payroll tax income and therefore makes Social Security less solvent.

Later Drum attempts to calculate the cost of item #2, but that's enough to motivate my comment (which concludes supporting both Drum's conclusion and his decision to not bother dealing with the possible counterargument discussed at boring length below). My comment. This post is wonderful. I can't say how impressed I am by your knowledge. I do have one possibly mildly interesting comment. The logic, such as it is, of exempting people over 65 from the payroll tax is the usual conservalogic which depends on a very strong behavioral response to changes in incentives. The story (which you quite reasonably ignore in your post) is that the increase in take home pay will cause people to delay retirement past 65. This would increase the solvency of social security, because even if they wouldn't paying payroll tax, they wouldn't collecting a pension. The logic of item 2 is Laffer curve logic -- I'm sure Rubio would argue that the indirect effect of a change in taxes due to the resulting change in behavior outweighs the direct effect so cutting taxes means higher net revenue (here in the form of lower pension payments). I think you are quite right to ignore this argument (I have no doubt you considered dealing with it and decided it wasn't worth the pixels -- I agree about main post pixels, but comment pixels come at a discount cause who reads comments anyway ?). Dealing with it here, I note that it was always obvious that Laffer curve logic is fantasy. It is possible to estimate the elasticity of labor supply with micro data. All such estimates always show behavioral effects smaller than direct effects. This was well known in 1980 (I think there was a Tip n Ronnie conversation in which Tip told Ronnie that 97% of economists disagreed with him and Ronnie said something like yes but what if the other 3% are right -- if so the 97% sanification factor of Laffer and Global warming might join the 27% crazification factor). The results of the Kemp-Roth experiment, the Clinton 93 experiment and the Bush 2001 and 2003 experiments should have removed all doubt. But Rubio is doing penance for his sanity on immigration, so he must declare absolute faith in Laffer. It is the central tenate of Republican dogma (even Megan McArdle admitted she was wrong to deny Chait's claim that it is and when was the other time McArdle admitted she was wrong about anything ?). Ignoring Laffer logic when discussing fiscal policy is like ignoring global warming denial when discussing carbon policy. It is the right choice for a post, but hey it's not as if I would be doing anything useful if I weren't Laffer bashing.

Jon Chait isn't Cynical Enough

I have been clicking Chait self links enjoying his mockery of the very silly centrists who dream of bipartisanship. This paragraph is brilliant

The framers of the Constitution didn’t expect elected officials to sacrifice their own power. They designed a system intended to align the interests of those officials with the public good. The trouble is that they did not anticipate the rise of political parties. Decades of ideologically diffuse parties — a Democratic coalition cobbling together urban liberals and Southern segregationists, a GOP joining Rockefeller progressives with McCarthyite reactionaries — masked this fundamental problem. In the modern system, single-party rule is the only condition that should be expected to produce major legislation. Americans want the two parties to get along, but they fail to understand that this requires one of them to acquiesce in its own defeat.

The post on the Georgetown Dinner Party Cargo Cult and the once might Quinn is, quite possibly, the most deliciously cruel. This is a brilliant line "It’s hard to argue against this kind of analysis because, like gut-based electoral forecasting, it’s not quite coherent enough to rise to the level of wrong. “ But I was shocked to find Chait slipping into naive over-optimism way back in the Halcyon Spring May 2 2013 (at 7 in the f'ing morning -- does the man sleep ?).

A similar divide, pitting many (though not all) of the same pundits against each other, can be seen in analysis of legislation. There is a quant way of looking at it, which assumes that a law will get passed if a majority of the House and 60 Senators deem it in their interest to change the law in such a way that the president also deems an improvement over the status quo. The quants believe there are few such opportunities because polarized parties make them responsive to very different interest groups and belief systems.

Just to think that an alleged cynic so recently imagined that a mere majority in the House was enough. Now we know that this is only true if Boehner decides to ignore the Hastert rule, which the founders put right there in article 13 of the Constitution. Chait's over-optimism is quite specific and explicit

If Obama signs new laws, it will be interpreted as him beating the other team. That only happens if Republicans cooperate. And Republicans don’t want to lose! There’s a unique situation with immigration reform, because Republicans perceive a long-term need to court a growing constituency, which justifies the cost of handing Obama a victory.

The Senate Immigration Reform bill has the support of the President and a majority of representatives, but it won't get passed. The extended unemployment insurance extension bill passed the senate and has the support of the President and a majority in the House, but it probably won't get passed. Oh how I long for the happy days when 60 Senators 218 Representatives and one President were enough and when people called the place where bills go to die "the Senate." Dear Brad DeLong Republican party isn't just worse than you imagine possible even after taking into account the fact that it is worse than you imagine possible, it's worse than Jon Chait imagined possible, and he has one evil imagination.

Ron Fournier Barely Missed the Trifecta Hat Trick of Stupid

Ron Fournier had a huuge day on the internet today. He was declared Wanker of the day by Atrios and caused the ever polit Kevin Drum to write "Whatever else you think of Fournier, he's an experienced reporter who understands the political landscape. How can he possibly believe this stuff?" But Fournier was robbed totally Robbed of his trifecta hat by Donald Sterling who distracted Josh Marshall. Better luck next time Ron. You will be the first to be mocked simultaneously by Black, Drum and Marshall. For now you will have to content yourself with the title of the guy who isn't quite as dumb as Donald Sterling. Keep fighting.

Ricardian Equivalence with Astrology

I recently discussed recently discussed (again) whether it is reasonable to assume (just as a rough first approximation) that people have rational expectations. I considered the argument that a temporary balanced budget spending increase causes increased demand, because consumers rationally expect that tax increase to be temporary. Is unreasonable to expect people to assume it is permanent and then be surprised when it is reversed ?

I think it is unreasonable to expect people to be surprised. Since the overwhelming majority of people in the USA did not notice the 2009 tax cuts in the ARRA, I would guess that people wouldn't note the tax cuts and therefore wouldn't be surprised.

I am back to be rude again. One of the most idiotic of all ideas in human history is the idea that there is Ricardian equivalence. Extraordinarily, this implication of economic theory was so absurd that Ricardo himself recognised it had no relevance to reality.

However, it has become conventional to use models with Ricardian equivalence (even Krugman does this while stressing that he doesn't believe in Ricardian equivalence). it is even common to assert that the permanent income hypothesis which implies Ricardian equivalence is an improvement over earlier models of consumption which had the minor advantage of actually fitting the data.

Ricardian equivalence requires consumers to know what share of the national debt will be repaid by themselves and their heirs. It also requires the assumption that people reproduce asexually. A much simpler requirement is for people to know how big the national debt is. It is even simpler for people to know the current year's budget deficit (because it is publicized much more often). It is vastly immensely simpler for people to know the signn of the change of the budget deficit from one year to then next when that change is extraordinarily huge.

In the past years the US Federal budget deficit has declined at an extraordinarily rapid rate. Steve Benen notes "It was just last year when an independent national poll asked Americans whether they thought the deficit was increasing, decreasing, or staying about the same. Only 6 percent of the country recognized reality. That’s not a typo; it was just 6 percent."

It seems most US adults are rather ignorant. But they are not insane or delusional. Therefore I am confident that they don't believe in Ricardian equivalence.

[rudeness deleted]. Of course the economists who consider rational expectations a good approximation know perfectly well that the vast majority of people are clueless about public budgets. I do not understand how they manage the cognitive dissonance.

Methodology Intellectual History Friedman and Phillips Again

This started as a comment on Wren-Lewis too. I discover that he does have a length limit. The methodology used by most economists has changed again. I think the mainstream of economic research is again highly empirical and that the key concept is the natural experiment. I am declaring that macroeconomics is cut off from the main stream of economics. It is the branch of economics which non economists imagine to be the main field. I deleted rude thoughts about the standing of macroeconomics in the profession. So I think you are thinking of the methodology of mainstream macroeconomics. It is undeniably a fact that many papers in top economics journals have nothing to do with DSGE. I will go on replacing "mainstream economists" with "mainstream macroeconomists." Friedman's argument was not at all controversial at the time. Paleo Keynesians were perfectly willing to use adaptive expectations as proposed by Friedman. Recall his proposal was a model in which inflation expected for next period is a weighted average of the inflation that was expected for this period and actual inflation this period. This corresponds to expected inflation equal to an exponential lag of past inflation with terms adding to one. The choice was considered no big deal, because it made very little difference for policy recommendations and because it was (and is) not possible to empirically determine which model worked better. I am basing my view of the Paleo Keynesian reaction to Friedman on this talk by paleo Keynesian James Tobin http://cowles.econ.yale.edu/P/cd/d03a/d0315.pdf

You correctly argue that Friedman's contribution was based on theory and not on evidence. His impact however, was clearly based on evidence. Here I stress as always Krugman's recollection of a lunchtime conversation. Note the lunchers are students of Samuelson and of Solow http://krugman.blogs.nytimes.com/2013/12/16/more-paleo-keynesianism-slightly-wonkish

The relatinship between the evidence and Friedman's influence is made clear in many popular discussions of the recent history of economic thought. Two good places to start are the Wiki on the Phillips curve http://en.wikipedia.org/wiki/Phillips_curve and "Zombie Economics " http://www.amazon.com/Zombie-Economics-Ideas-Still-among/dp/0691154546

The occurance of stagflation in the 1970s was considered proof that Friedman had been right and his intellectual opponents wrong. Without presenting proof, I note that I think that exactly this episode convinced most macroeconomists that macroeconomics needed a methodological revolution. However, the episode provided no useful information relevant to the debate at all. Friedman had no prominent opponents who asserted that stagflation was impossible. It is perfectly consistent with an expectations augmented Phillips curve in which expected inflation is a constant less than one times lagged inflation.

One might say (and I have so written) that the very simple constant times lagged CPI inflation (which was conventional pre 1973) failed because over time the estimated constant increased significatnly (rejecting the null , if such rejection were needed which it never was, that it i a structural parameter). However, I now discover that I was wrong. I finally decided to test the null that the relationship between US wage growth and US lagged CPI inflation as estimated with pre Friedman Presidential address data (pre 1968) is inconsistent with post 1968 data. This is a very crude simple test -- I just look at the coefficient on lagged cpi inflation times a post 1968 dummy.

Regression with Newey-West standard errors Number of obs = 259

maximum lag: 3 F( 3, 255) = 27.63

Prob > F = 0.0000

| Newey-West

ldqwinf | Coef. Std. Err. t

unem | -.3776157 .1145142 -3.30

infcpi | .5516583 .2054788 2.68

infcpia68 | .0089793 .1800448 0.05

_cons | .0527488 .008214 6.42

I think this is the main evidence that the old methodology was not ideal. The null that messing around with data and leaving theory last (or never) is rejected at the 96% level (that is the probability that the old approach would do at least this badly if it were valid is 96%).

The empirical success of the assumption that expected inflation is a constant times lagged inflation is surprising and would be surprising even if it were 100% true (not a useful model but the pure essential truth about human psychology). Note however, that the paleo Keynesians never bet their reputations on the constant times lagged inflation model. They were perfectly prepared to use Friedman's adaptive expectations model and used both well before the oil shocks.

Now the revolution was based on evidence at the time and not data up till now. I ran a few regressions with quarterly data always Newey-West standard errors (because I am using overlapping year long periods). I didn't find an interval such that the old pre-Friedman formula is rejected by the data. By 1985 the rational expectations revolution had definitely occurred (it's when I started grad school).

Data through t-statistic on lagged inflation times the post Friedman dummy

1974q4 1.29

1975q4 1.28

1977q4 1.37

1980q4 1.20

1982q4 1.25

1985q5 1.30

1989q5 0.93

1997q5 0.53

2007q5 0.06

This is what you expect when testing a null which happens to be true. I don't think any prominent paleo Keynesian bet his or her reputation on the failure to reject that null. The informal impression that the data showed the null was no good is, I think, the storming of the Bastille of the rational expectations revolution.

I believe there was no good reason at the time to consider the new approach promising (and I recall that Brad DeLong said in 1982 or 1983 that he thought macroeconomics had taken a wrong turn and would be sterile for at least a decade). I think that subsequent evidence strongly supports the view that the then new approach is not promising.

Now note that I think the actual methodology which actually influenced macroeconomic thought is the straw man rhetorical trick. I am quite sure that macroeconomists were generally convinced that neglect of micro foundations had caused someone prominent to be sure that stagflation was impossible and so macroeconomists should base macroeconomics on microfoundations to avoid such errors in the future. I think that this was a completely unsound method of attempting to find a good method based on the use of fictional intellectual history.

I am moving this to the end of my comment, as I think it will irritate readers. You will note that I have repeatedly deleted rudeness. I can't manage to discuss the topic in a way which is both diplomatic and honest. I hope the stuff above won't be ignored because of the stuff below.

I sincerely doubt that methodology is discussed little because mainstream macroeconomists think it is unproblematic. I am quite confident that it is discussed little, because the methodology of mainstream economics is indefensible. I have certainly never heard anything which I consider to be a argument that there is any reason to think it is a valid approach (I am thinking of what I've heard from Thomas Sargent and Robert Barro). The argument, as well as I can understand it, is that the approach might someday yield useful insights. This is a special case of the fact that "might" makes right. On disarray -- if only. [more rudeness deleted]. I think that mainstream macroeconomics has the relationship with evidence typical of totally false theories. That doesn't mean that it is totally false ( and not a useful approximation). I think this is what the available evidence suggests, but it isn't proof (as it is always impossible to prove that a research program is sterile -- something might turn up).

Simon Wren-Lewis is much too kind to Tony Yates

Simon Wren-Lewis is extremely polite as usual. He wrote

Tony Yates today criticises Paul Krugman’s argument that economics had the answer to how to respond to the crisis, but policy failed to follow the prescription. As I completely agree with Paul Krugman on this, let me say why I think Tony’s criticism is completely wrong.

"completely wrong" isn't the half of it. my comment: Wonderful post as usual. I very much like the firmness of your opening declaration. However, I also think you are too kind to Yates. "Social Welfare" is an ethical concept. One doesn't have to be a utilitarian. It must be ad hoc, because there is no way to derive a social welfare function from theory or evidence. Yates is correct that we can't know that the policy response was suboptimal for the simple reason that we can't know what is right and what is wrong [Godwin's law violated deleted]. That said, it is impossible to reconcile public hatred of inflation with utilitarianism. Model based estimates of the cost of inflation imply that it is negligible compared to the cost of output below potential. The case that the social costs of output gaps and of inflation are comparable rests on one of two arguments. First they may be comparable, because we can't know what is good. Even if no model gives high costs of say 10% inflation, there may be high social costs because say such inflation causes intense displeasure to God or something. This is just a special case of the fact that we can't prove something is good and something is bad. Second, maybe output gaps must always be on average zero. If so, the social cost is second order in the standard deviation of output. That means it is reasonable to assume it is small (since squared numers are generally small for example 1000 squared is ... shutup). This is a reasonable argument based on NK models given the assumption that there is no zero lower bound. In other words it is total nonsense.

added here [In fact, of course, people hate inflation, because they think it implies higher prices for the same nominal income. When asked about inflation, they say they would prefer much higher real income. Economists understand that this is nonsense and have decided to just accept that inflation is very very bad. This is a betrayal of utilitarianism and of the otherwise dominant methodology of normative economics. The refusal to admit that they are doing this is proof of gross dishonesty. No serious person can question the plain fact that policy is fundamentally based on an elementary error of logic.]

Finally, Yates must argue that it is reasonable to guess that fiscal stimulus would have caused high inflation. The logic of this argument is we can't know this isn't true, because fiscal policy was about the same everywhere so the fact that inflation was about the same everywhere proves nothing. This argument is insane. In fact fiscal policy differed vastly across countries. Output responded (with a revised estimated multiplier of 1.5). Inflation was about the same everywhere. The argument that the huge range of policy from Greece to say the USA tells us nothing about what would have happened if there was more fiscal stimulus is the argument that data can't tell us anything about what would have happened if we did something else. The claim that there isn't proof that policy was suboptimal is the claim that there can't ever be proof that anything is suboptimal.

Rosen Praised Fournier

Jay Rosen is a leading critic of what he calls "he said/she said" journalism (he seems to have coined the phrase). In a recent post, he askes for help finding egregious examples. I use the name "Ballance" for this lazy or cowardly refusal to report relevant facts if they tend to undermine one side (in my experience my impression has always invariably been that reporters refrain from noting relevant facts which are inconvenient to Republicans or conservatives). This is based on a wonderful example (this link is dead for some reason hmmmm http://blogs.washingtonpost.com/thefix/2005/11/political_scand.html) and the purely accidental pun noted by Chris Cilizza (who explained "Ballance was unnecessarily included for, frankly, balance."). On April 12 2009, back in one of his first posts on the topic. Rosen noted one hopeful sign. He found an opponent of rigid ideological centrism which ignores all evidence which might undermine the view that truth justice and the American way is exactly halfway between the two major parties.

The plan was to move “from its signature neutral and detached tone” to a more aggressive style of newswriting that bureau chief Ron Fournier calls “cutting through the clutter.”

Yep radical centrism was challenged by Ron Fournier. Oh my.

This post is a partial answer to a question asked by DougJ at Balloon Juice "Are there any actual Ron Fournier fans? " There may or may not be, but it sure seems that on April 12 2009, Jay Rosen was a Ron Fournier fan !!!

Now Fournier is considered the very epitome of Ballance and false equivalence and rigid radical centrism.

I think this is not fair. Back in 2008 it was noted that Fournier had been considered for a job with the McCain campaign (and may have considered taking it) and that his coverage was very helpful to McCain (including attacks on Romney as well as on Obama). I think he is a partisan Republican who exploits Ballance as a useful convention, because it enables him to ignore evidence that Republicans are wrong in cases where the balance of evidence supports that conclusion (which in my opinion include all important areas of dispute between the major parties).

The fact that he has taken radically opposite positions on the desirability of trying to appear neutral and detached convinces me that he has no firm view on neutrality, centrism, balance, Ballance or any such thing and that he merely uses any rhetorical tool at hand to help the Republican party.

In Which I started out praising Wren-Lewis then ... the usual

This excellent post (read it) is important but there is a minor irony. One of the main obsessions of those who contrast Keynesian economics and the economics of Keynes is well exactly the point you make in this post. New Keynesians (and not so new Keynesians the complaint was made in the 60s too) stress price stickiness. As you note here, the price level matters in Keynesian and New Keynesian models only through real balances.

I think the point is that Keynes often considered an economy in the liquidity trap (I also think he wasn't clear on this point and I'm not sure it was clear in his mind). By 1960 or so, economists had decided that a liquidity trap was a remote possibility. By 1980 it was views as Giffen goods are, theoretically possible but negligible.

I think you will notice (for example in this blog) attempts to define Keynesian economics not as economics in which employment may be below full employment because of low aggregate demand, but as macroeconomics with nominal rigidities. I think an accurate if clumsy definition would be macroeconomics with nominal rigidities or the possibility of a liquidity trap or both. Having typed that, I feel sure that the list of deviations of reality and therefore decent theory from the neoclassical model must number more than 2 (an Italian platitude is translated "there isn't twice without a third time").

Below find the usual rant which must bore anyone who regularly reads comments here. No I won't pollute the comment thread. It's over here.

On the other hand, I am not convinced by your newer Keynesian economics. I don't have suggestions for how to teach first year students, but I think there are statements in this post which don't correspond to reality.

“In the long run, monetary policy adjusts to achieve steady inflation, which means output goes to its ‘natural’ or Classical level. In the short run, monetary policy fails to achieve this, so we need to look at movements in aggregate demand to explain output.”

This works for any sensible monetary policy.

There is not a Classical level of output. Output has a trend. It tends to grow. I make this trivial point to note that the idea that the trend level of output is not affected by aggregate demand shocks is entirely 100% an assumption made for convenience. In particular technology is not exogenous to the economy (people invent things, inventions don't fall out of the sky). Technological progress is not modeled, because it is very hard to model it. The result is that macroeconomists who focus on the cycle make very strong assumptions. "Exogenous to my model because I know I don't understand it" does not imply "unaffected by policy".

Also the short run can last decades. Continental Europe in the 80s had steady inflation and enormous unemployment. Actually right now inflation has been steady for years in all rich countries. However, output is far below the classical level. The claim that steady inflation corresponds to full employment or output at its classical level is a hypothesis. When Milton Friedman made his AEA presidential address (1968) it was consistent with available post World War II data. It is no longer consistent with available data. It is not a rough approximation to available data.

The competing salt water and fresh water schools have decided to agree about the long run. The shared assumptions are not supported by the data. They are much more important than the points of disagreement. But the agreed doctrine is based entirely on making assumptions about the long run in order to focus on the cycle.

Then the models are confronted with some sort of differenced or detrended data (say Hodrick Prescott filtered data). The strongest claims are about the long run, but long run relationships are not considered.

Peter on Friedman, Phelps and Phillips

Pulled back from comments to this post.

Peter said...

Krugman just the other day:

"...Consider the somewhat similar debate in the 1970s over the “accelerationist” hypothesis on inflation — the claim by Friedman and Phelps that any sustained increase in inflation would cause the unemployment-inflation relationship to worsen, so that there was no long-run tradeoff. The emergence of stagflation appeared to vindicate that hypothesis — and the great majority of Keynesians accepted that conclusion, modifying their models accordingly."

http://krugman.blogs.nytimes.com/2014/05/08/predictions-and-prejudice/

So nobody claimed there wasn't [sic] a long-term trade-off and Friedman-Phelps made a straw man argument?

What explains the persistence of the myth?

OK the alleged myth is the claim that, before Friedman and Phelps, many prominent Keynesians believed that there was a stable long run expectations un-augmented Phillips curve. I think I will just call it "the alleged myth" to save space.

My honest opinion is that Friedman and Phelps made a straw man argument. The alleged myth, is extremely persistent. Peter accurately excerpts Krugman who clearly asserts the alleged myth as fact. This is an excellent example, because Krugman is not only very Keynesian but has clear sympathy for paleo Keynesians.

The obvious natural guess is that I am just wrong. However, the claim that the alleged myth is a myth is defended at great length by James Forder here, here and here.

I find his case to be rock solid and his arguments to be one hundred percent convincing.

Importantly, the alleged myth is very often stated as a well known fact, something everybody knows, and without the presentation of any evidence. This is true in the Wiki I edited and in the Krugman post to which Peter linked.

When the alleged myth is challenged, Krugman doesn't defend it.

Now, you can argue that the notion of a long-term usable unemployment-inflation tradeoff was never really part of Keynesian economics, that it’s a caricature of what 60s Keynesians actually believed. Nonetheless, the stagflation of the 70s was a decisive moment in economic ideology.

He doesn't claim that that which "you can argue" and which Forder does argue is incorrect. He expresses no opinion on the idea that Friedman obtained gigantic influence by knocking down a straw man. He just notes that whether the man knocked down was made of straw or not, he definitely obtained gigantic influence.

That post continues with

Stagflation seemed to confirm the Friedman-Phelps notion — based loosely on “microfoundations”, i.e., notions of rational behavior — that sustained inflation would get built into wage and price setting, so that historical correlations between unemployment and inflation would disappear. And this in turn gave a huge push to the anti-Keynesian revolution.

Put it this way: when I was in grad school, I remember lunchtime conversations that went something like this; “I just don’t buy the Lucas stuff — it’s not remotely realistic.” “But these people have been right so far, how can you be sure they aren’t right now?”

Now I think these conversations were with fellow graduate students not with the top Paleo Keynesians (Samuelson, Solow, and Tobin who was off in another city). In other words all that it shows is that, if it was a myth, the alleged myth had been accepted as truth by the students of the people who play the role of fools in the alleged myth.

Now specifically on Samuelson Solow 1960 (and specifically saying he disagrees with me) Krugman wrote

Via Brad DeLong, Robert Waldmann weighs in on the contributions or lack thereof of Milton Friedman, arguing that much of what he said was already there in Samuelson and Solow 1960. Actually, I’d give him more credit than that; the S-S paper — very unusually for both men, and for Bob Solow in particular — is one of those pieces sometimes described as “rich”, with many points alluded to but not many takeaway lines; to the extent that people did take something away, it was the crude notion of a usable downward-sloping Phillips curve, which turned out to be wrong.

Friedman — like Solow, in most of his work — was in the habit of writing crisp papers with very clear morals. So while you can,on a careful read, see from S-S why you should not in fact trust the Phillips curve to be stable, people didn’t actually get that until Friedman and Phelps laid out the point with stark clarity. Credit where credit is due.

So when discussing specific papers, Krugman says what Friedman and Phelps added was "stark clarity". Now if one makes a point which can be seen "on a careful read" with stark clarity and claim to have made a revolutionary advance, then one clearly has knocked down a straw man.

Note that Krugman says that "people" took away "the crude notion of a usable downward-sloping Phillips curve". Like the author of the Wiki, Krugman doesn't name any of those people or cite any document in which that crude notion was taken from Samuelson and Solow 1960. Forder claims to have looked and looked for such doccuments and found a white paper submitted to the Ontario Commission on Price Stability.

He may be wrong, but he is the only person involved in the discussion whom I have detected making an specific reference to any document published in the 1960s. Against him there is the alleged myth which everybody thinks he or she knows but which no one supports with any evidence except for the claim that it is what everybody knows.

I conclude that the alleged myth is a myth.

If so, why is it so persistent ?

1) I certainly confidently stated (to students in a lecture) that Samuelson and Solow believed in a stable expectations un-augmented Phillips curve. I hadn't read their paper (obviously I am literate). I didn't feel any sense of bluffing or pretending to know something I didn't know. I was sure this was true. Only later, did I begin to suspect that maybe their work had been unfairly characterized. After dawdling for months I googled Samuelson Solow Phillips curve. Now the second hit is a James Forder working paper which I find entirely convincing. After a few minutes of checking if the alleged myth might be a myth, I was convinced that it was. Then I was even more firmly convinced when I finally read Samuelson and Solow (1960).

A myth can persist if it is universally believed. If no one questions a claim, it can be accepted as true even if it doesn't withstand any scrutiny. I think that Forder is very lonely (now there are at least two of us).

2)It would be profoundly humiliating to the economics profession if "a decisive moment in economic ideology" was due to a successful rhetorical trick. I think Krugman went on to explain exactly how important the alleged myth was. The case of Samuelson and Solow mistakenly believing in a stable expectations un-augmented Phillips curve was central to the decision to start with theory and to a complete change in the methods used by economists. If this huge decision, which implied huge costs at least in effort, were due to a successful trick, then we must be a bunch of total fools. I think this is the problem. The main problem is that we are a bunch of total fools, but another terrible problem is that most economists are too proud to admit it.

3) Samuelson and Solow.

Samuelson was and Solow is an immensely respected economist. Any error by Samuelson becomes very famous. The thought that if Samuelson erred by looking at data and thinking without theory, then no ordinary economist should dare do that was very powerful. In particular, Samuelson is more responsible for the formalization of economics than anyone else (at least since Marshall). If he erred because of insufficient respect for mathematical economic theory, then very very much respect is required. My suspicion that they couldn't have written what I thought they wrote is based on the huge gap between the brilliance of work I had actually read and the stupidity of the alleged error. This is part of explanation 2 of persistence. Assuming that Samuelson and Solow said something stupid without checking, then checking and finding they said the opposite is profoundly humiliating. I was reluctant to check. I am sure I am not the only one.

But I think the key explanation for the persistence of the myth is that Samuelson and Solow didn't say that it was a myth (as far as I know and I now know that isn't necessarily very far). They hadn't forgotten what they wrote (that would be like forgetting how to ride a bicycle). They must have known that they were being mocked (I'm sure they weren't to their faces, but the mockery was in writing in many places). I don't understand their behavior.

But it makes persistence of the myth easy to understand. Friedman argued with a straw man. As far as I know, neither Samuelson nor Solow noted that they weren't that straw man. What's the chance of that ? I'm pretty sure it happened, but I still find it hard to believe.

Reading Brad Reading Reihan Salam

Brad DeLong read an essay on the ACA by Reihan Salam. He summarised it and politely contested Salam's conclusion. I read only his summary. I am very impressed that Brad managed to read through the essay and very very impressed by his courtesy. I am much less polite in comments. Click the link for Brad here or here if you want to know what the hell I am ranting about.

Redundantly refuting Reihan

1.1 "the more people know ...." This is simply false. There is still a majority which disapproves of the ACA but disapproval has declined from the peak. Overall, there is no noticible trend in the RCP average http://www.realclearpolitics.com/epolls/other/obama_and_democrats_health_care_plan-1130.html#polls

1.2 "64% ... " Salam is cherry picking. The RCP average is 53.3% against opposed (same link). I think anyone who talks about a single poll rather than an average may be assigned to one of two classes. He is either a fool or a knave. If he is indeed hignly intelligent, he is a knave. Clearly Salam is trying to win the approval of actual fools who don't understand the concept of averaging. His point 2 alone proves that he is not engaged in serious debate. I understand that it is frustrating having a serious debate only between Democrats Democrats and an occasional socialist, but that's no reason to treat a cherry picker as if he had anything useful to contribute.

1.3 20 states. See the definition of Chutspa.

2.1 Cancellations. Look you can't have a mandate that people buy health insurance without a defition. Otherwise people will buy plans with a million dollar deductible and a million and one dollar lifetime limit. Salam knows this. He also surely knows (as did Obama when lying in 2008) that a mandate is needed for the most small government market oriented reform which massively expands coverage. Some people will pay more. They were free riders who paid less because of the expected value of charity care they would receive. they are few. The search for people hurt by cancellations has been frustrating. It is reasonably clear that a majority people whose old plans were cancelled benefit from the ACA.

2.2 More cancellations. Probably more net benefits

2.3 technicalities affect subsidies. So what else is new ? Nothing is perfect.

2.4 There is a very real possibility that Reihan Salam is an infiltrator from the alien planet of fools and knaves. Here he is saying that we can't predict the future with certainty. That is his whole point. Data so far show a huge massive gigantic inrease in the number of people with private insurance with an gross increases on the order of 6 million (Rand) to 9 million (based on previously uninsured data from Healthcare.gov). Against this there is gross decline (from cancellations) estimated at 700,000 by Rand. There is every reason to forecast that the 6-9 million will grow (all forecasters forecast this) and the 700,000 will shrink. Clearly Salam's standard for there is "a very real chance that P" is that there is not 100% absolute proof of not P. To paraphrase Atrios, there is exactly just as very real a chance that Reihan Salam is molesting a goat as I type.

3.1 "enrollment in the new exchanges ..." This is not at the same level as 2.4. Enrollment has exceeded expectations. This is arithmetic. Salam is lying. He has decided to redefine enrollment to mean paying not signing up. The term has an ordinary English meaning which he ignores. Worse (you paraphrase him) using the past tense "has still fallen" to refer to the future -- the rate of payment of bills which are not yet due. Here he slipped. There is no way to define the term enrollment so that expectations of enrollment are expectations of an event now in the past and so that enrollment is below those expectations. The sentence as written is certainly surely false. There is no doubt about this. Even if the number of people who purchse insurance on the exchanges after choosing a plan during the open enrollment period ends up less than 7 million, Salam's false claim is false, because he used "has" to refer to an event which had not yet occurred when he wrote his clumsy lie.

3.2 Again "a very real possibility" which means "not proven to be false". Salam feels free to make any prediction he pleases about the future. There is a very real possibility that he will admit that he was just trolling us. That he is absolutely sure that the ACA will be a huge success and will tell us we've been Rick Rolled tomorrow. I won't waste my time with comments like "there is a very real possibility that Salam really thinks [the opposite of what he claims]. There is not just a very real possibility but an absolute certainty that this would be a complete waste of time. I think reading Salam is similarly a complete waste of time.

Also he has trouble with verbs again. You can't justify the indicative "will" with arguments about "very real possibilities." I think it is obvious that Salam has an unusual (perhaps extraordinary) command of the English language. His incorrect use of "has" and "will" shows the strain of having no legitimate case.

4.1 Limits innovation ... Since the incentive is to innovate to avoid the cost of actually insuring this is a good thing. Salam obviously knows that cherry picking innovations are good for insurance companies and their customers and not socially useful (if he is indifferent about distribution as I guess he is he might think that eliminating insurance isn't socially harmful). He has to make a case that limits on innovation are costly in expected value not that the benefits come with some possible non zero cost.

4.2 Obama care leaves cancer uncured. This is a worse defect. Failure to solve all of humanities problems is not failure and does not begin the first step towards setting the stage for an introduction the the groundwork of a justification of " “will eventually have to be either drastically reformed or replaced outright”

4.3 "don't ... a wide range" I think this is another simply false claim. The range is very wide. The qualifiers "wide" and "enough" make the claim (as paraphrased) unfalsifiable and meaningless. In particular, there are costs to allowing a wider range (cherry picking again). That the range isn't the widest conceivable (no million dollar deductible plans again) is not an argument that it is less wide than optimal. Here Salam attempts to exploit reader ignorance (making a claim which people who know the facts wouldn't accept) deliberate vagueness (as paraphrased) and counts only costs but not benefits.

4.4 OK here "narrowly" plays the role of "wide" and "enough". The qualified statement is unfalsifiable.

4.5 If Salam is willing to denounce the income tax (and he may be) then he has a case. If his argument is that the ACA will have to be replaced, because it is like the income tax (or the EITC) he is ignoring history entirely when making his predictions. Egalitarian redistribution affects incentives. In every poll taken over 22 years now shows a solid majority wants more of it. Salam clearly wishes this weren't so, but "will P" doesn't mean "would P if the world were as I wish it were and as it has never been."

4.6 see 4.2. Salam is defining failure as not eliminating all problems.

5 here he thinks he can improve on the ACA. This has nothing to do with the "will ..." assertion he set out to prove. Of course he thinks he could do better (if he were the house the senate and the president). Thinking he can do better is part of his job description. I don't have an opinion on Salam's proposed reforms. Point 5 is, as you note, completely off topic.

I conclude (before reading your responses)

You are a hero for working through Salam's obviously long essay and trying to summarize it. I haven't read his essay, so I can't evaluate your summary. I have never read an essay written by Reihan Salam. I try to avoid making predictions, but I do think I can safely say that I will never read an essay by Reihan Salam. I place him in the ignore bin. I don't value my time highly, but I see no point in reading him. I am quite sure that if I want to find valid arguments for a proposition, I can do better just thinking myself than trying to find a valid argument in an essay by Reihan Salam. My view is that he is not honest and not capable of distinguishing his guesses from reasonable inferences.

I understand that he is widely considered to be one of the most valuable and interesting conservative policy intellectuals (where "policy intellectual" is defined as someone addressing a broad range of issues (as you do) and not a specialist with some useful expertise). I consider his contributions worthless. This doesn't mean I can think of any more valuable policy intellectual who is a conservative in good standing. I think it is not possible to reason intelligently and honestly and maintain good standing as a conservative.

I have now read your comments. I think your response on point 1.2 "62%" is not optimal. You should at least link to a site which posted results from the other polls. The 62% is a cherry picked outlier. This is easily proven and should be proven.

You are very kind and polite. You have one reference to "credibility as a Republican". I think the observation that Salam is smart and can't possibly believe what he wrote should be added to responses to points 1.2, 2.4, 3.1, 3.2, 4.2, 4.3, and 4.6. So I classify 8 out of 16 topics I considered as each containing proof that Salam is a fool or a knave. He is not a fool.

Even I Can Edit the Wikipedia

I read the Wikipedia a lot. Usually I just google something and the Wikipedia article is the first hit. I am amazed by the breadth of the content and the accuracy of the small fraction of it which overlaps with my own knowledge.

I know of the case of the economics professor who was only briefly puzzled that half of the answers [this is false see below] on a test were clearly based on the assumption that Ricardian equivalence implies that a temporary increase in government spending has no effect on aggregate demand. The test asked about a simple two period case and included the unhelpful hint that the economy displayed Ricardian equivalence. The alert professor correctly guessed that the Wikipedia article on Ricardian Equivalence contained this elementary error. I think that he or she corrected it. OK now I'll google.

The prof. is Kevin Quinn who wrote of his experience in "The World Wide Web of Misinformation" (HT ProGrowthLiberal).

Yes the world wide web does contain some misinformation, but google told me I vaguely remembered a Wikipedia edit by Kevin Quinn. Also the web is self correcting. This post claimed that half of Quinn's students made the mistake. In fact Quinn's post said "say 10%" did. Ooops.

So I just edited the Wiki on "The Phillips Curve". I am feeling that I have been aggressive, but pleased to find that, yes indeed, even I can edit the Wikipedia.

My edits in Italics

In the years following Phillips' 1958 paper, many economists in the advanced industrial countries believed that his results showed that there was a permanently stable relationship between inflation and unemployment [citation needed -- this claim is not supported by any evidence and is contested see [5] ].

5. http://www.economics.ox.ac.uk/Department-of-Economics-Discussion-Paper-Series/economists-on-samuelson-and-solow-on-the-phillips-curve Note that a claim about "many economists in the advanced industrial countries" was made without the citation of any economist. Intellectual history is important enough for the Wiki, but demonstrating claims about intellectual history isn't. The linked working paper makes a very convincing case that very few economists ever wrote any such thing (IIRC the top example was from a white paper submitted to the Ontario Commission on Price Stability but do click the link).

Again just below a claim is made without evidence

One implication of this for government policy was that governments could control unemployment and inflation with a Keynesian policy. They could tolerate a reasonably high rate of inflation as this would lead to lower unemployment – there would be a trade-off between inflation and unemployment. For example, monetary policy and/or fiscal policy (i.e., deficit spending) could be used to stimulate the economy, raising gross domestic product and lowering the unemployment rate. Moving along the Phillips curve, this would lead to a higher inflation rate, the cost of enjoying lower unemployment rates [citation needed].

Then again

In the 1970s, many countries experienced high levels of both inflation and unemployment also known as stagflation. Theories based on the Phillips curve suggested that this could not happen, and the curve came under a concerted attack from a group of economists headed by Milton Friedman [citation needed].

No evidence is presented that any theories which "suggested" that ever existed. This claim should not be made in the Wikipedia without citation of a document which presented such a theory. I do not think this is a careless oversight. I think no such document exists.

Immediately following

Friedman argued that the Phillips curve relationship was only a short-run phenomenon. In this he followed 8 years after Samuelson and Solow [1960] who wrote " All of our discussion has been phrased in short-run terms, dealing with what might happen in the next few years. It would be wrong, though, to think that our Figure 2 menu that related obtainable price an unemployment behavior will maintain its same shape in the longer run. What we do in a policy way during the next few years might cause it to shift in a definite way. " [7]

"Analytical Aspects of Anti-Inflation Policy" Paul H. Samuelson; Robert M. Solow American Economic Reivew Vol. 50, No. 2, Papers and Procedings of the Seventy-second Annual Meeting of the American Economic Association (May, 1960), 177-194. Notably, the Wiki did not contain any reference dated between 1958 (Phillips's original article) and Friedmans 1968 Presidential address. All but four references are to documents published in 1995 or later. Those citations include The General Theory of Employment Interest and Money [1936] which, by the way, includes a warning not to trust any Phillips curve that one might find which was as clear as might be hoped, given that it was published 22 years before Phillips [1958], Phillips [1958], Friedman [1968] and a 1973 reprint of the 1926 Irving Fisher article describing the Phillips curve 32 years before Phillips [1958]. Claims about what "many economists" believed in the years between 1958 and 1995 are made without presenting any evidence that any economist believed any such thing. This is actually quite important. The Wiki correctly explains why the intellectual history is important. It is more or less accurate as claimed that

Since 1974 seven Nobel Prizes have been given for work critical of the Phillips curve. Some of this criticism is based on the United States' experience during the 1970s, which had periods of high unemployment and high inflation at the same time. The authors receiving those prizes include Thomas Sargent, Christopher Sims, Edmund Phelps, Edward Prescott, Robert A. Mundell, Robert E. Lucas, Milton Friedman, and F.A. Hayek.[6]

I have no idea what Sims is doing on that list. Mundell was awarded the prize for his work on optimal currency zones. F.A. Von Hayek was awarded the prize for enunciating a pro market ideology (balancing the award to Myrdal). But Phelps, Sargent, and Lucas were definitely awarded the prize in large part for refuting the permanent stable Phillips curve hypothesis. The claim that there was such a hypothesis should be of interest to the Nobel committee. The complete absence of evidence that any prominent economist ever believed that there was a stable long run Phillips curve is relevant. But there is also a hint of a much more important issue

There are at least two different mathematical derivations of the Phillips curve. First, there is the traditional or Keynesian version. Then, there is the new Classical version associated with Robert E. Lucas, Jr. The traditional Phillips curve[edit] The original Phillips curve literature was not based on the unaided application of economic theory. Instead, it was based on empirical generalizations. After that, economists tried to develop theories that fit the data.

The old approach of looking at data, finding patterns and only then trying to develop theories was almost entirely replaced by the new approach of making assumptions, developing a model, deriving testable implications, testing them (and then arguing that rejection of the implications of the model is of no interest, because models are false by definition and the model might still be a useful approximation, then assuming that the model is a useful approximation). It is very clear (based on first person recollections eg by Paul Krugman) that the failure of the permanent expectations augmented Phillips curve hypothesis played a central role in the methodological change. If no such error was made by any prominent economist, the case against the old methodology is very weak. The complete absence of success of macroeconomics based on the newer approach might have caused a methodological counter revolution were it not for the power of made up intellectual history which is presented in places much more influential than a Wiki.

Thoughts on "Paradigm Shifts"

An e-mail exchange. Marco F. wrote Ciao Robert, Tutto bene? I'm very keen to read your view! A presto. Marco [skip] http://delong.typepad.com/sdj/2014/05/over-at-the-wceg-in-what-sense-does-economics-need-a-new-paradigm-thursday-focus-may-1-2014.html I replied Robert Waldmann 3:13 AM (0 minutes ago) to Marco Dear Marco

I commented over there at Brad's blog (in the thread). All I said was that I think macroeconomics works OK provided one sticks to 1972 vintage macroeconomics. Or in other words, Krugman usually seems to know what is going to happen next, so what's the problem.

I'd say the rest of economics is doing much better than macro. A huge amount of current research is solidly empirical based on experiments or natural experiments. Research doesn't need a general theory to progress. We can learn what sort of policies work without theory. I am thinking of, say, does preschool cause better life outcomes, does means tested cash assistance to the poor create dependency which lasts generations, and can people without medical degrees who harass (da noia a) other people about their weight, blood pressure, diabetes and blood cholesteral save lives ?

I think the answers are yes, no, and yes. For the first google scholar (fake) Nobel prize winner James Heckman, for 2 see http://angrybearblog.com/2013/12/food-stamps-obesity-and-dependency.html for the last one I forget where.

These are the sort of questions we need to answer and these are the sort of questions we can answer without a "paradigm."

I think a problem economists have is that they always think of physics when thinking of successful fields of inquiry. Physics has core theories of incredible simplicity and power. I doubt economics will have something like that. But useful and fascinating and wonderful things have been discovered which aren't simple universal laws.

Simon Wren-Lewis has a question

Simon Wren-Lewis asked heterodox economists a question

I thought it might be useful to give an example of why I find thinking about a representative agent and rational expectations gives more plausible answers than using pre-microfoundations textbook analysis. It is an example where I’m genuinely curious about what heterodox economists who condemn using representative agents with rational expectations would do instead. As this is a post I’ll keep things as simple as I can and leave out most caveats and qualifications.

                The question is quite topical: what is the impact on output of a balanced budget increase in government spending in an open economy stuck at the zero lower bound (ZLB)? Well the first thing we have to do is ask whether the increase is permanent or temporary. If it’s permanent, if the import content of government spending is similar to consumer spending, and if taxes are lump sum, the answer is nothing. As the tax increase is permanent then consumption falls by the same amount, with no net impact on the demand for domestic output. That is pretty obvious, although anyone using a first year textbook would get this wrong (because they would have the mpc<1).

If the government spending increase is temporary, then the tax increase is also temporary. Thinking about an optimising consumer immediately gets us the result that consumption will initially fall by less than government spending, so there is a short run net increase in demand. (I am assuming that investment is unchanged, for standard reasons described here.) Higher demand raises output and income. If inflation does not change we get a multiplier that would be one if there were no imports. The analysis without imports is here, but we do not need it to show that output must rise.  

                In an open economy, we need to ask what will happen to the exchange rate if we have a temporary balanced budget increase in government spending, lasting no longer than the period interest rates are stuck at zero. Everyone remembers their Mundell Fleming – under flexible exchange rates fiscal policy is ineffective, because the exchange rate appreciates to crowd out the additional demand. But that is completely wrong in this case. Agents in the foreign exchange markets will note that there is going to be no increase in interest rates and no change in the steady state (so no long run appreciation or depreciation), so there is no reason for the exchange rate to move in the short run either. There is no crowding out through the exchange rate, so the analysis in the previous paragraph stands.

                This is pretty simple stuff, but it gives different – and in my view better - answers than many undergraduate textbooks. And both the representative intertemporal consumer and rational expectations were central in getting the answer. Now you may want to complicate in various ways, but that normally means building on this analysis rather than overturning it.

                So this is microfounded intertemporal macro telling us that a balanced budget fiscal expansion works at the ZLB. If you think this is obviously wrong because I’ve assumed all-embracing representative actors equipped with superhuman knowledge and forecasting abilities, tell me how you would do the analysis differently.  

OK my analysis. I will start with the original IS-LM model in a closed economy. That is I will assume that investment depends only on the nominal interest rate (and that there is only one nominal interest rate which is the same for all maturities). This would be enough to conclude that investment is constant, since the economy is at the ZLB.

The IS-LM model implies that output will increase by the increase in government spending. Pre-tax income will increase by an equal amount. After tax income will be unchanged and consumption will be unchanged. The national accounts identity checks.

OK now what happens if the economy is open ? The standard Mundell Fleming argument, based on the assumption that the economy is not at the ZLB. is that the shift in the IS curve causes and "incipient" increase in the interest rate as the economy attempts to move up the upward sloping LM curve. This causes and appreciation of the domestic currency so that the increased government spending causes decreased net exports and no change in GDP. This argument has no relevance given the assumption that the economy is at the ZLB. The Mundell-Fleming analysis in this case is that GDP i remains 0 no matter what so the economy stays on the BB curve (bond market equilibrium) and there is no change in the exchange rate. The multiplier is less than one, because some of the increased demand spills over into increased imports. The analysis is qualitatively similar to Wren Lewis's analysis of a temporary balanced budget spending increase. They are the same if the spending increase lasts and instance. Wren Lewis asserts that the effect is smaller the longer the spending increase lasts shrinking to zero if it is permanent. The Paleo Keynesian analysis asserts that the effects are the same no matter how long the spending increase lasts.

I know of no evidence that the effect of a permanent spending increase is different than the effect of a temporary spending increase. In particular, I know of no evidence that, given disposable income (hence net of taxes) budget deficits are associated with lower consumption as they would be if consumers rationally anticipated higher future taxes as a result.

OK moving on a bit, after 1937 paleo Keynesians decided that investment is best fit by a flexible accerator meaning it increases if real gdp grown and decreases in the real interest rate. This implies a closed economy multiplier greater than one given the GDP increase. If one adds a Phillips curve, one also expects higher inflation than otherwise so lower real interest rates at the ZLB and an additional increase in GDP.

So what do I think ? I do not believe that there would be a detectable difference between the effects of permanent and temporary spending increases. For one thing, I have no idea what a reasonable forecast of future spending would have been so I have no idea what agents should have anticipated. I mean I have no guess whether past fluctuations in government spending were perceived to be permanent or temporary and would not be able to make that guess even if I assumed rational expectations. It is worth noting that many commentators and such tell Paul Krugman that temporary spending increases always turn into permanent spending increases. This is false. If one assumes that average people are better informed than policy intellectuals, then one would guess that temporary spending increases have a different effect than permanet spending increases. if not, and if one wanted micro founded macro, one would guess that temporary spending increases have no effect on GDP.

I'd guess people have only the vaguest notions not only of future spending but also of current spending. In any case, polls have demonstrated that US residents don't know about recent changes in taxes http://www.cbsnews.com/blogs/2010/02/12/politics/politicalhotsheet/entry6201911.shtml . I have not detected any connection between aggregate consumption and any events in the future (differences in events say 5 years in the future outcomes would be positively correlated with 5 year ahead expectations if people had rational expectations).

Therefore I certainly expect a positive multiplier. For the USA (a large economy with low imports compared to GDP) I would expect a multiplier slightly greater than one.

I'd guess that the spending increase would cause a slight depreciation. I guess some FOREX traders use the rule of thumb that exchange rates move to cause the balance of trade to return to normal and so sell domestic currency denominated assets when net exports decrease. Also I think that some FOREX traders think that government spending is bad and depreciation is bad and bad things go together. I don't think there are as many (weighted by risk bearing capacity) who make the opposite guesses. I sure wouldn't bet on this guess.

A Ten Minute Hate of Chait

Jon Chait wrote a post entitled "Why the Clintons Can’t Handle the Media". He concedes that "It is probably true that the Clintons have suffered more than most at the hands of vacuous pack journalism. " but presents evidence that the Clintons suffer from a "pathology". I hereby quote all of the evidence which he presents 1. "“Look, she hates you. Period,” a Clintonite tells Thrush and Haberman. “That’s never going to change.”" 2."Those of us who remember the 1990s recall that Clinton used to elaborately desconstruct the psyche of Howell Raines, then–New York Times editor. Clinton believed that Raines somehow resented him as a fellow white Southerner who had succeeded." 3. "Former Clinton adviser Philippe Reines ...(Reines responded to questions from BuzzFeed like so: “Thank you for the opportunity to answer BuLLfeed’s inane questions. I typically don’t respond to BuLLfeed inquiries, but given the extra special inanity BuLLfeed put into today’s inquiry, I’ve answered each of BuLLfeed’s inane questions with as much specificity as possible.”)" In my enraged comment, I didn't respond to his point 2 . I think that Reines's pathological hatred of Clinton is obvious to anyone familiar with the case. In any case, Chait doesn't provide an alternative explanation for Raines's conduct or, for that matter, discuss it at all.

My comment.

You base your conclusion on one quote of an anonymous source and on something rude which someone named "Reines" wrote. Let me check. Hmm an R is not a C. Furthermore an "e" is not an "l". It seems to me that you have drawn a conclusion about "Clintons" based on the behavior of someone who is not a Clinton.

Note you identify Reines as a *former* aid. Hillary is responsible for every e-mail written by anyone who ever worked for her.

She may or may not be paranoid, but if this post were read by anyone unfamiliar with the Clintons that person would undoubtably conclude that you are out to get her.

I seriously propose that you replace the name of the Clintons with say the names of the Obamas. Then read it as an essay which purports to look at the evidence related tot he question of why the Obamas can't handle the press. I think your own post will seem absurdly unrair to you if it is detached from the assumption that everyone knows that the Clintons can't handle the press. I stress again, the evidence you present consists entirely of a quotation of one former aid who doesn't even work for them any more.

I think you are incapable of thinking rationally about the relationship of the Clintons and the press. I think that an open minded assessment is inconsistent with being a top journalist in good standing. The conduct of the press was so dishonest that it can't be even considered without the assumption that simple descriptions of the events of the 90s are paranoid fantasies.

Again and tiresomely I beg you to try to read this post with an open mind and consider whether you would ever take anything this Chait guy writes seriously given the gross contempt for journalistic standards, open mindedness, rationality and sanity which is obvious who doesn't assume that, when there is conflict between Clintons and the press, the Clintons must by definition be in the wrong.