NAWRU IV The Long Term

Guest post by Marco Fioramanti explaining how the EC "reconciles" the NAWRU Phillips curve model with completely implausible long term implications with their long term forecasts. Brief summary -- they don't take the model seriously.

by Marco Fioramanti

At this link you can find an EC's WP in which they distinguish between NAWRU and Structural Unemployment.

  They say (pg 1 link above):

“(...) Importantly, this method [the Unobserved Component Model for NAWRU - mf] provides only a proxy for structural unemployment that might not remove fully the impact of all temporary shocks. In particular, persistent shocks are likely to contaminate the trend.”

  Macroeconomic projections for the forecast and the fiscal stuff in EC works this way:

  1. Country desks do the forecast up to t+1/t+2 depending on the season (t+1 in spring, t+2 in autumn).

2. The service in charge of the estimation of potential output and output gap takes the numbers from (1) applies the methodology (production function approach called PF below) and go to t+5. In doing this a set of rules (on top of the PF approach) is used to extend the projection horizon, one of which is that the output gap closes in t+5. These estimations are at the core of the SGP.

3. EC also has long term projections for long term sustainability of public finance (pension, health care etcAgeing-related expenditure) which goes from t+10 to t+50. This is a simplified PF approach. To link t+5 to t+10 they have introduced a modified version of PF(t+5) methodology in which they anchor NAWRU to converge to structural unemployment in t+10 (for Italy structural unemployment is 9.4% according to EC’s latest estimate).

They say (pg. 39 in this WP ):

            “The NAWRU framework incorporates economic rationale into the T+10 NAWRU forecast, relying on a set of four labour market economic indicators (i.e. unemployment benefit replacement ratio; tax wedge; active labour market policies; & union density) and a set of macro control variables (i.e. TFP; real interest rate; employment in construction; & the T+5 NAWRU) to guide the forecast beyond T+5. This approach allows for a decomposition of the NAWRU into structural drivers and medium term cycles & for a prediction between T+6 and T+10 which reverts the NAWRU back towards the long run structural unemployment rate. A simple convergence rule towards the T+10 NAWRU is applied & a so-called prudent rule is built into the approach in order to override the calculations in cases where the T+10 NAWRU forecast is deemed to be surrounded by a relatively high degree of uncertainty for a particular country.”

So, while EC recognizes the NAWRU is too cyclical, they keep using it.

Fioramanti, Padrini and Pollastri (2015) propose (among others methodologies) using structural unemployment instead of NAWRU in the PF approach also for the t+5 projections - so the estimate of the natural rate of unemployment used in calculating the output gap would be the natural rate of unemployment as originally defined by Friedman. Endnote: In contrast to the t+5 methodology (for which you can get all the necessary files and instructions to replicate EC’s results) the t+10 methodology is not fully public.

 -- Marco Fioramanti

Comment by Robert Waldmann

It is very important that the EC doesn't take the I(2) NAWRU model seriously.  They have a model used for long term forecasts and another model used to calculate the NAWRU and cyclical unemployment = unemployment - NAWRU.  The NAWRU is used only to calculate the output gap and allowed deficits under the stability and growth pact (SGP). The bad long term implications of policies with good effects in the short term is the justification for the SGP *and* the claim that the concept of the natural rate of unemployment has policy relevance.

The estimates of cyclical unemployment include a series of arbitrary fudge factors NAWRU minus structural unemployment called "medium term cycles". There is no explanation of the cause of "medium term cycles".  The model of "medium term cycles" is not a model of "cycles" as the word is used in macroeconomics, because NAWRU-structural unemployment is not stationary.

It is hard to justify the use of a model (the NAWRU accelerationist Phillips curve discussed in these posts) with absurd long term implications which are ignored when making long term forecasts in the application of the SGP. I think there are two possible explanations of this modelling strategy. First it is possible that the technicians were instructed to make the accelerationist Phillips curve work and overcome all challenges from the data. Second it is possible that DG EcFin is willing to allow deficts over 3% of GDP because of cyclical corrections but only so long as the cyclical corrections are small. This corresponds to dividing the cycle into a "medium term cycle" with huge variance which has no role in a short term cycle with small variance (based on which Treasuries are given some slack) .

In any case, I certainly agree with Fioramanti, Padrini and Pollastri's proposal to use unemployment minus structural unemployment when estimating output gaps.

Global Warming Update

To celebrate the Paris peace talks and in honor of the Christmas season it has been almost unpleasantly hot in the Washington DC area (interesting how the people who laugh at Al Gore whenever it snows aren't mentioning this).

I am in my parents house in Silver Spring Maryland. On Christmas day it was so hot in their house that we used a fan to cool. We didn't turn on the air conditioning in December only because we didn't want to contribute to the global problem.

Here is a photograph taken (by Richard Waldmann) December 27th 2015 of Forsythia's blooming in Silver Spring Maryland

NAWRU III Hysteresis

This is the third of a series of posts on the non accelerating wage inflation rate of unemployment (NAWRU) estimated by the European Commission. In the first, I argue that this estimate is very important because it is used to implement the Stability and Growth Pact. In the second, I argue that the NAWRU is not well defined if there are anchored expectations or if there is downward nominal rigidity, and that there is strong evidence of both in 21st century Italian data (and therefore no hint at all that the NAWRU is a concept useful for those attempting to estimate the current Italian output gap). This post was a general overview and promise of future blogging.

When estimating the NAWRU the European Commission staff imposes the assumption that it shifts exogenously. The assumption is that the NAWRU is I(2) that is that the first difference of the first difference of the NAWRU is stationary. This implies that the NAWRU will almost certainly *not* remain in the interval from 0% to 100%. This makes no sense, but, in this post I will focus on the assumption that the disturbance terms which shift the level and the trend of the NAWRU are independent of all other variables. This means that the NAWRU is assumed to be genuinely exogenous -- not just exogenous to the model but exogenous to the economy, and, in particular, not affected by monetary or aggregate fiscal policy. This means that when unemployment is decomposed by total unemployment = NAWRU + cyclical unemployment, the conditional distrubtion of the NAWRU depends on past NAWRU but is independent of current and past cyclical unemployment.

The assumption that these shifts are exogenous is extremely important. An alternative view (discussed in 1960 in the second major article on the Phillips curve) is that structural unemployment is not exogenous because, with time, cyclical unemployment can become structural. This possibility was discussed and named "hysteresis" by Blanchard and Summers in 1986. They and Eugenio Cerutti have returned to the topic and presented massive evidence that it is important in (pdf warning) 2015.

The assumption that the NAWRU is not affected by aggregate demand is not easily reconciled with the fact that, in the 21st century, the estimate NAWRU closely tracks total unemployment. This must be true of estimated NAWRUs as inflation has remained stable in Eurozone countries (warning same pdf to which I linked in an earlier post).

The hypothesis that the NAWRU is exogenous can be tested by embedding the model used by the Commission in a more flexible model. One possibility (actually explored by the commissions DG EcFin) is to allow the acceleration of wage inflation to depend on lagged shifts in total unemployment. I have estimated both the official model and this more flexible model by maximum likelihood. My impression (that is the output of a program I wrote but don't swear by) is that the null of the official model is strongly rejected against the alternative. In any case, Blanchard, Cerutti and Summers present strong evidence that recessions often appear to have long lasting effects. The general pattern of European unemployment and wage inflation from 1980 on is of huge long lasting shifts in unemployment and a single huge decline in wage inflation in the 80s.

The assumption that the NAWRU is exogenous and must simply be accepted by fiscal authorities is critically important. If austerity causes an increase in the NAWRU, it can be self defeating. There is now overwhelming evidence that, especially when the safe short term interest rate is near zero, reduced government spending causes lower GDP and higher unemployment (pdf warning). If cyclical unemployment becomes structural, this implies a long lasting reduction in revenues and a long lasting increase in social insurance transfers. As noted by DeLong and Summers (pdf warning), this can imply that reduced government spending causes a higher long run debt to GDP ratio. The technical assumption that the NAWRU is exogenous has fundamentally important policy implications. It can be tested.

The econometricians at the Commissions DG EcFin are placed in a difficult position. They are required to look at data to apply the stability and growth pact, but they are not allowed to estimate parameters which suggest that the stability and growth pact causes instability and stagnation.

NAWRU II . There is no such thing as a NAWRU

This is the first of five posts I promised to write in this post.

NAWRU stands for the Non Accelerating Wage inflation Rate of unemployment. It is a concept used by the European Commission when deciding how much to allow Treasuries adhering to the Stability and Growth Pact to spend. The commission considers cyclically adjustments based on, among other things, unemployment minus the NAWRU. The Commission gives mere elected officials some slack if unemployment is above the NAWRU as estimated by Commission staff.

Unemployment is never far above the estimated NAWRU. The estimated NAWRU has dramatically increased in countries whose unemployment rates have increased. Estimates for Spain vary from 21% to 25%.

I think it is clear that there is something very wrong with the estimates. I think the approach has five fatal defects and should not be accepted as an area for further exploration let alone a basis for dictates to member countries. The first fatal defect of estimates of the NAWRU is that the hypothesis that there is such a thing has been rejected by the data. The concept survives only by changing the 1968 natural rate hypothesis into a natural rate model which is used without any assertion that it has testable implications which have not been rejected by the data.

The NAWRU is a meaningful concept only if the acceleration of wage inflation is a function of the unemployment rate. This might or might not be true. The logic was that wage settlements are made aiming for a real wage, so expected price inflation is incorporated one for one into wage inflation. It is assumed that all recognize that the nominal wage doesn't matter, so there is no particular problem with cutting nominal wages when expected price inflation is negative. The opinions on this question of everyone who has ever had any role in negotiating wages were considered irrelevant. The argument went on that people won't make forecasting mistakes with the same sign forever, so the coefficients of expected inflation on lagged inflation must add to one. Oh yes, it was assumed that expected inflation was a linear function of lagged inflation, because uh that makes the math easier. It was decided to cut out the middle periods and make the coefficient on once lagged inflation one. Finally, somehow, lagged wage inflation took the place of lagged price inflation (I can't even imagine a bad argument for this step, but the Commission took it).

The concept requires both that only the difference between nominal wage growth and expected inflation matter. This means that there is no downward nominal rigidity, that is there there is nothing special about nominal wage increases of zero nor any difference between wage inflation near zero and far from zero.

It also requires that expectations can not be anchored. Expectations which are sometimes anchored and sometimes not anchored are not a linear function of past outcomes. They are absolutely a feature of expectations elicited in experiments. When presented with random walks, people usually forecast mean reversion. However a series of increases in a row causes them to forecast further increases (Barberis, Nicholas, Andrei Shleifer, and Robert Vishny, 1998, A model of investor sentiment, Journal of Financial Economics 49, 307–343). This is a robust result.

If there is downward nominal rigidity or expectations can be anchored, then there may be no well defined NAWRU. This doesn't mean that it is impossible to calculate a number and call it the NAWRU. Rather it implies that there is a range of unemployment rates such that wage inflation does not accelerate. If that is the case, cyclical fluctuations of unemployment within that range will be incorrectly identified as fluctuations in the NAWRU. I think it is clear that, for Italy, this range stretches at least from 8% to 13%, since wage inflation has remained roughly constant as unemployment rose from 8% to over 13%. Wage inflation didn't increase back when Italian unemployment was 8% nor did it decrease after unemployment rose to over 13%.

The simple fact is that, in the 21st century, there is almost exactly precisely zero correlation between the Italian unemployment rate and the change in Italian wage inflation. To calculate a NAWRU year after year with such data requires heroic data processing.

Here is a Phillips scatter of unemployment and wages for Italy

Data from FRED. There is one observation per month from February 1980 through February 2015. Winf is the percent increase in LCWRIN01ITM661S the "Hourly Wage Rate: Industry for Italy©: Seasonally adjusted" over the preceding year (so the series for Winf consists of overlapping 12 month intervals). Unem is LRHUTTTTITM156S"Harmonized Unemployment: Total: All Persons for Italy©:Seasonally Adjusted" from January 1983 on but is ITAURHARMMDSMEI "Harmonized Unemployment Rate: All Persons for Italy© : Seasonally Adjusted" for 1980-1982. I have no idea why one series is available only after January 1983 or why the other is available only before August 2012 or how they differ (in the period when both are available, they are very similar but not identical).

I think it is obvious that the graph doesn't look as a Phillips curve should. Since January 2000, the unemployment rate has varied from 5.8% to 13.2 % yet wage inflation has varied only from 1.1% to 4.8%. 21st century changes in Italian wage inflation are dwarfed by the huge declines in the 1980s. According to the accelerationist Phillips curve, Italian wage inflation should have remained in double digits in the 80s and 90s or declined to well below zero by now.

It is possible to pick an arbitrary series of numbers and call them the highly variable NAWRU, that is, it is impossible to prove that no NAWRU exists (as it is impossible to prove a negative) but there is clearly no more evidence that Italy has a NAWRU than that it is haunted by ghosts.

Here is the graph for the 21st century

There is, perhaps, some hint of higher wage inflation at lower unemployment rates, but no clear acceleration. Nothing much seems to have happened to wage inflation as unemployment rose from around 8% to 13.2%.

The NAWRU refers to the acceleration of wage inflation. I consider the difference between wage inflation in one month and 12 months earlier (so it is an annual difference of an annual difference and the data refer to overlapping 24 month intervals)

This is an extremely impressively horizontal scatter. There is no sign of any association of unemployment and accelerating wage inflation at all. Here is a regression (with uncorrected standard errors)

. gen awinf = winf-winf[_n-12]

. reg awinf unem if month>2000

Number of obs = 181

F( 1, 179) = 0.00

Prob > F = 1.0000

R-squared = 0.0000

Adj R-squared = -0.0056

awinf | Coef. Std. Err. t

unem | 3.30e-07 .0396278 0.00

_cons | .0270689 .3569347 0.08

So "almost exactly precisely zero correlation " means a correlation coefficient of 0.00 something and a regression coefficient of 0.00000033 . The T-statistic is not correct, the standard errors should be corrected for the 24 periods of overlap. But I don't think that a T-statistic which is biased away from zero and equal to 0.00 really needs to be corrected. The almost exactly complete absence of any evidence of any effect of unemployment on the acceleration of wage inflation is extraordinary. It is extremely unlikely that two independent series would happen to have such low correlation.

This is the first regression I estimated with Italian data. Using the full sample I get a (statistically insignificantly) upward sloping accelerationist Phillips curve.

. reg awinf unem

awinf | Coef. Std. Err. t

unem | .0373827 .076396 0.49

_cons | -.8178216 .7054678 -1.16

I just now think that, maybe I should lead wage inflation acceleration (or lag unemployment)

awinf2 = winf[_n+12]-winf

. reg awinf2 unem if month>2000

awinf2 | Coef. Std. Err. t

unem | .0211333 .0482586 0.44

_cons | -.1483054 .4191373 -0.35

That doesn't make much difference does it ?

There is no hint in the Italian data that there is such a thing as a NAWRU. Those with firm faith can still believe in the NAWRU, but their faith receives no assistance at all from the data.

update: typos corrected thanks to Reason and Marco Fioramanti. An explanation was revised aiming for comprehensibility following advice from Marco Fioramanti.

NAWRU 1 The totally arbitrary estimated natural rate of unemployment and Euro Block Fiscal Policy.

Please read the version here which was updated and corrected (following comments by Marco Fioramanti)

European Commission fiscal dictates are based on outdated economic theory, strange econometrics and arbitrary ad hoc restrictions on parameter estimates. It is not easy to discuss the technique behind that which presents itself as technocracy with a straight face. The 'cracy part is genuinely powerful, so this matters.

This will be the first of a long long series of posts. It is written to blogging editorial standards, which means I think everything is true, but it's not as if I were submitting this to a peer reviewed Journal. I will try to present an outline.

A. Allowed deficits under the Stability and Growth Pact as revised in 2005 depend on estimated output gaps -- the restrictions on deficits refer to the "structural balance" (SB) which is the cyclically adjusted deficit minus one off expenditures and revenues. These posts will focus on the cyclical adjustment. The allowed deficit is 3% plus 0.5 times potential output minus actual output (the output gap). update: (correction due to Marco Fioramanti) Allowed spending depends on a "medium term objective" (MTO) which in turn is defined in terms of the SB end update. This means that estimation of potential output are very important as they is step required to apply an international treaty.

B. The European Commission (from now on EC) estimates of potential output are based on a production function and require estimates of the capital stock, total factor productivity and potential employment. This series of posts will consider only the estimates of potential employment. Potential employment is equal to the labour force times the natural employment rate. The natural employment rate is 100% minus the non wage inflation accelerating rate of unemployment (NAWRU). Estimates of the NAWRU are needed to construct estimates of potential output.

C. Another way of putting it is that the estimate output gap is a function of cyclical unemployment which equals actual unemployment minus the NAWRU. This means that estimates of the NAWRU are very important.

D. This means we (in the Eurozone) have a problem. The stability and growth pact requires estimation of the NAWRU which means that it dictates that there is a NAWRU and that, if unemployment is above the NAWRU the rate of increase of nominal wages declines. If the accelerationist Phillips curve does not correspond to reality, the Stability and Growth Pact is like the possibly mythical local ordinance which declared that Pi is equal to 3.0.

E This means that reassurances (to Paul Krugman) that policy makers and staff have moved on to use of Phillips curves with anchored expectations are uh not accurate.

F. There are many many problems with EC estimates of the NAWRU. This is obvious, because estimates of the NAWRU track actual unemployment and are absurdly high -- the EC estimate of the Spanish NAWRU for 2014 is greater than 20% (pdf warning) . I will write a post on each of the problems which I have noticed.

1. The theory which implies there is a NAWRU is rejected by the data. The acronym NAWRU implies that there is one and only one unemployment rate consistent with non accelerating inflation. European data from the past 7 years show huge fluctuations in unemployment and extremely stable inflation. There is no falsifiable hypothesis including a NAWRU which has not been falsified. The reaction has been to assume that the NAWRU fluctuates for unexplained reasons so the NAWRU story has no implications for the association between unemployment and inflation.

2. The changes in the NAWRU must be exogenous. It is not just that they are exogenous to the model (not explained) they must be unaffected by policy. This is an assumption. It is assumed that fiscal policy has no effect on the future NAWRU. In other words it is assumed that there is no hysteresis. This assumption is required for calculations of the effects of spending and revenues on the long term debt to GDP ratio (as stressed by DeLong and Summers pdf warning). The vitally important assumption is not tested.

3. The NAWRU is assumed to be an I(2) process -- not only does the level shift exogenously but so does the trend. This means that the first difference of the first difference of the NAWRU is stationary. This assumption implies that long term forecasts of the NAWRU, say 100 years from now, are always either greater than 100% or less than 0%. Clearly this is crazy. The original argument for an accelerationist Phillips curve is very explicitly an argument about the long run. There is a fundamental contradiction between the concept of a NAWRU and a time series model of the NAWRU whose long term implications are ignored.

4. The NAWRU is estimated by EC using two time series -- the acceleration of wage inflation and the unemployment rate. A model (explained for example in Fioramanti Padrini and Pollastri 2015 (warning same pdf to which I linked above). This model has 4 series of disturbance terms used to fit 2 time series. As one might guess, identification is a bit problematic. However, it is possible to convince a computer to estimate all the parameters.

5. In a last arbitrary ad hoc step, EC imposes limits on three of the parameters of their model. Crucially one of these is the variance of disturbances to cyclical unemployment. This last intervention is not motivated by theory or evidence. It has a very large effect on estimates of cyclical unemployment and allowed deficits.

I think it is clear that point 5 is very interesting. Even the reader who has been patient enough to read this far, might not be patient enough to read posts 1 through 4. I think 2, 3 and 4 will be skipable, but I don't guarantee that the future post 5 will be comprehensible without reading 1-4 (or even after reading 1-4).

update: the post has been corrected based on comments by Marco Fioramanti.

Kids these days

I am blogging with my smartphone while waiting for a plane. That is all.

Is Okun's Law OK ?

I think this is the 4th thing I've written about this Krugman post "Anchors Away"* while alarmed by my obsession with that application of 1960s macro and 1960 (but not 61) macro to current issues, I do see some hope. I have made it to the last two paragraphs.

How much output growth would this involve? An Okun’s Law type relationship also works pretty well for the euro area as a whole, and gives a coefficient close to the US level:

[graph] So a 4 percentage point decline in unemployment would, if the historical relationship holds, mean 8 percent more in real GDP — that is, this naive calculation puts the euro area output gap at 8 percent, which is huge.

Should we take this seriously? If not, why not?

Glad you asked Paul. First I don't have a problem with the calculation that Euro block unemployment is 4% greater than it could and should be. The astonishing implication is that Euro block economies could endure unemployment as low as 6% without suffering ever rising inflation. I see no reason to doubt this. Even the famously dysfunctional Italian economy managed it (the stability of inflation is even more striking if one looks at wages not consumer prices -- the ups and downs of the consumer price inflation rate in the graph in the linked post correspond to sharp increases and decreases in the price of oil -- no new graph as this is not this post's topic).

But I am not so convinced by the Okun's law estimate and calculation. Krugman's estimate ( and Okun's) is a simple regression with no lags or leads. The regression is valid if unemployment is a function of current output so the immediate effect of a downturn is equal to the long run effect of a prolonged depression. However, in practice employment adjusts slowly in recessions with the peak of unemployment typically occurring after the trough of GDP. I think the coefficient of GDP growth on the change of unemployment reflects this slow adjustment of employment. I'd guess a long run Okun's relationship would give a number closer to labor's share so two thirds, maybe 1 but not 2. I won't estimate this coefficient using changes from 2007 to 2014 for different Euro group countries (although I should). It implies an output gap of roughly 3 to 4% which I find highly plausible.

I think this implies an average allowed deficit of 4.5 to 5% of GDP (IIRC the Eurocrats calculate that a 1% output gap causes the deficit to increase by 0.5% of GDP based on increased transfers as well as reduced tax revenues). *The pun in the title doesn't fit the content of the post and set a very bad example, which may have influenced me and led me aweigh from the balanced prose path appropriate for serious topics)

Phillips curve Philippic I

This post is a teaser. I am writing that I will be writing about how the Phillips curve is used by the European Commission and in particular EcoFin. I am trying to force myself to write something by promising the web that I will.

Just in general, when reflecting on the other than ideal state of academic macroeconomics, I have comforted myself with the thought that policy makers mostly ignore allegedly micro founded macro and, to the extent they listen to economists at all, use old pretty much Keynesian models roughly based on the work of Keynes Hicks, Solow Samuelson U Friedman and not of Lucas let alone Prescott (yes Friedman would be surprised to be called roughly Keynesian, but, in fact so called New Keynesian economics is largely based on Friedman as noted by Brad DeLong).

I am distressed because I have learned something from Marco Fioramanti about what models policy makers use. The model in question is a highly modified Phillips curve not a silly modern micro-founded macroeconomic model. It is used to estimate the non accelerating wage inflation rate of unemployment (NAWRU not exactly the same as the good old NAIRU because the inflation is wage inflation not price inflation). This is subtracted from unemployment to estimate cyclical unemployment. The estimated Cyclical unemployment is used to estimate potential output and the output gap (with a production function of capital and (employment + cyclical unemployment) and estimated technology (estimating technology is another very tricky issue). The output gap is used to cyclically adjust deficits -- that is to dictate fiscal policy.

The last part is key. At the end of the calculations there aren't recommendations to policy makers. The calculations are part of implementing an international treaty -- the Stability and Growth Pact as modified in 2005.

In order to ensure long-term compliance with the SGP deficit and debt criteria, the member states have since the SGP-reform in March 2005 striven towards achieving their country-specific Medium-Term budgetary Objective (MTO). The MTO is the set limit, that the structural balance relative to GDP needs to equal or be above for each year in the medium-term. Each state select its own MTO, but it needs to equal or be better than a calculated minimum requirement (Minimum MTO) ensuring sustainability of the government accounts throughout the long-term (calculated on basis of both future potential GDP growth, future cost of government debt, and future increases in age-related costs). The structural balance is calculated by the European Commission as the cyclically-adjusted balance minus "one-off measures" (i.e. one-off payments due to reforming a pension scheme). The cyclically-adjusted balance is calculated by adjusting the achieved general government balance (in % of GDP) compared to each years relative economic growth position in the business cycle (referred to as the "output gap"), which is found by subtraction of the achieved GDP growth with the potential GDP growth. So if a year is recorded with average GDP growth in the business cycle (equal to the potential GDP growth rate), the output gap will then be zero, meaning that the "cyclically-adjusted balance" then will be equal to the "government budget balance". In this way, because it is resistant to GDP growth changes, the structural balance is considered to be neutral and comparable across an entire business cycle (including both recession years and "overheated years"), making it perfect to be used consistently as a medium-term budgetary objective.[24][25]

Whenever a country does not reach its MTO, it is required in the subsequent year(s) to implement annual improvements for its structural balance equal to minimum 0.5% of GDP, although it should be noted that several sub-rules (including the "expenditure benchmark") has the potential slightly to alter this requirement.

As a "pact" this can't be unilaterally changed by a national parliament. Here is an extreme (but not misleading) edit ""output gap" ... a country ... is required". The calculated output gap affects what once sovereign countries are required to do.

However, the output gap has to be estimated by a long suffering staff which has to follow clear objective unchanging rules (they not being superior to elected officials as their immediate superiors are). These rules have to make sense and yield sensible results even if the economic model on which they are based doesn't fit recent data well. Since casual discussion of the Stability and Growth pact doesn't clearly distinguish the structural deficit and the ordinary budgetary deficit, large cyclical adjustments would cause extreme suspicion that the rules were being bent.

In particular, that which many countries are required to do depends on a calculation based on an accelerationist Phillips curve. Behind the calculation there is a model in which it is assumed that unemployment affects the change in the rate of wage inflation and in which a decrease from 11% to 9% is just like a decrease from 1% to -1%. This means that, to the extent that the Stability and Growth Pact is involved, policy is absolutely not based on consideration of Phillips curves with anchored expectations.

The reassuring claims about policy and Phillips curves made to Paul Krugman -- " the usual response from model-oriented public officials and research staff at policy institutions is to say that what they work with now is a Phillips curve with “anchored” expectations " -- are to this important extent, false.

Krugman calculated a Euro area output gap using an anchored Phillips curve. Even he is astounded (and unconvinced) by his calculated output gap of 8%. Using such a gap for the correction would allow a fundamental transformation of fiscal policy in many Euro area countries. These do not including those, such as Germany, where the pact isn't binding, or Greece which can't borrow even if it had EcoFin permission, because no one will lend to them. However, they most definitely include Italy.

I don't take Krugman's calculation more seriously than he does (another post) but it is easy to understand why the binding authoritative calculations with the force of an international treaty are completely different. One reason is that they are based on an accelarationist Phillips curve estimates of which imply double digit natural rates of unemployment (which have shot up since 2008). The other (and probably more important) explanation is that such a conclusion is unacceptable to the Eurocrats who claim to be technicians not dictators, but who accept no limits on their power and will never accept markedly higher deficits.

Still the demonstrable fact that the official and binding calculations are based on a model which is wildly at odds with the data might have some impact on someone somewhere sometime somehow.

Donald Trump number one in all the polls

of course that is in @Satan 's time line. I would guess Donald Trump is less hated by people who follow @realDonaldTrump but I'd rather go to hell than go there.

RubiK's Octopus

via Mark Thoma The photograph illustrates a fascinating post which really is about How to do cephalapod philosophy And while on the topic of molluscs an old favorite

When is a Bailout not a Bailout

Simon Wren Lewis wrote "It raises important issues about how to reinterpret a no bail out policy when OMT is possible,"

Heh indeed. The crucial credibility of the commitment to Calvinist virtue of the European Central Bank is entirely based on the distinction between lending money to a Treasury and buying bonds issued by that Treasury.

Buying bonds that no one else wants is an forbidden sinful bailout. Open market operations are standard central banking. Open markets being what they are, open market operations involve selling something or a price lower than the asking price of anyone else buying something for a price higher than any other bid. Roughly half of open market operations must involve buying a bond at a price no one else is willing to pay because markets work that way.

The fundamental central economically and morally crucial distinction is between buying a bond to drive up its price (drive down its yield) for good macroeconomic reasons or doing the exact same thing to bail out a Treasury.

This is a rule which can't be enforced without ESP. Even with ESP the central banker and the enforcer have to have a clear idea about a distinction based on words alone and not on desired outcomes. Also there is no enforcer.

The no bailout policy is like a rope made of sand except for the parts about ropes, sand and making.

Microcardiods Vs Magaurisoids

Well this is delicate. This humble blog is getting some traffice (from Mark Thoma as usual). It is unfortunate that I feel the need to blog wearing my tinfoil hat. I would like the reader to consider the civilizational struggle and ask if might be reasonable to entertain the possibility that our planet is the scene of a struggle for dominance between two alien civilizations. Now I understand claiming contact with one alien civilization is already full tinfoil hat so I guess I am going for tinfoil gloves too.

Of course one of the alien races would have to be the Megaurasoids characterized by large ears and completely mysterious political success. They seem to have landed in Indonesia in the 1960s and have already colonized the 2nd and third largest democracies.

I don't approve of colonialism, but we had been making a mess of things.

Of course this means I am not just a birther but a Birther alleging that Obama isn't just an alien in the legal sense but in the science fiction sense. I have seen photos of his birth certificate, but think back to 2002. Would you ever have imagined that a black guy named Barack Hussein Obama would become president through entirely terrestrial means ?

The second exemplar would, of course, have to be Joko Widowo who rose from a humble (allegedly earthling) background to be elected president of Indonesia. Hmm that extremely large important country no one ever thinks about again. Just look and tell me this is a coincidence

Hmm different hair. Slightly different eyes. The same ears. The same strange career path. I mean Widowo was elected president before he learned how terrestrials perform the strange task we call "pulling up our socks."

Look at the expressions. Both seem mildly pleased to find themselves in the White House. It's almost as if, after the distance they've travelled the distance from Hawaii or Indonesia to DC isn't any big deal.

Now I am confident that the megaurisoids have good intentions. Obviously, as mentioned above, their ability to get people to trust them is one of the ways in which they differ from humans.

Unfortunately we, and they, are not alone. There is clearly another group which landed in the frozen wastelands of Northern North America somewhere between Calgary and Milwauki. Again, try to tell me this is a coincidence with a straight face

I am, of course, almost the last to notice

MomJ at gardenweb has an wonderful example (think about it -- a political story so alarming and easily supported with photographic evidence that it is reported in a gardenweb forum).

Ms Observer Staff showed that even color film can not hide the resemblance

In five decades, at least the microcardiods have learned how to shave. The strange technology called the "razor" must be alien to them (probably because they were too tempted to try to kill each other with safety razors).

Bearing the Crown of Scorn

In "Who's the Most Humble? We Are!" Kevin Drum draws my attention to something Carly Fiorina said to which People for the American Way drew his attention.

"I do think it's worth saying," Fiorina declared, "that people of faith make better leaders because faith gives us humility"

Heh indeed. They also have a better sense of irony and self awareness.

Drum is not pleased.

He did write

"I've got nothing against organized religion. It provides an important part of life for a lot of people and does a lot of good charitable work. "

But then "" and wrote a devastating critique.

My rant volume goes up to 11

(his rant quality is much higher -- "always click the link" -- Kevin Drum).

My comment.

But even those of of us who don't believe that He technically Exists must be hypothetically eternally grateful to Jesus Christ for His willingness to suffer. I'm not talking about a bit of scourging and 3 hours on the cross. For such a benevolent and omniscient being the pain due to the humiliation of being associated with people like Fiorina must make crucifixion seem like a walk in the park.

OK enough snark now how about some science. I tried to check if Luntz was telling the truth. I know that socially undesired outcomes including teenage pregnancy are more likely in highly religious states. I also know what "ecological fallacy" means.

Of course I googled. It turns out that it is hard to get to other than obviously biased by googling [religious faith and teenage pregnancy]. The first few hits were all to heritage foundation sites. I chose to go to google scholar and found

http://www.sciencedirect.com/science/article/pii/S1054139X04004124

"Conclusion

Frequency of attendance and religious affiliation have little impact on sexual behaviors once intercourse occurs."

Which contradicts Luntz's claim because of the qualifiers "every single" and "all".

I also recall Case and Katz (1991) "The Company You Keep"

http://www.nber.org/papers/w3705

Which makes me feel old. The relevant bit of the abstract is "We find that family adult behaviors are strongly related to *analogous* youth behaviors. The links between the behavior of older family members and youths are important for criminal activity, drug and alcohol use, childbearing out of wedlock, schooling, and church attendance."

** mine.

The point is that, in regressions including the other adult behaviors, parents' church attendance is significantly related to youths' church attendance but not statistically significantly related to youths' criminal activity, drug and alcohol use, childbearing out of wedlock, or schooling.

Now this doesn't mean that organized religion has no effect -- to conclude that would be to reject the alternative hypothesis. It doesn't even mean that Luntz's claim is false -- he said "correlated" not "partially correlated," so he referred to simple regressions not multiple regressions.

I am sure Luntz knows about omitted variable bias. I am sure he is deliberately appealing to omitted variable bias to strengthen (and flatter) the faith of the audience.

I am as atheist as Kevin Drum is and as confident that organized religion is, on balance, a good thing*, but I am sure that Luntz's claim about the current level of empirical support for this view is based on the deliberately misleading use of the word "correlated".

* Yes I know that, according the the Gospels as written decades after his death, Jesus said "the truth shall set you free" and I just said I believe religious beliefs are are for the most part good false beliefs. I disagree with Jesus on the value of believing the truth.

What caused the Great Recession ?

A short comment on a shorter comment on Krugman's short comment on "The Big Short"

Comment FSP asked a question

FSP Los Angeles 41 minutes ago My question is this: Would the Lesser Depression have occurred if we did not have the "financial superstructure" of sub-prime backed securities, and just had instead the bursting of a housing bubble, without the implosion of those financial products adding to the problem? Or, can the two not be separated? I think at least a rough attempt to separate the two factors (housing bubble and financial superstructure) can be managed. Dean Baker has definitely claimed that the lesser depression would have occurred without the financial superstructure

The rough approach (Baker's approach) is to look at the much smaller past fluctuations in housing prices back before the RMBS CDO CDS superstructure was built and the subsequent fluctuations in GDP and employment. Baker argues that GDP behaved as one would forecast based on housing prices and regressions with pre-superstructure data.

Or you can ask if the financial crisis would have caused a lesser depression even if triggered by something other than a bubble bursting (a bubble in house price or some other price). Here the standard variable is the quality premium on corporate bonds (the spread between say a B corporate bond rate and AAA bonds or treasuries). This spiked in late 2008.

The time series of the two candidate explanatory variables are very very different. The lag, magnitude and duration of the effects on GDP can be estimated with 20th century data.

This is crude, but not as bad as my knowledge of the literature. I know of people (Del Negro & Schorfheide 2012 ) who look at quality premia and what happened next. I know of Baker who looks at house prices and what happened next. I (amazingly) don't know of anyone who has let the two variables into the same regression.

Yglesias on Abenomics

https://twitter.com/mattyglesias/status/666049859753918464 I have three responses. First I don't approve of changing the indicator between the time one makes a prediction and one looks at the data. Yglesias stressed expected inflation and actual inflation when declaring Abenomics a success.

Second in macro there aren't enough data points to just compare means for treated and untreated subjects -- there is one case of Abenomics treated Japan. Macro theory is unreliable, but imposing some theory on data is necessary. I think it is safe to assume that monetary policy affects employment through interest rates and the price level. Nominal interest rates were very low pre-Abe (also including the 10 year treasury rate = 0.713% the month before he was elected prime minister). The inflation rate remains extremely low. I don't see a path from changed monetary policy to improved employment. But I will check.

OK unemployment. rom the graph can you guess when Shinzo Abe was elected ? I can't (and with failing memory had to go to the Wikipedia but I'm man enough to admit it)

Answer he became prime minister after the DEcember 2012 elections. This was unsurprising after he was elected LDP party president September 26 2013. I see no hint of a change of economic regime September 2012 or December 2012 or at any date after 2008.

I don't see what checking the working age population growth rate has to do with Abenomics. It is determined by fertility 15 years ago and 65 years ago and, a tiny bit (but matters a lot for those uh involved) by the very low death rates of Japanese under 65. I guess that the idea is either that low working age population growth explains low GDP growth in spite of Abenomics or the tweet includes a typo and Yglesias meant to refer to the ratio of employment to the working age population.

That ratio has indeed increased dramatically. It began increasing before Abe but something new and different has been happening.

Stanley Greenberg Warns the GOP

I found Stanley Greenberg's article Why 2016 could be shattering for Republicans very interesting.

I was afraid to read it, because I don't want my hopes raised and then crushed. The current polls, for what they are worth, don't show a GOP cruising for a bruising. Greenberg's main claim is that John B. Judis and Ruy Teixeira were right way back in 2004 when they predicted an Emerging Democratic Majority.

I think the change based on 11 years of information is a greater stress on the beliefs of currently young Americans about religion and gays (also marijuana but Greenberg didn't mention that green stuff). They key paragraph is

... a new majority coalition of racial minorities, single women, millennials and seculars. Together, these groups formed 51 percent of the electorate in 2012, but our analysis of census survey data and exit poll projections indicates that they will comprise fully 63 percent in 2016. With these growing groups each supporting Hillary Clinton by more than 2 to 1 in today’s polls, it is fair to say that the United States has reached an electoral tipping point.

I think the growth of seculars is a bit of a surprise (they are people don't identify with any organized religion a majority of whom are neither atheist nor agnostic). But I think the key question is whether millennials will keep their current views which are similar to mine and very different from those of a majority of US citizens of my age. Another question is whether US Hispanic whites will continue to be a racial minority (as US Irish, Italians and Poles once were) or whether they will come to consider themselves part of roughly the same group as WASPs.

The point is not new (it probably wasn't new in 2004 either). To me the really interesting thing about the article is the name of the author. Greenberg has made a career studying the difficulties Democrats have have regaining the support of Reagan Democrats/blue collar ethnics/working class whites recently here. In this article, he argues that that group, which he studied and studied is no longer politically crucial. It is almost as if Mudcat Saunders wrote that he was convinced by Thomas Schaller's thesis in "Whistling Past Dixie" (I see it was published in January 2008 so Schaller sure didn't have to wait as long as Judis and Teixeira for confirmation).

I am not really surprised that Greenberg goes where the data lead him -- I have often been impressed by his research. But I am pleased. I think his narrow economic interests would have been well served by acting as the debater contra Judis and Teixeira. I don't think there is any advantage for public intellectuals gained by noting that the world has changed and that the things they said about the past are not true of the present. I think it helps to be predictable (I'm sure it helps them get on TV as bookers want to know what guests will say). Now Greenberg is in a different league than Sanders or the talking heads. Top Democrats will listen to him even after he has changed his emphasis. He wants them to win elections so he doesn't just want to take their campaign money, he wants to give them good advice. Still I am pleased (and displeased that I am surprised enough to be pleased).

Greenberg suggests that the new Republican and Conservative extremism is a reaction to the knowledge that people of my age race and gender won't control our shared country for long. This is the natural if uncharitable guess of what tea partiers really mean when they say they want to take our country back. Here it is important that, following party affiliation, voting intention, and issue polling, he considers key groups to be single women vs married women and men whether married or single (lots of tea partiers are women but few are single women). I know very few US conservatives and very few Republicans, but I am sure he is right. They talk and write about tipping points and some sort of doom. I am sure it is demographic doom.

I am out of touch (I am typing this in Rome). I am surprised that 15% of new marriages include spouses of different races (always counting Hispanic and Anglo white as different). I am shocked and appalled that only 68% of US adults think that "Sex between and unmarried man and woman" is "morally acceptable". I mean what the fuck do they expect single adults to do ? I guess it is impressive that this is only 5% more than the 63% who think gay sex is morally acceptable (still way too low but much higher than it was). I guess the dramatic news is that attitudes towards gay sex and premarital heterosex are similar, but I think it bears repeating: what the fuck ?

Second Comment on one Morning Plum Post by Greg Sargent

Extreme editing

GOP consultant Charlie Black explains what might stop Trump:

Black said he was briefed on the findings of two recent private focus groups of Trump supporters in Iowa and New Hampshire that showed these voters knew little about his policy views beyond immigration.

Members of the House Freedom Caucus are preparing a “Contract With America II” that would call for House votes in the first 100 days of 2016 on replacing Obamacare, overhauling entitlement programs such as Social Security and Medicare, and repealing the estate tax. [It] also calls for legislation to slash government regulations by 20 percent, cut corporate tax rates and expand offshore oil drilling.

That is one Republican argues that Trump will be stopped, because people don't know about his policy proposals, are thinking of only some issues, and responding to pollsters based on a general impression not policy issues and other Republicans propose cutting Social Security, Medicare and corporate tax rates. The case for Republican optimism is that people will learn the facts and decide whether to vote for Trump based on his policy proposals and then we can go back to getting the votes of people who want to keep the government's hands off of their Medicare and get back to fighting to cut Medicare.

As noted by many (including of course Paul Krugman) the establishment Republican case against fear of Trump and Carson is that they are obviously crazy. This is true, but so are all Republicans. They have to assume that voters will pay attention to Trump and Carson's policy proposals but not to the policy proposals of any other Republicans.

They are not only relying on voter ignorance but on selective voter ignorance. This leads me to conclude that the chance that they are guessing right and will win the next election is ... terrifyingly high.

Republican Stupidity Shocks me

"Worse than you can possibly imagine even taking into account that they are worse than you can possibly imagine" - Brad DeLong

"Members of the House Freedom Caucus are preparing a “Contract With America II” that ... calls for legislation to slash government regulations by 20 percent,"

That's not a bad proposal, because it isn't a proposal. What would it mean to cut regulations by 20% ? I suppose there might be some attempt at a definition, but I am sure they can't come up with a definition that makes sense.

Do they want to reduce the total pages of regulations by 20% ? That could be achieved by eliminating exceptions to regulations. How about reducing the number of separate regulations ? That could be achieved by reformatting the regulations without changing anything.

Would eliminating all regulation of sex, drugs, and abortion count ? Is this a joint GOP-NORML-NAMBLA coalition ?

In any case, such a law would have to grant enormous discretion to the executive branch.

The magic asterisk has magically moved from magic asterisk budgeting in which it is declared that some spending will be cut to magic asterisk deregulation in which it it declared that some regulations will be eliminated.

I already knew that the House Freedom Caucus are a post policy caucus, but they seem determined to remove all doubt. They can't be bothered to come up with extreme vague proposals. They demand a yoooge conservative shift but aren't willing to bother with details such as the difference between the EPA and the SEC.

I'm tempted to say this will finally save Congress by convincing these representatives' constituents that they are dangerous irresponsible crazy fools if election after election hadn't proven that there is no way to convince these representatives' constituents to vote for a Democrat.

Quote of the Day

QOTD "The Repubs haven’t updated their lies any over the last twenty years, but Hillary has gotten infinitely better at respondng to them." Anne Laurie

Downward nominal wage rigidity at wage growth of 2% per year

One great puzzle of the great recession is why extremely high unemployment caused such a small change in the rate of wage inflation. In the USA it fell only about 2% from the peak of wage inflation to the trough. Based on models popular in 2008, one would have forecast an actual decline in nominal wages.

The presumed explanation is that it is very hard for firms to actually cut dollar wages without infuriating workers. Micro data offers strong support for this view as there are a large number of individual wage changes of exactly zero as illustrated in this working paper by Mary C. Daly and Bart Hobijn (for the graph without the math look at Krugman).

To be clear the authors whose calculations are shown are Daly and Hobijn not your humble blogger.

Downward nominal rigidity also explains why unemployment is correlated with wage inflation not the acceleration of wage inflation (that is the change in wage inflation) or wage inflation minus expected price inflation. 21st century data look like the original Phillips scatter and like the expectations unaugmented Phillips curve (which was never actually taken seriously by more than one or two macro-economists in the 60s). As argued by Akerlof Dickens and Perry in 1996 (and informally by many others back in the even older days) if there are different markets for labor (different places, different industries, different occupations requiring different skills) then the relevant unemployment rate will be different for the different labor markets. With high unemployment and low expected inflation, many wage changes will be zero & stuck at the lower bound. higher constant not accelerating inflation relaxes this lower bound (which is that nominal wage changes can't be negative). This causes higher employment (and lower real wages). This gives a stable downward sloping Phillips curve (at least sloping down at very low inflation rates). The argument is important, because inflation also makes it easier for relative wages to adjust which (in the model) causes higher productive efficiency and average welfare.

I think the puzzle of why average wages continued to grow at a rate well above zero isn't completely solved. I can't imagine that in 2009 and 2010 there were many particular labor markets with enough demand to cause high wage increases (I'm sure the tails in the Daly and Hobijn figure are due to people losing good jobs and moving to bad ones or finding better jobs).

I think that the standard scheduled increase in wages with increased seniority might be binding too. If there is a contract (or an explicit contract) which says that wages increase 1% for every year of seniority, it could be infuriating for the firm to pay only last years nominal wage.

It is also true that with the high unemployment rate, the quit rate declined dramatically in 2009 and stayed low. This would make the promise of an increase of wages with seniority binding. Another way of putting it is downward nominal wage rigidity (with or without seniority based pay increases) means workers have wages higher than other employers want to pay (but are still worth employing for their current employer because of firm specific training). This means their wage is higher than the market wage. Higher and rising with seniority as promised.

I think this could explain the mass of wage increases around 3% to 4%. It isn't a spike like the spike at 0%, because different contracts have different provisions (and implicit contracts are vague). Or it could just be the normal normal.

With Notably Rare Exceptions, David Brooks is Aware of all Internet Traditions

David Brooks has scored a major internet hit by writing two of the most vapid and idiotic sentences in human history (which includes the collected writings of Donald Luskin and the speeches of Louis Gohmert Padishah emperor of the crazy people for life).

"At this stage it’s probably not sensible to get too worked up about the details of any candidate’s plans. They are all wildly unaffordable. What matters is how a candidate signals priorities."

He has managed to get quoted by Paul Krugman, Jonathan Chait, Scott Lemieux ,Tom Levinson and, oh hell just ask google.

Lemieux asks of Brooks is a mark or a con artist (I read the headline "In Republican Punditry, It’s A Fine Line Between Mark and Con Artist" as "A Fine line between stupid and clever") but I think Brooks is neither. I go for performance artist. I mean he had to have some reason to turn the stupid up to eleven.

I think the sentences might achieve internet immortality. I am sure that this was Brooks's intention.

Of course, the precedeing sentence was not intended to be a factual statement.

Desperate no hope GOP presidential candidates will try anything.

Lindsey Graham has been having a bit of trouble getting attention and beating 0% in polls so he decided to get sloshed and discuss who he would fuck, marry or kill (or -- as asked date, marry or disappear permanently). I am not exaggerating.

CNN’s Very Serious Journalist Dana Bash asked Graham to play a delightful childhood game known as Fuck Marry Kill, although she asked it in her Very Serious Journalist way:

Asked which of these people — Hillary Clinton, Sarah Palin, or Carly Fiorina — he would “date, marry, or disappear forever,” Graham initially resisted, joking that he “didn’t know we were going to do the Mormon thing here.”

Finally, he said he would date Palin and marry Fiorina “‘cause she’s rich.” Asked by Bash if that meant he would “disappear” Clinton, Graham shot back, “No. Is she rich? ‘Cause she said she was flat-broke.”

I suppose the get real drunk and sexist approach has to work better than whatever he was doing (I think aiming to reach across the aisle to work on bipartisan initiatives to go crazy about Benghazi or something).

But, sadly, Graham isn't the most desperate one. Kasich is so desperate for attention that he has tried the last, the very last, option -- telling the truth about what the Republican party has become.

Tweet of the day

Matt Yglesias writes it all with 140 characters or less Matthew Yglesias ‏@mattyglesias Oct 24 Washington, DC "The strong economy of 1997-2000 made welfare reform look good and the political system just closed the books on it and never looked back."

Deep in the Weeds meets Who Cares

Update2: never mind. Burkett never served in the Air Force. At Texas Monthly Joe Hagan explores the Bush Texas Air National Guard tale. In 2004, this was not an important issue and it's absurdly unimportant now. Only someone who has too much time on his hands (no) or is an idiot (yes) would try to guess the name of this anonymous source.

Littwin’s Dallas lawyers recruited a local Air Force veteran to interpret the file. He was a Bush antagonist still agitated by medical issues from his service, but he was an expert in the military jargon of the time. “I was stunned at what I saw,” explained the man, who requested anonymity for fear of retribution.

I believe it is the dread Bill Burkett who later gave the alleged Killian memo to Mary Mapes and Dan Rather.

I think the phrase "agitated by medical issues from his service" almost amounts to a violation of the promise of anonymity.

Consider

Burkett has, in the past, raised his allegations about the Bush records as part of his personal struggle with the Guard over medical benefits.

For instance, in a 1998 letter to Texas state Senator Gonzalo Barrientos, Burkett complained that he had not received adequate medical care when he became seriously ill after returning from a mission to Panama.

Update: yep reading on in the Texas Monthly article (after a pause to google and post)

“I was stunned at what I saw,” explained the man, who requested anonymity for fear of retribution. “It was full of inconsistencies.” As compensation, the man asked Littwin’s lawyers if he could keep a photocopy of Bush’s record, then made an appointment to go see someone at the Dallas bureau of CBS News. That person was Mary Mapes.

The Two Minutes Chait of the Day

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

he wrote

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

I commented twice. The second comment I typed is

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

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

Are you debating with a straw man ?

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

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

http://bit.ly/1OPuwYi

I conclude you are debating with a straw man.

The first was less rude

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

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

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

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

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

I will now google hillary clinton

www.hillaryclinton.com

ISSUES

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

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

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

OK how about Sanders

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

The first 3 clickable issue headings are for the middle class

"INCOME AND WEALTH INEQUALITY

GETTING BIG MONEY OUT OF POLITICS

CREATING DECENT PAYING JOBS"

Neither mentions foreign aid or welfare.

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

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

Quote of the Day

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

The Hunting of Snark

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

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

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

Smart and Smarter

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

Dumb V Dumber

Carly Fiorina decided to contrast her knowledge with Donald Trump's ignorance. He said the 14th amendment doesn't establish birthright citizenship (dumber) Fiorina said "The truth is, you can't just wave your hands and say 'the 14th Amendment is gonna go away.' It will take an extremely arduous vote in Congress, followed by two-thirds of the states," Uh Ms Fiorina, Article V of Constitution begs to differ

The Congress, whenever two thirds of both Houses shall deem it necessary, shall propose Amendments to this Constitution, or, on the Application of the Legislatures of two thirds of the several States, shall call a Convention for proposing Amendments, which, in either Case, shall be valid to all Intents and Purposes, as Part of this Constitution, when ratified by the Legislatures of three fourths of the several States, or by Conventions in three fourths thereof, as the one or the other Mode of Ratification may be proposed by the Congress;

Yet she was the relatively knowledgeable Republican candidate.

House Republicans Attempt Kabuki and Trip Over Mask

Being upset that Democrats managed to filibuster the resolution disapproving the Iranian Nuclear deal, House Republicans decided to take three symbolic votes. First they voted on whether to approve the deal (which does not need congressional approval). For some reason this difference was important to them. On that vote 25 Democrats voted yes along with all but one Republican (one voted present). This means that there would not be enough votes against the agreement to overturn a veto of a resolution disapproving the veto (which will not pass the Senate because of the filibuster or the House because of the weird theatrics). Then they insisted on voting on a resolution suspending the President's authority to relax sanctions until January 21 2017 (that is exactly so long as Obama is the President). It is not clear to me why Conservative House Republicans demanded a vote on this resolution. It will not be proposed in the Senate and would obviously be vetoed if it passed the Senate.

On this vote two (2) Democrats voted with the Republicans. The roll call might be the closest to purely partisan in the recent history of the House of Representatives[nope see update]. So Republicans can now boast that their effort to block Obama has bipartisan support, because two (2) Democrats voted with them. If they hadn't insisted on the second resolution, they could have claimed the support of 25 Democrats.

Losing is always painful, but losing mid term elections to these buffoons is humiliating. The two Democrats are Representatives Graham and Vargas. I don't know what districts they represent, but I hereby promise to donate no less than $100 to anyone who primaries either of them (if you do primary them demand that I pay up in a comment to this post). The crazy and/or cowardly Democrats' names are in italics

Update: My mistake. On Thursday there was an even more perfectly partisan vote with 0 Republicans voting no and 0 Democrats voting yes on a motion claiming the Obama administration hadn't sent congress enough information so the 60 day clock never started. I am confident that there has never been a more purely partisan vote (that's safe to say) So why did Republicans insist on getting a record that no (0 (zero)) Democratic representatives agree with their absurd claim ? Does anyone there know how to play this game ?

QOTD

"President Obama really should come out in favor of breathing, just to see how many Idiot-Americans pass out trying to refudiate such tyranny. I really think Gohmert would give it a shot — if the cameras were rolling, at least."

Terrific Trilingual Trolling on Twitter

Daniel Davies is probably being very witty, but it's all Welsh to me

Paul Romer has 3 Questions

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

Consider these two statements:

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

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

Next, consider these two statements:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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