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Tuesday, April 24, 2012

Drum has decided to stop objecting to talk of Social Security bankruptcy would be a helluva dramatic event if the trust fund ran out of money and Social Security suddenly had to slash benefits by 25% in 2033 (see chart above). Referring to this as "bankruptcy" isn't all that big a rhetorical stretch ...

My comment is relatively mild

Nothing dramatic has to happen when the trust fund runs dry. In fact, I guess that nothing dramatic will happen. I guess that pensions will be paid in full using money from the general fund. In the very long run, this might cause the US to end up like Greece, but I am sure that we won't let them cut our pensions when the time comes.
Why does Wall Street Hate Obama
Delong and Drum
my thoughts here
Commenting on Drum

No one reads "Robert Comments" so I will post a comment here. Many more over there.

Drum writes that Nobody Really Cares About Political Predictions

most pundits don't really care if they're right. It's not like they have any money riding on their predictions, after all. But predictions stir the pot, and unusual predictions stir the pot even more.

Wonderful post. I absolutely agree with you and Waldman. There is a very low penalty for confidently made grossly wrong predictions. I have some thoughts.

First evaluating pundits has become much easier than it was. Now a google search will get you part of the way there, then (when you worked in high tech) one had to get ink on one's fingers leafing through old newspapers. So there has been a ranking of pundit prognostication. The results included the unsurprising facts that Krugman was much better than the others and that many pundits did worse than a flipped coin.

The fact is that someone has an incentive to meta-analyse pundits (people have incentives to find something new to write about -- they aren't all like you with ideas about everything). Watch out.

A) I will never make another forecasts (after the one I just made).

But no one (except, of course, for Krugman who linked to the study) cares.

In fact, I think pundits are rewarded for making firm predictions. I also fear that predictable predictions are favored by cable gab fest bookers. This doesn't just lead to bad predictions but to boring TV.

I think the really alarming thing is that your argument applies to matters where good predictions matter more than the horse race -- predicting that Clinton tax increases would cause a slump and Bush tax cuts a boom has not been punished at all. Yes elections are important, but forecasting them isn't. Forecasting the effects of policy is very important. But the situation is even worse as there isn't a moment of truth.

It's not just the future. Getting facts wrong is allowed. But before despairing I return to my first point. The web has made things better. The incorrect predictions are on the web. Hords of bloggers remind each other of them. Bloggers don't have tenure as I do and columnists almost do. I don't predict that the current pathologies will last, or that things will improve, since (see A above -- I can't repeat it -- that would be a prediction).

Saturday, April 21, 2012

This is the usual flip out.

update: this is the usual apology for the usual flip out which I always type whenever Drum mentions those polls. I retract the tone. The content may be of interest.
Now we return to our regularly scheduled rant.

Years ago I pointed out Gallup polls showing a solid majority of US adults say the rich pay less than their fair share to Kevin Drum (it was news to him). He noted this in a follow up post, but ever since that post he has been arguing that his guess was sortof right. Now the point is that the solid majority is smaller than it was in 1992 (the first time Gallup asked the question) and even 6% lower (which is statistically significant see below) than in 1994. So the 62% who absolutely utterly reject the central policy proposal of the Republicans are ignored to focus on the estiamted 6% who are no longer diametrically opposed to the central tenet of Republican policy. I totally lost it (as usual when he writes on this topic). Just click the link then come back. I don't want to excerpt. Speaking of the power of repetition, you continue to ignore the main fact reported by all of those polls years after I first pointed them out to you. I hope you recall that you (and Felix Salmon) claimed that people in the US oppose higher taxes on the rich. I told you about those of the polls in your figure which had been conducted before that date years ago. In a follow up post, you admitted that you had been wrong about US public opinion. Since then, you have been arguing against the data. In this post rather spectacularly. I know you suspect polling literalism, but on this topic, I very much think that you are being stubborn. I Now you discuss only the change and not the level. This is a dealing with data 101 error. The fact is that now as in every poll most US adults think the rich pay less than their fair share. Repitition has not worked for Republicans (as it has not worked for me here). Now you note the change 92 to 94 actually makes sense as taxes on the rich were significantly increased by a bill signed into law in 93. The remaining decline of 6% is tiny compared to the current level of 62%. A major party's main policy proposal goes in the opposite direction than the policy desired by Sixty Two percent (62%) of the public. The number is huge compared to the perceptions of commentators who don't bother with data. Comparison with 1992 only makes sense if we can assume that there was nothing unusual about views on tax fairness in 1992. Of course there was. Gallup started asking the question for a reason, which is that rage at the low taxes paid by the rich was extraordinarily intense Compared to anything. Two facts from 1992. First during a debate with focus groups with the dial thingy Bush supporters dialed strong agreement with Clinton at one point. I'm not sure something like this has happened before or since. It was when he said "only rich people have gotten tax cuts" or something (this is an almost 20 year old memory -- I don't remember the exact words). Also an internal Clinton campaign poll found a plurality were in favor of higher taxes on the rich to fund more "waste fraud and abuse" or so Brad DeLong (then deputy assistant secretary of the treasury) told me. Anger at the low taxes paid by the rich was not normal in 1992. It wasn't even especially sane. Yet your whole post is based on the assumption that there was nothing unusual about 1992. Read it. Note all discussion is of change since 1992. The idea that 1992 was a strange year and reversion to the mean could be expected isn't even considered. It is obviously the case. This comment is in the format spittle flecked rage not very rude arrogance, because Gred Sargent misread the post (and ignored Khimm's post). Also put my comment on Sargent in Khimm's comment thread -- twice. But to me, the practical message is that Democrats do not have to fight the Republicans to convince the US public that the rich pay too little. A very solid majority is convinced. Democrats just have to stand for a more progressive tax code and they will win. I'd say that means cutting taxes for the non rich a little (the full soak the rich and spread (some of it) out thin). This approach has worked very well so far. There is no problem except for sloppy data analysis based on stubborn insistence that your guess was roughly partly in a way semi right. Finally, quick what is the probability that a change as large or larger than the 6% decline from 1994 till 2012 is due to sampling error alone with no change in population public opinion ? You should have the answer immediately, since you should have done the calculation. By pollster usual silly approximation the change is roughly 0.6root(20) standard deviations so the chance is less than 5%. A better estimate is 0.9root(10) actually larger. Both are statisically significant changes. The calculations are quick and should not be optional.
This is the second time they (who were Pyra and are Google) have changed the interface (yes this blog is that old). I feel totally disoriented.

OK found the menu with "old blogger interface." Whew what a relief.

Wednesday, April 18, 2012

On Noah Smith on weather chaos and economics

On weather and economics. As you have mentioned we disagree on the promise of using more realistic micro foundations. I am not optimistic. The reason is thateople are much more complicated than molecules. The ideal gas law plus something on evaporation and condensation are extremely simple and fit the data very well. Meteorologists have solid micro foundations based on elementary chemistry and a bit of thermodynamics -- all, I think, stuff done pretty early in the 19th century. Psychology is not at that stage yet and might never be. Micro foundations for the social science can't be approximately accurate -- people are too complicated.

Ironic that so much of general equilibrium theory is due to Arrow, a guy trained in meteorology.

On chaos: it was huuge in the late 80s. Larry Summers asked me to look at chaos and see if it could appear in asset prices. Total failure. Might be me, but the models gave very simple predictable dynamics. Weather can be forecast a bit ahead (not where tornadoes touch down or even when it srarts to pour but you know the sattelite stuff is useful). The long run is very hard.

Asset prices are unpredictable in the short run, but some can predict in the long run (say Shiller). The difference is that there are not a lot of molecules looking for quick profits looking for short run patterns and eliminating them.

For other prices not updated continuously on double auction markets and for real flows, things are better, but people looking for patterns and making them go away matter there too. People aren't rational, but they aren't stubbornly dumb enough for me to model them.

Back to Summers, this was the context in which he said " You know my opinion. In the history of economic theory, the day in which they came up with the utility function wasn't an especially good day. The day in which they came up with the idea of the supply curve was an especially good day". Playing with models of chaos is the only thing that made me suspect that he wasn't right.
On Noah Smith contra The equilibrium

Not just multiple, there can be a continuum of equilibria and sunspots can matter.

I think the key point of this excellent post is that you note that eg Lucas assume that, in the long run, the economy must go to a unique equilibriumevance (ok be stationary around it). This is just assumed with no motivation. The policy irrelevance ( or with frictions near irrelevance) result is not a result but a methodological a priori.

Note this can't be true if there is endogenous growth (I think my student Alessandra Pelloni may have been the first to note this in the literature). Some rarios might be stable, but GDP isn't. Note that when he decided to
work on endogenous growth, Lucas ceased to discuss learning dynamics at all. Maybe because rational expectations had become the orthodoxy or maybe because he knew that assuming no need for learning matters in that new context. By the way, I keep trying to interest people in a paper on how learning vs magically knowing the joint probability distrubution of everything must make a permanent difference if there is hysteresis (as in all endogenous groth models). I can't tell if the point is too obvious or not obvious enough. Also I can never tell how many times something has been noted in the literature.

This is all off topic. On topic comment later.

Tuesday, April 17, 2012

More on DSGE forecasting

Please click here

Sorry for the inconvenience.

Monday, April 16, 2012

Simon Wren-Lewis again.  I really don't mean to criticize everything he writes, but I find his blog extremely stimulating.

He wrote

Monetary policy works by changing the real interest rate. At the zero lower bound monetary policy loses its power, unless it can influence inflation expectations. However inflation expectations for consumers will also depend on the evolution of sales taxes (indirect taxes like VAT). A pre-announced increase in sales taxes will raise expected inflation, and so reduce the real interest rate faced by consumers at the zero lower bound. In this sense changes in sales taxes can mimic monetary policy.

update: After thinking more (roughly that means after thinking at all) it is really hard for me to see how Wren-Lewis's proposal could fail to work (not impossible - it is never impossible -- but requring one extreme implausible assumption after the other). I will critique my critiqu below said critique.

I comment:

There are three relevant real interest rates.  One is nominal interest minus consumer price inflation -- this is the rate which should affect consumption.  The other is the nominal interest rate minus producer price inflation.  This should affect investment along a balanced growth path.  OK also the nominal interest rate minus the rate of increase of prices of capital goods should shift the timing of investment.

My concern is that the second real interest rate is not reduced by rising VAT.  If I am deciding whether to invest, I compare my nominal revenues which depend on the price I get for my product to depreciation plus nominal interest.  The fact that consumers will have to pay more does not make it profitable for me to invest.

I admit again that if I am deciding when to invest, I will invest now when I can get equipment and building materials without paying higher VAT.

But it still seems to me that you are thinking of a model in which real interest rates have an economically important effect on consumption.  I think there is essential no evidence of any such effect (last I heard GMM estimates of the aggregate intertemporal elasticity of substitution were negative.  In any case, empirical estimates of it are tiny.

I guess that it is still true that DSGE models require reasonably high intertemporal elasticities of substitution to come close to fitting the data.  But they don't fit the regression coefficient of consumption.   growth on the real interest rate.  Here I fear that focusing on a micro founded model which most nearly fits the data has possibly lead you to believe something about the relationship between real interest rates and consumption which is simply inconsistent with the data.

update: OK two things. First the pulling forward of investment almost has to be important. The idea is that firms invest now to avoid paying VAT on equipment and such which they buy (I just paid VAT to have my research project buy a new computer -- in theory that is productive capital although I will have to work on producing something with it). The only case would be irreversible investment in capital with low resale value by a firm which is only investing at all because of extremely low real interest rates right now. The plausible case is that investment is currently low, since demand is low so there is spare capacity (or in more neoclassical theory terms the capital labor ratio is high and the marginal product of capital is low). In this plausible case, firms will invest when things are back to normal and will invest right now not later to avoid paying taxes later.

Also, the stylised fact that the intertemporal elasticity of consumption seems to be low is based on regressing the growth rate of consumption on an econometricians estimate of the expectable real interest rate. This might mainly show that econometricians and normal people have extremely different estimates of inflation. A very clear extremely forecastable increase in prices due to a scheduled increase in VAT might have a large effect on consumption even if the econometricians' estimates generally don't have much to do with real world consumers.
I don't understand what Mohammad El-Erian is saying here.

I do entirely sympathise with this

a professor ...advised me that, in order to maximize the probability of success, I should ... Make sure to cover issues where I know more than those who will be evaluating my work; and, in putting everything together, make sure that I mix and match among components that no one in their right mind would ever combine!
I did not listen to this professor’s advice back in 1980, and I have not done so today. Indeed, I have gone the other way! And in so doing, I suspect that I will get very close to – and perhaps even cross, though I hope not – that delicate line that every speaker faces and fears: the one that separates courage from stupidity.

He is not a central banker.  I know almost nothing about real world finance.  This post will definitely demonstrate my ignorance, but it might be interesting anyway.

update: My worse concern is that, while typing, I had the vague sense that Krugman had written something very vaguley similary to what I was typing.  I fear I am passing off Krugman's arguments (which I don't remember) as my own.  More than that, I fear I am a victim of Krugmanic possession and that I have lost my ability to think independely of him.

El-Erian's main argument is that central banks can't and shouldn't bear the full burden of stimulating the economy, that is (I assume) there should be fiscal stimulus too.  I absolutely agree with that (although he doesn't exactly explain what he means).  But his discussion of disadvantages of central bank interventions is very odd to me.

He seems to define the normal situation and the free market outcome to be the way things were before 2007.  But the system was headed for catastrophe then.  It was distorted by the irrational confidence some had in the boundless wealth of investment banks and, for the less naive, by to big to fail moral hazard.

There are also genuine concerns that such activism involves a range of collateral damage and unintended consequences, only some of which are visible at this stage. And there will be questioning whether all this continues to be justified by central banks’ impact on the overall economy.
Already, there are visible changes to the characteristics and functioning of certain markets. As an example, consider what is happening to the money markets segment.
With policy interest rates floored at zero for such an extended period of time (past and also prospectively, according to recent FOMC statements), this segment will continue to shrink – and will do so mostly from the supply side. Funds are being re-intermediated to the banking sector, with quite a portion ending up in excess reserves at the Fed. In the process, borrowers that previously depended on money market investors (think here of commercial paper issuers as an example) are having to find alternative sources of funding. 

First he seems to be saying that low interest rates are bad for borrowers.  He doesn't quite say it, but what else does "having to find alternative sources of funding" mean ?  Why don't they just pay enough on commercial paper to make money market funds attractive ?  I'd say it is obvious that they are using alternative sources of funding, because those alternative sources are very attractive, because FOMC policy is very stimulative.

But my more general objection above is based on the fact that El-Erian seems to assume that the capitalisation of money market funds in say 2007 was appropriate, so a change is "collateral damage."  I have a rather different view of money market funds.  I consider them a fraud designed to evade necessary prudential regulation which, by itself, would have destroyed the US economy in the absense of public rescue.  They have been around for decades and worked fine until they collapsed entirely.  I think a reasonable level of their capitalisation would be zero -- they are entirely based on a promise not backed by anything (like deposits before the FDIC) which works fine until there is a panic.  They were saved by a legal only in a crisis rescue.  How can their decline be "collateral damage."

The idea always was that there are shares which are legally equity but which always happen to be equal one dollar.  Shareholders were not all aware that they owned shares not deposits and that there was no guarantee that a share would be equal to one dollar.  Since the shares are legally equity of a special purpose entity, parent corporations did not have to count them as liabilities when calculating capital ratios.  Nor did they have to hold reserves to redeem the shares.  Also they never paid the FDIC for insurance, but, it turns out they had it for free when they needed it.

The key to the whole approach was that the parent company made a market in the shares (so long as it could with no reason for people to have such faith that it always could given the absence of any prudential requirement for capital, reserves or insurance).  It seems to me that generally if firm A sets up firm B then buys and sells shares of firm B to make them more attractive to other investors we call it market manipulation and call in the SEC.  Sure doesn's sound like arms length transactions at market prices to me.

I'm old enough to remember the silly regulation which money market funds got around.  Once upon a time there were tight restrictions on nominal interest on deposits (zero for checking accounts IIRC).  I remember when banks offered toaster ovens to people who opened accounts (since they couldn't pay a market clearing interest rate).  I never had such an account (I was under 18 at the time).  This was a silly nominal rigidity (which by the way makes any time series econometrics which pools data from the regulation q era and the post regulation q era nonsense).  But it is long gone.

If the purpose of the funds is to convince people they have an asset as safe as a bank deposit without having to bother with capital or reserves, then I think the right policy response is to ban the funds. If the purpose is to get deposit insurance without paying for it, then I think the right policy is to ban the funds.  The people who set them up made a promise which people believed and which they couldn't keep in a crisis.  A decline of that sector does not strike me as collateral damage.


The functioning of markets is also changing given the size and scope of central bank involvement. The result is artificial pricing, lower liquidity and a more cumbersome price discovery process.
Huh ? I don't even know what this means (at all).  I don't see the basis for the conviction that high trading volume (liquidity) is socially desirable.  I think this confuses the interest of expert traders (who benefit from a high volume of fools who are willing to buy what they want to sell and vice versa) with market efficiency. It seems to me that the less cumbersome price discovery process of the recent past was associated with high price volatility and gigantic misspricing of assets largely driven by the irrational trading of expert traders.

Also how does one reconcile these two claims

The essence here was captured well in a recent investor remark reported by Bloomberg: “Investors are numb and sedated…. by the money sloshing around the system.”

Put differently, a view has evolved that the “trading” segment of markets, whose focus is understandably short-term, is now dominating the “investment” segment.
So numb and sedated investors are focusing on the short term as is demonstrated by low liquidity (that is low trading volume).  I just don't see how both claims can be true.

Somehow he seems to consider there to be a natural interest rate defined in a way very different from Wicksell and that the current interest rates are lower.  So some interest rate is the free market rate and another one isn't.  This sounds vaguely Austrian to me.  It doesn't make any particular sense as far as I can tell.
iWrite real bad with an iPad.  Some have noted that the uh production values of this iBlog have declined even below their normal astonishinly low level.  In particular links appear as urls and in odd places.  The reason is that I am surfing and commenting with an iPad.  iCan't write as well with an iPad as with a keyboard.  One key problem (and motivation for this iBleg) is that iCan't figure out the iEquivalant of the arrow keys.  How can iMove around in a document with an iPad ?

iMisspell because iDon't know how to spell.  That is a problem with the author not the medium.  But iWish iCould move around iText boxes.
What Is Dilma Rousseff talking about ?

At the failed summit of the Americas she complained about loose US monetary policy causing the dollar to depreciate hurting other countries exports. What depreciation ? The exchange rate is about the same as it was 2 years ago and the dollar has recently appreciated against the Real.

Looking at the data, I wondered if she was worried that the US was deliberately driving down the value of the Real.  No actual US policy would do this, but at least it fits the recent data.  Instead the appreciation of the dollar is unappreciated.

I'm relying on raw story.

Brazil’s President Dilma Rousseff has voiced concern to US President Barack Obama that the easy money policies of developed countries threaten the growth of emerging economies like Brazil.
The comments from the leader of Brazil, the world’s sixth largest economy, came Monday on her first visit to the White House — for talks that yielded little in the way of concrete announcements.
“Such expansionist monetary policies… ultimately lead to a depreciation in the value of the currencies of developed countries, thus impairing growth outlooks in emerging countries,” Rousseff said.

 The point is that, since I honestly couldn't tell if she was making one complaint or an opposite complaint, I don't think she has much of a case.
Someone else pulled back from comments.

Look almost no one reads this blog and almost exactly no one reads the comments. I agree with this comment. In particular, I agree with the comment on Krugman. I don't know quite how to put this First I note that I my efforts at economic theory are not taken seriously. However, like Krugman, I use the mathematical techniques whose usefulness I challenge. I stress again that I am not claiming I use them as well as he does.

Robert, this was a nice post, again, but I have two comments I would like to make.
Pro primo:
New-classical, real business cycles, dynamic stochastic general equilibrium and new-Keynesian micro-founded macromodels are bad substitutes for real macroeconomic analysis.
Not only do they trivialize uncertainty into risk. These models also try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent. That is, with something that has absolutely nothing to do with reality. And - worse still - something that is not even amenable to the kind of general equilibrium analysis that they are thought to give a foundation for, since Hugo Sonnenschein (1972) , Rolf Mantel (1976) and Gerard Debreu (1974) unequivocally showed that there did not exist any condition by which assumptions on individuals would guarantee neither stability nor uniqueness of the equlibrium solution.
Opting for cloned representative agents that are all identical is of course not a real solution to the fallacy of composition that the Sonnenschein-Mantel-Debreu theorem points to. Representative agent models are rather an evasion whereby issues of distribution, coordination, heterogeneity - everything that really defines macroeconomics – are swept under the rug.
Conclusion – don’t believe a single thing of what these microfounders tell you until they have told you how they have coped with – not evaded – Sonnenschein-Mantel-Debreu!
Of course, most macroeconomists know that to use a representative agent is a flagrantly illegitimate method of ignoring real aggregation issues. They keep on with their business, nevertheless, just because it significantly simplifies what they are doing. It reminds – not so little – of the drunkard who has lost his keys in some dark place and deliberately chooses to look for them under a neighbouring street light just because it is easier to see there!
Pro secondo:
Although I certainly agree with Krugman’s harsh judgements on microfoundations of macroeconomics – and it goes for both the “new-Keynesian” and new-classical variety – Krugman’s explications on this issue is really interesting also because they shed light on a kind of inconsistency in his own art of argumentation. During a couple of years Krugman has in more than one article criticized mainstream economics for using too much (bad) mathematics and axiomatics in their model-building endeavours. But when it comes to defending his own position on various issues he usually himself ultimately falls back on the same kind of models. This shows up when he repeatedly refers to the work he has done with Gauti Eggertsson – work that actually, when it comes to methodology and assumptions, has a lot in common with the kind of model-building he otherwise criticizes.
On most macroeconomic policy discussions I find myself in agreement with Krugman. To me that just shows that Krugman is right in spite of and not thanks to those models he ultimately refers to. When he is discussing austerity measures, ricardian equivalence or problems with the euro, he is actually not using those models, but rather simpler and more adequate and relevant thought-constructions in the vein of Keynes.
# posted by Lars P Syll : 9:38 AM
Pulled back from comments again

First anonymous is Justin Dylan. I was totally unfair of me to complain that he posted as anonymous as that is the default given my blogger settings. Before, I admitted the problem is my ilhtmliteracy.

Second, I have no idea why I had a ragegasm. I do fairly often. I use the blog to blow off steam. It makes me less unpleasant to be around. It is better to type out rage than to speak (or more likely) shout it out. No one has to walk away to not read what I type, while people do walk away to not hear what I say (and sometimes I follow them).

I am fairly calm now. I can briefly restate my problems with micro foundations. Then I will reply in detail.

1. I agree that the rational expectations assumption doesn't have strong implications. I think (and have frequently written and believe I have rigorously proven) that it has no observable implications at all. That's why I try to avoid the phrase "rational expectations hypothesis." I think the word "hypothesis" should be reserved for testable hypotheses, and I don't think there is any testable hypothesis there.

2. Some micro founded work has improved economic theory. But I think it has just undone some of the damage done by other micro founded work. Given my first claim, I think it is possible to get any micro founded result one wants. If people think that economic theory tells us something, they are wrong, that is, any implication of any effort in economic theory can only be something which might be true and we have to look at the evidence to see that if it is true. I don't think it can lead us. But I am sure that it has lead many people astray. Proving case by case that the core assumptions of economic theory don't imply this that or the other thing is therefore useful. But the same useful goal could be achieved (if I am right) by general acceptance of the idea that the core assumptions of economic theory have no implications at all.

3. I suspect the sincerity of people who provide micro foundations for Keynesian assertions (more generally for assertions that some people foolishly think are inconsistent with the core assumptions of economic theory). I suspect that I am not the only one who starts with the conclusions and works back to the assumptions required to reconcile those conclusions with rational utility maximization. In particular, I have fairly strong suspicions about Stiglitz and the late R Dornbush. I fear that it is very costly to admit that one does this (I sometimes wish I hadn't publicly admitted it here on this blog). I don't see the use of starting with the conclusion then finding the right assumptions (this helps explain my extremely low research output).

4. The Lucas critique of Friedman's methodology of positive economics. There is a monstrous equivocation at the base of the effort to find micro foundations. On the one hand, it is argued that it would be good to understand the true psychology, sociology, technology etc which causes economies to behave as they do. The advantages of knowing this are argued at length, for example by Lucas in "Econometric Policy Evaluation: A Critique" but no one has ever disdained understanding the causes of things or knowing the truth.

The problem is that economists also argue that it doesn't matter that the micro assumptions in micro founded models are false. When acutal micro foundations are considered, suddenly the exactly opposite argument is made: that models may be useful even if they aren't true, that the economy might act as if the false assumptions about psychology were true etc.

Each argument is valid as far as it goes, but the research program relies on both of them at once. Some clearly false assumptions must be made, because if they were true and ignored models which fit the historical data would not be useful for policy analysis.

The first (Lucas critique) is valid in that, other things equal, it would be better to have approximately accurate micro foundations. Other things are not equal and micro founded models rejected by the data are preferred to ad hoc models which aren't rejected by the data because uh well I don't know why.

The second is valid because "might" makes right. The approach of making false assumptions and finding their implications might lead us to useful policy conclusions, because anything at all might work.

OK now responding

It certainly wasn't my intention to upset you, let alone enrage you, so I apologize for that. I merely meant to point out that dismissing the microfoundations literature, as I thought you were doing, seems an unreasonable position to me.

That is what I was doing. Also don't apologize. I get enraged regularly for no good reason.

I'm beginning to see that people understand "microfoundations" in different ways, and it appears that the New Classical economists may have given the idea a bad name.

I was not writing only about New Classicals. My disdain was aimed at new Keynesians. Also at my own work.

But I agree strongly with Stiglitz ( that it is "important that macroeconomics be based on the right microeconomic assumptions, those consistent with actual behavior, taking into account information asymmetries and market imperfections".

But Stiglitz considers only the deviations from economics 101 (first semester) that he likes best. What about irrationality ? A model with rational agents information asymmetries and market imperfections is absolutely rejected by all available data. Assumptions that are wrong in fewer ways than new Classicals are is not the same "the right microeconomic assumptions". Stiglitz asserts that the world really is in Nash equilibrium. He is way too smart to believe this, but he sees only the points where he disagrees with the new Classicals and ignores the points where he chooses not to argue with them.

The use of representative agent models with perfect competition, complete markets, perfect information, instantaneous market clearing etc etc, as has become standard, makes it more or less impossible to address any worthwhile macroeconomic questions. But it is that particular, and somewhat perverse, choice of microfoundations which is at fault and not the idea of microfoundations in general.

That's not what I was talking about. We agree that RBC models are silly, but I was criticizing modern economic theory much more generally.

I also agree with Stiglitz that the rational expectations hypothesis (REH) is not necessarily always the problem. Once you move away from the New Classical (or most DSGE) models, REH no longer has the same strong implications that it has in these contexts.

I think it obviously has no implications and is not, therefore, properly speaking, a hypothesis.

Macroeconomics has probably lost 20 or 30 years, but interesting work is now being done, by Roger Guesnerie, Roman Frydman and others, both in reevaluating REH and assessing its implications (see for instance, ). Hopefully much more will follow.

I will have to look at that to comment.

Finally, I would quibble with you on what is probably a semantic point: I don't think the issue is to consider "the possibility that we are not Bayesian" as you put it, but rather to recognize that Bayesian arithmetic only in applies in Savage's "small worlds" in which we can know what all possible states of the world are (or every conceivable possible course of future events), and assign probabilities to them. In a "small world" new knowledge never leads us to reconsider the basic model we use in determining our beliefs, or feel the need to alter our model of the world after being surprised by a chain of events whose implications had not previously been considered (all of this paraphrases Binmore).

This just shows that Savage's work has been abused by people who ignore the qualifications he made. I didn't know this (although I should have guessed).

The New Classical model describes just such a "small world" in which we all agree on the relevant model of the economy and in which true "surprises" can never occur. But neither can most of the macroeconomic phenomena we are interested in, which I guess is why Robert Lucas finds it all so surprising.

well I agree with that.

Thanks very much for a stimulating discussion.

Justin Dylan

Thanks for the thoughtful comment from which I learned.

Saturday, April 14, 2012

Pulled back from comments. I typed the first two lines in

Robert said...[skip]

I don't know when the quest for micro foundations could have been a serious enterprise. I perceived it to be completely absurd nonsense 30 years ago.

6:38 AM

Anonymous said...
No Robert, that is not a serious position. The "microfoundations" research programme in the 1970s and early 1980s was focused on answering the fundamental questions of macroeconomics, originally posed in the General Theory by Keynes. How could a capitalist market economy settle on extremely inefficient outcomes, or states, such as equilibria (or disequilibria) with high unemployment and low output? How do market economies coordinate (or fail to coordinate) in the absence of the Walrasian auctioneer? Why might a market system fail to coordinate the actions of heterogeneous individuals? Etc.

Robert Lucas, perhaps surprisingly, put it very well in a 2008 lecture in Italy ( ). Referring to 34% decline in real output in the USA from 1929 to 1933 he asks: "Why did we, collectively, choose to reduce production by 1/3, with no change in available resources?" He describes these events as "frightening precisely because they are so mysterious."

Since the early 1980s economists have made literally no progress in understanding these fundamental questions of macroeconomis. But to dismiss the attempt as "absurd nonsense" is, well, absurd nonsense. Perhaps macroeconomics is just too complex and difficult, forcing us to rely on more or less ad hoc aggregate models which seem to have some predictive power (although we are not sure why). But should economists really give up on any attempt to reach a deeper understanding of the questions posed in the General Theory?

PS Lars P Syll is clearly right that a big part of this is dealing with risk versus uncertainty, and moving away from the inappropriate use of Baysian reasoning in "large world" contexts, a subject recently taken up at length in Ken Binmore´s book Rational Decisions.

The comment by "anonymous" enraged me. I will try to respond semi rationally here.

First some things which might be of interest to people other than me.

The normal usage of "micro foundations" does not refer only to efforts to find micro foundations for Keynesian models, as anonymous asserts without any evidence or any qualification. Some participants in the effort aimed to develop realistic consistent models with aggregate implications inconsistent with Keynes's views. It was partly because economists didn't agree about what would happen that the argument that they needed better theory was so convincing.

The idea of abandoning the assumption that agents are Baysian (sic) is not, to my mind, a new approach to micro foundations. A large part of what has been meant by "micro foundations" at least since 1985 (when I became an economist) is that one must assume that agents are Bayesian. For many years it was further required to assume that we have rational expectations.

The huge advance of considering the possibility that we are not Bayesian, if widely accepted, would bring the profession part of the way back to Keynes who wrote a treatis on probability.

Now I don't think that no possible quest for micro foundations can ever be serious. I would tend to guess that psychologists will have something useful to teach economists (in fact I think they already do). But my expression of ignorance about a serious period in the past referred to the past and, in particular (following an unquoted comment above mine) to a period which has ended during which, it was alleged, the quest for micro foundations was seroius. That means a period during which finding micro foundations meant reconciling the macro evidence with assumptions about psychology which everyone agreed were false. That doesn't seem to me to be a serious endevor.

This doesn't mean that I consider all micro founded macro equally worthless. It is clear that some people believe that the core (false) assumptions including rational expectations have policy relevant implications. Finding examples in which agents are rational and the policy implications are the opposite of what these people imagine can prevent the quest for micro foundations from doing damage -- prevent it from leading us astray by preventing it from leading us. If this is the way things are, then the combined impact of the better and worse micro founded research is exactly nothing.

Note it begins with an attack on me. Anonymous notes that my view as of 30 years ago was not a serious contribution to economic thought. Wow. 30 years ago, I was trying to be a biologist. I had no responsibility to make serious contributions to economics. Today, I am accurately reporting what I thought then. I don't think that an accurate report of a fact can be "not a serious position."

I assume that "anonymous" does not claim to have more expertise on the thought of Robert Waldmann in 1982 than Robert Waldmann. Evidently "anonymous" must consider it to be "not ... serious" to report a fact.

The other part of the claim which anonymous denounces as "not a serious position" begins "I don't know ..." Does anonymous assert that I do know and know not that I know ? I assure anonymous that I am more expert on my lack of knowledge than he or she is.

The claim that micro foundations were added to achieve publishability is a paraphrase of something which Paul Krugman wrote (no link yet I'm working on it). He described conversations with people he knew at MIT. He has won the Nobel memorial prize for extremely micro founded international and has made highly influential contributions to extremely micro founded macroeconomics. He knows what he wrote about. He didn't name the friends at MIT, but I would guess that they are rather in the thick of things too.

Since anonymous is anonymous, I have no idea if he or she has reason to claim to understand the motivations of leading economists better than Paul Krugman. But frankly, I don't think that anyone in any position to contest Krugman's views of what motivates those who move the economics profession would comment on my blog. I did not provide a link in a comment on my blog, but the assumption that I based my claim on nothing was uncharitable to put it mildly.
The Wikipedia is One of the Most Wonderful Wonders of the World

Especially, because it is a collective voluntary process. I love it more than Linux (for one thing I don't use Linux). I do resent the Wikipedia for one reason -- it makes it harder to impress people with extensive pointless knowledge -- everyone who can look things up in the Wikipedia is astonishingly knowledgeable by the standards of say 2000. I know people who similarly resent spell checkers.

The amazing thing is that the Wikipedia is fairly reliable. I now know of two errors in the Wikipedia. The first was in the article on "Ricardian Equivalence." It was asserted that, if there is Ricardian equivalence then, like a temporary tax cut, a temporary increase in government spending does not cause an increase in nominal aggregate demand. Since full professors at top universities made the same howler, it isn't all that shocking. But I was alarmed.

Now I have found another error in the Wikipedia. I quote from the article on the Arrow-Debreu model

In general, there may be many equilibria; however, with extra assumptions on consumer preferences, namely that their utility functions be strongly concave and twice continuously differentiable, a unique equilibrium exists

This is false as is obvious to anyone who clicks the link in the later sentence
"(See also the Sonnenschein–Mantel–Debreu theorem.)"

Nothing is perfect, but the Wikipedia is wonderful.

I added the text in square brackets which you might find between the two quoted sentences. This is my first contribution to the Wikipedia. I have no idea what will happen next.

Friday, April 13, 2012

Brad really. First as you note allll the time the dividend yield should be r-g where g is the expected growth rate of dividends. Krugmans theory is that safe r is low because expected growth is low. That naturally translates to low g. Second, the r in the equation you love above all other equations, is a risk adjusted required rate of return, not the safe r. You position is that the equity premium is unusually high, but here it is important to decide if we want to measure the risk premium as r/rsafe or r-rsafe. As I recall (in one of my most terrifying memories) you could prove it should be r -rsafe in your head while writing 60 words a minute. That's what theory suggests for constant risk.

R-rsafe ( as we both like to stress) is normally huge. Something like 0.05 with rsafe around 2 and g around 2.5 to 3. rsafe is now about 0 so a perfectly ordinary equity premium correspons to growth of 0.5 to 1. Very low, but you have noticed that Krugman is very pessimistic. Expected g of 2.5 should imply a dividend yield of about 0.025 . I just looked it up and found an S&P 2011 yield alleged to be 0.019. But the newish normal for the 21st century seems to be less than I had guessed -- 0.04 to 0.045 but rather 0.3 to 0.35 so my new guess is it should have been 0.01 or 0.015 not 0.025 and I have a big big anomaly of 0.04 to 0.09 to explain. This is a series which has varied from 0.03 to 0.08.

I really see almost no puzzle for Krugman at all.

Also, as always, I suggest looking at corporate bond rates. Nominal corporate bond rates are low. Differentials with Treasuries are higher than in say 2006 but lower than in 2003 (except for total junk). The differentials are tiny miniscule and microscopic compared to late 2008 and early 2009. The current malaise looks very different from the omigod the world is ending months. Your analysis is quite similar.

I am getting bored agreeing with Krugman all the time. I do note that I have been arguing against the shortage of safe assets hypothesis for over a year right here in comments on this blog ( one of which you kindly pulled back to the blog).

Thursday, April 12, 2012

This post is of interest only to me. I promise.

For decades I have been puzzled by the widespread conviction among macro economists that models which yield poor forecasts also provide useful guidance to policy makers. I don't see how one can conclude that a hypothesis has any value whatsoever if it doesn't fit the data. It is true that a model which is rejected by the data might be useful. "Might" makes right. It also might be useful to sacrifice chickens and examine their innards. But that's not the way to bet.

I thought to myself "I can't make a statement about probabilities. I can't say that a model which gives better out of sample forecasts also gives better forecasts for the effects of different policies." This is obvious and well known, so there is no point in giving an example. So I will give an example.

First note I am saying that I can't prove that the macroeconomists with whom I disagree are wrong.

The reason I can't say anything definite, even anything definite about probabilities, is that outcomes depend both on policy and exogenous factors. I will assume that the effects are additively separable. If you have two models A and B, model A might have better estimates of the effect of policy but worse estimates of the exogenous factors. So it will give better estimates of the difference in outcomes if one applies policy 1 or policy 2. The poor forecast of the exogenous factors can add the same error to the forecast conditional on policy 1 and conditional on policy 2. That means it won't affect the estimate of the difference between the outcome with policy 1 and with policy 2. That's what we want to know. This is totally obvious so I will make a more explicit example.

Forecasts of employment in the USA in January February and March 2012 were incorrect, it was higher in January and February than forecast and lower in March when forecast based on employment in January and February. It is widely agreed that the reason is that the weather was unusually warm in January and February 2012. I will assume this is true. I will also assume that macro policy doesn't affect the weather significantly in the medium term (so I will assume no global warming -- this is just an example).

Now lets go back to model A and model B. Model A is a standard macro model and a good one. Model B has two modules, a bad macro model and an excellent model of the weather which gives excellent forecasts. So model B gives better forecasts for current policy. But it gives worse forecasts of, say, the effects of QE III.

Now if one added the weather forecasting module to model A, one would have the best available model. This would give better forecasts than model A even in the cheating competition when actual weather which occurs after the forecast is made is plugged into the model. The weather module reduces the spread of the disturbance terms in model A + weather so the parameter estimates are more precise.

In this case, it is easy to see what to do with models A and B. In the real world it is hard.

I am sure no one will learn anything from this post. Everyone who knows what I am talking about knows my conclusion.
Comment on

Macroeconomic model comparisons and forecast competitions

by Volker Wieland and Maik Wolters

via Mark Thoma

Selective excerpts

We use two small micro-founded New Keynesian models, two medium-size state-of-the-art New Keynesian business-cycle models – often referred to as DSGE models – and for comparison purposes an earlier-generation New Keynesian model (also with rational expectations and nominal rigidities but less strict microeconomic foundations) and a Bayesian VAR model.

Note that one of the models has nothing to do with micro foundations and three non DSGE models. To jump ahead, I note there is no comparison of the performance of these totally different approaches in the rest of their post.

Given this failure to predict the recession and its length and depth, the widespread criticism of the state of economic forecasting before and during the financial crisis applies to business forecasting experts as well as modern and older macroeconomic models. ... over purely model-based forecasts, were not able to predict the Great Recession either. Thus, there is no reason to single out DSGE models, and favour more traditional Keynesian-style models that may still be more popular among business experts. In particular, Paul Krugman’s proposal to rely on such models for policy analysis in the financial crisis and disregard three decades of economic research is misplaced.

I think Wieland and Wolters are totally completely utterly unfair to Krugman when they hold him responsible for the forecasts of professional forecasters. Krugman is responsible for Krugman's forecasts. He didn't give a numerical prediction for GDP, but he did predict in fall 2008 that there wouldn't be a quick recovery. I think Krugman outperformed all of the models and all of the professional forecasters. concluding that Krugman was wrong based on their data is bizarre.
Note the gross category error of saying that Krugman's recomendation "is" misplaced (an unqualified statement in the indicative) because of something which professional forecasters "may" do. What is the chance that each professional forecasters does what W and W guess they may do ? If some do and some don't, then the average professional forecast can not be used to evaluate the forecasting performance of more traditional Keynesian approaches.

Finally see below that W and W must concede that professional forecasters do better on average than their models, some of which have nothing to do with DSGE.

The model forecasts are on average less accurate than the mean SPF forecasts (see Wieland and Wolters 2011 for detailed results). ...
Computing the mean forecast of all models we obtain a robust forecast that is close to the accuracy of the forecast from the best model-

Note that they do not explain which model performs best. Since the models are as different as models can be, this is a shocking omission.

Conditioning the model forecasts on the nowcast of professional forecasters (reported in the paper) can further increase the accuracy of model-based forecasts. Overall, model-based forecasts still exhibit somewhat greater errors than expert forecasts, but this difference is surprisingly small considering that the models only take into account few economic variables and incorporate theoretical restrictions that are essential for evaluations of the impact of alternative policies but often considered a hindrance for effective forecasting.

Professional forecasters do not set a very high standard. It is very easy to improve the forecasts of most professional forecasters using no theory and almost no data (see Ehrbeck and Waldmann Quarterly Journal of Economics (1996)
Vol 111 pp 21–40 also note Solferino and Waldmann 2010. "Predicting the signs of forecast errors," Journal of Forecasting vol. 29(5), pages 476-485).

I am shocked that W and W treat DSGE models and Bayesian VARs as part of a uniform class of "models" and argue that the fact that they perform only slightly worse than professional forecasters is evidence that DSGE models are better than old Keynesian models. There is no similarity between Bayesian VARs and DSGE models. I do not believe that this gross conflation is the result of carelessness.

Does any reader of this post believe they would have presented "models" as a homogenous group if DSGE models outperformed the less rigorously micro founded new Keynesian models or if the theory influenced models outperformed Bayesian VARs ?

It is very odd that they consider a narrow set of conditioning variables and a small set of estimated parameters to be an unambiguous handicap. It is well known that richly parametrised models tend to have poor out of sample forecasting performance. The idea of limiting models based on theory was that it would give better forecasts not that, of course, rigor hampers forecasting.

Finally, I think that W and W propose ignoring the past few decades of Macroeconomic empirical research which has shown again and again that theory based macro models can only fit patterns in the data if they are massaged ex post. The pattern they attempt to fit is a simple hump shaped impulse response function. The pathetic failure of the models is shocking -- only to someone who hasn't been paying attention for the past few decades.

There is something else which I type with some reluctance.

"For each forecast we re-estimate all five models using exactly the data as they were available for professional forecasters when they submitted their forecasts to the SPF. Using these historical data vintages is crucial to ensure comparability to historical forecasts by professionals."

Now the legend for figure 1 "Solid black line shows annualised quarterly output growth (real-time data vintage until forecast starting point and revised data afterwards), grey lines show forecasts from the SPF, green line shows mean forecast from the SPF, red lines show model forecasts conditional on the mean nowcast from the SPF."

Click the link and look at figure 1. The numbers for 2008Q2 and 2009Q1 in figure 1 should be "revised."

On July 29, 2011 the BEA released revised estimates for GDP including GDP in 2008 and 2009.

The revisions did not change the timing of the contraction. The overall pattern of quarterly changes during the downturn was similar in both the revised and previously published estimates, though the revised estimates show larger decreases for 2008:Q4 (-8.9 percent compared with -6.8 percent) and for 2009:Q1 (-6.7 percent compared with -4.9 percent). The contributions of specific GDP components to the contraction were similar in both the revised and previously published estimates. (See the briefing on results of the 2011 NIPA annual revision.)

Figure 1 should show revised GDP growth for 2008Q4. It shows a contraction at an annualized rate on the order of 6%. It should show a contraction at an annualized rate of 8.9 percent. The data in the figure do not correspond to the legend -- they are incorrect.

NOw look at figure 2. The contraction rate for 2008Q4 shown in the second panel of Figure 2 should have been available in 2009Q2 as the "nowcast" corresponds to 2009Q2. The number is very similar to those shown in figure 1 and the first panel of figure 2 which should be revised. There was a massive revision of this number made in 2011. Again the figures do not fulfill the promise made in the legend to figure 1.

The data presented in the figures are not the current official estimates of the GDP growth to be forecast. They give no hint of revisions long after the fact. The analysis is incorrect.
Can Welfare Reform be Re-reformed ?

Below I rant at Ed Kilgore and Steve Benen. Also I agree with Kilgore that it would be terrible strategy for progressive activists to try to reverse welfare reform. I am sure that this is one battle which we would lose (my complaint was that he seemed to apply his strategic caclulations to journalists who should report the facts and not consider political strategy -- also his key claim of fact was incorrect).

So what is to be done ? I think that it is possible to get some money for the desperately poor families tossed off of TANF. I think it is even possible to get something for homeless single adults. But I am absolutely sure that the love in question will have to be much tougher than optimal policy. I am sure that the majority of voters will insist that people be made to sweat for the aid their children need.

This is not reasonable. For one thing given the low demand for unskilled labor, it would probably be cheaper to just give people money. For another, taking care of young children without a spouse in the house is extremely hard and vitally important work. The idea that single mothers without jobs are not doing enough makes no sense. The idea that it is good for their children to grow up assuming that adults work for a wage makes some sense.

But political reality is real. So the only approach to fighting deep poverty which I think might actually be implemented is a massive program of workfare. I am sure this implies wasting public money and is pointlessly cruel, but I see no politically possible alternative.
Internal Consistency, rational optimizing agents and the Lucas Critique

please click here

Wednesday, April 11, 2012

Ed Kilgore on Ryan and Welfare Reform.

This will be a long rant which I hope will be theraputic, but it isn't likely to be worth your time to read.

When Ed Kilgore replaced Steve Benen at Political Animal (update: see ironic update below search for Benen), I was very suspicious that he couldn't be a progressive, since he had worked at the Progressive Policy Institute. Until now, I have been pleasantly surprised. He seems very reasonable and writes well. But some people just can't let old debates go. I am one of those people and I hope I am calmed down enough to write about his recent post on, among other things, welfare reform.

As far as I can tell, Kilgore's main point is that redebating welfare reform would be bad political strategy. Paul Ryan is claiming his unspeakable budget is Welfare Reform II. His opponents must decide whether to note this is totally untrue or to denounce Welfare Reform I. Also, Democrats of different orientations can work together to defeat Republicans and going back to our old quarrels is volunteering for the circular firing squad. I feel free to ignore political strategy here, since almost no one reads this blog. Therefore, I feel free to note that I think Kilgore is unwilling to deal with evidence rationally. I think that he is so emotionally committed to welfare reform that noting its horrible effects is like insulting his mother.

I will first try to list all of the things which infuriate me about this post, then discuss them.

1) He attacks the motives of the people with whom he debates claiming we are determined to "grind old axes." The possibility that a description of deep poverty is motivated by oppositoin to deep poverty is not mentioned.

2) He mixes a discussion of the evidence and of political strategy. I agree with Kilgore that the Democratic party is not helped by progressives denouncing welfare reform. The reform is so popular that it is bad political strategy to note the evidence that it has had damaging consequences. But Kilgore should let wonks be wonks. He discusses the political strategy of people who claim to be non-partisan analysts. This is a very common tick among Democratic centrists -- they shift back and forth between discussing which claims are supported by the evidence and discussing which claims are supported by the median voter. Kilgore denounces people who note facts based on the claim (with which I agree) that most US voters will refuse to face those facts and punish the party which notes them.

3) He asserts that the expansion of the EITC was part of welfare reform. This is simply false. His description of welfare reform does not correspond to the bill signed into law by Clinton.

4) He cherry picks statistics. He notes improvements in the situation of the average single mother. This is what one would expect given the increase in the fraction of births out of wedlock. Single mothers are less selected by disadvantaged backgrounds. This is a simple point which he must understand. See an earlier rant about other people who pulled this trick here.

OK down to detail

It is entirely unsurprising that Paul Ryan and his many supporters have been advertising the massive safety net cuts and wholesale abandonments of the poor that make the bulk of the spending “savings” in his budget proposal as the greatest thing since the Clinton-era welfare reform legislation. What is surprising is that some progressives seem to be going along with the characterization in order to grind some old axes about the 1996 act.

There was a big Sunday New York Times piece by Jason DeParle

Given the context, it is an understatement to say that Kilgore very strongly suggests that DeParle's aim is to grind some old axes (it isn't logically implied but it is the normal inference). DeParle wrote a long article full of data. Kilgore speculates about his motives to denounce him for noting inconvenient facts. I think this rhetorical trick should always be denounced.

There was a big Sunday New York Times piece by Jason DeParle conflating the plight of “the poor” with those of the single unwed mothers affected by state-level reductions in cash assistance under the TANF program

I read the DeParle's argument with some care and noticed no such conflation. Kilgore presents no evidence for his claim.

DeParle does indeed document some dreadful state practices (notably in Arizona),

Notice how quickly Kilgore slides over the dreadful state practices. They were made possible by the welfare reform which gave states enormous power to do whatever they pleased with their welfare block grants. Changing programs to block grants is a major feature of the Ryan horror, so this fact is very relevant to the current debate. I think it is clear that Kilgore disapproves ("grinding axes") because it is criticism of welfare reform, not because he has any response to the criticism.

even as he acknowledges that despite the recession more single unwed mothers are able to work than before 1996, and have lower poverty rates.

This is an appalling abuse of statistics for two reasons. First, as noted above, single unwed mothers are different not just because of welfare reform. The comparison is not informative. Second, there is the monomaniacal focus on the poverty rate. This would make sense if all incomes below the poverty line were equally bad, that is it makes no sense. It is a horrible thing to do when discussing welfare reform, because AFDC and TANF benefits are designed to convert deep poverty (income below half the poverty line) to ordinary poverty. Kilgore's point is valid to the extent that an income of $15,000 is just as bad as an income of 1,500. It is very very common to look at the poverty rate as a measure of suffering due to poverty, but it is always simplistic. In a discussion of welfare reform it is utter nonsense. I don't think anyone familiar with the issues could make such a howling error in good faith.

But by overstating the importance of TANF in the post-reform safety net scheme, and giving critics of the original law a new soapbox for claiming vindication, DeParle’s piece is not only misleading, but understates the potential damage Ryan’s proposal could inflict.

Here an accurate account of important facts (people suffering severely) is considered as rhetoric. DeParle doesn't state anything about the potential damage Ryan's proposal could inflict. Kilgore does not accept that there is anything but political strategy. Accurate statements of fact are interpreted as contributions to the policy debate even when the author who is being travestied and insulted draws no such inference.

Kilgore also conflates dollars spent (very few on TANF) with suffering prevented. It is no comfort the the people described by DeParle that other people have section 8 housing vouchers (one in four poor people do) even though a lot is spent on the program. Similarly the deeply poor don't benefit from the EITC much at all (having little earned income). Kilgore clearly infers that TANF is unimportant, because very few dollars are involved. But many people desperately need those few dollars.

Kilgore just asserts that DeParle's piece is misleading. He presents no evidence for the claim. Apparently it should just be assumed that critics of welfare reform are wrong so "giving critics of the original law a new soapbox for claiming vindication" must be misleading. This is how ideology reacts to evidence.

Indeed, the biggest problem with the “welfare reform has failed” narrative, and with treating the Ryan budget as a logical extension of welfare reform, is that it ignores one of the main purposes of the 1996 act was to make other elements of the safety net, some work-conditional and others simply much better targeted, more central, even as they were significantly strengthened.

I assert that this claim is false. Kilgore does not quote from the law. He just claims that other elements of the safety net were strengthened by the law. I claim that his claim about historical fact is absolutely inaccurate. I challenge Kilgore to present evidence in support of his claim. I think he is making up facts which please him.

He cites Elain Karmack making a similar claim. I have denounced her post already. I note that the quoted passage includes no evidence.

Further down he gets more specific. He is demonstrably totally wrong, ignorant and unqualified to engage in the debate.

TANF costs and caseloads were intended to go down in no small part because the other safety net programs, along with the extremely important earned income tax credit (EITC) were intended to pick up the slack.

This is utter anti historical nonsense ! Kilgore does not know what he is writing about ! The EITC was expanded in 1993 as part of the Clinton tax increase bill. The EITC expansion passed with zero Republican votes. It preceded welfare reform. If Clinton had continued to veto welfare reform bills, then there would have been the EITC expansion but not welfare reform (until Republicans had the White House, the House and a filibuster proof majority in the Senate which would probably have happened). Kilgore is totally ignorant and utterly wrong about policy. His main point is that welfare reform was not just cutting and block granting but also included an expansion of the EITC. This is absolutely 100% false. Kilgore demonstrates his utter ignorance of the law he chose to debate. He is not qualified to debate welfare reform, because he is not willing to check the facts (in the Congressional Record).

I am sure that Kilgore will be forced to note the problem that 1993<1996. I am sure he will argue that it doesn't matter and stick to his conclusion which is fundamentally based on an incorrect recollection of the basic facts. I am sure he is incapable of debating welfare reform ratoinally, because he is emotionally attacked to it and because he is reluctant to consider his role in helping to cause extreme poverty and suffering. He concedes that Ezra Klein is right that states have poached from the welfare budget to fund general programs (he has too Klein presents proof). I'm not sure if he thinks that Klein is grinding old axes (not plausible given Klein's age). But then back to strategy. Kilgore concludes with a statement about political strategy with which I entirely agree

Progressives would be well advised to put aside ex post facto wrangling over what happened in 1996 and make it abundantly clear that whether you think welfare reform was good, bad, or a mixed bag, what’s underway right now is very different and unambiguously a travesty.

My problem is that he recognizes no role for progressives" except political strategy. Evidently, progressive social scientists can't study facts which displease the median voter.

I ask Kilgore, do you mean to say that progressive economists must not study TANF and deep poverty, because that is counter to the interests of the party ?

This combination of inept argument about reality followed by a switch to a discussion of political strategy is typical of Democratic centrists. Kilgore, in particular, is so grossly ignorant of history that he can't make the shred of a hint of a half decent argument about policy and its consequences. But he knows that most US adults agree with him (and are even more ignorant). So, he argues, the facts don't matter, or rather that mentioning them is objectively pro-Republican wonking.


This is weird. Steve Benen himself approvingly linked to the Kilgore post which made me reconsider my acceptance of the idea of Kilgore replacing Benen at Political Animal. I blasted him in comments.

This is strange. It is as if 1996 and 1993 are ancient history and the claim that something which happened in 1993 happened in 1996 isn't obviously wrong. In other words, I am old. Reminding me of my age is not the way to ease me impulse to rant.

The sensible refutation of Ryan's claim that welfare reform worked in the late 90 s is that everything and the opposite of everything worked in the late 90s. Welfare is still reformed and reformed welfare is not working (click the links in Kilgore's post).

I hate to agree with Ryan about anything, but Kilgore's version of history is absolutely innaccurate. Kilgore claimed that the1993 expansion of the EITC was an "important" part of the 1996 welfare reform. I note that 1993<1996. Kilgore's post on welfare reform is based on an "important" claim of fact which is also totally incorrect.

Since you linked to the post, you should update this post to note the gross error of fact in post to which you linked.

By theway, when I pointed out Kilgores error to him, the person who was deputy assistant secretary of the treasury when the EITC was expanded replied "ouch" and note that the expansion which was not part of welfare reform, was included to ameliorate the distributional impact of the BTU tax (which was replaced by a 4.7 cent a gallon gas tax in the final 1993 "recovery act" bill which increased the EITC and which was not welfare reform).

Kilgore disapproves of progressives who are playing into Ryan's hands by reporting facts damaging to the case for welfare reform. I actually agree that egalitarianism is harmed by noting the facts which make it hard for most Americans (who love welfare reform) to agree with reality based wonks. I just think that journalists should place accuracy above serving the Democratic party. Anyway, Kilgore
has a right to his own opinion but not to his own facts. His claim that Ryan's proposal is not at all like welfare reform rests on a false claim about recent history.

Tuesday, April 10, 2012

As far as I can tell, Simon Wren-Lewis has been convinced by Paul Krugman. He now proposes parallel reasearch projects one of which is to be focused on fitting the data. This is exactly what Krugman advocated.

Update: clearly I couldn't see very far. In fact, as he has repeatedly written, Wren-Lewis always agreed with Krugman about what is to be done. I assume he still disagrees with Krugman about the fruits of the effort to micro found macro. In any case, I missinterpreted his new parallel research program proposal. It is the same as his original paralkel research program proposal.

Also he isn't the one who caused the Bank of England model to have an ad hoc periphery around the consistent core. That was the work of Bank of England employees. Or something. Just go to his blog for more reliably correct corrections.

Thomaists please click this link.

Monday, April 09, 2012

We don't think centrism is the yellow line in the middle of the road, we think it is the dead armadillo. SadOldVet is rude and the past is past, but "maximum" and "unambiguously" are cheap rhetorical tricks which don't work here. Don't stab a straw man in the back.

Note that the word "gullible" was used as a necessary qualifier. The implication is that not all centrists ae gullible. Krugman clearly thinks Obama has learned his lesson ( and what could ever be more useful to Obama than Krugman denouncing his alleged centrism?).

I think the 1 dimensional representation of ideology is astonishgly useful, but can be overdone. In particular, the mederate center of US public opinion does not have a view on taxes on the rich between Obama and Romney but much closer to Obama. They clearly are more enthusiastic about class warfare than Obama admits in public to being. This is demonstrated by dozens of polls going back decades.

The winning strategy is based on defining centrism as standing up for the interests of the US middle class (I sincerely am more concerned about the problems of the third world poor so I should be shunned).

The odd thing about your debate with Krugman is that you both agree with Obama's current
rhetorical strategy. I shudder to imagine what you would write about each other if you
actually disagreed about anything.

I hate the captcha, but this one is perfect. It is "ISAbout popolo" . Exactly, it is about the people and populism.

All on Kilgore on centrism

More on an earlier post

I commented that I agreed with every word in the post above. Not this one. Why do you think it doesn't make much sense for tax fairness etc ? It makes a whole lot of sense to me.

I sense a centrist reflex -- like Obama you feel the need to agree in part with the view you go on to reject. You also love to set up straw men. I think that the trick of ascribing "overriding" to some in your party fails twice. First, since you couldn't identify any such person (until I volunteered in the first paragraph of this commen) the rhetorical trick is obvious. Second, "overriding" isn't an extreme enough word to serve your rhetorical purpose. This is a key issue on which a solid majority absolutely rejects the Republican's overriding priority.

Can you come up with a hint of a shred of an argument for your view that it should't become an overriding issue for Democrats ?

All throwing a cow because he casually wrote that he agrees with the third wayers that tax fairness shouldn't be an overriding issue for the Democrats. This on the way to writing that it should be an issue. A blatant Obamanation.

Thursday, April 05, 2012

I still like this video
But it is now the second most politically unwise video not posted by fucking AFSCME surpassed by this

Yep AFSCME can (link to) out of context quotes with the best of them.

Wednesday, April 04, 2012

Shorter Daniel Patterson

I'd agree that I need to spend more time with my family if it weren't for the restraining order.

Tuesday, April 03, 2012

Republicans admit that Mitt is gaffe prone. Their latest line is that Ann Romney is a rock star.

The latest from this lady sure left me gaga.

I knew that she suggested some revelation, but didn't know she was fighting the impression that he was "stiff" this makes the following choice of words with totally accurate annotation even more amazingly unfortunate than I thought

"I guess we better unzip him and let the real Mitt Romney out, because he's not" [stiff].

I too would not be exited oops up uh perky I mean thrilled that's it not thrilled if I were relying on Ann Romney's verbal skills to help me achieve election.

I promise you that I had to struggle to resist the temptation to write a much more offensive post.