What Happened to the Phillips Curve ?

Here we go again. There is a blog discussion among Keynesian to New Keynesian economists on the cause of the new Classical & Rational expectations revolutions. I have been typing my usual comments. I will now try a post. The question is: how important was stagflation in causing the abandonement of old Keynesian models ? I basically agree with Simon Wren-Lewis this time.

The discussion I have read Simon Wren-Lewis, Mark Thoma, Paul Krugman, and Noah Smith

A glossary: I'm not sure the participants are using terms exactly the same way. I will explain how I use them.

1. New Classical to me refers both to models based on the Lucas supply function and to real business cycle models. I think Mark Thoma used the phrase to refer only to the Lucas Supply function which explains why he says new classical models have been abandoned.

2. Stagflation: I think this generally refers to high inflation and high unemployment at the same time. Importantly, I don't think the word implies inflation which will remain high forever and ever so long as unemployment remains normal or low (at or below the NAIRU).

3. Stable Phillips curve: To correspond to the meaning of curve, this should mean the claim that inflation is best modelled as a function of unemployment plus a disturbance term (that is with no effect working through expected inflation)

4. The natural rate hypothesis is a claim that the long run Phillips curve is vertical at a natural rate of unemployment (which depends on labor market institutions)

Simon Wren-Lewis argues that stagflation could easily be reconciled with the old Keynesian approach (and notes that it was) so the change must have been caused by something else. He believes the cause was economists' attraction to rational constrained maximization.

There is a much simpler reading. Just as the original Keynesian revolution was caused by massive empirical failure (the Great Depression), the New Classical revolution was caused by the Keynesian failure of the 1970s: stagflation. [skip] I just do not think that is right. Stagflation is very easily explained: you just need an ‘accelerationist’ Phillips curve (i.e. where the coefficient on expected inflation is one), plus a period in which monetary policymakers systematically underestimate the natural rate of unemployment. You do not need rational expectations, or any of the other innovations introduced by New Classical economists. No doubt the inflation of the 1970s made the macroeconomic status quo unattractive. But I do not think the basic appeal of New Classical ideas lay in their better predictive ability. The attraction of rational expectations was not that it explained actual expectations data better than some form of adaptive scheme. Instead it just seemed more consistent with the general idea of rationality that economists used all the time. Ricardian Equivalence was not successful because the data revealed that tax cuts had no impact on consumption - in fact study after study have shown that tax cuts do have a significant impact on consumption. Stagflation did not kill IS-LM. In fact, because empirical validity was so central to the methodology of macroeconomics at the time, it adapted to stagflation very quickly.

I agree (except for the word "need" see below).

Mark Thoma agrees with Simon Wren-Lewis.

Paul Krugman wrote

I remember the 70s quite well, and stagflation did indeed play a role in the rise of new classical macro, albeit in a subtler way than the caricature that it proved Keynes wrong, or something like that. What mattered instead was the fact that stagflation had in effect been predicted by Friedman and Phelps; and the way they made that prediction was by taking a step in the direction of microfoundations. [skip] What this did was to give immense prestige to the notion that you could use the assumption of rationality to make better predictions than you could using historical experience alone.

I agree with this too except for the part about "What mattered"

Noah Smith agrees with Krugman.

My thoughts.

I am sure that Krugman recalls the 70s correctly (I arrived later but have similar recollections). However, I do not think that the perceptions in the late 70s about what Paleo Keynesians said in the 60s were accurate. Roughly I have seen no evidence that any prominent economist wrote anything which was proven false by the occurance of stagflation. Here, as often, I am retailing the research on recent history of thought by James Forder

I do not believe that any prominent Keynesian ever presented a model which was inconsistent with stagflation. It is widely believed that at some point Keynesians believed in a stable Phillips curve. This belief is not based on any primary sources.

I think that the immense prestige is based on an extraordinarily successful strategy of setting up and knocking down a straw man.

I think it is useful to see how the Old Keynesians responded to Lucas's supply function paper. I strongly recommend reading as a statement of the old Keynesian orthodoxy http://cowles.econ.yale.edu/P/cd/d03a/d0315.pdf. ( the twits ad Cowles have redone their indexation of old discussion papers (and failed to make old links link to new papges) so the above link is dead. The current link is http://cowles.yale.edu/sites/default/files/files/pub/d03/d0315.pdf . I can make no promises that it won't rot too.

This is prominent old Keynesian James Tobin summarizing a conference which happens to have included roughly the first presentation of the Lucas supply function outside of Chicago (except, as noted by Tobin in 1971, for the clear description in "The General Theory of Employment Interest and Money"). I note that Tobin agreed that Friedman was definitely right that eventually expected inflation would rise one for one with a permanent increase in inflation.

Second I think that a non accelerationist expectations augmented Phillips curve in which a permanent increase in lnflation of 1% causes an increase in expected inflation of 0.5% is consistent with stagflation (as I defined it above). An accelerationist Phillips curve is sufficient but not necessary. Let's say crazy monetary policy causes 30% inflation one year and 15% expected inflation the next year. According to the non accelerationist expectations augmented Phillips curve, enormous unemployment would be required to get actual inflation down to 10%. One might argue that actual data through the 70s refuted the 0.5 times lagged inflation model, but it just isn't true that any combination of high inflation and high unemployment refutes it. I know of no hint of any evidence that anyone ever believed that such a model is the truth and, in particular, was not convinced by the argument that a permanent increase in inflation must eventually cause a one for one increase in expected inflation. Simple models like the 0.5 model were estimated and used to forecast, because people thought they were false but useful -- reasonable approximations given the range of policies actually being considered -- that is because people used Friedman's methodology of positive economics.

Importantly the 0.5 model implies a downward sloping long run Phillips curve. It is also the sort of model which old Keynesians used in the 1960s.

Finally, it is consistent with the data through the 1970s. My estimate of that parameter using data through 1980q1 is

. reg ldwinf infcpi linfcpi unem if qtr<1980 ldwinf | Coef. Std. Err. t

infcpi | .4888773 .0642374 7.61

linfcpi | .0698199 .0748645 0.93

unem | -.1724548 .1291306 -1.34

_cons | .0518619 .0063418 8.18

This is roughly similar to estimates reported by 1971 (though not with my few variables from FRED). Ldwinf is the growth rate "Business Sector: Compensation Per Hour" over the following year, infcpi is CPI inflation over the preceding year, linfcpi is CPI inflation the year before that and unem is the standard unemployment rate. I used quarterly data so overlapping year long periods.

The controversy between Friedman and the Paleo Keynesians was whether the sum of coefficients on lagged inflation is one or less. Data from the 1970s do not answer this question.

The standard definition of "stagflation" is a combination of high inflation and high unemployment. This can occur in a 1960s era Keynesian model. Only after the fact did people (notably including Friedman who knew otherwise) come up with the idea that Paleo Keynesians didn't model expected inflation or assume that the Phillips curve shifts up at all with expected inflation.

Also 1960s era Keynesians agreed that Friedman was right about the long run -- that eventually an permanent increase in inflation would not cause inflation higher than expected inflation.

In 1971 Tobin agreed that this must be true. However, the US data from the 70s which allegedly proved Friedman right and someone else wrong doesn't prove that it is true.

Friedman says the world if flat but time zones still matter

Historically distance travelled North South doesn't hurts a teams world cup chances much less than distance East West does -- time zones jet lag you know. Nate Silver himself went for some globalization speculation guessng time zones would matter less now that players play all over the world. Yet eight of ten American teams advanced to the round of 16. The 16 are evenly divided between the Western and Eastern hemispheres. I doubt that has happened often.

Vox On Clown Posse

When you say Dylan, he thinks you mean Dylan Thomas. Man he aint got no culture A think which really exists in the world were you live is a long detailed scholarly, balanced article by Dylan Matthews on the suit in which the Insane Clown Posse, four Juggalos, and the ACLU sued the DOJ and the FBI. No doubt there are stranger artifacts on the web than http://www.vox.com/2014/6/25/5838268/the-insane-clown-posses-lawsuit-against-the-fbi-how-does-it-work But I dont't dare imagine them. It is also odd that I came there clicking Brad DeLong's link. I was surprised that it lead me to the real authentic Insane Clown Posse and not to a conservative critic of Paul Krugman.

Rolling Stones in Rome

Tonight I listened to the Rolling Stones perform in the Circus Maximus in Rome. Of course I didn't buy a ticket (180 Euros and sold out I'm sure). I just loitered in via Terme di Caracalla. I could see the maxi screens with St Peter's in the distance. They are old but they've still got it. They did play too many new songs (new meaning post 1978). I high point was Mick Jagger introducing Ron Wood then saying "Ron non mangia abbastanza pasta". I am pleased to report that his accent is even stronger than mine. But the really wonderful aspect was the crowd of un paying listeners. About half were kids of going to rock concert age and a good third were old enough to have been going to rock concerts when the Stones were new. The very best part was 8 pairs of people. In each pair one was middle aged and the other a teen ager and they had the same face. This was clearly a mother daughter (or father son or father daughter)bonding thing were the not so young Stones fan was showing his or her child what it was (and still is) all about. These were just people standing or milling around. There were also mom dad and the kids families which were almost as good. The stars were three women daughter mother and grandmother. I am old enough to remember when the Stones were a source of tension between parents and children, so I found all this absolutely totally incredibly wonderful.

Jella internazionale

Yesterday I checked what was happening in the World Cup. I was surprised to find that Iran had held Argentina to a 0-0 tie after 90 minutes (so in tempo di recupero which I think is called stoppage time in English). I was a bit surprised to find that I was pleased. OK so they occupied our embassy and held diplomats hostage 33 years ago, but I find I don't bear a grudge and must must must root for the underdog. So I clicked for more details and saw huh wah now it says Argentina 1 Iran 0. Yes that was minute 91. My 5 seconds (10 second max) of rooting for Iran caused them to lose the match. This reminds me of the strange case of Barack Obama. He isn't just a half Arican US president whose parents divorced when he was 2 and whose middle name is Hussein. He is also the only candidate who has ever won in spite of receiving a campaign donation from me. Speak no ill to me of your worst enemy. If I am for him, he will lose.

Waldman on Cheneys

I was frustrated to learn that I am not the Waldman[n] who has enough influence to be quoted on Fox News by Megyn Kelly. Paul Waldman manages to win a Hirohito award with "Maybe listening to Dick Cheney on Iraq isn’t a good idea" as a result of which the debate situation has worked out not necessarily to the Cheneys' advantage while underlining history's greatest example (so far) of self unaware inadvertant self reference (which is not thee first line in their op-ed).

The op-ed contains nothing even approaching a specific suggestion for what , other than to say that defeating terrorists “will require a strategy — not a fantasy. It will require sustained difficult military, intelligence and diplomatic efforts — not empty misleading rhetoric."

@robertwaldmann was attempting absurdly self referential tweets when I found Greg Sargent @ThePlumLineGS noting the influence of his co-blogger.

Pretty cool. Megyn Kelly directly confronts Dick and Liz Cheney by reading from @paulwaldman1's rant: https://t.co/AloCeL3BgK

— Greg Sargent (@ThePlumLineGS) June 19, 2014

I should have known that I couldn't compete with the Cheneys

Ahmed abu Khattala was just captured in Spite of the declarations of Ayotte, McCaina and Graham.

Via Jed Lewison at the Daily Kos Last month Kelley Ayotte, John McCcain, and Lindsey Graham wrote "Since we know where Ahmed abu Khattala is, why hasn’t he been detained?" Ahmed abu Khattala was recently detained in spite of the publication of the fact that the US authorities knew where he was. I'm pretty sure that Ayotte, McCain and Graham have the speach and debate clause to thank for the fact that they aren't criminally liable under the Espionage Act. update: In fact abu Khattala was living openly in his mom's house. He knew that everyone knew where he was, so the fact that the US government knew wasn't a secret at all.

Use Your Head

As I type and if I recall correctly, the past four world cup goals have been headers. Wilfried Bonny (Ivory Coast) Gervinho (Ivory Coast) Enner Valencia (Ecuador) (bouncing the ball off the goal line too) Admir Mehmedi (Switzerland) That seems like a rare rund to me. It turns out to be surprisingly hard to find any calculation of what fraction of goals are scored with the head. I finally learned that 21% of league 2 goals are scored with heads (I would have guessed closer to one in ten and no I don't know what league 2 is) So that means that the chance that a series of 4 goals are all headers is about 1/625 which isn't very low (the game has been played for a while).

27 % again

It's that number 27%. The well known crazification factor. The fraction of Hispanic Americans who voted for Romney. How do you say "crazification factor" in Spanish ?

I told Kevin Drum So

Kevin Drum Just revised and updated his prediction of how many people gained insurance coverage due to the ACA

Latest Gallup Numbers Confirm 10-12 Million Newly Insured Under Obamacare [skip] you're probably up to 12-13 million who are newly insured under Obamacare.

I comment. April 2 you forecast 10 million newly insured by December 31 2013 well below the CBO's original forecast. I said hooey. I think you were, in part, relying on Gallup estimates for the first quarter (the 15.6 in your graph) and very conservatively extrapolating.

I guessed the original CBO guess would be about right (bewared of Doug). Now you agree. Your calculations from then say 12 million adults (your guess was 2 million under 26ers were already covered due the ACA in 2013). Clearly the number of children newly covered when their parents get medicaid or private is well over a million. Your 10 million by Dec 31 guess is no longer operative. I told you so

http://www.motherjones.com/kevin-drum/2014/04/how-many-uninsured-have-been-helped-obamacare#comment-1315393921

Also this isn't what we get from the ACA in 2014. Medicaid signups continue. The Medicaid rolls increased by about 1 million in April. Almost all of this must be due to the ACA (one would expect less than 100,000 due to population growth etc).

I admit I was wrong (link above). I thought the CBO guess (13 million in 2014) would turn out to be about right. Clearly it was an underestimate. Counting under 26ers and children the number is clearly well over 13 million now. Also it is growing quickly (by almost a million last month).

Worth the price ? Hmm Surtax -- fine by me. Cut back the Medicair advantage boondoggle very fine by me, tax Cadillac insurance very fine by me, Medicair advisory panel uh not just advisory excellent. The costs seem to be excellent reforms all by themselves.

Of course the real cost was keeping the Senate busy during the few months of a filibuster proof majority. Also the 2010 elections. I'd say well worth the political cost, but that's not obvious.

update: Just here. Drum is anchored. He said 10 million and he is reluctant to admit he was wrong. So a Gallup estimate of 10 million adults since 2013 (in addition to the 2 million by 2013) becomes 10-12 million in his headline. That doesn't work. His old calculations (no new relevant data) say 12 million adults plus millions of children. After reviewing the Gallup numbers, he gets to "you're probably up to 12-13 million who are newly insured under Obamacare." The "10-" in the title is absulultey not justified by the text of the post.

Drum Kinsley Greenwald Holder and The Espionage Act

Boy did I ever let this comment run away with me. Kevin Drum asked what the hell Michael Kinsley was thinking when he wrote the following

<

b>that decision must ultimately be made by the government. No doubt the government will usually be overprotective of its secrets, and so the process of decision-making — whatever it turns out to be — should openly tilt in favor of publication with minimal delay. But ultimately you can’t square this circle. Someone gets to decide, and that someone cannot be Glenn Greenwald.

I was unusually prolix in a comment.

I believe the bolded passage is an example of a fallacy which is more common than any other fallacy or any valid method of reasoning -- the false dichotomy. Kinsley asks if elected officials should have authority to keep things secret backed by the threat of prison. The alternatives he offers are prosecute Greenwald for espionage or eliminate all restrictions on revealing government secrets.

Thus Kinsley tries to sneak in the assumption that there is no middle way -- that it is, for example, impossible to threaten to prosecute people with security clearance for revealing secrets learned using that clearance without also threatening to prosecute journalists who report those secrets. I have just described the Obama administration's current policy (although the espionage act is so vague that the non prosecution of Greenwald and well most Washington reporters is an act of prosecutorial discretion - Obama administration policy which the next administration is free to change).

So our Democratically elected officials decide to keep secrets with a system of classification and security clearances. Currently Snowden would be prosecuted if in the USA while prosecution of Greenwald is not even under consideration (unless Eric Holder lied).

Kinsley could go further. The Guardian online has a wide circulation, but the Snowden effect is vastly amplified by all the other journals (including say mother jones at this blog) which repeated Greenwald's assertions. If Greenwald is guilty for reporting facts which were already out of the control of the US government, why so are you. Kinsley's logic is that there is no difference between Snowden, Greenwald, Drum, or, I'm sure, Kinsley.

Or heads up. I'm pretty sure that Greenwald, Drum,Kinsley and a good half of the US public could be prosecuted under the Espionage Act. It might be time to amend it a bit no ?

I think this is a fair excerpt with elisions

http://www.firstworldwar.com/source/espionageact.htm

"whoever, for the purpose of obtaining information respecting the national defence with intent or reason to believe that the information to be obtained is to be used ... to the advantage of any foreign nation ... obtains, ... any sdocument, writing or note of anything connected with the national defence

[skip]

"(d) whoever, lawfully or unlawfully having possession of ...any document ...relating to the national defence, wilfully communicates or transmits or attempts to communicate or transmit the same and fails to deliver it on demand to the officer or employee of the United States entitled to receive it;

[skip]

shall be punished by a fine of not more than $10,000, or by imprisonment for not more than two years, or both."

The elided text consists of clauses or phrases separated from the quoted text by conjunctions such as "or". If you obtain any document respecting the national defence with an aim to help humanity (including foreigners) you are criminally liable.

Note there is no requirement that the documents related to the national defence be classified. If, say, you tell foreign policy makers the US military budget as published in the Federal Register for the sole purpose of helping them forecast US aggregate demand and optimizing their macroeconomic policy, then "shall be punished by a fine of not more than $10,000, or by imprisonment for not more than two years, or both."

I'm not a lawyer. I note that the text is perfectly clear. I trust that it has been interpreted to be the law Congress should have written. I think this is done through the absolutely essential judicial principle of lying about plain English if reading what was clearly written has bad enough consequences. But I have no doubt that, under current US law, you, Kinsley and I are felons.

Who will be quickest on the draw ?

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

Only Kynect

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

The two seconds Chait

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

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

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

Drum beats Rubio to a pulp

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

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

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

Jon Chait isn't Cynical Enough

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

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

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

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

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

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

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

Ron Fournier Barely Missed the Trifecta Hat Trick of Stupid

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

Ricardian Equivalence with Astrology

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

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

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

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

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

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

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

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

Methodology Intellectual History Friedman and Phillips Again

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

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

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

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

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

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

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

Prob > F = 0.0000

| Newey-West

ldqwinf | Coef. Std. Err. t

unem | -.3776157 .1145142 -3.30

infcpi | .5516583 .2054788 2.68

infcpia68 | .0089793 .1800448 0.05

_cons | .0527488 .008214 6.42

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

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

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

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

1974q4 1.29

1975q4 1.28

1977q4 1.37

1980q4 1.20

1982q4 1.25

1985q5 1.30

1989q5 0.93

1997q5 0.53

2007q5 0.06

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

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

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

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

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