What TPM Reader JM Said

Read it Quote of the day "we’ve entrusted our national medical system to the managerial competence and goodwill of the Rick Scotts of the world, and that is much scarier than a podium fan."

Nail Biters

There are some close races for Governor in the USA. They are especially close according the the Huffington Post Pollster aggregation In fact as of October 15 2014 11:54 AM EST, the two candidates are separated by exacly one point in the Governor's races featured by the Huffintong post. That is each and every featured Gubernatorial race all 6 of them. averaging over the 6, Democrats lead by 0% yes Zero.

I Just Voted by E-Mail

Amazing but true, Massachusetts allows voting by e-mail. You don't get much more 21st century than that. Well now that I think of it, maybe by 2016 they will have an iPhone app for that. I had to sign something waving my right to a secret ballot as humans will deal with the attachments (that form, an affidavit and 2 pages of ballot) I noted 3 things about the ballot First there is no glass ceiling in MA politics. The Democratic candidates for Governor, Attorney General, Treasurer and auditor are women. Second I now vote in the 5th congressional district. Ah how time passes. This means this is the end of the biennial tradition of being asked if I want to vote for Michael Capuano -- I don't think he has ever had an opponent. Now I am asked if I want to vote for Katharine M Clark. Another woman. Republicans are Abt to avoid the embarrassment of getting hammered in a distric which is mostly Cambridge MA (by population). That is an inside joke, the most recent (actually the only) Republican candidate who I can remember was named Abt. Oh there was also a Communist candiate on the ballot in 1980. In my district we have a Soviet approach with only one candidate for each of Representative in Congress, Senator in General Court, Representative in General Court, and District Attorney.The sole candidates for all of those offices but Senator in General Court are women, as is the Democratic candidate for Register of Probate. Again, no glass ceiling in the Peoples' Republic of Massachusetts, although with all due respect I'm not sure that one has to break a glass ceiling to be Register of Probate (in fact I have no idea what the Register of Probate does). All so very progressive. Third and finally, on the back of the ballot (a separate file attached to the e-mails) I find Question 4 -- "A YES VOTE would entitle employees in Massachusetts to earn and use sick time according to certain conditions" . Yes super modern ultra progressive Massachusetts might establish a legal right to sick leave. I wish I could say that's so 20th century, but I strongly suspect that Bismarck might have done that in the 19th century. With the web the world may be flat, but it is also totally twisted.

A Comment on StrawKrugman

I am going to critique something Krugman didn't quite say about Tirole. What he really said is here. can't resist jumping in the deep end and discussing what Nobel memorial prize winner appreciates about another. I think the best title is "calculated silliness was a Trojan horse". In a parody of your version (StrawKrugman's view) consideration of imperfect competition was made possible if examples were allowed as theory, and this was good. But then things went too far and a smart graduate student could provide and example of everything and the opposite of everything. My reply to StrawKrugman is that there is no legitimate way in which this was is going too far. The examples of everything and the opposite of everything existed in the world of math (hyper-Urania). Ignorance is strength but time is stronger. In fact, I think the reason economists insisted (and some still insist) on assuming perfect competition is that it was easy to guess that there were no results out there -- no implications of imperfect competion by itself -- that anything could happen. I think the useful role of Tirole et al was to give the impression that there were interesting general results following from imperfect competition and/or asymmetric information. Once the approach was accepted, the pretense that theory without evidence tells us something about the world can't survive the onslaught of smart graduate students who need PhD topics. I don't think the intent was destructive, but I bet it was as if you, he and MIT played a trick on the profession,

The usual comment on Wren-Lewis

Simon Wren-Lewis has a very thoughtful post on what went wrong in Macroeconomics. I wrote the same thing I always do (see below). I also tried to answer his questions.

I will write a second comment. I will try to respond to your questions. I wasn't an economist in the 70s so (as usual) I don't know what I am talking about.

"So why didn’t this happen? Why did we have a revolution which overturned an existing methodology and temporarily banished Keynesian theory, rather than an adaptation and augmentation of what was then mainstream?"

"Was the attraction of overturning orthodoxy too strong, as it is for a minority of heterodox economists today? "

I think this attraction was very strong. There is something else. A couple of Economists from U Minnesota mentioned Harvard for no clear reason -- I think there was and is an element of Midwestern pride (neither of the economists is originally from the USA). In particular a distasteful aspect of appeals to common sense or judgment is that they are and must be assertions of intellectual authority. Math has the appealing feature that a proof is a proof and does not rely on the authority of the person stating it.

" Did an ideological imperative of dismissing Keynesian ideas play a role?" I think it definitely did. Friedman, Lucas, Prescott and Barro are very ideological. The models change but the policy proposals remain the same. Views on methodology change (Sargent asserted that Lucas and Prescott were all in favor of testing models as null hypothesis until he rejected their favored models).

"To what extent was the hostile reaction of many in the macroeconomic establishment to eminently sensible ideas like rational expectations responsible? "

I think the extremely hostile reaction played an important role (of course, I don't think that rational expectations is a sensible idea).

"Was the attraction of a methodology where at least you could be sure you were consistent too enticing, ? "

Here I would say that mathematics was enticing. Writing papers that look like Physics except the variables have different meanings is enticing.

"perhaps encouraged by increasing segmentation between theoretical and empirical macro? "

I'm quite sure this came later. In the 70s and early 80s new Classicals developed new empirical tools and did a lot of empirical work. I think theoretical macro separated from empirical macro when the data kept saying that new Classical models were not good approximations to reality.

So far, I have made no progress towards understanding how a few departments were so influential. Here I think that hard work and the passion due to fanaticism were important. The general rightward political shift also must have mattered. I think that the loony left managed to cast discredit on Republican Keynesians somehow. But I really don't understand how and why it happened.

I have two other thoughts.

If macro theory (or non theory or ad hoc models or whatever) were about as good as it is would ever be in 1973, PhD candidates and junior faculty would still have to present something new. In fields which aren't progressing a new and crazy original contribution is preferable to an unoriginal contribution. Here I think the trouble is that some questions in macro are too simple and have for decades been answered well enough to serve. I think it is very easy to fit consumption and investment without theory -- 1960s equations fit well out of sample.

If aggregates depend on expectations which are not rational nor adaptive nor anything which can feasibly be modelled, then the problems of stabilizing output and even of forecasting can't be solved. If so the only reasonble thing to do is to try something and if it fails badly try something completely different.

I think many of the questions are too easy and have been answered (but young researchers can't afford to accept this) and the unanswered questions are too hard (I fear unanswerable).

Now my usual boring pointless comment

Here I am again more certain than ever that this comment serves no useful purpose. You support an eclectic approach and not the utter rejection of all of the past 40 years of theoretical macroeconomics. I guess this must seem obviously reasonable to you and to basically everyone. However, while you have very often stated this view, I don't recall much in the way of argument, evidence or even examples.

"Microfounded models could have shown the kind of errors that can arise in more empirically based models when theory is ignored or only applied piecemeal, "

for example ? To be sure such errors can arise, one should point to examples of such errors arising. The classic example is the 1960s era Keynesian ad hoc assumption that the Phillips curve is a structural relationship. This error never happened. It may well be that going to the data armed only with common sense and verbal arguments leads to errors which would have been avoided if one used formal theory. But to claim that such errors occured, one should cite them with authors, dates, titles, Journal titles volume and page numbers.

"However I also think the new ideas that came with that revolution were progressive. I have defended rational expectations, I think intertemporal theory is the right place to start in thinking about consumption, and exploring the implications of time inconsistency is very important to macro policy, as well as many other areas of economics. I also think, along with nearly all macroeconomists, that the microfoundations approach to macro (DSGE models) is a progressive research strategy."

I note that the word "progressive" appears twice. I think it is very useful, too useful. To argue that something is progressive, one need not point to achievements. The word is consistent with the claim that the approach will in the future yield valuable fruits. I recall reading in 1982 Sargent expressing the hope that realistic micro founded models which could be taken seriously and confronted with the data would be developed in the following 30 years. I say time is up.

I also note "to start". Now the claim that something is the right place to start can't be disproven. The claim is that something good will happen. I know of no evidence against the view "(6) Changes in expectations of the relation between the present and the future level of income. — We must catalogue this factor for the sake of formal completeness. But, whilst it may affect considerably a particular individual’s propensity to consume, it is likely to average out for the community as a whole. Moreover, it is a matter about which there is, as a rule, too much uncertainty for it to exert much influence." Keynes 1936 chapter 8 section II.

I have 2 3 final questions.

1. What evidence could possibly convince you that intertemporal theory is not the right place to start in thinking about consumption ?

2. What evidence could possibly convince you that DSGE isn't a prgressive research program ?

3. What could the data do which they have failed to do in the past 40 years ?

Ballance at Vox ?

Ezra Klein has an excellent post on the closed feedback loop conservabubble where the obamacare is failing. One aside illustrates a few things. The first is that I find it much easier to criticize than to praise -- I can't help myself. The second is that the rule that an essay should include a "to be sure" and a "both sides" is very strong. The third is related to Drum's rule -- if you have to search comment threads for evidence that people of type X have crazy opinion Y, you have really found evidence against your conclusion.

the aside is

(Of course, information loops can go the other way, too: a lot of liberals probably don't know that of the much-discussed 8 million enrollees in Obamacare's insurance exchanges, new data suggests only about 7.3 million stuck around as paying members.)

It is, of course, true that a lot of liberals don't know about the 7.3 million as it is true that a (smaller) lot of liberals never heard about the 8 million -- political junkies can't imagine how little normal people know about public affairs.

That said, Klein's argument is so weak that, if I didn't trust his integrity, I would suspect that he was trying to convince people that all loopy information loops loop right. 7.3/8 >90% . The fraction is at the upper end of predictions. political junky liberals have been reading forecasts that the ratio will be about 90% for months from, for example, Charles Gaba .

The 7.3 million number was trumpeted at liberal sites

Trusting Klein's integrity as I do, I think the aside really does provide strong evidence for the opposite of its apparent claim.

First the news for the ACA has to be very good indeed for "only about 7.3 million" to be the example of not as good as the rest of it news for the ACA.

Second, the hack gap is huge. New liberal alternatives to the MSM (shuch as Talking Points Memo and VOX) play it straight. In fact, liberals like Klein feel the need to add a bit of Ballance.

Well at least I sincerely honestly believe this. Klein's critique of Klein and people like him is so feeble and his obvious interest in convincing people of the opposite of his stated claim means that my confidence that he didn't make an invalid argument on purpose indicates my absolute faith in his integrity.

"Might" make right II -- a comment on Chait.

"Might" makes right. You can take almost any indefensible claim P and make it the defensible claim "P might be true". "Might" is the ultimate weasel word. It should be obvious that it appears in a conclusory sentence only when the writer knows perfectly well that he (or she) doesn't have a case. Yet it appears very often.

Jonathan Chait recently criticised "Tom Frank, author of What's the Matter With Kansas?" . The post was devastating (as Chait's critiques often are I mean talmost always are I mean hey I can't think of an exception).

More recently he chose to write about Kansas. Obviously he felt the need to refer to "What's the Matter with Kansas" and "The Wizard of Oz." He had a problem. He sumarized his actual views on recent events in Kansas and "What's the Matter with Kansas" perfectly with the (brilliant as usual) paragraph

Brownback’s biggest mistake was to forget a lesson Frank made well: Even in Kansas, tea-party populism requires the maintenance of a ruse. One needs cultural elites and other enemies to bash in broad daylight while doing the dark work of plutocracy behind the scenes. Openly conducting class warfare on behalf of the rich is no way for a pseudo populist to get ahead.

Now I haven't read "What's the Matter with Kansas" but all of the dozens of summaries of it which I have read present that as the central theme of the book. Recent polling data do as much as so few data points possibly could to suggest that Frank was totally right.

But Chait doesn't want to just agree with Frank. So he focuses on a separate issue and recent data from Kansas provides essentially no evidence one way or the other "Frank audaciously proposed that Democrats address their catastrophic standing in Kansas, and places like it, not by moving toward the center but away from it, by embracing populist economics. "

Chait correctly notes that the Democrats in Kansas didn't do this. Thus he should conclude that data from Kansas provides no evidence one way or the other about what would happen if they did do this. But having brought up the argument, he chose not to conclude that he had nothing new to say and so rather dressed up the nothing he had to say as something.

Chait wrote a sentence which is as vapid as most of his writing is incisive. "In fact, as much as Kansas provides liberals a happy story line in an otherwise difficult campaign season, it also offers a lesson that might give progressive Democrats pause."

This is, as usual, brilliant prose. But in this case the skill is used to obfuscate. We have the "might" which makes right watering down a "give ... pause". I risk nothing when I write that something should give someone who made an argument pause. It almost always is perfectly safe to propose that someone pause and think some more. If the person is standing in front of a speeding car, it is unsound to propose a pause for further reflection. Otherwise it is a proposal so mild that it is safe to make.

But Chait knows that he doesn't have new evidence for a case against populism, so he waters down the water with a "might".

Aside from picking on prose, I do have an actual argument. Chait relies on the magic word "center" without defining it. He is hinting at the argument that elections are won by racing to the center. The problem is that the word has two completely different definitions, even when used as a term of art by political scientists. It sometimes means a point midway between Republicans in Congress and Democrats in congress (as in DW-Nominate scores) or halfway between voting for Democrats and voting for Republicans (this is red district vs blue district scores). Here by construction the center is between the two parties, so for Democrats moving left is moving away from the center.

In contrast the center towards which it is good strategy to race is the position held by the median voter. Frank's point (as summarized in the quoted Chait paragraph) is that Republicans can win lots of elections, even if their positions on bread and butter populist v plutocrat issues are far to the right of the median positions of US adults. The logic is partly that they can obfuscate, partly that they can lie, and mostly that ideology is multi dimensional, and that people also vote based on the "social issues" (really the pelvic issues).

This means that a move from the current Democratic main stream towards more populism might be a move towards the views of the median voter, hence a move towards the center by this second definition. In fact a solid majority of US adults support higher taxes on high incomes, while the offical Democratic main stream position is that the ACA surtax and the expiry of Bush cuts for incomes over $400,000 for an individual $450,000 for a household are enough. Most US adults and the left fringe of elected Democrats supported increased social security pensions and increased Medicare and Medicaid spending. Basically the median US adult is markedly more populist than the median elected Democrat. I challenge Chait to find a poll and a roll call vote which don't fit this pattern.

So Frank makes the audacious proposal that Democrats would win more elections if their policy proposals were closer to the policies supported by the median voter.

"Might" makes Right I -- a comment on Sargent

"Might" makes right. You can take almost any indefensible claim P and make it the defensible claim "P might be true".

"Might" is the ultimate weasel word. It should be obvious that it appears in a conclusory sentence only when the writer knows perfectly well that he (or she) doesn't have a case. Yet it appears very often.

Greg Sargent wishes he were naive enough to believe that the fact that most voters agree with the Democrats' anti ISIS policy and disagree with Republicans' alternative proposal means that the issue will help Democrats in the mid terms. In fact he knows better. So he whips out the mighty "might" and concludes "But on the other hand, if Republicans really want to make these elections about national security, you’d think it just might prompt some media pressure on GOP candidates to say what course of action against ISIS they support and to clarify whether they support another ground war in the Middle East."

I agree that this won't happen.

His post is here. My comment is there and also below.

As I began reading this post I almost had the impression that you were going to argue that the fact that the US public rejects the Republicans' proposed response to ISIS implies that the issue won't help the GOP in November, but then I thought to myself "no Greg Sargent can't be that naive." I now know you aren't.

I think by "could -- or at least should" you mean "should" and believe "should -- but almost certainly won't."

The post illustrates intellectual distress caused by being a serious commentatator advising a country (indeed a world -- it's not just the USA) which doesn't take the responsibilities of self rule seriously.

with a "Perhaps" (which means "I know perfectly well that") you concede that candidates win with slogans and "keeping their own ideas vague". I am sure you also know that US elections tend to be decided as if they were referendums on the President, that the President and his party are held responsible for everything and, finally and quite separately, fear makes people Conservative (I am appealing to psychological research but I admit that I won't provide a link).

In the end you are so desperate that you rely on the fact that "might" makes right. Your concluding sentence includes the word "might". As written it is true. Anything at all might happen. A big enough majority of voters might consider competing policy proposals and the evidence which suggests which is better. And pigs might fly.

Who can deny that somethign might happen. For all I know the GOP might make a useful contribution to the policy debate.

So yes indeed the fact that most voters agree with the Democrats' policy and disagree with the Republicans' proposed alternative might determine how the issue affects the mid terms. But that's not the way to bet.

Monkey Cage Match

A real smack down in the Monkey Cage via Jonathan Bernstein (who summarized better than I can)

A catch to Andrew Gelman for correcting an attempted but inaccurate catch by Alfred Moore, Joseph Parent and Joseph Uscinski, who thought they had caught Paul Krugman in an error on the always-fun topic of conspiracy theories. Not so!

I cut and paste from Gelman

More particularly, Moore et al. criticize liberal pundit Paul Krugman for writing, “Unlike the crazy conspiracy theories of the left — which do exist, but are supported only by a tiny fringe — the crazy conspiracy theories of the right are supported by important people: powerful politicians, television personalities with large audiences.” They respond, “Krugman is mostly wrong that nuttiness is found mainly among conservatives.” But that’s not what Krugman wrote!

This shows, among other things, the power of Krugman derangement syndrome -- people often right that his claim is refuted because of a fact noted in the criticized post.

I think there is a simple solution to the Moore et al etc problem. I think there should be an editorial rule that if one criticizes another for exaggerating (say Al Gore inventing the internet) oversimplifying or omitting inconvenient facts, then one is not allowed to paraphrase.

If Moore et al had been required to use only direct quotes of Krugman, their elision of his statement of exactly the fact which they claim contradicted his statement would have been obvious.

What's the problem even with the stronger rule that one must quote directly and only quote directly when one criticizes ? Would we run out of pixels ? I think the rule should be cut and paste and if you insist elide but don't ever paraphrase when criticizing.

This is now the editorial policy of this blog (catch me in comments and you will get the fame that comes when your comment is pulled back to the main window of a 50 hits a day blog).

I also wrote a comment which notes that we will obtain objectivity no sooner than nirvana, immortality and a pony.

My comment.

Excellent post.

I noticed something funny -- the figure from Kahan Peters et al (2012) doesn't illustrate your point well at all. You write "the research of Dan Kahan finding that roughly equal proportions of political liberals and conservatives in the United States engaged in irrational or “motivated” reasoning" but there is no evidence related to that issue in the figure.

In fact, the data for liberals happens to correspond exactly to the arbitrary hand drawn illustration of unmotivated reasoning with bounded rationality. Now I do not think that Kahan et al provide any evidence that liberals do not engage in motivated reasoning or even that liberals engage in it less than conservatives. The figure illustrates the prejudice of the person who made it based on Kahan et al 2012 [note in the comment over there I mistakenly asserted that the figure is in the published article -- I don't know who made it] prejudices (I guess based on it that he or she is a liberal who thinks that Climate change is a big risk).

My point (if any) is that one can't tell if reasoning is motivated without knowing the consequences of unmotivated reasoning. As far as I can imagine, we could only tell how vulnerable someone is to motivated reasoning if we were capable of perfect objectivity.

Teh figure could be explained if a hypothetical perfectly objective and well informed agent would answer 8 and liberals are completely immune to ideological reasoning, and equally well explained if that hypothetical agent would say 3 and conservatives were completely immune to ideological reasoning.

Until we achieve perfect rationality ourselves, we can't measure the irrationality of others. That is, I think your claim couldn't possibly be have been demonstrated scientifically given data available in 2014 AD or 1002014 AD.

I had some more pointless text here &ran out of allowed characters exactly when I tried to type "conservatives were completely immune to ideological reasoning." I figured it out (& can explain with my 90 left) but irrationally guessed ideological typos or bugs or something.

Copying It's not Just for Students any More

There is alleged to be a problem with students taking exams and knowledge spillovers. Another question is whether grownups do this too. Yes they do. In a totally brilliant post building on brilliant research by Joshua Clinton and Steven Rogers (pdf warning)

I comment

Brilliant. One obvious practical question is whether one gets better forecasts by averaging only gold standard polls (if any are available). Do the non traditional polls improve or worsen the average ? A purely hypothetical purely copycat pollster who took an average of other polls then added a bit of noise to disquise the purely hypothetical (non-irony alert really) would worsen the average.

Anyway a set of simple practical questions are of the form If there are N gold standard polls, the average of the N gold standard polls gives a lower forecast error than the average over all polls. Arithmetic says this can't be true if N is zero. I doubt it would be true if N is 1. It might not be true for any N (averaging is powerful and the purely hypothetical fraudulent pollster doesn't exist). So I ask when is N enough ?

Now I also think that forecasters would do better if they were to copy more, but this doesn't mean that averages would be better if forecasters were to copy more.

There is a real problem. Note that the purely hypothetical pollster might have low forecast errors. The simple trick that averaging improves forecasts, makes it possible to make good forecasts which don't contribute anything to the accuracy of the average. In the real world, pollsters who fiddle the numbers to make their results closer to the lagged average will have lower forecast errors than those who don't even if averaging them in improves forecasts less.

Paul Krugman has an unanswered question

Paul Krugman wrote

The answer all the deficit-panic types offer is basically that we must cut future benefits. But why, exactly, is that something that must be done immediately? If you state the supposed logic, it seems to be that to avoid future benefit cuts, we must cut future benefits. I’ve asked for further clarification many times, and never gotten it.

I am not a deficit-panic type demanding immediate cuts to future benefits, so I can't answer the question. That won't stop me from trying. I can think of three answers. The first is not

0) "Greece Greece I tell you." Krugman understands this argument. In fact I am quoting him putting words in the mouth of a straw man. He once believed something like the non parody version of this. This is one of the errors he pulls out when he is accused of not admitting errors. The short reply is "Japan Japan I tell you." The long one is to ask people to explain how the USA could run out of dollars. Greece can go bankrupt because it borrowed in Euros. California can and Argentina did default because they borrowed in dollars. The US Federal government can't run out of dollars. The true concern isn't for the debtor (US Treasury) but the creditors who don't want the value of their dollar denominated assets to be inflated away.

1) We must cut benefits now, because if we don't we won't cut benefits later (I favor this one). It is hard to cut future social security and Medicare benefits but it is essentially impossible to cut current benefits. If the USA reaches the point where the can can't be kicked down the road, taxes will be increased. My guess is that programs with dedicated revenue streams and trust funds will just continue if the trust fund reaches zero, with the general fund paying part of the cost. The fear of the deficit hawks is the so called bankruptcy won't amount to anything and things will just continue until investors loose confidence in Treasury securities. Even if something is then done, it will include tax increases and probably soak the rich type tax increases.

In contrast they might hope to legislate cuts in future benefits for the currently non-elderly. This means the argument cut future benefits now to avoid cutting them in the future is indefensible, because it is insincere. If the aim is to cut benefits rather than raise taxes on the rich, honesty is not the best policy. The argument that an empty trust fund will be like say Lehman going bankrupt and not like Social Security before the Greenspan commission is needed to convince people to accept distant future benefit cuts which they prefer to sharp emergency benefit cuts, but which they like less than current or future planned or emergency tax increases on high incomes.

2) Unfortunately, it might just be me first listen to me first nowwwww. If one's expertise is in long term budget forecasting, the frank statement that one knows about a problem which doesn't need immediate attention is a sure way to be ignored. No one likes the prospect of waiting 20 years before anyone will listen. Everyone argues we should listen to them now.

But I like explanation 1) better. I think it is about taxes on the rich, because it is generally about taxes on the rich.

Experiment in Information Retrieval, Moore's law and double or nothing betting.

How hard is it to get state employment data ? I want past 5 years (told goes through May). I go to www.bls.gov. What a pain. 10 minutes and raw data on my hard disk. I had to check I am doing seasonally unadjusted to seasonally unadjusted. I have a *.txt file. Now states are Texas, California, New York and Florida. All data in thousands data Texas May 2009 10,399.3 May 2014 11,562.5 difference 1,163.2 California May 2009 14,351.5 May 2014 15,487.2 difference 1,135.7 New York May 2009 8,605.2 May 2014 9,057.3 difference 452.1 Florida May 2009 7,399.3 May 2014 7,801.8 402.5 23 minutes in all data here, but I have to subtract. Twenty three Minutessss !!! is it me or is the BLS site a nightmare ? It's me it is now 25 minutes in and all I did was subtract 3 numbers from 3 numbers (I had done Texas) OK so 25 minutes to answer from what the hell is this BLS web site. I am sure it would have been quicker with FRED.

Comment on Noah Smith

Noah Smith wrote an easy to read version of his thoughts on why DSGE models aren't used by the private sector. It is, of course, an excellent article. He includes some conventional history of 1970s macrieconomic thought. I object strongly. My comment. 1) "The Keynesian SEMs predicted that when the Federal Reserve lowered interest rates, it should have given the economy a boost; instead, all it did was create useless, harmful inflation. " Definitely false. In particular around 1980 Volcker demonstrated that he had the power to make the GDP turn on a dime. The data show a huge correlation of short term interest rates and growth (with the well known roughly 6 month lag). 2) Robert Lucas,“We tried (stupid) inflation! It didn’t (dang) work!” . Did we really ? Whose idea was that ? Why are the Keynesian inflation advocates never named or and their advocacy never cited ? The simple reason is that they are straw men. 3) The SEMs could have been tweaked to fit the data. Two things. They were tweaked to give no long term inflation unemployment tradeoff. Second, the old SEMs fit the data from the 70s fine. The evidence available in 1973 and in 1980 doesn't fit the then leading new classical model at all. It fits the old Keynesian models from 1971 very well. The tweak to old Keynesian models (replacing an old 1960-70s Phllips relationship in which wage inflation depends on a few lags of price inflation and unemployment with one where the change in inflation depends on unemployment) replaced models which fit the then and now available US data with models which don't. 4) As Lucas explained in "Econometric Policy Evaluation: a Critique." his argument was not at all original having been made by the developers of SEMs while they were developing SEMs. There is no mystery why people with money on the line don't use DSGEs. It is a complete mystery how they took over academic macro (I was there not then but soon after). The candiate explanations you present in this post are not valid. The stylized facts on which they depend are falsehoods.

On Brad on 2 intellectual Fathers of Reagan and Thatcher

I am going to do Brad Fair use and cut and past this post. (do click the link anyway to be fairer to him) THURSDAY HISTORY: INTELLECTUAL ORIGINS OF REAGAN-THATCHERNOMICS The policies that enabled the creation of our Second Gilded Age were born at the end of the 1970s out of a particular reading of the political economy of that moment. Were the ideologues and the intellectuals of the right correct back when they claimed in the late 1970s that the economic problems of the 1970s were the result of "too much government" or of "an excess of democracy"? I think not. But in order to evaluate the argument we need to remember what it was. So here are the particulars of the claims that the U.S. in the late 1970s suffered from too-large a government and too-strong a democracy set forth by Martin Feldstein9 and Samuel Huntington10, with 1-17 from Feldstein and 18-31 from Huntington: [ed note Feldstein quoted -- I'm not sure about context] 1"Real GNP growth slowed from an annual rate of 3.9% between 1947 and 1967 to only 2.9% between 1967 and 1979... productivity per man-hour in... private business... 3.2% during 1947-67 to less than 1.5% since 1967 and less than 1% since 1973..." 2"The average unemployment rate rose from 4.7%... to 5.85%..." 3"The average rate of... CPI inflation jumped from 2% to 6.7%... with an acceleration to an average of nearly 9% since 1973 and over 13% in 1979..." 4"Stock prices... rose sixfold between 1949 and 1969.... In the decade since... in constant dollars fell nearly 50%..." 5"A falling share of national income devoted to net investment and to research and development..." 6"Increasing pressures and risks in the financial sector..." 7"Low profitability and an aging stock of plant and equipment in many specific industries..." 8"A deteriorating performance of United States exports..." 9"Expansionary monetary and fiscal policies... in the hope of lowering the unemployment rate but without anticipating the higher inflation rate that would eventually follow..." 10"High tax rates on investment income were enacted and the social security retirement benefits were increased without considering the subsequent impact on investment and saving..." 11"Regulations were imposed to protect health and safety without evaluating the reduction in productivity that would result or the effect of an uncertain regulatory future on long-term R&D activities..." 12"Raising the amount and duration of unemployment benefits to the current high levels to avoid hardship among the unemployed would encourage layoffs and discourage reemployment..." 13"Medicare and Medicaid... lead[ing] to an explosion in health care costs..." 14"Welfare programs... weaken family structures..." 15"Federal aid through the tax laws and through special credit programs to encourage homeownership would have such adverse effects on the cities..." 16"The high rate of unemployment, the lack of investment demand, and the low rate of personal income tax constituted an environment in the 1930s in which the side effects of social security and unemployment compensation would be relatively innocuous. Today's tight labor market, capital scarcity, and high personal tax rates imply that these programs now impede employment and capital formation..." 17"Personal and business tax laws were designed for an economy with little or no inflation. The interaction of this tax structure with the current high inflation rates causes extremely high effective tax rates on capital income, a discouragement to saving, and a distortion of investment away from plant and equipment toward housing and consumer durables..." [Now Huntington quoted. I'm again not sure about context] 18 "The democratic surge of the 1960s raised again in dramatic fashion the issue of whether the pendulum had swung too far..." 19 "The vigor of democracy in the United States in the 1960s thus contributed to a democratic distemper... the expansion of governmental activity... and the reduction of governmental authority..." 20"Across the board, the tendency was for massive increases in government expenditures to provide cash and benefits for particular groups within society rather than in expenditures designed to serve national purposes vis-a-vis the external environment..." 21"During the 1950s and early 1960s... governmental expenditures normally exceeded... revenue... but... the gap.. was not large.... In the late 1960s... after the... Welfare Shift... the overall government deficit took on new proportions... obviously one major source of the inflation which plagued the United States..." 22"The beneficiaries of governmental largesse coupled with governmental employees constitute a substantial proportion of the public. Their interests clearly run counter to those groups in the public which receive relatively little in cash benefits from the government but must contribute taxes..." 23"In the family, the university, business, public and private associations, politics, the governmental bureaucracy, and the military services, people no longer felt the same compulsion to those whom they had previously considered superior to themselves... discipline eased and difference in status became blurred..." 24"The commandments of judges and the actions of legislatures were legitimate to the extent they promoted, as they often did, egalitarian and participatory goals. 'Civil disobedience', after all... implied the moral value of law-abiding behavior depended upon what was in the laws, not on the procedural due process by which they were enacted..." 25 "The major expansion of unionism in the public sector... add[ed] still further to governmental deficits and to the inflationary spiral..." 26 "The imposition of 'hard' decisions imposing costs on any major economic group is... particularly difficult in the United States..." 27 "Domestic problems... become intractable.... The public develops expectations which it is impossible for the government to meet..." 28"Politicians... [seek] achievement which may have an immediate payoff but which they and, more importantly, their country are likely to regret... giv[ing] to dictatorships (whether communist party states or oil sheikdoms)... a major advantage..." "An 'excess of democracy'.... The effective operation of a democratic political system usually requires some measure of apathy and non-involvement on the part of some individuals and groups..." 29 "Marginal social groups, as in the case of the blacks, are now becoming full participants in the political system.... Less marginality... needs to be replaced by more self-restraint..." 30 "Democracy is more of a threat to itself in the United States than it is in either Europe or Japan where there still exist residual inheritances of traditional and aristocratic values..." My comment That is a long and interesting list. Somewhere the crime wave seems to have fallen between to stools (between 17 and 18). I think that, to be fair to both, especially Feldstein, you should number separately. Huntington's willingness to criticize democracy and praise deference to superiors is amazingly frank. I will use the word "Feldstein" to mean "Martin Feldstein as presented by Brad DeLong". OK Feldstein. On 1,2,4 and 6 subsequent evidence has been very unkind to Feldstein. Post Reagan revolution all did worse than pre. 6 (financial risks) was an amazing hostage to fortune on which he would have lost a fortune if he took his own arguments seriously. on 5 huh ?!? the ratio of nonresidential fixed capital investment to GDP was extraordinarily high in the 70s. (also it declined in the 80s) . what the hell is he talking about ? https://research.stlouisfed.org/fred2/graph/?graph_id=162563&category_id= 1-8 he is playing with timing. He is ascribing the 60s boom to the old policy regime even though it followed the policy shift. He is like the supply siders who decide that Reagan policy began in 1982. 9 this assertion is simply false. The increase in inflation was certainly anticipated by all prominent paleo Keynesians (who argued for tighter fiscal policy in the 60s). What actually happened is fiscal policy was loose (at least by pre Reagan standards) as no one likes taxing and Nixon demanded loose monetary policy to stave off the McGovern juggernaut. The second claim is a paraphrase of Arthur Burns who would tend to be more expert on the thought of Arthur Burns than Feldstein was. 10)I know of no evidence that taxing investment income reduces national savings. The data since 1979 have been very very unkind to Feldstein. 11) Feldstein assumes that health has nothing to do with productivity. The data suggest that good health precedes rapid growth (in a cross section of countries). Of course the "without considering" is simply a lie. I was alive in the early 70s and read some newspapers -- possible undesirable side effects of regulation were discussed at length (in the not so high brow Newsweek). 12) he has to deal with experience rating of UI when considering the effect on layoffs. Job search can be productive if it leads to better matches. it is easy to write down models in which UI causes a Pareto improvement. 13) Medicare, Medicaid & health care costs. This is very hard to reconcile with subsequent international comparisons. US has a larger fraction private and much higher spending than other developed countries. Private insurance plus out of pocket have grown very fast. Again subsequent data have not been kind to Feldstein. 14) there is little evidence that welfare programs weaken family structures. The structures kept changing the same way after welfare reform. Of course I must admit there is little evidence for the pro generous welfare position (say Moynihan) that it is important to provide welfare to unemployed couples too. Basically even in the 25 blue states which did this, the program was irrelevant as too few couples needed it. Now there has been a decline in teen pregnancy. That was clearly due to the clean air act (see 11 -- I am 100% serioius). 15) good point Marty -- note how actual elected Republicans don't agree. 16) again wtf is the labor market loose or tight ? In 2 vs 16 Feldstein has it both ways. On taxes, the top rate was higher in the 40s and 50s than in the 60s and 70s. As quoted, Feldstein is using high GDP growth in a period with UI, Social Security and high tax rates as proof that you can't have high growth with UI, social security and high tax rates. WTF ! Huh ! etc 17) good point again. However, I again note the very high level of investment in plant and equipment in the 1970s. Summing up. I think Feldstein wrote crazy things about investment in the 70s and growth with high taxes UI and social security. I think he knew better, but was exploiting the vague sense that everything was very right wing in the 50s. I think he counted on tricking people who were paying more attention to the 18-30 issues than to actual economic policy. He arbitarily picked the peak of a boom as the end of the good old days. This is cheating. However, he certainly was right that 70s economic performance was very disappointing. I didn't think that Reaganism was worth a try, but I can see how some people did. Subsequent poor economic performance refuted Feldstein's argument, but hey, that's social science. I think this is also true of health care spending. The USA had not pulled away from the pack yet. I think claims 8-17 (which are standard pro-market arguments) have weak empirical support (that includes 15 and 17 with which I agree). I'm pretty sure they are based on economics 101 and the assumption that elasticities are high. Trying to be quicker on 18-30 which I will ascribe to Mad Dog 18. His courage amazes me. Even George Will doesn't question Democracy so bluntly any more. 19. The word "distemper" is pejorative. Think of trying to tell a tea partier that a reduction in "government authority" is "distemper" I think they would lose their tempers. Again amazing frankness (I refer to mad dog who may or may not have anything to do with a Harvard prof.) 20. WTF !!! Does mad dog think Vietnam is internal to the USA. Some of the points clearly refer to the 60s and not the late 70s. Where was prof. Mad Dog at the time ? 21 subsequent events have not been kind to mad dog either. You have a problem yourself if you consider deficit phobia to be part of the intellectual origins of Reaganism. 22. mad dog has a problem. The big expansion in spending was mostly Medicare. Not cash, and benefiting all who live past 65. He seems to think that a high fraction of GDP was spent on means tested cash benefits. He is wrong. Increased public employment had a lot to do with teaching baby boomers how to read. I'm sure he doesn't oppose that. 24) does mad dog know what "procedural due process means" ? It sure doesn't mean depriving people of the vote then passing laws to keep them separate and unequal. Did mad dog know that congress is supposed to declare war and peace and that Johnson was sure the Tonkin gulf resolution did not grant him authority to escalate ? I mean how the hell does he dare place contempt for due process on the side of protesters when it characterized those against whom they protested ? 28-29 and 30 again amazing boldness. Also cluelessness. Had Mad Dog ever visited Europe ? I knew there was somewhere the Us authoritarians frank expression of envy of dictators. I think subsequent events have taught a bit about the advantages of dictatorships. The fact is that history shows that Democracy works horribly but less horribly than the alternatives.

Gil Fullbright - Stormy Daniels 2016

Optics

Comment on a Drum Foser Twitterdebate Drum wrote For better or worse, politicians spend a lot of time thinking about how various audiences—supporters, opponents, undecideds, pundits, members of Congress, the media—will react to their proposals, and they shape their messages accordingly. If you're reporting on politics, you have to include that as part of the story, and optics is as good a word as any to describe it. I wrote a long comment below. Here I just want to note that "you have to" is a catagorical imperitative. Drum didn't write "If you want to obtain result X, you have to" which would be a hypothetical imperative. It is very odd to find a catagorical imperative in a paragraph which begins "For better or worse." I object to "If you're reporting on politics, you have to include that as part of the story," I had the impression that, given the first amendment, reporters could chose what to report. I think you are attempting to answer a question about what people should do by considering only facts and not values. This is a harsh claim, but I think I can back it up. Your discussion of what reporters must do includes no discussion of the proper role of journalism in society, no hint of an idea of what the point of being a reporter is. I will assume that their useful role is to make the citizens better able to make informed decisions. I claim that citizens would be more able to get what they want out of government if reporters reported only on policy proposals and evidence related to forecasts of the effects of the proposed policies. The question is what should be done. You say people will not decide based on evidence and specific proposals. You respond to a proposal to light a small candle by cursing against the darkness. I think it is possible for reporters to refuse to listen to campaign operatives (no one can force them). To report as follows "the X campaign released a press release which included claims of fact unsupported by links to independent sources" full stop. No mention of the content. Or "X claimed he would achieve a desirable result but provided no details as to how he would" full stop. This can be done. It is legal (note first amendment). Foser is talking about what journalists *should* do. In the debate, it is imagined that the whole profession is waiting for your advice. The argument that one newspaper or TV channel which did this would lose market share to the unscrupulous political rumor mongers is out of order. Your rule seems to be just because something is happening, and someone wants it reported, reporters must report it. But of course this rule can't be followed given world population. It is more nearly that powerful people want it reported so it must be reported. But I think it is that people whom reporters quote (off the record) want to be quoted (off the record) so this is the way things must be. I have a question (and a tiny shred of hope for an answer). What did you mean by "have to" in "have to include that" ? Not that reporters would die if they didn't, nor that they would be sent to jail. Was this "in order to do you job the best you can, you have to" ? This is statement about right and wrong and can't be addressed without asking what the socially useful role of journalism is. Or is it, you have to to keep your job, given the fact that your editor has to keep up circulation and people like to read that stuff. That might even be a true claim, but it doesn't respond to Foser's assertions about what journalism should be, which is quite distinct of what is the best we can hope it will be given reader/viewer tastes and competitive pressures. update: dangerous chemicals can cause synesthesia "chemical interests, creates particularly noxious “optics” "

TB testing

My daughter needs a Tuberculosis test for a job. This is therefore an experiment in comparative health care system functioning Italy vs USA. Now in Italy she (OK her mother) was able to make an appointment quickly and then get a tetanus booster. Considerable waiting in the doctor's office (even with the amazing efficiency of Anna the amazing office managers who handles all bureaucracy for two MDs. Charge 0.00. This requires going to Gianfranco Rondoni the one doctor "Medico di Base" who can provide free ambulatory care or prescribe free amulatory care. He also prescribed a TB test as requested. Then in a TB testing clinic (private I think her mother took her) she was told that the TB test was unreliable because of the tetanus booster, so the refused to do it. No US MD (of three asked) has any idea what they were talking about. There is free TB testing available at the Montgomery County Department of Health and Human Services Dennis Avenue Clinic . However they do a new fancy test and the employer asked for an old style PPD test. From an abundance of caution, we went to Fast Track Urgent Care at 10540 Connecticut Ave Kensington, MD 20895 where we got a PPD in about five minutes. No line. Fast courteous care. $45.00 . During the brief wait (and the few seconds to stick the tines in). I was entertained or rather appalled by CNN health. CNN was talking about Deer Antler dietary supplements and considering the claim that they speed recovery from injury and increase "energy". I thought it was an infomercial until Dr Sanjay Gupta appeared. The sound was set to near zero to not irritate the patients (or customers ?) but I heard him say in a very polite tone to some quack that the claims are viewed with great skepticism because they seem too good to be true. i think it is here (search the page for Gupta). I had some trouble googling [health deer antlers gupta site:www.cnn.com] as there was more than one relevant hit (including one to an unreadalbe xml) This was in marked contrast to the angry tone he used to claim that Sicko by Michael Moore contained factual errors in a surprise fact check before an interview. I remind my reader(s) that the only part of the fact check which alleged an error of fact was CNN's false claim about a true assertion in Sicko. Aside from that the fierce tone was used to present the other side of a debate as if the fact that a case for pro could be made implied errors in the case presented by Moore. In itself a disgraceful episode, but one which is made infinitely more shocking by the velvet glove treatment of peopel hawking dietary supplements. I recall that Barack Obama seriously considered nominating Dr Sanjay Gupta surgeon general. Now I must include a disclaimer. I saw and (barely) heard a man identified as Dr Sanjay Gupta on CNN. I can't be 100% sure it is the same Sanjay Gupta who attacked Moore and was considered a credible Surgeon General. It might be a different Dr Sanjay Gupta for the rubes. The point is that I am not sure I can judge the effect of 7 years of aging since the last time I saw video of Dr Sanjay Gupta. The Dr Sanjay Gupta I just saw looked more than 7 years older than the one who slandered Moore (reckless disregard for the truth -- not actionable because CNN conceded the point). I think I saw a prematurely aged withered hack, but I may have seen a withered hack who works for the same employer as the younger aggressive act I saw 7 years ago. I realize that this complaint will not be compreshensible to any of my few readers who are young, but we old timers remember that, long long ago, CNN was a serious news network.

Some people read the post below through to the end.

J. Edgar Mihelic read the very incredibly boring post below to the end. Having never met the man, I assume he smells like Noah. Also "Anonymous" read the post to the end. To paraphrase Dr Strangelove Vy did you keep your name a secret ? You are not supposed to keep it a secret. The offer expires now.

Phillips curves with anchored expectations

update: J. Edgar Mihelic read the very incredibly boring post below to the end. Also "Anonymous" read the post to the end. To paraphrase Dr Strangelove Vy did you keep your name a secret ? You are not supposed to keep it a secret. The offer expires now. In his very famous AEA Presidential address, Milton Friedman argued that if the Fed attempted to target unemployment at 3% the result would be accelerating inflation. Then he concluded that there is a natural rate of unemployment and no long term inflation unemployment tradeoff. I will claim that the conclusion doesn't follow.

I will assume that unemployment is a function of actual inflation minus expected inflation. I will also assume that people are smart enough that no policy will cause them to make forecast errors of the same sign period after period after period.

Friedman's conclusion follows if there is the additional assumption that expected inflation is a constant plus a linear function of lagged inflation. In this case, unless the coefficients sum to one and the constant is zero, it is possible to cause a constant non zero forecast error. It can't be that people are dumb enough to stick with a constant plus a linear function with coefficients that sum to anything but one if that rule is exploited to make surprise inflation always always positive.

However, I know of no one who ever wrote that such a simple model of expectations is the truth. Rather some people including Cagan, Friedman, Tobin, and Solow asserted that something like that is a useful approximation at some times in some places. Many authors expressed belief in a more complicated story in which inflation expecttions are anchored if inflation is low and variable but not anchored if inflation is high and/or steady.

I think such expectations can be modelled either as a result of boundedly rational learning with hypothesis testing or ration Bayesian updating. I will try to do so (famous last words of this post which sensible readers will read).

The monetary authority will, in fact, stick to a simple rule (but agents do *not* know that the rule never changes). It can target inflation and is tempted to trick firms into supplying more than they would under perfect foresight by setting actual inflation higher than expected inflation. I will assume that perfect inflation forecasting causes unemployment to be 5%. This is the non accelerating inflation rate of unemployment. Unemployment is linear in the inflation expectations error so the long term average unemployment is equal to the long term average expectations error.

The simple rule may be stochastic with targets based on coins flipped and dice rolled etc in secret. The monetary authority wants low unemployment and low inflation.

The question is can the long term average unemployment rate be lower than 5%

First bounded rationality with hypothesis testing. The bounded rationality is forecasting with a simple rule which might included parameters estimated by OLS on old data of. In the very simplest rule expected inflation is 2% no matter what. The hypothesis testing part is it is assumed that forecasting rules are ordered from a firwt rule to a second etc. When agents use rule n they also test the null that rule n gives optimal forecasts against the alternative that rule n+1 gives better forecasts. The switch to rule n+1 if the null is rejected a the 5% level (as always this can be any level and as always I choose 5% because everyone does). I will assume that rules are also ordered so if rule n gives persistent underestimates of future inflation, rule n+1 gives higher forecasts.

Forecasting rule 1 is forecast inflation equals 2%. Rule 2 is forecast inflation is equal to a constant estimated by OLS. Rule 3 is forecast inflation is equal to an estimated constant plus an estimated coefficient times lagged inflation. Rule 4 is a regression on two lags of inflation. the series of rules goes on to infinity always adding more and more parameters to be estimated, and includes the actual inflation rule (the monetary policy rule for this silly model).

Friedmans story about accelerating inflation at 3% unemployment works in this model. Rule 2 is flexible enough for his example. If inflation is higher than forecast inflation by a constant, the estimated constant term in the regression grows without bound.

A key necessary assumption is that agents never accumulate more than a finite amount of data about the Monetary authority. A sensible way of putting this is that learning about the Fed Open Market Committee restarts each time a new Fed chairman is appointed. To make things not too easy for myself, I assume that once agents pass from rule 1 to rule 2 they stick with it using all data to estimate parameters. The data used to test the current rule against the next one are only those accumulated with the current chairman. I will assume Chairmen are replaced at known fixed intervals of say 100 periods of time.

Fed open market committe members know all this. They can set inflation so the 2% forecast rule is never rejected against the estimated constant. The optimal strategy will be mixed, that is they will randomize inflation so it isn't too easy to learn what the best estimated constant is. I will assume they set inflation equal to a constant plus a mean zero white noise disturbance term (to be clear the expected value of the random term conditional on lagged information is always zero)

Clearly FOMCs can achieve set inflation to be 2.000001% plus a mean 0 variance 1 constant term without getting caught before the chairman's term expires. This means that the long run average unemployment rate can be less than the NAIRU. This means that there is a long run tradeoff between average unemployment and average inflation.

update: we have a winner so the offer immediately below has expired. [if anyone has read this far, please tell me in comments and I will praise you to the sky in a new post]

Friedman's argument can be true, unemployment can depend only on expectation errors and there can be a long run inflation unemployment tradeoff. There is a big difference between trying to achieve constant unemployment lower than the NAIRU and trying to achieve average unemployment lower than the NAIRU. Friedman also implicitly assumed that the monetary authority never changes and is known to never change.

Basically his implicit assumption is either the Fed can set unemployment to any constant or there is a natural rate. This doesn't follow for many many reasons. I just described one.

OK I talked about Bayesian learning. This post is already way too long. The idea about Bayesian is we start with a prior with a huge mass at inflation is 2% plus a mean zero disturbance term. Then there are positive prior probabilities on a huge variety of other models. However all of the other models have time varying coefficients which follow random walks. This means that the forecast conditional on belief in model N depends on parameters estimated with exponentially weighted lagged data. This means that given the 2.0000001% plus noise rule, the ratio of the likelihood for those models to the likelihood with the 2% plus noise model doesn't growth without bound. This means that the posterior keeps a huge mass on 2% and there is a long run tradeoff between long run average unemployment and long run average inflation.

A comment on Kling on Remembering the 1970s

Arnold Kling agrees with Simon Wren-Lewis that the rational expectations revolution was caused by something other than evidence, and, in particular, other than the stagflation of the 1970s. Their clearly stated and valid point is that Friedman did not believe in rational expectations and had no trouble explaining and, more or less, predicting the stagflation. I agree entirely with this point.

I disagree 0.1% with Wren-Lewis (I object to his use of the word "need") and about 0.01% with Kling who suggests a claim about what was necessary without quite making it.

Now I cut and paste an over long comment with which I polluted Kling's comment thread. I do not recommend reading the same old same old. I seriously considered posting this to my hard drive (but not my trash can -- I'm a word horder).

Thanks for the link. I think that you and Wren-Lewis agree 100%.

The 0.1% is that I think Friedman's story (in which backward looking expectations were pretty explicit) is sufficient to explain stagflation in the USA in the 1970 but not necessary. I think the pre-Friedman and contra Friedman Keynesians could fit the facts too.

[this "comment" has become much too long for a comments thread. The rest is over here]

My now old tired argument is that a model in which expected inflation is a constant plus 0.5 times lagged inflation fits the 1970s US data fine, but implies a long term inflation unemployment tradeoff and does not imply acceleration.

The model is obviously not the truth and not just because all models are false by definition. We can be sure it isn't a true claim about expectations by introspection, that is a thought experiment. No one can believe that after a thousand years of exactly 10% inflation year after year, expected future inflation will be 5%. I know of no evidence that anyone ever believed any such thing (although I'm sure someone somewhere did, because tinfoil hats).

It was obvious to prominent Keynesians (I am thinking of Solow and Tobin) that the one lag autoregressive expectations model wasn't the truth. It is also obvious that in around 1970 and 1971, they thought something like it was an approximation useful to US policy makers. This view seems to me to be supported by US aggregate data through 1980 (and through 2014). I think that Friedman's position is that Keynesians should not be allowed to use friedman's methodology of positive economics and their claim that an equation was useful there and then must be interpreted as a claim that it is a universal truth. If that was his view, he was much more generoust to Solow Samuelson and Tobin than well to get personal I ever was in the 20th century (and at least the first 10 years of the 21st). I believed that they believed in a Phillips curve with no expectations term at all. I was clearly totally wrong.

As I note from time to time to time to time, it was standard to include price inflation in estimates of the Phillips relation from say Phillips's second paper on the topic on. There was a debate which can be translated into contemporary econospeak as "in around 1970, Solow believed that US inflation expectations (unlike Latin American inflation expectations) were anchored."

This doesn't mean that he predicted that they would remain anchored. Like Keynes, he clearly and definitely said that the relationship between inflation and real variables was not stable and that they decoupled given high inflation.

Solow's position was very explicitly that inflation expectations are sometimes anchored and sometimes not. So high or steady inflation is eventually reflected one for one in expectations, but low and variable inflation isn't (so the average forecast error can increase in the average inflation rate). I think that this is very devinitely the view currently expressed by, among others, Ben Bernanke, Janet Yellen and Narayana Kocherlakota. I also think it is consistent with the evidence. In any case, it is the current view of many top status economists, who remember the 1970s as we do, and is the standard view among monetary policy makers.

For example, I just noticed this

In this Economic Letter, we focus on two simple extensions that are potentially important to the current inflation outlook.

The first extension incorporates anchored inflation expectations with the constraint that long-run inflation eventually returns to the Fed’s inflation target of 2% (see Williams 2006, Stock and Watson 2010, and Cogley, Primiceri, and Sargent 2010).

note especially "Cogley, Timothy, Giorgio E. Primiceri, and Thomas J. Sargent. 2010. “Inflation-Gap Persistence in the U.S.” American Economic Journal: Macroeconomics 2(1), pp. 43–69 (which I haven't read).

The semi new point I would like to make here is that Solow's position is entirely consistent with the argument Friedmans AEA presidential address. Friedman discussed only the case of a FOMC which set a very low unemployment target (3% IIRC). If one accepts his assertion that this would lead to accelerating inflation (as I do) nothing much follows. It doesn't follow that the Fed can't stabilize. It doesn't follow that the Fed can't cause long term average unemployment to be lower or higher (within limits).

It is an example which makes it clear that belief in an expectations unaugmented Phillips curve is unreasonable. Almost nobody ever believed in an expectations unaugmented Phillips curve. Samuelson and Solow definitely did not. Hicks made an argument almost identical to Friedman's in 1967. http://www.economics.ox.ac.uk/materials/working_papers/paper399.pdf

I think the key event was the spread of the strange belief that Samuelson, Solow et al believed in an expectations unaugmented Phillips curve. It was believed by, well for example, Robert Waldmann that looking at the data they saw a pattern and just decided to assume it was a structural relationship. I think that this strange delusion (about what Samuelson and Solow thought) was extremely influential exactly because they were famously brilliant economists. Also they and especially Samuelson were top figures in the formalization of economic theory, so a perceived error by Samuelson due to insufficient respect for theory was shocking. The take home lesson was that you better not trust data without formal theory -- that looking at data and thinking in English could lead very smart people to think very stupid things.

I don't know exactly when or how the strange delusion about old Keynsians began. It is certainly expressed in Friedman's Nobel lecture (in which he doesn't name his straw Keynesians).

Tnis all means I agree with Krugman about the role of Friedman Phelps and stagflation in causing the rational expectations revolution. However I also think that incorrect beliefs about what people who disagreed with Friedman said were crucial too.