Tag: Dialogue

Must-Read: Simon Wren-Lewis: The Knowledge Transmission Mechanism and Austerity

Posted on by Brad DeLong

Must-Read: A good wrestle with a very tough intellectual problem by the truly excellent Simon Wren-Lewis:

Simon Wren-Lewis: The Knowledge Transmission Mechanism and Austerity: “How do economic policy mistakes happen?…

…Policy makers want to do the right thing (although they have political preferences), and the academic consensus is correct, but policy makers do not follow it because they rely on imperfect intermediaries….

In contrast to the 1930s, the key features of the current situation are explicable in terms of textbook macroeconomic theory. Governments are actively trying to reduce their budget deficits through fiscal austerity, and this is having a predictably negative impact on economic activity when monetary policy is unable to offset its effects. So the current macroeconomic crisis does not seem to be the result of lack of macroeconomic understanding….

[The] folk story… often told by policy makers [has basic problems. It is that] in response to the Great Recession… some countries had employed a limited fiscal stimulus… this intervention, the recession itself and earlier failures of governments to be fiscally prudent led to a debt-funding crisis. Economies realised that they too could become like Greece, and so were forced to embark on a sharp fiscal contraction, commonly called austerity…. [But] there is no clear evidence that there were serious fiscal problems [outside of Greece] before the financial crisis… debt increased… because of the impact of the recession itself… no evidence whatsoever of a debt-funding crisis outside the Eurozone… if anything a shortage of debt…. How can I blame the second Eurozone recession on fiscal austerity with such confidence?… First, it is what basic macroeconomics – the macroeconomics taught to every undergraduate and post-graduate around the world, including in Germany – tells us. Second, it is what every independent model based exercise that I have seen also tells us….

Things have gone wrong in the Eurozone not because of any inadequacies in macroeconomic theory, but because that theory was ignored by policymakers…. I think it is worth exploring [the] alternative: that policy has gone wrong because the knowledge transmission mechanism (KTM) has failed…. Why might [policymakers] have been getting the wrong advice? One response is that they asked the wrong people…. The expansionary austerity line… appeared to be the one that many policymakers adopted. If the KTM had been working, then this result could only have been a consequence of policy makers willfully choosing to adopt a minority academic point of view for political ends…. Political commentators… unlikely to be economists… relate to… financial bookkeeping. It is… easy… to tell stories about excessive borrowing, but rather more difficult to talk about multiplier effects and the ZLB…. There are also important interactions between economists working in the financial sector and the media…. There is a saying in financial markets: “bond economists never saw a fiscal tightening they didn’t like”….

Among the governors of the three major central banks, only Ben Bernanke seemed prepared to say publicly that a severe fiscal contraction would make his job much more difficult. Central banks also seem far too optimistic, at least when they talk publicly, about the impact of unconventional monetary policy measures…. It seems to me that the main reason why central banks failed to give good advice on fiscal consolidation is that, among their leaders at least, there is a deep seated fear of fiscal dominance. They fear that if deficits are large, then at some stage they will be asked (or required) to monetise those deficits and that inflation will increase as a result. As Mervyn King, Governor of the Bank of England in 2010, once said: “Central banks are often accused of being obsessed with inflation. This is untrue. If they are obsessed with anything, it is with fiscal policy.”… It possible to argue that King’s role in 2010 was actually quite pivotal…. Central banks therefore played a crucial role in the failure of the KTM in 2010. They were naturally seen as a source for macroeconomic received wisdom, and indeed they were, if those seeking advice had talked directly to those involved in modelling the business cycle. In practice, however, advice was received from central bank governors, and in most part that did not convey received macroeconomic wisdom…

But…

My memory of what the bulk of policy-oriented macroeconomists were saying in 2008-10 is:

  1. Central banks are not tapped out at the zero-lower bound.
  2. Even at the zero lower bound, fiscal multipliers are relatively low.
  3. Debt issued now will have to be refinanced later at high interest rates.
  4. Hence expansionary fiscal policy can be a temporary bridge, but is not a solution.
  5. North Atlantic economies recover robustly and rapidly from demand shocks on their own.

Must-read: Henry Farrell: “Piketty, in Three Parts”

Posted on by Brad DeLong

Must-Read: Second to Miriam Ronzoni in the Crooked Timber Piketty symposium is Henry Farrell–who provides the best precis of Piketty as both sociological phenomenon and political actor I have yet seen:

Henry Farrell: Piketty, in Three Parts: “Piketty[‘s]… contribution is better understood in sociological terms…

…Economic knowledge… is the product of social processes… in which socially-legitimated social structures produce socially-legitimated forms of knowledge that are validated in socially-legitimated ways…. In a technocratic age… high-quality statistical data are… legitimate in ways that other kinds of knowledge are not. Piketty and his colleagues[‘]… high-quality data sets… confound… previous… wisdom that we didn’t need to worry about inequality. This makes a vast and important social phenomenon… visible, salient and socially undeniable….

Although efforts to undermine the credibility of the project (such as the notorious Financial Times investigation) have failed, it will continue to get empirical pushback. However, this pushback is likely to further increase the salience of the problem of inequality, by making it a major object of scientific inquiry…. If you (whether for principled or unprincipled reasons) don’t want inequality to be a problem that people pay attention to, and want to try and solve, then the Piketty book is likely to seem like a disaster to you. You’ll devote a lot of time and energy to trying to tear it down. Sometimes this criticism will be useful…. Sometimes it will be a form of denialism. Equally, if you are someone who believes that inequality is a real problem, Piketty’s work not only helps to validate your beliefs, but it gives you a new set of tools….

Finally, it helps explain Piketty’s policy prescriptions, some of which are proposed not so much to solve the problem of inequality, as to help generate the kinds of politics that might solve the problem…. For example, his self-admittedly utopian proposal for a global tax on capital is in part motivated by the desire to reduce financial opacity, and to make it clearer just how well the truly rich are doing…. If we (as a democratic society, in the US, France, Ireland or some congeries of these national societies) truly understood how rich the rich were, we could do something about it…. Obviously, this bet is an uncertain one. Piketty has little to say about the politics through which knowledge generates political action…. What more we might need than knowledge is difficult to say…

Must-Read: Paul Krugman: Obamacare and the Cockroaches

Posted on by Brad DeLong

Must-Read: Still looking, without success, for conservatives at think tanks willing to be reality-based on health care…

Paul Krugman: Obamacare and the Cockroaches: “Zombie ideas are claims that should have been killed by evidence…

…but just keep shambling along, like the notion that vast numbers of Canadians, frustrated by socialized medicine, come to America in search of treatment…. Cockroaches are claims that disappear for a while when proved ludicrously wrong, but just keep on coming back…. The notion that Obamacare hasn’t really reduced the number of uninsured as a cockroach… [and] is back, as Charles Gaba notes. He says that Avik Roy’s latest is embarrassing, which I guess it is–but how much more embarrassed can the guy who did the totally spurious work on ‘rate shock’ get? I’d say, rather, that the latest is impressive in the way it uses multiple layers of misrepresentation to obscure what you might have thought was too obvious to deny…

Obamacare and the Cockroaches The New York Times

Must-Read: Ryan Cooper: How Climate Change Ate Conservatism’s Smartest Thinkers

Posted on by Brad DeLong

Must-Read: It is important to note that global warming is not unique here. There has been no sign of the reemergence of technocratic voices on the right in health care, macroeconomics, anti-poverty policy, inequality, or–increasingly–national security..

Ryan Cooper: How Climate Change Ate Conservatism’s Smartest Thinkers: “Ross Douthat grappled yesterday with the issue, arguing that…

…he’s basically okay with doing nothing….

We could be wrong; indeed, we could be badly wrong, in which case we’ll deserve to be judged harshly for misplacing priorities in the face of real perils, real threats. But on the evidence available [at] the moment, I’m willing to argue that we have our priorities in order, and the other side’s allegedly forward-looking agenda does not….

Like Clive Crook, Will Wilkinson, and Walter Russell Mead, Douthat doesn’t seriously engage with the evidence… constructs a lengthy Rube Goldberg analogy to ‘insurance’… to cast doubt on every portion of the climate hawk case, but he doesn’t take the obvious next step of trying to work through what that means on a quantitative basis…. Without numbers, Douthat’s case is nothing more than vague handwaving that reads very much like he has cherry-picked a bunch of disconnected fluff to justify doing nothing…. Saying we can chance 3 to 4 degrees of warming and that sensitivity is much lower than previously thought might give us enough space to push CO2 concentrations up to 5-600 ppm or so. But right now we’re barreling towards 1000 ppm and beyond….

Like Douthat, the few conservatives who even talk about climate (like Reihan Salam and Ramesh Ponnuru, who he mentions) are constantly saying whatever policy is on deck at the moment is no good. It’s too inefficient; it’s too expensive; it’s trampling on democracy; we should be doing technology instead, etc, etc…. Consistent advocacy against every single climate policy amounts to little more than putting a patina of credibility on the denialist views of the Republican majority.

Must-Read: Kevin Hoover: The Methodology of Empirical Macroeconomics

Posted on by Brad DeLong

Must-Read: Yes. The combination of representative-agent modeling and utility-based “microfoundations” was always a game of intellectual Three-Card Monte. Why do you ask? Why don’t we fund sociologists to investigate for what reasons–other than being almost guaranteed to produce conclusions ideologically-pleasing to some–it has flourished for a generation in spite of having no empirical support and no theoretical coherence?

Kevin Hoover: The Methodology of Empirical Macroeconomics: “Given what we know about representative-agent models…

…there is not the slightest reason for us to think that the conditions under which they should work are fulfilled. The claim that representative-agent models provide microfundations succeeds only when we steadfastly avoid the fact that representative-agent models are just as aggregative as old-fashioned Keynesian macroeconometric models. They do not solve the problem of aggregation; rather they assume that it can be ignored. While they appear to use the mathematics of microeconomics, the subjects to which they apply that microeconomics are aggregates that do not belong to any [really-existing] agent. There is no agent who maximizes a utility function that represents the whole economy subject to a budget constraint that takes GDP as its limiting quantity. This is the simulacrum of microeconomics, not the genuine article.…

[W]e should conclude that what happens to the microeconomy is relevant to the macroeconomy but that macroeconomics has its own modes of analysis.… [I]t is almost certain that macroeconomics cannot be euthanized or eliminated. It shall remain necessary for the serious economist to switch back and forth between microeconomics and a relatively autonomous macroeconomics depending upon the problem in hand.

Must-Read: Dani Rodrik: When Economics Works and When it Doesn’t

Posted on by Brad DeLong

Must-Read: I wonder: There is an awful lot of bad right-wing economics. There is much less bad left-wing economics. But if the left wing were stronger as a political movement–as strong as the right wing–would there be as much bad left- as right-wing economics. I suspect not, but that is merely a guess. But if it is a correct guess, the next question is: “Why?”

Mark Thoma sends us to Dani Rodrik: When Economics Works and When it Doesn’t: “If we take as our central model one under which the efficient markets hypothesis is correct…

…in the run-up to the financial crisis… the steady increase in house prices or the growth of the shadow banking system… wouldn’t have bothered you at all. You’d tell a story about how wonderful financial liberalisation and innovation are…. But if you took the same [set of] facts, and applied the kind of models that people who had been looking at sovereign debt crises in emerging markets had been developing… you’d get a very different kind of story. I wish we’d put greater weight on stories of the second kind rather than the first. We’d have been better off if we’d done so…

Must-Read: David Roberts: Why Conspiracy Theories Flourish on the Right

Posted on by Brad DeLong

Must-Read: David Roberts: Why Conspiracy Theories Flourish on the Right: “Matt Yglesias flagged this quote from Ryan Lizza’s great story…

…on the turmoil in the Republican House, but it’s worth reading again:

‘I used to spend ninety per cent of my constituent response time on people who call, e-mail, or send a letter, such as, ‘I really like this bill, H.R. 123,’ and they really believe in it because they heard about it through one of the groups that they belong to, but their view was based on actual legislation,’ [House Intelligence Committee chair Devin] Nunes said. ‘Ten per cent were about ‘Chemtrails from airplanes are poisoning me’ to every other conspiracy theory that’s out there. And that has essentially flipped on its head.’ The overwhelming majority of his constituent mail is now about the far-out ideas, and only a small portion is ‘based on something that is mostly true.’ He added, ‘It’s dramatically changed politics and politicians, and what they’re doing.’

We don’t need Nunes to tell us this, of course…. Some new research in political science helps home in on the circumstances and character traits that allow conspiracy theories to flourish–and casts a fairly grim light on the direction of American politics…. For liberals, more knowledge reduces endorsement of CTs, no matter the level of trust, and more trust reduces endorsement of CTs, no matter the level of knowledge…. For conservatives, on the other hand, more knowledge increases endorsement of CTs among those with low trust; for high-trust conservatives, knowledge seems to have no effect…. The high-info/low-trust dynamic is in fact the conspiracy theory sweet spot, but primarily for conservatives…. Low-trust, high-knowledge conservatives are a breeding ground for CTs, and more and more conservatives are low trust and high knowledge….

There are some horrible incentive structures built into current conservative politics. Conservative media, activists, and politicians have every reason to convince their most engaged supporters that the whole system is rotten and can’t be trusted–it makes it easier to fill their heads with nonsense about Sharia law, Agenda 21, and all the rest, which in turn increases their intensity and engagement…. But as we’ve seen, if that process goes on long enough, it produces two unpleasant results. First, the most engaged conservative voters will be more and more adrift in a paranoid fantasia… hassling politicians… and making it effectively impossible for lawmakers to do their job in a reasonable way, as Nunes pointed out. And second, they won’t trust conservative elites any more than they trust liberals, scientists, or the media. That means they are not only deluded but unchecked, beyond the influence of any moderating force, easy prey for demagogues and hucksters. They become the conspiracy-addled tail that wags the political dog. And that’s exactly what we’re seeing unfold…

Must-Read: Mark Thoma: Why It’s Tricky for Fed Officials to Talk Politically

Posted on by Brad DeLong

Must-Read: I would beg the highly-esteemed Mark Thoma to draw a distinction here between “inappropriate” and unwise. In my view, it is not at all inappropriate for Fed Chair Janet Yellen to express her concern about excessive inequality. Previous Fed Chairs, after all, have expressed their liking for inequality as an essential engine of economic growth over and over again over the past half century–with exactly zero critical snarking from the American Enterprise Institute for trespassing beyond the boundaries of their role.

But that it is not inappropriate for Janet Yellen to do so does not mean that it is wise. Mark’s argument is, I think, that given the current political situation it is unwise for Janet to further incite the ire of the nutboys in the way that even the mildest expression of concern about rising inequality will do.

That may or may not be true. I think it is not.

But I do not think that bears on my point that Michael R. Strain’s arguments that Janet Yellen’s speech on inequality was inappropriate are void, wrong, erroneous, inattentive to precedent, shoddy, expired, expired, gone to meet their maker, bereft of life, resting in peace, pushing up the daisies, kicked the bucket, shuffled off their mortal coil, run down the curtain, and joined the bleeding choir invisible:

Mark Thoma: Why It’s Tricky for Fed Officials to Talk Politically: “I think I disagree with Brad DeLong…

…Should speeches by Federal Reserve officials be limited to topics concerning monetary policy and financial stability, or should they be free to speak on any topic, no matter how politically charged it might be? It’s an important question as the Fed prepares to announce next week what’s looking like a significant change in its eight-year policy of zero-perecent interest rates.
Fed Chair Janet Yellen, for example, was sharply criticized for a speech last year highlighting what economists know about rising inequality and what might be done to overcome it.
This speech, which Yellen gave in October 2014, is still creating controversy. This week, it erupted again when UC Berkeley economist Brad DeLong defended Yellen against the charge that she’s a ‘partisan hack,’ a description in the headline of a Washington Post story by Michael Strain after Yellen’s speech…

Musing on one’s intellectual responsibilities…

Posted on by Brad DeLong

Live from Evans Hall: Musing on One’s Intellectual Duties: Apropos of David Romer’s teaching Gabriel Chodorow-Reich and other things this morning…

Those who state that they are worried about zero interest-rate policy and financial stability are not worried about the excessive new risky lending. New risky lending is far from excessive–and boosting it is, in fact, one of the principal aims of low interest rate policy. We want there to be more of.

What they might be worried about is a model in which there are two groups of investors: those who can assess risks and those who cannot. The second group are easily phished. And zero interest-rate policy induces them to “reach for yield”. The complaint is not that there is too much new risky lending, but that the wrong people are undertaking risky lending, and financial instability may result when the tide goes out and they see how phoolish they have been.

The problem with the previous “what they might be worried about…” paragraph is that those who claim to be worried about zero interest-rate policy and financial stability do not make this “phishing for phools” argument, and do not present any evidence that zero interest rate policy materially adds to the problem of phools who are easily phished.

As a matter of dialogue and debate and the advancement of knowledge, how much work should I be doing not just to acknowledge and express the strongest wrong arguments I think are being made, but to go one step further and develop even stronger arguments then are currently being made if those stronger arguments are along lines that I think of as fundamentally wrong?

Must-Read: Steve Roth: The Pernicious Prison of the Price Theory Paradigm

Posted on by Brad DeLong

Must-Read: Steve Roth (2014): The Pernicious Prison of the Price Theory Paradigm: “Steve Randy Waldman has utterly pre-empted the need for this post…

…cut to the core of the thing, in the opening line of his latest (collect the whole series!):

When economics tried to put itself on a scientific basis by recasting utility in strictly ordinal terms, it threatened to perfect itself to uselessness.

But I’ll try to help a little. What that means: In the mid 20th century, economists decided:

It’s impossible to measure absolute utility. We can’t say what the value to you is of a heart bypass for your mother, or the value of a college education for your kid, or the value of (you or someone else) buying a third or fourth Lamborghini…. Absolute utility — because we can’t measure it — will effectively not exist…. We not only aren’t able to think about absolute utility — actual human value — we are forbidden to do so. Barred.

And with this spectacular piece of rhetorical legerdemain, the discipline disavowed itself of any responsibility for the implications and effects of that rhetorical legerdemain. (It’s hard not to be impressed.)… The (inexorable) implications? Concentration and distribution of wealth and income not only don’t matter… they can’t matter. Steve explains it all far better, with circles and arrows and a paragraph on the back of each one explaining how each one is to be used as evidence against us. But I hope this little summation helps.