Category: Equitablog

Must-Read: Simon Wren-Lewis recounts his career history and how it has shaped his thought. I have enormous respect for him. But I still do not understand why it would be a good thing to require that models have all of:

• a representative agent
• an Euler equation governing consumption
• Calvo pricing and the associated forward-looking Phillips Curve
• TFP residuals as an explanatory variable

All of these are either rejected by the data–strongly–or cheat by taking one of your model’s fit errors and claiming that it is a well-understood driving factor:

Simon Wren-Lewis: Economics, DSGE and Reality:

Just before 1990… with colleagues I showed that entering the ERM at an overvalued exchange rate would lead to a UK recession…

A well respected Financial Times journalist responded that we had won the intellectual argument, but he was still going with his heart that we should enter at 2.95 DM/£. The Conservative government did likewise, and the recession of 1992 inevitably followed. This was the first public occasion where academic research that I had organised could have made a big difference to UK policy and people’s lives…. It was also the first occasion that I saw close up academics who had not done similar research but who had influence use that influence to support simplistic reasoning. It is difficult to understate the impact that had on me: being centrally involved in a policy debate, losing that debate for partly political reasons, and subsequently seeing your analysis vindicated but at the cost of people becoming unemployed….

I went to Strathclyde University… to build a new UK model…. The writing was on the wall for this kind of modelling in the UK, because it did not fit the ‘it has to be DSGE’ edict from the US. A third round of funding, which wanted to add more influences from the financial sector into the model using ideas based on work by Stiglitz and Greenwald, was rejected because our approach was ‘old fashioned’ i.e not DSGE. (The irony given events some 20 years later is immense.)… I had no problem moving with the tide…. Having to ensure everything was microfounded I think created more heat than light, but I learnt a great deal from this work which would prove invaluable over the last decade….

After the financial crisis… governments from around the world first went with what macroeconomic theory and evidence would prescribe, and then in 2010 dramatically went the opposite way. The latter event was undoubtedly the underlying motivation for me starting to write this blog…. I discovered not just that the Coalition government’s constant refrain was simply wrong, but also that the Labour opposition seemed uninterested in what I found….

You can see from all this why I have a love/hate relationship to microfoundations and DSGE…. More traditional forms of macromodelling also had virtues that were lost with DSGE…. [But] those who believe microfounded modelling is a dead end are wrong….

Austerity is not the first time good advice has been ignored at considerable cost. And for the few that sometimes tell me I should ‘stick with the economics’, you can see why given my experience I find that rather difficult to do. It is a bit like asking a chef to ignore how bad the service is in his restaurant, and just stick with the cooking.

Must-Read: It’s time to work toward a better definition of “equitable growth” than the vague and implicit one that we have been working with so far. Elements needed are that prosperity should be (a) broad-based, (b) fair, and also (c) substantial. That means substantial economic growth, but it also means conforming to people’s reasonable expectations of how economic growth was going to be divided and a relatively low level of inequality:

Laura Tyson and Anu Madgavkar: The Great Income Stagnation:

MGI surveys in France, the United Kingdom, and the US have found…

…that people whose incomes are not growing, and who do not anticipate an improvement, tend to view trade and immigration much more negatively than those who are experiencing or foresee gains. The Brexit vote in the UK and bipartisan opposition to trade agreements in the US are clear signs of this. Recent debate about income inequality in the US and other developed countries has focused on the rapid surge in incomes for the few. But stagnating or falling incomes for the many add a different dimension to the debate – and demand different types of solutions that emphasize wage growth for the majority of the income distribution. With most households continuing to face stagnating or falling incomes – and with younger generations thus on track to be poorer than their parents – such solutions are urgently needed.

Arindrajit Dube and Ethan Kaplan (2010): Does Outsourcing Reduce Wages in the Low-Wage Service Occupations? Evidence from Janitors and Guards:

Outsourcing of labor services grew substantially during the 1980s and 1990s….

Two occupations… janitors and guards…. The outsourcing wage penalty ranged from 4% to 7% for janitors and from 8% to 24% for guards… not due to compensating differentials for higher benefits or lower hours, skill differences, or the types of industries that outsourced. Rather, outsourcing seems to have reduced labor market rents for workers, especially for those in the upper half of the occupational wage distribution. Industries with higher historical wage premia were more likely to outsource service work.

Must-Read: There is a debate that may be semantic and may be substantive with respect to whether a higher inflation target is in some sense a “policy” or a “tool” or not. I find myself of more than two minds about this. But by not including it on his list of things he prefers to negative interest rates alongside QE, Joe Gagnon implicitly reaches the conclusion that monetary régime change is not on the menu:

Joe Gagnon: Negative Interest Rates: A Useful But Limited Tool:

The disadvantages of paper currency are not so large as to allow for unlimited negative interest rates….

The Geneva Report shows that for negative rates down to -0.75 percent, there is little evidence of any large-scale shift into paper currency. But, especially if rates are expected to stay negative for a long time, there may not be a lot of room to cut further before triggering such a shift, which would mark the true lower bound on interest rates. Overall, it appears that other policies, notably large-scale asset purchases or QE, offer greater opportunities for monetary stimulus if and when it is needed.

Must-Read: The wise Manu Saadia makes the case for his belief that “The Next Generation” rather than “The Original Series” is the real Star Trek:

Manu Saadia: The Enduring Lessons of “Star Trek”:

There are two kinds of science fiction… us[ing] the trappings of the future to explore the present…

…and us[ing] the same sorts of artifice for the opposite purpose—to imagine foreign, even utopian, futures. The original “Star Trek” series was undoubtedly of the first kind. The present saturated it. For a show that purported to “boldly go where no man has gone before,” it was remarkably at home in the familiar, if turbulent, world of the nineteen-sixties…. “Balance of Terror,” for instance, meditated on the futility of the Cold War. “A Private Little War” was an unsubtle dig at America’s involvement in Vietnam. “Let That Be Your Last Battlefield” offered a clumsy dramatization of slavery and racial discrimination…. Tellingly, the original series was at its best when its cast engaged in good, old-fashioned time travel….

It is hard to overstate how much of a departure the “Star Trek” franchise’s eighties-and-nineties-straddling incarnation, “The Next Generation,” was…. [It] swung almost entirely toward the second, more cerebral form of science fiction. It had no anchor in the present, nor did it genuflect before America’s frontier myths. “The Next Generation” was wholesale utopia, a thought experiment on how humans would behave under terminally improved material circumstances. Civilization, and the future, had won….

In “The Neutral Zone,” a reverse-time-travel episode, cryogenically preserved twentieth-century humans awake on the Enterprise. One of them, a take-charge Wall Street tycoon, is particularly eager to reclaim his stock portfolio and his status as master of the universe. “People are no longer obsessed with the accumulation of things,” Picard tells him—and us, the audience—sternly. “We’ve eliminated hunger, want, the need for possessions. We’ve grown out of our infancy”…

Must-Read: Project Syndicate is introducing a new fortnightly feature: trying to themselves aggregate the best explicit and implicit dialogues about the most important aspects of the world situation that are currently taking place in its pages. We wish them all the best of luck:

Project Syndicate: Untruth and Consequences:

In every corner of the world, governments are failing…

…to recognize the full implications of their policies, and experts are too confused, or inappropriately influenced, to provide clear and credible guidance. The result is a mixture of hubris and cluelessness that is consuming countries’ entire political establishments.

Must-Read: People who say that America today is in aggregate poorer than it was in 2000–or in 2008-9–are almost surely wrong. Economic performance since 2000 has been depressing, but not depressing to that extraordinary a degree:

Gary Burtless: This Pessimistic Conclusion Does Not Correspond with Other Indicators:

This pessimistic conclusion… does not correspond with other indicators…. Personal income statistics published by the Commerce Department… show healthier income gains in the 21st century compared with the… CPS survey…. GDP estimates [say] real U.S. money income per person increased almost 11 percent in the first six years of the current economic recovery…. The Census CPS… suggests that the income gain was less than one-third as large (3.3 percent versus 10.9 percent)…. The Census household survey suggests that virtually all the income improvement in the recovery occurred in 2015, the Commerce Department’s personal income statistics show sizeable income gains in four of the last five years. This gap between… the CPS survey and… the national accounts has persisted for more than a decade….

The Commerce Department’s income estimates in the national accounts are derived from income tax returns, earnings records maintained by the unemployment insurance system, and administrative records provided by government transfer agencies… are almost certainly more accurate in the aggregate than estimates based on household survey responses. Of course, the national accounts data by themselves provide us with no evidence about the prevalence of poverty, the distribution of income, or the trend in median income.  Only household survey data offer a guide to how income is distributed…. But if the household survey is giving us an inaccurate picture of the trend in average income, it is inevitably giving a distorted picture of the trend in income at many points in the income distribution…. The [CPS] survey findings are worth reporting on the front pages of the nation’s newspapers, [so] the data they rely on are worth checking against competing, and perhaps more reliable, sources of information.