Over at Grasping Reality: Trekonomics Teaser Clip: The Economic Problem Is Not Permanent…: Manu Saadia, the author of the forthcoming book, Trekonomics, discusses the economic theories behind the creation of the Star Trek with J. Bradford DeLong, professor of Economics at UC Berkeley and former Deputy Assistant Secretary at the US Treasury. Inkshares’ Adam Gomolin is the moderator:
The economic problem is not the permanent problem of the human race…
Must- and Should-Reads:
Might Like to Be Aware of:
The extremely sharp Paul Romer gets something, I think, very very wrong in paragraph 3 of his latest weblog post. Paul is, I think, the captive of a folk story about the economy and economics that only survives–that could only survive–only within the epistemically-closed scholastic hothouse that is the post-Friedman Chicago School:
: Solow’s Choice: “Robert Solow’s had a choice about how to respond…
…He chose sarcastic denial over serious engagement. His optimistic assessment of the prospects for the simulation models, a grade of B or B- but nothing ‘in that record that suggests suicide,’ is hard to reconcile with the decision by virtually all macroeconomists to abandon work on them…
Ummm…
That seem to me to be pretty completely wrong.
Consider Macro Advisers. Macro Advisors makes a very good living today selling its simulation models:
: Model Services: “We released a major update of our structural macro model, MA/US in December 2012…
…We are proud to share our modeling with clients who want to make their own forecasts, conduct their own policy analysis and develop their own alternative scenarios. Clients interested in developing their own model-based forecasts understand that model building and forecasting is a team sport, requiring vast resources. By subscribing to MA’s Model Service, these clients have access to MA’s structural econometric model of the U.S. economy, MA/US, and receive extensive support from the MA team… clients are able to produce their own forecasts, perform policy analysis, and construct alternative scenarios…
And MA’s founder Laurence Meyer still finds his structural model very useful–and believes that it would be an error to require it impose rational expectations everywhere:
: What I Learned at the Fed: “Bond markets are fiercely forward-looking and have to be modelled as such…
…Rational expectations also appears to be important in explaining the effect of a productivity acceleration, specifically in terms of capturing the effect on equity valuations of forward-looking expectations of earnings growth and the effect on consumer spending of forward-looking expectations of the growth of wage income. On the other hand, I don’t find rational expectations as compelling when it comes to inflation dynamics. With respect to understanding the effects of monetary policy, it is forward-looking behaviour in the bond market that is especially important…
Larry Meyer gives his assessment of all of the impact of Lucas and the rest of Chicago macro thus:
John Cassidy (1996): The Decline of Economics: “Meyer… “In our firm…
…we always thanked Robert Lucas for giving us a virtual monopoly. Because of Lucas and others, for two decades no graduate students are trained who were capable of competing with us by building econometric models that had a hope of explaining short-run output and price dynamics. [Academic economics Ph.D. programs] educated a lot of macroeconomists who were trained to do only two things–teach macroeconomics to graduate students, and publish in the journals.
Cassidy continues:
Meyer also pointed out that the large-scale Keynesian models that Lucas criticized have actually tracked the economy pretty accurately… when… modified….
People who have spent their lives doing macroeconomic forecasting and policy analysis know that over the last twenty-five years the Phillips curve has been the single most reliable tool in their tool kit…
And:
Meyer dismissed Lucas’s followers as practitioners of what he terms closed-blind economics, saying mockingly:
When you close the blinds, you don’t look out of your window and you don’t care what’s happening out there. You don’t try to build models which are consistent with the real world. With the blinds closed, it’s hard to see anything…
It is not just private-sector clients who are going to make investment decisions that depend on having a good macroeconomic forecast who are willing to pay handsomely for the output of the simulation models Romer scorns. The same holds true for central bankers as well:
Greg Mankiw: The Macroeconomist as Scientist and Engineer: “Laurence Meyer… left his job as an economics professor at Washington University…
…and as a prominent economic consultant to serve for six years as a Governor of the Federal Reserve. His book… leaves the reader with one clear impression: recent developments in business cycle theory, promulgated by both new classicals and new Keynesians, have had close to zero impact on practical policymaking. Meyer’s analysis of economic fluctuations and monetary policy is intelligent and nuanced, but it shows no traces of modern macroeconomic theory. It would seem almost completely familiar to someone who was schooled in the neoclassical-Keynesian synthesis that prevailed around 1970 and has ignored the scholarly literature ever since. Meyer’s worldview would be easy to dismiss as outdated if it were idiosyncratic, but it’s not. It is typical of economists who have held top positions in the world’s central banks…
Mankiw concludes:
Greg Mankiw: The Macroeconomist as Scientist and Engineer: “A new consensus has emerged about the best way to understand economic fluctuations…
…The heart of this new synthesis–a dynamic general equilibrium system with nominal rigidities–is precisely what one finds in the early Keynesian models. Hicks proposed the IS-LM model, for example, in an attempt at putting the ideas of Keynes into a general equilibrium setting. (Recall that Hicks won the 1972 Nobel Prize jointly with Kenneth Arrow for contributions to general equilibrium theory.) Klein, Modigliani, and the other [structural simulation] model builders were attempting to bring that general equilibrium system to the data to devise better policy. To a large extent, the new synthesis picks up the research agenda that the profession abandoned, at the behest of the new classicals, in the 1970s….
The new classical economists promised more than they could deliver. Their stated aim was to discard Keynesian theorizing and replace it with market-clearing models that could be convincingly brought to the data and then used for policy analysis…. The movement failed…. Their analytic tools that are now being used to develop another generation of models that assume sticky prices and that, in many ways, resemble the models that the new classicals were campaigning against.
The new Keynesians can claim a degree of vindication here. The new synthesis discards the market-clearing assumption that Solow called “foolishly restrictive”and that the new Keynesian research on sticky prices aimed to undermine. Yet the new Keynesians can be criticized for having taken the new classicals’ bait and, as a result, pursuing a research program that turned out to be too abstract and insufficiently practical…
This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth has published this week and the second is work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.
Editor’s Note: Value Added will be off for the next two weeks. We will resume our regularly scheduled postings on Monday, August 31.
Equitable Growth round-up
Is it time to consider ideas that would make U.S. monetary policy less dependent on fiscal policy?
New research indicates that more equitable distributions of pay within firms might decrease quit rates and reduce turnover within firms.
University of Massachusetts Amherst’s Arin Dube and Equitable Growth’s Ben Zipperer examine whether Puerto Rico’s debt crisis was caused by the island’s high minimum wage.
Equitable Growth announced the new 2015 class of grantees and more than $800,000 in new academic grants that will add to growing body of work on whether and how economic inequality affects growth.
Links from around the web
If the division of corporate rents is indeed shifting away from labor, Nobel Prize-Winning Economist, emeritus professor of economics at MIT, and Equitable Growth Steering Committee member Robert Solow argues that the “casualization of labor” may make it much harder for the work force to reverse the trend. [Robert Solow, Pacific Standard]
A growing mismatch in the supply and demand of childcare has wide-ranging economic repercussions for both individual households and the wider U.S. economy. [Michelle Jamrisko, Bloomberg]
Pre-school age-children may not care if they have access to first-run episodes of “Sesame Street,” yet this week’s announcement that HBO will air new episodes of the kids’ programming a full 9 months before they reach those without the premium service raises serious concerns about the economic stratification of a program that was created to address educational achievement gaps between kids from high- and low-income households. [Emily Steel, NYT]
According to a new report from the non-partisan Congressional Budget Office, reversing the federal government’s sequestration caps could generate as many as 1.4 million jobs over the next two years. [Rebecca Shabad, The Hill]
Friday figure
Figure via “From Puerto Rico’s predicaments: Is its minimum wage the culprit?” by Arindrajit Dube and Ben Zipperer.
Must- and Should-Reads:
Might Like to Be Aware of:
Must-Read: (2014): The Home Page Isn’t Dead. It’s Just Resting: “The home page… is becoming the way your power users find the content…
…to share with your casual users…. [That] will likely change the way we build and curate home pages…. Medium… demanded my Twitter information before I could log in, and now the homepage I see there is full of things my friends have liked, or in some cases written–and that means I’m a lot likelier to share it…. Quartz’s designs makes every page… a mini home page. Readers… come in any door… but… still find themselves… [in] the living room….The home page, after all, is one of the last spaces that publishers actually control, and that committed readers reliably frequent. It’d be crazy to let it die.
The rate of growth of U.S. economic potential is currently something like 2.4%/year. The 1/e time for the economy’s convergence to its long-run steady-state growth path is roughly twenty years–that is, the economy will close roughly 5% of the gap between its current potential and its long-run steady-state growth path a year. A huge institutional reform–one that was completely successful, and had a much broader impact than an ObamaCare–that raised the long-run productivity of the American economy by 20% would thus raise the growth rate over a president’s tenure in office from 2.4% to 3.4%. And that is far outside what we can expect to follow from any set of even the most far-reaching and successful changes in policy.
For unreasonably optimistic assessments of the benefits of the FAIR tax, I believe the boost to growth is 0.2%-points per year.
Thus over at Twitter, Justin Wolfers and others:
Huckabee asked about how to get Jeb!-style 4% econ growth: "I believe we can get it to 6% or higher with the FAIR Tax."
— daveweigel (@daveweigel) August 13, 2015
@daveweigel Trump: 5% is is fore losers. We'll 10% growth under President Trump.
— Jeet Heer (@HeerJeet) August 13, 2015
It's an auction, not an election! https://t.co/zcdLuN4WtJ
— Justin Wolfers (@JustinWolfers) August 13, 2015
If you can find an economist willing to say that your plan will create 4%, 5% or 6% growth, then you're not talking to an economist.
— Justin Wolfers (@JustinWolfers) August 13, 2015
.@JustinWolfers doesn't @johnhcochrane have a plan for 4%/yr RGDP growth in the United States that does not involve massive immigration? :-)
— J. Bradford DeLong (@delong) August 13, 2015
Must-Read: : Opinion: Who will care for my brother-in-law Vincent?:
Must-Attend (if you are in Oregon, that is): Up in Eugene they have long been doing a great deal of work on expectations and the stability of stochastic equilibrium that is genuinely useful. And have I ever said that I was first taught about equilibrium stability by Roger Guesnerie in the fall of 1979? There are probably smart things I could use to impress people in my Econ 2001a notes, if I could find the basement box that they are in. Mark Thoma tells us about:
: Expectations in Dynamic Macroeconomic Models: “Cars Hommes… Behavioral Learning Equilibria for the New Keynesian Model; Discussant: George Waters…
…Jasmina Arifovic… Escaping Expectations-Driven Liquidity Traps; Discussant: John Duffy. Bill Branch… Perpetual Learning and Stability in Macroeconomic Models; Discussant: Cars Hommes. Mordecai Kurz, Stabilizing Wage Policy; Discussant: George Evans. Diogo Pinheiro… Refinement of Dynamic Equilibrium; Discussant: Bruce McGough. Arunima Sinha… A Lesson from the Great Depression that the Fed Might have Learned: A Comparison of the 1932 Open Market Purchases with Quantitative Easing; Discussant: Vasco Curdia…. James Bullard….
Damjan Pfajfar… Are Survey Expectations Theory-Consistent? The Role of Central Bank Communication and News; Discussant: Fernanda Nechio. Stefano Eusepi… In Search of a Nominal Anchor: What Drives Inflation Expectations? Discussant: Sergey Slobodyan. In-Koo Cho… Gresham’s Law of Model Averaging; Discussant: Noah Williams. Martin Ellison… Time-Consistent Institutional Design; Discussant: Sergio Santoro. Klaus Adam… Can a Financial Transaction Tax Prevent Stock Price Booms?; Discussant: Pei Kuang. Kevin Lansing… Explaining the Boom-Bust Cycle in the US Housing Market: A Reverse-Engineering Approach; Discussant: Paul Shea. Thomas Sargent… Sets of Models and Prices of Uncertainty….
David Evans… Optimal Taxation with Persistent Idiosyncratic Investment Risk; Discussant: Max Croce. Anmol Bhandari… Fiscal policy and debt management with incomplete markets; Discussant: Kenneth Kasa. Chris Gibbs… Disinflationary Policies with Imperfect Credibility; Discussant: Eric Gaus. Kaushik Mitra… Comparing Inflation and Price Level Targeting: the Role of Forward Guidance and Transparency; Discussant: Bruce Preston.
Two years ago today we noted Daniel Keuhn saying smart things about Friedrich von Hayek and Paul Krugman saying smart things about Milton Friedman. Keuhn’s major point was that Hayek is inconsistent and incoherent on both macroeconomic political economy issues, and we should recognize that incoherence. Krugman’s is that Friedman’s the-market-is-perfect-except-we-need-a-k%-money-growth-rule is deeply incoherent. Both are very smart points, but…
I do give Hayek much less credit than Daniel does for the times when he says the proper monetary policy is to stabilize the nominal level of total spending. In my view that position is, while not as bad as liquidationism, also batshit-insane. It calls for the overall price level to fall at a rate equal to the sum of population and productivity growth. It calls for nominal wages to fall as rapidly as the labor force increases? In the real world we live in, why would anybody want that?
The reason Hayek gives seems to be that… well, actually, there are no coherent reasons.
And the really existing Hayek deployed today is not the stabilize nominal GDP on its pre-2007 trend path Hayek. It is the liquidationist Hayek.
I think that Krugman overstates the inconsistency when he says that: “if markets can go so wrong that they cause Great Depressions, how can you be a free-market true believer on everything except macro?” It is possible, after all, that the vulnerability of the market economy to Great Depressions is its only major market failure. That is unlikely, but it could be the way that world is. Because it is unlikely, it is a hard position to argue for. But you can argue for it.
: That Friedrich von Hayek Was Not Consistent or Coherent Does Not Redound to His Benefit: “Hayek said liquidationist things and he said stable nominal income things…
…and the latter do not erase the former. Larry White has a very odd response up to Paul Krugman…. White makes a great argument that Hayek said he wanted to stabilize MV…. [Hayek] also made alarmingly liquidationist statements. I hate this tendency to act like people are dummies because of Hayek’s inconsistency or the tendency to act like because Hayek said X on Tuesday it means he didn’t say Y on Friday. The latter absolutely does not follow from the former. It’s hard to get around this: ‘…if we pass from the moment of actual crisis to the situation in the following depression, it is still more difficult to see what lasting good effects can come from credit expansion.’…
You see this with Road to Serfdom too… [so] I… [am] tuning out of any posts about the book. Farrant and McPhail do a really masterful job on this one taking down the Caldwell/Boettke position by pointing out that–as with the MV stabilization/liquidationist issue–Hayek did indeed make strong slippery slope arguments sometimes and didn’t at other times. The Caldwell/Boettke camp usually responds to this by pointing out the times that Hayek wasn’t making the strong slippery slope arguments. But that… only demonstrates that Hayek was highly inconsistent!…
People are allowed to change their minds, and… be careless with words…. What bothers me….
- Larry White treating Krugman like he’s being intellectually lazy for pointing out that Hayek was clearly a promoter of liquidationism… and
- The failure to recognize that this seems to be a particularly common problem with Hayek. You wouldn’t get liquidationism jumbled up together with anti-liquidationism in Keynes or Friedman…. But you do with Hayek…. If we still can’t agree on the message of the Road to Serfdom or… the interwar macro work… the obvious conclusion is not that Krugman is a dummy–but that Hayek was all over the map. And it seems to me it’s reasonable to assume he is culpable for being all over the map…
: The Eclipse of Milton Friedman: “Friedman’s larger problem… is… he was…
…a man trying to straddle two competing world views… an avid free-market advocate, who insisted that the market, left to itself, could solve almost any problem… [and] also a macroeconomic realist, who recognized that the market definitely did not solve the problem of recessions and depressions. So he tried to wall off macroeconomics… and make it… inoffensive to laissez-faire sensibilities…. We do need stabilization policy–but we can minimize the government’s role by relying only on monetary policy… and then not even allowing the monetary authority any discretion.
At a fundamental level, however, this was an inconsistent position: if markets can go so wrong that they cause Great Depressions, how can you be a free-market true believer on everything except macro? And as American conservatism moved ever further right, it had no room for any kind of interventionism…. So Friedman has vanished from the policy scene–so much so that I suspect that a few decades from now, historians of economic thought will regard him as little more than an extended footnote.
Friedman’s problem with the right–and the reason for his effective banishment by the right from the intellectual scene today–is not so much a logical problem as a rhetorical problem. People who believe the market is perfect can on a rhetorical level accept the proviso “…as long as you maintain a neutral monetary policy which is easily to calculate and automatic”. They cannot accept the proviso “…as long as the central bank and the government juggle enough balls well enough to make Say’s Law true in practice even though it is false in theory”.
But do you know who else thought that the market was perfect as long as the central bank and the government juggle enough balls well enough to make Say’s Law true in practice even though it is false in theory? No, this time the answer to the “do you know who else?” question is not Adolf Hitler:
: The General Theory of Employment, Interest and Money by John Maynard Keynes: “If the State is able to determine the aggregate amount…
…of resources devoted to augmenting the instruments and the basic rate of reward to those who own them, it will have accomplished all that is necessary…. Our criticism of the accepted classical theory of economics has consisted… in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if… [the] aggregate volume of output correspond[s]… to full employment as nearly as is practicable, the classical theory comes into its own…. Then there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed… no objection to… the modern classical theory as to the degree of consilience between private and public advantage in conditions of perfect and imperfect competition respectively… no more reason to socialise economic life than there was before….
When 9,000,000 men are employed out of 10,000,000 willing and able to work, there is no evidence that the labour of these 9,000,000 men is misdirected. The complaint against the present system is not that these 9,000,000 men ought to be employed on different tasks, but that tasks should be available for the remaining 1,000,000 men. It is in determining the volume, not the direction, of actual employment that the existing system has broken down. Thus I agree with Gesell that the result of filling in the gaps in the classical theory is not to dispose of the ‘Manchester System’, but to indicate the nature of the environment which the free play of economic forces requires if it is to realise the full potentialities of production…. There will still remain a wide field for the exercise of private initiative and responsibility. Within this field the traditional advantages of individualism will still hold good.
Let us stop for a moment to remind ourselves what these advantages are. They are partly advantages of efficiency — the advantages of decentralisation and of the play of self-interest. The advantage to efficiency of the decentralisation of decisions and of individual responsibility is even greater, perhaps, than the nineteenth century supposed; and the reaction against the appeal to self-interest may have gone too far. But, above all, individualism, if it can be purged of its defects and its abuses, is the best safeguard of personal liberty in the sense that, compared with any other system, it greatly widens the field for the exercise of personal choice. It is also the best safeguard of the variety of life, which emerges precisely from this extended field of personal choice, and the loss of which is the greatest of all the losses of the homogeneous or totalitarian state. For this variety preserves the traditions which embody the most secure and successful choices of former generations; it colours the present with the diversification of its fancy; and, being the handmaid of experiment as well as of tradition and of fancy, it is the most powerful instrument to better the future.
Whilst, therefore, the enlargement of the functions of government, involved in the task of adjusting to one another the propensity to consume and the inducement to invest, would seem to a nineteenth-century publicist or to a contemporary American financier to be a terrific encroachment on individualism. I defend it, on the contrary, both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition of the successful functioning of individual initiative.
For if effective demand is deficient, not only is the public scandal of wasted resources intolerable, but the individual enterpriser who seeks to bring these resources into action is operating with the odds loaded against him. The game of hazard which he plays is furnished with many zeros, so that the players as a whole will lose if they have the energy and hope to deal all the cards. Hitherto the increment of the world’s wealth has fallen short of the aggregate of positive individual savings; and the difference has been made up by the losses of those whose courage and initiative have not been supplemented by exceptional skill or unusual good fortune. But if effective demand is adequate, average skill and average good fortune will be enough.
The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and in my opinion, inevitably associated with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom.
I have mentioned in passing that the new system might be more favourable to peace than the old has been. It is worth while to repeat and emphasise that aspect.
War has several causes. Dictators and others such, to whom war offers, in expectation at least, a pleasurable excitement, find it easy to work on the natural bellicosity of their peoples. But, over and above this, facilitating their task of fanning the popular flame, are the economic causes of war, namely, the pressure of population and the competitive struggle for markets. It is the second factor, which probably played a predominant part in the nineteenth century, and might again, that is germane to this discussion.
I have pointed out in the preceding chapter that, under the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent under-employment were ruled out, except measures to improve the balance of trade on income account.
Thus, whilst economists were accustomed to applaud the prevailing international system as furnishing the fruits of the international division of labour and harmonising at the same time the interests of different nations, there lay concealed a less benign influence; and those statesmen were moved by common sense and a correct apprehension of the true course of events, who believed that if a rich, old country were to neglect the struggle for markets its prosperity would droop and fail. But if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours.
There would still be room for the international division of labour and for international lending in appropriate conditions. But there would no longer be a pressing motive why one country need force its wares on another or repulse the offerings of its neighbour, not because this was necessary to enable it to pay for what it wished to purchase, but with the express object of upsetting the equilibrium of payments so as to develop a balance of trade in its own favour. International trade would cease to be what it is, namely, a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases, which, if successful, will merely shift the problem of unemployment to the neighbour which is worsted in the struggle, but a willing and unimpeded exchange of goods and services in conditions of mutual advantage.