Category: Equitablog

Barry Eichengreen sees four important sources of new economic thinking:

1. “Big data”–the use of computers to handle more than just a few aggregate indicators.
2. “New data”–the use of communications technologies to free economists from reliance on a near-exclusive government’s-eye view of the economy.
3. “Policy history”–precisely because this time is not (very) different, what policies were used last time and how they worked is valuable information.
4. “Institutional history”–it is no longer John Maynard Keynes’s 1925 but our 2015. We have 90 years to add to the 50 he had to try to assess the performance of global post-agricultural market economies. The longer baseline and more institutional variation allows us to move from theory to empirics in studying institutions and the emergent patterns to which they give rise.

Barry:

Barry Eichengreen: An Economics to Fit the Facts: “The economics profession was arguably the first casualty of the 2008-2009 global financial crisis…

…Its practitioners failed to anticipate the calamity, and many appeared unable to say anything useful when the time came to formulate a response. But… there is reason to hope that the discipline is on the mend. Mainstream economic models were discredited by the crisis because they simply did not admit of its possibility…. Training that prioritized technique… and theoretical elegance… did not prepare economists to provide… practical policy advice…. Some argue that the solution is to return to the simpler economic models of the past, which yielded policy prescriptions that evidently sufficed to prevent comparable crises….

Simple models have their place… [and] are useful for making the straightforward but counterintuitive points that distinguish macroeconomics from other fields…. [But, first,] while older members of the economics establishment continue to debate the merits of competing analytical frameworks, younger economists are bringing to bear important new evidence… ‘big data’… [such as] the Billion Prices Project….

A second approach relies not on big data but on new data… ‘bots’ to scrape bits of novel information about economic decisions….

A third approach… global financial crisis was good for economic history… replete with similar events and with evidence concerning which policy responses work….

The fourth and final focus of the new empirical research: institutions…. Renewed attention to history is thus allowing economists to consider more systematically the role of institutions in macroeconomic outcomes.

These developments amount to a sea change…. Analytical frameworks are still needed…. But now there is reason to hope that… economists… will be shaped not by those frameworks’ elegance, but by their ability to fit the facts.

I wish that I were as optimistic as Barry is, but I cannot be. I do not think he has spent enough time sitting in on first year graduate economics courses around the United States and the world. It imposes intellectual blinders that are, I think, positively harmful if one is then going to conduct useful work in big data, new data, comparative policy history, or institutions and their consequences. Yes, even here at Berkeley. It is true that here at Berkeley the first-year sequence is intended one-third as a tool-building course, one-third as a course allowing our students to communicate in the future with students who have been to other universities, and one-third pointing out things wrong with economics as it is currently practiced that we are going to try to fix.

The problem is that the education we are providing the future economics professors is not the preparation that the economics of the future will require its practitioners to have had. The work will be done, but for the most part it is likely to be done by data scientists, computer modelers, and historians of various stripes. And because they will not be in economics departments, the economies of scope to be potentially gained from talking across these areas are unlikely to be fully realized.

Must-Read: Matthew Yglesias: 5 Overhyped Trends that Turned Out to Just Be a Big Recession: “From New York Times columns to Treasury Secretary Tim Geithner…

…dismissing stimulative policies as a ‘sugar high,’ the structural view has dominated both the media and the practical policy debate. But… the real story of the past seven years is that the Great Recession was just really, really big. As the recovery continues, the shifts are melting away… [and] things are going right back to normal. 1) College graduates are getting white-collar jobs…. 2) People are moving out of their parents’ basements…. 3) Millennials are buying cars…. 4) Retailers are raising wages…. 5) Everyone is moving to the suburbs…. Of course, there are still a lot of problems. To say the recession is a passing phenomenon that the country is recovering from is sometimes taken as a full-pollyanna sign or a denial of one’s right to complain about broad social problems in the United States. Do not make this mistake! Think back to 2007, before the recession started. America had a lot of problems back then, ranging from high child poverty to mass incarceration to a shockingly inefficient health-care system…. But pretty much everything that made 2011 seem significantly different from 2007 now looks to be a consequence of the ups and downs of the business cycle.”

Must-Read: Felix Salmon mourns the coming journalistic future. But it has seemed to me for a long time that most reporters worth reading would produce better work if they could find their audience without all the intermediary armamentarium of “editors and fact-checkers and clear ethical guidelines”. Why do I think this? Because those come with additional very heavy organizational, rhetorical, and moral baggage. Because most reporters worth reading at all are much more interesting and teach me more via email and in person than when they are placed behind the screen of the media organization. Why is this so? Because most reporters want to be trusted information intermediaries, while rather fewer people who run or set up media organizations care much about being so.

Felix Salmon: Facebook Could Kill the News Brand: “It seems my prediction is coming true: Facebook wants news stories to live within its own app…

…That’s better for Facebook’s readers… and… Facebook, which gets to keep those readers within its own ecosystem and collect more data on exactly what kind of stories they like to read. It’s also good for companies like BuzzFeed… [seeking] to reach a large, young, mobile, social audience in a multitude of different ways. The ability to reach those people is something of a holy grail for advertisers…. The key here is reach — which, in an app-based world, is a very different animal from traffic. So it’s no surprise that BuzzFeed looks set to be one of the first publishers to sign on to Facebook’s new native-news platform.

It’s more surprising, however, that the New York Times is going to be one of the others…. The NYT… has a different business model, which is to build a loyal readership of people who trust the brand to deliver top-flight news, and then to monetize that readership…. The downside [of partnering with Facebook] is potentially enormous…. Losing website traffic… losing control over… how your content is presented and delivered… the things which make your news brand memorable and unique….

Talented individuals, rather than brands, [will make a good living by producing the kind of news content which ‘works really well’ on Facebook…. The result could be an existential crisis for news organizations with old-fashioned things like editors and fact-checkers and clear ethical guidelines. Those things are expensive, and it’s far from clear that Facebook’s readers particularly value them. The risk is that they’ll just get disintermediated away.

Must-Read: Mark Thoma: Restoring the Public’s Trust in Economists: “The belief that economics has become politicized is a big reason…

…the general public has lost faith in… economists to give advice on important policy questions. For most issues, like raising the minimum wage, the effects of government spending, international trade, whether CEOs deserve their high compensation, etc., etc., it seems as though economists who also happen to be Republicans will mostly line up on one side of the issue, while economists who are Democrats mostly take the other. Members of the general public, not knowing who to believe and unable to rely upon the press to sort it out, either throw up their hands in frustration or follow the side that agrees with their preconceived notions and ideological beliefs. But why is it so hard to sort out? Why can’t the press do a better job of avoiding ‘he said – she said’ reporting and give the public direct and specific answers to these important policy questions?…

Physicists cannot assume whatever they want in order to produce an interesting or counterintuitive result, the assumptions must be consistent with the experimental evidence. Why isn’t the same true in economics? Why doesn’t the data tell us about key assumptions? Why is there so much debate about whether prices and wages are sticky, whether government spending multipliers are big or small, whether markets should be modeled as competitive, and so on?… When the data do not fully determine the appropriate modeling assumptions – when there is evidence on both sides of an issue – we ought to be open to models that make both types of assumptions…. In many other cases, the data do point in a particular direction but this is ignored or denied because it gives results that disagree with someone’s previous work, goes against their political leanings, or contradicts their preconceived conclusions…. We must find a way to make it clear what the preponderance of evidence says about important policy decisions… restoring the trust of the public that our policy recommendations are based upon solid evidence rather than ideology, pre-conceived beliefs, or cliquish political infighting.

Must-Read: Josh Barro: But What Does the Trade Deal Mean if You’re Not a Cheesemaker?: “Much of the controversy is because the T.P.P. isn’t really (just) a trade agreement….

…A lot of it is about labor, environmental standards, intellectual property and access to markets for services like banking and accounting. And in contrast with the tariff cuts, there’s a lot more reason to worry that some of the agreement’s non-trade provisions would hurt the world economy…. In particular, strengthening already overly strong protections for intellectual property could harm consumers and shrink the world economy over all…. Well-designed patent and copyright laws encourage innovation and expand the economy. But protections that are too strong just transfer wealth from consumers to owners…. All that said, not all these non-tariff rules are a negative…. takeaway, that’s not an accident. Congress is essentially debating Schrödinger’s trade deal: The partnership’s broad outlines are known, but its specific provisions remain unknown for the valid reason that multilateral deals can’t be effectively negotiated with every member of Congress in the room. Even if we knew exactly what was in the deal, the actual economic effects of its provisions wouldn’t necessarily be known until after implementation…

Must-Read: Ah! Here we are: trade, trust, Obama, Warren, Politico, and journamalism. Paul Krugman sees the Obama administration engaged in something it does rarely: trying to depress the substantive level of discussion in the public sphere. And he sees Politico do something that it does sufficiently often that it seems to me to do so more often than not in those of its pieces that cross my screen: work not to inform its readers but rather to misinform them in order to please that subset of its sources it believes it really works for.

I confess I do not know how to improve the public sphere–short of taking note of when the bosses of organizations like Politico make moves to degrade it:

Paul Krugman: Trade and Trust, Obama, Warren, Politico, Journamalism: “One of the Obama administration’s underrated virtues is its intellectual honesty…

…[in] every area, that is, except one: international trade and investment. I don’t know why the president has chosen to make the proposed Trans-Pacific Partnership such a policy priority…. There is an argument to be made… some reasonable, well-intentioned people are supporting the initiative…. But other reasonable, well-intentioned people have serious questions about what’s going on. And I would have expected a good-faith effort to answer those questions. Unfortunately, that’s not at all what has been happening….

Some already low tariffs would come down, but the main thrust of the proposed deal involves strengthening intellectual property rights–things like drug patents and movie copyrights–and changing the way companies and countries settle disputes…. International economic agreements are, inevitably, complex, and you don’t want to find out at the last minute… that a lot of bad stuff has been incorporated…. So you want reassurance that the people negotiating the deal are listening to valid concerns…. Instead… the Obama administration has been… trying to portray skeptics as uninformed hacks who don’t understand the virtues of trade. But they’re not…. It’s really disappointing and disheartening to see this kind of thing from a White House that has, as I said, been quite forthright on other issues…

Must-Read: Paul Krugman: Hypocritical Sloth: “Yesterday [Edward-Isaac Dovere and Doug Palmer of John Harris, Jim VandeHei, and Mike Allen’s] Politico posted a hit piece on Elizabeth Warren…

…alleging that she’s being hypocritical…. It was clearly based on information supplied by someone close to or inside the Obama administration–another illustration of the poisonous effect the determination to sell TPP is having on the Obama team’s intellectual ethics. Second, the charge of hypocrisy was ludicrous nonsense–‘You say you’re against allowing corporations to sue governments, yet you were a paid witness against a corporations suing the government!’ Um, what? And more generally, the whole affair is an illustration of the key role of sheer laziness in bad journalism.

Think about it: when is the charge of hypocrisy relevant?… Someone can declare that inequality is a problem while being personally rich; they’re calling for policy changes, not mass self-abnegation. Someone can declare our judicial system flawed while fighting cases as best they can within that system–until policy change happens, you have to live in the world as it is. Oh, and it’s very definitely OK to advocate policies that would hurt one’s own financial interests–it’s just bizarre when the press suggests that there’s something insincere and suspect when high earners propose tax increases. So why are charges of hypocrisy so popular [especially among journalists who work for John Harris, Jim VandeHei, and Mike Allen? Mainly, I think, as a way to avoid taking on policy substance…. The same motives drive the preoccupation with flip-flopping…. So maybe this head-scratchingly weird hit on Warren will serve as a teachable moment, a reminder that journalism about policy should be, you know, journalism about policy.

The pace of real GDP growth in the first half of 2015 may be 0.5%/year.

That is all.

Must- and Should-Reads:

• Jamelle Bouie: “What do you call a $60 million film from a multibillion dollar multimedia company that grossed almost half a billion dollars? If you’re most moviegoers, you call it The Lego Movie, one of the surprise hits of last year. But if you’re Wisconsin Sen. Ron Johnson, you call it anti-business propaganda…”

Might Like to Be Aware of:

• “Millennials to Snake People is a Chrome extension that, naturally, replaces all instances of the word ‘millennials’ on the web with ‘snake people’…”
• Jeet Heer: “Anderson has a point to make and… overweigh[ts] one side… giving scant acknowledgment to… when Kennan did live up to his reputation… [his] calls for the demilitarization of Germany and Austria in the 1950s, his late-life criticisms of the arms race, and his disdain for George W. Bush’s Middle East adventurism…. [And] Kennan’s elegant historical scholarship deserves more attention…”
• Khoi Vinh: How Dropbox Remains Relevant
• M. Harold Page: “To people like us, the advice, ‘Just write!’ is about as  useful as an alien screaming at us, ‘Just use your r’tkost organ and you will be able to fly like us!’…”
• Charlie Jane Anders: Is Game of Thrones all about the war between Varys and Littlefinger?
• Schwartzchild Orbits
• Richard Evans (1999): In Defence of History: Book

Over at Project Syndicate: Putting Economic Models in Their Place:

Among the voices calling these days for new–or at least substantially different–economic thinking http://ineteconomics.org is the very sharp Paul M. Romer http://paulromer.net/ of New York University, with his critique of what he calls “Mathiness” in modern economics http://paulromer.net/mathiness/. He seems, to me at least, to be very worried principally about two aspects of modern economic discourse. The first is to take what is true about one restricted class of theories and generalize it, claiming it is true of all theories and of the world as well. Romer’s prime example is Robert Lucas, in the claim:

Some knowledge can be ‘embodied’ in books, blueprints, machines, and other kinds of physical capital, and we know how to introduce capital into a growth model, but we also know that doing so does not by itself provide an engine of [permanently] sustained growth…

That is true in the theory–if and only if the growth model is set up so that the return on that kind of embodiment capital drops to zero eventually as capital accumulates. As Romer notes, there are models in which things are otherwise, including: those “with an expanding variety of capital goods or a ladder of capital goods of improving quality…” Thus what Lucas claims must be true about the world as a matter of correct theory–that the big secret to successful economic growth cannot lie in creating and acquiring the kind of knowledge that gets “’embodied’ in books, blueprints, machines…”–rests on the barely-examined decision to restrict attention to only a few kinds of models.

That restriction to examining implications of only a few classes of theories would not be so bad if the classes of theories examined were those that might be correct. Suppose the theories examined are those that model the salient and important aspects of individual decision-making and action, properly setup their strategic and non-strategic actions, and end up with a bestiary of visible aggregate-level patterns into which the economy might fall–what could be wrong with that? The problem comes with the second principal aspect of “mathiness”: to claim that one and only one mode of interaction and one and only one mode of individual decision-making is admissible at the foundation level of economic models. Here Romer attacks the assumption that the only allowable interaction is one of price-taking behavior: selling (or buying) as much as one wants at whatever the single fixed price currently offered by the market is. And here I would attack the assumption that individual decision-making is always characterized by rational expectations.

These might be adequate as foundations on which to build models that will fit and help us understand the world. But that is so only if and where we be lucky enough that market processes be structured exactly right. They must iron out at the macro level all the deviations from price-taking and rational expectations we see at the individual level. And as we look around, we see them everywhere. It is theoretically false to claim that market processes must be so structured. It is an empirical question as to whether, which, and when market processes are so structured.

Thus Paul Romer sees, in growth theory, the current generation of neoclassical economists grind out paper after paper imposing on the world “the restriction of 0 percent excludability of ideas required for [the] Marshallian external increasing returns” necessary for there to even be a price-taking equilibrium. And he judges–and I agree–that such papers are useless for any purpose other than advancing the writers in academic status games. And I see, in macroeconomics, paper after paper and banker after banker and industrialist after industrialist and technocrat after technocrat and politician after politician claiming that everything that governments might to to speed recovery must be counterproductive, or at least too risky–because that is what is in the case in a very restricted class of rational-expectations models.

This has now been going on for a long time: yesterday they crossed my desks critiques of expansionary fiscal and monetary policy made by Jacob Viner http://delong.typepad.com/viner-on-keynes.pdf and Étienne Mantoux http://classiques.uqac.ca/classiques/mantoux_etienne/theorie_generale_keynes/theorie_generale_keynes_texte.html in the 1930s–in the middle of the Great Depression!–claiming that such policies could only boost employment if they were accompanied by undesirable and unwarranted inflation, and would probably reduce production in the long run as well.

The depressing thing is that while academic economists in universities may be a little more willing to entertain the possibility that what is needed is a general theory rather than a classical price-taking rational-expectations theory, are the others? Are bankers and industrialists and technocrats and politicians?