Category: Equitablog

Must-Read: Alan J. Auerbach and Yuriy Gorodnichenko: FISCAL STIMULUS AND FISCAL SUSTAINABILITY: “The Great Recession and the Global Financial Crisis have left many developed countries with low interest rates and high levels of public debt… https://www.kansascityfed.org/~/media/files/publicat/sympos/2017/auerbach-gorodnichenko-paper.pdf?la=en

…thus limiting the ability of policymakers to fight the next recession. Whether new fiscal stimulus programs would be jeopardized by these already heavy public debt burdens is a central question. For a sample of developed countries, we find that government spending shocks do not lead to persistent increases in debt-to-GDP ratios or costs of borrowing, especially during periods of economic weakness. Indeed, fiscal stimulus in a weak economy can improve fiscal sustainability along the metrics we study. Even in countries with high public debt, the penalty for activist discretionary fiscal policy appears to be small.

Should-Read: Michael Spence: The Global Economy’s New Rule-Maker: “Not too long ago, many pundits doubted that China could make the shift… to a service economy underpinned by domestic demand… https://www.project-syndicate.org/commentary/china-in-the-global-economy-by-michael-spence-2017-08

…But even if China’s economic transition is far from complete, its progress has been impressive… offloading its labor-intensive export sectors to less-developed countries with lower labor costs… shifted to more digital, capital-intensive forms of production, rendering labor-cost disadvantages insignificant….

As a result of these changes, China’s economic power is rapidly rising. Its domestic market is growing fast, and could soon be the largest in the world. And because the Chinese government can control access to that market, it can increasingly exert its influence in Asia and beyond. At the same time, China’s declining dependence on export-led growth is reducing its vulnerability to the whims of those who control access to global markets. But China does not actually need to limit access to its own markets to sustain its growth, because it can increase its bargaining power by merely threatening to do so…

Must-Read: Samuel Bowles, Alan Kirman, and Rajiv Sethi: Friedrich Hayek and the Market Algorithm: “‘[The market is] a system of the utilization of knowledge which nobody can possess as a whole… http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.31.3.215

…which… leads people to aim at the needs of people whom they do not know, make use of facilities about which they have no direct information; all this condensed in abstract signals…. That our whole modern wealth and production could arise only thanks to this mechanism is, I believe, the basis not only of my economics but also much of my political views” (Hayek 1994, p. 69).

These political views included opposition not only to Soviet-style central planning, but also to monetary and fiscal demand management policies, collective bargaining, wage floors, and significant public expenditures. Such forms of interference with the market, in his view, would compromise its ability to deliver continued prosperity. His hostility to Keynes and Keynesian policies, in particular, was deep and visceral…. Hayek drew a sharp contrast between his approach and Walrasian general equilibrium theory, which itself had been used to make a case for laissez faire on the basis of the two fundamental theorems of welfare economics….

Hayek did not consider the welfare theorems to be compelling arguments for his policy stance. As he put it, the “argument in favor of competition does not rest on the conditions that would exist if it were perfect” (1948, p. 104). Instead, his case for competitive markets rested on the idea that competition was a “procedure for discovering facts which, if the procedure did not exist, would remain unknown or at least would not be used” (Hayek 1968). In this view, the superiority of competition as a procedure for discovering and utilizing knowledge could be established only through a comparative evaluation of economic systems….

We believe that Hayek’s economic vision and critique of equilibrium theory not only remain relevant, but apply with greater force as information has become ever more central to economic activity and the complexity of the information aggregation process has become increasingly apparent. Advances in computational capacity and the growth of online transactions and communication have made the collection and rapid processing of big data feasible and profitable. Many markets now involve algorithmic price-setting and order placement alongside direct human action, raising interesting new questions about the processes by which information is absorbed and transmitted by prices.

Second, we wish to call into question Hayek’s belief that his advocacy of free market policies follows as a matter of logic from his economic vision. The very usefulness of prices (and other economic variables) as informative messages—which is the centerpiece of Hayek’s economics—creates incentives to extract information from signals in ways that can be destabilizing. Markets can promote prosperity but can also generate crises. We will argue, accordingly, that a Hayekian understanding of the economy as an information-processing system does not support the type of policy positions that he favored. Thus, we find considerable lasting value in Hayek’s economic analysis while nonetheless questioning the connection of this analysis to his political philosophy…

Should-Read: John Quiggin: What’s left of libertarianism?: “Liberaltarianism… the Niskanen Center…Radley Balko, Jacob Levy, Stephen Teles, Jerry Taylor, Will Wilkinson… an important contribution to left-of-centre thinking… http://crookedtimber.org/2017/08/13/whats-left-of-libertarianism-2/

…The break with the Cato version of libertarianism…. Useful in the liberaltarian perspective is scepticism about the efficacy and beneficence of state action, and particularly detailed regulation as opposed to broadbased structural changes. Similarly… lots… have been impatient with constraints on executive action by the federal government. Liberaltarianism provides a check on this…

Should-Read: Herbert Hovenkamp (2009): THE COASE THEOREM AND ARTHUR CECIL PIGOU: “In ‘The Problem of Social Cost’, Ronald Coase was highly critical of… Pigou… http://www.arizonalawreview.org/pdf/51-3/51arizlrev633.pdf

…presenting him as a radical government interventionist. In later work, Coase’s critique of Pigou became even more strident…. [But] Pigou’s Economics of Welfare created the basic tools, including the transaction costs model, that Coase’s later work employed. Much of what we today characterize as the Coase Theorem was either stated or anticipated in Pigou’s work. Further, Coase’s extreme faith in private bargaining blinded him to the problems of bargaining in two-person markets that Pigou saw quite clearly and that remain with us to this day…

Should-Read: Patti Waldmeir: The gritty truth of life in America’s heartland: “It is hard to see a solution to America’s political crisis until Trump-haters accept that most Trump-lovers are human too… https://www.ft.com/content/b3ec55b0-7dd4-11e7-9108-edda0bcbc928

…Amy Goldstein’s book Janesville: An American Story humanises the suffering of the white working class in America at a time when the country critically needs to understand the angst that helped elect the president. It’s especially important to hear those voices when the White House is in crisis because the president chose not to distance himself from racist-inspired violence in Charlottesville…. Hers is not intended as a book about Donald Trump nor even about those who elected him president (much of the white working class still voted for the Democrats last year). But it is exactly the kind of gritty portrait of job loss, sudden poverty, humiliation and despair that illustrates the cultural revolution that helped land Mr Trump in the White House.

Ms Goldstein’s book is about the ordinary people of Janesville in southern Wisconsin, hometown to House Speaker Paul Ryan, and how they lost their jobs, their pride and their future when General Motors closed its oldest assembly plant there in 2008. Small wonder that Mr Trump has made Wisconsin, which went Republican in 2016 for the first time since Ronald Reagan, a focus of his campaign to shore up grassroots support in the face of the chaos and controversy surrounding his White House. Last month, he claimed the credit when Foxconn, the Taiwanese electronics company, said it would open a $10bn plant and create as many as 13,000 jobs in Wisconsin….

Bridging the gap between the coasts and the middle, the elites and the working class—between the affluent classes and Rust Belt Wisconsin whites—is crucial to how America will emerge from the Trump presidency. Ms Goldstein has done her bit to close the chasm: simply by letting the people of Janesville tell their story.

Should-Read: Ezra Klein (2007): My Honor…Defended!: “I actually watched a bit of [Mickey] Kaus’s Bloggingheads… too petulant to be genuinely offensive… http://ezraklein.typepad.com/blog/2007/03/my_honordefende.html

…But his assault demonstrates something interesting…. His criticisms of me… take two main forms… that I’m on “the far left”… that I’m young. Now, unless your spectrum runs from Al From to Sam Brownback, it’s six types of absurd to place me on the “far left.”… Maybe Mickey is such a firebreathing conservative that advocating for universal health care really does make me a Communist… [but] Mickey’s latest post at Slate is anchored by a gushing encomium to my friend Jon Cohn…. Jon is, if anything, farther left on health policy than I am….

For Kaus, the question is style points. Jon Cohn and I both focus on social policy, both believe approximately the same things, and both are working towards much the same outcome. But I’m the “far-left.” Why? Style. I’m young, I’m partisan, I’m pro-union, I’m insufficiently impressed with Mickey’s years in the trenches of neoliberalism. Temperamentally, I’m the anti-neolib. And that’s enough. Indeed, it’s too much. That’s what’s so fundamentally unimpressive…

Must-Read: Cosma Shalizi (2010): The Bootstrap: “That these [statistical] origin myths invoke various limits is no accident… https://web.archive.org/web/20100518171527/http://www.americanscientist.org:80/issues/pub/2010/3/the-bootstrap/2

The great results of probability theory—the laws of large numbers, the ergodic theorem, the central limit theorem and so on—describe limits in which all stochastic processes in broad classes of models display the same asymptotic behavior. The central limit theorem (CLT), for instance, says that if we average more and more independent random quantities with a common distribution, and if that common distribution is not too pathological, then the distribution of their means approaches a Gaussian. (The non-Gaussian parts of the distribution wash away under averaging, but the average of two Gaussians is another Gaussian.) Typically, as in the CLT, the limits involve taking more and more data from the source, so statisticians use the theorems to find the asymptotic, large-sample distributions of their estimates. We have been especially devoted to rewriting our estimates as averages of independent quantities, so that we can use the CLT to get Gaussian asymptotics. Refinements to such results would consider, say, the rate at which the error of the asymptotic Gaussian approximation shrinks as the sample sizes grow….

The bootstrap approximates the sampling distribution, with three sources of approximation error… [1] using finitely many replications to stand for the full sampling distribution… brute force—just using enough replications—can also make it arbitrarily small… [2] statistical error… the sampling distribution changes with the parameters, and our initial fit is not completely accurate…[but] reduce the statistical error… [by] subtler tricks… specification error…. Here Efron had a second brilliant idea, which is to address specification error by replacing simulation from the model with resampling from the data…. Efron’s “nonparametric bootstrap” treats the original data set as a complete population and draws a new, simulated sample from it, picking each observation with equal probability (allowing repeated values) and then re-running the estimation…. This new method matters here because the Gaussian model is inaccurate….

Although this is more accurate than the Gaussian model, it’s still a really simple problem. Conceivably, some other nice distribution fits the returns better than the Gaussian, and it might even have analytical sampling formulas. The real strength of the bootstrap is that it lets us handle complicated models, and complicated questions, in exactly the same way as this simple case…