Must-Read: John Maynard Keynes (1938): On Tinbergen. To Harrod http://economia.unipv.it/harrod/edition/editionstuff/rfh.34a.htm: “My dear Roy…

…I think we are a little bit at cross purposes. There is really nothing in your letter with which I disagree at all. Quite the contrary. I think it most important, for example, to investigate statistically the order of magnitude of the Multiplier, and to discover the relative importance of the various facts which are theoretically possible.

My point against Tinbergen is a different one. In chemistry and physics and other natural sciences the object of experiment is to fill in the actual values of the various quantities and factors appearing in an equation or a formula; and the work when done is once and for all. In economics that is not the case, and to convert a model into a quantitative formula is to destroy its usefulness as an instrument of thought. Tinbergen endeavours to work out the variable quantities in a particular case, or perhaps in the average of several particular cases, and he then suggests that the quantitative formula so obtained has general validity. Yet in fact, by filling in figures, which one can be quite sure will not apply next time, so far from increasing the value of his instrument, he has destroyed it. All the statisticians tend that way. Colin, for example, has recently persuaded himself that the propensity to consume in terms of money is constant at all phases of the credit cycle. He works out a figure for it and proposes to predict by using the result, regardless of the fact that his own investigations clearly show that it is not constant, in addition to the strong a priori reasons for regarding it as most unlikely that it can be so.

The point needs emphasising because the art of thinking in terms of models is a difficult–largely because it is an unaccustomed–practice. The pseudo-analogy with the physical sciences leads directly counter to the habit of mind which is most important for an economist proper to acquire.

I also want to emphasise strongly the point about economics being a moral science. I mentioned before that it deals with introspection and with values.[3] I might have added that it deals with motives, expectations, psychological uncertainties. One has to be constantly on guard against treating the material as constant and homogeneous in the same way that the material of the other sciences, in spite of its complexity, is constant and homogeneous. It is as though the fall of the apple to the ground depended on the apple’s motives, on whether it is worth while falling to the ground, and whether the ground wanted the apple to fall, and on mistaken calculations on the part of the apple as to how far it was from the centre of the earth.

But do not be reluctant to soil your hands, as you call it. I think it is most important. The specialist in the manufacture of models will not be successful unless he is constantly correcting his judgment by intimate and messy acquaintance with the facts to which his model has to be applied.

I have every intention of writing my paper for Cambridge,[4] but whether I shall turn up to read it in person is very much more doubtful. As regards your own address,[5] I would strongly urge on you that it would be a much better plan to read a curtailed version and leave the audience to study a complete text of it later, than to recite the printed version at a great pace, relying on the audience to follow in the text. In fact audiences do not follow in the text, if only for the reason that reading pace is quite different from speaking pace, even when the latter is accelerated. You want to catch the attention of the audience to the impact of your own personality on the text. The details of the latter they can pick up much more satisfactorily and completely when they get home[a].

Yours ever,

J M Keynes

Notes:

[1] The letter (misdated 16 July 1938 in Keynes’s Collected Writings) was only received by Harrod two weeks later: see letter 799.

[2] C. Clark, “Determination of the Multiplier from National Income Statistics”, Economic Journal XLVIII, September 1938, pp. 435-48.

[3] Letter 787.

[4] “The Policy of Government Storage of Foodstuffs and Raw Materials” (1938), which was eventually read by G. Shove (see letter 812 ). Keynes had originally suggested a different topic: see letter 749.

[5] Harrod, “Scope and Method of Economics” (1938:15).

[a] TLS with autograph corrections, four pages on four leaves numbered from the second, in HP II-79. Further copy, marked “CO/15” at the top of the page, in HP II-200. CcI in JMK CO/11/277-80. The letter is printed in Keynes, Collected Writings, vol. XIV, pp. 299-301. Reproduced by kind permission of the Provost and Scholars, King’s College, Cambridge.

Should-Read: Is this right? Certainly before 1800 we do not see a banking crisis produce a collapse of the circulating medium and a large excess demand for cash and thus a large excess supply of pretty much anything—a banking crisis-driven general glut. And certainly before 1800 we do not see an economy-wide shortage of investment opportunities producing a Wicksellian real neutral rate below the market rate. And certainly before 1800 we do not see a virulent debt-deflation collapse cycles—if Antonio the merchant of Venice goes bankrupt, his goods are sold at market on the Rialto rather than his factories standing idle, and the chance that his creditors are also caught up in a bankruptcy chain is much less.

But I am not at all sure that the (real productivity-adjusted) wage flexibility we think we see in the later nineteenth century applied before. The Jacksonian economy was still in many of its aspects a pre-industrial economy—an agricultural, mercantile economy. And yet The Jacksonian Economy http://amzn.to/2sZE9vY definitely had a large, albeit policy driven cycle produced by a government policy shock. Did policy, war, and harvest shocks have similar effects earlier in economies? Probably not if wages were flexible. But were they?

Paul Krugman: Formerly True Theories (Wonkish and Self-Indulgent): “Are there other examples? The self-correcting economy… https://mobile.nytimes.com/blogs/krugman/2017/07/10/formerly-true-theories-wonkish-and-self-indulgent/

…in which unemployment leads to deflation, which increases the real money supply, and thus restores full employment—is another thing that probably did work for most of history, but began to fall apart as agrarian economies gave way to industrialized economies with less flexible prices. David Ricardo’s rejection of the possibility of demand shortfalls eventually turned out to be very wrong—and was surely already wrong in Britain by 1817—but had been true in the past…

Should-Read: Robert Solow: Improving the measurement and understanding of economic inequality in the United States: “There has long been interest in extending and improving the National Income and Product Accounts… https://equitablegrowth.org/research-analysis/improving-the-measurement-and-understanding-of-economic-inequality-in-the-united-states/

…The accounts, and the summary Gross Domestic Product number, were not initially intended as an indicator of welfare, but rather as a measure of economic activity—even misdirected activity such as the production of cigarettes. Even on that basis, there is room for improvement: Perhaps the most commonly suggested extension has been the explicit inclusion of environmental degradation and improvement, along with other instances of resource depletion. I would certainly be in favor. Nevertheless, I want to begin with a retrograde suggestion. Whatever is eventually done with NIPA and GDP, I hope it is done in such a way that it will always be possible easily to extract from the new NIPA most of the components of the old NIPA…. Having a fairly consistent quarterly time series going back to 1949 is a wonderful thing. Even with those data, it is a hard problem—without them, it would be hopeless. Another 65 years of compatible data would be more than welcome.

From the very beginning of national accounting, it has been understood that the focus on gross investment and gross product is a standing temptation to error…. Taking account of depreciation to yield net product—and correspondingly net national income—would provide a better measure…. Devote more resources to the improvement of depreciation (and depletion) accounting….

A useful and substantial extension of the standard statistical picture of the economy would be the regular publication of distributional information… well beyond the familiar Gini coefficient, which hides more than it reveals….

It would also be useful, in a different way, to have a serious accounting of the assets and liabilities of the public sector at all levels of government….

It hardly needs to be added that better and more complete tracking of the distribution of private wealth would also contribute to our understanding of economic welfare….

Finally, sticking close to familiar economic indicators, I would urge a major effort to collect more longitudinal data, especially on employment status, earnings, and income…

Should-Read: Ann Marie Marciarille: Let’s Make a Deal and the Better Care Reconciliation Act of 2017: A Car or A Goat?: “I am as mesmerized as anyone else by the repeated iterations of the Better Care Reconciliation Act of 2017… http://www.marciarille.com/2017/07/lets-make-a-deal-and-the-better-care-reconciliation-act-of-2017-a-car-or-a-goat.html

…The New York Times’s] astonishingly sports page-like coverage scoring of winners and losers for each version, and tales of back room sweeteners  (“Klondike Kickback” being my personal favorite coinage so far). But none of this… distracts me from the fact that it is all about persuading elected officials and the American public that what they have in hand (the Affordable Care Act) would be better surrendered for one of these myriad other offerings. And the offers do keep coming… with such frequency but with such slight variation from each other that I can’t help but wonder about that variation on the old Monty Hall Probability Problem  where, if the host is not required to make the offer to switch yet repeatedly does so, the player has to suspect malice and wonder if, in fact, the player has already chosen the car and that the host is merely trying to shake them loose from that choice….

The correct next move… turns on some assumptions about the host’s behavior…

Should-Read: Helene Rey: The Global Financial System, the Real Rate of Interest and a Long History of Boom-Bust Cycles: “Financial cycles strongly determine real short-term interest rates… http://www.bis.org/events/agm2017/sp170625_lecture.pdf

…Wealth increases rapidly during financial booms, faster than consumption itself. As a consequence, the consumption to wealth ratio declines, as happened in the “Roaring 20s” and the “Exuberant 2000s”. In the subsequent busts, savings increase and keep real interest rates low. The related global financial cycle constrains monetary policy independence, even for countries with flexible exchange rates, transforming the Mundellian trilemma into a dilemma. Tackling these issues calls for combinations of monetary and fiscal policy coordination, macro-prudential policies, and possibly capital controls. It also means considering the role of the US as a provider of safe assets, and asking whether a multipolar system would be advantageous…

Must-Read: Ann Marie Marciarille: More Than One Way to Say “No”: “When I teach my students about the concept of guaranteed issue in health insurance I always make it clear that without some constraints on individual underwriting it  can mean very little… http://www.marciarille.com/2017/07/more-than-one-way-to-say-no.html

…In short, there is more than one way to say “no” to an applicant for health insurance.  A health insurance company could decline to issue a policy or it could offer coverage at such an incredibly high cost that the answer might as well be no.  The latter has the virtue of being nominally non-exclusionary, because the only problem is “affordability”, but if that problem is not remedied by some kind of subsidy or discount it is the problem that can end all access.

Senator Cruz’s subsidies proposal max’s out subsidies at the $42,000 in annual income level, much much lower than the current ACA level, leaving a significant coverage and affordability gap to only widen.

All of this is pretty much what is at stake with Ted Cruz’s market segmenting proposal to fix the Senate GOP health care reform proposal. Insurers, under it, may sell non-ACA conforming products so long as they sell one ACA conforming product. There are no limits to what the non-ACA conforming insurance products may look like so think back to such  pre-ACA health insurance marvels  as policies lacking hospitalization coverage, maternity coverage, mental health coverage, prescription drug coverage, and so on. Yes, the one sheet manifesto describing these policies as consumer demanded describes these policies as the flavors of freedom — must be why the data tells us so many thinly insured  Americans used to  feel free to just stay home and celebrate freedom when policies with those limitations maxed out and not crush into the nation’s  already highly stressed  government funded free clinics.

Must-Read: I think that the odds are very high that Adam Ozimek is right here. But when I have to teach my students and write my articles in the future, how am I going to explain the Federal Reserve’s attachment to the unemployment rate as its single sufficient statistic for the state of the labor market in spite of all the evidence that it is not?

Adam Ozimek: There Is No U.S. Wage Growth Mystery: “Economists… puzzled over U.S. wage growth… wondering why it has been so slow despite a labor market that is allegedly back to or close to full employment… https://www.economy.com/dismal/analysis/datapoints/296127/There-Is-No-US-Wage-Growth-Mystery/

…However… there is no mystery: Wage gains are right where they should be. And… the labor market has room to improve. Starting early in 2014, economists and pundits began debating the wage growth “mystery.” If unemployment has fallen so much (at the time, unemployment had fallen below 6%) then why hasn’t wage growth picked up?… However, there really is no wage puzzle [if] you… look at the right numbers…. [Make] sure you are looking at the right measure of wage growth… the employment cost index…. The performance of the economy over the last few years has resoundingly rejected the pent-up wage cuts, compositional changes, low productivity, and measurement problem theories of wage growth…. It’s time to put those theories to bed and consider that, in fact, labor slack was greater than the full-employment hawks thought….

The unemployment rate wage Phillips curve… wage growth… has tracked relatively close… from 1994…. However, it has indeed fallen short in recent years compared with the line of best fit…. [But] the unemployment rate is not the right measure of labor market slack…. The prime age non-employment rate… see[s] an even tighter wage Phillips curve… [and] wage growth is exactly where we would expect given the level of slack in the labor market….

Whether you use the unemployment rate or prime non-employment Phillips curves, both suggest there is room to improve. The unemployment rate Phillips curve fails to explain the last two years of wage growth. The prime non-employment rate curve in contrast suggests wage growth should be exactly where it is…. Wage growth is not really that mysterious if this level of slack is correct. Labor market pessimists who have pivoted from one theory to the next only to see them debunked by subsequent economic performance should consider the parsimonious explanation that there remains slack in the labor market, and they have underestimated it for years…

Should-Read: Well? It’s been two more years!

Ezra Klein (2015): A Very Brief Sokratic Dialogue on Website Redesign: “I have sat down a couple of times to write up what’s worked and what’s failed at Vox… http://www.bradford-delong.com/2015/08/a-very-brief-sokratic-dialogue-on-website-redesign.html

…I keep abandoning the project, because I keep realizing I am not yet sure what’s failed and what’s simply in the learning process still…

I will say of these five items, the one I worry about most for Vox —and for everything — is the stock. I think we are better at using stock than most, and we are particularly good at making stock useful to our writers. But I don’t think our stock is sufficiently available to our readers…