Tag: Noah Smith

Macroeconomics, Fantasy, Reality, and Intellectual Utility…

Posted on by Brad DeLong

A very nice overview piece this morning from smart young whippersnapper Noah Smith:

Noah Smith: Economics Struggles to Cope With Reality: “Four different activities… go by the name of macroeconomics. But they actually have relatively little to do with each other….

  1. ‘coffee-house macro,’ and it’s what you hear in a lot of casual discussions. It often revolves around the ideas of dead sages–Friedrich Hayek, Hyman Minsky and John Maynard Keynes. It doesn’t involve formal models, but it does usually contain a hefty dose of political ideology.

  2. Finance macro. This consists of private-sector economists and consultants who try to read the tea leaves on interest rates, unemployment, inflation and other indicators in order to predict the future of asset prices (usually bond prices). It mostly uses simple math, though advanced forecasting models are sometimes employed. It always includes a hefty dose of personal guesswork.

  3. Academic macro. This traditionally involves professors making toy models of the economy–since the early ’80s, these have almost exclusively been DSGE models (if you must ask, DSGE stands for dynamic stochastic general equilibrium). Though academics soberly insist that the models describe the deep structure of the economy, based on the behavior of individual consumers and businesses, most people outside the discipline who take one look at these models immediately think they’re kind of a joke. They contain so many unrealistic assumptions that they probably have little chance of capturing reality. Their forecasting performance is abysmal. Some of their core elements are clearly broken. Any rigorous statistical tests tend to reject these models instantly, because they always include a hefty dose of fantasy….

  4. Fed macro. The Federal Reserve uses an eclectic approach, involving both data and models. Sometimes the models are of the DSGE type, sometimes not. Fed macro involves taking data from many different sources, instead of the few familiar numbers like unemployment and inflation, and analyzing the information in a bunch of different ways. And it inevitably contains a hefty dose of judgment, because the Fed is responsible for making policy.

However, I think he has picked the wrong four.

Let’s start with Noah’s second: finance macro. It needs to be divided: One of its pieces–call that the second of our four components of macro–is grifter-finance macro: essentially affinity fraud to terrify rich people and get them to let you overcharge them to manage your money or simply to sell some snake oil you have to offer. I think it should come first:

  1. Grifter macro

The other piece of Noah’s second–call that the useful finance-forecasting macro–is really the same thing as Fed-technocratic macro: the flow of ideas and people is large, and convergence not to a consensus model or approach but to a near-consensus distribution of models and approaches is relatively rapid. But let’s postpone that.

Instead, turn to Noah’s third, academic macro. It too needs to be divided: One of its pieces–DSGE macro–has indeed proven a degenerating research program and a catastrophic failure: thirty years of work have produced no tools for useful forecasting or policy analysis. As Noah puts it:

Academic macro has basically failed the other three…. Because academic macro is so useless for forecasting–including predicting the results of policy changes–the financial industry can’t use it for practical purposes. I’ve talked to dozens of people in finance about why they don’t use DSGE models, and some have indeed tried to use them–but they always dropped the models after poor performance.

Hence Noah’s first two need to be:

  1. Grifter macro
  2. Pointless (academic DSGE) macro

The other piece of Noah’s third is composed of that part of the academic community that is in dialogue with both finance-forecasting and Fed-technocratic macro. Noah says:

My view is that academic macro has basically failed the other three…. The Fed has had to go it alone when studying how the macroeconomy really works. Regional Fed banks and the Federal Reserve Board function as macroeconomic think tanks, hiring top-level researchers to do the grubby data work and broad thinking that academia has decided is beneath it. But that leaves many of the field’s brightest minds locked in the ivory tower, playing with their toys…

I think this is wrong. Academics are not locked in the ivory tower. Rather, some academics–unfortunately, many academics–lock themselves in their own ivory tower. And I question Noah’s description of the people as “brightest”. If you insist on trying to understand business cycles by requiring a single consumption Euler equation (rather than, say, risk-averse rich 70-somethings with short horizons; myopic middle-class 40-somethings, and the liquidity constrained); if you insist on trying to understand business cycles by requiring that firms engage in Calvo pricing; If you insist on trying to understand business cycles by requiring rational expectations (rather than anchored, adaptive, extrapolative, perfect-foresight, and Panglossian)–well, then you really aren’t very bright at all, are you?

In fact, there is a dialogue between Fed-technocratic, finance-forecasting, and what we might call useful-academic. This dialogue is strong enough that they are pretty much the same thing: the flow of ideas and people is large, and convergence not to a consensus model or approach but to a near-consensus distribution of models and approaches is relatively rapid. Thus Noah’s first three should be:

  1. Grifter macro
  2. Pointless (academic DSGE) macro
  3. Useful (Fed-technocratic, finance-forecasting) macro

And then there is Noah’s first, coffee-house macro:

Because academic macro models are so out of touch with reality, people in causal coffee-house discussions can’t refer to academic research to help make their points. Instead, they have to turn back to the old masters, who if vague and wordy were at least describing a world that had some passing resemblance to the economy we observe in our daily lives…

What this leaves out, I think, is that there is substantial idea-flow from coffee-house macro into useful Fed and forecasting macro. The useful macro community has spent the last decade realizing that there is a lot more to be learned from Keynes and Minsky than it had thought, and has been busily revising how and what it thinks under pressure of events. In some sense this was or ought to have been obvious. As Larry Summers said to me back in 1983: “There ought to be an awful lot of excellent careers to be made in macro by mathing-up more pieces of Keynes”. (There is also, alas!, substantial idea-flow from coffee-house macro into grifter macro–Hayek, von Mises, etc.)

Thus if I were to write down a quadriad, I would modify Noah’s into:

  1. Grifter macro
  2. Pointless (academic DSGE) macro
  3. Useful (Fed-technocratic, finance-forecasting) macro
  4. Coffee-house macro

I would say that (2) is in dialogue with nobody and nothing. I would say that (1) is in dialogue with the wing nuttier parts of (4). And I would say that (3) and (4) are in useful dialogue–albeit one-way dialogue, so far at least, as useful macro is a recipient of big ideas from coffee-house macro rather than a generator of new and different big ideas for coffee-house macro.

And I would add a fifth:

  1. Grifter macro
  2. Pointless (academic DSGE) macro
  3. Useful (Fed-technocratic, finance-forecasting) macro
  4. Coffee-house macro
  5. Policy macro

Policy macro is the intellectual framework that underpins the policies that the North Atlantic has followed since the start off 2010.

It is not in close dialogue with any of the others.

It has been, on the fiscal side, a complete disaster. It has been, on the regulatory side, a mixed bag. And it has been, on the monetary side, a very partial success.

Noah concludes with optimism:

Justin Wolfers… a conference celebrating the career of MIT economist Olivier Blanchard…. Wolfers suggested abandoning DSGE models, saying that they ‘haven’t worked’… suggests that the new macroeconomics will focus on empirics and falsification… fertilized by other disciplines… will incorporate elements of behavioral economics….

I think the new macroeconomics… will redefine what ‘macroeconomics’ even means…. ‘Macro-focused micro’–studies of businesses, competition, markets and individual behavior that have relevance for macro… business dynamism, price adjustment, financial bubbles and differences between workers. Let’s hope more and more macroeconomists focus on these things, instead of trying to make big, grandiose, but ultimately vacuous models of booms and recessions. When we understand the pieces of the economy better, we’ll have a much better chance of grasping the whole…

I am not sure. Macroeconomics needs, desperately, better and real behavioral microfoundations at the sector and the market level. But it also needs much better approaches to aggregation–to understanding how macroeconomic phenomena emerge out of real microfoundations.

Must-Read: Noah Smith: Republic of Science or Empire of Ideology?

Posted on by Brad DeLong

Must-Read: Noah Smith: Republic of Science or Empire of Ideology?: “[Jim Tankersley of] The Washington Post has a long story about Charles’ Koch’s attempt to influence the economics profession with massive donations…

…The Post’s article is titled ‘Inside Charles Koch’s $200 million quest for a ‘Republic of Science'”. This is a reference to a 1962 article by Michael Polanyi called ‘The Republic of Science: Its Political and Economic Theory’….The Post article’s author, Jim Tankersley, drily notes:

[Koch’s donation effort] raises the question of whether Koch has become, for university researchers, the sort of distorting force that Polanyi warns against.

Why yes. Koch is making a sustained, multi-hundred-million dollar effort to push the academic economics profession toward a libertarian ideology. This is a ‘Republic of Science’ to the same degree that North Korea is a ‘Democratic People’s Republic of Korea’…. I don’t like it…. It sets back our understanding of the world when people try to flood any portion of academia with researchers whom they think will promote a certain set of conclusions. I don’t have much more to say than that, so here’s one of my favorite Feynman quotes:

Our responsibility is to do what we can, learn what we can, improve the solutions, and pass them on. It is our responsibility to leave the people of the future a free hand. In the impetuous youth of humanity, we can make grave errors that can stunt our growth for a long time. This we will do if we say we have the answers now, so young and ignorant as we are. If we suppress all discussion, all criticism, proclaiming ‘This is the answer, my friends; man is saved!’ we will doom humanity for a long time to the chains of authority, confined to the limits of our present imagination. It has been done so many times before.

A real ‘Republic of Science’ would focus on an open-minded search for truth, not the enshrinement of one pre-decided dogma.

Updates: I also thought this passage from Tankersley’s article was interesting:

None of the largest recipients of Koch dollars appear on a list of the most influential academic economic departments in the United States, as calculated by the research arm of the Federal Reserve Bank of St. Louis. Only one professor who works at one of Koch’s most-supported centers cracks a similar list that calculates the top 5 percent of influential economists in the research community
Koch-funded researchers make a larger impact in the public arena. They frequently testify before Republican-led committees in Congress. Their work often guides lawmakers, particularly conservatives, at the state level in drafting legislation, and they have provided the foundations for judicial opinions that affect the economy on issues such as whether the government should intervene to stop large companies from merging.

It’s possible that the Koch doesn’t want to influence economic science itself, as much as he wants to sculpt its public-facing component. The end result could be two econ professions – a dispassionate, truth-seeking one occupying the upper levels of the ivory tower, at MIT and Princeton and Stanford, doing hard math things and careful honest data work that slowly trickles out through traditional media channels, and another in the lower-ranked schools, doing a slightly fancier version of the kind of political advocacy now done by conservative think tanks. The former would have the best brains and the best understanding of the real world, but the latter would have much more policy influence and impact on the wider intellectual world. This is different from the wholesale yoking of science to ideology that I was envisioning, but it also doesn’t seem like a pleasant vision of the future.

Must-Read: Noah Smith: Finding Better Ideas to Rebuild America

Posted on by Brad DeLong
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Must-Read: Noah Smith: Finding Better Ideas to Rebuild America: “‘Concrete Economics,’ by University of California-Berkeley professors Brad DeLong and Stephen S. Cohen, needs an expanded sequel…

…900 pages long, with charts, data, theory and an exhaustive list of historical case studies. That book would become the Bible of the New Industrialist movement that is just beginning to grope its way out of the ashes of the neoliberal free-market consensus. Perhaps that tome will get written. But DeLong and Cohen couldn’t wait to write it, because we need new ideas now, and they decided they had to put a sketch of those new ideas into people’s heads very quickly. And I agree with their decision. If you’re at all concerned about economic policy, this is a book you need to read. It will take you only a couple of hours, and the time will be well-spent….

The peril of this sort of historical analysis is that it’s always easy to make the past fit some pattern after the fact. Sometimes policy causes big economic shifts, and sometimes it’s just along for the ride. A cautionary tale is provided by Japan’s experience, which DeLong and Cohen extol. Although Japan’s government certainly did try to pick winners — and still does — this probably stopped working around the late 1970s. For a good primer on how Japan’s industrial policy petered out, see ‘Can Japan Compete?,’ by Michael Porter, Hirotaka Takeuchi and Mariko Sakakibara. Nor have South Korea and China, for all their fast growth, yet managed to reach the income levels of the finance-ridden U.S….

DeLong and Cohen are absolutely right — the American mind has been far too captured by the beguilingly simple and powerful theory of free-market dogma. That theory was oversold, and we need a corrective…. DeLong and Cohen don’t focus on elevating… theories…. DeLong and Cohen propose to frame economic policy programs in terms of simple, tangible, objectives. Build railroads across the West. Break up monopolies. Fund Big Science…. This short, almost casually sketched book is really the opening shot in a long campaign… to build a New Industrialism–an approach to economic policy that respects the power of the private sector but isn’t afraid of an activist government. No one quite knows what New Industrialism is going to be yet. ‘Concrete Economics’ is meant to get people thinking about what it ought to be.

Must-Read: Noah Smith: Finding Better Ideas to Rebuild America

Posted on by Brad DeLong

Must-Read: Noah Smith: Finding Better Ideas to Rebuild America: “‘Concrete Economics,’ by University of California-Berkeley professors Brad DeLong and Stephen S. Cohen, needs an expanded sequel…

…900 pages long, with charts, data, theory and an exhaustive list of historical case studies. That book would become the Bible of the New Industrialist movement that is just beginning to grope its way out of the ashes of the neoliberal free-market consensus. Perhaps that tome will get written. But DeLong and Cohen couldn’t wait to write it, because we need new ideas now, and they decided they had to put a sketch of those new ideas into people’s heads very quickly. And I agree with their decision. If you’re at all concerned about economic policy, this is a book you need to read. It will take you only a couple of hours, and the time will be well-spent….

The peril of this sort of historical analysis is that it’s always easy to make the past fit some pattern after the fact. Sometimes policy causes big economic shifts, and sometimes it’s just along for the ride. A cautionary tale is provided by Japan’s experience, which DeLong and Cohen extol. Although Japan’s government certainly did try to pick winners — and still does — this probably stopped working around the late 1970s. For a good primer on how Japan’s industrial policy petered out, see ‘Can Japan Compete?,’ by Michael Porter, Hirotaka Takeuchi and Mariko Sakakibara. Nor have South Korea and China, for all their fast growth, yet managed to reach the income levels of the finance-ridden U.S….

DeLong and Cohen are absolutely right — the American mind has been far too captured by the beguilingly simple and powerful theory of free-market dogma. That theory was oversold, and we need a corrective…. DeLong and Cohen don’t focus on elevating… theories…. DeLong and Cohen propose to frame economic policy programs in terms of simple, tangible, objectives. Build railroads across the West. Break up monopolies. Fund Big Science…. This short, almost casually sketched book is really the opening shot in a long campaign… to build a New Industrialism–an approach to economic policy that respects the power of the private sector but isn’t afraid of an activist government. No one quite knows what New Industrialism is going to be yet. ‘Concrete Economics’ is meant to get people thinking about what it ought to be.

Must-Read: Noah Smith: Don’t Give Up on Equality of Opportunity

Posted on by Brad DeLong

Must-Read: Noah Smith: Don’t Give Up on Equality of Opportunity: “The purpose of an ideal of equality isn’t to serve as a blueprint for the creation of a utopia…

…but to nudge us in the direction of policies that will make society feel more fair. And it’s here that I think equality of opportunity shines. What the focus on opportunity has consistently led to is prioritizing children… more resources have been devoted to education, child-care assistance and childhood health. This has been good, because children’s mental and emotional plasticity means that their lives can be improved a lot with early intervention. Universal public education is one of government’s greatest successes, and it’s an institution that has been adopted in almost every society. Public health is certainly another. Nowadays, the emphasis on child care has led to policies like paid parental leave, which other developed countries have already adopted. Equality of opportunity also entails more government investment, instead of consumption…. Redistribution is important. But during the last two centuries, government has been at its most effective when it concentrated on investment and on children. Medicare and Social Security Disability payments have eased the suffering of many poor, elderly and ill people. But schools, roads, electrical grids, public health and research transformed the country…. Thus, let’s hold on to the notion of equality of opportunity. For all its faults, it has been very good at keeping the country pointed in the right policy directions.

Must-read: Noah Smith: “Policy Recommendations and Wishful Thinking”

Posted on by Brad DeLong

Must-Read: I must say I am getting more than a whiff of the disastrous trope that “it is the duty of an organic intellectual to support the Movement” here.

The technocratic view is that there will be a bunch of competing ideological views and material interests pulling and hauling, and that by always wading in and joining the tug-of-war side that has the better policy idea at the moment in the issue under dispute one will get better governance and higher societal well-being. The opposite view is: There is a Movement, the Movement is good because the Movement is supported by the class whose interest is the general interest and by Correct Ideological Thought, and all progressives must support the movement.

That is a disastrous pattern of thought. I am 100% with Noah Smith here:

Noah Smith: Policy Recommendations and Wishful Thinking: “There was a bit of a blow-up earlier this year over Gerald Friedman’s analysis of Bernie Sanders’ economic plans…

…To me, it seemed that the coup-de-grace was delivered by Justin Wolfers…. Friedman admits he made a mistake and then says that his conclusion was right anyway, because we can go find some alternative assumptions that make his original conclusion hold. To me this is transparently assuming the conclusion. That’s a big no-no, and while a lot of macroeconomists probably do this, it looks really bad to admit to it! (I’m also starting to realize that ‘Joan Robinson’ is a sort of an invincible rhetorical refuge for lefty macro types, the way ‘Friedrich Hayek’ is for righty macro types.)….

The fracas quieted down, but now it’s back. Friedman and allies are no longer saying that their analysis is ‘just standard economics’, since they had to switch to non-standard economics to make the conclusions come out the way they wanted. The line now is that Krugman, the Romers, et al. are just a bunch of pessimists, who are unintentionally playing into the hands of conservatives…. Krugman was not happy about this, and blogger ProGrowthLiberal was pretty mad:

The claim that economists like Christina and David Romer bought into the New Classical revolution is both absurd and dishonest…[W]e critics do admit we are below full employment and we have been calling for fiscal stimulus. On this score, the latest from J.W. Mason is even more dishonest than the latest from Gerald Friedman. Guys–you do not win a debate by lying about the other side’s position….

I don’t like what Friedman and Mason are doing. I think economists have a duty to look at the facts as objectively as they can, regardless of their emotions and desires. You shouldn’t prefer Model B over Model A just because one leads to ‘hope’ and the other to ‘hopelessness’…. Friedman and Mason seem to be arguing that our belief about the facts should be driven, at least in part, by our desire to avoid a feeling of powerlessness. They also seem to be saying that if the facts seem to support conservative policies, even a tiny bit, we should reinterpret the facts. I don’t like this approach. It seems anti-rationalist to me, and I think that if wonks behave this way, they’ll end up recommending lots of bad policies.

Cf. Henry Farrell’s 2011 attack on Matt Yglesias:

Henry Farrell (2011): The Limits of Left Neo-Liberalism: “[Doug Henwood is] wrong in the particulars…

…But… Doug is onto something significant…. Left neo-liberalism in the US… have always lacked a good theory of politics… tend[s] to favor a combination of market mechanisms and technocratic solutions to solve social problems. But… politics… requires strong collective actors…. I see Doug and others as arguing that successful political change requires large scale organized collective action, and that this in turn requires the correction of major power imbalances (e.g. between labor and capital). They’re also arguing that neo-liberal policies at best tend not to help correct these imbalances, and they seem to me to have a pretty good case…. It’s hard for me to see how left-leaning neo-liberalism can generate any self-sustaining politics. I’m sure that critics can point to political blind spots among lefties (e.g. the difficulties in figuring out what is a necessary compromise, and what is a blatant sell-out), but these don’t seem to me to be potentially crippling, in the way that the absence of a neo-liberal theory of politics (who are the organized interest groups and collective actors who will push consistently for technocratic efficiency?) is…

People should say that policies are good if they tend to do good things–to make people freer and richer. People should not say that policies are good if they tend to build the Movement, for there is neither Correct Ideological Thought nor a universal class whose interests are identical to the general interest. And people should, especially, not misrepresent what policies are likely to do in the interest of building the Movement.

And where the Movement is good, the policies that advance it will also be the policies that make technocratic sense…

Must-read: Noah Smith: “America Isn’t Going Broke”

Posted on by Brad DeLong

Must-Read: Noah Smith: America Isn’t Going Broke: “The U.S. government isn’t insolvent…

…Insolvency… [is] when liabilities are greater than assets. That’s very basic accounting. One of the U.S. government’s assets is its ability to tax…. The national debt–which includes debt held by the public and money owed to other branches of the government–is only equal to about six years’ worth of tax revenue. If the U.S. devoted a fifth of tax revenue to paying down the entire national debt, it would take 30 years to do it. That’s not insolvency….

The federal debt held by the public is now growing at about a 3 percent rate, while the economy is growing at about a 3.4 percent rate (these are both in nominal terms)…. the U.S. deficit is now perfectly sustainable. This represents a remarkable–possibly even excessive–display of fiscal responsibility by the U.S. government…. So the U.S. debt isn’t frighteningly large, nor is it growing in relation to the economy. In the future, it might do so, if health care prices accelerate again, or if the population ages more. But the U.S. can take steps to address those contingencies when they happen. For now, the U.S. is living in the greatest period of fiscal responsibility since the second Clinton administration.

Resist the urge to engage in debt hysterics, please.