Archive for the Category Misc.

 
 

The great unwashed masses (there’s weakness in numbers)

Over at Econlog I have a new post pointing out that back in 2006 New Keynesians like Brad DeLong believed in monetary offset.  I should clarify one point, however. I am basically talking about the New Keynesian elite, the people who follow the latest developments in macroeconomics.

A paper by Daniel Klein and Charlotta Stern (2006) points to a 2003 survey done by the AEA that showed that most economists favored using fiscal stimulus for purposes of fine-tuning the economy.  Read that again, I didn’t say “most Keynesians,” I said most economists.  Fiscal skeptics like Krugman and DeLong were right-of-center economists back in those days.

The problem here is that most economists get their ideas on macroeconomics from studying the Keynesian cross model in EC101, and also using common sense (obviously if G goes up, then C+I+G must go up.)  But by 2006 the Keynesian cross model was horribly outdated, and common sense is almost useless in economics.  Indeed you could argue that it is a lack of common sense that separates the elite economists like Krugman from their mediocre colleagues.

In a 1997 article Paul Krugman called those holding this consensus view “Vulgar Keynesians.” Here Krugman makes the same mistake I made (when discussing the paradox of thrift and the widow’s cruse.):

Such paradoxes are still fun to contemplate; they still appear in some freshman textbooks. Nonetheless, few economists take them seriously these days. There are a number of reasons, but the most important can be stated in two words: Alan Greenspan.

After all, the simple Keynesian story is one in which interest rates are independent of the level of employment and output. But in reality the Federal Reserve Board actively manages interest rates, pushing them down when it thinks employment is too low and raising them when it thinks the economy is overheating. You may quarrel with the Fed chairman’s judgment–you may think that he should keep the economy on a looser rein–but you can hardly dispute his power. Indeed, if you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God.

Krugman and I both believed that there were “few economists” who stilled believed that nonsense back in the late 1990s, when in fact most economists believed that nonsense as late as 2003.  Krugman had the Pauline Kael problem, he didn’t know most economists; he knew Bernanke, Svensson, Woodford and other Princeton economists. My problem was that I didn’t know most economists, I read Bernanke, Svensson, Woodford and Krugman, and assumed they were representative.

Of course Krugman has now joined the vulgar Keynesians, citing the new circumstances of near-zero interest rates.  I suppose he finds strength in numbers, such as the 350 economists who warned that fiscal austerity in 2013 would produce a recession.  Indeed I’ve seen Krugman cite a poll of 50 economists, almost all of which thought fiscal stimulus had a positive effect.

Unfortunately, most economists are far behind the times in macro theory.  By joining up with most economists, Krugman has allied himself with the least informed segment of the profession.  It would be like suddenly becoming a protectionist, and citing the fact that 90% of Americans think Chinese imports cause unemployment.  Come to think of it, isn’t Krugman also making that argument?

Economics is the queen of the counterintuitive sciences.  And no parts of economics are more counterintuitive than stabilization policy and trade.  Krugman was wrong in thinking the majority agreed with him in 1997.  But Krugman’s right that he’s now in with the overwhelming majority of economists.  I’m in the tiny, tiny minority of economists who think the economy has needed demand stimulus but that fiscal stimulus is ineffective.  But this is one case where there is weakness in numbers. I’m perfectly happy being in a tiny minority, if it’s the same minority that Krugman and DeLong and the other elite NKs belonged to a decade ago.

PS.  To be fair, the 350 warned about fiscal austerity slightly worse than the $500 billion reduction in the deficit in calendar 2013 that actually occurred, but still . . .

 

Odd notes

1.  Look how Newsweek puts things in perspective:

The bombardment was preceded by a large-scale Kurdish operation against Isis in northern Iraq, which saw 5,000 Kurdish fighters, supported by US-led coalition airstrikes, sweep around Mosul to recapture an area larger than the size of Andorra, Liechtenstein and San Marino combined.

That large, eh?

2.  This surprised me:

Ms Schneider reckons that more than half of the world’s feed crops will soon be eaten by Chinese pigs.

And some more information:

As a result, land use is changing drastically on the other side of the world. In Brazil, more than 25m hectares of land—parts of which were once Amazon rainforest—are being used to cultivate soy (Chinese companies have not signed up to the “soy roundtable”, a voluntary association, the members of which agree not to buy soyabeans from newly deforested land). Entire species of plants and trees are being sacrificed to fatten China’s pigs. Argentina has chopped down thousands of hectares of forest and shifted its traditional cattle-breeding to remote areas to make way for soyabeans. Since 1990 the Argentine acreage given over to that crop has quadrupled: the country exports almost all of its whole soyabeans—around 8m tonnes—to China. In some areas farmers harvest two or three crops a year, using herbicides that have been linked to birth defects and increased cancer rates.

3.  In China, small cities are more densely populated than large cities:

Screen Shot 2015-02-08 at 5.47.28 PM

4.  Here’s something you probably didn’t know about Edgar Allen Poe:

Poe’s mind was by no means commonplace. In the last year of his life he wrote a prose poem, Eureka, which would have established this fact beyond doubt—if it had not been so full of intuitive insight that neither his contemporaries nor subsequent generations, at least until the late twentieth century, could make any sense of it. Its very brilliance made it an object of ridicule, an instance of affectation and delusion, and so it is regarded to this day among readers and critics who are not at all abreast of contemporary physics. Eureka describes the origins of the universe in a single particle, from which “radiated” the atoms of which all matter is made. Minute dissimilarities of size and distribution among these atoms meant that the effects of gravity caused them to accumulate as matter, forming the physical universe.

This by itself would be a startling anticipation of modern cosmology, if Poe had not also drawn striking conclusions from it, for example that space and “duration” are one thing, that there might be stars that emit no light, that there is a repulsive force that in some degree counteracts the force of gravity, that there could be any number of universes with different laws simultaneous with ours, that our universe might collapse to its original state and another universe erupt from the particle it would have become, that our present universe may be one in a series.

All this is perfectly sound as observation, hypothesis, or speculation by the lights of science in the twenty-first century. And of course Poe had neither evidence nor authority for any of it. It was the product, he said, of a kind of aesthetic reasoning—therefore, he insisted, a poem. He was absolutely sincere about the truth of the account he had made of cosmic origins, and he was ridiculed for his sincerity. Eureka is important because it indicates the scale and the seriousness of Poe’s thinking, and its remarkable integrity. It demonstrates his use of his aesthetic sense as a particularly rigorous method of inquiry.

5.  In a review of a book on disappearing religions, I found this:

In a Detroit supermarket Russell experiences one of the most moving moments in a book that is often tinged with sadness. As he roams the aisles, Russell notices voices speaking a language that echoes with the sounds of Arabic or Hebrew, though it is neither: it is Aramaic. “Amid the Muzak and synthetic fruit drinks in a suburban American store, I was hearing the language of Christ.” The people speaking it are Assyrian Christians from northern Iraq, the descendants of the legendary Church of the East. Its followers—some of whom (the Chaldeans) today answer to Rome—once claimed a tenth of all Christians among its flock. Their missionaries brought Christianity to China in 635. When Mel Gibson brought out his film version of the life of Christ, the Assyrians were among the few people in the world who could follow its Aramaic dialogue without the benefit of subtitles.

During the modern era, many Assyrian Christians settled in the city of Mosul, Iraq’s second largest. In June, the jihadist army that would soon rename itself “Islamic State” captured the city, setting off an exodus of Iraqi Christians that could well mean the end of yet another ancient religious presence in the Middle East. There are already more speakers of Aramaic in metropolitan Detroit (around a hundred thousand) than in Baghdad; the head of the Assyrian Christians, Patriarch Mar Dinkha IV, lives in Chicago. In the Midwest, they have their churches, clubs, restaurants, and newspapers. There is some comfort in the thought that they have found safety, and that in some degree their culture will endure. But this is small consolation for the loss of an entire world.

6.  My favorite Indian film is The World of Apu (1959.)  This story about an Indian bride who marries a wedding guest reminds me of the film.

7.  Why is this called a “head transplant” and not a body transplant?  And what does that say about our concept of personal identity?

8.  This is rather surprising:

Britain has prized the ideal of economically mixed neighbourhoods since the 19th century. Poverty and disadvantage are intensified when poor people cluster, runs the argument; conversely, the rich are unfairly helped when they are surrounded by other rich people. Social mixing ought to help the poor. It sounds self-evident—and colours planning regulations that ensure much social and affordable housing is dotted among more expensive private homes. Yet “there is absolutely no serious evidence to support this,” says Paul Cheshire, a professor of economic geography at the London School of Economics (LSE).

And there is new evidence to suggest it is wrong. Researchers at Duke University in America followed over 1,600 children from age five to age 12 in England and Wales. They found that poor boys living in largely well-to-do neighbourhoods were the most likely to engage in anti-social behaviour, from lying and swearing to such petty misdemeanours as fighting, shoplifting and vandalism, according to a commonly used measure of problem behaviour. Misbehaviour starts very young (see chart 1) and intensifies as they grow older. Poor boys in the poorest neighbourhoods were the least likely to run into trouble. For rich kids, the opposite is true: those living in poor areas are more likely to misbehave.

9.  Fight Islamic fundamentalism–put them in charge of the government:

Hardliners have long railed against “Westoxification” (the title of a book by Jalal Al-e Ahmad, published in 1962), yet in their daily lives they are now surrounded by Western consumer goods, computer games, beauty ideals, gender roles and many other influences. Iranian culture has not disappeared, but the traditional society envisaged by the fathers of the revolution is receding ever further.

The most visible shift is in public infrastructure. Tehran, the capital, is a tangle of new tunnels, bridges, overpasses, elevated roads and pedestrian walkways. Shiny towers rise in large numbers, despite the sanctions. Screens at bus stops display schedules in real time. Jack Straw, a former British foreign minister and a regular visitor, says that “Tehran looks and feels these days more like Madrid and Athens than Mumbai or Cairo.”

.  .  .

Iran is the modern world’s first and only constitutional theocracy. It is also one of the least religious countries in the Middle East. Islam plays a smaller role in public life today than it did a decade ago. The daughter of a high cleric contends that “religious belief is mostly gone. Faith has been replaced by disgust.” Whereas secular Arab leaders suppressed Islam for decades and thus created a rallying point for political grievances, in Iran the opposite happened.

Long and variable leads (a reply to Tony Yates)

Tony Yates expresses shock that someone calling himself a market monetarist could reject Milton Friedman’s famous “long and variable lags” claim about monetary policy.

I have great respect for Friedman, but when I did my research on monetary policy in the interwar years (which is the period where it is easiest to clearly identify monetary shocks) I wasn’t able to find significant lags.   The monthly WPI and industrial production indices seemed to move almost immediately and sharply after monetary shocks.  If NGDP data had been available, it would have also responded quickly.

Even worse, I found that Friedman and Schwartz had misidentified monetary shocks by focusing on the monetary aggregates, which often moved ahead of or behind the actual shock.  Thus the devaluation that occurred in April 1933 led to expectations of future money growth, and these expectations led to an immediate surge in prices and output. That’s what led me to coin the “long and variable leads” phrase.  I thought it would be obvious to people that I know that classical theories of causation don’t really allow for cause to follow effect.  Rather that it is actually expectations of future money growth that caused the near term NGDP growth surge.  I used a bit of poetic license to drive the point home.

Later I learned that Woodford and Eggertsson were doing similar research from a New Keynesian perspective.  Here’s Yates:

Sumner cites Woodford and Krugman as commenting on the potency of expectations, and uses this in support of his thesis that changing expectations changing things refutes the long and variable lags thesis.  But I am quite sure neither of them believe any such thing.  Estimated versions of Woodford’s model (for example, the original Rotemberg-Woodford model) behave just like my account above.  And Krugman is a firm believer in sticky prices, talking interchangeably between IS/LM and New Keynesian models.  Which behave just as I’ve explained above.

The only model I know where monetary policy has its entire effect instantaneously is the flexible price rational expectations monetary model.  And in this case there is no point in monetary stabilisation policy at all.  Money has no short-run effects on output.  Optimal policy in this model is to set rates at zero permanently, obeying the Friedman Rule.  If there are real frictions in this model, like financial frictions, there will still be a role for fiscal stabilisation, however.

I’m sure these mix-ups would get ironed out if MaMos stopped blogging and chucking words about, and got down to building and simulating quantitative models.  Talking of which….

Lots of problems here:

1.  Obviously I’m a believer in sticky wage/price models, and hence do not believe that monetary policy has an instantaneous effect on all prices (although it does instantly impact the prices of commodities traded in auction-style markets.)  So Yates has mischaracterized my views.

2.  When Woodford’s coauthor Gauti Eggertsson tried to apply their approach to the Great Depression, he read a great deal of my empirical work, and seemed to like it. Eggertsson’s 2008 AER paper on monetary policy expectations in 1933 cites three of my empirical studies.  That doesn’t mean he agrees with all my views, but he didn’t seem to find them ridiculous. And in 1993 I published a paper arguing that temporary currency injections would not be inflationary, 5 years before Krugman published “It’s Baaack . . .”

3.  I can’t speak for all market monetarists, but I’m extremely skeptical of the VAR modeling approach discussed by Yates.  The early attempts at VAR models produced a “price puzzle,” which meant that tight money seemed to “cause” higher inflation.  I remember thinking “Yeah, what do you expect when you use interest rates as an indicator of the stance of monetary policy.”  Yes, some of these problems have been “fixed”, but I’m not impressed by the fact that 99% of the economics profession seemed to think monetary policy was “easy” during 2008-09.

In my view economists should forget about “building and simulating quantitative models” of the macroeconomy, which are then used for policy determination. Instead we need to encourage the government to create and subsidize trading in NGDP futures markets (more precisely prediction markets) and then use 12-month forward NGDP futures prices as the indicator of the stance of policy, and even better the intermediate target of policy.  It’s a scandal that these markets have not been created and subsidized, and it’s a scandal that the famous macroeconomists out there have not loudly insisted that it needs to be done.

If and when we get out of the Stone Age and have highly liquid NGDP and RGDP futures markets, then it would be much easier to explain my views on leads and lags. In that world a change in NGDP futures prices, not a change in the fed funds rate, represents a change in monetary policy. To be more specific:

I predict that whenever the 12-month forward NGDP futures prices starts falling significantly, near term NGDP would fall at about the same time, or soon after.  For instance, if we had had a NGDP futures market in 2008, then during the second half of the year you would have seen a sharp fall in 12 month forward NGDP futures.  At roughly the same time or soon afterwards current NGDP would have been falling. In contrast, if the Fed had moved aggressively enough to prevent 12-month forward NGDP prices from falling, then near term NGDP in late 2008 would have been far more stable.  I think that’s roughly consistent with Woodford’s view, although we may differ slightly on the lag between a change in 12-month forward NGDP expectations and a change in actual NGDP.  (Nor would he necessarily accept my views on the potency of monetary policy in 2008.)

PS.  The post also speculates on my views on fiscal policy.  Just to be clear, I oppose attempts to force a balanced budget.

PPS.  Yates’s blog is entitled “Longandvariable.”  Not the specific post, the entire blog. He just needs to add “leads.”

PPPS.  Yates refers to me as a “MaMoist.”  I guess that’s better than being a Maoist, like that faction in the Greek party Syriza.  You know, the party so many on the left now seem enamored with.  The one that has a bunch of MPs that idolize history’s greatest mass murderer.

HT:  Marcus Nunes

 

Beware of income inequality data

A few years back I got so exasperated reading a Journal of Economic Perspectives piece on income inequality (by Emmanuel Saez and Peter Diamond) that I did a post calling it “propaganda.”  I probably shouldn’t have used that term, but I was reminded of my frustration when reading a very good Alphaville post by Cardiff Garcia:

The issue of whether US inequality has climbed since the recession of 2008 has been relitigated this week. A short analysis by Stephen Rose claimed that income inequality had actually fallen, assigning the credit to public policy.

David Leonhardt of the New York Times discussed Rose’s findings, followed by further analyses and critiques from Ben Walsh and Nick Bunker. I’ll present the findings first before adding my own thoughts at the end.

Mainly in response to the heavily cited claim by Emmanuel Saez that 95 per cent of the income gains in this recovery have gone to the top 1 per cent of earners, Rose emphasizes a couple of broad points.

There are two problems with the 95% claim, one has already been discussed by David Henderson, while the other is often overlooked.  David pointed out that when evaluating income equality you want to remove cyclical effects, as it’s a long term problem.  It’s not unusual for the share of income going to the rich to fall during recessions (as capital gains plunge), and then rise during expansions.  It would make more sense to compare 2014 to a year with similar unemployment, say 2004.

The less often discussed problem is that talking about shares of growth can be very misleading, especially when growth is slow. I’m going to give an extreme example, just to make the point more obvious.

Suppose nominal income and the CPI rose at roughly the same rate between 2004 and 2014.  In that case real income would be roughly unchanged.  But let’s also suppose it wasn’t completely unchanged, just roughly unchanged. More specifically, assume real income rose from $15,000,000,000,000 to $15,000,000,010,000.  That is, real income rose by $10,000.

Let’s suppose that in 2004 Ray Lopez worked at a car wash in LA, making $10,000/year.  In 2014 he had two car wash jobs, and was working much harder. Assume his real income had risen to $18,000.

Now here’s my question:  Is it accurate to say that between 2004 and 2014, 80% of the entire the gain in real income for the United States of America went to Ray Lopez, car washer in LA?  You’re damn right it’s accurate!  And I’m willing to assume that the cited claim by Saez is also accurate.

But there’s another question that goes beyond accuracy; is it misleading?  To me it’s obviously misleading to say that one car washer in LA received 80% of all the real income gains in America, even if my hypothetical data were true. That’s because one could say the same thing about his cousin, if she had gone from doing one house cleaning job to two, with the same $8000 gain in real income.  Indeed I would have earned more than 100% of all real income gains, as my real income rose by more than $10,000 over that decade.  Any time an aggregate doesn’t change very much, but there are significant changes to the components within that aggregate, there are lots of ways of slicing up the data to create misleading impressions. Presenting data that way may not be propoganda, but it certainly does more to confuse than enlighten.

Nobody understands that nobody understands supply and demand

Paul Krugman often makes claims like something to the effect that nobody understands liquidity traps—expressing frustration with the views of his fellow economists.  But liquidity traps are a fairly esoteric issue.  Why is there so little outrage that nobody understands supply and demand?

Marcus Nunes has a new post pointing to the latest atrocity, in the WSJ:

Oil’s Plunge Could Help Send Its Price Back Up

If something is cheaper, people will likely buy more of it. That core principle of economics is proving to be especially true with oil after its recent plunge.

The first two sentences of the article are breathtakingly wrong.  It would be easy to mock the particular reporter who wrote this piece, but let’s face it:

1.  The WSJ hires people from top universities, who probably got As in economics.

2.  Just a few days ago I did a post on Nobel Prize winner Robert Shiller doing the exact same thing.

Non-economists don’t know this, but economics instructors in the lunchroom will often sort of roll their eyes at the fact that students are unable to distinguish between shifts in demand and shifts in quantity demanded.  Thus student essays will sometimes say “price fell, so demand rose, so price went up, so demand fell, so price went down . . . ” in an endless circle.

Yes, it’s easy to mock those who know less that we do.  But when even high-level academics, pundits and reporters are making what is essentially the exact same error we accuse the students of making, then something is clearly wrong.

I’ve always thought that we teach economics the wrong way.  In the intro chapter to supply and demand we have all these stupid examples of a frost hitting the orange crop in Florida, reducing supply and driving up prices.  Or heavy demand for Super Bowl tickets driving up prices.  Actually, this is the sort of stuff students already know before taking economics. And it’s exactly what they know after taking economics.  I firmly believe that the value added of the supply and demand chapter in most textbooks is zero.  Students know no more S&D a year after taking the course then they knew going in. Maybe that’s inevitable, maybe supply and demand, like quantum mechanics, is simply too hard for most people.

But I’m not convinced.  QM is too hard for me, but I do understand supply and demand.  Maybe textbooks should reorient their coverage of the supply and demand chapter, putting less emphasis on the stuff that students already know going in and focusing far more heavily on the identification problem.  A good start would be to include 5 examples of experts reasoning from a price change, so you could tell the students, “if you learn this stuff you be smarter than Nobel Prize winners in economics.”  Young people love the idea that they are smarter that old people.  They love challenges.