Does the Nobel committee regard economics as a science?

Unfortunately I’m traveling today and unable to say much about the Nobel Prizes. I couldn’t help thinking of the rule that physical scientists can only win Nobel’s when their theories are experimentally confirmed. Are both Fama and Shiller right about the EMH?

Seriously, I am very pleased by the awards. Especially Fama, who is one of my favorites. I’m a huge fan of the EMH.

Surprisingly, I also think Shiller is deserving. The anti-EMH research agenda is very important, indeed even Fama has contributed. And Shiller has some of the best anti-EMH stuff. Alex Tabarrok points out that Shiller advocated the creation of GDP futures, but I believe he forgot to mention that they are NGDP futures. Often the term ‘GDP’ is assumed to mean RGDP, when there is no qualifier. I can’t link on this iPad, but check out all the excellent posts at MR.

I don’t know much about Hansen, but I favor any choice that augments the UC’s dominance of economics Nobels.

PS. Did Tyler say “our own Scott Sumner?” There are many possible interpretations, probably worth a blog post down the line.


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53 Responses to “Does the Nobel committee regard economics as a science?”

  1. Gravatar of Kevin Donoghue Kevin Donoghue
    14. October 2013 at 08:51

    “I don’t know much about Hanson….”

    Nor do I, but I know it’s Hansen.

  2. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. October 2013 at 08:55

    Shiller’s book from 2012, ‘Finance and the Good Society’, is very good. Here’s a video of him discussing it;

    https://www.youtube.com/watch?feature=player_embedded&v=ZeC34GWALD0

    And, his ‘Trill’ is a way of implementing NGDP targetting;

    http://hisstoryisbunk.blogspot.com/2012/05/trill-of-it-all.html

  3. Gravatar of Steve Steve
    14. October 2013 at 09:20

    EMH thought experiment:

    Suppose XYZ Corp comes public at $30.

    Over the next 6 months, XYZ quickly rallies to $180.

    Most investors happen to live in CA and have 60% MTRs. These investors could sell at $180, but they only receive $90 after paying $90 ($150*0.60) in tax.

    These investors believe XYZ is worth more than $90; therefore, they are unwilling to sell at $180.

    What is the market telling us about the fair value of XYZ? That it is worth $180? Or that it is worth more than $90, and the tax code has induced additional price momentum effects?

  4. Gravatar of Doug M Doug M
    14. October 2013 at 09:57

    Steve,

    Only the marginal traders have to “rational” for an asset to have the marginal price.

    e.g. if there are 1000 shareholders who think that XYZ should be worth $650 a share, and there are 1 million investors out there who think it should be worth <1$ a share, they are not actively trading, and do not influence the price.

    One more not on the EMH — The EMH doesn't say that prices are necessarily rational, just that they incorporate new information quickly. It can be teased out from the EMH, that future movements of stock prices are hard to predict. But, that still doesn't mean that bubbles don't happen.

    The market can stay irrational longer than you can stay liquid.
    –J.M. Keynes

  5. Gravatar of Gordon Friedman Gordon Friedman
    14. October 2013 at 09:57

    Here’s the official press release for those that are interested.

    http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2013/press.pdf

  6. Gravatar of Steve Steve
    14. October 2013 at 10:12

    Yes, it’s theoretically true that the price is set by the marginal trader, with no effect from the tax-locked investor. However, those marginal traders are competing for a much smaller supply of shares than would otherwise be the case.

    In practice, you need a model for price discovery when many investors have very heterogeneous opinions, presumably something involving risk adjusted portfolio weights for each agent based on his individual opinion.

    In this scenario, it’s hard to argue the “tax-locked investors” are not significantly influencing the price (in the direction of positive price momentum) by restricting the supply of shares, even though they aren’t actively trading.

    Anyway, I was just curious about the academic view on this, since it’s something I see in the real world all the time.

  7. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. October 2013 at 10:20

    I’m probably one of the few people more excited by Hansen’s award than by those other two guys.

    The Nobel Prize committee honored Lars Peter Hansen for his work in developing a statistical method for testing rational theories of asset price movements. The statistical method Hansen developed is Generalized Method of Moments (GMM). The fact that Hansen won the Nobel Prize for his “empirical analysis of asset prices” caught me off guard as I did not realize this was the original application of GMM.

    GMM is used in the estimation of the New Keynesian Phillips Curve. The New Keynesian Phillips Curve includes expectations of future inflation as an idependent variable. Since inflation expectations cannot really be observed, GMM offers a way around this difficulty.

    The New Keynesian Phillips Curve, which was developed in 1995, is integral to most DSGE models on which central banks across the globe are increasingly dependent. Thus it’s hard to imagine modern central banking without Hansen’s contributions to econometrics. So for Hansen to have won the prize for his empirical analysis of asset prices strikes me as somewhat ironic.

    And since the awards to Fama and Shiller effectively cancel each other out, in my opinion this year’s Nobel Prize in economics really went to Hansen.

    P.S. Where would statistics be today without the important contributions of econometricians?

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. October 2013 at 10:33

    Baseball? And Fama and Shiller don’t cancel each other as much as they complement each other.

    Here’s another video of Shiller, with Steve Forbes that’s pretty good too;

    https://www.youtube.com/watch?feature=player_embedded&v=FGkP63hJivQ

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. October 2013 at 10:35

    ‘EMH thought experiment:

    ‘Suppose XYZ Corp comes public at $30.’

    Which has nothing to do with the EMH.

  10. Gravatar of Vivian Darkbloom Vivian Darkbloom
    14. October 2013 at 10:56

    Regarding that EMH “thought experience”:

    Steve’s right that the tax cost of selling will affect the market price of stock. But, rather than disproving the EMH, that actually is an argument for it. The EMH, by definition, takes into account these tax costs. Only the market “knows” how many and to what extent sellers and would-be sellers are subject to these external costs. No market analyst, no matter how prescient, would ever know the cumulative effect that tax costs have on stock prices. But, the market knows.

  11. Gravatar of Vivian Darkbloom Vivian Darkbloom
    14. October 2013 at 10:57

    OK, make that thought *experiment* (as well as experience).

  12. Gravatar of J J
    14. October 2013 at 11:03

    Steve,

    The tax rates create a wedge between expected price growth and the growth in the expected value of the asset to a tax payer because they only pay taxes on the capital gains, not on the total selling price. This does not mean that they wouldn’t sell the stock if they believe it is worth more than $90. Define “worth $90.” If, no matter when they sell the stock, they will have to pay 60% of the capital gains to the government, then the stock is “worth” less to them.

    It doesn’t matter what I think the stock is worth. What matters is how I think the price will change. Then, I buy the stock if the expected percentage change in the price is enough to offset the risk, and I sell the stock if the opposite is true.

  13. Gravatar of Vivian Darkbloom Vivian Darkbloom
    14. October 2013 at 11:13

    Thought experiment:

    Suppose that tomorrow Congress would eliminate the capital gains tax on stock sales. Would the price of stock go up, down, or remain the same?

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. October 2013 at 11:19

    Patrick R. Sullivan,
    “Baseball?”

    You’re looking through the wrong end of the microscope. True, baseball is a subject of statistical analysis, but how many people with a career in baseball have made a meaningful contribution to the field of statistics?

    On the other hand, a surprising proportion of the articles published in statistics journals (e.g. the Journal of the American Statistical Association) with baseball as their subject have been authored by economists.

  15. Gravatar of Steve Steve
    14. October 2013 at 11:29

    Ok, if my tax rate would drop from 60% to 30% next year, then I save $45 in tax. I receive $135 instead of $90, assuming XYZ doesn’t go down.

    If I studied EMH in school, that’s a no brainer. The market knows best, so I should wait a year, and get 50% risk free after tax!

    On the other hand, if I look around and see all the calm investors listening to the violinists on the Titanic Deck, I might say, “This could be $90 next year, because everyone else is trying to reduce their tax bill by waiting to sell, too.”

    P.S.
    Even if my tax rate doesn’t drop, I am willing to accept an expected return well below market return since I can earn that return on the accrued but unpaid tax liability.

    PPS
    “It doesn’t matter what I think the stock is worth. What matters is how I think the price will change.”

    But if I think the price will change because other investors are managing down their tax liabilities, rather than any fundamental information??? That’s my point about taxes inducing momentum effects.

    PPPS.
    Vivian wrote: “make that thought *experiment* (as well as experience).”

    Freudian slip! True!

  16. Gravatar of Geoff Geoff
    14. October 2013 at 12:01

    The “Nobel Prize” in economics isn’t a Nobel Prize. It is an award given to an economist by the Swedish central bank “in memory of” Alfred Nobel.

  17. Gravatar of BC BC
    14. October 2013 at 12:04

    Fama was interviewed by Litterman in this piece [http://www.cfapubs.org/doi/pdfplus/10.2469/faj.v68.n6.1]. On the last page (p. 19), Fama says that the Fed has lost the ability to control inflation because it greatly expanded reserves while paying interest on those reserves. As a result of IOR, currency supply alone (rather than currency plus reserves) determines inflation and the Fed cannot control the degree to which banks exchange reserves for currency. Fama also says that, if the Fed were to stop paying IOR now, that could trigger hyperinflation due to the trillions of excess reserves that would become non-interest bearing.

    I have a few questions for Scott (and others, of course). (1a) Do you agree with Fama’s view that if the Fed pays IOR then bond purchases are “largely neutral” because the Fed is issuing bonds to buy bonds? (1b) Does paying IOR while conducting asset purchases increase both money demand and money supply such that the two offset? (2) Do you agree that when the Fed pays IOR, inflation is determined by currency supply and, thus, the Fed has lost the power to control inflation? (3) Given the explosion in interest-bearing reserves, if the Fed wanted to stop paying IOR, what if anything would the Fed need to do with respect to the amount of reserves prior to, or concurrent with, the ceasing of IOR to prevent unacceptably high inflation, e.g., would the Fed need to start asset sales prior to or concurrent with the ceasing of IOR? Thanks.

  18. Gravatar of John Hall John Hall
    14. October 2013 at 12:11

    My recollection is that Eric Falkenstein has written critically about GMM in the past. Unfortunately, he is no longer blogging.

  19. Gravatar of Doug M Doug M
    14. October 2013 at 12:44

    What has baseball contributed to the study of statistics?

    Ask Nate Silver.

  20. Gravatar of nickik nickik
    14. October 2013 at 13:01

    @Geoff

    Everybody involved with economics knows that. People need to stop repeating this every fucking year.

  21. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. October 2013 at 13:19

    Doug M,
    “What has baseball contributed to the study of statistics?”

    That is the wrong question. What has econometrics contributed to baseball statistics?

    Nate Silver earned his Artium Baccalaureus in economics, at the University of Chicago, where both Fama and Hansen are professors. He spent his Junior year at the London School of Economics. His first job was as an economic consultant with KPMG. Only then did he become a professional baseball analyst.

  22. Gravatar of ssumner ssumner
    14. October 2013 at 13:22

    Thanks Kevin.

    Mark, So Hansen is the only “alpha” in today’s prize, as the others cancel out?

    I’ll address the other questions later.

  23. Gravatar of Geoff Geoff
    14. October 2013 at 13:25

    Nickik:

    “Everybody involved with economics knows that. People need to stop repeating this every fucking year.”

    Not true. The very reason it keeps getting repeated is for the benefit of those who keep calling it a Nobel Prize.

    You’ll stop seeing me repeat it when I see people stop calling it that.

  24. Gravatar of Edward Edward
    14. October 2013 at 15:06

    Hey everyone, don’t the tea party’s antics remind you if Geoff aka Major Freedom? Both are as don Quixote as you can imagine , anti consequential it’s, given to pipe dreams…
    The tea party is a party of “geoffs”

  25. Gravatar of Edward Edward
    14. October 2013 at 15:08

    Anti consequentialist, and given to pipe dreams,
    Given to absolutist thinking and fanatical personalities, I could go on…

  26. Gravatar of Geoff Geoff
    14. October 2013 at 15:33

    Edward:

    The Federal Government shut “the government” down (meaning some of governmental activities), not “Tea Party antics.”

    Hardly any one of the 219 members of the Democrat controlled House in 2010 actually read the 1,900 page law that most call “Obamacare”. In other words, they were willing to impose a huge, a hugely expensive, legislation on the American people without any clear idea of what they were doing.

    Now the Republican majority House is exercising its constitutional authority by insisting on excluding funds from Obamacare for the coming fiscal year. This is actually a reasonable thing to do. It would actually give Obamacare’s Democrat supporters time to actually read the law they passed.

    Instead of accepting this justified proposal, the Democrats decided to be fanatic defenders of “Obama’s legacy” and they decided to shut portions of the government down.

    If you want to blame this on “Tea Party antics”, then I’d like to hear you argue what is wrong with refusing to finance Obamacare.

  27. Gravatar of Geoff Geoff
    14. October 2013 at 15:35

    And besides, it’s not “tilting at windwills” to want to reduce and/or eliminate coercion, from either street thugs or statesmen. You are the one doing so, by fighting the image you have of me.

  28. Gravatar of Ricardo Ricardo
    14. October 2013 at 16:31

    OT: Scott Sumner on The Hays Advantage, Bloomberg radio:

    http://media.bloomberg.com/bb/avfile/Economics/On_Economy/v2OF28yoDIVc.mp3

  29. Gravatar of Morgan Warstler Morgan Warstler
    14. October 2013 at 16:38

    Edward, if purple districts have 5-10K, and blue districts have 20K people who have been screwed by Obamacare….

    We could keep the govt. shutdown for months and nobody will remember it.

    If Obamacare is truly going to suck, the only way to lose is to bend. Dems need govt. open more then GOP.

  30. Gravatar of Steve Steve
    14. October 2013 at 16:46

    “Spam has proven to be a significant problem for NSA “” clogging databases with data that holds no foreign intelligence value.”

    http://www.washingtonpost.com/world/national-security/nsa-collects-millions-of-e-mail-address-books-globally/2013/10/14/8e58b5be-34f9-11e3-80c6-7e6dd8d22d8f_story_2.html

    Maybe the NSA should designate spammers as terrorist organizations.

  31. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. October 2013 at 17:45

    @Scott,
    “Mark, So Hansen is the only “alpha” in today’s prize, as the others cancel out?”

    As my initial comment points out my familiarity with Hansen is through macroeconomics, not asset pricing. So that joke went way over my head until I did some googling.

    @John Hall,
    “My recollection is that Eric Falkenstein has written critically about GMM in the past.”

    I’ve never heard of Falkenstein until now. I googled his previous comments on GMM and my impression is that his main issue with GMM is that its application to risk-adjusted returns completely undermines Falkenstein’s “big idea”, which is essentially that there is no correlation between risk and return.

    I’ve searched in vain for a rational critique from Falkenstein of GMM. All he seems to say over and over about it is that it is “sophisticated”, “complicated”, “pretentious” or “irrelevant”. Given he is a PhD in economics all of his complaints about GMM come off as surprisingly low brow.

    My basic take on GMM is that Ordinary Least Squares (OLS), Instrumental Variables (IV), and Maximum Likelihood (ML), are all really just special cases of GMM. GMM is not just a significant advancement in econometric techniques, it is a fundamental statistical/mathematical discovery. One can be critical of how it has been applied, but to criticize GMM itself borders on the ridiculous.

  32. Gravatar of Edward Edward
    14. October 2013 at 19:04

    Geoff,
    I don’t care about about Obamacare, nor I am a fan. But I certainly don’t think “it’s one if the most insidious laws ever developed by man!

    As to the government shutdown, I’m not that concerned either, except for things like the CDC, which might miss an outbreak if it remains closed. (Is it?) or NASA, which might miss an asteroid heading our way. You know, the little things, life and limb?

    What enrages me is the prospect of default. I’m not that invested in the stock market, but my parents are. Several hundred k, as a matter of fact. They depend on it for their retirement. The fact that they are threatened along with the entire world, by these teabagger thugs and monsters, fills me with rage.

  33. Gravatar of Geoff Geoff
    14. October 2013 at 19:37

    “What enrages me is the prospect of default. I’m not that invested in the stock market, but my parents are. Several hundred k, as a matter of fact. They depend on it for their retirement. The fact that they are threatened along with the entire world, by these teabagger thugs and monsters, fills me with rage.”

    So your reason for being against default is a selfish one.

    Well, if selfishness is the driver, how can you possibly deny the selfishness of those who want a default? If you want them to respect your selfishness, shouldn’t you respect theirs?

    Default is desperately needed, IMO. The first responsibility of members of Congress is to uphold the Constitution, which requires an abolition of not only Obamacare, but more than half of all government activity. Principles is what should be guiding their actions. Indeed all of our actions. Yes, horrible consequences can and do result from upholding principles. War has been fought over the principle of individual freedom.

    You say you don’t care about Obamacare. Well, you don’t seem to realize how vicious it is. Hardly any Congressman read the law, and yet they had no problems trampling over our liberty when it comes to our own health! If you want to stay numb to all of this, and make a fool of yourself belittling those who do care, then please, just stay out of the way.

    Default seems to be the only way to stop the lunatic sociopaths in Washington.

  34. Gravatar of Ben J Ben J
    14. October 2013 at 19:53

    Geoff,

    Isn’t a default the initiation of force against those the US owes debt too? Or at least a violation of contract? How can you advocate harming others in your political endeavours?

  35. Gravatar of Saturos Saturos
    14. October 2013 at 20:09

    I think it’s a shame that the physics prize only goes to those theories which *happen* to agree with reality, even if the wrong ones required even more genius, creativity and productive effort to come up with. Whether it’s seen as an incentive or a celebration I think a Prize ought to recognize this. The work of predictive accuracy only comes in once a verified theory is deployed for applications; discovering how nature works in the first place, with the division of labour between theorizing and experimenting is as much a matter of luck as anything else.

  36. Gravatar of Thoughts on the “Nobel” Prize in Economics Thoughts on the “Nobel” Prize in Economics
    14. October 2013 at 20:15

    […] Ishn’t zat veird? (Scott Sumner kinda sorta agrees.) […]

  37. Gravatar of Jon Jon
    14. October 2013 at 22:10

    Shiller and Fama do not cancel out (except the political bogeyman score).

    Shiller raised issues with 70s era work that followed Fama’s path breaking work in the 1960s, but Fama integrated those criticisms quite successfully in the 90s and there is not much space between Shiller and Fama’s three factor model. Which turn means that there is not much space between Shiller and “Efficient Capital Markets: A Review of Theory and Empirical Work” from Fama in ’70.

  38. Gravatar of Scott Sumner Scott Sumner
    15. October 2013 at 03:21

    BC, The effect of QE mostly depends on whether it is a temporary or permanent injection. If permanent, it’s still very effective.

    IOR doesn’t leave the Fed powerless to control inflation, as they can control the IOR rate.

    I don’t know what they’d have to do with the base if they stopped IOR. In the short run they might not have to do anything.

    Saturos, I agree. I’d add that I’ve never met Mr. Reality, and hence I have no way of knowing whether he agrees with me or not. I suspect not.

    Jon, I don’t entirely agree. I think there are important differences. For instance Shiller believes bubbles exist and Fama does not. That’s a significant difference.

  39. Gravatar of Benjamin Cole Benjamin Cole
    15. October 2013 at 05:09

    “The effect of QE mostly depends on whether it is a temporary or permanent injection. If permanent, it’s still very effective.”–Scott Sumner

    Dang! That is what I have been talking about–to myself, usually.

    When the Fed disposes of its hoard of QE bonds (or lets the bonds mature) it collects the money from the sale or maturation of principle—and then destroys the money (“extinguishes” the money).

    That is terrible! It should return the proceeds to the Treasury, as it does with interest payments on bonds that is wins (in excess of expenses).

    This would not only develerage the nation, it would give a lot more stimulative punch to QE.

    The Fed, even under current law, can come close to the same result as permanent debt monetization by “rolling over” —that is maintain in perpetuity—the size of its QE hoard by buying more bonds as existing bonds mature. But it would have to tell the market that is what it plans to do.

    This topic is usually ignored, even in MM circles, or is taboo, as no one ever likes to talk about “monetizing the debt” which immediately summons the ghosts of the Weimar Republic.

    But dang! That is what the Fed should do, hard and heavy. Monetize debt and say so, and damn the torpedoes.

  40. Gravatar of Benjamin Cole Benjamin Cole
    15. October 2013 at 05:12

    PS on the Nobel Prizes: Well, the winners are nice numbers guys I suppose, but I can’t say the extremely fussy range of econometrics does much to advance the actual practice of macro-monetary policy. Which is where the bucks are.

    I hope some Nobel Prizes are handed out in the future to people who effectively improved the practice of macroeconomic monetary policy (i.e. Scott Sumner and others).

  41. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    15. October 2013 at 06:27

    ‘Shiller believes bubbles exist and Fama does not.’

    True, but it’s little more than a semantic difference. Shiller admits he doesn’t know what you can do about bubbles. He deserves a lot of credit for speaking truth to the powerful emotions of Occupy Wall Streeters.

    My reading of the two is that ther’se a disagreement about how strong a version of the EMH is justified.

  42. Gravatar of Jon Jon
    15. October 2013 at 06:50

    Scott agree, but that appears to be due to mood affiliation.

  43. Gravatar of Vaidas Urba Vaidas Urba
    15. October 2013 at 08:11

    In addition to EMH, Fama and Shiller have different views on macroeconomics and causes of the recession.

  44. Gravatar of John Hall John Hall
    15. October 2013 at 09:01

    @Mark A. Sadowski I had remembered him saying he didn’t like it, but I can’t recall any specifics (why I would have preferred that he were still blogging so he could make clear what he doesn’t like about the technique).

    I was familiar with GMM before the prize announcement and that a lot of other statistical techniques can be considered a subset of GMM. However, I’ve never purposefully set out to apply GMM the way that I purposefully set out to use the techniques that can be considered a subset of it. It might be useful for finance academics, but I don’t see it used that often by finance practitioners (because why would I need to estimate a stochastic discount factor as a practitioner?). I’ve made more use from Bayesian techniques (I believe there is a Bayesian Method of Moments, but it seemed a bit too convoluted for my tastes), but they haven’t won a Nobel (yet).

  45. Gravatar of BC BC
    15. October 2013 at 09:49

    Scott, fair point on the Fed being able to control the IOR rate. Would a fair analogy to IOR+QE be driving with one foot on the brake (IOR) and one foot on the accelerator (QE)? Is it fair to say, for example, that by paying IOR the Fed needs to do more QE for a given effect on inflation or NGDP? If so, what is the advantage of paying IOR and doing more QE vs. no IOR and less QE?

  46. Gravatar of Lorenzo from Oz Lorenzo from Oz
    15. October 2013 at 11:51

    Saturos: you’re a bad man but I like you 🙂

    (Which will pass over the head of everyone not up on their British comics of a few decades ago.)

  47. Gravatar of Geoff Geoff
    15. October 2013 at 17:13

    Ben J:

    “Isn’t a default the initiation of force against those the US owes debt too? Or at least a violation of contract? How can you advocate harming others in your political endeavours?”

    If A borrows from B, and A robs C to pay back B, would it be an initiation of force for A to default on B, or would it be a cessation of initiation of force?

    Does B really have a moral claim over the money taken from C?

    I don’t advocate harming people. I advocate for removing harm from people, even if that means removing the benefits from those who are unjustly benefiting at the expense of those who are hurt.

    It’s tough to see this because most of the time, B is your regular non-violent individual. But don’t forget, when a regular person buys a government bond, they are in fact banking on initiation of force in order to be paid back.

    If you asked me, there should be a constitutional amendment to ban all government borrowing. It is incredibly unethical. Forcing the unborn to pay back a debt they had no say over.

    Are you sure you have the correct focus here? Or are you just trying to pin me as a hypocrite, which is really the typical response from those who support this unjust system?

  48. Gravatar of Mark A. Sadowski Mark A. Sadowski
    15. October 2013 at 22:26

    Scott,
    Krugman’s latest:

    http://krugman.blogs.nytimes.com/2013/10/15/five-on-the-floor/

    “…What’s more, the turn to austerity that began in 2010 gives us an opportunity to observe the paradox in action. Take the estimates of fiscal contraction 2009-13 from the IMF Fiscal Monitor in fall 2012 (Figure 13), and compare this with changes in real fixed investment over the same period (from Eurostat). It looks like this:

    [Graph]

    That’s Greece in the lower right corner, of course “” but even without Greece there’s a clear negative correlation between government austerity and investment. Yes, you can try to explain away the results with endogeneity, but it’s a strain.This is prima facie evidence of crowding-out in reverse, aka the paradox of thrift…”

    Krugman defines the degree of fiscal contraction as the change in the general government cyclically adjusted primary balance as a percent of potential GDP between 2009 and 2013. He graphs this for 22 nations. These consist of all of the eurozone members except Cyprus, Estonia, Luxembourg and Malta, plus Denmark, the Czech Republic, Sweden, the UK, Norway, Switzerland, Iceland, Japan and the US. (Krugman doesn’t explicitly say which nations, but it is clear if you read between the lines.)

    Right away you should see the problem. Thirteen of these countries are eurozone members, and another (Denmark) is pegged to the euro. Thus two thirds of the sample have the same exact monetary policy. It would be very surprising if there were no correlation between the degree of fiscal austerity and the change in real gross fixed investment.

    I’ve run regressions using the exact same investment data and the change in the cyclically adjusted primary balance between 2009 and 2013 from the October 2013 IMF Fiscal Monitor. The correlation is statistically significant with the R-squared value equal to 52%. When you run the same regression on just the 13 eurozone members and Denmark the R-squared value rises to 71%. But when you run it on the other eight nations plus the eurozone as a whole, the result is not statistically significant and the R-squared value drops to only 8%.

    In particular, four nations out of the original 22 nation sample had above average fiscal austerity and investment growth, namely Iceland, Slovakia, the UK and he US. I have no idea what’s going on in Slovakia, but the UK and the US have both done significant amounts of QE, and Iceland is Krugman’s poster child for the benefits of currency devaluation in his never ending feud with the Council on Foreign Relations.

  49. Gravatar of Edward Edward
    16. October 2013 at 05:37

    Geoff,
    ” a default is desperately needed iMO. It seems the only way to stop
    The lunatic sociopaths in Washibgton. .”

    We’ll it looks like you might seriously get your wish you bastard.

  50. Gravatar of benjamin cole benjamin cole
    16. October 2013 at 06:48

    Running some moderate inflation for a while is better than a default…

  51. Gravatar of John John
    16. October 2013 at 07:10

    Good for Eugene Fama. He is a super interesting guy. His interviews and writings are very different and interesting. The EMH is a useful conceptual tool and has framed the biggest debate in economics over the past 40 years. There couldn’t be a more deserving candidate.

  52. Gravatar of ssumner ssumner
    16. October 2013 at 09:35

    Patrick, It would be interesting to put them in the same room for a debate. I suspect the difference is more than semantic, but am not certain.

    BC, That’s a good analogy, I’ve used it once and a while.

    Thanks Mark, I’ll do a post.

  53. Gravatar of TheMoneyIllusion » Mark Sadowski drives another stake through Keynesian economics TheMoneyIllusion » Mark Sadowski drives another stake through Keynesian economics
    16. October 2013 at 12:06

    […] talked about this problem many times, but Mark Sadowski left a comment in an earlier post that puts meat on the bone, with a regression showing no […]

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