Archive for March 2010


Gold, not money, drove the interwar macroeconomy. (1932, pt. 2 of 5)

Austin Frakt has an interesting new post that praises a recent paper by Joshua Angrist and Jorn Steffen-Pischke.  They argue that the econometrics used in recent applied micro research (but not macro) has dramatically improved.  Frakt discusses their paper:

They argue that the “credibility revolution” experienced in empirical microeconomics since Leamer’s critique is due principally to a greater focus on research design not on sensitivity analysis.

A “research design” is a characterization of the logic that connects the data to the causal inferences the researcher asserts they support. It is essentially an argument as to why someone ought to believe the results.

I like this quotation.  As you know I have been very critical of traditional macroeconomic research, which I believe has not adequately addressed the identification problem.  In my work on the Great Depression I tend to focus on market responses to macro policy shocks.  I don’t claim this overcomes all identification problems, but I do believe it is much easier to make persuasive arguments about causality if you can observe policy announcements having a dramatic and immediate impact on asset prices.  Today’s excerpt from chapter 6 tries to use this approach, but I don’t have a smoking gun linking gold market shocks and the financial markets.  Nevertheless I thought there was a lot in interesting circumstantial evidence.
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Annus horribilis (1932, pt. 1 of 5)

Here are a few brief comments on the blogosphere before discussing 1932.

1.  Is there no one available with both a head and a heart?

Mark Thoma must be pretty influential; Obama picked Yellen right after he posted this call for new Fed governors.  Over the last year I have struggled with the issue of which group is more appalling; right wing economists who opposed monetary stimulus in 2008-09, or left wing economists who didn’t think it is was possible to use monetary stimulus once rates hit zero.  Last year I had this post on Yellen.  In another post (I can’t find) I argued that her failure to understand that monetary stimulus was still possible at zero rates should be an automatic dis-qualifier for the Board of Governors, roughly equivalent to a Supreme Court nominee who opposed Brown vs. Board of Education.  Some will say “but at least she’s a dove.”  It’s a given that Obama was going to appoint non-hawks, what we needed was someone who also understood that the Fed was capable of actually doing something.  Rumors are that only one of the three appointees will be an expert on monetary policy.  Let’s hope this isn’t the one.

2.  Yglesias vs. Krugman

Matt Yglesias makes the following point in a discussion of the Chinese yuan:

Meanwhile, if you ask me this inflation tends to vindicate China’s earlier much-complained-about currency policy. Keeping the renminbi cheap was a form of monetary stimulus that kept the economy growing throughout a global downturn. Now that Western demand is increasing again and China’s exports are rising rapidly you’re starting to see some inflation, which is precisely what happens as you come to the end of a successful stimulus cycle. Now it’s time for policymakers to start backing off from these measures.

I think that is about right.  During 2008-09 I strongly opposed attempts by Krugman and others to pressure China into a strong yuan policy.  At the time I suggested that at some point during 2010 they might want to consider appreciating the yuan.  If it happened tomorrow, in three months, or in six months I’d be fine with that.  If they wait a few years I might start gently chiding them to raise the yuan for their own good.  But never, ever, because it benefits the US.  They are rather nationalistic, and outside pressure is just as likely to backfire.

3. Tax burden tables using income in the denominator are meaningless.

In this post Krugman criticizes Ryan’s tax plan because the top tax rate is only 25%.  Given how much this country spends, Krugman is right.  If we are going to switch to a consumption tax (which is what Krugman claims the Ryan plan is) then the top rate needs to be closer to 40%.  But the chart he uses to illustrate this point is meaningless, as it divides taxes by current income, rather than consumption.  As a result Krugman makes it look like the rich would only pay 12% under the Ryan plan.   Krugman’s not the only one to do this, but it really annoys me when I read this sort of nonsense.  I don’t have time now, but this summer I plan a long post on why the income tax is widely misunderstood by progressives.  It is a moral abomination, and grossly inefficient as well.

4.  Who’s promoting loan sharks?

I must have missed something in this Krugman post.  I thought the standard view among economists (yes, I know, excluding Adam Smith) was that usury laws were counterproductive because they merely forced people to go to loan sharks.  In that case not only did borrowers have to pay high interest rates, but your legs were broken if you couldn’t repay the loan.  Yet in this post Krugman seems to be criticizing those who oppose usury laws.  What am I missing?  Is there new research out there suggesting usury laws are actually good?  Or is this just one more example of Krugman moving away from economic orthodoxy, like his “bizarre” recent claim that unemployment insurance doesn’t raise the unemployment rate?  (Check out this reply from David Henderson.)

Here’s the first part of the 1932 chapter (which supports 123’s theory of Congressional markets):
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Final thoughts on 1931 (pt. 4 of 4)

Before concluding chapter 5, a few comments on a recent post by Mark Thoma, who responds to my previous post on Adam Smith.  First a couple areas where I agree with Thoma:

1.  I shouldn’t have used the term ‘trivial’ to describe the list.  I should have said something like “modest.”

2.  Because I read the post too fast, I did not notice that the list was Viner’s, not Kennedy’s.  That does change things somewhat (and not just because he is a University of Chicago guy.)  In 1928 the Federal government in the US comprised 3% of GDP, as compared to nearly 25% today.  If that was the benchmark for normal, then yes, Smith’s views did not seem all that laissez-faire by comparison to the role of government in 1928.  We weren’t completely laissez-faire in 1928, but we were much closer than today, and hence Viner’s list would have seemed much more impressive back then.

Update: I just noticed the following comment from Thoma:

You say “I did not notice that the list was Viner’s, not Kennedy’s.”

You also don’t seem to realize that the latest points are from Gavin Kennedy, not me. (e.g. “Thoma ends up with this argument…”)

Let’s hope you read Smith with a more comprehension than you’ve demonstrated here.

Touche.  Yes, I did get confused by Thoma’s quotations within quotations.  But that’s my fault, as I know he often uses that format.  In any case scratch Thoma and consider all these comments directed at Kennedy.  Back to the original post:
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Why Friedman, Schwartz and Hamilton were wrong about October 1931. (1931, pt. 3 of 4)

First a few interesting links:

1.  Adam Smith did favor laissez-faire.

Mark Thoma recently linked to a Gavin Kennedy post that argued Adam Smith did not favor laissez-faire.  I don’t agree.  The evidence cited was a one page list of government interventions that Smith favored.  The US, by contrast, has enough government interventions to fill a New York City phone book, if not a small library.  And the US is regarded by the Europeans as “unbridled capitalism.”  Even Hong Kong intervenes in far more ways than Adam Smith contemplated.   Of course Smith was not an anarchist, he did favor some government intervention in the economy.  But relative to any real world economy, his policies views were extremely laissez-faire. 
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Hooverstrasse and the British mutiny. (1931, pt. 2 of 4.)

Before getting into part two of chapter 5, where most of the action is, I’d like to make a few comments on a recent paper by Greg Mankiw.  Although the comments will be mostly critical, it is a very good paper, and I probably would end up agreeing with most of his policy conclusions, albeit for utilitarian reasons.
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