Archive for March, 2009

Who’s line is it anyway?

Tuesday, March 10th, 2009

Here’s an interesting interview with Barro and Krugman in 2003 regarding Bush’s fiscal stimulus plan. My uncharitable eyes have Barro 2003 being more consistent with the priorities of Barro 2009 than the Krugman versions, but on the pro/anti-stimulus front the combatants have flip-flopped.

BTW, the most important fact about the economy bar none and don’t listen to any idiots who claim otherwise, THE one and only interest rate was getting close to zero in January 2003.

Raj Chetty

Tuesday, March 10th, 2009

I’m meeting with him on Wednesday. Anything I should ask him about?

His page; his “best young economist” award(link only works in firefox and maybe ie); his views on stimulus .

Of policies and goals

Monday, March 9th, 2009

There’s what you want to accomplish and there’s the best way of accomplishing those goals. It seems there’s often little disagreement on what people want to have happen; help the poor, protect the environment and encourage growth, for example. It seems obvious that policies should be chosen that best implement these goals; negative income tax, Pigovian taxes and subsidies on basic research, in order.

It is ironic that most policy debates get heated and start sounding like disagreements about normative goals when they’re just arguments about what policies are best at attaining common goals. The passion should be in normative fights, not normative-sounding fights. Positive analysis of policy’s effects are more or less boring, but its these discussions that I see become most heated (e.g. the stimulus debate).

Perhaps this is because those debating suspect their opponent is hiding some agenda. They suspect their opponent doesn’t really share their normative goals. They think the opponent’s “so-called” positive analysis of the policy in question is tainted by a desire to see policy not work.

What’s funny about this is that if policy analysis is done in a transparent way, one should be able to discern if the analysis is flawed. Why question the motives of the arguer when the argument can be criticized directly?

This line of reasoning only works for positive analysis of policy. Normative goals come from the ether and there’s no reason to think people will agree on goals. So perhaps there’s a different phenomenon explaining the passionate disagreements over policies. People simply confuse positive analysis for normative. They associate certain policies — minimum wages and rent controls, subsidies for “green” technologies and direct R&D, in order — with normative goals. Any opposition to those policies is prima facie evidence of opposition to their objective.

If this is the case, its really annoying. Knock it off, please.

Sumner on monetary policy

Saturday, March 7th, 2009

My favorite paragraphs:

The key insight of rational expectations (which should be called consistent expectations) is that if you model the economy in a way where policy X produces result Y, you should not assume the the rest of the public believes policy X produces result Z. This is especially true of public policies. It is very unlikely that a policy regime will be effective if it is based on the assumption that the public will respond foolishly to your policy. They might behave foolishly, but you can’t count on it.

The rational expectations revolution also showed that:

1. Today’s AD will be heavily influenced by changes in tomorrow’s expected AD, and thus by changes in the expected future path of monetary policy.

2. Changes in the expected future path of policy show up immediately in the auction-style commodity, stock, and bond markets.

The idea is the world is classical in the long run (permanently doubling money, doubles prices), but prices are slow to adjust in the short run. Some prices adjust faster than others so today’s GDP can change in response to expected future changes in monetary policy. So even in a weak monetary trap (where short-term rates are zero) if the monetary authority can affect expectations, they can have an affect on GDP.

The predicate — “if the monetary authority can affect expectations” — is where the disagreements are. Krugman thinks normal open market operations are the only mechanism for the Fed to affect expectations. Most everyone else thinks otherwise. Read the rest of the Sumner article to get six reasons to think Krugman is wrong.

Buiter, good macro critic?

Tuesday, March 3rd, 2009

Google scholar and a minimal knowledge of the DSGE literature allows one to refute Buiter’s claims in less than 10 minutes. Someone should really give him a quick lesson on Google scholar.

No complete markets? Nope (first page of “dsge incomplete markets“).

No asset bubbles? Negative. (third result from this search: “dsge asset bubbles“)

Only linearization? Not really. (first result of this search “dsge nonlinear solution techniques“)

Can we have better macro critics please? Like this one or this one, I mean.

Apropos of nothing

Monday, March 2nd, 2009

I’d like to take this opportunity to remind economics department chairs, and other administrators holding the purse strings, the demand for economics education has sky-rocketed recently and it continues to do so.

(h/t Mankiw)