The Ambrosini Critique

The red line is the wage-age profile from 1990 to 2005 and the blue line is the wage-age profile from 1968 to 1980. I just picked those years randomly. These profiles were calculated in such a way that what you’re seeing is average “within person” wage profiles over their lives¹. This means there’s no funny business with changes in demographics or whatever:

In the good ol’ days, workers ramped up their wages early in their careers and then wages flattened out for the rest of their careers. In these evil dark ages of widening inequality, it takes longer for workers to get to their wages to peak and the peak is higher than before. Also, the peak comes so late there’s never a period of stagnant growth in their wages.

1. I estimated this equation with 18 year olds the comparison group. The y-axis are the estimated two-way panel coefficient on the age dummy plus the average log wage for 18-year olds in the appropriate time period. Everything’s waaaay significant. These are heads of households with positive wages in the PSID. R code and the data set is available but its too big for me to post my hosted account so email me if you want it. [↩]

A story in the New Yorker:

“They hire someone—this has happened several times—so they don’t have to talk to me,” he went on, growing more animated and reddening with amazement. “It’s like they’re afraid of me! So they hire a guy who’s more comfortable dealing with a masculine-type person. I stand there and talk to the customer, and the customer doesn’t talk to me or look at me, he talks to the intermediary, and the intermediary talks to me. It’s the yuppie buffer.”

(h/t Sharon)

This was a funny exchange between two pretty well known economists:

SCHRAMM: Question here.

LUCAS: Uh-oh. (Laughter.)

QUESTIONER: Ed Prescott, Arizona State University. There’s one area I’m a little bit confused. there seem to be that a little shuffling of assets — you know, I own a little bit less of some, a little bit more deposited in the bank’s going to make much of a difference at all. There’s plenty of assets out there for the transaction purposes and it just A goes up and down; B goes down and up on the two assets.

LUCAS: What do you mean by asset?

PRESCOTT: I don’t see how the money does anything real.

LUCAS: What do you mean there’s plenty of stuff out there? Like we could all sort of start trading in gold?

PRESCOTT: I’m saying that I — when the Fed gets my junk bonds, and I get deposits in my bank, where’s the — it’s just changing my portfolio a little bit, changing the Fed’s a little bit, and I guess our banks — and my bank’s portfolio. These are all — there’s nothing real. They’re just bookkeeping entries, I mean, sort of shifting assets around.

LUCAS: Shifting assets around when liquidity’s involved — I mean, is seems like what you’re saying is that Lehman Brothers couldn’t have failed. Liquid assets have the property that — I hold them because I know I can pass them on to the next guy. Why does he take it? Because he knows he can pass it on to the next guy. And that’s true of U.S. currency, I’m going to go take my money into Walgreen’s, you know, and get in an argument about whether or not they’re going to accept it or not.

But all these probably created liquid assets seem to me to be analogous to kind of unregulated money or private money — used to be called inside money. And it does matter.

I’m not sure about the Lehman example. If you wake up in the morning and all your assets are worthless (as in they’re not productive), the problem isn’t that you can’t sell them. Not finding some sucker to buy them is an indication that they’re not worth that much.

Anyway, I’ve been doing this grad school thing for a while, studying macro, and I’m still not sure if money (policy or nominal fluctuations) has real effects or not.

I genuinely want to know if this does anything for anyone. Does understanding the basics of DSGE help you understand the economy better (vs. the traditional AD/AS model or vs. whatever theory you have floating in your head)? Does it help you understand the current recession better?

Seriously, what do you think? I’m teaching intermediate macro out of Mankiw’s book this summer and I’m wondering if this chapter is worth it or not.

…but I don’t give two shits (as they say back home) if you do.

Do we really think the prisons are filled up with pot smokers/dealers and the Mexican drug cartels traffic Marijuana? Or is pot is a gateway drug to further deregulation?

From a good book review of a book I’ll never read:

The early pioneers made negative arguments. Because of unquantifiable uncertainties (Knight), the fragmentation of knowledge (Hayek), the lack of timely data (Simons and Friedman), and/or the lack of suitable motivation (Buchanan), we cannot expect policymakers to engineer results that are superior to those that emerge spontaneously in a competitive market economy. With such negative arguments, it was difficult to attract adherents in large numbers… Lucas, by contrast, offered a positive argument. He brought laissez-faire into play up front as a modeling technique, rather than saving it as a possible policy recommendation. As a consequence, the macroeconomic modeler of the late 1970s and early 1980s could make full use of the mathematical techniques already in the economist’s tool box, could learn some new modeling techniques that were part and parcel with new classicism, and could possibly develop still more techniques to push the envelope of this new mode of theorizing. Devising so-called fully articulated artificial economies, calibrating the models on the basis of actual movements in real-world macroeconomic magnitudes, subjecting the model economies to hypothetical shocks, and making predictions on this basis occupied many practitioners…. Further, an ideological taint attaches to Lucas’s new classicism… because the tools that Lucas borrowed from Friedman were themselves influenced by Friedman’s ideological commitment to laissez-faire.

Get that? Lucas’ methods — a label I’d give to all methods of modern macro — are ideologically tainted because someone who once used them was an ideologue and because those methods happen to produce (under some sets of assumptions) laissez-faire policy prescriptions.

This is why economics is hard. There’s a mysterious political smell to our models that other sorts of models don’t have.

“Einstein was a Republican so relativity is a back-handed conservative conspiracy!”

Even though the structure and workings of economic models are right there for everyone to see, they’re assumed to be twisted by ideology; their outcomes invalid under some other world view. Crazy.