The Ambrosini Critique

I’m what you might call a political newb so this might be an obvious question: why is Obama talking about redistributionist policies like credit cards and health care when the real problem in America, on this front at least, is Black poverty? What political costs would he pay that outweigh the large benefits of fixing this problem? Wouldn’t these costs would be relatively small for him? Or is it not about politics at all…is the problem just intractable?

Being an economist, I just assume redistributionist policy is easy. Maybe I’m wrong.

(h/t DarwinCatholic)

I think economics turns students off because of its Libertarian bent… all the invisible hand stuff¹ makes ‘em think economics=”greed is good”. This, on the other hand, is how economics should be taught:

In fact, if Joseph Heath’s Filthy Lucre turns out to be any good, I’ll use it as an intro economics text.

1. All of which I buy hook, line and sinker. [↩]

That State-by-state HDI map making the rounds is sooo 2007.

Not sure why I want to take credit for completely bogus statistics, but they’re MY completely bogus statistics!

I’m afraid if this post becomes even slightly more self-referential, it would gain sentience and take over the world. Or maybe the signals sent by this post will push the whole thing over the edge.

… has expenditures causing growth? I missed that one.

What kind of “profound” shocks lower growth rates permanently? Rogoff argues government’s response to this recession will reduce efficiency in the finance sector and thus reduce growth as a whole. This isn’t a shock. Its a considered policy response.

Either The Economist is confused or I am.

The substantive piece of John Quiggen’s criticism of New Keyensian macro is that the analysis is limited to looking at deviations of the economy around some set point. If the economy gets far away from that point, the analysis may not apply. His mistake was assuming the set point was the Smithian or neoclassical ideal, but in the NK models this isn’t the set point.

Nevertheless, to analyize these models, we do local analysis. Everybody does local analysis, so this criticism actually applies not just to New Keyensian macro but to most modern macro. I’ve actually been worried about this problem sense I realized this is what I was doing when I solved those models.

Ken Judd — Stanford’s computational economics god — gave a seminar at Davis yesterday and he made me feel much better about these techniques. While discussing this paper, he defended so-called perterbation methods by appealing to the authority of physics. They do it, so its ok for us to do it. Apparently, to solve the equations of general relativity, physicists perterb the system around the no mass solution. In other words, the set point that they do local analysis around is a universe with no mass in it! Not only that, because they’re doing local analysis (and like in economics “local” is undefined), their analysis suggests the universe is stable only up to an undetermined point of time. Outside that time interval, the local area of analysis, the results of general relativity may not apply¹. Yike!

That said, there are still problems with the way most macro folks do local analysis — we linearize when we probably should use higher order local approximations² — and if all of us picked up a copy of Judd’s textbook (and read it!) we’d be better off.

1. BTW, IANAP (physicist) and neither is Judd, but he’s a smart guy and as long as I didn’t misunderstand him, I believe what he told us. Corrections are welcome. [↩]
2. Although, a professor told me there’s very few cases where linearization can lead you astray. Unless you’re studying precautionary motives or other behaviors that depend on second moments, linearization should be ok. [↩]

John Quiggin is loving the attention he’s getting for his series of posts labeled “refuted economic dogmas”. These refutations have left me unconvinced. Often, when I know a little about the “dogma” being refuted, I find myself suspecting Prof. Quiggin doesn’t really appreciate the nuances. For example, in his refutation of central bank independence, he conflated independence with inflation targeting and independence with the lack of cooperation between governments and central banks.

Another example: Quiggin argues New Keynesian Macroeconomics has been refuted by recent events. He defines New Keynesian Macroeconomics as the analysis of small deviations from Adam Smith’s ideal economy. This is not New Keynesian Macro. NK macro models a number of serious deviations from the ideal: imperfect goods markets, imperfect labor markets, sticky prices and sticky wages are standard features of these models. Its interesting that these serious deviations from Smithian ideal result, by construction, in a place being found for policy to improve macro outcomes but despite these deviations, the effect of policy is minor.

The problem of these models is that they can only analyze small deviations from these Keynesian economies. Shocks to the system are assumed to be small and “small” isn’t defined. It could be, in theory at least, the kinds of shocks experienced in the actual economy are bigger than the small shocks analyzed in the model. This would mean the results from the model don’t tell us much about the real economy.

In particular, it could be the shocks experienced to the economy in the current recession are too big to correspond to the implications of NK models. I agree, then, that this feature of these models is troubling. However, we can’t know if the shocks are too big. To use these models, we assume they’re not.

The standard rebuttal to this argument against using NK models, then, is that without an alternative framework of analysis — one that does at least as good a job of replicating key facts about the economy — we can’t do better than NK models. Yes, they’re not a perfect fit to reality, but they’re the best we’ve got. And until we have an alternative, this rebuttal seems persuasive to me.

BTW, Delong says that because NK models don’t tell us everything, they tell us nothing. This argument is just silly. Really very silly.

In the latest NEP-MAC, there’s 12 papers on fiscal policy out of 64.

This paper finds significant crowding out effects. This one claims, “discretionary fiscal policy is more timely than conventional wisdom would suggest.” Those two are data papers, but this theory paper explores the implications of imperfect competition in the goods market and concludes despite this deviation from neo-classical nirvana, its hard for policy makers to improve welfare with fiscal policy.

Many (most… all…) claims about money policy contain some predicate, explicit or not, that the money authority actually can have real effects (e.g. Hamilton, “If you think that the Federal Reserve is responsible for more than 15-20% of the variation in the CPI, …”). This seems to be a pretty important assumption. Why don’t I know if its been tested or not?

I guess one way its tested is to produce models that don’t have money policy but explain big chunks of the data. Is this what RBC was all about? Does a current strand of the literature continue this line of research?

The Great Depression was a test of this assumption, but I want more than narrative evidence (i.e. more than one data point).

The first spoonful of delicious soup she just made contains octopus tentacle.

I don’t know why I was surprised… at this point she’s had me eat rotten beans, gummy ice cream and seaweed flakes on rice.

UPDATE: She tells me boxed cereal reminds her of dog food and that its weird to have so many varieties of cheese.