The Ambrosini Critique

The presumption is that financial bubbles are super-why-didn’t-you-stupid-macro-people-predict-it-and-prevent-it bad. Guillermo Calvo says not so fast.

I like the Rawlsian robustness check.

Kaldor published some stylized facts about growth in the sixties and growth theorist went about explaining them. They’re done now. Professors Jones and Romer came up with a new set of growth facts (h/t Kling). I will spend my career hearing theories that explain these new facts. Yeah!

Two UC Davis econ profs are cited.

Also, in that paper is my original dissertation idea:

The interaction between institutions and idea flows is easy to illustrate in familiar contexts. For example, until 1996, opponents successfully used the local permit process to keep Wal-Mart from building stores or distribution centers in Vermont. This kept powerful logistics ideas like cross-docking that Wal-Mart pioneered from being used to raise productivity in retailing in the state. Such nonrival ideas must have been at least partly excludable. This is why Wal-Mart was willing to spend resources developing them and why competitors were not able to copy them. All this fits comfortably in the default model of endogenous discovery of ideas as partially excludable nonrival goods.

Looking at the macro (state-level) data, I couldn’t find the relationship suggested in the bolded section. There’s great data on Walmart’s spread out of Arkansas after its founding. If anybody’s interested in this stuff, I can pass on citations, etc.

I’m actually with Will Wilkinson when he talks up “liberaltarianism” and I support a reasonable social safety net. I’m one of those people that thinks rising GDP indicates increasing interdependence, that that is a good thing and that self-sufficiency is the road to poverty. Today Wilkinson suggests a reason why liberaltarianism might be a non-starter:

[I]t’s easiest to get people to face up to tax increases if they don’t have the sense that they’re paying more just so the special interests of the winning coalition can get more.

Isn’t the conditional phrase an empirical fact about governments?

This reminds me of my dad and the Church. Even after all us kids grew up and he stopped going to church, he gave money to them every week. The Church does a lot of good things for people — disaster relief, poor assistance, etc — but a couple years ago my dad stopped giving. His primary reason: he thought his money was primary going to paying off molested children; it wasn’t going to help poor people. He didn’t want to subsidize corruption.

I don’t want to subsidize corruption either.

The gateway drug:

Moving forward, we need to be less ideological and more empirical in figuring out what works in combating America’s drug problem. One approach would be for a state or two to experiment with legalization of marijuana, allowing it to be sold by licensed pharmacists, while measuring the impact on usage and crime.

and my favorite paragraph:

“I had arrested a 19-year-old, in his own home, for possession of marijuana,” [Norm Stamper, a former police chief of Seattle] recalled. “I literally broke down the door, on the basis of probable cause. I took him to jail on a felony charge.” The arrest and related paperwork took several hours, and Mr. Stamper suddenly had an “aha!” moment: “I could be doing real police work.”

For the two of you in Humboldt reading this blog (three if you count my mom… howdy Ma!), I’ll be teaching an economic history course (econ 20) at College of the Redwoods this summer starting next Tuesday. Lectures are in the evening, so you can use work as an excuse. Sign up!

Yes, we’ll be covering the Great Depression and “historical lessons applied to the current recession”. Other than that, I’m taking requests for topics.

So if you like catching people in gotcha moments… here’s a post of mine where I urge macroeconomists to discover non-rationalizing models. Ahh, so young and new to the world!

The difference between the 2007 version of Will Ambrosini and the new and improved version is the experience of attending dozens of macro seminars. Its hard enough to get your head around this stuff when everyone is on the same page as far as modelling assumptions. If you opened up the flood gates, the already limited “real” communication going on in the macro research community would quickly go to zero.

There’s been a couple criticism floating about regarding how macroeconomics do their thing. Here’s Matt Yglesias wondering about Levitt wondering about microfoundations. And here’s Ezra Klein turning , unwittingly I think, Cowen’s newest paper into an ideological flamewar about… rational expectations… of all things.

These criticisms are kinda funny. They’re a bit like going after the President for the order he inserts his legs into his pants in the morning. As in… who cares how macro folks get they’re job done, as long as they get their job done. Yeah, I get it. Macro failed to predict the crisis and there was too much hubris and blah blah blah, but I don’t see how dredging through the minutiae of day to day macro research is going to fix those problems. If you think we should be seers, say so. Let us decide the shape and color of our crystal balls.

But I’ll defend rational expectations and microfoundations anyway. These — like Occam’s razor does in the rest of science — bring discipline to macroeconomics. They’re a common language and they make progress in research more transparent.

Rational expectations is just an assumption about the psychology of agents in the model. By insisting on rational expectations, we get a common set of psychological assumptions across models. This is good for two reasons. First, economists know about economics and we don’t know much about psychology (or social psychology or whatever the appropriate level of abstraction). Given this, we choose to fight on the margin we know about.

Second, if every macro researcher had his own psychological assumptions, we wouldn’t know if when two models conflicted in their implications it was because of those different assumptions or because of the other features of the models. By limiting the set of possible assumptions, we limit the set of theories to more manageable size. This makes the game much easier for us cognitively constrained macroeconomists to play. Just imagine what chess would be like to play (or watch) if each player was allowed to make his own rules about how the various pieces could move.

But psychological assumptions only make sense in the context of microfounded modelling. Models without microfoundations aren’t required to have agents and so psychology doesn’t even have to play a role. Again, this discipline limits the size of the allowable macro theories to a set for which its even possible to have a unified vocabulary for talking about those theories. It takes years for a PhD student to get her head around this vocabulary and many students never master it (I’m certainly not even close). So all of you calling to expand the set of possible theories, please think of the children!

(Notice I haven’t even mentioned the Lucas Critique. It was an important impetus for the introduction of microfoundations in the 60’s and 70’s, but they’ve taken a life of their own since then. And the demonstration of the unstable nature of the Phillips curve is an important milestone in the history of macroeconomic thought, but microfoundations live on because they continue to provide value as a discipling mechanism.)

The second function of these disciplining devices is they provide a way to mark progress in the field. If you can build a microfounded, rational expectations model that rationalizes seemingly irrational behavior or displays market failure, then, well, you’ve really done something. Presumably, by building such a model, you’ve supplanted an ad-hoc theory built on some sort of irrationality. Explainations based on irrationality are, inevitably, just-so stories.

“Why did we have a crisis? Well, subprime lenders/borrowers were stupid.” Doesn’t tell you much, does it.

Stories that depend on irrationality are also a sort of god-of-the-gaps. Progress in macro research, as it rationalizes more and more, makes such ad-hoc theories obsolete in the same way that progress in science makes the explanation “God willed it so” obsolete. Ad-hoc theories aren’t wrong, but because they’re less universal, they’re less satisfying.

Maybe you don’t have the same aversion to ad-hoc macro stories based on irrationality as you do to stories about the natural world that depend on the will of God. I do and, more importantly, so do most macroeconomists.

Here. Or maybe its evidence that markets win over government intervention in the (too) long run. Or maybe its evidence that good institutions (and thus governments) matter.