Sharpening my knife
“since I think one of the big problems with current economics teaching is its deliberately obscuring ahistoricism, I always appreciated this book.” — VCer
The presentation I gave last week to the Humphrey scholars gives support to Sumner’s call for an American Union. Didn’t “State” used to mean something like nation anyway?
Here’s the presentation I gave. Subtext: immigration is good!
Go here to see why the positive/normative distinction matters. They almost get it in the baby rollerskating post, but even that one ends with the crazy-good argument that our society is racist because, well, its racist.
Every post on the first two pages was bitching about something or other. Its all bad. I’m not sure why because there’s no semblance of a normative theory; except for “everything in our society is bad”. The about page says the site “encourages all kinds of people to exercise and develop their sociological imagination and that, between all of us, public discourse will increasingly include a sociological lens with which we can all learn about social processes and mechanisms, critique social inadequacies, and design functional and equitable alternatives.” On the first two pages of the site, I didn’t see anything but “critiques of social inadequancies” or at least claimed inadequancies; there is no attempt to argue why they are so.
How am I suppose to engage this website? Nod my head? And if I’m not inclined to do so?
“If everyone worked on one year annual contracts like mine, there would be no wage stickiness in the economy.” — Scott Sumner
Crap, there goes the sticky wages example I use in class.
I dunno, but I’m reading Christiano, Eichenbaum, and Rebelo and they seem pretty confident they know. They say, “[w]e only consider values of κ for which the zero bound is binding, so we display results for 0.013 ≤ κ ≤ 0.038.” Kappa is the degree of price stickiness and assuming I’ve done my sums right, their analysis depends on the assumption that firms update prices on average once every 5.88 to 6.90 periods. That seems like a very precise calibration range for a variable we’re not very certain about…
What do Christiano, Eichenbaum, and Rebelo mean when they say, “[w]e only consider values of κ for which the zero bound is binding, so we display results for 0.013 ≤ κ ≤ 0.038.”?
In the last post, I concluded that the macro debate today is about whether or not at the zero lower bound monetary policy can be effective. Theory says yes; data is inconclusive.
I neglected to mention that the debate is also about whether or not fiscal policy is effective at that lower bound. Martin Feldstein, in a highly readable and short paper that anticipates and takes the reader through this whole debate, says fiscal policy can be effective in such a situation (search google scholar for a free version).
Given we haven’t seen deflation so far, fiscal stimulus is a hedge against it. Once stimulus finally comes on line, if the economy is in a deflationary spiral, it will help get it out. Of course, we all trust that if that contingency doesn’t come to pass, the spending will be quickly unwound. Right? Right!?
Prof. Delong has a nice summary of the pre-RBC (aka “purist”) macro literature of the 70’s:
The underlying argument went something like this: (i) There is no sense talking about anything like “involuntary unemployment”: markets clear, and at all times people work as much as they want to work and firms produce as much as they want to produce. (ii) Workers work more relative to trend when they think their real wages are high, and firms produce more relative to trend when they think real prices for their products are high. (iii) Workers work less relative to trend when they think their real wages are low, and firms produce less relative to trend when they think real prices for their products are low. (iv) Workers and firms have rational expectations, so if they expect government fiscal or monetary policies to expand (or contract) nominal demand they will expect nominal wages or prices to rise (or fall) accordingly. (v) Thus if a predicted government-driven expansion (or contraction) raises (or lowers) nominal demand and thus their nominal wages or prices, they will understand that their real wages or prices have remained unchanged–and hence will not work more or less, and will not produce more or less. (vi) Only if nominal wages or prices rise (or fall) in an unexpected fashion will workers or firms get confused, and work and produce more (or less) than the trend. (vii) But with rational expectations the only cases in which government policy produces unexpected rises or falls in wages and prices is if the government policy is random. (viii) In which case its effects are random. (ix) And so government policies–not just fiscal but monetary policies too–cannot be stabilizing but only destabilizing. (x) Hence the best of all policies sets a predictable and constant rule for monetary and fiscal policy and does not deviate from it no matter what.
Regarding (i), (ii) and (ii), there’s a growing literature in macro on unemployment. Robert Hall has done a lot of work on this (e.g. note that he uses some psychologist-pleasing behavioral assumptions in wage bargaining). This macro research has done a very healthy thing; it inspired research questions for micro folks (e.g.). The back and forth between macro and micro people on this issue (and the state-based vs. time-based pricing stuff) suggests, at least to me, that macro is far from insular. In fact, I’d say the field is learning real things about the real world. We’re learning practical things that pragmatist might find interesting if they paid attention.
Also, these employment search models — ones where employment doesn’t hinge solely on the labor/leasure trade-off (i.e. doesn’t require unemployment to be equivalent to vacation time) — have recently found themselves studied in the DSGE framework (e.g.) where they’ll quickly find applications in policy making.
All modern macro papers have sticky prices and wages. Recently maligned Nobel prize laureate Robert Lucas has found evidence consistent with sticky prices. In other words, (iv) and (v) may have been the purist view in the 70’s but they don’t reflect the current state of macro.
As to the consequent points (vii to x), modern macro doesn’t deny discretionary policy can have short-term effects, but once the public learns policy makers are using their discretion, they will expect it, policy becomes incredible and it becomes inefficient or ineffective. Policy makers will say one thing but the public will suspect they’re lying. Policy makers will promise to be good and do what’s right in the long run, but the public will suspect they’ll do what’s most expedient. There’s a good discussion of this in the introduction of Micheal Woodford’s textbook.
And have you ever noticed how deficits aren’t counter-cyclical1? Fiscal policy looks awfully discretionary.
You might interpret the actions of the Fed last year as discretionary, but that entirely depends on what rule (or which rule-making framework) the public thinks the Fed was using. If the public thought the Fed was targeting inflation, then the Fed’s actions may not have looked discretionary at all. If it thought the Fed was doing something because something had to be done, then, yeah, the Fed’s actions looked discretionary. It may be too that last Fall was so unprecidented any action on the part of the Fed would look like it was acting with discretion. On the other hand, if the Fed was seen as acting in its prescribed role as lender of last resort and so it wasn’t acting expediently, its policy credibility may sill be intact. Its hard to tell, but a spontaneous dirty fight between economists — and their political slaves2 — about the relative merits of fiscal and monetary policy during that time didn’t do much for the credibility of policy making.
In any case, Professor Delong says, “So when the financial crisis began in the summer of 2007, we Pragmatists largely ignored the Purists, for they seemed to have nothing to say.” There’s been a lot of progress in macro since the Puritan 70’s. The professor has seemed eager to attack finance people and he debated a theorist here in Davis, but as is evidenced by this post he has had limited engagement with modern policy oriented macroeconomics.
And this is all an attempt to change the subject. For standard counter-cyclical policy when given a choice between effective monetary policy and effective fiscal policy, monetary policy wins hands down (and I’ll go out on a limb and say Prof. Delong’s hand would be down too). Monetary policy is faster and, when you consider policy expectations, more efficient. The current debate is over whether or not monetary policy can be effective right now. Are we in a liquidity trap? Is the Fed pushing on strings? Theory says no; monetary policy can be effective when short-term nominal interest rates are zero. What does the evidence say? Well, there hasn’t been very many instances where those interest rates were zero, but monetary forces got us out of the Depression. And so far we’ve managed to stay out of deflationary spiral, so chalk one up for monetary policy at the zero lower bound.
That’s not the question Will Wilkinson asked, but until more disaggregate data becomes available we won’t know the impact of the recession on inequality. What’s more, we only have data at the State level through 2008 so we don’t even see the brunt of the badness. Here’s State income levels in 2007 plotted against income growth over the next year:
There’s a statistically insignificant and small negative relationship between initial income level and growth rate.
Beware the ecological fallacy (in reverse).
Being a proper MR drone, I’ve pre-ordered Cowen’s latest book. He had me so worked up that I’m not only anticipating it, but also his next next book.
Apparently, his next next book will be moral philosophy as economics (i.e. done right!). Key words: tragedy and bliss, inframarginal analysis, pragmatic normativity. (I made the last one up.)
You have four options:
Surprisingly, (1) almost always beats (2). If you wanna do (1), it is pretty straight forward to do in Excel’s analysis toolkit.
Some models, like large DSGEs, do better than others, like old-school macroeconometric models. This Fed working paper compares the forecasting methods used by the Fed. It finds that, at least for real variables like GDP, a DSGE model does better than staff forecasts (method 4), does better than an old fashion ad-hoc model and it does better than sophisticated multi-variate statistical methods.
That said the DSGE model doesn’t do much better than simple statistics (method 1). This implies, of course, simple statistical methods forecast better than the Fed staff. In other words, (1) weakly dominates the other three “more sophisticated” forecasting methods. This line from the paper kills me, “[A] comparison to existing methods at the Federal Reserve [i.e. staff forecasts and the macroeconometric models] is more policy relevant than a comparison to AR and VAR forecasts [i.e. the simple and more sophisticated statistical methods, respectively], in part because Federal Reserve forecasts have not placed much weight on projections from these types of models.” Even though they’re no better at forecasting than simple statistical techniques, experts are relied on exclusively.
In defense of DSGE models, though, even if they don’t forecast better than simple statistical models, because they tell an economic story, they’re more policy relevant.
