Tuesday, September 27, 2016

Rudy is Appalling as is Politico

I am so naive that I can still be shocked by Rudolph Giuliani who said

"after being married to Bill Clinton for 20 years, if you didn’t know the moment Monica Lewinsky said that Bill Clinton violated her that she was telling the truth, then you’re too stupid to be president.”

The problem (revealing utter moral depravity) is that Monica Lewinsky never said that Bill Clinton violated her. She also didn't say he sexually harassed her. To Giuliani, there seems to be no difference between genuinely consensual sex by 2 adults and violation.

I am also so naive that I can still be appalled by "Politico's lack of editorial standards. Louis Nelson quoted Giuliani without noting that he conflated sex and violation. Giuliani's claim about what Lewinsky said is just false and an adequate reporter would have noted this fact.

Others note that Giuliani holds wives responsible for their husbands' infidelity. This is, in fact, part of a long now mostly obsolete Catholic tradition (which was never official doctrine) which includes the phrase "dovere congiugale" (which is Italian for women are obliged to have sex with their husbands even if they don't want to because that is the only way to prevent adultery).

But to me the key point is that, to him, it doesn't matter at all that Lewinsky took the initiative (not that there is anything wrong with that). This used to be the standard view here (in Rome) 2000 years ago (also later and moving to Istanbul in the law promulgated by Constantine which mandated the death penalty for voluntary premarital sex (obviously only if the father of the woman had high social class). I had hoped humanity had moved on.

As to the alleged stupidity, Giuliani knows a lot about how often spouses (such as his two wives) are the last to know.

I have heard of Clinton attacking Lewinsky a lot recently. I don't recall any such attacks. Now, one way or the other, it is not at all surprising that she was irritated with a woman who claims to have had sex with her husband (even if Lewinsky first said it to someone she thought was a friend in what she thought was strict confidence). Again, Rudy must know all about that. But when two people contest the facts, saying you trust and believe one isn't attacking the other.

I do think that what Clinton did was morally wrong especially given the gap in ages and huge gap in power. But "violated" is a strong word which, in context, means "raped". Giuliani doesn't understand the moral difference between voluntary sex and rape. Now I am not saying that I am therefore confident that he has raped. Based on his attitude, I strongly suspect that he has, but I know of no evidence of any specific rape (of course I know that Trump has been accused of rape by two women and of sexual assault by a third and I am very very sure that Donald Trump is a rapists (I note that here the standard for what I just typed to be both a tort and a crime is that it was false -- not knowing is no defense here).

Fact Check Fact Check

The AP got a facts wrong when fact checking Trump

TRUMP: "Had we taken the oil (in Iraq) -- and we should have taken the oil -- ISIS would not have been able to form."

THE FACTS: Donald Trump's assertion that the U.S. should have seized Iraq's natural resources would have required that it also seize control of the country and at no point was the U.S. in a position to do so.

To achieve Trump's stated goal of destroying Islamic State militants' revenue stream, the U.S. has bombed oil facilities in Iraq. The bombing was designed to render the oil facilities inoperable, but not destroy them, so Iraq could rebuild its economy with its oil when the conflict ended.

(Emphasis mine)

The AP is WRONG. The USAF has bombed oil facilities in Syria not in Iraq. This is actually very relevant. Trump claims the US could have cut off ISIS funding by seizing Iraqi oil. He displays his ignorance. ISIS is partly funded by selling Syrian oil (or was before the bombing). ISIS hasn't captured Iraqi oil fields.

They all look alike to Trump. Not just all Arabs but also all Arab countries. He has also incorrectly claimed that ISIS has captured and sold Libyan oil.

I guess it is hard to understand that proceeds from selling Syrian oil is (or was) a large part of the ISIS budget, because Syria has never been a major oil producer. It is possible, because the ISIS budget, while very large for a terrorist organization, is very small compared to the export revenues of a major oil producer.

Trump's inability to understand that Iraqi and Libyan oil fields are not the same as Syrian oil fields is one proof that he isn't qualified to be president. Failure to note that gross error is a gross fact checking error.

Watching (but not listening to) the Debate

I am not a sexist and I followed the brilliant advice the woman whose husband I am gave me in 2000. To understand how a presidential debate affects undecided voters, it is best to watch with the sound off. If you can't follow the words but only get visual impressions, then you might be able to understand the perspective of low info voters. In particular way back in the sad sad year 2000 she noted that Bush looked like a human being and Gore looked like a robot. That (and 5 supreme court justices) caused hundreds of thousands of deaths, a great recession and an indelible stain on the honor of the USA. OK maybe I am a sexist, but I can't stand to listen to Donald Trump for more than two minutes (I tried really I tried). He didn't look good. She looked calm and confident. But one thing that really struck me was the post debate. Trump was surrounded by his grim faced family. Then he ran off stage. Hillary and her husband shook hands and posed for photos, shared themselves with an adoring crowd, and acted like nice friendly people. I think this might make a difference.

Monday, September 26, 2016

Politico Fact Checking Clinton

I am very pleased that the New York Times, The Washington Post, The Los Angeles Times and Politico have decided to report the fact that Donald trump makes extraordinarily many false assertions. I'm fine with refraining from using the word "lie" which implies that the liar knows the truth. Given that he might be elected President, I hope he is lying. I fear he is delusional sincerely believing whatever it is convenient for him to believe or uninterested in the truth (to use the technical term that he is bullshitting). I also agree with Politico's decision to fact check Clinton too and to compare the two rates of false claims. But I disagree with the fact checking of Clinton. I rate Four of Politico's claims that Clinton erred to be False One as considering a difference of opinion a fact check One as refusing to interpret words with the usual meanings given the context of a political campaign One as interpreting normal political hyperbole as a claim of fact One actual false Clinton claim and one where it depends on what definition "has" has. So I say Politico is wrong three times as much as Clinton even though Kyle Cheney, Isaac Arnsdorf, Daniel Lippman and Daniel Strauss chose the most favorable 8 topics to debate Clinton and had the last word (actually the only words I read). The hyperbole one is ambiguous so maybe they are only 5/3 as error prone on the most favorable possible ground. In any case, I am quite sure that moving second, choosing the topics least favorable to Clinton and having the last word, Politico managed to beat Clinton 4 clear falsehoods to 1. Wow. Their claims 1. That Clinton falsely said she was very careful with classified information. First even if people who are very careful make mistakes (human perfection is impossible). Clinton must be compared with some other human being not an ideal. Politico makes no claim that anyone has ever been more careful. Clinton's alleged error was receiving an e-mail. This isn't an act. The error would be failing to denounce an aid who slipped up (after noticing the (C)s in documents. Obviously most US political journalists have lost their minds over Clinton's e-mails. I am confident that this will be another object lesson (used in journalism schools) of failed journalism like the Whitewater blood sports, the war on Gore, the run up to the Iraq war. Here I think Politico is treating the conventional wisdom as known fact and the prefered narrative as objective truth. In any case "very careful" is a matter of opinion and Clinton's claim is definitely not a false claim of fact. 2. Clinton said "I’ve met the standard that everyone running for president has met. ... healthy" I guess I have to go to hyperbole and standard political English for the every. Obviously Clinton isn't claiming that Lincoln reported his cholesterol levels. Aside from that, another fact checker seems to roughly rate Politico's claim as false with (according to Politico)
PolitiFact has found that Clinton’s health release in 2015 was on par with Mitt Romney’s and Barack Obama’s from 2012, and she’s released more details since her bout with pneumonia that led to a collapse outside a 9/11 memorial. Trump has left out more details than Clinton,
Note that this is in the fact check which claims her assertion is false. I claim Politico's assertion is false given the ordinary understanding of words (especially theirs). 3. 3. Trump’s “economic plans would ... include an estimated $4 billion tax cut for his own family just by eliminating the estate tax.” This is the one widely mocked on Twitter. Politico claims that Clinton's claim is false, because she treats Trump's claim that he has $10 billion as true. So one of Clinton's few alleged lies is only false because of a Trump lie. Also Politico is wrong again. The weasel word "estimated" makes the claim true. Clinton didn't mention that the estimate was provided by Donald Trump. This is not a falsehood. I rate Politico's claim to be false. 4. "So if you are a family living in an expensive city, you would be able to find an affordable place to call home.” Here Politico is right and Clinton is wrong. She claims a program which would help some families would make housing affordable to all who live in expensive cities. I think this may be an almost honest slip. She is trying to explain the purpose of the program. I can delete some words and a comma and make a two singulars plural to generate the very similar true claims Families living in expensive cities would be able to find an affordable place to call home. This is true. I think the "if you are" are a clumsy attempt to make an abstract benefit concrete by focusing on a hypothetical family. t is standard for politicians to falsely claim that programs will achieve their aims. But it is false. Current score Politico one out of 4. Sad. 5 “We’ve actually put in one place all of our plans,” she said while holding up a copy of her book “Stronger Together." “We have this old-fashioned idea if we’re asking you to support us, we should tell you what we’re going to do.” Politico notes that, if elected, Clinton won't do that because Congress will block her. It is absolutely standard for Presidential candidates to describe proposals as things that will be done. In any case, Politico's claim depends entirely on the referents of "we" and "us". If "we" are the Democrats who support the Clinton campaign (including almost all candidates for the House and Senate) and voters were support all of them, then the Democrats would have overwhelming majorities in the House and Senate and would pass Clintons proposals and then add more. In any case, Clinton's language is absolutely 100% standard. Politico is insisting that words not be interpreted as they are always always used in political campaigns. 6. Clinton said a technical true thing which sure sounds false “Your former guest, Donald Trump, has refused to actually admit that President Obama is an American, born in America.” This is true. Trump has frequently refused to admit that. He has also admitted it. I can change Clinton's true claim to a false claim adding one word “Your former guest, Donald Trump, has [consistently] refused to actually admit that President Obama is an American, born in America.” This claim is false, but Clinton didn't say that. Now I will add some more words which I really honestly often use to explain how "has" is used in English to Italians ( and how it does not translate the ha in the Italian passato prossimo) “Your former guest, Donald Trump, has, at least once in his life, refused to actually admit that President Obama is an American, born in America.” This is a clearly true claim. It is, I think the one and only correct clarification of Clinton's very brief and simple and therefore ambiguous statement. It is what she meant to say. Obviously she wasn't denying the existence of Trump's very famous recent admission. Here I think the Clinton's have a problem, because they are lawyers and know what exactly what some key words mean. I think the Politico writers sincerely thought they had caught Clinton in a slip of the tongue. But only because they don't understand the meaning of the word "has". I made the same error they did. I think that Clinton should have said "“Your former guest, Donald Trump, has frequently refused to actually admit that President Obama is an American, born in America.” This strengthens the claim but it also makes it clear that the claim that Trump has done something does not imply the claim that he has done only that. I rate Politico's claim as false (and admit again that I made the same error before re-reading the Clinton quote). Oh Christ they counted that one sentence as two false claims. That's crazy and she is right and they are wrong so I score Politico as 4 falsehoods to 1. 8 "“We have a Republican nominee for president who incites hatred and violence like we’ve never seen before.” This is clearly exaggerated. I'd say Osama Bin Laden beat Trump in the incitement business (so far). This is clearly normal hyperbole. I consider the truth value of Clinton's claim ambiguous. So one false claim and one normal exaggeration. Now I think they are very proud of themselves at Politico for drawing the unBallanced conclusion that Trump lies much more than Clinton. But I think they were very careful to leave no opening for critics to claim they had missed a Clinton falsehood. So their fact check of Clinton demonstrates their trouble with facts not hers.

Sunday, September 25, 2016

Macroeconomic Puzzles II Aggregate Supply

This is the second installment on general thoughts about Macroeconomics without a rational representative agent. The first installment is here. I'm going to continue to argue that it would be an improvement to go back to (some of) the macroeconomics of roughly 1970.

In the first installment, I claimed that Old Keynesian consumption functions which give consumption as a function of current and a few lags of personal disposable income and wealth outperform models based on intertemporal optimization and that investment (to the limited extent it can be modeled and forecast) is mostly fit by GDP growth with a significant effect of estimated real interest rates on residential investment. This means that I think closed economy models of aggregate demand from 1970 (really roughly from 1936) are much superior to later models.

Now I am going to go all the way and write that I think the best available model of aggregate supply is the 1960s era Phillips curve. First it is necessary to stress (again) that this was an expectations augmented Phillips curve. It differed even from more recently used a-theoretic Phillips curves, because anchored expectations were allowed.

To close the model it is necessary to have both a wage Phillips curve and a price inflation Phillips curve.

This is just exactly the model which was considered to be most thoroughly refuted in the 70s. The failure was the justification for the complete change in methodology. But I don't think it failed at all. The straw man of an expectations un-augmented Phillips curve was knocked down, but it hadn't been set up by old Keynesians in the 60s.

Notably, Paul Krugman is convinced that old Keynesian views on the Phillips curve have been vindicated writing "Tobin was right" also at length here. Blanchard recently wrote The US Phillips Curve: Back to the 60s which, I should stress asserts that the pattern of inflation and unemployment has become similar to that of the 60s and not that theory should return to 1960s theory (or 1960s absence of theory if you prefer).

The very old point as recorded in undergraduate macro textbooks (and for decades nowhere else) is that all macroeconmists really need from the supply side is a model of inflation. That combined with an empirical monetary policy rule (I guess just a Taylor rule) yields the one variable needed to estimate aggregate demand and output.

The fact is that extremely old fashioned Phillips curves actually worked rather well through the 1980s. They were abandoned because of oil shocks, theoretical arguments, straw man rhetorical tricks and fashion.

I think there are two necessary changes that were (and are) to be made. First the 1960s era Phillips curves went too far in correcting for expected inflation. It was assumed that there was nothing particularly special about 0% nominal wage inflation. In history it is very difficult to achieve actual reduction in nominal wages. It occurred in many countries during the Great Depression and in Greece recently, but even very high unemployment rates do not seem to be high enough to break through downward nominal wage rigidity. In the USA in the 60s this wasn't an issue so applied macroeconomists who focused on forecasting didn't discuss it much. Tobin in 1972 (and Solow in 1978) did.

Second, as argued by Solow and Samuelson in 1960, cyclical unemployment can become structural. This has been named hysteresis and it is clearly an extremely important issue here in Europe. In practice the first difference in unemployment matters much more for wage inflation than the level of unemployment.

The combination of anchored expectations and hysteresis means that economists got it backwards around 1980 -- fluctuations in unemployment lasted longer than fluctuations in inflation. The costs of policy makers' confidence that disinflation would be painful briefly but beneficial in the medium run were immense.

Anyway more thoughts here

Saturday, September 24, 2016

Macroeconomic Puzzles

Narayana Kocherlakota wrote a brilliant and brief post "On the Puzzling Prevalence of Puzzles".

I can't summarize Kocherlakota (just read it) but the key critique is as follows

To an outsider or newcomer, macroeconomics would seem like a field that is haunted by its lack of data, especially good clean experimental data. In the absence of that data, it would seem like we would be hard put to distinguish among a host of theories with distinct policy recommendations. So, to the novice, it would seem like macroeconomists should be plagued by underidentification or partial identification.

But, in fact, expert macroeconomists know that the field is actually plagued by failures to fit the data – that is, by overidentification.

Why is the novice so wrong?

The answer is the role of a priori restrictions in macroeconomic theory.

[skip]

The mistake that the novice made is to think that the macroeconomist would rely on data alone to build up his/her theory or model. The expert knows how to build up theory from a priori restrictions that are accepted by a large number of scholars. (Indeed, in the academe, that’s exactly what it means to be an expert macroeconomist.) Those restrictions are what give the models their empirical content. As it turns out, the resulting models actually end up with too much content – hence, the seemingly never-ending parade of puzzles.

I think the prevalence of puzzles is no more puzzling than the fact that the squares in a crossword puzzle aren't filled in. The puzzles are the point of the exercize. In particular, researchers need problems which are neither to easy nor to hard. Easy problems have been solved decades, centuries or millennia ago. Hard problems won't be solved before tenure decisions are made. The macroeconomic puzzles are just difficult enough. Furthermore the huge gap between the standard DSGE model and reality means that the solution to one puzzle creates another puzzle.

JEC at Mean Squared Errors puts it much better than I could

Consider the macroeconomist. She constructs a rigorously micro-founded model, grounded purely in representative agents solving intertemporal dynamic optimization problems in a context of strict rational expectations. Then, in a dazzling display of mathematical sophistication, theoretical acuity, and showmanship (some things never change), she derives results and policy implications that are exactly what the IS-LM model has been telling us all along. Crowd -- such as it is -- goes wild.

And let's be clear: not even the most enthusiastic players of the macroeconomics game imagine that representative agents or rational expectations are, in any sense, empirical realities. They are conventions, "rules of the game." That is, they are arbitrary difficulties we impose on ourselves in order to demonstrate our superior cleverness in being able to escape them.

I add, however, that some assumptions are made, because it is too difficult to manage without them. We know that we don't have rational expectations, but we don't know how we actually do form expectations. The macroeconomist can't wait for psychologists (and sociologists) to finish their research program. Efforts to relax the rational expectations assumption have ended either with even less plausible mechanical assumptions or with extreme mathematical difficulty in models which are otherwise as simple as possible.

As usual, the challenge to the young macroeconomist goes back to Keynes. The General Theory of Employment Interest and Money begins with book 1 containing models which are not difficult enough (aside from the fact that they were explained clearly and in detail a year later by Hicks). It also includes Chapter 12 on long term expectations (beauty contests and all that) clearly presenting problems too hard for Keynes. Then thereare warnings really to not trust a Phillips curve (not called that 23 years before Phillips) and discussion of how wage setting is an extremely complicated and probably incomprehensible social process. So there are the parts which were finished at least 79 years ago and the parts which might maybe be finished 79 years from now (but I doubt it)

Here (as almost always) I am following Krugman

I’d divide Keynes readers into two types: Chapter 12ers and Book 1ers. Chapter 12 is, of course, the wonderful, brilliant chapter on long-term expectations, with its acute observations on investor psychology, its analogies to beauty contests, and more. Its essential message is that investment decisions must be made in the face of radical uncertainty to which there is no rational answer, and that the conventions men use to pretend that they know what they are doing are subject to occasional drastic revisions, giving rise to economic instability. What Chapter 12ers insist is that this is the real message of Keynes, that all those who have invoked the great man’s name on behalf of quasi-equilibrium models that push this insight into the background – from John Hicks to Paul Samuelson to Mike Woodford – have violated his true legacy.

The lack of puzzles is due to the fact that the puzzle addressed in book 1 is solved in book 1 and the problems posed in bok declare themselves to have "no rational answer". Neither provides a good dissertation topic. They do provide useful policy guidance. Keynes wrote that there will be manias, panics, and crashes no matter what policy makers do, and that they can deal with the aftermath by temporarily increasing government investment or consumption. If that's as good as macroeconomics can do then it's a very boring research program which reached it's apex the day it started. But it sure would be better than what ma macroeconomists did in 2008 with internal debates which weakened already limited influence on policy makers who did crazy things.

I am now going to write a long boring unoriginal post on which problems in macroeconomics are too easy and which are too hard. Aggregate demand is too simple. An IS curve works very well. Economists can create a problem by arguing that it shouldn't work and declaring its success to be a puzzle and others can let us have our fun. But they would be foolish to pay us for our play.

The accounting identity is that aggregate demand is equal to private consumption + private investment + government consumption + government investment + exports - imports. In standard DSGE models the last four terms are not microfounded. there is just a random variable for GDP minus private consumption minus private investment. I don't think it is wise to ignore foreign trade (especially not when trying to apply models to countries other than the USA). Here I think the problem is that exchange rates fluctuate wildly. Those fluctuations matter, but no one has found a rational explanation. So either one accepts irrationality or one leaves the effects as an undiscussed unexplained disturbance term. In particular and importantly, aggregate consumption is much much too simple. It can be fit using current disposable personal income and any crude measure of wealth (ordinary non-human wealth). It helps to add a few lags of current disposable personal income. This is rather important, because it has a huge effect on estimated multipliers and the lags are needed to fit the response to shifts in fiscal policy (that is get a multiplier of around 1.5 and not around 8). My view is that Keynes said ust about everything useful to be said about aggregate consumption with two exceptions. He didn't discuss circulating credit and living off of credit cards (because they didn't exist then) and he didn't recognize the important role of housing equity as one of the key forms of wealth which affects consumption.

I do seriously think that list of omissions is more or less adequate and complete. I argue this at great length here.

Now this is interesting, because Friedman's permanent income hypothesis has a central role in contemporary DSGE macroecomics. One of the two dynamic equations corresponding to the D in DSGE is the Euler equation, which has no place at all in Keynes. It also just so happens that the implications of the Euler equation are a leading source of puzzles and it is, by now, widely hated even by the open minded Simon Wren-Lewis who wants to give DSGE the benefit of every doubt and the very central (states) New Keynsian who works near a great lake Martin Eichenbaum. Keynes's argument was that future aggregate income is very hard to predict, so while the ratio expected future income to current must be considered when studying individual consumption, it is can and should be neglected by macroeconomists. I know of no evidence against this position.

Investment is much trickier. It is the topic of the dread chapter 12 (among others). It is, in fact, hard to fit and harder to forecast private investment. Here I think a large part of the problem for DSGE is the decision to model investment as a scaler and identify all of it with business fixed capital investment. Residential investment and inventory investment are not included in standard DSGE models. This is odd, because inventory investment is discussed constantly by practical forecasters who talk about the latest business cycle. Also it should be clear since 2008 that housing investment is extremely important.

I report some 1960s style econometrics of investment here. Here I learn (from Krugman) as usual that useful knowledge was abandoned in the current dark ages of macroeconomics

Back in the old days, when dinosaurs roamed the earth and students still learned Keynesian economics, we used to hear a lot about the monetary “transmission mechanism” — how the Fed actually got traction on the real economy. Both the phrase and the subject have gone out of fashion — but it’s still an important issue, and arguably now more than ever.

Now, what you learned back then was that the transmission mechanism worked largely through housing. Why? Because long-lived investments are very sensitive to interest rates, short-lived investments not so much. If a company is thinking about equipping its employees with smartphones that will be antiques in three years, the interest rate isn’t going to have much bearing on its decision; and a lot of business investment is like that, if not quite that extreme. But houses last a long time and don’t become obsolete (the same is true to some extent for business structures, but in a more limited form). So Fed policy, by moving interest rates, normally exerts its effect mainly through housing.

Here it is worth noting that while macroeconomists have worked very hard to include financial frictions in DSGE models, they still don't include a housing sector (as far as I know). This is very odd (have I missed a flourishing literature). I have some thoughts as to why housing might be ignored. First back to consumption. Housing wealth does not cause high consumption in a model with a rational representative consumer. The consumer's wealth in terms of consumption goods increases, but so does the price of the consumer's consumption bundle including housing services. Housing equity can relax liquidity constraints with HELOCs but the representative agent can't face a liquidity constraint. Housing equity can reduce precautionary spending as someone who, for example, is laid off can sell her house and live in a smaller house. But the whole economy can't sell its houses.

Notably the apparent effect of wealth on consumption (separately from its role as a predictor of future income) was rejected because it is hard to micro found

I would argue we built the first UK large scale structural econometric model which was New Keynesian but which also incorporated innovative features like an influence of (exogenous) financial conditions on intertemporal consumption decisions. [4]

[skip]

Our efforts impressed the academics on the ESRC board that allocated funds, and we won another 4 years funding, and both projects were subsequently rated outstanding by academic assessors. But the writing was on the wall for this kind of modelling in the UK, because it did not fit the ‘it has to be DSGE’ edict from the US. A third round of funding, which wanted to add more influences from the financial sector into the model using ideas based on work by Stiglitz and Greenwald, was rejected because our approach was ‘old fashioned’ i.e not DSGE. (The irony given events some 20 years later is immense, and helped inform this paper.)

[skip]

[4] Consumption was of the Blanchard Yaari type, which allowed feedback from wealth to consumption. It was not all microfounded and therefore internally consistent, but it did attempt to track individual data series.

I havent read the linked paper. I can see a problem with using stock market indices as wealth which directly affects consumption. They should summarize future dividends which are future income and so already considered in the permanent income hypothesis. Here the problem is that stock fluctuations are very large compared to the tiny fluctuations in the achieved present value of future dividends. If there is noise in stock prices, one might ask if it helps explain consumption and how it deviates from the consumption of hypothetical rational representative agent. There is and it does, but facing that fact requires one to abandon the rational expectations assumption and join one side of a furious debate in finance. Now I think it is important to understand why contemporary models of monetary policy and its effects totally suppress the fact about what sort of investment is affected which Krugman was taught back in the age of the dinosaurs. I suppose it is probably really because it was considered a harmless simplification and it is very important to have few variables if the benchmark of one's benchmark model is a VAR. But I can see a number of reasons why housing is problematic. The first is that there was a huge housing bubble which is very hard to reconcile with the rational expectations assumption. It is much easier to explain a huge increase in stock prices as the effect of an increase in expected future technological progress. Second it is hard to understand how monetary policy affects housing investment. First it is necessary for the monetary authority to affect real interest rates (and that already loses the hard core new Classicals). Then it is necessary that fluctuations in short term interest rates cause fluctuations in mortgage interest rates. I think the high correlation doesn't make sense (so long term bonds and mortgages are good buys when short term interest rates are high). The 30 year fixed interest rate mortgage is a very extreme case of nominal rigidity. Their existence makes no sense. I think that, like foreign exchange markets, housing demand is incomprehensible and must be treated as an unexplained and unpredictable source of shocks. On the other hand, there are useful simple things to say about investment. First it is well fit by a flexible accelerator which gives high investment to GDP when GDO growth is high and low investment when short term nominal interest rates minus lagged inflation is high. In particular, the vulgar estimate of a real interest rate helps explain housing investment (and not so much if at all business investment). The problems are too hard (chapter 12 and business fixed capital investment, housing bubbles and housing investment) or solved long ago. Now the old IS model has stong implications which are very different from those of standard DSGE models. In the old model, there was no Ricardian equivalence. I think there is no evidence of Ricardian effects at all. I think the IS curve works find and the only problems are that it is very old and that no optimization under constraint is considered when writing it. Aggregate supply (coming fairly soon -- lags are important). Part II here

The Monkey Fu Kung Sanification Factor II

27% of US adults say the press is too easy on Donald Trump. 73% of US adults are delusional. http://www.pewresearch.org/fact-tank/2016/09/22/more-say-press-is-too-easy-on-trump-than-said-so-of-romney-mccain/

Friday, September 23, 2016

Comment on Noah Smith on Neo-Fisherism and an old Silverfish

I'm not sure why I can't resist commenting on this post. I certainly love the illustration of an extremely old silverfish frozen in amber. I deeply regret my inability to think of a joke connecting unorthodox monetary policy and silver (with perhaps a reference to paleobiology). Oh and the Wizard of Oz. Oddly I have a complaint that Noah's introduction and conclusion don't have much to do with his main point. He mentiones neo Fisherism in the first paragraph, provides some links and discusses it in the last paragraph, but the post is really about Friedman's compromise.

Noah argues that monetary policy is not working (I told them it wouldn't hah but later admitted I was wrong ho so the jokes on me). He asks why economists are so devoted to it, and argues that it is a compromise between Keynesians who support fiscal stimulus and neo-liquidationists who say that the correct response to a recession (or an expansion) is deregulation.

politics. Macroeconomics has a political spectrum all its own, which is at most loosely connected to the familiar left-right axis. On one side of macroeconomic politics are the true Keynesians, who believe that government spending is the answer to downturns, and possibly can even boost growth in normal times. On the other side are the liquidationists, who believe that recessions are the healthy functioning of a normal economy, and should be left alone, or used to make a political push for structural reforms.

These two sides have battled it out since the Great Depression. The evidence in macro isn't very strong it’s been very hard for either side to defeat the other with facts. Instead, what tends to happen is that they fight each other to a standstill. In the end, they agree on the compromise position, which is that monetary policy, rather than fiscal policy or structural reform, should be the main tool of recession-fighting.

... it represents a compromise between the Keynesian interventionists and the opposing coalition of anti-interventionists. It posits that technocratic central bankers, manipulating a single price in the economy (the interest rate), are all we need. This is a minimal intervention that liquidationists can stomach and that Keynesians can grudgingly accept.

Others have mentioned this compromise and ascribed the compromise of free markets plus active monetery policy to Milton Friedman.

I have some objections also to this non neo Fisherian discussion.

First at the anti-Keynesian pole there are two very different camps. There are economists (real business cycle theorists) who argue that recessions and expansions are the healthy functioning of a normal economy and all would be for the best in the best of all market systems if only the state were drowned in a bathtub. But the word liquidationist referred to another view in which recessions are needed to restore the economy to health. To the original liquidationists (Von Mises, Von Hayek and Schumpeter) the booms which preceded recessions were unhealthy binges caused by irrational exuberance and loose monetary policy. They didn't trust the market or market participants. Now it is odd that the two Vons thought that the market could and would handle any challenge other than loose monetery policy perfectly, but the fact is that during the depression they noticed that something had gone wrong. They just thought the policy errors were back before the crash and the depression was necessary penance.

Second, I think the evidence in macroeconomics is plenty strong enough to refute the liquidationists. I think the debate will never end, because they have declared that evidence is irrelevant. It just isn't true that there is too little evidence in macro to reject either of two competing hypotheses. It is definitely a fact that macroecnomists don't test hypotheses and say "all models are false" when the implications of their models are rejected by the data. In other posts, Noah has mentioned this fact (and also that if New Keynesian models were treated as hypotheses they too would be rejected).

Third the real business cycle theorists and liquidationists do not accept any compromise at all. They do not concede that monetary stimulus can ever be useful. Actually, I can't name a New Keynesian who hasn't argued for fiscal stimulus recently either. I see no hint of academic compromise.

The problem is that fiscal authorities have no time for old Keynesians, new Keynesians, real business cycle theorists or liquidationists. They listen to supply siders and ordoliberals. I think we are stuck with ineffective monetary policy because of ordinary politics not academic politics.

Expectations Robust Policy Evaluation is Impossible

Macroeconomists have a problem. We know that agents' expectations are very important, but we don't understand how people form expectations. This is a problem for psychologists and sociologists. They haven't solved it and we can't wait decades (or centuries or millennia) until they do.

One proposal was to assume that people have rational (that is model consistent or Nash equilibrium) expectations. This requires either a unique Nash equilibrium or the abandonment of methodological individualism. The assumption that the world is in Nash equilibrium and it is unique rules out bubbles. So we can either advise policy makers on how to deal with the housing bubble and the dot com bubble and their aftermaths by assuming that bubbles are impossible, or try something else.

Hansen and Sargent (extremely eminent Nobel prize winning fresh water economists who were once enthusiasts for rational expectations) have thoughts about what to do. These thoughts are expressed in papers which I haven't read. I will debate Straw Hansen and Sargent (SHS)

SHS says we should seek policy rules which yield OK outcomes for any conceivable expectations formation mechanism. SHS doesn't understand that this quest is utterly futile, because SHS has limited imagination and can conceive only of expectations mechanisms which have been explored by SHS.

In fact, there can be no policy which gives OK outcomes for any conceivable expectations mechanism. The idea that knowing that people form expectations somehow has policy implications is like the idea that assuming that people maximize some utility function has policy implications. Any illusion of implications can be based only on a failure of imagination.

So consider economy X and proposed policy A. I may make any assumption about the expectations of agents in the economy I please. I assume that if the policy maker implements any policy other than A then agents have adaptive expectations. I also assume that if the policy maker implements A then agents believe that there will very soon be an instantly spreading plague which will paralyze all people and make us die slow horrible deaths (without the ability to put ourselves out of our misery.

Thus the agents all maximize their utility by killing themselves (altruistic agents kill others first).

I don't think this is an OK outcome.

Now the expectations mechanism which implies that just because policy A is implemented everyone will instantly believe something crazy is not plausible.

But at this point, all hope of having anything useful to say is based on the belief that we can have some confidence that human psychology (and sociology) fall in some plausible subset of the conceivable. That's not robust in any well defined way.

Friday, September 16, 2016

The Monkey Fu Kung Sanification Factor

James Hohmann asks pollsters "Why most think the country is on the wrong track, despite positive economic indicators"?

Many paragraphs of BS follow. The first pollster quoted by Hohmann is, get this, Kellyanne Conway. Many pollters make claims about how those who think the economy is on the wrong track can reconcile this view with recent data (they really did). None hints at any asymmetry in the accuracy of perceptions of Republicans and Democrats.

The article includes the notoriously accurate pollster Anne Seltzer saying both sides do it, because, in recent decades, Democrats think the economy is on the wrong track when Republicans are in the White House. "Selzer ... : “If there is a Democratic president, Democrats most commonly say things are on the right track while Republicans most commonly say things are on the wrong track. And vice-versa.”

During those decades, this means that Democrats thought the country was on the wrong track when George W Bush was in the White House. I don't think Seltzer really thinks that this view can only be explained by partisan bias. I think she added her "and vice-versa" for Ballance.

Finally Hohmann gets to PPP (clearly in a partisan pollster ghetto unlike Conway).

Tom Jensen, who runs the Democratic firm Public Policy Polling: “Republicans pretty much universally say they think the country is on the wrong track because they don’t like the president and don’t want to give him any credit. One set of findings we had that really drove that home is that nationally 64 percent of Republicans say the unemployment rate has increased under President Obama, to only 27 percent who say it’s decreased. And 57 percent say the stock market has gone down under Obama, to only 27 percent who say it’s gone up. Obviously, when you see voters saying something that’s just very objectively wrong they don’t care about the actual statistics. Their assessments on that question are just driven by emotion and their negative feelings toward President Obama.”

Oh my. these are questions of fact. Most Republicans have incorrect beliefs about simple questions (on the unemployment rate I think PPP should have specified that they are talking about the official numbers not some "real" unemployment rate).

But look, there's that number again. On the two questions 27% of Republicans answer correctly. 27% is the Kung Fu Monkey crazification factor It turns out that there is some balance and symmetry. Overall 27% of Americans are crazy. Also 27% of Republicans are sane.

Thursday, September 15, 2016

Macro Mess

It seems to be open season on DSGE macroeconomics again (as it was in 2008).

Paul Krugman says that The State of Macro is Sad, and that OJ Blanchard is too polite to write that he agrees. He also says that Tobin was right all along so the rational expectations revolution was not only unsuccessful but also un-necessary (what a Schama). It isn't surprising that Brad DeLong agrees. They are nowhere near as shrill as Paul Romer.

This will be a long boring unoriginal post commenting on Krugman (comments on Romer here).

First I claim that the state of macro has been sad for longer than Krugman recognised back in August. Then (as often) he praises Friedman while criticizing those who think they are Friedman's followers. He agrees that the Stagflation of the 70s demonstrated that Friedman had made a huge contribution when he presented the natural rate hypothesis in 1968.

The theory of a natural rate of unemployment got a big boost when the Phillips curve turned into clockwise spirals, as predicted, during the stagflation of the 1970s.

I have argued that Friedman was setting up and knocking down a straw man, because old Keynesians didn't use models which ruled out stagflation. I also argue that stagflation does not imply that there is a natural rate. I often direct readers to James Forder

This makes Krugman's post on Tobin interesting to me.

along the way I’ve found myself rereading some writings of actual James Tobin from the time; and it has been a revelation.

Let me focus in particular on Tobin’s 1972 presidential address to the American Economic Association, “Inflation and unemployment” (sorry, I don’t see an ungated version.) I remember how that address was seen among my fellow grad students a few later: it was seen as Tobin’s last stand, a desperate rearguard action in the debate with Milton Friedman over the natural rate hypothesis. And everyone knew that Friedman won that debate, vindicated by stagflation.

Except if you read Tobin again now, he’s the one who looks vindicated.

I love to say "I told him so" but I told him so (same link as above). This means that the one victory of fresh water economists over old Keynesians (which Krugman sometimes concedes happened) didn't actually happen. I also look forward to telling Krugman so again (as I have in the past). The recent post on Tobin isn't the first time he has noted that Tobin was right about the Phillips curve and that the standard intellectual history is based on systematic misprepresentations

So how does the decade of the 1980s end up being perceived as a defeat for Keynesians? To see it that way you have to systematically misrepresent both what happened to the economy and what people like Tobin were saying at the time. In reality, Tobinesque economics looks very good in the light of events.
In all the strange thing is that I have the very strong impression that even the shrill one himself can't resist Ballance. He often feels the need to concede something to the Chicago economics Department and to admit some of the blame belongs to old Keynesians. From time to time, he notes that both sides didn't have a point (at least not an original point). But Friedman's defeat of the stable expectations unaugmented Phillips curve keeps coming back from the dead (in Krugman's terms Krugman's concession to Chicago is a cockroach -- uh oh now I've gone and typed it).

Saturday, September 10, 2016

Why has Trump Gained in Polling Averages ?

Yesterday, the talk of the day was Democrats panicking (as always) because support for Trump is creeping up in polling averages (as are estimated probabilities of President Trump). Today's talk is totally deplorable and I will ignore it.

I think believe the shift (from mid August to early September 2016) is mostly due to which polls have dropped (there are clear house effects) and sampling error.

The reason is that it doesn't appear at all in the USA LA-Times panel poll. http://www.latimes.com/politics/

They poll the same people again and again. They weighted so that self reported 2012 voting corresponds to actual 2012 votes. This means that they underweight people who claim they voted for Obama (systematically more claim to have voted for the winner than actually voted for the winner). This makes the level of the poll uninteresting.

But changes show how actual people have changed their minds, and are interesting

Look at Trump gaining uh ooops What ! In this panel poll of the same set of people, Clinton has gained from mid August to early September. The sample isn't huge, but the change isn't due to any change in the sample. People trying to explain what has happened have to deal with these data.

Friday, September 09, 2016

I wish I'd written that

This is my second Chait link of the day.

Conservatives have a deep and completely principled belief, stemming entirely from abstract constitutional premises and not at all from partisanship or substantive opposition to his policies, that Barack Obama has governed like a dictator. Everything he does is vaguely unconstitutional, from the laws he passes through both chambers of Congress to his enforcement of laws that existed beforehand. Their cause is liberty itself and the preservation of the checks and balances crafted by our hallowed founders.

Also, many of them like Vladimir Putin.

Saturday, September 03, 2016

A Query regarding the State of Political Historiography of the 21st Century USA

On the Washington Post Opinion pages Norman Ornstein just wrote

We know that Republican congressional leaders, on the night of President Obama’s inauguration in January 2009, chose a deliberate policy of uniting in opposition to all of his initiatives, even before he served a full day in office.

Is this a generally accepted fact ? I mean is the claim that this didn't happen respectable or is it common but also generally considered absurd (such as e.g. the claim that Jefferson was a dominionist) ?

On the one hand, Ornstein is an AEI fellow who self identified as a Republican for decades. On the other hand, he is half of Mann & Ornstein.

I hope that the day has or will come when the claim, supported by overwhelming evidence, is generally accepted as a fact by all those who have any times for facts (that's not enough we need a majority). But I really don't know if it has yet.

Friday, September 02, 2016

Why are there so many qestions about The Clinton Foundation ?

I think this shows how no good deed goes unpunished. The questions focus on donors to the Clinton Foundation receiving favors from H Clinton in her capacity as secretary of state. No 0 (zero) examples of anything suspicious has been found, but the stories keep coming. Back during the primaries, Sanders asked Clinton about speaking fees. This is a much more plausible line of attack as that money went into the Clinton's bank account. Step one in the Clinton Foundation pseudo scandals is to argue that giving to the foundation is just like giving to the Clintons because they used it as a slush fund (or more exactly as a way to pay their aids when not in office).

This first step of the argument for impropriety is obviously demonstrably absolute nonsense. The reason is that there are independent groups which attempt to detect charities which aren't really charities. As far as I know, they all give the Clinton foundation their highest rating.

Charity Watch rates it A and notes that (I think for different years) 88% & 89% of the money goes to the stated purposes. That's not 100%, but they also note that the average for good charities is more like 75%. Daniel Borochoff (president of Charity Watch) described the Clinton foundation as "outstanding"

Charity Navigator gives The Clinton Foundation four stars (the maximum rating). In contrast it give the American Red Cross three stars. Guide Star rates it Platinum (don't search for Platinum :-( the rating is a *.jpg in the upper right corner of the page).

This is not a slush fund.

I have a theory for why I read so many articles questioning the integrity of the operations of the Clinton Foundation. I think the Clintons are being punished for insisting (in this case) on transparency. Although not required to do so, the Clinton Foundation publishes a searchable list of donors. This makes it relatively easy to check for donors who met Clinton when she was secretary of state (not easy as State resisted releasing her calanders but easier than looking for meetings with people who paid her to speak).

So journalists (who worked very hard on the stories) looked for corruption where it was easier to check, found none, and wrote lede paragraphs suggesting they have maybe found the shadow of a possible appearance of conflict of interest (then someone wrote a headline damaging to the Clintons and also AP wrote and refused to correct an absolutely false libelous tweet).

Now political journalists talk and write about how Clinton is hurt by "questions", that is the media report on the choices of the media and their effects. Of course the misleading headlines and ledes hurt Clinton. Most people don't have time to read the stories and notice that they provide strong evidence that the Clintons (and Abedine) have been very very careful to avoid anything which might even be alleged to appear to be ethically questionable.

Now I'd guess that any of the few readers of this blog know all this, so why am I typing it ? Yes you guessed, I've had twitter debates (which I can't find in my time line because at least twitter doesn't make that easy)

I recall someone who was outraged at the observation that Elisabeth Dole was President of the American Red Cross & Bob Dole was ran President. That person said that the Red Cross helps people after disasters and so is nothing like the Clinton Foundation. That's why I (and @ericboehlert) chose to compare their rating. 4>3. In fact the American Red Cross has had it's share of real scandals.

Someone else said the Clinton Foundation spent it's money on, in effect, luxurious consumption (junkets fancy meals at meetings) & noted the true but irrelevant fact that it gives only 10% of its revenues to other charities. I said they spend most of their money on direct assistance to poor people. My twitter correspondent said I couldn't know that as their accounts are secret. I admitted (only to myself) that it was something I vaguely remember reading on the web somewhere at a place I trusted. Obviously, as noted by Charity Watch for example, the accounts aren't secret and most of the money is spent on direct aid to poor people.

Anyway, these cases show it isn't just journalists who assume that the Clinton's just must be corrupt.

Thursday, September 01, 2016

Trump 8/31/2016 ???

What happened yesterday ? Trump went to Mexico where he mostly stuck to his script (except for one lie) then he went to Phoenix and went wild. The New York Times made various efforts of extremely variable quality to describe the events.

The front page write up of the days Trump events by Patrick Healy was factually innaccurate. It described a speech different from the one Trump gave. It was massively edited to reconcile it with reality.

https://twitter.com/MattGertz/status/771201493730889728

I will get expelled from the progblog community now by praising this article by Alexander Burns and Maggie Haberman.

Maybe because of the edits of the Healy article, I suspect there was a draft written pre-Phoenix speech and that paragraphs 4, 7 ,8,9, 10 and 11 were added after the speech.

In the space of a few hours on Wednesday, Mr. Trump veered from avoiding a clash with Mr. Peña Nieto over his proposal for a border wall to goading an Arizona crowd into chants about constructing the barrier.

[snip] On Wednesday night, as the crowd in Phoenix grew more energized, he could not resist returning to his fiery form, even as he outlined his new approach to immigration control.

He repeated at high volume his harsh denunciations of illegal immigration as a threat to public safety. Mrs. Clinton’s plan, he said, was “open borders and let everybody come in and destroy our country.”

At one point, referring to Mrs. Clinton, he told the crowd that perhaps he should “deport her.”

And Mr. Trump, as is his pattern, created confusion for even his closest supporters as he appeared to embrace opposite sides of important issues as the day unfolded.

He told reporters in Mexico that he and Mr. Peña Nieto had not discussed forcing that country to pay for a border wall, suggesting the delicate question would be explored in the future by the two leaders. But hours later, Mr. Trump thundered in Phoenix that his mind was made up: Mexico would foot the bill.

My guess is that they wrote a story (based on inside dope from the Trump campaign) about how Trump was pivoting. Then they watched the speech and revised the article before posting it. My guess of what happened to Trump is basically the same as Charles Blow's

I think that, for all his bluster, Trump is both a bully and a coward. So, I think, he tells each audience what he thinks it wants to hear. In Mexico, he tried to appeal to Mexicans. In Phoenix "as the crowd in Phoenix grew more energized, he could not resist returning to his fiery form".

update: I think the "Make Mexico Great Again Also" hats are actually a fairly strong piece of evidence that Trump was supposed to give a speech very different from the one he gave. Those props are suited for a speech which is totally different in tone from the speeches Trump gave during the primaries -- with a deportation and wall based policy softened by praise of Mexicans. The actual speech differed from the older ones in tone, but in the opposite direction with more screaming.

One other thing, the failure to resist fiery rhetoric might have been caused by the need to get huge cheers from the crowd (the Blow hypothesis) but it might also have been an expression of rage over being caught lying over whether he and Pena Nieto had discussed who would pay for the wall

update: In this important article (which shows that the Trump campaign leaks like a sieve) MONICA LANGLEY reports that Trump did, indeed, change the speech after being caught lying. However, the Trump campaign's claim is that he only added a sentence about Mexico paying for the wall & they were planning a hard line speech. Reading the article, I almost have the impression that the person who said Trump changed his speech over a tweet doesn't understand how damaging that is to him & thinks the story is a good one for Trump.

end update:

(and over jokes about Trump losing his balls and caving and such).

end update

From this guess, I have a guess as to what went wrong with the Healy article. I guess he wrote it based on the same inside dope and felt forced (maybe was forced by a deadline) to put it up on the web almost the instant Trump finished his speech. Therefore it described the speech Trump's aids told him to give, not the one he "could not resist" giving.

Unfortunately for Healy (and anyone else who might have imposed the deadline) this is not an excuse. The article presented itself as a description of the speech as given and not as a description of what some insider had secretly said the speech was going to be. I think the New York Times failed yesterday exactly because it is the most prestigious newspaper and therefore got an exclusive advance description of the speech under double super secret background such that Healy was not allowed to even admit that he had a source.

Now reporting what a source said without mentioning that one has a source is, to my mind, dishonest and journalistic malpractice. My guess is that it is quite common and we only learned about it because Trump can't stick to a script. So some good has come of him after all.

I stated my burned by a source guess *before* I learned of the massive edits. https://twitter.com/robertwaldmann/status/771196884748636160

update 2 In a tweet storm Jeet Heer presents the same hypothesis I presented here, but with a lot more evidence. Then in tweet 12 he says he (and I) were wrong ??? I don't know how to storify. It ends here https://twitter.com/HeerJeet/status/771219481628585985

Wednesday, August 31, 2016

Sims, Krugman,and DeLong

Paul Krugman is dismayed by something Christopher Sims said a Jackson Hole

Sims said

Fiscal expansion can replace ineffective monetary policy at the zero lower bound, but fiscal expansion is not the same thing as deficit finance. It requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as fi- nanced by future inflation, not future taxes or spending cuts.

I promise that my immediate thought when I read the Sims quote somewhere else yesterday is that another effective fiscal stimulus would be increased government consumption whether financed by future spending cuts, future taxes or even current taxes with no increase in the deficit ever.

I sense the long term damage done by Milton Friedman's rhetorical brilliance. Friedman somehow managed to redefine Keynesian stimulus as temporary tax cuts and not as temporary deficit financed spending increases (which is you know (at least I hope you know) the policy that Keynes actually advocated).

Sims makes it fairly clear that he is not considering spending increases. I don't know why. The statement "fiscal expansion ... requires deficits" is false for all existing macroeconomic models and makes no sense *unless* fiscal is interpreted to mean "based on taxes alone for given government spending".

DeLong is in the title for two reasons. First he remarked somewhere on the amazing success of Friedman's rhetorical trick (one among his many completely brilliant, unscrupulous and successful triks: others are saying that keeping the growth of the money supply constant via constant monetoriing and intervention is laissez faire, saying the Fed caused the great depression because he thinks the Fed could have countered the private sector crisis (as it tried to do in 2008 so the current evidence is that the Fed could have made the great depression a great recession), and pretending that prominent Keynesians claimed that the expectations unaugmented Phillips curve was stable). Second, he regularly has the effect on me that Sims had on Krugman when he writes things to the effect that *THE* solution to inadequate aggregate demand in a liquidity trap is to increase the supply of safe assets. I try to always comment that balanced budget fiscal expansion would also work without any increase in the supply of any assets. He always agrees until the next time he writes that.

There is something strange going on there in Berkeley & Jackson Hole . I am at least as confused as Paul Krugman (as is usual).

update: There is a third reason to put Brad in the title. He wrote this post before I did, then added an interesting post with a model and all that. He usefully adds that Sims might also have considered a model in which there is government spending but GDP is defined as GDP-G, that is there is no fiscal stimulus do to increased spending if the multiplier is 1. It is indeed true that a lot of Ricardianoid arguments are based on the equation 1=0 in which "multiplier effects" mean a multiplier greater than 0 if one is discussing optimal policy and a multiplier greater than one if one is discussing the evidence. I hit post and *then* surfed over to Brad's blog (usually a mistake).

Tuesday, August 30, 2016

Not My Usual Comment on Simon Wren-Lewis

I think Simon Wren-Lewis's post "Heterodox economics, mainstream macro and the financial crisis" is excellent even by his high standards. I advise you to just read it, but if you insist on staying here I attempt a brief summary and some comments.

1) Heterodox economists make two valid points about what the financial crisis showed us about inadequacies of 2008 vintage mainstream macro models.

2) The models did not include a financial sector. Banking and bank regulation was considered a sub field separate from macroeconomics. Thus macroeconomists such as Wren-Lewis (and I) didn't even know about the alarming increase in bank leverage. Since 2008 " there has been an explosion of DSGE and other microfounded analysis putting a financial sector into macromodels."

3) Heterodox economists also note that mainstream macro models failed to consider household finance and household balance sheets. Unfortunately while "heterodox economists also have a point, ... they tend not to put it very well and, perhaps as a result, it has not yet impacted on the mainstream " (here I have to note he means on mainstream theory as there is a very active largely empirical research program)

4) I think this [] was/is ignored because incorporating this analysis into microfounded models raises serious problems associated with heterogeneity across age and income. ... Playing around with habits or some ‘rule of thumb consumers’ is much easier. Blanchard has recently made a similar point in his critique of DSGE models.

5) This reveals a key problem with mainstream macro methodology which "allows you to be very selective about what empirical features you do or do not explain.

6) "As Jo Michell writes “The problem with heterdox economics is that it is self-definition in terms of the other”."

7) Macroeconomists might not have ignored bank and household balance sheets if they hadn't insisted on micro founding everything.

My effort to summarize shows why it is better to just click the link. The summary is almost as long as the post and consists mainly of quotes.

I do have some thoughts.

I think that point 5) is fundamental. Macroeconmists have a problem that there are few aggregate data points and no experimental data at all, but the standard approach makes this problem much worse by ignoring most of the available data. In particular, I think this applies to banking, prudential regulation and financial crises too. The 2008 financial crisis wasn't the first in human history, but it had been decided for some reason that macroeconomists could and should ignore data from long ago (the 30s) and far away (East Asia, Russia, Brazil and Argentina). One of Krugman's favorite boasts is that international macroeconomists weren't as blind as other macroeconomists, because they couldn't ignore those crises. Most macroeconomics was cut off not only from banking and finance but also from international -- that is from data from countries (including Korea and Japan) outside of Western Europe and North America. I have to add that, even aside from financial crises, data on unemployment rates collected east of the English Channel were neglected.

Personally, I think it is better to banish intertemporal optimization from models of aggregate consumption. Incorporation of realistic consideration of liquidity constraints and precautionary savings is, as Wren-Lewis notes, very difficult. I agree it is very costly to avoid such difficulties by assuming a representative consumer. but I think that there is no evidence that consideration of optimal intertemporal consumption choices adds anything useful to macroeconomic models. That is a very strong statement and I mean it literally. I fear that assuming consumers solve some sort of highly constrained optimization problem might be required to get papers published. That is I agree with Wren-Lewis that macro should cease to "shun what it calls policy models (models that use aggregate relationships justified by an eclectic mix of theory and data)", and, in particular, I think such models should include a simple empirical reduced form consumption equation. I am quite sure that, even if macroeconomists cease to shun policy models, it will shun the models I have in mind. Consumers' intertemporal optimization is the main dynamic aspect of DSGE. It won't be abandoned just because it leads to one false prediction after another. I am sure that aggregate relationships justified by data will be accepted, if at all, only in less central equations in the model, and probably only in equations including a variable which was totally ignored in 2008. I agree that, for the forseable future, the best we can hope is that macroeconomists will accept mixed models which consider things totally excluded from existing models but do not micro found that consideration.

Wednesday, August 24, 2016

Vox vs Vox And also "and" vs "AND

I think that Zack Beauchamp and Matt Yglesias are both wonderful bloggers. Also Yglesias sent me to Beuchamp's latest. However, I think they need to have a talk about the exact meaning of "and."

Beuchamp just wrote "James O’Keefe had dressed up as a pimp and taped himself asking employees at the liberal community organizing group ACORN for help setting up a brothel. "

Now that use of "and" is consistent with formal logic. O'Keefe did indeed do both of those things. However, it is not correct given ordinary English usage of "and" as explained by Yglesias

When it was pointed out to Hoyt that this is false, he replied — with emphasis in the original — that

“The story says O’Keefe dressed up as a pimp and trained his hidden camera on Acorn counselors. It does not say he did those two things at the same time.”

Look. The New York Times is a great newspaper. Its writers and editors are familiar with communication in the English language. So is Hoyt. The writers and editors who worked on that story screwed up. It’s bad to screw up. But it’s not the worst thing in the world. To have the error pointed out to you and somehow pretend that the error wasn’t made is, however, unforgivable. Nobody can seriously maintain that the sentence as written doesn’t convey simultaneity.

And also by Neddy Merril

By the way, this is the first time I've read of O'Keefe discussing setting up a brothel.

Following (as usual) DeLong and Separately Krugman on Blanchard

Like Brad DeLong, I found reading Olivier Blanchard's brilliant, brief and concise article on DSGE jarring.

I find his critique of DSGE entirely convincing. However, he doesn't. He wrote " I see the current DSGE models as seriously flawed, but they are eminently improvable and central to the future of macroeconomics. "

He notes the flaws that (in my words)

1) the core assumptions are absurd and have yielded false implications (the models can be fiddled to eliminate those implications as one would expect if the approach were "a dangerous dead end").

2) After the fiddling, the models are too richly parametrised to estimate so the implications are the result of conventions and not of any interaction with reality.

3) the models have normative implications which are clearly nonsense.

and 4) only the economists who write the literature can understand it.

Sure sounds like a "dangerous dead end" to me.

Blanchard responds to the straw person who says DSGE is a dead end as follows (I mean that literally -- the is all of the defense DSGE models in the article)

The pursuit of a widely accepted analytical macroeconomic core, in which to locate discussions and extensions, may be a pipe dream, but it is a dream surely worth pursuing. If so, the three main modeling choices of DSGEs are the right ones. Starting from explicit microfoundations is clearly essential; where else to start from? Ad hoc equations will not do for that purpose. Thinking in terms of a set of distortions to a competitive economy implies a long slog from the competitive model to a reasonably plausible description of the economy. But, again, it is hard to see where else to start from. Turning to estimation, calibrating/estimating the model as a system rather than equation by equation also seems essential. Experience from past equation-by-equation models has shown that their dynamic properties can be very much at odds with the actual dynamics of the system.

So he argues that DSGE is a good approach, because he can't think of another one. So, just for example, it is necessary to start with plainly false assumptions about individual behavior, because one obviously can't start with observations of individual behavior and estimate behavioral patterns (note there are more than 240 data points). Also one must start with a competitive model, because OJ Blanchard said you must.

He argues that one must start from DSGE because he can't think of an alternative *and* dismisses other approaches without considering them. I think that Blanchard genuinely doesn't think there is any macro but DSGE macro. I note in passing that he has friendly relations with Paul Krugman, Larry Summers and Brad DeLong.

OK his conclusion (includes) "DSGE models can fulfill an important need in macroeconomics, that of offering a core structure around which to build and organize discussions. " Krugman notes that this sounds just like the defense of Marxist theory he used to hear. I ask why the core structure couldn't be national income and product account identities and the definitions of wage inflation, price inflation and interest rates ? update: Pulled back from comments. I got a bit uh enthusiastic down in the comment thread and decided to pull things up here.

First the comments

Anonymous [I] said...

Hi Robert, I'm an interested graduate student (who used a DSGE model in his dissertation). Would you please elaborate on your suggestion about a core structure using national income and product account identities etc.? I'm interested in what we would use instead of the elaborations on the 3-equation NK DSGE model. Cheers!
Anonymous [II] said...

Robert, this is perhaps a criticism you have heard too often, but if there is a better alternative out there why isn't in the journals and at conferences? There is currently a consensus why not convince the other side that there is a better model out there? To me, and I do not do macro, DSGE seems like a sensible and reasonable approach. I have read about alternatives but their proponents seem rather ideological and rather unprofessional in their behavior. Their arguments seem to boil down to ad hominems and the models are incidental to it.

I replied

Anonymous I: The alternative framework I had in mind is the Paleo Keynesian framework with an IS curve, a Taylor rule and some sort of Phillips curve. Oh my, those are the same trhee equations. The IS curve and the Phillips curve are old equations from the 30s and 60s respectively. The Taylor rule is the odd equation out in the 3 eqn NK model, because it is not derive from an optimization problem and is rather an estimated empirical relationship.

My point (if any) is that the New Keynesian project is to reconcile the old Keynesian equations with optimization. To the extent that the mathematical and theoretical effort is completely successful and the behavior of the New Keynesian model is identical to that of the old Keynesian model, nothing has bee accomplished (if this were so, Keynesians would have learned nothing and forgotten nothing).

In actual history, the NK models have implications different from the old Keynesian equations. Also consistently without one exception that comes to mind, the new implications are also rejected by the data. Blanchard mentions this when he discusses how the PIH had to be patched to fit the excess sensitivity of consumption to income and the NK Phillips curve had to have an unmotivated assumption about indexation somehow so that lagged inflation matters separately from the conditional mean of future inflation.

He has also discussed how the new improved micro founded Phillips curve doesn't work as well as the old primitive one https://piie.com/system/files/documents/pb16-1.pdf

and in the post under discussion he explains the approach of figuring out what a market information of policy using an old ad hoc model, then noting that the same result still holds in a DSGE model which is designed to correspond to the old ad hoc model, then explaining what is going on so people can understand it by presenting the old ad hoc model. This is what he does. However, he also asserted that the DSGE step is useful in some way. He gave no hint as to what way exactly.

I stress that the DSGE step is *not* harmless. It can be very difficult and time consuming to translate to DSGE (and worse to translate from theoretical DSGE to code a computer can run). So it is standard to leave out little details such as the housing sector when discussing the great recession. To get to DSGE sacrifices are made. They include any consideration of the fact that not all investment is business fixed investment -- the models don't include houses and don't include inventories. Banks were added in the past 8 years. The current models have no place for oil shocks (which are considered to be sort of like technology shocks which is fine except for the fact that standard theory says their effects are different).

Now Blanchard could say, if you want to get a job or, having a job, want to get tenure, you have to do DSGE too even if you also present an ad hoc model as a heuristic explanation of the behavior of the DSGE model. In any case I do. Don't ruing your career by refusing to dress up your actual thought in DSGE disguise.

There is another approach. It is what Blanchard himself does. Also Krugman, Summers, and Stiglitz. These are not marginal figures.

Anonymous II I refer you to the linked Blanchard post. He explains that the other way, the old way, is presented at conferences by Blanchard who is allowed to do so because he is the discussant. It isn't hidden at all. It's the way New Keynesian macroeconomists talk. It isn't the way they write (except on blogs).

Another approach is available. It has been available and used for decades. Somewhat more than half of macroeconomists are saltwater economists who sure seem to think the old way (as old Keynesians) then disguise their thoughts with DSGE models. A now somewhat smaller number are fresh water RBC economists who assert that monetary policy doesn't affect GDP, that recessions are efficient, and that nothing much unusual was going on in January 2009 (I could look up the exact Prescott quotes -- he said all those things -- but I won't bother). In contrast, I can't think of a single economist who is demonstrably a sincere New Keynesian economist in that he or she accepts the new Keynesian model but demonstrably doesn't secretly also accept the old Keynesian models.