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September 4, 2009

Economist's View - 4 new articles

Beauty and the Macroeconomic Beast

Discover Magazine's blog Cosmic Variance responds to Paul Krugman's essay How Did Economists Get it So Wrong?:

...One part of the essay worth commenting on, or at least musing about, is the punchline. Krugman thinks that a major factor leading to the failures of economics to understand the mess we're currently in was the temptation to think that beautiful models must be right. ...
Without knowing much of anything about the relevant issues, I nevertheless suspect that this moral might be a bit too pat. Sure, people can fall in love with beautiful theories, to the extent that they overestimate their relationship to reality. But it seems likely to me that the correct way of understanding all this, once it's properly understood, will look pretty beautiful as well. General relativity is widely held up as an example of a beautiful theory — and it is, when understood in its own language. But if you put the prediction of GR in the Solar System into the language of pre-existing Newtonian physics (which you could certainly do), it would look ugly and ad hoc. Likewise, Newton's theory itself is quite elegant, when phrased in the language of potentials on a fixed spacetime background; but if you express the theory in terms of differential geometry (which you could certainly do), it looks like a mess. Sometimes the beauty/ugly distinction between theoretical conceptions is more a matter of how well we understand them, and less about their intrinsic qualities.
So my counter-hypothesis would be that it wasn't beauty that was the problem, it was complacency. If you have a model that is beautiful and works well enough, you're tempted to take pride in it rather than pushing it to extremes and looking for problems. I suspect that there is a very beautiful theory of economics out there waiting to be developed, one that understands perfectly well that individuals aren't rational and markets aren't perfect. One that has even more impressive-looking equations than the current favored models! Beauty isn't always a cop-out.

I'm not sure if complacency is the right word, there is great credit in the profession for finding anomalies within the existing framework. The problem is that it's almost always possible to tweak the existing model in some way that rationalizes any new regularity discovered in the data that is at odds with existing theory. And without the ability to take the models to the lab and subject them to experiments, there's no way to immediately test the augmented theoretical structures (and as I've noted before, of course the models will pass the test with existing data, they were built to rationalize all the important known regularities in the data). It's only when a lot of time has passed and we have enough data to sort things out, or when we have large shocks of the type we've recently had, that we get the kind of information that we need to subject models to rigorous tests.

In addition, we didn't have "a model," we had competing models all of which claimed to be able to explain the known regularities in the data, and while I think the evidence does point in one direction, the existing pre-crash evidence was not conclusive enough to seal the case for one model over another, or to point in a new direction altogether. As I said once before, "I think what has happened will have a much bigger impact on the profession and the models it uses to describe the world than most economists currently realize," and hopefully this shakeup will move macroeconomic theory in a positive direction. With any luck, "the correct way of understanding all this, once it's properly understood, will look pretty beautiful."


The (Sluggish) Employment Report

I've been trying to figure out what to say about the employment news today that the economy lost "only" 216,000 jobs last month and that the unemployment rate ticked upward to 9.7%. While I don't have anything to add that hasn't been said already by someone, somewhere - see below - the main thing I want to do is to reinforce the message that employment is likely to lag output once the economy begins recovering, so we must continue programs that support the unemployed even after it's clear that output has turned the corner. If anything, we need to reinforce those programs, not reduce them. (Note: Contrary to the impression one might get from reading about recent economic developments, according to the data we have in hand the recovery has not started yet, i.e. we have not yet passed the trough of the output cycle let alone the employment cycle. What is happening is that the fall appears to be slowing substantially and we are poised to turn the corner, but that has not happened yet. And while expectations are high, there's no guarantee it will happen anytime soon, particularly if you strip out the effects of the stimulus package.)

Here's more: Paul Krugman, Spencer, Calculated Risk, Calculated Risk II, Brad DeLong, Real Time Economics, Andrew Leonard, Credit Writedowns, The Curious Capitalist, The Big Picture, Robert Reich.


Study Hard and Stay in School = Socialism?

Apparently, people who are upset that prayer has been removed from schools are worried the president's "study hard and stay in school" message is an attempt to indoctrinate students.

They are worried the speech will "spread President Obama's socialist ideology."

Of course, this is fine:

While Republicans are busy gnashing their teeth over President Obama's imminent indoctrination of the nation's schoolchildren, there's an education story bubbling up in Texas that could have considerably more far-reaching consequences.

The GOP-controlled State Board of Education is working on a new set of statewide textbook standards for, among other subjects, U.S. History Studies Since Reconstruction. ...

Approved textbooks, the standards say, must teach the Texan student to "identify significant conservative advocacy organizations and individuals, such as Newt Gingrich, Phyllis Schlafly, and the Moral Majority." No analogous liberal figures or groups are required...

Paul Krugman has it right, these are not people that will be persuaded by logical arguments:

The point is that whatever is driving all this doesn't have anything to do with the realities of what I, or, much more important of course, Obama say or do. Obama could have come in proposing to pursue an agenda identical to Bush, and he would still be a socialist/Commie/fascist, with those of us who don't see it that way lying Nazis ourselves.

Something is going very wrong in the heads of a substantial number of Americans.

There is no middle ground, no ideological center, no place to meet these people halfway. Any attempt to appease these is a waste of valuable time, gives the media a controversy to cover, and encourages more of the same.

But how do you defend against this nonsense when the media's coverage gives it the status of a legitimate claim? If the administration stays silent, the media will build the controversy up in an attempt to force a response - they do very well ratings-wise when there are controversies - and that amplifies the false, negative message. If the administration engages the false charges and responds, that too simply stokes the fires and encourages more. So what's the answer?

Somehow, the focus needs to be on the messengers rather than the message, and Barney Frank's "On what planet do you spend most of your time" is a start in this direction.

Update: Joe Klein:

It Gets Worse, by Joe Klein: I was at a Blanche Lincoln town hall meeting in Russellville, Arkansas, yesterday--and the number of people who believe that the President has larded the government with communists (!) was astonishing. One woman said there were four known communists in the government and that she'd researched it on the internet. When I asked her afterwards, she said environmental adviser Van Jones, legal advisor Cass Sunstein (who was last spotted being excoriated by the left for supporting the FISA revisions), someone named Lloyd and she didn't remember the fourth. And wasn't it suspicious that Obama had all these czars working for him--that was a Russkie commie term, wasn't it? When I asked, the woman admitted that, among other things, she occasionally listened to William Bennett's conservative radio show. I pointed out that Bennett had once been the Drug Czar, appointed by Ronald Reagan. Life sure can be complicated sometimes. ...

The amazing thing remains not only the unwillingness of responsible Republicans--a term that is in danger of becoming an oxymoron--to call bull-- on this, but also the willingness of many prominent Republicans to join in the slinging of garbage. Michelle Cottle reports that there are Republican-sanctioned efforts afoot to have parents not send their children to school on September 8 because the President is scheduled to address the nation's school-children that day and they are afraid that he will fill their little heads with socialist propaganda. That is somewhere well beyond disgraceful.

Could I just say that the intensity of this getting pretty scary...and dangerous? We are heading toward a cliff and the usual brakes of civil discourse are not working. Indeed, the Republicans have the pedal to the metal--rushing us toward a tragedy far greater than the California health care forum finger-biting Karen describes below. I'm usually not one to panic or be overly worried about the state of our country--even when we do awful things like invade Iraq and torture people, we usually right our course before long--but I have a sinking feeling about where we're headed now. I hope I'm wrong.

We'll see about the "usually right our course before long" claim for torture and Iraq (and Afghanistan?), and so far our progress doesn't bode well if that's the model for repairing civil discourse and public debate.

Update: Speaking of speaking to schoolchildren:

...On November 14, 1988, Reagan addressed and took questions from students from four area middle schools in the Old Executive Office Building. According to press secretary Marlin Fitzwater, the speech was broadcast live and rebroadcast by C-Span, and Instructional Television Network fed the program "to schools nationwide on three different days." Much of Reagan's speech that day covered the American "vision of self-government" and the need "to keep faith with the unfinished vision of the greatness and wonder of America" but in the middle of the speech, the president went off on a tangent about the importance of low taxes... During the question-and-answer portion of the event, Reagan ...[told] students that lowering taxes increases revenue...


links for 2009-09-04

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