This site has moved to
The posts below are backup copies from the new site.

June 29, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

The State of "Modern" Macro

Posted: 29 Jun 2010 02:07 AM PDT

James Morley discusses modern macroeconomics, and defends the use of large-scale econometric models that have been discarded by adherents to the DSGE framework (this is a bit wonkish, even more so in parts I left out):

The Emperor has no Clothes: The state of "modern" macro, by James Morley: [pdf]: Much has been made of the failure of modern macroeconomics to predict or understand the Great Recession of 2007–2009. In this Macro Focus, our resident time-series econometrician, James Morley*, explains what is currently meant by "modern" macroeconomics, what is behind its failure, and what can be done to rehabilitate its reputation.

"Modern" Macroeconomics

In a recent essay, Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, acknowledged that modern macroeconomics failed during the recent financial crisis.[1] However, his essay misses the point of why it failed.

Like many in academia, Kocherlakota associates modern macroeconomics with a particular school of thought that takes something called the "Lucas critique" as its guiding principle. The Lucas critique refers to an argument put forth by the Nobel Prize-winning macroeconomist Robert Lucas about how the changing expectations of economic agents will confound forecasting and policy analysis based on macroeconomic data.[2] Its main implication is that an economic model with "deep structural parameters" related to preferences and technology for households and firms should provide more reliable forecasts, especially when predicting the effects of policy, than a model based more on the apparent historical correlations between macroeconomic variables. This is sometimes referred to as the "microfoundations" approach to macroeconomics because it presumes that a microeconomic structure — in particular, the metaphor of optimizing economic agents— is more robust to changes in the policy environment than macroeconomic correlations.[3]

Rather than question the relevance of the Lucas critique, Kocherlakota explains the recent failure of modern macroeconomics as due to much narrower issues. In his view, the micro-founded models failed because they lack sufficient complexity, especially in terms of their treatment of financial markets. Also, he points out, rightly, that the models are driven by "patently unrealistic shocks".

However, the rehabilitation of modern macroeconomics requires a different tack than suggested by Kocherlakota. In particular, macroeconomists need to do more than simply add complexity to their models. They should also remember that it is empirically testable whether models that put most of their weight on "deep structural parameters" produce more accurate predictions than models that put more weight on historical correlations. In doing so, it may be found that some macroeconomic relationships are useful even if they cannot be easily motivated as the literal outcome of a micro-founded model. This is not to deny the important role that economic theory plays... However, there is no reason for models to take theory quite so literally as is typically done in modern macroeconomics. Instead, the data should be taken more seriously.

History Repeats Itself

The idea of the Lucas critique arose out of the 1970s. It was a time when large-scale macroeconometric models that relied heavily on historical correlations — especially the traditional Phillips curve tradeoff between unemployment and inflation — failed to predict or even explain "stagflation" in the form of simultaneously high rates of unemployment and inflation. ...

Ironically, this historical episode should remind us somewhat of the present. Now it is "dynamic stochastic general equilibrium" (DSGE) models inspired by the Lucas critique that have failed to predict or even explain the Great Recession of 2007–2009. ...

So can the reputation of modern macroeconomics be rehabilitated...? As discussed below, the problems for DSGE models run deeper than a lack of complexity, while the large-scale macroeconometric models have improved considerably since the 1970s. ...

The Lucas Critique and Large-Scale Macroeconometric Models

Before discussing the details of large-scale macroeconometric models, it is perhaps useful to revisit Kocherlakota's essay on modern macroeconomics. ... An immediately noticeable thing about ... Kocherlakota's discussion of the Lucas critique is that he presents it as some sort of universal truth that estimated demand and supply relationships will be unstable and of limited use for policy analysis. This might be valid if a DSGE model were reality. But DSGE models are models, not reality. Thus, the relevance of the Lucas critique is testable and the tests have not been favorable.[13] Meanwhile, according to a meta-critique of the Lucas critique by Christopher Sims, the lack of practical relevance should come as no surprise.[14] ...

Thus, contrary to the precepts of "modern" macroeconomics, the Lucas critique in no way proves that DSGE models will predict the effects of policy better than large-scale macroeconometric models based more on historical correlations.

However, to avoid getting lost in a long, fruitless debate over the semantics of the Lucas critique, it is perhaps more constructive to simply review the features of modern macro models that Kocherlakota argues have been inspired by it. In his words, modern macro models have the five following properties:

  • They specify budget constraints for households, technologies for firms, and resource constraints for the overall economy.
  • They specify household preferences and firm objectives.
  • They assume forward-looking behavior for firms and households.
  • They include the shocks that firms and households face.
  • They are models of the entire macroeconomy.

The thing that is notable about this list is that these features are far from the sole domain of DSGE models. They are also present in contemporary versions of the large-scale macroeconometric models of the U.S. economy such as those developed by Macroeconomic Advisers (WUMM/MAUS), the Federal Reserve Board (FRB/US), and the Bank of Canada (MUSE). In this sense, it might well be reasonable to acknowledge the impact of some interpretations of the Lucas critique on macroeconomics. However, it is quite a leap to go from this acknowledgment to discarding all but DSGE models, as Kocherlakota would seem to have us do.

So what about contemporary large-scale macroeconometric models? They have a number of advantages over DSGE models. ... [lists and discusses the advantages] ...

Can't We All Just Get Along?

In some sense, the various approaches to macroeconomics are not really as different as they are sometimes made out to be. Although Finn Kydland and Edward Prescott, the Nobel Prize-winning gurus of the RBC camp, once wrote dismissively of a "system-of-equations" approach,[20] the reality is that VARs, large-scale macroeconometric models, and DSGE models all imply systems of equations. Policy forecasts for these different approaches are all based on some assumptions from macroeconomic theory and some consideration of how economic agents perceive a given change in policy — i.e., was it anticipated or unanticipated and will it be permanent or transitory? The main differences across approaches are in terms of how estimation is carried out and how the theoretical assumptions are imposed. The VAR places the least (but not zero) weight on theory, while the DSGE models place the most, even to the extent of imposing strong restrictions on some parameters across equations. It is ultimately an empirical question as to whether the imposition of these cross-equation restrictions really helps with predicting the effects of policy and forecasting more generally.[21] ...

Doing Better in the Future

It is a safe bet that future versions of DSGE models will incorporate more complicated financial sectors and allow for different types of fiscal policies. And guess what? The new-and-improved DSGE models will turn out to imply (ex post) that the Great Recession was actually due to serially-correlated financial intermediation shocks and suboptimal fiscal policy.

Alas, these conclusions will be driven much more by the DSGE framework than by the data. In general, the implications of DSGE models for policy are more assumed than estimated. ... At the very least, the analysis of DSGE models should be geared much more towards convincing a skeptic that results are being driven by endogenous economic mechanisms that are consistent with data, not by assumed exogenous processes...

In general, promoters of DSGE models need to convince non-believers that estimates are robust across policy regimes in the sense of producing better forecasts than other models in changing policy environments. ... The bottom line then is that DSGE models should be subject to the same (market-based) forms of evaluation that large-scale macroeconometric and other forecasting models have been subject to — i.e., they need to forecast well in real time.

Meanwhile, it should be acknowledged that,... in terms of really predicting the crisis, the award obviously goes to theories of endogenous financial crises inspired by the ideas of Hyman Minsky. Formal evaluation of these more narrative approaches is hard... But it would be foolish to dismiss such theories out of hand. In particular, a ludicrous notion sometimes expressed in the ivory towers of academia is that, for Minsky to be taken seriously, his ideas need to be put into a DSGE model.[26] Instead, the converse is true. For DSGE models to be taken more seriously outside of academia, they need to explain and predict as well as Minsky. And serially-correlated preference and technology shocks aren't going to do it!

To be critical of the Lucas critique is not to say it is completely irrelevant. An important goal of macroeconomic models is to have stable parameters given changes in the policy environment. But how we get there is not necessarily through a particular class of micro-founded models. More broadly, if macroeconomists want to regain the trust of the public at large, they need to resist the notion that "macroeconomics" is defined as a method, rather than as a subject matter. Specifically, macroeconomists need to be more pluralistic. They should draw from different types of analysis, be it time-series models, large-scale macroeconometric models, DSGE models, and more narrative approaches. Ultimately, we will know that the reputation of macroeconomics has been rehabilitated when "modern macroeconomics" is no longer used as a label for a particular school of thought, but instead refers to a body of knowledge of substantive and useful insights into how the macroeconomy actually works and what will happen to it in the future.

Tax Receipts and Expenditures at the State and Local Level

Posted: 29 Jun 2010 12:39 AM PDT

This is a graph of state and local expenditures and taxes since the 1970s showing how much both spending and taxes have fallen in the current recession (it's part of a more general discussion of the causes and consequences of the fiscal crisis in state and local government from the SF Fed):


In both the 73-74 and 2001 recessions, revenues fell sharply. Not as much as in the current recession, but the fall in both cases is still steep and pronounced. Yet, unlike in the present recession, expenditures stayed relatively constant during the recession. After the 73-74 and 2001 recessions, when the economy had recovered, expenditures did fall noticeably and the deficit flips from negative to positive, but this is exactly how countercyclical policy should work so that is not a problem, it's a feature. But in the present recession, spending has fallen quite a bit which is not desirable.

The failure to offset the fall in spending at the state and local level with help from the federal government is, I think, a large policy error. Even now, it's not too late to help, but Congress has decided not to provide any additional help to state and local governments. When this is finally over, we need to figure out how to do better the next time a severe recession hits. But, unfortunately, it doesn't seem likely that such a discussion will take place, or even if it does, that there will be any action in response.

Tyler Cowen suggests:

The real fiscal problem is spending contraction at the state level (expanding and contracting spending are not symmetric in their effects; contracting spend hurts more than expanding spending helps). The correct fiscal policy move would have been, and still is, to take Medicaid away from the states and make it fully federal. This would give state budgets a huge break, and help employment, yet as a one-time change it reduces the moral hazard problems from ongoing outright grants.

The moral hazard issue is the difficult hurdle. You don't want states to simply substitute federal for state spending, or intentionally make their budgets look worse in order to get more federal help. Many policies that can be set in advance to help state and local governments give them the incentive to do one or the other. However, mechanisms to offset the bad incentives exist, and that's why it's important to discuss how we can improve the next time this happens. We can design policies that minimize these problems, but that won't happen if we don't take the time and effort to design and implement effective strategies to overcome the unfortunate tendency of state and local governments to make recessions worse.

links for 2010-06-28

Posted: 28 Jun 2010 11:05 PM PDT

Don't Let Fed Economists Tell You Otherwise...

Posted: 28 Jun 2010 11:07 AM PDT

This essay by Kartik Athreya criticizing the economics blogosphere is making the rounds, and I am late commenting on it (links to other comments at the end), so here are a few quick responses.

Let me start by noting that the essay is not even digitized in a convenient form -- it is a pdf -- and to me that says a lot about the writers knowledge of how the digital world works. Why not make it available in a convenient form (unless the goal is to overcome the fact that federal reserve work cannot be copyrighted by making it difficult to reproduce)?  (This is an irritation more generally, and the Kansas City Fed is the worst. Even the president's speeches are offered only as pdfs -- and they are locked to prevent copying -- rather than in a more convenient digital form. Are they trying to discourage this information from more general circulation? If so, why?) [Update: I added a few follow up comments on pdfs at the end of the post.]

OK, on to the essay:

Economics is Hard. Don't Let Bloggers Tell You Otherwise, by Kartik Athreya, Federal Reserve Bank of Richmond: The following is a letter to open-minded consumers of the economics blogosphere. In the wake of the recent financial crisis, bloggers seem unable to resist commentating routinely about economic events. It may always have been thus, but in recent times, the manifold dimensions of the financial crisis and associated recession have given fillip to something bigger than a cottage industry. Examples include Matt Yglesias, John Stossel, Robert Samuelson, and Robert Reich. In what follows I will argue that it is exceedingly unlikely that these authors have anything interesting to say about economic policy. This sounds mean-spirited, but it's not meant to be, and I'll explain why.

Hmm. I wonder what he thinks about the fact that Greg Mankiw -- someone he cites approvingly later as an example to emulate -- sends people to read Robert Samuelson and John Stossel regularly? (See here for just one example. The post has two links, one to Samuelson and one to Stossel.)

Before I continue, here's who I am: The relevant fact is that I work as a rank-and-file PhD economist operating within a central banking system. I have contributed no earth-shaking ideas to Economics and work fundamentally as a worker bee chipping away with known tools at portions of larger problems. It is precisely from this low-level vantage point that I am totally puzzled by the willingness of many who fearlessly and breathlessly opine about economics, especially macro- economic policy. Deficits, short-term interest rate targets, sovereign debt are all chewed over with a level of self-assuredness that only someone who doesn't know more could. The list of those exhibiting this zest also includes, in addition to those mentioned above, some who might know better. They are the patron saints of the "Macroeconomic Policy is Easy: Only Idiots Don't Think So" movement: Paul Krugman and Brad Delong. Either of these men will assure their readers that it's all really very simple (and may even be found in Keynes' writings). Lastly, before you dismiss me as a right- or left-winger, I am not. I'm simply less comfortable with ex cathedra pronouncements and speculations than the people I have named.[1]

Is the author saying that he is unable to read the academic literature, weigh the evidence, and then come to a conclusion? And if he can do this, is he saying that someone in possession of, say, a Nobel prize shouldn't then boil this down to a comprehensible form that can be shared with the public? Paul Krugman does take one-side positions based upon his reading of the academic literature, some of which he helped to create. But he has qualified things on his blog. He has explained when, for example, monetary and fiscal policy should have large or small effects, he's linked to the appropriate research, and so on. Somebody has to explain these things to the public, and do so in a way that highlights the essential elements while leaving everything else aside, and Paul Krugman is a master at this. Krugman and others, myself included, do pass along their digested views of the academic literature in a simple, readable form. We also point to non-professionals when we think they have something worthwhile to say. What's wrong with that? (To me, this whole essay reads like it was driven by a touch of Krugman-DeLong Derangement Syndrome).

The main problem is that economics, and certainly macroeconomics is not, by any reasonable measure, simple. Macroeconomics is most narrowly concerned with the tracing of individual actions into aggregate outcomes, and most fatally attractive to bloggers: vice versa. What makes macroeconomics very complicated is that economic actors... act. Firms think about how to make profits, households think about how to budget their resources. And both sets of actors forecast. They must. One has to take a view on one's future income, health, and familial obligations to think about what to set aside for retirement, how much life insurance to buy, and so on. Of course, all parties may be terrible at forecasting, that's certainly a possibility, but that's not the issue. Even if one wanted to think of all economic actors as foolish and purposeless organisms making utterly random choices, one must accept that their decisions will still affect, and be affected by what others do. The finitude of resources ensures this "accounting" reality.
Beyond this, some may recall that Economics 101 is usually insistent on reminding students of the Fallacy of Composition: what is true for some may not be true for all. Much of macroeconomics is dedicated precisely making sure that when we talk about the "economy", we don't fall afoul of this fallacy. It is therefore not surprising that the majority of the training of new PhDs in their macroeconomic coursework is giving them a way to come to grips with the feedback effects that are likely present. Some of this is nothing more than (valuable) exercises in book-keeping. So much of my 1st year homework involved writing down tedious definitions of internally consistent outcomes. Not analyzing them, just defining them, and so trying to convincing my instructors that I wasn't inadvertently describing something nonsensical, where resources were being allowed to "fly in (or out) through a window." In discussions of fiscal policy, such as those regarding deficits, for example, the discipline imposed by an insistence on doing the accounting correctly helps focus economists on the real issue (total spending, and the expected future path of spending), and also learn what might be peripheral (the deficit at any given moment).

Uhm, Krugman and DeLong weren't the ones doing the accounting incorrectly by mixing up definitions, identities, and equilibrium equations, that was the economists the author nods to approvingly later on. Is there some example where Krugman and DeLong were not internally consistent in the things they have written on this topic? Or is this just an objection to the way things are said as opposed to the content? (I realize this is directed in part at non-economist bloggers, but I will focus on the shots taken at academic economists.)

The punchline to all this is that when a professional research economist thinks or talks about social insurance, unemployment, taxes, budget deficits, or sovereign debt, among other things, they almost always have a very precisely articulated model that has been vetted repeatedly for internal coherence. Critically, it is one whose constituent assumptions and parts are visible to all present, and can be fought over. And what I certainly know is that to even begin to talk about the effects of unemployment, debt, deficits, or taxes, one has to think very hard about many, many things. Examples of this approach done right in the context of some of the topics mentioned above are recent papers by Robert Lucas of the University of Chicago, Jonathan Heathcote of the Minneapolis Fed, or Dirk Kreuger and his co-authors. Comparing, even momentarily, such careful work with its explicit, careful reasoning, its ever-mindful approach to the accounting for feedback effects, and its transparent reproducibility, with the sophomoric musings of auto-didact or non-didact bloggers or writers is instructive. For those who want to really know what the best that economics has to offer is, you must look here. And this will be hard.

And, because it's hard, wouldn't it be nice to have the best economists in the business interpreting this work and boiling it down to its essential elements for the public? And when the non-economist bloggers trust these individuals based upon a long history of getting it right and echo what they are saying, why is that a problem?

But why should it be otherwise? Why should anyone accept uncritically that Economics, or any field of human endeavor, for that matter, should be easy either to process or contribute to? To some extent, people don't. Would anyone tolerate the equivalent level of public discussion on cancer research? Most of us readily accept the proposition that Oncology requires training, and rarely give time over to non-medical-professionals' musings.

I'm sorry, but that's just wrong. Many, many people are susceptible to quack medicine, promises of miracle cures and the like (especially with cancer). 

Do we expect advances in cell-biology to be immediately accessible to anyone with even a college degree? Science journalists routinely cite specific studies that have appeared in specific journals. They generally do not engage in passing their own untrained speculations off as insights.

Yeah, you hardly ever see a Charles Krauthammer or a George Will (the equivalents of Robert Samuelson) saying uninformed things about global warming. Give me a break. Also, I do see non-economist bloggers citing academic papers regularly (e.g., from last night) so I don't think this is a valid complaint.

But economic blogging and much journalism largely does not operate this way. Naifs write books, and sell many of them too. People as varied as Matt Ridley and William Greider make book-length statements about economics. I've never done that, and this is my job. This is, to say the very least, bizarre. The response of the untrained to the crisis has been even more startling. Many books have already been written about the nature of financial markets by non-economist writers, and I listen to Elizabeth Warren on the radio fearlessly speculating about the nature of credit market dysfunction, and so on.

Why is it bizarre that he has never written a book? Lots of professional economists have written books for the general public (e.g. Krugman for one). If he hasn't even though it's his job, that's something he should fix (I actually think his job is something else, but I'll take his word for it). And the shot at Elizabeth Warren is ill-informed (and makes me wonder why I should listen to him about anything, credentials or not). Yeah, we wouldn't want a lawyer from Harvard who specializes in contract law, bankruptcy, and commercial law to talk about problems in credit markets. Better to have economists discussing the legal issues? And we certainly don't want people like Warren who hold important government positions to explain to the public the reasoning behind the things they are doing?

I find the comparison between the response of writers to the financial crisis and the silence that followed two cataclysmic events in another sphere of human life telling. These are, of course, the Tsunami in East Asia, and the recent earthquake in Haiti. These two events collectively took the lives of approximately half a million people, and disrupted many more. Each of these events alone, and certainly when combined, had larger consequences for human well-being than a crisis whose most palpable effect has been to lower employment to a rate that, at worst, still employs fully 85% of the total workforce of most developed nations. However, neither of these events was met by (i) a widespread condemnation of seismology, the organized scientific endeavor most closely "responsible" for our understanding of these events or (ii) a flurry of auto-didacts rushing to offer their own diagnosis for what had happened, and advice for how to avoid the next big one.

Yep, not a single religious nut blamed it on god's anger at one group or another. All those stories about how someone's cat or their uncle's arthritic knee predicted the earthquake? I must have imagined those. As for blaming seismologists, unlike economists, they have never claimed to be able to forecast these events. Seismologists weren't claiming that they had solved the earthquake problem and that due to their valiant efforts we were now in the Great Earthquake Moderation.

Everyone understands that seismology is probably hard enough that one probably has little useful to say without first getting a PhD in it. The key is that macroeconomics, which involves aggregating the actions of millions to generate outcomes, where the constituents pieces are human beings, is probably every bit as hard. This is a message that would-be commentators just have to learn to accept. For my part, seventeen years after my first PhD coursework, I still feel ill at ease with my grasp of many issues, and I am fairly confident that this is not just a question of limited intellect.

Is there no issue that the author would be willing to take a position on and advocate for it in public? Is the state of theory and the accompanying empirical work so bad that there is no issue where we can take one side or the other? If so, why the give the instruction to rely upon experts?

So far, I've claimed something a bit obnoxious-sounding: that writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy. Taken literally, I am almost certainly wrong. Some of them have great ideas, for sure. But this is irrelevant. The real issue is that there is extremely low likelihood that the speculations of the untrained, on a topic almost pathologically riddled by dynamic considerations and feedback effects, will offer anything new. Moreover, there is a substantial likelihood that it will instead offer something incoherent or misleading.

Then quit complaining, learn how to do things digitally instead of as pdfs, and join in and help to correct bad information that is circulating. The economy is important to people and they are going to discuss it. And just as with medicine, there will be a lot of bad ideas that circulate. Is the answer to this to shut down all public conversation except that which exists in private between people and their doctors? Of course not, the answer is for doctors and (not doctor) journalists to take to the airways and correct the misinformation (there is also, of course, a role for regulation here). The answer to bad information is not less information, it's more.

This didn't start with the blogoshpere, people have been trying to sway the public one way or the other on policy issues from day one. In my view, the blogosphere has helped to counter bad information like "tax cuts pay for themselves." Prior to blogs, it was much harder to counter this stuff in real time but now, with non-professionals able to access the blogging of academics and others, it's much easier (though still far too hard) to rebut foolish policy ideas. So yes, bad information gets in the public arenas. It has always been so. The question is how fast it can be corrected and it is easier now than ever. In fact, the author is attempting to take advantage of this new capability with this essay.

Note also that intelligence is not the issue. Many of those I am telling you not to listen to will more than successfully be able to match wits, in any generalized sense, with me. This is irrelevant. The question is: can they provide you, the reader, with an internally consistent analysis of a dynamic system subject to random shocks populated by thoughtful actors whose collective actions must be rendered feasible? For many questions, I and my colleagues can, and for those that the profession cannot, the blogging crowd probably can't either.
You might say, "you're telling us to leave everything to the experts, so why should I believe you are adequately policed?" This is a fair question, but as someone who has worked for a decade to publish in leading academic journals (with some, but hardly overwhelming, success), I now have the referee reports to prove that I live in a world where people are not falling over themselves to believe my assertions. The reports are often scathing, but usually very insightful, and have over the years pointed out all manner of incoherence in my work. The leading journals have rejection rates in the neighborhood of 80%, and I've had my share of them.

I have had errors corrected in the blogosphere, e.g. to name just one, when I first started David Altig corrected something I had said wrong about growth theory. So the mere fact that journals point out incoherence in work does not, by itself, make the case for journals over the blogosphere. Both are error-correction mechanisms. And when it comes to civility, anonymous referee reports can be as petty and obnoxious as anything you will read in blogland. And they can also be flat wrong too (and unlike the public sphere, there is very little one can do to correct it). So yes, journals sometimes correct things, but it's a very imperfect process.

In summary, what I'd like to convince the public that economics is far, far, more complicated than most commentators seem to recognize. Because if they did, they could not honestly write the way they now do. Everything "depends", and this is just the way it is. And learning what "it" depends on, exactly, takes enormous effort. Moreover, just below the surface of all the chatter that appears in blogs and op-ed pages, there is a vibrant, highly competitive, and transparent scientific enterprise hard at work. At this point, the public remains largely unaware of this work. In part, it is because few of the economists engaged in serious science spend any of their time connecting to the outer world (Greg Mankiw and Steve Williamson are two counterexamples that essentially prove the rule), leaving that to a group almost defined by its willingness to make exaggerated claims about economics and overrepresent its ability to determine clear answers.

Is this what he has in mind from Williamson? That's as petty as anything I've read in along time (and there are other posts like this). He calls Krugman a lot of names, e.g. an "ignoramus," and there is lots of evidence of Krugman Derangement Syndrome. But how much information about macroeconomics does he actually convey? Almost none. Certainly less than Krugman conveys almost daily on his blog (and the fact that Krugman does this is routinely ignored by his critics).

How can this be changed? A precondition for the market delivering this is a recognition by the general public that they are simply being had by the bulk of the economic blogging crowd. I hope to have alerted you to the giant disconnect that exists between the nuanced discussion that occurs between research economists and the noise (some of it from economists!) that one sees in the web or the op-ed pages of even the very best newspapers of the US. As a result, my hope is that the broader public will ask for a slightly higher bar when it comes to economics, rather than self-selecting into blogs that merely confirm half-baked views that might have been acquired from elsewhere. And I hope that non-economists who write about economics start routinely to do so in a way that references and discusses the premises that lead to particular conclusions about a given issue. Economics is full of this sort of "if-then" knowledge, which, if communicated well, could significantly sharpen the public discussion. This is not asking a lot, it is asking just enough.
1 Somewhat strangely, in an earlier era Paul Krugman very effectively took the same sort of "accidental theorist" to task, so what I'm saying is really a bit of a rehash of his arguments.
The views expressed are my own, and do not necessarily represent those of the Federal Reserve Bank of Richmond, or Federal Reserve System.

For more, and probably better comments since I did this far too fast and didn't really address the parts directed at non-professional economists, see Brad DeLong, Scott Sumner, Mathew Yglesias, Arnold Kling, Tyler Cowen, and Nick Rowe.

Update: See also Economists behaving foolishly, by Ryan Avent, and something I didn't talk enough about, the state of modern macro (DeLong covers this when he quotes Federal Reserve Bank of Minneapolis President Narayana Kocherlakota): Are We Better Off Getting Advice from the IMF than a Drunk in the Street?, by Dean Baker.

Also, one more from Brad DeLong: Is Macroeconomics Hard? Will Wilkinson adds his comments.


[Update: In comments, some people are puzzled by the statements on pdfs (though one person did defend them). It's mostly me venting a long-held frustration about the KC Fed practice, and also partly in response to an email conversation last night where one person who wanted to comment on the article was having trouble extracting text to post. He's not all that familiar with the technical side of blogging, and all of the junk that appears when text from a pdf is cut and then pasted into a blog was causing difficulties. A pdf is not a very convenient form for blogs, far from it -- the CBO offers both pdfs and html versions of many of its documents for this reason --  but I probably should have left these comments out since it appears to be distracting from the main points I wanted to make.]

DeLong: Listening to Arsonists

Posted: 28 Jun 2010 10:24 AM PDT

Brad DeLong seems pessimistic about our political system:

Listening to Arsonists, by J. Bradford DeLong, Commentary, Project Syndicate: I had always thought that Barack Obama made a significant mistake in naming the Republican ex-senator Alan Simpson to co-chair the president's deficit-reduction commission. Simpson was a noted budget arsonist when he was in the Senate. Indeed, he never met a budget-busting, deficit-increasing initiative from a Republican president that he would not lead the charge to pass. Nor did he ever meet a sober deficit-reducing initiative from a Democratic president that he did not oppose with every fiber of his being.
You don't pick an arsonist to head the fire department... But perhaps I am ungenerous. Perhaps Simpson has had a change of heart. ... Even in that case, however, naming those who misbehave to important positions of high trust and acclaiming them as bipartisan statesmen gives the next generation really lousy incentives. And it's not as though Congressional Republicans think they owe enough to Simpson for him to swing a single vote in either chamber of the legislature.
Obama officials assured me that Simpson had, indeed, had a change of heart; that he was a smart man with a sophisticated understanding of the issues; that he could sway reporters and get them to describe the commission's advice as "bipartisan" (even though he could not sway actual legislators); and that he would be a genuine asset to the substantive work of the commission.
John Berry recently wrote in the online journal The Fiscal Times that not even that is true. Simpson is "condescending and derisive – and wildly wrong about important parts of the Social Security system's past." ...
Four centuries ago, the consensus, in Western Europe at least, was that good and even adequate government in this fallen world was inevitably a rarity. Democracy always degenerated into mob rule, monarchy into tyranny, and aristocracy into oligarchy. Even when well run, democracy took little interest in the distant future, aristocracy took little interest in the well-being of those whom Simpson calls the "little people," and monarchy took little interest in anything other than legitimate succession.
Then, at the end of the eighteenth century, the founders of the United States of America and their intellectual successors claimed that this pessimism about government was unwarranted. "The science of most other sciences," claimed Alexander Hamilton, "has received great improvement....The regular distribution of power into distinct departments...legislative balances and checks...judges holding their offices during good behavior; the representation of the people in the legislature by deputies of their own election...are means, and powerful means, by which the excellences of republican government may be retained and its imperfections lessened or avoided..."
Perhaps Hamilton was too much the optimist. When I look at Barack Obama's deficit commission – indeed, look at governance worldwide – I see many imperfections, but few or no examples of excellence.

I get pessimistic too, especially when I see Simpson types put in charge of things they have no business overseeing. But when I step back and look at the U.S., I see progress over time on important economic and social issues. The progress is not linear, or even always positive, it's excruciatingly slow, and that can be pretty frustrating when you are fighting the battle of the moment. But things are better now than they once were, and we continue to make progress on important social issues (though, again, it is frustratingly slow). Don't get me wrong, we are far from the end of the process, there is much, much more to do before our job is complete, but if you are a anything but a wealthy white male, things are relatively better now than they once were.

Will things continue to get better? I think so, but the system must continue to evolve over time so it can match the rise of economic and political power with institutions and mechanisms that will blunt their influence and reassert core principles. People with power will find a way to capture the system for themselves, and as their economic and political power increases as a result of their efforts, they will be increasingly successful at this task. I believe that we have allowed far too much capture of government by the powerful in recent decades -- the current state of campaign finance is one reflection of this -- and that this is the biggest danger we face going forward.

Political power is derived in large part from economic power, and a good place to start would be to begin asking harder questions about the costs and benefits of having businesses as big and influential as they are presently. If the economic efficiencies from size do not justify the costs from having such large and powerful firms, and I suspect in most cases they will not, then we need to reduce the power that these firms have (by breaking them if that is the best way to accomplish this). And even when size is justified by efficiency considerations, we need to do a much better job of regulating these firms so that they cannot exert undue influence on politics and the economy. If we don't, if we continue to allow the biggest among us to have the most say as has happened more and more in recent decades, if being big means you will mostly get your way, then we should worry about the future of our political system. I've been optimistic that we'll see the light, but that optimism has been shaken a bit by the outcome of legislation to reform the financial system. This legislation did very little to blunt the power that large firms can exert on our political system. That must change.

No comments: