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May 5, 2014

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Inventing a Failure

Posted: 05 May 2014 12:42 AM PDT

Surprise! Republicans are opposed to Obamacare. But the lengths they'll go to to validate their beliefs in the face of evidence to the contrary is startling:

Inventing a Failure, by Paul Krugman, Commentary, NY Times: On Thursday, House Republicans released a deliberately misleading report on the status of health reform, crudely rigging the numbers to sustain the illusion of failure in the face of unexpected success. Are you shocked?
You aren't, but ... the fact that this has become standard operating procedure for a major party bodes ill for America's future.
About that report: The really big policy news of 2014, at least so far, is the spectacular recovery of the Affordable Care Act from its stumbling start... This is a problem for Republicans, who have bet the ranch on the proposition that health reform is an unfixable failure. ... How can they respond to good news?
Well,... they have ... continued to do what they've been doing ever since the news on Obamacare started turning positive: sling as much mud as possible at health reform, in the hope that some of it sticks. Premiums were soaring, they declared, when they have actually come in below projections. Millions of people were losing coverage, they insisted, when the great bulk of those whose policies were canceled simply replaced them with new policies. The Obama administration was cooking the books, they cried (projection, anyone?). And, of course, they keep peddling horror stories about people suffering terribly from Obamacare, not one of which has actually withstood scrutiny.
Now comes the latest claim — that many of the people who signed up for insurance aren't actually paying their premiums. ... Previous attacks on Obamacare were pretty much fact-free; this time the claim was backed by an actual survey purporting to show that a third of enrollees hadn't paid their first premium.
But the survey was rigged. (Are you surprised?) ...
So why are Republicans doing this? Sad to say, there's method in their fraudulence.
First of all, it fires up the base. ... Beyond that, the constant harping on alleged failure works as innuendo even if each individual claim collapses in the face of evidence. ...
So Republicans are spreading disinformation about health reform because it works, and because they can — there is no sign that they pay any political price when their accusations are proved false.
And that observation should scare you. What happens to the Congressional Budget Office if a party that has learned that lying about numbers works takes full control of Congress? What happens if it regains the White House, too? Nothing good, that's for sure.

'Britain’s Economic Growth is Not a Sign that Austerity Works'

Posted: 05 May 2014 12:33 AM PDT

Larry Summers:

Britain's economic growth is not a sign that austerity works, by Lawrence Summers, Commentary, Washington Post: The British economy has experienced the most rapid growth in the Group of 7 over the past several months. ... Naturally enough, many have seized on Britain's strong performance as evidence vindicating the austerity strategy that the country has followed since 2010 and rejecting the secular-stagnation idea that lack of demand constrains industrial growth over the medium term. ... Unfortunately, properly interpreted, the British experience refutes austerity advocates and confirms Keynes's warning about the dangers of indiscriminate budget-cutting in the midst of a downturn. ...
Britain's growth reflects a combination of the depth of the hole it found itself in, the moderation in the trend toward deeper and deeper austerity and the effects of possibly bubble-creating government loans. It may be better for the citizens of Britain than any alternative. But it certainly should not be seen as any kind of inspiration for other companies or countries. ...

Fed Watch: Difficult Labor Report

Posted: 05 May 2014 12:15 AM PDT

Tim Duy:

Difficult Labor Report, by Tim Duy: The headlines numbers from the April employment report are at first blush a challenge to the Fed's low rate commitment.  One doesn't have to dig much deeper into the data, however, to see that the near term implications are minimal as the Fed maintains its strong focus on measures of labor market slack.  Still, the rapid drop in unemployment - if it continues - will leave policymakers increasingly anxious that their one-way bet on labor market slack will quickly turn sour.
Nonfarm payrolls grew pay 288k, well above expectations of 215k.  While this numbers pushes the three-month moving average higher, the longer-term trend remains the same:


Maybe this is the month the acceleration begins.  Maybe not.  Either way, the report supports the dismissal of the weak first quarter growth numbers (now tracking in negative territory) as transitory.  Just as has been the case for the last three years, there is nothing here to suggest a dramatic change in the pace of underlying economic activity.
The unemployment rate decline was a bit more intersting as it collapsed to 6.3% on the back of falling labor force participation:


The downward trend accelerated in the second half of 2013, pushing us ever closer to levels traditionally associated with greater inflationary pressures and with those pressures tighter monetary policy.  Policymakers, however, appear to remain content dismissing the unemployment rate in favor of a wider range of labor market indicators that suggest plenty of slack left in the economy.  Federal Reserve Chair Janet Yellen's current four favorites:


The wage story is, in my opinion, the key.  It is hard to argue against the labor slack story when employees can't push wages significantly higher.  That alone should be enough to stay the Fed's hand.  And if it isn't enough, they can always draw additional comfort from the inflation figures:


Inflation is, at best, only in the process of bottoming.  
All that said, policymakers will be a little anxious that they are too quickly dismissing traditional metrics that would indicate they should be  be adjusting their inflation forecasts higher in light of the unemployment decline.  As I am relatively confident will be much discussed this week, variants of the Taylor rule suggest that policymakers should already be raising rates:


In this environment, policymakers will increasingly worry about the policy lags.  They will want to hold rates low, but the further unemployment drops, the more they will fear that they risk falling behind the curve - that by the time the pace of wages growth accelerates, inflationary pressure will already be well established.  This is especially the case if they view the 2% target as a ceiling.  Hence I remain concerned that the risk is that policy turns sharply tighter relative to current expectations.  
I am also challenged to see why I should not expect the now-infamous dots in the summary of economic projections to be pulled forward on the basis of the falling unemployment rate.  I am looking forward to the next FOMC meeting for that alone.
I emphasize, however, that any substantially tighter policy remains only a "risk," not a baseline. I anticipate that in her Congressional testimony this week, Yellen will emphasize the alternative measures of labor market slack and the Fed's expectation that policy rates will remain well below "normal" rates for a protracted period.  As a general rule one report doesn't change policy.
Bottom Line: Overall, the general contours of the employment report suggest reason to (very) modestly bring forward expected rates hikes, but little to suggest any dramatic change to the Fed's reaction function overall.  Policymakers, however, will worry that the current reaction function is overly dependent on dismissing the unemployment rate as an indicator of inflationary pressure. And there is a risk that they will move quicker than expected if that bet starts to sour.  Risk, not baseline.

Links for 5-05-14

Posted: 05 May 2014 12:03 AM PDT

'The Mainstream Economics Curriculum Needs an Overhaul'

Posted: 04 May 2014 07:16 AM PDT

Diane Coyle (this is also in today's links):

The mainstream economics curriculum needs an overhaul, Vox EU: One of the delayed consequences of the financial crisis is a widespread and apparently growing desire to change how economics is taught. Students in a number of countries, including vocal groups in Chile and the UK, have recently intensified the demand for reform. One recent example is a report from the Post-Crash Economics Society at the University of Manchester (Post-Crash Economics Society 2014).
Professor Wendy Carlin of University College London is leading an international group of academics in developing a new open-source course for introductory economics (funded by the Institute for New Economic Thinking). It contrasts with conventional courses in:
  • Emphasising dynamics, instability, institutions, and environmental questions; and
  • Integrating new results and empirical evidence.
The question of curriculum reform was also the subject of a special session at the recent Royal Economic Society conference.
Some of the issues were first raised by contributors to a VoxEU debate in 2012 entitled "What's the use of economics?" (see also Coyle 2012). The debate noted a widespread belief that the profession's credibility was at stake. If the core economics courses did not respond to the challenges that the Global Crisis posed, economics as a whole would suffer a significant loss of credibility.
Common reform themes
Common themes in the debate at that earlier stage were the need for students to have:
  • More exposure to economic history and the history of thought;
  • More practical hands-on experience with data;
  • Better teaching of communication skills; and
  • Some exposure to new developments in economic research.
Overall the thrust was for a less narrow and reductive approach to economics than has become the norm in undergraduate courses. Both academics and employers of graduate economists agreed on these needs.
In the UK, a working group set out such principles in a statement of principles (Coyle 2013). It concluded that undergraduate courses should become more pluralistic and should include:
  • Some economic history, which could be integrated into existing courses, especially macroeconomics;
  • An introduction to other disciplinary approaches;
  • Possibly 'tasters' of the frontiers of academic economic research with potential policy application, such as behavioural economics, institutional economics, and post-crisis developments in financial economics;
  • Awareness of some of the methodological debates in economics;
  • Confronting all theoretical frameworks with evidence and encouraging a healthy scepticism towards all assertion from whatever source.
What do these general principles mean in practice?
Even a relatively minimal interpretation implies a substantial amount of change in many undergraduate economics programmes. In many universities, the core curriculum settled into a predictable rut. This interacted with two factors: (i) incentives for academic research to focus on technical increments to knowledge – contributions aimed solely at professional peers, and (ii) rising teaching loads and student numbers stemming from pressures on university finances.
Despite the great interest in reform among economists teaching undergraduate courses, change will take some time as these various barriers are overcome.
There is probably the widest agreement about changes such as:
  • Re-introducing elements of economic history into core modules;
  • Incorporating some issues on the frontiers of research into undergraduate teaching;
  • Encouraging inter-disciplinary interest; and
  • Ensuring students are taught key skills such as data handling and good communication.
A number of economists have commented on the desirability of updating the curriculum to reflect interesting areas of research and 'real world' examples (see e.g. Seabright 2013).
More disagreement exists when it comes to the question of the character of economics itself, and the extent to which the experience of the past six years calls the mainstream of the subject into question. Andrew Haldane, newly appointed as chief economist of the Bank of England, argues: "It is time to rethink some of the basic building blocks of economics." (Post-Crash Economics Society 2014: 4.) Student groups campaigning for reform would clearly agree on the need for a radical reinterpretation of what should be in the core courses or modules.
There is some overlap between their views and those of the mainstream. For example, the UK working group cited above also recommended greater pluralism in economics: "Hostility towards other approaches is the antithesis of a dynamic self-critical discipline that is genuinely seeking to discover new and better ways of understanding the world."
But it added: "That said, students should not be left unnecessarily confused or with the impression that all schools of thought have an equal standing, or that 'anything goes'. There should be a balance between a) providing a coherent 'workhorse' framework for intellectual development and building analytical skills, and b) the candid highlighting of uncertainty, the limits of economic knowledge and the existence of serious alternative views and approaches."
In a recent blog post, Roger Farmer of UCLA made a similar point: "My advice to students is this. […] [T]ake the time to absorb those ideas that are in the mainstream. The very best mainstream economists were the radical students who questioned authority when they were undergraduates. It is those economists who you must engage if you are to make meaningful changes that will advance our understanding." (Farmer 2014.)
Shortcomings of the critiques
However, it is clear that the campaigning students have an incorrectly broad interpretation of the 'neoclassical mainstream' and a narrow interpretation of 'pluralism'. For example, the recent report from the Post-Crash Economics Society fails to recognise the breadth of the courses available in its economics department (which it describes unfairly as a 'monoculture'); and is itself narrow-minded in dismissing the value for economics students of courses that happen to be taught in the other social sciences and the business school.
The report also mistakenly equates pluralism with the specific views of heterodox economics, rather than the open-minded willingness to analyse economic issues from a range of alternative perspectives (including heterodox ones). There is an obvious logical fallacy in the labelling – and dismissing – of any non-heterodox views as the 'neoclassical mainstream'.
Simon Wren-Lewis of Oxford University has expressed sympathy with the instincts of the student group but describes their conclusions as "fundamentally misguided":
"I think it is true that economics as a discipline has tried too hard to emphasise that it is an objective, politically neutral discipline, thereby underplaying value judgements when it makes them. Worse still, sometimes heavily value laden ideas like the importance of Pareto optimality are portrayed as being value neutral, which is clearly nonsense. […] Yet the idea that it should be possible to build a science of human behaviour which is independent of ideology or politics is a noble ideal, and one which has been partly achieved. We may need (and are getting) more political economy, in the sense of recognising that economics works alongside and interacts with social and political forces, but I do not think we need more partisan economics." (Wren-Lewis 2014.)
Indeed, the 'science of human behaviour' in the economic domain has made huge strides during the past 20 years or so, in the advances in applied microeconomics. More data, advances in econometric techniques, new methodologies such as randomised control trials and field experiments, interdisciplinary work with psychology in particular, the revival of economic history, and urban economics, have all contributed to scientific advance (for a survey, see Coyle 2007). This progress is certainly 'mainstream'; it should be celebrated, and students should be agitating to be taught more about it.
Concluding remarks
Finally, it should be added that – not least because of such advances in much recent research in economics – there is by no means universal agreement among academic economists that substantial curriculum reform is needed. This reflects their view – in contrast to Andrew Haldane's – that the basic building blocks of the subject remain solid.
This is therefore a debate with some distance to go, and not least because of the international character of the academic discipline. It seems highly unlikely, though, that undergraduate economics courses will not have changed considerably in character five or ten years from now.
Coyle, Diane (2007), The Soulful Science, Princeton University Press.
Coyle, Diane (2013), "Teaching Economics After the Crisis: Report from the Steering Group", Royal Economic Society Newsletter, 161, April.
Coyle, Diane (ed.) (2012b), What's the Use of Economics? Teaching the Dismal Science after the Crisis, London Publishing Partnership, September.
Farmer, Roger (2014), "Teaching Economics", My Economic Window, 23 April.
Post-Crash Economics Society (2014), "Economics, Education and Unlearning: Economics Education at the University of Manchester", April.
Seabright, Paul (2013), "Microeconomics for All", Project Syndicate, 5 December.
Wren-Lewis, Simon (2014), "When economics students rebel", Mainly Macro, 24 April.

'The Big Ideas'

Posted: 04 May 2014 07:16 AM PDT

Have there been any "genuine innovations in thought in the past fifty years, especially in the social and historical sciences?" This is from Dan Little:

The big ideas: The deluge of changes that shook Europe around 1800 -- the making of the modern world -- brought with them an explosion of big new ideas, new ways of framing the social, historical, and natural world which we inhabit. Darwin, Freud, Marx, Walras, Carnot, Poincaré, Einstein -- each brought forward one or two foundational and iconoclastic ideas in terms of which to understand some very profound but mysterious features of the world. We think about the world differently because of their originality. And their categories, once shockingly strange, now seem like pure common sense. And the stock of ideas and theories we now have for understanding the social and natural world is vastly richer than it was in earlier epochs.

One theme that runs through these thinkers is the binary of order and disorder, rule and randomness. Classical physics offered a view of the world that stressed the fundamental orderliness of nature -- the idea that natural phenomena were mathematical and law-governed. Much of the intellectual ferment in nineteenth century and early twentieth century physics stemmed from the insight that randomness and the statistical properties of ensembles were even more basic (Carnot, thermodynamics; Brownian motion) and that the laws of physics were stranger than we thought (Poincaré on non-Euclidean space, Einstein on special relativity, Schrödinger on quantum physics). (Peter Galison's fascinating book, Einstein's Clocks and Poincare's Maps: Empires of Time, sheds light on the conceptual revolutions of Poincaré and Einstein.)

In a similar vein, Darwin brought the workings of random variation within a population into center stage in biology. Instead of species with fixed properties, Darwin described a process of evolution through which the properties of a species change over very long stretches of time. Rather than assuming that the features of an organism have been fine-tuned by an intelligent designer, Darwin conceived of a myopic process of adaptation and selection through which functionality could emerge without a designer. (Jonathan Howard's Darwin: A Very Short Introduction is a good account of Darwin's innovation.)

Freud and Marx brought a different sort of paradigm shift to the human sciences. Human behavior is not a transparent consequence of instrumental rationality. Rationality and full self-knowledge are not the primary keys to human action. Instead, people have hidden and only partially available thoughts, aversions, and wants, and it is the work of psychoanalysis to uncover these hidden ideas and thoughts. The self is contradictory and hidden to the actor. (Here is a nice essay by Donald Carveth on the relevance of psychoanalysis for social theory; link.)

And Marx disputed the assumptions of collective rationality and optimality that were embodied in the political economy inspired by Smith and Ricardo -- the idea that a person-independent market served to solve the most basic social problems behind the backs of the actors. In place of this assumption of neutral impersonality Marx argued that modern society reflects a fundamental opposition between groups of people based on their property and economic interests. And he argued that the behavior of the state and its primary institutions could best be understood as the expression of the interests of the dominant class. (Two very different accounts of Marx's intellectual system include Jon Elster, Making Sense of Marx and David Harvey's A Companion to Marx's Capital.)

These are indeed big and important ideas. We understand the real workings of the natural and social worlds better because of these revolutions in thought. We can ask two important questions. First, why did the modern world -- industrial revolution, democratic movements, revolutions in physics and biology -- stimulate such a rich flourishing of innovation and insight, as contrasted to the ancient world or the medieval world?

The beginnings of an answer to this question can be found in the velocity and manifest importance of the changes that western Europe began to experience from 1750 forward -- the French Revolution, the advent of the factory system in England, the spread of revolutionary ideas from anarchists and socialists into popular movements, and other profound changes. Thomas Carlyle was one of the creative thinkers who was forced to find a new vocabulary to describe industrial cities and factories in the early nineteenth century (Past and Present); these social complexes barely existed in the previous century.

The second important question is even more interesting -- where are those new ideas today? Has the twenty-first century yet created any genuinely new thinking to compare with the nineteenth century period of intellectual ferment?

I am tempted to answer this second question in the negative. We have witnessed enormous technological advancement in the past fifty years. Who, in 1964, could have imagined the connectivity created by the Internet and Google, or the extension of human cognition enabled by a connected iPad? But have we encountered genuinely innovative and insightful new ways of organizing our world in thought, about either nature or society? Perhaps not. The social sciences have certainly advanced in the half century of research that has transpired since 1964; but I'm not sure that I would say that there are fundamentally new conceptions of social reality in play. (Perhaps the ontology of assemblage might compete for a spot on the stage; link.) It seems rather that our frameworks of thought have remained somewhat static for the past fifty years.

It is possible that we should not expect big ideas at this point in our history, on the grounds that we now have a reasonably good understanding of both the natural and the social world. If we made that assumption, then we should expect long periods of incremental growth, expansion of knowledge of detail, along with combination and recombination of existing theories and concepts, but no major new breakthroughs.

There will be objections to this line of thought. One is that earlier epochs may have been more innovative and paradigm-breaking than I suggest. Stephen Greenblatt's recent book on Epicurus and Lucretius certainly makes a case for profound intellectual innovation in the ancient world (The Swerve: How the World Became Modern; link). So it is possible that the impression of radical intellectual change starting in the nineteenth century is just a consequence of the foreshortening of history; perhaps the ancients were as resourceful and creative in their thinking as the moderns were.

Another objection is that each of the thinkers I have mentioned had predecessors, including Darwin's contemporary Alfred Russel Wallace and the many versions of socialism that competed with Marx. Was Marx so innovative after all, when compared to Proudhon or Blanqui? So one should not over-emphasize the point of absolute originality. But taking all of this into account, it seems inescapable that human conceptual and imagination space took a major step forward between 1850 and 1925. And, by contrast, the past fifty or seventy-five years seem rather tame when it comes to big ideas.

What thoughts do readers have about genuine innovations in thought in the past fifty years, especially in the social and historical sciences? Are there intellectual or conceptual discoveries that strike you as being genuinely transformative to the way we understand the contemporary world?

(T. J. Clark makes a number of interesting points about the influence of modern social change on the representational arts in Farewell to an Idea: Episodes from a History of Modernism. In an earlier post I discussed the connections that seem to exist between social conditions of modernity and the forms that modern art took during those decades; link.)

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