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June 27, 2014

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Latest Posts from Economist's View


Paul Krugman: The Incompetence Dogma

Posted: 27 Jun 2014 12:24 AM PDT

Why heve predictions from "the enemies of health reform" been so wrong?:

The Incompetence Dogma, by Paul Krugman, Commentary, NY Times: Have you been following the news about Obamacare? The Affordable Care Act has receded from the front page, but information about how it's going keeps coming in — and almost all the news is good. Indeed, health reform has been on a roll ever since March, when it became clear that enrollment would surpass expectations despite the teething problems of the federal website.
What's interesting about this success story is that it has been accompanied at every step by cries of impending disaster. At this point, by my reckoning, the enemies of health reform are 0 for 6. That is, they made at least six distinct predictions about how Obamacare would fail — every one of which turned out to be wrong.
"To err is human," wrote Seneca. "To persist is diabolical." Everyone makes incorrect predictions. But to be that consistently, grossly wrong takes special effort. So what's this all about?
Many readers won't be surprised by the answer:... a dogmatic belief in public-sector incompetence — is now a central part of American conservatism, and the incompetence dogma has evidently made rational analysis of policy issues impossible.
It wasn't always thus. If you go back two decades, to the last great fight over health reform, conservatives seem to have been relatively clearheaded about the policy prospects, albeit deeply cynical. ...
But that was before conservatives had fully retreated into their own intellectual universe. Fox News didn't exist yet; policy analysts at right-wing think tanks had often begun their careers in relatively nonpolitical jobs. It was still possible to entertain the notion that reality wasn't what you wanted it to be.
It's different now. It's hard to think of anyone on the American right who even considered the possibility that Obamacare might work, or at any rate who was willing to admit that possibility in public. Instead, even the supposed experts kept peddling improbable tales of looming disaster...
And let's be clear: While it has been funny watching the right-wing cling to its delusions about health reform, it's also scary. After all, these people retain considerable ability to engage in policy mischief, and one of these days they may regain the White House. And you really, really don't want people who reject facts they don't like in that position. I mean, they might do unthinkable things, like starting a war for no good reason. Oh, wait.

Links for 6-27-14

Posted: 27 Jun 2014 12:06 AM PDT

'The Enormous Wage Potential of Infrastructure Jobs'

Posted: 26 Jun 2014 10:45 AM PDT

Even after years of "recovery" it's not too late t help those struggling to find employment, and to improve our future potential for growth at the same time. Of course, that would require Congress -- particularly those on the political right -- to actually care about the unemployed, and to recognize the critical role that government (and taxes) must play in meeting our infrastructure needs:

The Enormous Wage Potential of Infrastructure Jobs, by Joseph Kane and Robert Puentes, Brookings: This month marks five years since the U.S. economic recovery began, but we clearly have a long way to go to address our nation's jobs deficit. Even though more workers are gradually finding employment, their wages continue to stagnate and hold back widespread economic growth. ...
Cutting across multiple industries and geographies, infrastructure jobs offer needed stability. Since these jobs also typically require less formal education and pay competitive wages across a variety of occupations, they give workers from all backgrounds a chance to make a decent living in today's unforgiving economy.
As our recent report reveals, infrastructure jobs tend to pay 30 percent more to lower income workers—wage earners at the 10th and 25th percentile—relative to all jobs nationally...
Infrastructure occupations not only employ thousands of workers with a high school diploma or less, but they also frequently offer higher wages compared to many other jobs, particularly those involved in sales, maintenance, production, and other support activities. ...
Over time, by forging stronger connections between our infrastructure investments and workforce needs, we can help boost the long-term opportunity available to American workers.

'Are the Rating Agencies About to Get Their Comeuppance?'

Posted: 26 Jun 2014 10:16 AM PDT

Barry Ritholtz:

Are the Rating Agencies About to Get Their Comeuppance?: This week in encouraging news, we learn that the Securities and Exchange Commission may finally be pursuing one of the prime enablers of the financial crisis — the ratings companies. Previously, it was reported that disclosure violations were on the SEC's radar, but truth be told, those are minor offenses.
The SEC's Office of Credit Ratings, a division whose sole purpose is essentially to oversee Moody's and Standard & Poor's, seems to be stirring. ... Multiple cases have reportedly been referred to the SEC's enforcement division, and new regulations are due.
And a welcome change it would be. Of all the players that helped cause the financial crisis, the ratings companies have gotten off scot-free. Banks have had massive fines while many mortgage and derivative underwriters have had their garbage securities put back to them at great cost. Since 2008, there have been 388 mortgage companies that have gone bankrupt. All of that junk paper found its way into AAA-rated securitized products and derivatives. The penalty for Moody's and S&P has been essentially nil. ...[continue]...

It may be "encouraging news" but why has it taken so long?

Why DSGEs Crash During Crises

Posted: 26 Jun 2014 09:24 AM PDT

David Hendry and Grayham Mizon with an important point about DSGE models:

Why DSGEs crash during crises, by David F. Hendry and Grayham E. Mizon: Many central banks rely on dynamic stochastic general equilibrium models – known as DSGEs to cognoscenti. This column – which is more technical than most Vox columns – argues that the models' mathematical basis fails when crises shift the underlying distributions of shocks. Specifically, the linchpin 'law of iterated expectations' fails, so economic analyses involving conditional expectations and inter-temporal derivations also fail. Like a fire station that automatically burns down whenever a big fire starts, DSGEs become unreliable when they are most needed.

Here's the introduction:

In most aspects of their lives humans must plan forwards. They take decisions today that affect their future in complex interactions with the decisions of others. When taking such decisions, the available information is only ever a subset of the universe of past and present information, as no individual or group of individuals can be aware of all the relevant information. Hence, views or expectations about the future, relevant for their decisions, use a partial information set, formally expressed as a conditional expectation given the available information.
Moreover, all such views are predicated on there being no unanticipated future changes in the environment pertinent to the decision. This is formally captured in the concept of 'stationarity'. Without stationarity, good outcomes based on conditional expectations could not be achieved consistently. Fortunately, there are periods of stability when insights into the way that past events unfolded can assist in planning for the future.
The world, however, is far from completely stationary. Unanticipated events occur, and they cannot be dealt with using standard data-transformation techniques such as differencing, or by taking linear combinations, or ratios. In particular, 'extrinsic unpredictability' – unpredicted shifts of the distributions of economic variables at unanticipated times – is common. As we shall illustrate, extrinsic unpredictability has dramatic consequences for the standard macroeconomic forecasting models used by governments around the world – models known as 'dynamic stochastic general equilibrium' models – or DSGE models. ...[continue]...

Update: [nerdy] Reply to Hendry and Mizon: we have DSGE models with time-varying parameters and variances.

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