Posted: 15 Oct 2015 12:15 AM PDT
Fed Debates and the EMU Technocratic Illusion, Gloomy European Economist: ...I have read with lots of interest the speech that newly appointed Federal Reserve Board Member Lael Brainard gave last Monday. The speech is a plea for holding on rate rises, and uses a number of convincing arguments. Much has been said on the issue (give a look at comments by Tim Duy and Paul Krugman). I have little to add, were it not for the point I made a number of times, that the extraordinarily difficult task of central bankers would be made substantially easier if fiscal policy were used more actively.
What I'd like to express here is my jealousy for the discussions (and the confrontation) that we observe in the US. These discussions are a sideproduct, a very positive one if you ask me, of the institutional design of the Fed. I just returned from a series of engaging policy meetings on central bank policy in Costa Rica, facilitated by the local ILO office, where I pleaded for the introduction of a dual mandate.
I wrote a background paper (that can be seen here) in which my main argument is that a central bank following a dual mandate will always be able to take an aggressive stance on inflation, if it deems it necessary to do so. ... No choice of weights, on the other hand, would allow a central bank following an inflation targeting mandate to explicitly target employment as well. Thus, the dual mandate can embed inflation targeting strategies, while the converse is not true. In terms of policy effectiveness, therefore, the dual mandate is a superior institutional arrangement.
I also cited evidence showing, and here we come at my jealousy for the Fed, that inflation targeting central banks, like the ECB, de facto target the output gap, but timidly and without explicitly saying so. This leads to low reactivity and opaque communication, that hamper the capacity of central banks to manage expectations and effectively steer the economy. I am sure that those who followed the EMU policy debate in the past few years will know what I am talking about.
One may argue that the cacophony currently characterizing the Federal Reserve Board is hardly positive for the economy, and that in terms of managing expectations, lately, the Fed did not excel. This is undeniable, and is the result of the Fed groping its way out of unprecedented policy measures. The difference with the ECB is that for the Fed the opacity results from an ongoing debate on how to best attain an objective that is clear and shared. We are not there yet, but the debate will eventually lead to an unambiguous (and hopefully appropriate) policy choice. The ECB opacity, is intrinsically linked to the confusion between its mandate and its actual action, and as such it cannot lead to any meaningful discussion, but just to legalistic disputes on the definition of price stability, of how medium is the medium term and the like.
And I can now come to my final point: a dual mandate has the merit to let the political nature of monetary policy emerge without ambiguities. It is indeed true that monetary policy with a dual mandate requires hard choices, as the ones that are debated these days, and hence is political in nature. The point is, that so is monetary policy with a simple inflation targeting objective. The level of inflation targeted, and the choice of the instruments to attain it, are all but neutral in terms of their consequences on the economy, most notably on the distribution of resources among market participants. Thus, an inflation targeting central bank is as political in its actions as a bank following a dual mandate, the only difference being that in the former case the political nature of monetary policy is concealed behind a technocratic curtain. The deep justification of exclusive focus on price stability can only lie in the acceptance of a neoclassical platonic world in which powerless governments need to make no choice. Once we dismiss that platonic view, monetary policy acquires a political role, regardless of the mandate it is given. A dual mandate has the merit of making this choice explicit, and hence to dispel the technocratic illusion.
I am not saying there would be no issues with the adoption of a dual mandate. The institutional design should be carefully crafted, in order to ensure that independence is maintained, and accountability (currently very low indeed) is enhanced. What I am saying is that after seven years (and counting) of dismal economic performance, and faced with strong arguments in favor of a broader central bank mandate, EMU policy makers should be engaged in discussions at least as lively as the ones of their counterparts in Washington. And yet, all is quiet on this side of the ocean… Circulez y a rien à voir
Posted: 15 Oct 2015 12:06 AM PDT
Posted: 14 Oct 2015 12:13 PM PDT
In case this is something you want to discuss (if not, that's okay too -- I got tired of this debate long, long ago):
In Search of the Science in Economics, by Noah Smith: ...I'd like to discuss the idea that economics is only a social science, and should discard its mathematical pretensions and return to a more literary approach.
First, let's talk about the idea that when you put the word "social" in front of "science," everything changes. The idea here is that you can't discover hard-and-fast principles that govern human behavior, or the actions of societies, the way physicists derive laws of motion for particles or biologists identify the actions of the body's various systems. You hear people say this all the time.
But is it true? As far as I can tell, it's just an assertion, with little to back it up. No one has discovered a law of the universe that you can't discover patterns in human societies. Sure, it's going to be hard -- a human being is vastly more complicated than an electron. But there is no obvious reason why the task is hopeless.
To the contrary, there have already been a great many successes. ...
What about math? .... I do think economists would often benefit from closer observation of the real world. ... But that doesn't mean math needs to go. Math allows quantitative measurement and prediction, which literary treatises do not. ...
So yes, social science can be science. There will always be a place in the world for people who walk around penning long, literary tomes full of vague ideas about how humans and societies function. But thanks to quantitative social science, we now have additional tools at our disposal. Those tools have already improved our world, and to throw them away would be a big mistake.This is from a post of mine in August, 2009 on the use of mathematics in economics:
Lucas roundtable: Ask the right questions, by Mark Thoma: In his essay, Robert Lucas defends macroeconomics against the charge that it is "valueless, even harmful", and that the tools economists use are "spectacularly useless".
I agree that the analytical tools economists use are not the problem. We cannot fully understand how the economy works without employing models of some sort, and we cannot build coherent models without using analytic tools such as mathematics. Some of these tools are very complex, but there is nothing wrong with sophistication so long as sophistication itself does not become the main goal, and sophistication is not used as a barrier to entry into the theorist's club rather than an analytical device to understand the world.
But all the tools in the world are useless if we lack the imagination needed to build the right models. Models are built to answer specific questions. When a theorist builds a model, it is an attempt to highlight the features of the world the theorist believes are the most important for the question at hand. For example, a map is a model of the real world, and sometimes I want a road map to help me find my way to my destination, but other times I might need a map showing crop production, or a map showing underground pipes and electrical lines. It all depends on the question I want to answer. If we try to make one map that answers every possible question we could ever ask of maps, it would be so cluttered with detail it would be useless. So we necessarily abstract from real world detail in order to highlight the essential elements needed to answer the question we have posed. The same is true for macroeconomic models.
But we have to ask the right questions before we can build the right models.
The problem wasn't the tools that macroeconomists use, it was the questions that we asked. The major debates in macroeconomics had nothing to do with the possibility of bubbles causing a financial system meltdown. That's not to say that there weren't models here and there that touched upon these questions, but the main focus of macroeconomic research was elsewhere. ...
It wasn't the tools, and it wasn't lack of imagination. As Brad DeLong points out, the voices were there—he points to Michael Mussa for one—but those voices were not heard. Nobody listened even though some people did see it coming. So I am more inclined to cite the sociology within the profession or the concentration of power as the main factors that caused us to dismiss these voices. ...
I don't know for sure the extent to which the ability of a small number of people in the field to control the academic discourse led to a concentration of power that stood in the way of alternative lines of investigation, or the extent to which the ideology that markets prices always tend to move toward their long-run equilibrium values and that markets will self-insure, caused us to ignore voices that foresaw the developing bubble and coming crisis. But something caused most of us to ask the wrong questions, and to dismiss the people who got it right, and I think one of our first orders of business is to understand how and why that happened.
Posted: 14 Oct 2015 11:36 AM PDT
Paul Krugman notes the correlation between getting tough on the financial industry and the flow of campaign cash. Some people argue this money doesn't much matter in terms of influencing elections, but the people giving it -- the ones so lauded on the political right for their wisdom on business and financial matters -- sure seem to think it does:
The Waaaaah Street Factor: Following up on my point about how this is looking like a Dodd-Frank election: to understand what's going on this election cycle, you really need to know about the dramatic shift in Wall Street's political preferences.
There was a time when Wall Street was quite favorable to Democrats. ...
But that all changed in 2010, when Democrats actually pushed through a significant although far from adequate financial reform, and Barack Obama said the obvious, that some financial types had behaved badly and helped cause the crisis. The result was a great freakout — the coming of "Obama rage".
Wall Street doesn't like the regulations, which really do seem to have more or less eliminated the implicit too-big-to-fail subsidy. Beyond that, with great wealth comes great pettiness: financial tycoons are accustomed to constant deference, and they went berserk at even the mild criticism they faced.
You can see the result in the chart: a drastic shift of campaign giving away from Democrats toward Republicans. And this will have consequences: if a Republican wins, he or she will be very much in Wall Street's pocket. If a Democrat wins, not so much.