Sunday, July 1, 2012

Macroeconomic Thought is Driven by Politics?

He's plenty smart enough to do the job. It's his lack of curiosity about complex issues which troubles me.

He truly believes he's on a mission from God. Absolute faith like that overwhelms a need for analysis. The whole thing about faith is to believe things for which there is no empirical evidence.

We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.

Unfortunately I'm giving it away, since that last one is quite famous. I think those quotes apply to Paul Krugman, but they come from a 2004 article by Ron Suskind on George W. Bush and his administration.

Krugman is certainly smart enough for the job. He didn't get a Nobel prize in economics for nothing. What's the job, though? Krugman still holds an academic position at Princeton, but he's not into academic life any more. Just ask anyone who takes his classes, goes to seminars at Princeton, or attends professional conferences. Krugman spends his time writing a NYT column, a NYT-sponsored blog, giving speeches, and writing popular books. If you have read Krugman's recent writings, and you know modern macroeconomics, you have probably noted his lack of curiosity. The ignorance may be willful, but maybe he just doesn't have the time. What a lot of distractions!

Krugman is indeed on a mission. That's a political mission, not a mission to educate the lay public about economics. He wants to see Democrats elected to high office, and he wants the adoption of a particular set of economic policies. Krugman's religion, which he uses to motivate his followers, is an Econ 101 version of Keynesian economics. This is a wonderful motivator, as there are millions of people out there whose only contact with macroeconomics was just that - a world of thrift paradoxes, multipliers, and macroeconomic-policy-as-engineering-problem - gleaned from Econ 101. These people are true believers, and if you can push them along by raising the specter of some mostly-unnamed foils - non-Keynesian bad guys intent on starving the unemployed - all the better.

As in the Bush administration, oft-repeated un-truth becomes truth, in the limit. You create your own reality - as in this recent missive. According to Krugman, there are good guys:
it’s not hard to find open-minded macroeconomists willing to respond to the evidence. These days, they’re called Keynesians and/or saltwater macroeconomists.
And there are bad guys:
...freshwater macro has been failing empirical tests for decades... Everywhere you turn there are anomalies that should have had that side of the ...rather than questioning its premises, that side of the field essentially turned its back on evidence, calibrating its models rather than testing them, and refusing even to teach alternative views.
But why do those bad guys cling to their silly theories in the face of all that contrary evidence?
So there’s the trouble with macro: it’s basically political, and it’s mainly – not entirely, but mainly – coming from one side.
Krugman finishes with:
Do we need better macroeconomics? Indeed we do. But we also need better critics, who are prepared to take the risk of actually taking sides for good economics and against dogmatism.

What's wrong with that?

1. The existence of the bad guys is a fiction - a figment of Krugman's imagination. I don't know any macroeconomists who identify themselves as "saltwater" and "freshwater." Modern New Keynesians, who I suppose are good guys in Krugman's mind, have much more in common with Ed Prescott than with John Maynard Keynes. If we dug Keynes up today and re-animated him, he would not recognize his ideas in Mike Woodford's book.

2. The watershed of modern macroeconomics was the Phelps volume and Lucas's Expectations and the Neutrality of Money. In the forty years since then, the profession has hardly been static. Methods have evolved; our ideas about the sources of business cycles have changed; we have adopted ideas from information economics, mechanism design, search theory, general equilibrium, and growth theory; research programs have come and gone. All of this development has involved an active interplay between theory and measurement - theory adapts to the evidence, measurement adapts to the evolving theory.

3. Modern macroeconomics has been much more concerned with science than with politics. Robert Solow, David Cass, Tjalling Koopmans, Len Mirman, and Buzz Brock were not thinking about politics when they developed the theory that Kydland and Prescott used in their early work. I don't think Kydland and Prescott had politics on their mind in 1982, nor was Mike Woodford thinking about politics when he adapted Kydland and Prescott's work to come up with New Keynesian theory. Everyone knows that the tickets to Washington typically go to old-style Keynesians - Tobin, Heller, Summers, Mankiw, Romer, for example. Modern Minnesota macros - Sargent, Wallace, Lucas (by association), for example - are basically nerds. If you gave Sargent a ticket, he wouldn't go.

One senses a tone of frustration in Krugman's post. He seems to think that the world should be on his "side," but even people who have only a vague idea of what practicing macroeconomists are up to aren't responding well to his message. Krugman's post is in part a response to Diane Coyle, who writes:
Paul Krugman in his new book End This Depression Now plainly thinks those who disagree with him about a fiscal stimulus now are blithering idiots. OK, maybe I am, but it’s not a good tactic to win me over in the debate.
I also ran across this New Yorker piece, which includes a conversation with Tom Sargent, and this comment:
Sargent has a halting, poker-faced manner and a tinge of California in his voice (he’s from Pasadena), which makes him seem laid-back and self-effacing. He’s no Paul Krugman.
Krugman is all about self-promotion and the demonization of straw men, and I think that's obvious to most people. So there's hope.

54 comments:

  1. That is sad; perhaps you will be more effective if you talk about what your m model of choice is (and has been) and how it was superior in its predictions of the past 4-5 years` economic happenings; all the best!

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    1. I don't have a "model of choice." Different questions, different models. I think what you're getting at is Krugman's claim that IS/LM has "predicted" marvelously over the last several years. That's nonsense.

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    2. Macroeconomics is not about predicting the future. For those kind of things you should generally consult fortune tellers, not economists.

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    3. "Macroeconomics is not about predicting the future. For those kind of things you should generally consult fortune tellers, not economists."

      Fine, but what about tendencies and potential processes rather than prediction? Surely that's better than claiming that the "...central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades"

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    4. BTW the above July 8, 2012 3:40 PM
      is by me - Mark. I am not the author of the 'parent'/original.

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  2. there's now so many different schools of thought in macro - Austrian, old Keynesian, New Keynesian, New Classical, post-Keynesian, MMT. Where's the science in that ? There are not 6 different theories of electromagnetism! To most people, it just looks like religion. Pick your theology, go to church/mosque and look down on those with different worldview.

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    1. there seem to be 6 string theories - and not everyone believes that string theory is the way to go.. but hey, you've obviously got the best ideas, why don't you let the rest of us in on the secret?

      http://superstringtheory.com/basics/basic5.html

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    2. So many different schools - that's actually a good organizational structure for a healthy science. Competition among ideas produces better ideas. That's simple economics.

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    3. "Competition among ideas produces better ideas." That is religion and not science unless it is supported by solid evidence that "Competition among ideas produces better ideas" holds every where and every time.

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  3. This is Stephens point. There are not different schools that describe modern economics departments. They're all mutually intelligible, and differ in only the particularly frictions they emphasize. Paul Krugman and the "no model for us, were Austrian" crowd, would love for you to think this. Greg mankiw Stephen Williamson and gauti eggertson can understand each other just fine.

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  4. When it comes to communicating with the the public, Krugman has a huge leg up on yourself and those you describe as modern macroeconomists ("the profession") because the rest of you stopped translating your models back into English a long time ago. Into the public relations void steps anyone - Krugman, the various econ blogosphere schools of thought, whatever - who is capable of communicating in English with the rest of us great unwashed, all of whom are dying to know what happened and how the situation might be resolved.

    You criticize Krugman, but the real problem here is yourselves: you've spent so long geeking out at conferences that you don't remember how to speak non-mathematically.

    Here's a concrete suggestion: every paper that professionals write should have a 2 page non-mathematical re-translation. The key here is not so much to provide accessibility to non professionals, but to get professionals back into the practice of explaining to the public both their methods and conclusions. Until real efforts to communicate are made, the professionals you speak of are in danger of having the public increasingly conclude that they're drifting out of touch.

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    1. JP, what do you think I'm trying to do here? Apparently you're reading this on a regular basis, so you must find it intelligible.

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    2. Stephen,
      Good point, and thanks for taking the time to write this blog.

      That said, JP Koning also has a point. Compared to physical scientists, economists seem underrepresented at my local Barnes and Noble. There, I can find a non-mathematical exposition of physical scientists' ideas on everything from string theory to genetics. Many of those authors presumably employ inaccessible mathematical tools in their academic work. Despite this obstacle, they seem to think their basic ideas are worth translating into logic that the public can follow. I'm not sure the same is true of leading macroeconomists. A sweeping generalization, I know. If I'm wrong, please point me in the right direction.

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    3. Sylvia Nasar's books are good, at least as intellectual history, but I don't think that's quite what you are looking for. This is interesting, actually, as the older generation of people who contributed the most to Minnesota macro - Lucas, Sargent, Prescott, Wallace, Sims - are not big on accessibility. None of them has written a book for the lay public. It's not that it can't be done. They just don't do it. Maybe we pay them too well.

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    4. "They just don't do it."

      It is interesting. Why not? If its not the inaccessible math -- or the incentives, which other fields share -- then what explains it? Maybe you could post your thoughts on this sometime.

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    5. I really don't know. Maybe they are just shy.

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    6. You're an exception, Steve ;)

      Maybe you should write a laybook on the subject.

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    7. JP makes a good point. There is no neoclassical counterpart to Krugman. At the same time, Krugman seems to be singularly ineffective at winning people in the middle over to his way of thinking. He keeps shooting himself in the foot by insulting anyone who doesn't agree with him.

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    8. "It is interesting. Why not? If its not the inaccessible math -- or the incentives, which other fields share -- then what explains it? "

      Probably because once you begin to translate new monetarist macro into lay English, you realize how ridiculous the theory is. This of course would jeopardize the fun math games in a sandbox - best to stick with the advanced math and at least keep the appearance of respectability (ie., it looks like physics --must be important stuff!!)

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  5. We have more than 6 theories of Macroeconomics. Do not forget Professor Williamson's now seemly defunct Monetarism (old or new).

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    1. Why would you think of that as defunct?

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    2. Maybe it is a reference to its irrelevance?

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  6. Much appreciate your blog, and glad to see somebody pulling up Krugman on his sad descent into political hack.

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    1. But there is absolutely no substance here, only a personal attack on Krugman. I have no problem with believing whatever Williamson says he believes in -- if it seems to work, that is -- but it doesnt and hasnt since GW Bush took office. In fact, growing income inequality accompanied by relative wage decline and weakening aggregate purchasing power, except for a few years during the Clinton administration, has been the story since Reagan took office and told us that government is the problem. The Williamson attacks on Krugman -- someone who actually seems to care about 15% real unemployment -- do nothing whatsoever to help us who are not professional economists understand what will get us out of this 1.6 generation mess. Unfortunately, Williamson seems to have no clue how clueless, weak and sophomoric he sounds.

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  7. When all else fails, try an ad hominem attack on Krugman. Oh, you just did. Krugman is known by his predictions that come true. Kind of like an Einstein of economics.

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    1. List his predictions that have come true.

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    2. What did Krugman do beyond poo-poo modern macro? A confused ad hominem attack doesn't deserve a detailed rebuttal.

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    3. "List his predictions..."

      Hamilton College has done that for you.

      http://www.poynter.org/latest-news/mediawire/130485/claim-krugman-is-top-prognosticator-cal-thomas-is-the-worst/

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  8. Lucas (2003):

    My thesis in this lecture is that macroeconomics in this original sense
    has succeeded: Its central problem of depression-prevention has been solved, for all
    practical purposes, and has in fact been solved for many decades. There remain
    important gains in welfare from better fiscal policies, but I argue that these are
    gains from providing people with better incentives to work and to save, not from
    better fine tuning of spending flows. Taking U.S. performance over the past 50 years
    as a benchmark, the potential for welfare gains from better long-run, supply side
    policies exceeds by far the potential from further improvements in short-run demand
    management.

    1) We entered a Depression less than 3 years after these words were spoken. Why didn't Lucas see the Depression coming in 2003, or '04, or '05?

    Second, why didn't Lucas, the Supply Sider, foresee that the Bush tax cuts were not going to work but that two unpaid for wars were going to bankrupt the federal government? These cuts were law, when he spoke, and the Iraq War started within 60 days.

    2) We are still in a Depression and nothing having to do with the Supply Side is going to get us out, for the Depression was caused by oil price shocks and private debt (Keen).

    In sum, you are clueless as to the scope and extent of the disconnect between what you write and what is happening in the real world.

    That's why you have been expecting inflation for over 4 years, that is never going to happen.

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    1. John D, your nonsense is getting tiresome. Nobody is fooled by your snake oil.

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    2. Maybe not you, Buster, but I am. : )

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  9. We may live through one more decade of low inflation, and professor Williamson will not change his mind. Facts and data do not matter.

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    1. And apparently you cannot understand ceteris paribus well enough to figure out why predictions of low inflation might not come to pass. Jesus you're an idiot, no wonder you don't work anywhere important.

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  10. To the illiterate commentator of 2:47 AM:

    Which part of the phrase "Taking U.S. performance over the past 50 years as a benchmark..." did you not understand?

    Moreover, before you delve into issues you know little about you should a)compare the response of the Fed during this lesser depression with that during the Great Depression and wonder if this difference has anything to do with why it is lesser, b)read the literature on the great moderation, and c)ask yourselves if the current form of the European monetary union, which has become a destabilizing force, was based on sound economics or populist politics.

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    1. I would agree with you if the massive bulge in the Fed's balance sheet had been a relatively short term event. But as far as I can tell, this bulge is going to stick around for many years to come. In other words, we are in uncharted territory. Also, don't call people illiterate when they obviously are not. That is not civil, and it will not win you any friends.

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    2. How do you call a person who cannot read properly (or understand what they read)? The same passage from Lucas is posted on every other piece Prof. Williamson puts up, despite the fact that it has been discussed thoroughly. On topic, much of what the Fed has done is based on economic theory and helped prevent a meltdown. So although Lucas exaggerates when he says that the problem of depression-prevention has been solved, his comment is not that far off.

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  11. have you read this: http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.24.4.85
    It seems Ricardo Caballero is not happy with the core of modern macroeconomics and at the same time he's an active researcher at a respected department (your main argument against Krugman seems to be he's inactive). So I was just wondering what you think about this.

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    1. Notice that he's recommending intellectual humility, not Krugman's arrogant pretense of knowledge.

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  12. Since you quote Diane Coyle as an authority, let us see what she thinks of modern macro:

    "Many academic macroeconomists adhere to Dynamic Stochastic General Equilibrium models and are, in my view, away with the fairies."

    SW:
    The watershed of modern macroeconomics was the Phelps volume ...

    And let us see what Edmund Phelps thinks of equilibrium macro:

    "We thought that, empirically, equilibrium theory would not work well. For one thing, the economies (at least the world economy) we lived in had become too rich for equilibrium theory to fit at all well: forming correct expectations about a sole experiment, such as a lower price or a new variation on a product, is one thing, but forming expectations when most or all firms are simultaneously experimenting is qualitatively different. For another thing, these economies were not really fluctuating around the stationary state or steady-growth path of neoclassical theory; they were constantly evolving in their structure and were changing too fast for economic relationships (between prices and quantities, for example) to have the durability that would be necessary for formation of accurate expectations about present and future data"
    ...
    "In the end, this way of modeling has not illuminated how the world economy works. "

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    1. He didn't cite Coyle or Phelps as authorities. Arguments from authority suck and so does your comprehension skills. Also, it's funny how everyone focuses on the (overstated) shortcomings of modern macro, as if modern macroeconomists don't admit there is still a good amount of progress to be made. What about the shortcomings of Krugman's old Keynesian world-view? Don't tell me you believe that Krugman is not "away with the fairies" and that his way of modeling has "illuminated how the world economy works?"

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    2. On this point, I wonder if Caballero, in his critique cited above, had Krugman in mind when he wrote these:

      "Modern Cassandras will always claim to have seen the crisis coming. What they will not say is how many times they saw things coming that never materialized, or how the specific mechanisms behind the crisis are different from those on which their predictions were based."

      "This distinction between core and periphery [macroeconomics] is not a matter of freshwater versus saltwater economics."

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  13. Krugman's paragraphs on the "bad guys" without ellipsis:

    "Recent events have been one empirical debacle after another for that view of the world – on interest rates, on inflation, on the effects of fiscal contraction. But the truth is that freshwater macro has been failing empirical tests for decades. Everywhere you turn there are anomalies that should have had that side of the profession questioning its premises, from the absence of the technology shocks that were supposed to drive business cycles, to the evident effectiveness of monetary policy, to the near-perfect correlation of nominal and real exchange rates.

    But rather than questioning its premises, that side of the field essentially turned its back on evidence, calibrating its models rather than testing them, and refusing even to teach alternative views."

    The ellipsis make it seem like Krugman is simply throwing out generalities, despite the fact that he explicitly mentions six empirical failings (interest rates, inflation, fiscal contraction, technology shocks, monetary policy, and exchange rates). Right or wrong on those points, the ellipsis (ellipsii?) make it sound like Krugman is engaged in generic bomb-throwing, as opposed to noting several specific overlooked empirical anomlies. Poor form.

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    1. You mean specific lies. For example:

      "the evident effectiveness of monetary policy"

      Does any modern macroeconomist anywhere deny the effectiveness of monetary policy?

      "the absence of the technology shocks that were supposed to drive business cycles"

      I know PK does not have much time to read scientific journals, but he should at least read the AER on occasion: "https://www.aeaweb.org/articles.php?doi=10.1257/aer.101.4.1144"
      My own research (currently under review) also finds that from 1963 to 2008 the behavior of the real rate of interest can in part be explained by an input and and output measure of technological progress (this one channel through which technology shocks are transmitted to the labor market). So it is not like the jury is out. Krugman is misinforming people.

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    2. You cite exchange rates as if Krugman's view on them is accurate. We all know exchange rates are disconnected from the macroeconomy, and none of us (including St Paul) know why. Your "gotcha" post is only surpassed in its sadness by your understanding of the economy, Anon 11:47.

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    3. Huh?

      There is a 'cycle' in "business cycle". That positive technology shocks can and do play an important role in booms is not in dispute. What is in dispute is the role of *negative* shocks in causing depressions and large scale involuntary unemployment.

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    4. 1) Krugman writes: "the absence of the technology shocks that were supposed to drive business cycles". He does not distinguish between booms and busts. And of course we do have the supply shocks of the 1970s, which can be viewed as adverse technology shocks.

      2) I have some ideas why a recession may not require a negative technology shock (once home production is taken into account), but am not ready to share them in full detail yet. I also have some preliminary results showing that higher dispersion in the use of IT across sectors is associated with lower matching efficiency in the US labor market, likely for the reasons highlighted by Acemoglu (1999). So the impact of sector-specific shocks on aggregate employment may depend on the stage of diffusion of a new technology. What I am trying to say is that the role of technology shocks is still under investigation, yet none of this fits Krugman's IS-LM view.

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    5. Earth to Anon 11:47,

      I talked about interest rates, not exchange rates! Who is the saddest one of all?

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    6. So, use of IT in a sector says something about acquisition of some IT-specific human capital by people in that sector. Then, it's going to be hard for people to move from a low-IT sector to a high-IT sector while the technology diffusion is happening? Can you relate this to recent events, or do you not want to stick your neck out yet? Do you think this is a big deal?

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    7. For example, in the past to work as a warehouse manager all you needed were basic literacy and people-management skills, and certain physical abilities. This means that an unemployed sub-contractor in construction could move to the warehousing sector relatively easily. Today warehousing is much more computerized than construction. Most ads list familiarity with computers and even experience with warehouse management systems as a requirement. The same sub-contractor would therefore have a harder time securing a job in warehousing. So what I have in mind is that the adoption of skill-specific IT by some sectors but not others makes the labor market more segmented, and amplifies the impact of random adverse shocks in some sectors on aggregate unemployment. The preliminary statistical results I have show that greater dispersion in the stock of software per worker across sectors coincides with drops in matching efficiency (outward shift of the Beveridge curve). Specifically, in the 1960s IT was used by only few sectors, so mismatch was unimportant. In the 1970s and early 1980s we see a greater diffusion of IT and greater dispersion across sectors. We also observe an outward shift of the Beveridge curve. In the mid 1990s, when IT has been adopted by most sectors and computer literacy has become the norm, the Beveridge curve shifts back in. Is this a big deal? I think so, but I guess it will be up to the referee to decide! :)

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    8. CA,

      I was responding to Anon 11:47, not you. You're the only one making sensible posts in this little section. Apologies if you thought I was attacking you instead of the dummy.

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    9. No problem. I realized after I re-read your post but it was too late! :)

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  14. I found this post following a link from Mark Thoma.

    He's holding it up as one more example of KDS.

    (That's Krugman Derangement Syndrome, for those unfamiliar with this widespread pathology.)

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  15. Thought you might be interested in Simon Wren-Lewis' more thoughtful take on this issue:

    http://mainlymacro.blogspot.com/2012/07/ideology-and-falsification-in.html

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