Here is a Stiglitz talk at the Lindau meetings. He gets going, and you think it is just going to be Krugman ideas - kibitzing about modern macro in general. He makes the common error of finding fault with models that did not predict the crisis. If you build a good model of a financial crisis, the people living in that artificial environment know that a crisis can happen, but they won't be able to predict it. And you won't be able to use the model to predict a crisis in the real world either.
However, the talk then gets more interesting. It becomes clear that, when he's finding fault with models that are in common use, he has actually talked to people and tried to figure this out. The models he finds fault with are apparently New Keynesian models. He thinks that wage rigidity is unimportant, that the distortions that New Keynesians worry about don't matter much, and that we should be more concerned with financial frictions and credit. Excellent! A central banker tells him that the model used in his or her central bank has no banks in it. Stiglitz is flabbergasted. Stiglitz is now my hero.
He thinks that...we should be more concerned with financial frictions and credit.ReplyDelete
Hasn't he been saying that for years? I can't see him being your hero for long. His politics are too far left for you.
I'm joking of course. I haven't paid much attention to what Stiglitz has been saying recently, but I get the sense that I would not like a lot of it. The bad part of his talk is that the young economists in the audience might interpret this as a dismissal of all modern macroeconomics. I can read between the lines and see some things in there I agree with, but those people might be mislead. What do you think I would find disagreeable about his political views?ReplyDelete
someone who regularly goes onto democracy now, and gets a positive reception, does not seem like your cup of tea. "It becomes clear that, when he's finding fault with models that are in common use, he has actually talked to people and tried to figure this out". it's interesting how someone needs to have a deep understanding of the models in use in mainstream macroeconomics to criticize them but you don't need any understanding whatsoever of heterodox models to criticize them.ReplyDelete
Apologies if this comment duplicates – the comment box seems to be acting strangely.ReplyDelete
What do you think I would find disagreeable about his political views?
On a Saturday night, even a very wet one, I’m not going to go searching your pronouncements and his looking for differences, but here’s a few snippets from a recent Stiglitz article.
He tells us that:
...central banks are political institutions, with a political agenda, and that independent central banks tend to be captured (at least “cognitively”) by the banks that they are supposed to regulate.
He describes the debt-ceiling standoff as follows:
...the extreme right threatened to shut down the US government, confirming what game theory suggests: when those who are irrationally committed to destruction if they don’t get their way confront rational individuals, the former prevail.
He argues for fiscal stimulus:
...with housing prices continuing to fall, GDP growth faltering, and unemployment remaining stubbornly high (one of six Americans who would like a full-time job still cannot get one), more stimulus, not austerity, is needed – for the sake of balancing the budget as well. The single most important driver of deficit growth is weak tax revenues, owing to poor economic performance; the single best remedy would be to put America back to work. The recent debt deal is a move in the wrong direction.
If you say ditto to more than one of these three pronouncements I have misunderstood you. My expected value is close to 0/3.
If financial frictions are the more important problem, what courses of action (if any) are recommended?ReplyDelete
1. "...central banks are political institutions, with a political agenda, and that independent central banks tend to be captured (at least “cognitively”) by the banks that they are supposed to regulate." This is a standard problem with regard to the regulators and the regulated. The people with the knowledge to know how to be regulators often come from the set of the regulated, and vice versa. There are going to be conflicts of interest. The key questions are how serious you think the problem is, and what you intend to do about it. If Stiglitz wants the legislative branch to have more control over the Fed, then I think that's a bad idea.
2. "...the extreme right threatened to shut down the US government, confirming what game theory suggests: when those who are irrationally committed to destruction if they don’t get their way confront rational individuals, the former prevail."
That's a political statement. He wants you to think his opponents are wacky. I'm sure you can specify a game with rational players that would describe observed behavior.
3. On the fiscal stimulus, I'm with Milton Friedman. Good decisions on tax policy and spending are never made in a hurry, and it's best to make sound economic decisions about what the government should be spending on, based on particular advantages the government has over the private sector. Then we pay for that spending by designing our tax system in an efficient way. You can make a good case that some transfers, like unemployment insurance, should increase in a downturn.
Now, I think most of what I would disagree with Stiglitz on has to do with economics, even on the second item. There he's pretending to talk economics but he's talking politics. Probably Stiglitz and I agree that we would not want Michele Bachmann, Rick Perry, Ron Paul, or Sarah Palin running the country. That seems like political agreement.
What we should ask of models is to help us both correctly gauge the risk of major crises and recognize them once they are underway. These two requirements have nothing to do with "prediction".ReplyDelete
Were economists' models helpful in the above two regards?
I'll take your word for it. Who, exactly, was "helped"?ReplyDelete
Setting aside political feasibility, I don't understand how a Ricardian intervention is more effective than Old Keynesian deficit-financed tax cuts. The difference is that we're assuming here that the government can commit to paying off the debt in good times (which actually sounds like "Hard Keynesianism"). Do you want to commit to paying off the debt because that's desirable in itself, or do you think a permanent deficit increase through the same sort of mechanism is less effective at fighting a recession? And do financial frictions come into the picture at all other than not being a traditional Keynesian problem like sticky wages?ReplyDelete
Here's a book, "Too Big to Fail" by Stern/Feldman.
When the book was published, in 2004, Stern was President of the Minneapolis Fed. There's certainly a warning in the book, but I'm not sure a lot of people were paying attention at the time.
The government's intertemporal budget constraint - basically the idea that when the governement floats debt it has to be paid off at some point in the future - is a reality. Less taxes today means more taxes in the future. I wanted to think about an fiscal policy intervention that made that explicit. If you cut taxes today, you have to raise them in the future, so what not commit to that. Unfortunately, in traditional Keynesian stabilization policy arguments, no one ever worries about the future.ReplyDelete
What I think of as a "financial friction" is entirely different from wage or price rigidities. In modeling financial frictions we think about features of credit markets such as asymmetric information and limited commitment (running away from your debts), which lead into, for example, thinking about the role played by debt vs. equity, or about collateral.
If Ron Paul was listened to say one or two...ummm...DECADES ago, do you think we'd be in the position of our government being Lehman Brothers?ReplyDelete
Ron's economic policy prescriptions are quackery. That usually gets you in trouble, I think.ReplyDelete
A (true) Stiglitz story for you:ReplyDelete
A student (not me) brought the current draft of his dissertation to Stiglitz. Stiglitz started leafing through it, glancing at each page in turn. After he had done this for a while, he stopped, seemingly at random, and pointed to an equation on the page. "What is the intuition for this?" he asked.
The student looked at it, then said, "To be honest, I'm not really sure."
Stiglitz replied, "Come back to me when you know."
The student went home and, after he had worked on the equation for a while, he realized it was wrong.
A funny take on this is that, sometimes, Stiglitz had the intuition, but the equation was wrong. I was thinking about this recently. When I was in graduate school, I read Stiglitz and Weiss's paper on credit rationing. The paper was somewhat sloppy, but the ideas were in general correct. They basically assumed a debt contract, and then ran with the idea, sometimes in indecipherable ways. I looked at that, and I had also read Townsend's costly state verification paper, and thought: You don't have to assume the debt contract, you can derive it in the same way Townsend does, and get the credit rationing equilibrium. Stiglitz's intuition told him that there was something Keynesian about the credit rationing. It turns out that's not correct - in general equilibrium you don't get anything remotely Keynesian, other then some idle resources. My paper on credit rationing came out in the QJE, and that made some people, including my colleague Costas Azariadis, think I was a Keynesian, .ReplyDelete