Wednesday, December 28, 2011

Ricardian Equivalance Heat

Here's the latest word from Paul Krugman on Ricardian equivalence. First Lucas doesn't understand it. Now, not only does David Andolfatto not understand it, he can't read either. What's the world coming to? Who taught that idiot Andolfatto anyway? Send him back to Surrey for reading lessons. Maybe he should consider going back to drywalling.

Here's what Krugman says:
I accused Lucas of not understanding Ricardian equivalence. Here’s Lucas’s argument:

But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. There’s no reason to expect any stimulation. And, in some sense, there’s nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that.

That’s saying that the spending response to expected future taxes leads to a fall in consumption that exactly offsets the expansionary fiscal policy. If that’s not a Ricardian equivalence argument, what is it?
What's Lucas saying? There's a bridge, it's funded by increasing taxes. Lucas says it doesn't make any difference that the government does this. He also says the answer doesn't change if the taxes that pay for the bridge are current taxes or future taxes. The last part of that is Ricardian equivalence. So what is wrong with that argument? It could be the spending actually matters, regardless of how it is financed, and we could argue about that. It could be that Ricardian equivalence does not hold in practice, and we could argue about that. Does Lucas somehow indicate in that line of reasoning that he doesn't understand Ricardian equivalence? Absolutely not. I was telling people that I thought Krugman had to understand Ricardian equivalence. My undergraduates get it. Why can't he? I don't want to be accusing the poor man of lack of understanding or poor eyesight. Maybe he can clear this up?

Here's another puzzler for you:
Then Andolfatto says that Lucas was arguing that it matters how government spending is financed. No, he wasn’t. Right there, he argues that government spending doesn’t matter at all:

If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that’s just a monetary policy. We don’t need the bridge to do that. We can print up the same amount of money and buy anything with it. So, the only part of the stimulus package that’s stimulating is the monetary part.

So he was saying that government spending can’t raise aggregate demand. Period.
Figure that one out and I'll give you a prize. Krugman starts off by tellling us he's going to show us that Andolfatto was wrong. But put this Lucas quote together with the previous one, and Andolfatto's interpretation seems to be exactly what Lucas said. Lucas told us in the first quote that the government spending won't matter if it's paid for through taxation (present or future). Then, in the second quote, he says that it will matter if the Treasury issues debt to finance the expenditure, and the Fed buys the debt. What Krugman says to summarize, i.e. "so he was saying the government spending can't raise aggregate demand," is essentially correct, but that is not in contradiction to what Andolfatto said. I would not use the words "aggregate demand" in relation to what Lucas was talking about, but we'll let that one go.

Here's where Krugman heads for the gutter:
Look, I know people want to defend Lucas and hit at me, but what Lucas said there betrayed a fundamental failure to understand the implications of debt-financed spending — followed by an outright smear against Christy Romer.
A fundamental failure to understand...? That's not the problem here at all. One could construct a coherent set of debating points, based on theory and empirical work, to counter what Lucas is saying, but there's no fundamental failure to understand something. I think it would be fun to have that debate, and I'm sure Lucas would be game. On Christy Romer, it helps to read the whole transcript of Lucas's talk, which is available here. The earlier quotes were taken from the main talk, which apparently was never written down. It looks like Lucas is making it up on the spot, presumably from notes. The Christy Romer stuff is in the Q&A at the end. Here's the relevant part:
QUESTIONER: Ben Steel, Council on Foreign Relations. Bob, I edit a journal called International Finance and I get a lot of submissions from people who build big models -- big economic models -- and the shortest referee reports I get back condemn these submissions by saying this model is subject to the Lucas critique. In the last session, we had quite an animated discussion which spilled over into the lunch about models on fiscal multipliers, what they are.

On the one extreme, we have models by people like Mark Zandi at Moody's who say that the fiscal multiplier for the spending initiatives we're discussing are on the order of 1.5. On the other hand, we have people like Robert Barro at Harvard who say there's zero or negative. How would you go about applying the Lucas critique to these types of models to sort of educate us in how we should think about the validity of these models?

LUCAS: Do I need the Lucas critique for -- I'm with Barro is the short answer. (Laughter.) The Moody's model that Christina Romer -- here's what I think happened. It's her first day on the job and somebody says, you've got to come up with a solution to this -- in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning.

So she scrambled and came up with these multipliers and now they're kind of -- I don't know. So I don't think anyone really believes. These models have never been discussed or debated in a way that that say -- Ellen McGrattan was talking about the way economists use models this morning. These are kind of schlock economics.

Maybe there is some multiplier out there that we could measure well but that's not what that paper does. I think it's a very naked rationalization for policies that were already, you know, decided on for other reasons. I don't -- I'd like to talk about the Lucas critique but I don't -- I don't think we can -- (chuckles) -- deal with that issue.
The question is about models and multipliers. Lucas tells us a story about how he imagines Christy Romer does her job. In fact, you can see how she does it in this speech from February 2009. She talks about how she and Jared Bernstein used some "very conventional macroeconomic models" to come up with a multiplier of 1.6, which she thinks is on the low side. As Lucas says, he thinks exercises like that are "schlock economics," and he's right. The "very conventional macroeconomic models" Romer is talking about are large-scale macroeconometric models which are fundamentally the same as the ones constructed in the 1960s and early 1970s - the FRB/MIT/Penn model for example. Those were the models Lucas criticized when he wrote this paper, which is part of what the question was about. It's not a smear to question someone's methods. Sorry, Paul.

Here's the finishing paragraph, and it's a winner:
Ever since I started writing about the failures of modern macro, I’ve been attacked by people claiming that I just don’t understand the depth of their thought. Each time it turns out that they either are making basic errors or simply can’t manage to read what I and others actually wrote. And here we have another example.
You have to pity the poor man who wrote that. Viciously attacked by arrogant failures who just can't get it right.

Well, give me a break. What does Paul Krugman want exactly? If you go around badmouthing the cumulative work over 40 years of many macroeconomists - work that has been vetted by mainstream economic journals, hashed over in many hours of seminars and conferences, and awarded many prizes, including several Nobels - do you want a pat on the back, or what? The smearing isn't being done by Bob Lucas here.

114 comments:

  1. Imagine a country inhabited by "Keynesian households," that is to say, people who believe that debt-financed public investments undertaken when unemployment is high and interest rates are low will yield higher GDP growth than the status quo.

    What happens if we add Ricardian Equivalence? Well, if expected GDP increases, then the government debt can be paid off at a lower tax rate (applied to larger income base). And if expected GDP is higher, then my future income is likely to be higher as well. Thus, these Keynesian households rationally believe their after-tax incomes will be greater. And, if so, then they may actually increase their spending today, giving rise to a Keynesian cum Rational Expectations multiplier.

    Sorry for the double comment, but it seems more timely here.

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  2. I think you're being a bit disingenuous here.

    Lucas was asked about the stimulus - a stimulus that would be funded entirely through an increase in the deficit. He then gives an answer as though it would funded by an increase in taxation, and then at the end states that this is the same as the actual situation (presumably because of Ricardian Equivalence). Clearly that last point is fundamental to what he was saying.

    What Krugman is saying, is that even if Ricardian Equivalence does hold it isn’t legitimate to answer the question like that because debt-financing and taxation are not the same when it comes to a temporary stimulus (for the reason he outlined).

    You have to look pretty hard to find a problem in that.

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  3. According to you Lucas is nothing but a political hack for the right wing and the Kochs.

    Lucas said, in the talk to which you refer, "I think it's a very naked rationalization for policies that were already, you know, decided on for other reasons."

    This statement is equivalent to conspiracy theories thrown out by wack jobs like Ron Paul and Newt Ginrich.

    If that isn't political slander, nothing more or less, what is it?

    Exactly what "other reasons," already decided upon, were behind Obama's policies?

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  4. Regarding the failure of moden macro, it seems clear to me that Krugman's case is proof to a moral certainty.

    We have been in this mess for 4 years and are no closer to resolution than when we started and Lucas promised it would never happen.

    Let me repeat: Lucas promised it would never happen

    I do know one law that will add jobs. End tenure (and with it the sticky wages of faculty), fire all current econ profs. and let the universities hire anew, at lower wages

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  5. Greg,

    I don't understand the experiment you are contemplating. "Well, if expected GDP increases..." Why did that happen?

    "I think you're being a bit disingenuous here."

    Not even a bit. I know exactly what Krugman is saying. You don't have to explain it to me.

    "According to you Lucas is nothing but a political hack for the right wing and the Kochs."

    No, Lucas is just a guy who likes to think about economics. He has no political agenda, as far as I can tell.

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  6. Proof to a moral certainty? I had not heard of that one. Must be like proof by contradiction.

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  7. "Not even a bit. I know exactly what Krugman is saying. You don't have to explain it to me."

    Yes, of course you do; that's why it's disingenuous...

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  8. disingenuous: Not candid or sincere, typically by pretending that one knows less about something than one really does.

    I'm being completely candid and sincere. There's no pretending, Adam. Krugman isn't trying to enlighten anyone about Ricardian equivalence. He's only interested in trying to make Lucas look stupid. It's pretty simple.

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  9. Stephen,

    "I don't understand the experiment you are contemplating. 'Well, if expected GDP increases...' Why did that happen?"

    Because households with a Keynesian model of the economy in their heads will expect an increase in GDP if government undertakes debt-financed investments when unemployment is high and interest rates are low.

    By the same token, households who view the economy through Barro's glasses won't expect GDP to rise, but will expect to pay higher taxes in the future, and will start saving now. Doesn't this mean that you've got "high output" and "low output" equilibria, both of which are internally consistent with respect to their theory-laden expectations?

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  10. Greg,

    A lot depends on how the world actually works. For example, Sargent and Hansen have thought about what happens when people have incorrect beliefs about the world they live in, and they gradually learn about what is going on:

    http://press.princeton.edu/titles/8535.html

    That's hard stuff. Rational expectations equilibria are much easier to think about and work through, which is why we typically do things that way. Rational expectations does not preclude the phenomena you want to think about. There is a whole set of coherent, rational-expectations, coordination failure models that deliver the multiple equilibria you are talking about - bad equilibria with low output coexist with good equilibria with high output. That's not what New Keynesians do, though.

    Once you have the multiple equilibrium model, typically there are policies you can design in the model that will get you to the good equilibrium. The problem for traditional Keynesianism is that those policies may not look like what, for example, Krugman might prescribe.

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  11. I'm confused. Krugman claimed Lucas argued from Ricardian equivalence ("If that’s not a Ricardian equivalence argument, what is it?"), David Andolfatto claimed he did not ("this is not a Ricardian Equivalence argument against stimulus"), and you agreed with Krugman ("The last part of that is Ricardian equivalence"). And yet your tone seems to indicate you disagree with him. Or maybe that first paragraph in which you call Andolfatto an idiot is intended to be a statement of your own opinion rather than channeling Krugman? Unclear.

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  12. I can certainly see why you are confused. Don't approach it by assuming that Krugman put together a logical argument. He didn't. Ricardian equivalence was not fundamental to Lucas's argument. RE played a bit part. Lucas is talking about the general efficacy of the stimulus. His argument is logical - he hasn't said anything stupid - though you could argue the economics. The fundamental disagreement with Krugman is over two statements:

    1. Lucas does not understand Ricardian equivalence.
    2. Lucas is being mean to Christy Romer.

    Both of those statements are false.

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  13. Stephen,

    When you say "A lot depends on how the world actually works" and point to work on "what happens when people have incorrect beliefs," I think you're begging the question, i.e., assuming the Keynesian households in my example have incorrect beliefs.

    In the case I outlined, the beliefs of these households are self-fulfilling in the sense Roger Farmer has theorized about. Or, see Heller's “Coordination Failures Under Complete Markets with Applications to Effective Demand” (1986), which reaches the same conclusion.

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  14. <sarcasm>But I thought Laffer disproved Ricardian Equivalence by showing that current borrowing could be paid for by future tax cuts.</sarcasm>

    Stephen, I would make Greg's point a little more strongly -- the Ricardian Equivalence argument is circular reasoning. If you don't assume a priori that it holds, then you have to allow for the possibility that the decision to tax now or tax later affects growth and therefore pre-tax incomes, and that means that permanent incomes could change and the Keynsian households in Greg's example may not have incorrect beliefs about the world -- their future losses from future taxes may be offset by their gains in pre-tax income, so they have no reason to cut consumption now. I'm not saying I can prove this will happen, I'm saying if you don't assume a priori that Ricardian Equivalence holds, you cannot assume a priori that this doesn't happen. But then the whole Ricardian Equivalence argument falls apart.

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  15. OK, I think I've got it. The weird thing is that this sounds like something I'm working on. It's a multiple equilibrium story, which has to do with dysfunction in the credit market. Everyone in this world is forward looking - they're hyper-rational and can figure everything out. People borrow in the credit market, and there is limited commitment. That means that you can potentially run away from your debts. But you may not want to do that if you know that people won't lend to you in the future if you are a known defaulter. There is an equilibrium which is Ricardian. If the quantity of government debt increases, it doesn't make any difference as this is just a change in the timing of taxes for everyone. However, there are other equilibria where there some people are good borrowers and others are bad. Who is good and who is bad is endogenous. Essentially, if I treat you like a bad borrower, you will behave like one. A bad borrower always defaults on his or her debts, but may be able to borrow occasionally in circumstances where lenders can't distinguish good borrowers from bad ones. Now, introduce some government debt, and it can make things better, essentially by serving as collateral. It's non-Ricardian. Thus, as you're saying, Ricardian equivalence can be an endogenous thing, i.e. self-fulfilling. In some sense, if you believe it, it happens, if you don't it doesn't. Very good.

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  16. But if there are multiple equilibria, then sacrificing a goat would be prime facie as likely as an increased deficit to get the economy to switch from the bad equilibrium to the good equilibrium.

    It's not really helpful to say that Ricardian equivalence is false when there are multiple equilibria. You might as well say that everything is false when there are multiple equilibria. Unless you can argue that some sort of temporary stickiness of something makes deficits more effective than goats in switching from one equililibrium to another.

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  17. But Krugman is saying that even if you assume FULL Ricardian equivalence, every single person in the world has perfect public knowledge, the ability and education to evaluate it perfectly and instantly, other super powers,... that government spending is still expansionary. The government deficit spends an extra trillion today; people know taxes are going up by a trillion over the coming decades, so they save an extra hundred billion or so this year, not one trillion this year because of consumption smoothing (hmm, is he thinking they will save the whole one trillion this year because the government goodies consumption compensates?). As $1 trillion this year is greater than $100 billion this year, aggregate demand increases this year. See: http://krugman.blogs.nytimes.com/2011/03/10/ricardian-confusions-wonkish/ for Krugman's wording.

    Do you disagree with this? Because this looks like what Krugman is saying Lucas misunderstands, at least in the Lucas quote.

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  18. Nick,

    Yes, exactly. In some multiple equilibrium models the goat sacrifice works as well as anything if people coordinate on it. What I was describing above is a case where you have multiple equilibria, and issuing government debt can kill some bad equilibria, and make other bad equilibria better.

    Richard,

    Let's forget about what Krugman wants to argue about. He wanted to get into some personal stuff which is not very interesting. Traditional Keynesian thinking does indeed exploit a lack of Ricardian equivalence, without being explicit about it. Take the simplest approach - Keynesian cross. People consume a constant fraction of disposable income. Cut taxes and you get a multiplier effect. There's a difference between the "balanced budget multiplier" and the standard multiplier on government expenditures because you don't have Ricardian equivalence.

    New Keynesian models are ones with Ricardian equivalence. The representative agent is forward looking. Further, markets are complete, i.e. there is perfect insurance. The only deviation from the basic neoclassical paradigm there is the sticky prices, or maybe sticky wages too. Some of those models get big fiscal policy effects at the zero lower bound on the nominal interest rate, though I'm not sure I completely understand why. I think there are arguments that say that is some artifact of the linearization that is typically done in the analysis.

    Even with Ricardian equivalence, there are plenty of good reasons why government spending matters. We know we need the government to do some things, and even if we're not convinced that sticky wages and prices are important, we might want the government to do some more of those things in a recession. It's not simple though, i.e. I don't want to give you the idea that you can spend on anything and it will make us better off.

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  19. Steve: "What I was describing above is a case where you have multiple equilibria, and issuing government debt can kill some bad equilibria, and make other bad equilibria better."

    Aha. I missed that bit. OK, that's where the "government bonds as colateral" bit comes in.

    "Some of those models get big fiscal policy effects at the zero lower bound on the nominal interest rate, though I'm not sure I completely understand why."

    Simplest possible case: assume an Euler equation IS curve determines the natural rate of interest. If current G were a perfect substitute for current C then a temporary increase in G would have no effect on the natural rate. Zero fiscal multiplier. But if current G were an imperfect substitute for current C, the natural rate would (generally) be increased. Positive fiscal multiplier, since an increase in G raises the natural rate above the rate set by the central bank.

    That's *implicitly* what's going on in those NK models.

    In fact, by making the right assumption about the substitutibility/complementarity between current G and current C and future C, you can make the fiscal multiplier positive or negative or whatever.

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  20. He's only interested in trying to make Lucas look stupid. It's pretty simple.

    I agree. I do it here, routinely, and I am only a trial lawyer.

    Which reminds me, Lucas, wasn't he the guy who falsely promised, as President of the AEA, that we know macroeconomics and that there would no more Lesser Depressions?

    Compared to Christie's small fib (unemployment won't go above 8%) that is a whopper.

    His saying anything about her is clearly worse than the pot calling the kettle black.

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  21. Ricardian Equivalence . . .

    Any one who has read Thinking Fast and Slow knows that the entire idea of a Ricardian Equivlance is nothing but economic self interest (and hence bias) parading as economics.

    The arugment is that people, knowing they will be taxed, with save, defeating the purpose of using deficits to fight deflation or to stimulate expansion.

    The flaw in the argument is the unstated assumption that the taxpayer has no other thoughts or choices.

    Lucas likes to us long term trend lines (which are meanigless) on which to make arguments. But, having made the choice, lets apply estoppel to his argument, meaning that we can use long term trend lines against him.

    Rational taxpayers know that the long term trend in the United States is to the opposite---we do not raise taxes to pay down debt. Indeed all of the GOP and thus have of Congress has pledged not to raise taxes under any circumstances. Thus the long term trend line on taxes is down and the rational taxpayer will not expect to pay more taxes if we have deficits now.

    When we get this far into the argument we can see what is really happening. Macroeconomics is not a science, it is a pawn in the national negotiations over taxes and is nothing but a means and method for the Kochs to cut their taxes under all environments.

    Can we have some honesty here? This is a game being played with the lives of the 99% by which academic macroeconomits seek and curry favor with the 1%

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  22. "Can we have some honesty here? This is a game being played with the lives of the 99% by which academic macroeconomits seek and curry favor with the 1% "

    Actually, my honesty usually gets me in trouble, but I don't have any problem with that. What exactly you think I have to do with the Kochs I have no idea. That's quite a misdirected diatribe.

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  23. Prof. Williamson, you ask, "What exactly you think I have to do with the Kochs?"

    I will be blunt---you shape your writing to curry favor with those whom are in a position to reward you financially. This is why you take on Krugman. You are wise enough to know, as just well repeated at the Movies (Girl with Dragon Tatoo), that the enemy of my enemy is my friend. Don't be cleaver or coy; your incentive caused bias in on your sleeve. The Kochs are a metaphor for the 1%. Your writing is consistently pro the 1% narrow short term intesest on any and every issue. That is your long term trend line.

    You will promote Lucas when he plucks a meaningless long term trend (3% GDP) over 150 year out of the air and yet you refuse to engage on three real trend lines

    1) private debt, as per Keen (who saw the Lesser Depression coming)

    2) federal r&d as a percent of GDP

    3) investment as a percent of GDP declining, concurrent with our cutting taxes (smart money is fleeing our tax cuts. Why?

    4) the vision thing, neuroeconomics, that intangible called confidence, et.

    5) location--the smart firms and individuals are "leaving for the [China] coast."

    And, that really is your greatest failing. You have no appreciation for literature or art.

    And the three men i admire the most,
    The father, son, and the holy ghost
    They caught the last train for the coast
    The day the music died
    I started singing


    You are likely blind to all of this.

    Kahneman just wrote about pundits like you:

    Political columnists and sports pundits are rewarded for being overconfident. Most successful pundits are selected for being opinionated, because it's interesting, and the penalties for incorrect predictions are negligible. You can make predictions and a year later people won't remember them. There was a study by Phil Tetlock about the ability of pundits, CIA analysts and academic experts to make long-term strategic predictions, looking five to 10 years ahead. They couldn't do it, but believed they could. And the people who were most overconfident, and had the strongest theory? They're the ones who were on TV.

    We're blind to our blindness. We have very little idea of how little we know. We're not designed to know how little we know. Most of the time, [trying to judge the validity of our own judgements] is not worth doing. But when the stakes are high, my guess is that asking for the advice of other people is better than criticising yourself, because other people are more likely – if they're intelligent and knowledgeable – to understand your motives and your needs.

    http://www.independent.co.uk/arts-entertainment/books/features/were-blind-to-our-blindness-we-have-very-little-idea-of-how-little-we-know-were-not-designed-to-6267089.html

    you are trying to be opinioned and to get noticed, as a pundit.

    I have read your papers. It bleeds through the pages.

    I understand your motives and needs and you should start to listen

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  24. Anon,

    If that's the case, couldn't the same be said of Krugman? That he writes to curry favor to those who are in a position to financially reward him? The NYTimes is not afraid to fire bad op-ed writers (see Bill Kristol) despite good pedigrees.

    You're arguing from a closed system. If you make the assumption Steve is ultimately biased, then any attempt to defend impartiality will be seen as a further retrenchment into blindness (being blind to blindness). Please step down from your dialectics. It's impossible to advance constructive dialogue when you begin from these closed premises.

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  25. I could believe in multiple equilibria, one like Greg's and one where RE was a self-fulfilling prophesy, except that the mechanism of Ricardian Equivalence seems wrong to me. It's not that I don't believe that the choice between borrowing and taxing is often a wash, I can think of plenty of reasons why deficits can be harmful, I just don't think Ricardian Equivalence gets at any of them.

    Intuitively it seems to me that many people living paycheck to paycheck would eagerly spend a deficit-financed tax rebate, and that if you're assuming otherwise there is probably something wrong in your assumptions about human behavior, and it's not even your assumption that people are rational, I suspect you have wrong assumptions about what is rational. But that said, if the behavior described in Ricardian Equivalence applies to anyone, it should apply to someone who is smart, conservative (biased to expect RE to hold), understands economics well and follows the news... someone like Stephen Williamson.

    So I'm curious... do you ever take the deficit into consideration when making spending decisions? For example, did learning about the deficit funded invasion of Iraq affect your spending decisions? Did any news out of the deficit ceiling showdown, any implications for the future deficit or your future taxes ever affect a spending decision you've made?

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  26. Anon asked this Anon, "If that's the case, couldn't the same be said of Krugman?"

    The answer is yes and I apply a very stong incentive caused bias filter to whatever Krugman says or writes. In fact, that is why I am pretty much a straight Keynesian--he is dead and not subject to bias. (I believe that Obama should ask for a Keynesian Constitutional Amendment, only permitting deficit financing when unemployment and underemployment exists and requiring progressive VAT and wealth taxes which pay down the deficit at all other times. I would end income and FICA taxes, both because they are regressive as applied, and the later because it is a direct tax on creating jobs.)

    The principal reason I read Krugman is that, by definition, new ideas, thoughts, or insights only come from liberals (whom you then have to filter with a massive common sense lens) There are, by definition (and observation), no conservative ideas in the history of the World. Never have been and never will be.

    I read and post on this blog solely due to geography. It is against by best interest that Williamson advance for his ideas are wrong and wrong for this region.

    As to your request that I "Please step down from your dialectics. It's impossible to advance constructive dialogue when you begin from these closed premises," the answer is No, for my premises are not closed.

    I apply the same thinking process as do Munger and Buffett as outlined by Munger in his speech at Harvard, The Psychology of Human Misjudgment. With almost 100 years of investing experience, Buffett and Munger do not even read what brokers and others say, applying the filter of incentive caused bias.

    At present, I am updating Munger with Thinking Fast and Slow filters.

    Read Munger and Thinking Fast and Slow--both leave plenty of room for constructive dialogue.

    I have continually listed 5 or so areas for discussion, the most important being the "Vision Thing." Anyone who walks the streets can see that the vision thing is what is killing us, that, private debt and income distribution.

    Williamson will never admit such, he won't even respond to the qeustion (for he has no answer) but cutting wages in a Depression caused by private debt does not work. It cannot work. It can only cause the burden of debt, the ratio of debt to income, to increase.

    When a society permits financial fraud to reach the scale we did, the medicine is bound to taste bad and make your hair fall out.

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  27. Eric L writes,

    Intuitively it seems to me that many people living paycheck to paycheck would eagerly spend a deficit-financed tax rebate

    We could just give everyone vouchers, per capita, that have to be spent, first, paying down debt, and second on consumption. IOW, they could be in a form that could not be easily saved.

    Keen says private debt levels are so high that we should have a debt Jubilee, perhaps giving vouchers to everyone in the bottom 99.5% sufficient to pay off all debt.

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  28. In a 2005 paper, Barbara Bergmann wrote that the high degree of government hiring of economists created a strong incentive for them to divide themselves into two camps that supported policies that the two parties liked (looking at almost every school of thought, it's not hard to figure out which party they're trying to please -- there's even a geographical saltwater/freshwater divide). Anonymous's point about incentives upon pundits fits pretty neatly into this, and everyone's behavior in this Ricardian Equivalence debate seems to bear this out.

    Williamson points out Bewley's work figuring out how real-world firms behave and why wages are sticky, but adds that "I don't think it amounted to anything. We have some economic models that have proven very useful, in spite of the fact that the decision problems faced by the people who live in the models don't look much like the problems that you and I are solving."

    I can't think of a more ringing indictment of the priorities of economists, that whether or not something is backed by real-world evidence is less important than whether or not it is easy to model with the methods one has learned (which to me sounds like honoring of sunk costs).

    Krugman is as biased as anybody, but at least he keeps things accessible to a lay audience rather than retreat into the obscurities of model-making. Whether or not the assumption is good to use in models is irrelevant to the question. In most other fields, this debate over Ricardian equivalence would be entirely over interpretation of the data on how consumers behave when faced with a tax cut.

    When one is debating over the effects of a tax cut, the big question is exactly how consumers (and firms) will react to it. To assume RE is to beg the question.

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  29. On economists and bias:

    These are the people that pay me:

    1. Washington University in St. Louis: I'm a tenured professor, and they pay me a salary. Tenure is great given what I do in this blog. It protects me from extremists on the right and left who might want to take my job away.

    2. Pearson: I have a textbook, Macroeconomics, US and Canadian editions. Pearson pays me royalties.

    3. Federal Reserve Bank of St. Louis: I spend about a day a week at the Fed as a Research Fellow.

    4. Various other academic visiting appointments with central banks and universities.

    My goal is to educate. I'm not interested in making any particular individuals richer. Sometimes I'll criticize the Fed, biting the hand that feeds me as it were, but they don't seem to mind so much. I'm not in the service of any political party, and if I had political ambitions, my blog would look more like Mankiw's. Mankiw and I vote differently, though.

    On Ricardian equivalance:

    Economists can learn something by talking to individual economic actors to find out what is going on in the world. Often though (e.g. Bewley's book), asking individuals how they make decisions won't be informative. For the information that an economist needs to analyze a problem, the individual at the center of things surprisingly won't have the right perspective. Here's my bottom line on Ricardian equivalence. Read two things:

    1. Chapters 8 and 9 of this book:

    http://www.pearsonhighered.com/educator/product/Macroeconomics/9780131368736.page

    2. http://newmonetarism.blogspot.com/2011/03/ricardian-equivalence.html

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  30. Yea

    I am so happy today. Me, a mere trial lawyer with a good undergrad degree in urban economics, has convinced at least one person that incentive caused bias is around the economics profession a lot and something worthy of attention. I can go into the New Year with some small pinch of hope.

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  31. Hmmm. Seems you have some bias against economists.

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  32. While not everybody responds to incentives to the same degree, the incentives you face are not determined solely by who is currently paying you, but the pool of those who could be paying you.

    All economists could greatly increase their income or status by being appointed the chair of the Fed or Treasury Secretary or as a pundit or columnist of a major media outlet. This degree of political partisan influence upon the field is not present in physics, chemistry, or even political science. As far as I can tell, economics has taken few steps to counter this influence.

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  33. Prof. Williamson,

    I appreciate the information you have posted. However, because past is prologue, one must also ask to whose favor do you tend.

    For example, Hayek only begged the Kochs for help (letters were recently found) after writing to their favor for 25 years.

    Face it, the stakes are too high, and the 1% have too much economic and politcal power, for any public commentatory on economics not to be questioned.

    Stiglitz, for example, just observed how cheap Citizens United has made it for the 1% to buy the Senate

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  34. Yes, I am biased against economist. I don't like people who are, shall be say, less than candid, at best. Keen believes they are mentally ill.

    After all, you worship Lucas who falsely promised, when President of the AEA, that macroeconomics would prevent a Lesser Depression and, as I have often repeated, you have never taken Lucas to task for this false promise, but instead continue to speak to his favor.

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  35. as for bias, look at what the GOP has done to Obama's attempts to nominate 2 people to the fed.

    a noble prize holder blocked, but not a peep on the subject from this blog.

    Economists are going to learn a lesson from that, just like those in my profession who harbor ambitions to be a judge have learned. Keep your mouth shut and move up the ladder by affiliation. A record of publication of any kind could well disqualify one from office.

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  36. Eric L:

    Yes, this is a good point. Last summer I saw Greg Kaplan present a paper with Gianluca Violante at the U of Minnesota Macro Workshop on exactly this topic. When you have some agents whose borrowing constraints are binding, they will spend most or all of a tax cut, even if that tax cut is financed by increasing taxes on the same agents in the future, as long as they expect that their borrowing constraints will not be binding when their taxes increase. And doing this is clearly welfare improving: these agents would like to take money from the future and consume it today but cannot (that's what having a binding borrowing constraint means). One of Greg's interesting findings was that in the US, there are many "wealthy" hand-to-mouth households due to high costs of moving money in and out of illiquid assets like houses. His data indicated that these households did in fact spend most or all of their Bush tax cuts, for example.

    The basic point is that some households (rich ones with loose borrowing constraints) exhibit much higher degrees of Ricardian equivalence than others (poor ones and those with tight borrowing constraints). This is a big part of why talking about aggregate demand, aggregate multipliers and whether Ricardian equivalence holds in the aggregate is not particularly useful. The stimulative (not to mention welfare) effects of increased government spending depend a lot on where (and to whom) that spending goes, and whose taxes get raised and when.

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  37. On economic bias:

    1.I wrote about Peter Diamond and his nomination for Governor here:

    http://newmonetarism.blogspot.com/2011/06/peter-diamond-and-fed.html

    The tactics of the Republicans with regard to the nomination were reprehensible, but actually I don't think that was a good job for Peter Diamond.

    2. What I think some of you are responding to is that anyone with a particular political agenda can hire an economist who will be happy to take the money and justify whatever. There's not much you can do about that, other than to sift the information and call people out on weak arguments. That's part of what I'm doing here.

    3. It takes a pretty bizarre view of the world to argue that Bob Lucas somehow owns the financial crisis. I thought I had heard everything. Bob also caused this rash I have on my arm, I think.

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  38. I think the argument is that Lucas believed the state of macro had progressed to the point where we had cured recessions, not that Lucas caused the crisis.

    As for the politicization of the field, lots could be done. For starters, schools or journals could provide incentives for people to publish findings that go against their professed political beliefs. Schools could encourage diversity of ideology.

    Most importantly, professors could teach students about the degree of political partisanship that exists within the field as a warning, so that as future economists, they would always keep this in mind as something to look out for and design their research methods accordingly.

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  39. Whoever this lawyer is, he's nuttier than a fruit bat.

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  40. Ink,

    Here's the relevant reference on Lucas's 2003 talk:

    http://home.uchicago.edu/~sogrodow/homepage/paddress03.pdf

    Here's what he says:

    "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."

    You could argue about this, but I think there is nothing that has happened since 2003 that makes any of what Lucas said in that quote look silly. The failure that led to the financial crisis and recession was not a failure of macroeconomic policy, it was a failure of financial regulation. Further, the recession, though severe, was small potatoes relative to the Great Depression, which involves a drop of about 40% in real GDP from peak to trough and about 10 years of depressed economic activity. Part of the reason that the recession was not as severe as it might have been was that the Fed did more-or-less the right things in the crisis, though you can argue about the details, and the subsequent quantitative easing experiments. Krugman would argue that we're not exploiting the current gains from "short-run demand management" through fiscal policy. Lucas would say no.

    On your proposals for reform in the economics profession:

    1. I think we're pretty good at keeping politics out of published academic work through the editorial and refereeing process. This is not a problem.

    2. You say "schools should encourage diversity of ideology." I have never been in an institution where ideology entered into how we do economics - in our research, in the classroom, in the seminar room. We're close to blind to it. Just not important.

    3. On the teaching, I can't speak for my colleagues, but I make my students aware of the role of politics in economic policy, and try to help them understand it.

    Believe me, we're scientists. Every profession has a few bad apples, but I don't think I'm working in a field that is reeking with corruption.

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  41. So is it inaccurate to characterize freshwater economics departments as favoring less government intervention in markets (Republican) and saltwater departments as favoring more intervention (Democrat)?

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  42. Freshwalter/saltwater were terms that were used to describe what was going on in macroeconomics in the 1970s. Everything has changed now. It's hard to identify anyone as particularly freshwater or particularly saltwater, or to characterize departments in that way, relative to what those terms meant in 1975. As I said, we are scientists, and we keep politics out of our academic discussions. For most academic economists I know, I can only guess how they vote. If I were to guess, I would say that a strong majority are Democrats. There are probably more Republicans in your average economics department than in your average history department, but we're more like other academics politically than we are like the rest of the population.

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  43. Addendum,

    There was an interview a while back in the New York Times with Tom Sargent. He described himself as "fiscally conservative but politically liberal" or something like that. That would describe a lot of macroeconomists.

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  44. Stephen

    It seems like Lucas has a view of monetary policy more in line with the market monetarists and Romer than you. It looks to me like he is saying the Fed can produce basically any level of monetary stimulus it wants, and that you had previously criticized that view. Am I reading him or you wrong? If not I would be curious about your disagreements.

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  45. Yes, Lucas's talk that I linked to above, that Krugman was quoting from, is mainly about monetary policy. There is one side of Lucas which is very much an old-style Milton Friedman quantity theorist. In the talk he says something like "the central bank can achieve any level of nominal GDP it wants," which I think is not true in the current state of the world. The NGDP targeting people (or quasi-monetarists) say stuff consistent with what Lucas does in his talk.

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  46. To clarify, I am not anti-economist like this lawyer fellow. However, my master's program was very ideological, and most of my entire career was spent in the private sector. So I'll admit that my impression of the field is limited and may very well be rather skewed.

    I would like to believe that the divide no longer exists, but it strikes me how easy it is to characterize various schools of thought as conservative (Classical, New Classical, Monetarist/New Monetarist, Austrian, Supply Side) or liberal (Keynesian/New Keynesian, Institutionalists/New Institutionalists, and arguably Behavioral and Post-Keynesian).

    It also seems so rare to find a paper, op-ed, or blog post from an economist making a policy recommendation that deviates from their party line. How often does Krugman, DeLong, Diamond, or Frank write something advocating less government or Lucas, Becker, Cowen, or Mankiw call for more government? In regards to the crisis, how many liberal economists wrote something focusing on government failure, or conservative economists about market failure?

    What percentage of your department would you estimate to be liberal? At Chicago or Minnesota? Berkeley or M.I.T.? George Mason? What percentage of your own work would you characterize as favoring policies that would increase the degree of government involvement in markets? How many saltwater economists argue in favor of Ricardian Equivalence and vice versa?

    In a pure science, where one always follows the data even if it leads them to conclusions they didn't originally believe in, I would expect that all of these things ought to be happening close to half the time, and a significant portion of the field would be arguing about something completely orthogonal to the conservative/liberal axis and not be able to be so easily categorized on the political spectrum.

    I acknowledge that I could be suffering from confirmation bias, so I would appreciate an honest answer from your perspective. But more importantly, did anything change to alter the incentives upon economists to cater to Democrat and Republican policy makers and media outlets and end the freshwater/saltwater divide? Did institutions or journals implement policies to counteract these tendencies? Was Bergmann simply way off base when she claimed that such incentives exist?

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  47. Freshwater won the broader methodological debate (DSGE framework is a product of freshwater economics) and saltwater for the most part won the "now what frictions do we jam in there" debate with sticky prices, though there is still plenty of work that doesn't utilize them. These saltwater economists of course being noted left wingers like... N. Gregory Mankiw and John Taylor.

    Minnesota has been the citadel of "freshwater" economics since the 80s... and virtually the entire faculty are democrats. Prescott was the only notable exception, albeit a big one. Sargent recently revealed his D voting preference in an interview with a paper after everyone tried to "claim" him for ideological purposes. I'm not going to name any other names for reasons of privacy, though I could.

    Evil radical right wing devil dog Robert Lucas voted for... Barack Obama (and in the same interview said he didn't see any problem with the fiscal stimulus, if the fed is buying trillions as well then hell why not?). I won't speculate on Stephen's political views since that isn't my place beyond saying that I kind of doubt he has ever dressed up like Thomas Jefferson and waved a Gadsden flag. Andolfatto as well.

    Hell, look at the guy who is literally the most prominent New Keynesian in world history, our dear Fed Chairman. Who nominated him, again?

    Krugman's greatest flaw is that he paints what are effectively methodological disagreements as ideological ones. When they say he doesn't understand macro... they mean he doesn't understand macro. His first paper published in macroeconomics was written in 2010, a coauthor with Gauti Eggertson. And based on Eggertson's other work it was... mostly Eggertson. He's doing a massive, massive disservice to the profession.

    He's one of the most brilliant living trade economists. He should stick to that.

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  48. Color me confused, but if the primary debate among macroeconomists is methodological, and the New Classical school won that debate over the New Keynesians, why are they still two different schools?

    I guess anecdotal evidence was begging for such vivid counterexamples, but you didn't answer the numbers questions. Are New Keynesians just as likely to argue for less government intervention as New Classical economists? Are they evenly distributed among schools now to the point that most departments are ideologically diverse? If so, what is wrong with Bergmann's analysis of incentives upon the field? Are there other stronger incentives working in the opposite direction?

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  49. Freshwater microfounded dynamic equilibrium modeling incorporating rational expectations won out. The freshwater/saltwater divide comes from a time when the debate was over what should be the methodological foundation of the field. DSGE is that foundation. The modern divide involves what bells and whistles you feel like tacking onto that foundation. It's not REMOTELY as large as it was.

    Whether you like sticky prices in your microfounded dynamic general equilibrium models doesn't really have any bearing at all on your policy views in regards to regulation and that kind of thing. They've got nothing to do with each other. It's possible that there is some inverse correlation between support for sticky prices and support for things like lower taxes and few regulations, but I don't know either way and doubt anyone else could tell you either. It seems unlikely. The people I named weren't just popular figures, they're some of the most influential people in the field by a mile.

    There isn't completely even dispersion of views throughout schools, but it's much more even than in the 70s and again the differences in viewpoints aren't nearly as large. There was a ton of bitterness and nastiness then. A top department was basically a macro black hole for a decade because an important economist (who I wont name) with power stonewalled hiring for people doing work with what was then a very new and controversial methodology. You don't get that kind of thing today. Disagreements within departments are as big (trivial?) as those between departments on most things.

    And that's just the business cycle stuff. When it comes to the other main part of macro, growth, there's basically no disagreement at all that can be segregated into regional schools of thought.

    And i've got no idea who bergmann is.

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  50. OK I am entering the discussion rather late but I couldn't help it after reading the following comment
    "I don't like people who are, shall be say, less than candid, at best."
    considering it came from a lawyer! But this is common from fanatics in both the left and the right, and of course lawyers; when they cannot find grounds to attack an idea they don't like, i.e., global warming or that Paul Krugman, with whom I agree on several issues, often goes over the top, they engage in ad hominem attacks. The truth is, doing so says more about them than about the person they are attacking.

    As for Ricardian Equivalence, please correct me if I am wrong but the argument has always been that government TRANSFERS (tax cuts, unemployment insurance, and so on) are neutral. Government purchases may have an effect (equal to the value of the product the government bought PROVIDED that the money borrowed would have stayed idle otherwise and not been spent on something else by the private sector) but that the effect will be small, that the multiplier will be one ($1 increase in GDP for ever $1 spent) or less than one if some of the taxes end up covering the costs of administering these policies.

    For reasons I have stated in a comment to a previous post on this topic I do not agree with this proposition, but I feel we should do justice to the idea by contemplating the validity of its correct form.

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  51. Ink and the anonymous lawyer appear to be among the walking wounded who "follow economics" from the sophomoric regions of the economics blogosphere Kartik so accurately characterized.

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  52. Phil Rothman of East Carolina University, now there is an academic fortress, is upset that people with keen insights into issues like incentive caused bias, etc., are taking a hard look at the Economics Profession from the outside.

    Somehow to suggest that a profession that doesn't have a code of eithics is "sophomoric."

    I have two observations.

    First, Prof. Williams is starting to feel the pressure from the questions being asked, and I suspect so are others.

    To the independent reader, let me add further context to the present debate. The Economics profession has no code of ethics. Thus, someone like Lucas who, as President of the AEA can says something that is just false ("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.") and remain in good standing in the business.

    Now I know some will defend Lucas by trying to say that we were never in a depression or such crap, to which I would respond that the descriptions of recession and depression used by the profession are self-serving definitions, slected to make assumed "models" work, and are in fact neither causative nor useful.

    A more useful definition would be unemployment above 2.75%

    Events since 2007 have proved the statement false; the profession has not solved the problem of depression prevention. We entered a depression in 2007 and remain there and most project such for the next 10 to 15 years.

    My second questiion to Phil Rothman (and I have been to you cite) is WHERE AND WHEN DID YOU FORESEE THE LESSER DEPRESSION? You are in complete denial about your own professional competence if you fail to understand the significance of this professional failure.

    There were people who saw events unfolding (Keen, Krugman) because they have some thoughts, ideas, and insights.

    Read Keen and respond to his challenges, not mine. I am only a messenger. I can ony report: (1) Keen's facts appear accurate and very hard hitting to this reader; and (2) no one seems to be able to answer him, especially on the mechanism or role of private debt (about which I know far more than you, comparing CVs).

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  53. Not surprisingly the response to Phil Rothman also starts with an ad hominem attack...by someone it seems who has never read Kuhn, and cannot tell the difference between a scientific prediction and a forecast.

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  54. A scientific theory is judged by its ability to explain what will happen to A given a set of conditions (the state of the world). An accurate forecast based on that theory requires that these consition hold and that they are relatively stable over time. Economists know very well, in part because of Lucas, that this is often not the case. Now, I don't agree with Lucas's policy prescriptions, and I do think they are, just like mine or Krugman's, influenced by his ideological beliefs. But that does no mean he is not a good economists or that he is in Koch's payroll. Get serious!

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  55. "...why are they still two different schools?"

    That's part of the point, they are not. Ideas have become so intermingled in the research people do in macroeconomics that you can't make that distinction. What's going on in the blogosphere, which is all that some of of the commenters above see, is not the economics that most of us do or even a good representation of it sometimes. A lot of blog activity is out there in order to sway public opinion in a particular way, and is not entirely honest. Part of what I do is a reaction to that. I think some of that blog activity is giving lay people the wrong impression, and I'm trying to correct it.

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  56. @lawyer commenter: You actually went to my web site and poked around. Gee golly, you sure do ruthlessly pursue the truth; clients must appreciate that intellectual tenacity of yours. Thanks so much for being a well-informed the-emperor-has-no-clothes "messenger"; I used to be lost, but now I'm found and know much better. Read well and prosper.

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  57. I'm afraid I've lost track of whether academic fortresses are supposed to be good or bad. No doubt East Carolina's econ department is not the peer of Harvard's-- but I'd have expected a disciple of Steve Keen to view that as a point in its favor.

    Are there really professions which have codes of ethics requiring them to kick out anyone who makes an error?

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  58. The Barbara Bergmann paper that I referred to earlier was "The Current State of Economics: Needs Lots of Work", Annals of the American Academy of Political and Social Science, Vol. 600 (Jul., 2005). I won't claim that she's anywhere in Lucas's league, but it made many of the above points that I think are worth addressing.

    While it is reassuring that there are many prominent counterexamples, unless somebody can explain why incentives don't matter to economists (anymore), I would think that the field ought to put institutional mechanisms in place to ensure that schools are as ideologically diverse as possible (ala Wisdom of Crowds, this is a good idea anyway to avoid groupthink) and to encourage research that is as objective and scientific as possible. I would think this to be far more sensible than, say, expecting economists to stop accepting lucrative and powerful positions within the government and media.

    Coincidentally, Bergmann also references the Truman Bewley study and cites the field's ignoring of the findings (along with a 1939 Hall and Hitch study on how firms really set prices) as examples of how it's too disconnected from reality and too connected to "made-up scenarios."

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  59. Also, it's my impression that New Keynesians adopted the methodology of the New Classical economists while introducing sticky prices as a new way to continue their argument. Which I think undermines the notion that the argument was ever really about methodology.

    If it's not about methodology, and not about degree of government intervention in markets, what is it about?

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  60. Paul Zrimsek

    Both medicine and law make incompetence a ground for being defrocked

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  61. Bergmann seems pretty out-of-it. Here's my defense against arguments like that:

    http://epress.anu.edu.au/apps/bookworm/view/Agenda,+Volume+18,+Number+3,+2011/7641/Text/williamson.html

    "...I would think that the field ought to put institutional mechanisms in place to ensure that schools are as ideologically diverse as possible (ala Wisdom of Crowds, this is a good idea anyway to avoid groupthink) and to encourage research that is as objective and scientific as possible."

    The second part is what we have actually done. The "institutional mechanisms" are promotion and tenure decisions, supported by evidence that scholars are recognized in their fields of study. Recognition is measured by publication in peer-reviewed journals, and through a demonstration by the candidate that they have shown leadership in their department, the university, and the profession.

    The first part, "ensuring that schools are idealogically diverse," is both silly and dangerous. Think about how you implement this. Your political ideology is now grounds for denying tenure and promotion, or for reducing your salary. You don't want to stifle public discussion. That's pretty scary.

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  62. Addendum:

    Here's an example of what I'm talking about:

    http://chronicle.com/article/Wisconsin-GOP-Seeks-E-Mails-of/126911/

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  63. "If it's not about methodology, and not about degree of government intervention in markets, what is it about?"

    Science.

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  64. Anonymous,when you write

    "You have no few ideas or insights. You play word games--prediction vs. forecast---when its suits your purpose"

    you are blaming economists for your own intellectual shortcomings. These are not "word games", they are real and significant distinctions. Meteorologists can predict with great accuracy if it is going to rain a week later in labs where all atmospheric conditions are controlled by them. Yet it is near impossible for them to forecast if it is going to rain a week from today in real life, because in real life these conditions are constantly changing. Does this make meteorology less of a science? Does their opinion on what causes weather patterns carry the same weight as that of witch doctors? Is a medical doctor not a scientist because he cannot tell a smoker with certainty whether he is going to develop cancer by the age of 70? Are you a bad lawyer if you were wrong in forecasting the verdict in Casey Anthony's trial? Perfect foresight is not a requirement for scientists!

    By the way, reading Kuhn is useful in terms of understanding what a "code of ethics" in science means, the one described by Stephen Williamson above. Since Kuhn is a philosopher of science, not an economist, and wrote his book several decades ago of course he could not have forecasted this or any other recession, this is not what he was interested in.

    Finally, why is this a "LESSER depression" as you call it? Did Bernanke have anything to do with it? If yes then was Lucas totally wrong in his statement?

    It took thinkers in many different areas of knowledge decades of pondering with these issues before they started making some sense of it, so it is extremely naive of you as well as arrogant to think that you can ignore volumes of work that many of us have lost countless hours (and hair) over, and start making unfounded accusations about the intentions of good scientists because of something you read in a blog or two.

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  65. Williamson: Bergmann seems pretty out-of-it. Here's my defense against arguments like that: [link to his review of Quiggin's _Zombie Economics)]

    There was nothing in that review regarding how the field of economics counters the career incentives upon economists.

    If New Keynesianism and New Classicalism differed on how science ought to be done, once that methodological debate was settled and the schools merged, you would then expect that a disagreement between totally different people about something completely different would have eventually caused a split along different fault lines.

    And yet we still have New Keynesians. Indeed, didn't the same thing happen from Keynesianism to New Keynesianism and Classical to New Classical (with a temporary hand-off to Monetarism)? Indeed, your above review refers to "interventionist economists" and "laissez-faire economists," the exact two camps you would expect to form if Bergmann is correct about the incentives upon the field.

    The second part is what we have actually done. The "institutional mechanisms" are promotion and tenure decisions, supported by evidence that scholars are recognized in their fields of study.

    What mechanisms prevents tenure committee members from unconsciously favoring scholars producing research that furthers the committee member's world view? Is there some sort of double-blind mechanism where they evaluate econometric methodology independent of who performed it, and thus can assess the validity of research independent of the policy implications?

    The first part, "ensuring that schools are idealogically diverse," is both silly and dangerous. Think about how you implement this. Your political ideology is now grounds for denying tenure and promotion, or for reducing your salary. You don't want to stifle public discussion. That's pretty scary.

    Groupthink is silly?

    Anyway, from off the top of my head, you could avoid the above by implementing swaps between departments where New Keynesian and a New Classical scholar switch places (providing incentives to the scholars and departments if need be). You're smarter than me, and with tenure, you have more time to ponder such things, so you could probably think up of something much better.

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  66. I thought you might find the Quiggin review useful reading, since it addresses some of what you are concerned about. You are discussing problems that do not exist. Specialization is a good thing. We have that. We also have plenty of cross-fertilization. You get that in departments like NYU and Princeton, for example, and those departments are very successful. You have some pretty bizarre notions about how to fix the problems you're imagining. Implementing swaps between departments? You're imagining forcing people to move their families from New York to Berkeley, or what? I'm afraid you can't engineer creativity. University administrators are particularly bad at it.

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  67. I don't doubt it was bizarre, as it was off the top of my head just to illustrate that the problem was solvable. Macroeconomics has solved the problem of not being able to run controlled experiments, so why would groupthink be any less solvable?

    Also, I was talking about politicization and polarization, not specialization or creativity. Choosing to respond to that instead of whether or not the field faces incentives to polarize into "interventionist economists" and "laissez-faire economists" is indication enough that I'm not imagining this.

    But it also indicates you have no interest in doing anything about it, so I guess I'm wasting my time here.

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  68. perfectlyGoodInk,

    the flow of ideas is much stronger than you think. First there were conferences. Then there were weekly departmental seminars, a reality in most research schools. Each week a department covers the cost of transportation and accomodation for professors from other universities to come and present an unpublished paper to faculty and graduate students. And of course, there is the internet and REPEC (http://en.wikipedia.org/wiki/Research_Papers_in_Economics)

    A problem that I have run into is that when departments hire heterodox economists those economists often seem to refuse to engage in honest debates, as if they are afraid. They prefer to cluster with other people who share the same beliefs and talk to each other. I have one colleague who still adhers to Marx's objective theory of value yet whenever I have asked him to elaborate on why, he brushes me off. Anyway, Happy New Year to all!

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  69. What micro-economic theory tells us about economists

    There is, however, another way of seeing utility theory. If it tells us little about what people in general are like it certainly does tell us something about what the economic theorists were and are like – and what many economists become like during the course of their training. Put in another way – there is evidence for that view that ‘rational economic man’ is a projection of the mind-set of economists themselves. As it says in the Talmud, “we do not see things as they are, we see things as we are”.

    For example, a study of economic and non economics students in 1993 by Frank, Gilovich and Regan found that most people learn to be more co-operative as they get older – but that learning economics slows this process of social maturity.

    “On the one hand, cooperative tendencies increase over time, with age. This is true for everyone, economist or not. Children are much more selfish than adults, for instance. Among university students, upper classmen exhibit more pro-social behavior than lower classmen. Controlling for this, though, authors show that the pattern of falling defection rates, or increasing cooperation rates, ‘holds more strongly for noneconomics majors than for economics majors.’ This means, while students in other disciplines learn to be cooperative over college years, students majoring in economics learn the same fact much more slowly.”

    Further to that they found that micro-economics teaching over as 4 months had a noticeable effect:

    “They picked three classes at Cornell University. Two of these were introduction to microeconomics. The third was introduction to astronomy. In the first microeconomics class (class A), the professor was a game theorist with interests in mainstream economics, and he focused on prisoner’s dilemma and how cooperation might hinder survival. In the second microeconomics class (class B), the professor’s interests were in development economics and he was a specialist in Maoist China.

    To the students in all these introductory classes, the authors posed simple ethical dilemmas, including questions such as “If you found an envelope with $100 with the owner’s address written on it, would you return it?” The questions were asked twice, first in September, in the beginning of the fall semester and once again during the final week of classes in December, not even a full four months apart.

    Comparing results against the astronomy control group, students in economics class A became much more cynical and gave less ethical responses at the end of the semester. Students in class B grew to be more unethical, yet not by so much compared to students in class A. The results clearly show that no matter what their initial ethical tendencies were, students who were exposed to a mere four-months of “rational” reasoning became less cooperative.”

    http://www.psychologytoday.com/blog/the-decision-lab/201104/why-does-studying-economics-hurt-ethical-inclinations

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  70. Let's get back to what Lucas actually said:"You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge."

    In other words, government spending is totally offset by a decrease in public spending. This is theoretical nonsense and has been proven to be empirically wrong. So much about science.

    Anybody who claims that economics is a science and defends a liar like Lucas at the same time is totally rotten.

    There was a reason economics has first been called "political economy". It is not a random social science but one that is inherently interwoven with politics. To claim that Krugman is a left-winger but Lucas not a right-winger is a petty attempt to disavow the very essence of economics, that it is political.

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  71. So we are now into censoring when people like John Kay and Paul Davidson are quoted, yet you claim to be trying to help the public understand?

    Where is your dust off of John Cochrane, who by the way is such right wing wacko that he sports a Cato Button.

    You might want to share this link with your students

    Unlearning economics

    I’m not – the theory has debunked itself repeatedly with the financial crises and depressions of capitalism, which economics cannot even model, let alone predict. In this blog I am channeling centuries of what should have been incredibly damaging critique, and attempting to supplement it with some of my own.

    But the models seemed to do a good job in the boom – why are you throwing the baby out with the bathwater?

    This implies no causal link between the boom and the bust, and reflects the fact that neoclassical models can only model the crisis as exogenous. Hopefully everyone agrees that the crisis was endogenous.

    http://unlearningeconomics.wordpress.com/

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  72. He's likely got little patience for typical loony heterodox garbage. The most heated exchange he's ever had on this website was with some Ron Paul crazies. There's not some conspiracy to beat down alternative ideas. There's a conspiracy to beat down stupid ones. The sizable shifts in economic intellectual history make it pretty clear that if you've got some new ideas and they are GENUINELY GOOD then you can get published and change minds.

    What Williamson, Wright and company have labeled "New Monetarism" is not the go-to macroeconomic framework for the majority of academic economists. Did they decide to round up the people that agree with them, set up shop at some university with a sympathetic administration and then proceed to do nothing but publish in-group citation wankery? No. No they didn't. They continue to publish their ideas in mainstream journals and debate other mainstream economists in hopes of advancing their ideas and more importantly advancing the field itself. Will their ideas win outright? Maybe not, but they will most certainly leave some influence on the field. Evolution is more common than revolution. But you're not going to do either by publishing in the Real World Economics Review or the editorial page of "Marx News Daily".

    Remember when they were ran out of a seminar with pitchforks by the New Keynesian illuminati, making a narrow escape in Randall Wright's Pontiac Sunfire? Wait no, that never happened.

    Every wave in economic thinking has happened as the result of published, peer reviewed ideas being debated among legitimate academic economists. Being met with intellectual resistance then crying that it's all a [Leftist Keynesian/Neoclassical/Neoliberal] conspiracy to suppress your righteous truth is the type of thing you'd expect from a cult, not serious academics.

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  73. "I’ve always found that people who make the argument that everything is at base political are people for whom that’s true." -- Ray Sawhill

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  74. Thanks Jay, for making more than one substantive and detailed comment.

    And @ Paul re: Sawhill's quote-- yes, it does seem that way.

    Keen,Rothbard, and the rest of the fringe, right and left, can register challenges via the same route as the rest of us: submit his work to anonymous peer review. Even Lucas, who gets so casually dismissed as a political hack by more than one commenter, PUBLISHED the work that ultimately led to a huge change in methodology.

    Critics don't get to ride for free, so forget it. The trademark direct-to-paranoid- customer marketing scheme of these so-called critics is pathetic.

    The subtext of the weird ramblings of those who refuse to engage the profession...professionally, is that they live in a world that is in cahoots to rubber stamp right wing ideas, and block their chosen prophet's great insights.

    Btw, I vote exactly the way Krugman does, and I find his hatchet jobs disgusting.

    I cannot believe Stephen Williamson keeps engaging these guys, and patiently at that.

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  75. Welcome to the postmodernist world, where everything we know about the world, that E=MC^2, that 2+2 = 4, etc. is a social construct. Whatever...

    The point is this, if you don't like Lucas you can interpret his few sentences as saying that there will be no effect whatsoever. What I think he meant is that the effect will be too small and therefore unworthy of the potential costs, but he was trying to get that accross to non-economists over an interview and did not want to engage in a detailed discussion. If we hold this one instance against him then Krugman, who exaggerates all the time, should be burned at the stake. Those of you who are stuck in 1936 ask yourselves why so many central banks have adopted explicit inflation targets, why the cost of disinflation is lower when central banks are able to commit, why dispite the monetary expansion long-term yields in the U.S. have remained low. A simple Keynesian framework has NOTHING to say on this, it is all based on Lucas's work.

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  76. I neglected to add: Lucas published in entirely mainstream journals. So did Sargent, Wallace,and the rest, well before they were bigshots. So, pointing to some off-brand drivel that a fringe critic has "published" is not good enough.

    at some level: why isn't informative that the economics profession is attacked as being craven by the right AND the left? Shouldn't that make you wonder? Or are we craven in some very special way that makes both groups correct?

    I'd also note that I too checked out Phil Rothman's cite, and to the other person who checked out his website--you should note that at least he seems to follow a path that does not presume that he alone "knows", with the rest of the field being nasty ideologues: he submits his work for review.

    This immediately puts daylight between him and someone whose MO is to complain to a lay audience via newspaper column, among other things.

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  77. I do think that the psychology article cited by an anonymous should make us pause and wonder; why the hell do so many people have so wrong an impression of what economists say? Take the phrase from the article

    "Those majoring in economics are taught that contributions to public goods are irrational, given that free riding is a possibility."

    This does not mean that it is crazy for a New Yorker to make a donation to help maintain Central Park, that they shouldn't do it for crying out loud. It means that many, knowing that whether they make an individual contribution or not will not make much difference, will choose not to contribute even if they use the service. I have dozens of friends who listen to public radio, yet not once have made a contributiobn. Many do, and every good economist I know tells their student that some people contribute because they feel good about doing the right thing. But on average the amount collected will be less than optimal. This is an argument IN FAVOR of government intervention. Far-right libertarians would love to get rid of mandatory taxation for roads, public parks, etc. and rely instead on voluntary contributions. Argh!

    ReplyDelete
  78. Williamson censored links to and quotations essays of John Kay, of the Financial Times, and Paul Davidson, both of which appear on the INET website,here:

    http://ineteconomics.org/

    This writing is hardly the work of Ron Paul.

    Kay, especially, shows that there is no such animal as the Ricardian Equivalence.

    As for the charge that Keen is an extremist, what is his sin: that he says depressions happen because of private debt?

    Sorry but others (Mian and Sufi) are now confirming his work.

    "The weakness in household balance sheets and the associated pullback in spending are directly responsible for the lion’s share of employment losses in the U.S. economy. This deficiency remains the most significant impediment to a robust recovery.

    "Our research suggests that 65 percent of the job losses from 2007 to 2009 came from the drop in household spending induced by the collapse in home prices and its effect on a highly levered household sector.

    http://www.bloomberg.com/news/2011-11-17/how-household-debt-contributes-to-job-cuts-commentary-by-mian-and-sufi.html

    Bloomberg.com Business Class, where this story appears, is where the Catofacist John Cochrane now pumbs out his screeds.

    Sufi, BTW, is at Chicago with Cochrane.

    I have not yet had an opportunity to review his cite.

    In sum, Keen is right and this blog and most all other "macros" are wrong.

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  79. Professor Williamson

    You will recall I promised a question, each day.

    Please explain why the alleged Ricardian Equivalence does not apply to private debt or borrowing?

    IOW, since I have to pay off private debt, shouldn't private debt for current consumption be subject to the same constraints as Lucas, Cochrane, et al falsely allege as to public debt and specifically that private debt cannot promote economic growth. (I realize that Keen has shown that prvate debt promotes growth).

    Thus, if private debt is not "pro growth," why do we need to permit such?

    Or let me ask a more narrow question. When a student borrows money to go to your classes, does such promote economic growth?

    If is does, what changes, when the gov't borrows money to pay for the student going to class?

    And so you cannot fudge,lets assume that both the student and the bank borrowed the money from a bank, which "created" new money to make the loan, so that there is no crowding out mendacity added to the discussion.

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  80. Sufi's work is for the San Franciso Fed. The conclusion:

    The evidence is more consistent with the view that problems related to household balance sheets and house prices are the primary culprits of the weak economic recovery. King (1994) provides a detailed discussion of how differences in the marginal propensity to consume between borrowing and lending households can generate an aggregate downturn in an economy with high household leverage. This idea goes back to at least Irving Fisher’s debt deflation hypothesis (1933) and has found empirical support in several studies (Mishkin 1978, King 1994, Olney 1999, Eichengreen and Mitchener 2003, Glick and Lansing 2010, and Mian and Sufi 2010). Our view is that the depth and length of the current recession relative to previous recessions is closely linked to the tremendous rise in household debt that preceded it.

    http://www.frbsf.org/publications/economics/letter/2011/el2011-02.html

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  81. Do you understand the profound implications of this paper?

    http://faculty.chicagobooth.edu/amir.sufi/Mian_Sufi_AERPP_2010.pdf

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  82. @ repeated "Steve Keen Said!" poster: you are full-on crank: right after people keep saying: "if your heroes' ideas are so great, why don't they publish it somehwere?" you follow-up with a string of weird comments re: Keen, and Kay, whine about being censored when there are already a couple of links in the thread to in which you are oddly threatening/nutcase "I will pose a question a day..." , and then oddly demanding (asking Williamson to do your homework for you).

    Lastly, please stop polluting this thread with your refusal to ask those whining Keens and Kays to place their ideas up for peer review. Notice that Sufi did. That doesn't make Keen right, silly. It's a point in Sufi's favor--Keen is unable to properly conduct a study, as seen by his non-record.

    ReplyDelete
  83. I found this useful:

    http://www.project-syndicate.org/commentary/rodrik65/English

    There are points aimed both the profession for not showing the world how much diversity of thought there already is (the apparent absence of which "perfectly good ink" seemed concerned by) and a clear reminder that progress comes in the way that Jay noted: seminars, peer-review, and then publication.

    Something for everyone!

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  84. To those who don't like me posting here.

    T.S.

    Sorry that the real world has stuck its nose under the tent of your ivory tower. Trust me, it could get a lot worse. Before this is over, unless those of my mindset prevail against the Greenspans, Lucases, Taylors, and Cochranes, it won't be a camel's nose in your office, it will be an angry mob with a pike for your head.

    Here is why, from the excellent essay linked to above:

    "As the late great international economist Carlos Diaz-Alejandro once put it, “by now any bright graduate student, by choosing his assumptions….carefully, can produce a consistent model yielding just about any policy recommendation he favored at the start.” And that was in the 1970’s! An apprentice economist no longer needs to be particularly bright to produce unorthodox policy conclusions.

    "Nevertheless, economists get stuck with the charge of being narrowly ideological, because they are their own worst enemy when it comes to applying their theories to the real world. Instead of communicating the full panoply of perspectives that their discipline offers, they display excessive confidence in particular remedies – often those that best accord with their own personal ideologies."

    This Country has been nearly destroyed by the "ideas" of this bunch of right wing ideologs (Greenspan, Taylor, Lucas, Cochrane, Barro, etc. etc. etc.). The evidence of their incompetence and worse is everywhere.

    Now, as chronicled by Krugman, we are in the final end game. His blog is a metaphor; he is naming names.

    If Obama is defeated then late 2012 or early 2013 will bring the austerity that they fascist dream of, crushing this Country. They hope, pray, and dream of leaving 99% of Americans destitute. Look at the great cities already destroyed from the idiocy of "free trade." (Detroit, Cleveland, St. Louis, Cincinnata, and in upper New York). One can go on and on and on.

    In so far as I am concerned you are either with us or against us---there is fence sitting any more.

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  85. Anon,

    I am not sure of your overall point. Keen (looking at his JEBO paper) models the cycle as caused by increasing profit shares, not microeconomic foundations of increased household leverage financed by an extension of credit (as Sufi, et. al speculated). See the AER: Proceedings paper you linked too.

    Those are two completely things (one causes a decrease in durable consumption, the other a decrease in investment as a first-mover).

    High debt, by itself, does not cause a pullback in household spending. Spending influenced by household debt is a function of the household's expectations of paying off that debt. If an increase in leverage is caused by productivity improvements, then the increase is fairly benign. It becomes worrisome when productivity improvements are lesser than expected. An outward extension of credit is worrisome when a household's individual expectations of income worsens.

    I don't see how these perspectives are either new, unique, or non-trivial. Sufi, et. al provides a good empirical investigation of a possible accelerator of the 07-09' recession, but it's not paradigm shifting by any means.

    So, I don't see how you can claim high-debt per se is the cause of the great recession when something ELSE must proceed it (a drop in nominal income, etc).

    ReplyDelete
  86. Ok--anon 7:23.

    Charming

    Is "anonymous" your actual name? When trying to bully people, you may want to identify yourself.

    You say: "Now, as chronicled by Krugman, we are in the final end game. "

    "chronicled"..."final end game?"

    Seriously, who talks like this?
    Are there some scrolls we need to be reading?

    and more importantly,

    Are you handing out kool-aid at your party too?

    ReplyDelete
  87. Anyone who refers to Carlos Diaz-Alejandro as "great" is so confused as to need medication.

    ReplyDelete
  88. "..."final end game?"

    who talks like this

    Birthers, Tea Party, GOP House and Senate, Kochs, Republican, Cato, etc.

    they are all buying guns and ammo for a reason

    you saw it in August, or have you forgotten already.

    ReplyDelete
  89. He's likely doing some kinda pointless false flag trolling to make heterodox people look like the wingbat cranks most everyone thinks they are.

    ReplyDelete
  90. Here is the blog post of J. Cochrane on RE:

    http://johnhcochrane.blogspot.com/2011/12/krugman-on-stimulus.html

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  91. heterodox people look like the wingbat cranks--

    truth, like art, is in the eye of the beholder.

    we are still waiting for the answer to today's question, which we will update and reframe

    Cochrane, Catoist, why do we permit private borrowing, since such does not lead to economic growth (per your reply to Krugman)

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  92. But the problem, Steve, is that what Lucas was saying is wrong, as in claiming that driving a car at 100 miles per hour against a wall does not increase the probability of death of the driver. Any economist worth his or her salt must know that Ricardian equivalence is an intellectual curiosity that does not hold on the real world; and that debt financed government expenditure has real effects IN THE REAL WORLD (and in any model economy any intelligent economist would care about).

    My reaction to Lucas' speech is one of shame: I am ashamed that Bob Lucas was a Nobel prize recipient; I am ashamed that the standards of intellectual honesty in my profession allows Bob Lucas to feel like a respected economy.

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  93. I thought Steve's point was that whether Ricardian Equivalance holds or not is a red herring. But then, why get in the way of a good soap box. Tell us how you really feel Anonimo.

    ReplyDelete
  94. Anonimo: I'm ashamed that Cain killed Abel.

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  95. Anonimo

    those of us not in the profession know its has no intellectual honesty, including this blog, which refuses to answer the most simple of questions

    If it is a good thing, from the POV of the economy for students to borrow money to pay to "learn," from Williamson, why would it be a "bad thing" for the gov't to borrow the money and pay Williamson?

    If the answer is the truth---there is no difference---then Lucas is a lying, disingenuous AH and Williamson ought to say so, rather than suck up to the guy

    Same for the Catoist Cochrane, in spades

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  96. cranky anonymous, I think you are very confused. ricardian equivalence doesn't say anything about the profitability of government spending. it is saying that the method of finance is irrelevant. whether you tax today or tomorrow doesn't change the outcome. I'm not sure in what context you want to apply this to private borrowing. It certainly doesn't say that government spending is a "bad thing".

    Before going off on the honestly of others, ask yourself if you've honestly understood those you seem bent on slandering.

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  97. I found it interesting that Paul Krugman attacked the so-called Chicago guys for missing the "revival of Keynesian economics" by making reference to Greg Mankiw's article here: http://www.iisec.ucb.edu.bo/amercado/clases/macroeconomia_maestria/lecturas/The_reincarnation_of_keynesian_economics.pdf
    Except Greg makes very clear that this is a reincarnation and NOT REVIVAL. To explain why he lists what he calls "six dubious Keynesian propositions" embedded in the traditional Keynesian models PK wants us to go back to. In fact, he attributes the differences in thinking between the old and new Keynesians to the insights offered by new Classical economists. I must therefore wonder, did Paul read only the tile of Greg's article, or did he hope that no one would click on the link and actually read the thing?

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  98. whether you tax today or tomorrow doesn't change the outcome

    BS

    first, read Krugman, but what you are talking about its not RE

    If I borrow $1,000 to buy a car today, I might be able to repay at $20.00 a week, for the next year.

    If I pay the $1,000, now: (1) I might not have the $1,000 or (2) if I did, I would have to forego spending the $1,000 on something else.

    The premise of your argument is unstated---that the Fed has to agree to the Gov't going to the bank and borrowing the $1,000

    If the Fed permits the gov't to borrow the $1,000, through the creation of money, the outcome is changed.

    IOW your reply is just more of the same intellectual dishonesty as Lucas

    ReplyDelete
  99. CA wrote...

    I must therefore wonder, did Paul read only

    CA, you left out the correct answer:

    Paul understood what Mankiw had written but you did not

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  100. The IS-LM model describes a short-run equilibrium on the goods, money and bonds market. Its implicit assumptions are that there is an excess supply on the product market and that prices are sticky (respectively an excess supply on the labour market plus stick wages).

    This is not funky "heterodox" but entirely classical thinking. You Chicago boys really gotta try harder.

    ReplyDelete
  101. Anonymous,

    "Paul understood what Mankiw had written but you did not"

    Can you point out how?

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  102. Anonymous again,

    Please try to understand! The RE is based on the (debatable) premise that people base their current consumption on the income they expect to earn during their lifetime. If your income is presently low because your are, say, in college then rather than skipping meals or hanging out with your friends or buying clothes you will finance your education by borrowing (e.g., student loans) in expectation of the higher income you will earn after you graduate. And since you are already consuming just the "right amount" given your lifetime income, your consumption can only be affected by a change in your LIFETIME income. Shuffling the same income around over time will make no difference because of your ability to borrow from or lend to credit markets. So if the government borrows on your behalf and pays for your tuition now (so that you don't have to get that student loan) with the plan of taxing you later to pay back its lenders this is not going to make any difference to you whatsoever unless a) you were cut off from credit markets so without the government's assistance you would not have been able to pay for your tuition, b) the government can borrow at a lower rate than you, or c) as Lucas said the government printed the money (borrowed it from the Fed) so it will not need to tax you (directly) to pay you back.

    But this is not what Krugman said. Krugman's example makes no sense!

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  103. The IS-LM model imposes a perfectly elastic aggregate supply curve. Output is completely determined by aggregate demand and the costs or expectations of producers do not matter AT ALL. "Classical thinking"?

    ReplyDelete
  104. Anon 3:58 really doesn't get it. I do love the statement "If I pay the $1,000, now: (1) I might not have the $1,000". If I pay it, don't I have to have it?

    Stupid can be spotted, you know.

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  105. Anon

    I do love the statement "If I [have to] pay the $1,000, now: (1) I might not have the $1,000..

    I have corrected the typo and am sorry that I have a handicap that restricts use of fingers

    Since you are so smart, let's have your answer

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  106. If you assume sticky prices, which is by the way an empirical fact in the short run, and an excess supply on the product market only demand matters, at least until you are back to full employment.
    What is non-classical about acknowledging empirical facts, including them in a short-run model and further acknowledging that most recessions, including the current one, are demand-side caused?

    This feels like having to argue with one of those folks who still believe the Earth is flat.

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  107. Anonymous,

    sticky prices does not mean fixed prices. It may mean slow-changing prices. Well how slow-changing? How short is the short-run? What is causing prices to be sticky, and can that cause change in response to policy (see the Lucas critique)? These are all questions one needs to answer to designe good policy responses. Saying ok, we observe that some prices are sticky so we are going to assume that they are fixed without asking why, and design policies that work well under this assumption is just not good economics. Do you really believe there is a static trade-off between inflation and unemployment? Are new-Keynesian models a waste of time because a simple IS-LM will do? Where is the earth flat in any of what I wrote?

    In any case, you asked before what makes the IS-LM non-classical, and that was what I was trying to answer. The notion that markets can be stuck in dissequilibrium and that the supply side does not matter. Now maybe these are appropriate assumptions, but they are non-classical.

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  108. Of course we need Neo-Keynesian models in order to explain this very price and wage stickiness and to model credit. Keynes' liquidity preferences story is hardly believable.
    Nonetheless the IS-LM model is good for starters or to say it with Tobin, "its simple apparatus is the trained intuition of many of us". And if you actually red Hicks you will realize that IS-LM is pretty classical. You cannot play this stupid "it is all dubious heterodox nonsense" game.

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  109. Your ship was sunk during Blog War III

    http://www.whataboutstlouis.com/?p=49

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  110. CA

    You seem to have no understanding of the private debt bubble Lesser Depression that we entered in 2007, if not before (Stiglitz dates to 2005). I date to 9/11/01.

    Wages are not "sticky;" workers aren't stark raving mad; they understand, which you do not, that falling wages means an increasing debt ratio making a bad situation worse.

    Repeat after me. When the cause of Depression is private (mostly consumer debt), falling wages can never lead to either a bottom or recovery and growth. We are getting buy on 1/10th the stimulus we needed.

    Today's Baron's had a good back of envelope estimate of 9 more years.

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  111. Anonymous,

    who said that "it is all dubious heterodox nonsense" about the IS-LM? The problem is that the IS-LM is NOT a good apparatus. By failing to examine the reasons behind the stickiness (by the way, isn't inflation evidence that prices are NOT sticky, but rather the change in prices?), the role of expectations, and by lacking well defined credit markets it eliminates a lot of possible policies that may be much better at dealing with the situation than spending like drunken sailors, a tool rather crude (because it rewards both the productive and unproductive segments) and potentially cotstly (look at Europe).

    John D,

    You seem to have no understanding of what you read. Sticky wages was Keyne's theory for explaining recessions, not mine. You have a problem with that, take it with the advovates of the IS-LM model, not me.

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    Replies
    1. CA

      "not mine" theory

      and what theory would that be?

      Delete
  112. You might wanna read Chapter 19 of the General Theory and educate yourself, Keynes did not blame sticky wages pr prices at all.
    Ehm, didn't I just say that I prefer New Keynesian models that explains stickiness and model credit markets instead of liquidity preferences? Yet for an analysis of a liquidity trap like right now the IS-LM model totally suffices. We gotta spend like drunken sailors to increase aggregate demand as long as liquidity is trapped. Or do you seriously advocate expansionary monetary policy right now ? The balance sheet of the Fed was trippled!

    Europe does not conduct expansionary fiscal policy since the eighties anymore. We Germans are the most hardcore austerity freaks in the world. So much about how certain economists are connected with the real-world.

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