Thursday, January 2, 2014

Research and Policy

Mark Thoma reminded me about a piece by Jim Bullard, which gives a nice perspective on the role that macroeconomic research can play in policy circles. I especially liked this paragraph:
In macroeconomics, the intellectual challenge is every bit as great as it is in other fields that have unsolved problems. The economy is a gigantic system with billions of human decisions made every day. Furthermore, people look to the future and try to predict the behavior of the system as they make their decisions today. How are all these decisions being made? How are people reacting to the market forces around them and to the changes in the environment around them? How can we effectively summarize their behavior at an aggregate level? How is policy interacting with all those decisions? These are not questions that can be addressed with a wave of the hand, a clever speech or a witty blog posting. There is just no substitute for heavy technical analysis—plenty of math and statistics combined with plenty of computing power and plenty of intellectual creativity—to get to the bottom of these issues. We might as well admit that progress in attaining satisfactory answers is going to be slow, but still this is the only reasonable course to make progress.
Excellent. A policymaker who understands that there is a lot we don't know, and that it's going to be hard slogging to improve on what knowledge we already have - or think we have. But he also seems to know where to look to get answers, and has respect for the economists doing the heavy lifting. For all of the young economists at the ASSA meetings looking for work, take note. This is the type of person you want to have in charge of the place where you plan on setting up shop.

For further reading, Bullard's piece is a synopsis from an interview for the Economic Dynamics newsletter.

23 comments:

  1. You say: "A policymaker who understands that there is a lot we don't know, and that it's going to be hard slogging to improve on what knowledge we already have - or think we have. But he also seems to know where to look to get answers, and has respect for the economists doing the heavy lifting."
    Oh Stephen, where is that perfect man (or woman) in policy-making? Yes, Bullard is one, but he is president of a regional Fed, a nerdy one at that. St. Louis Fed stands out for good research and taking these things seriously. So do other regional Feds, But those are 12 places at most.
    Where else? In Washington, with the clowns in Congress and in the Executive side? Please... I may have a more negative view than you, but policymakers in Washington DC serve politicians, and politicians only serve themselves and their big time money donors. Those policymakers do not give a damn that "...there is a lot we don't know, and that it's going to be hard slogging to improve on what knowledge we already have ...". They just want to serve their masters, or if said policymakers are politicians themselves, they have their own agenda of raw power, perks and influence. They don't give a damn about the public good.

    ReplyDelete
    Replies
    1. I agree, if what you mean is that there is little economics that goes into decisions on fiscal policy.

      Here's something interesting. Fed officials are not elected, and the ones at the regional Feds are appointed by regional Fed Boards of Directors (with approval from the Board of Governors). So how come the Fed is the closest we get to state of the art application of research in economics?

      Delete
  2. Because, it seems to me, that the Fed is insulated from political grandstanding, from politicians pursuing their raunchy agenda of power, influence and perks, because the Fed (and many Central Banks around the world) are nerdy places where actual research is valued.
    Now, there are Central Banks out there which are not as independent and shielded from political influence as the Fed - the Bank of England comes to mind, where (it seems to me, but do correct me) that the Governor is much more dependent on the Executive and not as free as the Fed Chair(wo)man. How is research at the Bank of England? Is it as good as in the regional Fed or Fed Board?

    ReplyDelete
    Replies
    1. I'm going to offend someone now for sure. My impression, from visiting some of these places, is that the regional Feds, because of their autonomy relative to Washington and New York, can have minds of their own, and serious research does indeed get done there. Size also works to their advantage - we're talking at most about 30 PhD economists, and fewer in some places. The New York Fed is much larger, and suffers a bit for it, but there is still good work that gets done there. The Board in Wasington has more than 10 times the number of PhD economists that they have in St. Louis. But I don't think there is anywhere close to 10 times the quantity of research (quality adjusted) getting done at the Board, relative to St. Louis, for example.

      The problem at a central bank like the Bank of England, the Bank of Canada, or the ECB, is that, if you want to get promoted to the policymaking positions, you're not going to do that, typically, by giving your superiors a hard time about policy positions you disagree with. But how that all works has a lot to do with individuals. I've met Charlie Bean, who is a Deputy Governor of the Bank of England, and he is a serious scholar who cares a lot about research. The new Governor is Mark Carney, who came from the Bank of Canada. I have never met him, but I know enough to say that he's pretty clueless about how to use serious research - and researchers - as an input to policy.

      Delete
    2. There is only one argument for central bank independence, avoid direct influence by the executive to monetize public debt (unless it is necessary to avoid a speculation attack / bad equilibrium like in the Eurozone, lender of last resort and so on). Given that the chairman of the Fed basically took his ideas of monetary policy out of a piece of fiction the notion that central banks are technocratic institutions, full of expertise, void of political influence and so on is preposterous. Of course Bernanke and Yellen are brilliant economists so you might wanna amend your argument and say that a CB is a technocratic institutions if its chairman is a "nerd".

      The key argument against central bank independence is fairly simple, an independent central bank is not subject to democratic control. So it will care more about the interests of groups who are able to exercise political control outside of the election system, i.e. rentiers. So independent central banks will rather care about the interests of rentiers than workers, i.e. inflation will on average be too low.

      Delete
  3. A "gigantic system" with "billions of human decisions".

    Makes me wonder if you know of any Fed economists that look into complex adaptive systems research.

    ReplyDelete
    Replies
    1. You can probably find someone doing something related in the Fed system, but I don't know who they are. The closest stuff I have seen to that is in game theory - evolutionary games, for example. And there are some monetary theorists who think about "contagion," which has to do with how information and behavior gets transmitted in an economic system.

      There are people at the Sante Fe Institute who think about so-called "agent-based" economic models. That's pretty crude, and I have never been a big fan of that stuff.

      Delete
    2. I find very funny that you praise Bullard's speech about the complexity of macroeconomics while a few days ago you linked favorably to Cochrane's sterile, useless and negative value added search for contradictions in a caricatural two equation version of the NK model.

      Delete
    3. You know what I find funny? O'Anomino's belief that he is a good economist. Or even a mediocre one.

      Delete
  4. Lots of heavy technical analysis with plenty of math and computing power? That sounds like a prescription for a lot of curve fitting and endless playing with noise. Now I know why plenty of failed quants do economics: no accountability. In finance you get found out pretty quickly (unless you work for a large bank).

    ReplyDelete
    Replies
    1. You really have no idea what we're doing, do you? The last thing that Steve does is overfitting data and tacking on error terms. Grow up and read something useful, or just shut the hell up.

      Delete
    2. You pitiful, angry little man. I weep for your children.

      Delete
    3. Looks like the above anonymous has clearly never done any empirical work

      Delete
    4. Looks like the above anonymous has clearly never done any work at all.

      Delete
  5. SW-
    I still have hope that this Post was a parody of some sort, an Austrian Joke made by the In-Crowd. Ahhh...No. It's serious, I'm afraid.

    "You are trapped by the Categories of the Understanding but I can Transcend them because I have Maff!". Oh, WAIT! It's "Policy" we're after.

    Not Markets.

    This isn't New Monetarism. It's New Fascism with a pretty Pink Bow, where "Policy" is the Political Control Officer playing the Overseer to Command the Prole to direct his Labors to some perceived State End.

    Very - VERY - sad.

    CW

    ReplyDelete
    Replies
    1. Yikes -- who let Charles out of his asylum? Does your tinfoil hat ever burn your scalp? Or are you afraid that the sun is also anti-free market since it gives away its energy for free?

      Delete
    2. Thanx, "Anonymous", for verifying the points in my Post.

      "The monetarist thesis has been caricatured as implying that if we get the flow of money spending right, everything will be right. This is not – repeat not – my belief. What I believe is that if we get the money supply wrong – too high or too low – nothing will come right."

      Rt Hon Sir Keith Joseph Bt MP, "Monetarism is not enough", 1976 Stockton Lecture, 1976

      When did Monetarism change? C'mon, we have clocks and calendars, we should be able to pinpoint to the minute when Monetarism was taken away from Milton and Anna and given to the angry mob.

      Friedman, when asked about some policy - Balanced Budget or Term Limits for ex. - would carefully state that an "improvement", if enacted, would provide greater Freedom as a result but that such an improvement was not necessary to the Greater Good of the Monetarist Program.

      When did that change?

      One purpose of models is to provide models for people who study models with more models to study. So it appears here. The Problem is that the River of Lethe runs through this particular 'Burg. See also Marxism, Statism and, evidently, the current issue of Rolling Stone. The model has become reality.

      You are as much a part of someone's Model as any data you have on hand. The Statist is more than happy to take your Paper with its First and Second Derivatives and appropriate its findings for the Good of the State. It's called "Policy".

      A mathematician was once asked about the usefulness of his work. He replied, "Many fine theses may be written on the subject."

      The more proper answer was given by Maxwell when asked about the usefulness of electricity: "Well, I do not know but I am reasonably certain that Her Majesty will tax it soon."

      Lookit: You don't need Mathematics to do Policy, you need a gun and if one won't do, you need an army. 'N you need to pay that army. That's "Policy". The Libertarians and the Austrians are about done with Monetarism and the reason is it became more concerned with "Policy" than with Controlling the Money Supply.

      When did Monetarism change?

      Thank you,

      CW

      Delete
    3. The sooner the libertarians and Austrians are "done" with something, the sooner it becomes useful. Charles, you seriously should consider some psychotropic medication before you hurt yourself.

      Delete
    4. And you should stop embarassing right-wingers via your constant trolling.

      Delete
    5. Are you suggesting that Charles is embarrassing the Austrians? I'm pretty sure they're beyond embarrassment -- if Greg Ransom isn't embarrassing enough, who would be?

      Delete
    6. Given that Austrian/libertarian ideology influences many people, including ample of economists I'd say that ANY self-embarassement is helpful.

      Delete
    7. I agree it would be helpful, but I think it is impossible.

      Delete
  6. While I certainly appreciate everyone's concern over my access to Thorazine and other Mood Candy, as well as availability of the best Shrinks building up Billable Hours discussing my mental health, please consider what I'm trying to achieve.

    There is a Unified Conservative Economix and, yes, I believe it contains Monetarism as well. Also, Wanniski's Supply Side views work quite well with a Libertarian/Austrian outlook. It may all be Unified.

    It can be unified if the State can be controlled and by that I mean MINIMIZED, maybe even radically so. The State may lay claim to certain monopoly rights but Money might not be one of them. The State may demand that ITS functions may be payable in the Coin of the Realm but its Utilitarian features of Common Value should be of voluntary character. 'N this is where Monetarism comes in. As long as there is value in use to a common standard, which standard remains stable in use, the benefit of the State might act to the benefit of the individual. 'N these days, even that's fairly "Iffy". Friedman and Schwartz, however, did all of the Groundwork. That work has been done.

    Which brings me to the question I asked, to which no one will answer: "When did Monetarism change?"

    ReplyDelete