After looking over Krugman's Trade and Wages Reconsidered the only thought that struck me was this:
How do we reconcile the data with static general equilibrium models when the data generating process is neither static nor in equilibrium at the time it is recorded?
I had expected a paper which would have stated the following:
In the following model, volume of trade is endogenous. If the elasticity of substitution between skilled and unskilled labor is y and the volume of trade exceeds a, then wage inequality will be b.
I imagine such a proposition is out there somewhere but I'm not a follower of trade theory enough to go out looking for it and perhaps I should.
Monday, July 5, 2010
Wednesday, June 30, 2010
Learned optimism in macroeconomics
I just couldn't resist coming up with that quip after reading Krugman's Learned Helplessness post.
I assume that the lessons that we are to take away from his post is that since the Great Depression was made more severe by austerity measures and tightening by the Fed (by raising interest rates and reserve requirements) we should not only avoid to repeat these mistakes but also by doing the exact opposite. While the debate on effectiveness of monetary policy vis a vis fiscal policy at the zero bound continues to rage (?), I only came up with the quip because for some the debate is settled and there is nothing more to discuss. Onward we go!
I assume that the lessons that we are to take away from his post is that since the Great Depression was made more severe by austerity measures and tightening by the Fed (by raising interest rates and reserve requirements) we should not only avoid to repeat these mistakes but also by doing the exact opposite. While the debate on effectiveness of monetary policy vis a vis fiscal policy at the zero bound continues to rage (?), I only came up with the quip because for some the debate is settled and there is nothing more to discuss. Onward we go!
The strength of our convictions
In a previous post I said:
We are not always arguing from evidence but from the strength of our convictions - or for lack of a better word, our faith.
The example I used was from Krugman:
Economists who didn’t go down this path, who didn’t flush everything the profession had learned between 1936 and 1973 down the memory hole, aren’t especially baffled by the situation we’re in now; on the contrary, it looks like an extreme version of a fairly familiar event, and policy recommendations aren’t hard to make.
The policy recommendations I am assuming are the following:
1. More fiscal stimulus.
2. Keep nominal interest rates low.
3. Austerity is misplaced.
My reading of this is that the policy recommendations are not purely model based nor are they based on overwhelming evidence. Reasonable economists can argue as to how large a fiscal stimulus could be, the effectiveness of nominal interest rates at the zero bound or that austerity measures in a recession can lead to a more severe contraction if x,y,z conditions are met.
Yet the policy recommendation as stated is based more on conviction (my read of it, that is) and analogy than on anything that we have really learned from the Great Depression. Yes, we may have learned all of the above, yet as economists and so-called scientists we are required to ask ourselves whether these policy recommendations can backfire. One thing that economists do not lack is humility. When we are wrong we brag about how wrong we are and how we cannnot do anything about it - recall Easterly's "economists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it."
The role of the blogosphere seems to be to drown out its critics (or to serve as advocate) rather than as a place to debate the nuances of disagreements. Moreover, it serves to accentuate my claim that arguments on the blog are either shrill-based on faith or hunch-based. An example of the latter is Tyler Cowen (and I don't mean to pick on him - just as an example):
If monetary policy is sufficiently accommodative, I do not see that we are risking a 1937-8 repeat. In 1936-7, monetary policy was not just insufficiently expansionary, it was absolutely draconian.
Again, the language matters - what is "sufficiently accommodative" and "insufficiently expansionary" and "draconian" and how do they translate in terms of policy?
Arguments for a policy that I would like to see would go as follows - again, using the above example (and I'm making this up as I go along):
If monetary policy is sufficiently accommodative, I do not see that we are risking a 1937-8 repeat. In 1936-7, monetary policy was not just insufficiently expansionary, it was absolutely draconian. By sufficiently accomodative, I mean that M1 is expanding at 5% each quarter for the next 3 quarters while by insufficiently expansionary I mean that M1 begins to slow to 3% each quarter for the next 2 quarters. I assume that monetary policy in 1936-37 was draconian because interest rates rose by more than x percent and M1 slowed to y percent. And so forth. Yes, I'd like to see these numbers even if they are just pulled out of thin air. (Some would call it hand-waving economics even with the numbers, but then I think its a lot better than without the numbers.)
We are not always arguing from evidence but from the strength of our convictions - or for lack of a better word, our faith.
The example I used was from Krugman:
Economists who didn’t go down this path, who didn’t flush everything the profession had learned between 1936 and 1973 down the memory hole, aren’t especially baffled by the situation we’re in now; on the contrary, it looks like an extreme version of a fairly familiar event, and policy recommendations aren’t hard to make.
The policy recommendations I am assuming are the following:
1. More fiscal stimulus.
2. Keep nominal interest rates low.
3. Austerity is misplaced.
My reading of this is that the policy recommendations are not purely model based nor are they based on overwhelming evidence. Reasonable economists can argue as to how large a fiscal stimulus could be, the effectiveness of nominal interest rates at the zero bound or that austerity measures in a recession can lead to a more severe contraction if x,y,z conditions are met.
Yet the policy recommendation as stated is based more on conviction (my read of it, that is) and analogy than on anything that we have really learned from the Great Depression. Yes, we may have learned all of the above, yet as economists and so-called scientists we are required to ask ourselves whether these policy recommendations can backfire. One thing that economists do not lack is humility. When we are wrong we brag about how wrong we are and how we cannnot do anything about it - recall Easterly's "economists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it."
The role of the blogosphere seems to be to drown out its critics (or to serve as advocate) rather than as a place to debate the nuances of disagreements. Moreover, it serves to accentuate my claim that arguments on the blog are either shrill-based on faith or hunch-based. An example of the latter is Tyler Cowen (and I don't mean to pick on him - just as an example):
If monetary policy is sufficiently accommodative, I do not see that we are risking a 1937-8 repeat. In 1936-7, monetary policy was not just insufficiently expansionary, it was absolutely draconian.
Again, the language matters - what is "sufficiently accommodative" and "insufficiently expansionary" and "draconian" and how do they translate in terms of policy?
Arguments for a policy that I would like to see would go as follows - again, using the above example (and I'm making this up as I go along):
If monetary policy is sufficiently accommodative, I do not see that we are risking a 1937-8 repeat. In 1936-7, monetary policy was not just insufficiently expansionary, it was absolutely draconian. By sufficiently accomodative, I mean that M1 is expanding at 5% each quarter for the next 3 quarters while by insufficiently expansionary I mean that M1 begins to slow to 3% each quarter for the next 2 quarters. I assume that monetary policy in 1936-37 was draconian because interest rates rose by more than x percent and M1 slowed to y percent. And so forth. Yes, I'd like to see these numbers even if they are just pulled out of thin air. (Some would call it hand-waving economics even with the numbers, but then I think its a lot better than without the numbers.)
Biased summary
In an earlier post, I complained about the following:
"I also dislike the fact that while Krugman can be biased and does occassionally say so, the strength of his convictions can drown out opposing points of view in his 'digested views of academic literature' ."
The claim calls for an example and this is one (and perhaps not a good one since I am in agreement with him):
1. Lucas and his disciples agree that the economy looks Keynesian — that is, it surely looks as if monetary and fiscal policy have real effects — but argue that an equilibrium approach with imperfect information can explain why, while rejecting Keynesian policy implications. And they ridicule Keynesian economics.
2. By 1980 — three decades ago! — it is already clear that the Lucas project has failed. Equilibrium models with imperfect information cannot, in fact, explain key facts about business cycles, especially the way recessions persist even though everyone knows that they’re in a recession.
3. Rather than admitting that they went down the wrong track, however, the advocates of freshwater macro double down; they decide to forget about what they used to know about the apparent effects of demand shocks, and explain the business cycle in terms of real shocks.
4. This approach also falls short; in an attempt to rescue the models, ever more epicycles are added, and whatever clarity may once have existed gets lost.
5. Freshwater economists declare that the business cycle is deeply puzzling, and that we need much more research before we can make policy recommendations.
In short, what we’re looking at is learned helplessness. Economists who didn’t go down this path, who didn’t flush everything the profession had learned between 1936 and 1973 down the memory hole, aren’t especially baffled by the situation we’re in now; on the contrary, it looks like an extreme version of a fairly familiar event, and policy recommendations aren’t hard to make.
It’s only if you’re committed to a failed research project — a project that failed a generation ago, but refused to admit it — that you’re baffled.
I would characterize this as a very strong (and negative) summary of the state of "fresh-water economics" and indirectly, of neo-classical economics and DSGE. While not completely inaccurate, the strength of his arguments are in the rhetoric, e.g.
- By 1980 — three decades ago! — it is already clear that the Lucas project has failed.
By using a date of 1980 and emphasizing that economists wasted 30 years he is emphasizing the fact that these economists were beating a dead horse. To me it isn't clear that the "Lucas project" failed by 1980. Reasonable arguments could be used to date this at 1990 or even as late 2000.
- Rather than admitting that they went down the wrong track, however, the advocates of freshwater macro double down...
The use of the phrase "double down" here implies desparation on the part of these economists. Again, I would disagree (mildly I suppose since I think that real shocks aren't very compelling) but one can also argue that these economists essentially contributed to the field by taking real shocks as far as they could go before "turning back" and deciding that "fresher avenues" can be found in price stickiness. Isn't the nature of science (something economics tries to lay unsuccessful claim to) and scientific discovery be to explore all avenues regardless of where they lead?
- Economists who didn’t go down this path, who didn’t flush everything the profession had learned between 1936 and 1973 down the memory hole, aren’t especially baffled by the situation we’re in now; on the contrary, it looks like an extreme version of a fairly familiar event, and policy recommendations aren’t hard to make.
Again, the phrase "flush everything" seems to indicate that these economists stubbornly clung on to the real shocks hypothesis (to the extent that Ed Prescott declared business cycles were explained). True, some might have but it is misleading to claim that the entire fresh-water school rejected price stickiness or fiscal stimulus effects (or whatever we were supposed to have learned between 1936 and 1973).
In some ways, this last fragment is also an example of what I had claimed in the post:
"We are not always arguing from evidence but from the strength of our convictions - or for lack of a better word, our faith." More on this later.
"I also dislike the fact that while Krugman can be biased and does occassionally say so, the strength of his convictions can drown out opposing points of view in his 'digested views of academic literature' ."
The claim calls for an example and this is one (and perhaps not a good one since I am in agreement with him):
1. Lucas and his disciples agree that the economy looks Keynesian — that is, it surely looks as if monetary and fiscal policy have real effects — but argue that an equilibrium approach with imperfect information can explain why, while rejecting Keynesian policy implications. And they ridicule Keynesian economics.
2. By 1980 — three decades ago! — it is already clear that the Lucas project has failed. Equilibrium models with imperfect information cannot, in fact, explain key facts about business cycles, especially the way recessions persist even though everyone knows that they’re in a recession.
3. Rather than admitting that they went down the wrong track, however, the advocates of freshwater macro double down; they decide to forget about what they used to know about the apparent effects of demand shocks, and explain the business cycle in terms of real shocks.
4. This approach also falls short; in an attempt to rescue the models, ever more epicycles are added, and whatever clarity may once have existed gets lost.
5. Freshwater economists declare that the business cycle is deeply puzzling, and that we need much more research before we can make policy recommendations.
In short, what we’re looking at is learned helplessness. Economists who didn’t go down this path, who didn’t flush everything the profession had learned between 1936 and 1973 down the memory hole, aren’t especially baffled by the situation we’re in now; on the contrary, it looks like an extreme version of a fairly familiar event, and policy recommendations aren’t hard to make.
It’s only if you’re committed to a failed research project — a project that failed a generation ago, but refused to admit it — that you’re baffled.
I would characterize this as a very strong (and negative) summary of the state of "fresh-water economics" and indirectly, of neo-classical economics and DSGE. While not completely inaccurate, the strength of his arguments are in the rhetoric, e.g.
- By 1980 — three decades ago! — it is already clear that the Lucas project has failed.
By using a date of 1980 and emphasizing that economists wasted 30 years he is emphasizing the fact that these economists were beating a dead horse. To me it isn't clear that the "Lucas project" failed by 1980. Reasonable arguments could be used to date this at 1990 or even as late 2000.
- Rather than admitting that they went down the wrong track, however, the advocates of freshwater macro double down...
The use of the phrase "double down" here implies desparation on the part of these economists. Again, I would disagree (mildly I suppose since I think that real shocks aren't very compelling) but one can also argue that these economists essentially contributed to the field by taking real shocks as far as they could go before "turning back" and deciding that "fresher avenues" can be found in price stickiness. Isn't the nature of science (something economics tries to lay unsuccessful claim to) and scientific discovery be to explore all avenues regardless of where they lead?
- Economists who didn’t go down this path, who didn’t flush everything the profession had learned between 1936 and 1973 down the memory hole, aren’t especially baffled by the situation we’re in now; on the contrary, it looks like an extreme version of a fairly familiar event, and policy recommendations aren’t hard to make.
Again, the phrase "flush everything" seems to indicate that these economists stubbornly clung on to the real shocks hypothesis (to the extent that Ed Prescott declared business cycles were explained). True, some might have but it is misleading to claim that the entire fresh-water school rejected price stickiness or fiscal stimulus effects (or whatever we were supposed to have learned between 1936 and 1973).
In some ways, this last fragment is also an example of what I had claimed in the post:
"We are not always arguing from evidence but from the strength of our convictions - or for lack of a better word, our faith." More on this later.
Tuesday, June 29, 2010
Blogging about economics
I had a very negative reaction to Mark Thoma's criticism on the article that claims that those who don't know economics shouldn't blog about them. My reaction was based not so much on the fact that I agreed with the author or that I disagreed with Mark but on the shrillness of the post. (Thankfully, I didn't read what Brad Delong had to say. Compared to Mark, Rajiv Sethi was a relief.)
I also reacted to Mark's defense of Krugman:
Paul Krugman does take one-side positions based upon his reading of the academic literature, some of which he helped to create. But he has qualified things on his blog. He has explained when, for example, monetary and fiscal policy should have large or small effects, he's linked to the appropriate research, and so on. Somebody has to explain these things to the public, and do so in a way that highlights the essential elements while leaving everything else aside, and Paul Krugman is a master at this. Krugman and others, myself included, do pass along their digested views of the academic literature in a simple, readable form. We also point to non-professionals when we think they have something worthwhile to say. What's wrong with that? (To me, this whole essay reads like it was driven by a touch of Krugman-DeLong Derangement Syndrome).
I can't put my finger on it except to note that perhaps I too have been infected with the Krugman-DeLong Derangement Syndrome. I dislike that DeLong claims to have weighed all the evidence and that fiscal policy is the only play left. I also dislike the fact that while Krugman can be biased and does occassionally say so, the strength of his convictions can drown out opposing points of view in his 'digested views of academic literature' (I suppose this goes for other bloggers as well). To me, economics bloggers (especially the more influential ones) are walking a fine line between conveying different academic opinions and being 'policy entrepreneurs' that Krugman so despises in Peddling Prosperity.
One thing that seems to be common for all bloggers (including this) is that in the end, it is not the evidence or the models that will sway opinion. To paraphrase McCloskey, its the rhetoric that matters (and models and evidence are all part of the rhetoric). We are not always arguing from evidence but from the strength of our convictions - or for lack of a better word, our faith.
I also reacted to Mark's defense of Krugman:
Paul Krugman does take one-side positions based upon his reading of the academic literature, some of which he helped to create. But he has qualified things on his blog. He has explained when, for example, monetary and fiscal policy should have large or small effects, he's linked to the appropriate research, and so on. Somebody has to explain these things to the public, and do so in a way that highlights the essential elements while leaving everything else aside, and Paul Krugman is a master at this. Krugman and others, myself included, do pass along their digested views of the academic literature in a simple, readable form. We also point to non-professionals when we think they have something worthwhile to say. What's wrong with that? (To me, this whole essay reads like it was driven by a touch of Krugman-DeLong Derangement Syndrome).
I can't put my finger on it except to note that perhaps I too have been infected with the Krugman-DeLong Derangement Syndrome. I dislike that DeLong claims to have weighed all the evidence and that fiscal policy is the only play left. I also dislike the fact that while Krugman can be biased and does occassionally say so, the strength of his convictions can drown out opposing points of view in his 'digested views of academic literature' (I suppose this goes for other bloggers as well). To me, economics bloggers (especially the more influential ones) are walking a fine line between conveying different academic opinions and being 'policy entrepreneurs' that Krugman so despises in Peddling Prosperity.
One thing that seems to be common for all bloggers (including this) is that in the end, it is not the evidence or the models that will sway opinion. To paraphrase McCloskey, its the rhetoric that matters (and models and evidence are all part of the rhetoric). We are not always arguing from evidence but from the strength of our convictions - or for lack of a better word, our faith.
Thursday, June 24, 2010
Pondering the effects of a gas tax
Which undoubtedly will not happen in the next 5 years:
1. If I now drive to big box stores 15-20 miles away, would I reconsider doing this with a large enough tax? What happens to the big box stores? A demise or would they move into the city? The experience of Bangkok seems to be that they may move into a city - if we consider that traffic jams are a tax. Or would a tax bring back more mom and pop stores?
2. What about school and work? Would enrollments in private schools drop if the costs of transportation were higher? My impression is that in the Washington DC area, most of the congestion comes from parents/caregivers having to drive their kids to schools even when they can walk to a public school (this is certainly true for us!). Would more white collar jobs that are now in suburban/exurban areas move closer in? This would be great if it could provide a chance for higher earnings for inner city folks. The decisions that go into commuting, work, and school and extremely complicated and it doesn't appear that much research has gone into this in terms of possible labor reallocation. Most of the work concerns traffic!
1. If I now drive to big box stores 15-20 miles away, would I reconsider doing this with a large enough tax? What happens to the big box stores? A demise or would they move into the city? The experience of Bangkok seems to be that they may move into a city - if we consider that traffic jams are a tax. Or would a tax bring back more mom and pop stores?
2. What about school and work? Would enrollments in private schools drop if the costs of transportation were higher? My impression is that in the Washington DC area, most of the congestion comes from parents/caregivers having to drive their kids to schools even when they can walk to a public school (this is certainly true for us!). Would more white collar jobs that are now in suburban/exurban areas move closer in? This would be great if it could provide a chance for higher earnings for inner city folks. The decisions that go into commuting, work, and school and extremely complicated and it doesn't appear that much research has gone into this in terms of possible labor reallocation. Most of the work concerns traffic!
Free trade externalities
Last weekend as I was pulling out weeds and being bitten repeatedly by mosquitoes, I contemplated on the possible externalities of free trade. Ignoring the problems with defining what is invasive and just accepting that soemthing is invasive if we start investing or spending dollars to get rid of it, the question then is whether the benefits of free trade outweigh these costs.
1. Undoubtedly some mosquito species are a direct result of trade e.g. tires:
Prior to 1985, the distribution of Aedes albopictus, the Asian tiger mosquito, was confined to Asia and many islands in the Pacific Ocean, including some of the Hawaiian Islands. Yet, in recent years the range of this mosquito has greatly expanded to include North and South America, Africa and Europe....The Asian tiger mosquito (ATM) was most likely introduced into North America through the importation of used tires from Japan or Taiwan.
2. Invasive plants as a direct result of trade, see here and here for instance. From the first link,
"... costs associated with a wider group of IS [invasive species] to be in the region of $143 billion per year." (for Oregon)
3. Some reallocation of labor to industries that deal with invasive species. This can either be a benefit (job creation) or a cost (job reallocation) if it hollows out other industries.
1. Undoubtedly some mosquito species are a direct result of trade e.g. tires:
Prior to 1985, the distribution of Aedes albopictus, the Asian tiger mosquito, was confined to Asia and many islands in the Pacific Ocean, including some of the Hawaiian Islands. Yet, in recent years the range of this mosquito has greatly expanded to include North and South America, Africa and Europe....The Asian tiger mosquito (ATM) was most likely introduced into North America through the importation of used tires from Japan or Taiwan.
2. Invasive plants as a direct result of trade, see here and here for instance. From the first link,
"... costs associated with a wider group of IS [invasive species] to be in the region of $143 billion per year." (for Oregon)
3. Some reallocation of labor to industries that deal with invasive species. This can either be a benefit (job creation) or a cost (job reallocation) if it hollows out other industries.
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