Paul Krugman, up until about a decade ago, was a brilliant international trade economist. His work deserves the awards that it has garnered, though arguably his Nobel Prize should have been a joint prize between him and any of a group of about four other prominent economists. However, Paul Krugman is not and never has been an expert in macroeconomics, despite his constant ranting on the subject-- but don't take it from me, I'm just a graduate student. Take it from Robert Barro:
In an interview with Robert Barro...
Do you read Paul Krugman's blog?
Just when he writes nasty individual comments that people forward.
Oh, well he wrote a series of posts saying he thought the World War II spending evidence was not good, for a variety of reasons, but I guess...
He said elsewhere that it was good and that it was what got us out of the depression. He just says whatever is convenient for his political argument. He doesn't behave like an economist. And the guy has never done any work in Keynesian macroeconomics, which I actually did. He has never even done any work on that. His work is in trade stuff. He did excellent work, but it has nothing to do with what he's writing about.
Friday, February 6, 2009
Saturday, January 31, 2009
Bailout Re-Do
From the AP: "Treasury Secretary Timothy Geithner met with the administration's top officials and advisers in recent days, trying to finish a plan to overhaul the $700 billion bailout program that is already half gone. Geithner previously said the administration is weighing the possibility of using a government-run "bad bank" to buy up toxic assets that are weighing on the books of financial institutions, but some officials now say that option is gone because of potential costs."
Wasn't this supposed be the original design of TARP? I originally supported the bailout precisely because I thought the government was going to conduct a reverse auction to buy bad debt from the banks. For reasons unknown to me, Hank Paulsen decided that that was not feasible. Geithner appears to have come to the same conclusion, although he only has $350 billion to work with, rather than the full $700 billion. I can only wonder what decision he would have made if he were in charge of the bailout from the beginning...
Wasn't this supposed be the original design of TARP? I originally supported the bailout precisely because I thought the government was going to conduct a reverse auction to buy bad debt from the banks. For reasons unknown to me, Hank Paulsen decided that that was not feasible. Geithner appears to have come to the same conclusion, although he only has $350 billion to work with, rather than the full $700 billion. I can only wonder what decision he would have made if he were in charge of the bailout from the beginning...
Friday, January 30, 2009
Equilibrium Macroeconomics and its Skeptics
Recently several economists-- few of whom seem to actually publish technical papers in reputable journals anymore-- led by Paul Krugman have seen fit to attack those who use equilibrium models to study macroeconomics. The thinking seems to go like this: "Equilibrium macroeconomics came mostly out of the University of Chicago and the University of Minnesota, both of which, and the University of Chicago in particular, were bastions of free market economic thought. Since those who oppose the bailout bill on free market grounds are 'clearly' idiots, and since several economists at Chicago in particular oppose the bailout, it must be that equilibrium macroeconomics is a failed endeavor."
Unfortunately, if Krugman had bothered to ever learn modern macroeconomics rather than spending time writing partisan op-eds, he might have learned how broad equilibrium macroeconomics really is. The first question is this: what exactly is equilibrium macroeconomics?
To answer that, I will first start by saying what it is not. Equilibrium macroeconomics is not free market economics, it does not automatically assume that markets are complete and that information is complete and symmetric, and it does not always conclude that market outcomes are Pareto optimal (basically, efficient) and that government intervention is always ill-advised. Twenty-five years ago there was indeed a correlation between belief in the free market and adherence to equilibrium macroeconomic methods, but as the methods have been more adopted, the specific assumptions used in any given model have become much more varied.
Equilibrium macroeconomics essentially rests on two pillars:
1) Agents-- firms, consumers, workers, etc.-- optimize their behavior (basically, they make decisions that they think will bring about whatever outcome they prefer most) given their knowledge of the actions taken by others and their information about the economic environment in general.
2) Aggregate variables-- interest rates, wages, the unemployment rate, etc.-- are the result of the decisions of the agents in the economy, disciplined by some notion of an equilibrium. Often times, the equilibrium condition is market-clearing. In some instances, the equilibrium condition is Nash equilibrium.
Modern macroeconomics has many fathers, perhaps most notably Robert Lucas, Tom Sargent, and Ed Prescott. The first seminal equilibrium macroeconomic model to study the business cycle was the Real Business Cycle model by Kydland and Prescott from the 1980's. That model DID assume that financial markets and information were complete. By implication, this means that people can perfectly insure themselves against economic risk and that the economy is Pareto efficient (ie there is no way the government can make everybody better off). Clearly, at least the result about perfect risk insurance is far from true.
However, it is NOT those particular assumptions of the model-- or the two controversial (or maybe just dead wrong) implications-- that have made the model an enduring baseline macroeconomic model. It is instead the fact that their model was the first to incorporate (1) and (2) to study the causes of business cycles, and that their model explained a sizable proportion of economic fluctuations. Since then, even if Krugman has not noticed, equilibrium macroeconomic has progressed far beyond that model. Here are some examples:
In the 1990's Rao Aiyagari developed a foundational incomplete markets equilibrium macroeconomic model where people face idiosyncratic risk. The result? People cannot insure themselves completely and the economy is not Pareto efficient. Same methodology (ie using (1) and (2)), different specific assumptions, different outcome.
Since then, Per Krusell and Anthony Smith have extended the model by adding aggregate risk. In addition, whereas Aiyagari assumed that financial markets were exogenously incomplete, there has been substantial work in the dynamic contracting literature within macroeconomics that gives rise to endogenously incomplete markets. What are some of the assumptions of these models? Private (incomplete) information and imperfect enforcement.
The equilibrium macroeconomic literature has been extended in many other ways as well. Several macroeconomists have done and continue to do work in developing better heterogeneous agent, incomplete markets models to explain the evolving wealth distribution and the extent to which people can and cannot insure themselves against risk. In addition, there is substantial work being done on incorporating search frictions-- namely, the fact that workers, firms, investors, etc. must actively search for economic opportunities, rather than automatically encountering them-- into equilibrium models. Christoper Pissarides and Dale Mortensen, among others, have developed a benchmark equilibrium model that generates unemployment dynamics far more realistic (and interesting) than the standard classical, full-employment models.
I could go on...
My main point is that equilibrium macroeconomics has become more or less the norm in the field these days, and I cannot think of any successful job market candidates in macroeconomics that work outside the equilibrium framework, broadly defined. The benefit to this framework is not the specific assumptions that individual economists put into their preferred models, but rather:
1) Equilibrium macroeconomic models do not divorce aggregate behavior from the individual actions which must necessarily generate it.
2) They are internally consistent and enforce discipline on the part of the economic modeler.
Unfortunately, if Krugman had bothered to ever learn modern macroeconomics rather than spending time writing partisan op-eds, he might have learned how broad equilibrium macroeconomics really is. The first question is this: what exactly is equilibrium macroeconomics?
To answer that, I will first start by saying what it is not. Equilibrium macroeconomics is not free market economics, it does not automatically assume that markets are complete and that information is complete and symmetric, and it does not always conclude that market outcomes are Pareto optimal (basically, efficient) and that government intervention is always ill-advised. Twenty-five years ago there was indeed a correlation between belief in the free market and adherence to equilibrium macroeconomic methods, but as the methods have been more adopted, the specific assumptions used in any given model have become much more varied.
Equilibrium macroeconomics essentially rests on two pillars:
1) Agents-- firms, consumers, workers, etc.-- optimize their behavior (basically, they make decisions that they think will bring about whatever outcome they prefer most) given their knowledge of the actions taken by others and their information about the economic environment in general.
2) Aggregate variables-- interest rates, wages, the unemployment rate, etc.-- are the result of the decisions of the agents in the economy, disciplined by some notion of an equilibrium. Often times, the equilibrium condition is market-clearing. In some instances, the equilibrium condition is Nash equilibrium.
Modern macroeconomics has many fathers, perhaps most notably Robert Lucas, Tom Sargent, and Ed Prescott. The first seminal equilibrium macroeconomic model to study the business cycle was the Real Business Cycle model by Kydland and Prescott from the 1980's. That model DID assume that financial markets and information were complete. By implication, this means that people can perfectly insure themselves against economic risk and that the economy is Pareto efficient (ie there is no way the government can make everybody better off). Clearly, at least the result about perfect risk insurance is far from true.
However, it is NOT those particular assumptions of the model-- or the two controversial (or maybe just dead wrong) implications-- that have made the model an enduring baseline macroeconomic model. It is instead the fact that their model was the first to incorporate (1) and (2) to study the causes of business cycles, and that their model explained a sizable proportion of economic fluctuations. Since then, even if Krugman has not noticed, equilibrium macroeconomic has progressed far beyond that model. Here are some examples:
In the 1990's Rao Aiyagari developed a foundational incomplete markets equilibrium macroeconomic model where people face idiosyncratic risk. The result? People cannot insure themselves completely and the economy is not Pareto efficient. Same methodology (ie using (1) and (2)), different specific assumptions, different outcome.
Since then, Per Krusell and Anthony Smith have extended the model by adding aggregate risk. In addition, whereas Aiyagari assumed that financial markets were exogenously incomplete, there has been substantial work in the dynamic contracting literature within macroeconomics that gives rise to endogenously incomplete markets. What are some of the assumptions of these models? Private (incomplete) information and imperfect enforcement.
The equilibrium macroeconomic literature has been extended in many other ways as well. Several macroeconomists have done and continue to do work in developing better heterogeneous agent, incomplete markets models to explain the evolving wealth distribution and the extent to which people can and cannot insure themselves against risk. In addition, there is substantial work being done on incorporating search frictions-- namely, the fact that workers, firms, investors, etc. must actively search for economic opportunities, rather than automatically encountering them-- into equilibrium models. Christoper Pissarides and Dale Mortensen, among others, have developed a benchmark equilibrium model that generates unemployment dynamics far more realistic (and interesting) than the standard classical, full-employment models.
I could go on...
My main point is that equilibrium macroeconomics has become more or less the norm in the field these days, and I cannot think of any successful job market candidates in macroeconomics that work outside the equilibrium framework, broadly defined. The benefit to this framework is not the specific assumptions that individual economists put into their preferred models, but rather:
1) Equilibrium macroeconomic models do not divorce aggregate behavior from the individual actions which must necessarily generate it.
2) They are internally consistent and enforce discipline on the part of the economic modeler.
Thursday, January 22, 2009
On the Anniversary of Roe vs. Wade
Supporters of Roe vs. Wade claim that abortion is purely a private medical decision. Tell that to the child whose life you are about to end-- whose story you are about to cut short. People with stories such as this:
Wednesday, January 21, 2009
Is Increased Inequality Bad?
...not unless you and your spouse are only high school graduates, argue Jonathan Heathcoate, Kjetil Storesletten, and Giovanni Violante in this working paper.
Tuesday, January 20, 2009
Monday, January 19, 2009
An Interesting Health Care Reform Idea
Clive Crook explains an interesting idea about how to reform the health care system here. Essentially, it would entail providing every citizen with a health care voucher to purchase private insurance (which would have benefits at least at the level that those in Congress receive), and private insurers in turn would be forbidden from rejecting people. This would get rid of the inefficiencies and inequities of the employer-based system, would increase meaningful competition in the insurance marketplace (competition based on providing good results, not based on screening out sicker patients), and would lead to more accountability. In the article, he suggests financing this by a 10% value-added tax. I won't comment on this extensively right now, but I will say that overall there are a lot of positive ingredients in this plan.
Monday, January 12, 2009
The Obama Stimulus Plan
President-elect Obama, his economic advisors, and many pundits across the country have been proclaiming the need for a large increase in government spending to get us out of the recession. They claim, to my knowledge without any rigorous argument or model to support their claims, that an increase in government spending would generate upwards of 4 million jobs, and that it would be more effective than tax cuts.
The main argument goes along the lines of this: "People are wary of increasing their consumption, so giving them more money will only result in them paying down debt or increasing saving, thereby providing not increasing economic activity." This argument has many holes. First of all, they claim that the increased spending will work by creating jobs, increasing incomes, and hence causing people to spend more. Why would people spend more if the money came from government spending versus from a tax cut? Furthermore, they ignore the fact that any increased government spending must come from increased borrowing, thereby draining money available for private investment.
I cannot say for sure what the effect of all this will be, especially since the details of the plan have nto been released. I can say, though, that in this recent working paper by Professor Harald Uhlig and Andrew Mountford that they find that deficit-financed tax cuts are more effective as economic stimulus than deficit-financed increases in government spending. Here is the link to the paper.
The main argument goes along the lines of this: "People are wary of increasing their consumption, so giving them more money will only result in them paying down debt or increasing saving, thereby providing not increasing economic activity." This argument has many holes. First of all, they claim that the increased spending will work by creating jobs, increasing incomes, and hence causing people to spend more. Why would people spend more if the money came from government spending versus from a tax cut? Furthermore, they ignore the fact that any increased government spending must come from increased borrowing, thereby draining money available for private investment.
I cannot say for sure what the effect of all this will be, especially since the details of the plan have nto been released. I can say, though, that in this recent working paper by Professor Harald Uhlig and Andrew Mountford that they find that deficit-financed tax cuts are more effective as economic stimulus than deficit-financed increases in government spending. Here is the link to the paper.
Wednesday, January 7, 2009
A Better Stimulus Idea
I have been quite busy, with all the traveling for the holidays and also with writing a paper, hence the long time since my last post. In light of that, I read a good article in the Wall Street Journal today by Berkeley economist Hal Varian. He talks about the importance of boosting private investment to get ourselves out of the economic downturn. Why so few people are talking about this is beyond me.
Link here.
Link here.
Tuesday, December 9, 2008
True Intolerance
Racism? That's so passé. Sexism? Go back to the Dark Ages. Being against gay marriage? What kind of a bigot are you?! Believing in God, the Bible, and Jesus Christ? How can you be so intolerant and ignorant?
The fact is, the one area where it is still acceptable to vent intolerance is when it comes to discussing Christians. They are called ignorant, they are called hateful, they are said to be against scientific progress, and their belief in Biblical inerrancy is called a relic of the past. These same people then turn around and proclaim the need for universal tolerance.
Rather than spend time venting myself on this hypocrisy, I will instead focus on the recent bit of Christian bashing in the recent Newsweek cover story, entitled The Religious Case for Gay Marriage. From what I can tell, the article has essentially four premises:
1) The Bible is ambiguous on the morality of same-sex relationships.
2) The Bible is so littered with bizarre rules and horrid tales that its teachings should be ignored anyway.
3) The Bible was written for a different culture, and is therefore not directly applicable (my translation: the Bible is irrelevant).
4) Because slavery was eventually outlawed, segregation ended, and women's rights were won, and because some opinion polls show that younger people are more open to legalizing gay marriage, it must be the case that gay marriage is the right way to go and anybody standing against it is merely resisting the inevitable course of history.
It is beyond me how an article which essentially bashes the Bible can claim to be making a religious case for gay marriage. Even beyond that, Lisa Miller is clearly ignorant when it comes to Biblical teachings. Rather than go into each and every point where she goes wrong, I will send you here.
In response to the outcry over his magazine's piece, Jon Meacham writes the following:
"Given the history of the making of the Scriptures and the millennia of critical attention scholars and others have given to the stories and injunctions that come to us in the Hebrew Bible and the Christian New Testament, to argue that something is so because it is in the Bible is more than intellectually bankrupt—it is unserious, and unworthy of the great Judeo-Christian tradition."
In other words, to argue that the Bible contains the ultimate truth, and that therefore what it says is correct, is unserious and unworthy of the great Judeo-Christian tradition. I ask again: how can you have a Judeo-Christian tradition that is not based on the Christian truths of the Bible?
Lastly, I will point you to a short musical made by the enlightened ones in Hollywood against Proposition 8 where they, you guessed it, made Bible believers look like intolerant, uneducated, closed-minded dupes and where Jesus himself criticizes the Bible and seems to endorse gay marriage. How strange.
For more reaction to this video, go here.
If you are interested in knowing the truth about what the Bible says about homosexuality, you should watch this video with Dr. Robert Gagnon:
Dr. Robert Gagnon, What Does the Bible Teach About Homosexuality? S3E2 from Pure Passion on Vimeo.
Addendum: I am sure that some people who read this will conclude that I am against gay marriage based on Biblical grounds, and that my main reason for posting this was to defend that view. This is not true. I do believe that the Bible is unambiguous on the immorality of same-sex relationships, but that is not why I oppose legalizing them. After all, I believe the Bible is unambiguous on the immorality of adultery, but I do not favor having the government enforce marriage fidelity.
To the contrary, I oppose same-sex marriage for two main reasons.
1) There is no Natural Law or biological purpose for same-sex relationships. Heterosexual unions are the only unions that can naturally bring about new generations. Like it or not, we live in a world where babies result from one man and one woman. As a result, I believe that these relationships serve a vital purpose that no other relationship can serve as fully.
2) If you believe that the only important thing about marriage is that the people love each other (I believe marriage is much bigger than that), then you probably support gay marriage. After all, why should we stop two people from acting on their love for each other? However, if you truly believe that our current laws are discriminatory, why not take that to its inevitable conclusion? Are ANY limits on the definition of marriage between consenting adults justified? Should we legalize polygamy, marriage between relatives, and group marriages? Most honest people, including those who honestly support gay marriage, will answer this question in the negative.
I have many more thoughts on this issue, but alas, I do have other things to do, you know! If anybody has comments, questions, or thoughts, I would like to hear them and I will respond.
The fact is, the one area where it is still acceptable to vent intolerance is when it comes to discussing Christians. They are called ignorant, they are called hateful, they are said to be against scientific progress, and their belief in Biblical inerrancy is called a relic of the past. These same people then turn around and proclaim the need for universal tolerance.
Rather than spend time venting myself on this hypocrisy, I will instead focus on the recent bit of Christian bashing in the recent Newsweek cover story, entitled The Religious Case for Gay Marriage. From what I can tell, the article has essentially four premises:
1) The Bible is ambiguous on the morality of same-sex relationships.
2) The Bible is so littered with bizarre rules and horrid tales that its teachings should be ignored anyway.
3) The Bible was written for a different culture, and is therefore not directly applicable (my translation: the Bible is irrelevant).
4) Because slavery was eventually outlawed, segregation ended, and women's rights were won, and because some opinion polls show that younger people are more open to legalizing gay marriage, it must be the case that gay marriage is the right way to go and anybody standing against it is merely resisting the inevitable course of history.
It is beyond me how an article which essentially bashes the Bible can claim to be making a religious case for gay marriage. Even beyond that, Lisa Miller is clearly ignorant when it comes to Biblical teachings. Rather than go into each and every point where she goes wrong, I will send you here.
In response to the outcry over his magazine's piece, Jon Meacham writes the following:
"Given the history of the making of the Scriptures and the millennia of critical attention scholars and others have given to the stories and injunctions that come to us in the Hebrew Bible and the Christian New Testament, to argue that something is so because it is in the Bible is more than intellectually bankrupt—it is unserious, and unworthy of the great Judeo-Christian tradition."
In other words, to argue that the Bible contains the ultimate truth, and that therefore what it says is correct, is unserious and unworthy of the great Judeo-Christian tradition. I ask again: how can you have a Judeo-Christian tradition that is not based on the Christian truths of the Bible?
Lastly, I will point you to a short musical made by the enlightened ones in Hollywood against Proposition 8 where they, you guessed it, made Bible believers look like intolerant, uneducated, closed-minded dupes and where Jesus himself criticizes the Bible and seems to endorse gay marriage. How strange.
For more reaction to this video, go here.
If you are interested in knowing the truth about what the Bible says about homosexuality, you should watch this video with Dr. Robert Gagnon:
Dr. Robert Gagnon, What Does the Bible Teach About Homosexuality? S3E2 from Pure Passion on Vimeo.
Addendum: I am sure that some people who read this will conclude that I am against gay marriage based on Biblical grounds, and that my main reason for posting this was to defend that view. This is not true. I do believe that the Bible is unambiguous on the immorality of same-sex relationships, but that is not why I oppose legalizing them. After all, I believe the Bible is unambiguous on the immorality of adultery, but I do not favor having the government enforce marriage fidelity.
To the contrary, I oppose same-sex marriage for two main reasons.
1) There is no Natural Law or biological purpose for same-sex relationships. Heterosexual unions are the only unions that can naturally bring about new generations. Like it or not, we live in a world where babies result from one man and one woman. As a result, I believe that these relationships serve a vital purpose that no other relationship can serve as fully.
2) If you believe that the only important thing about marriage is that the people love each other (I believe marriage is much bigger than that), then you probably support gay marriage. After all, why should we stop two people from acting on their love for each other? However, if you truly believe that our current laws are discriminatory, why not take that to its inevitable conclusion? Are ANY limits on the definition of marriage between consenting adults justified? Should we legalize polygamy, marriage between relatives, and group marriages? Most honest people, including those who honestly support gay marriage, will answer this question in the negative.
I have many more thoughts on this issue, but alas, I do have other things to do, you know! If anybody has comments, questions, or thoughts, I would like to hear them and I will respond.
Sunday, December 7, 2008
What To Do About The Auto Industry
The automotive industry has been going before Congress with a mixture of groveling, implicit threats, and dooms-day scenarios, proclaiming the urgent need for a bailout of their industry. It is true that if the auto industry fails, there will be some heavy initial job losses for people who are currently employed by Ford, GM, and Chrysler. On the other hand, who is to say that a $25 billion low-interest loan to these companies will do anything to contribute to their long-term viability.
Congress has been responding to this by demanding that the Big 3 draw up plans for their viability and present them before Congress. This approach is ridiculous. Congress has no ability whatsoever to judge how likely the business plans are to succeed. Having Senator Dodd or Barney Frank put their stamp of approval on GM's business plan says absolutely nothing about how the market will value the companies' products and business strategies.
Another problem with the potential bail-out is the precedent it sets. What distinguishes the auto industry from any other major US industry (aside from its inability to be competitive)? What if the pharmaceutical industry knocks on Congress' door, or large energy companies, or agribusiness? Will Congress expect all of them to draw up business plans for Congress to evaluate? The whole notion is patently absurd.
My preferred approach is to let the marketplace decide the fate of the auto companies, just as it does all other companies. In the meantime, the government should focus on helping out the workers themselves who would be potentially affected by a bankruptcy. These workers should not get any more insurance or protection than workers at other US companies, nor should they receive less. I do not doubt that a bankruptcy would have some negative short-term consequences for the US macroeconomy, but that is no different than any other major loss of jobs. If we start meddling in the economy to prevent companies from failing, in the long-run all we will really end up doing is to ensure that fewer companies end up truly succeeding. That is a consequence we should all hope to avoid.
Congress has been responding to this by demanding that the Big 3 draw up plans for their viability and present them before Congress. This approach is ridiculous. Congress has no ability whatsoever to judge how likely the business plans are to succeed. Having Senator Dodd or Barney Frank put their stamp of approval on GM's business plan says absolutely nothing about how the market will value the companies' products and business strategies.
Another problem with the potential bail-out is the precedent it sets. What distinguishes the auto industry from any other major US industry (aside from its inability to be competitive)? What if the pharmaceutical industry knocks on Congress' door, or large energy companies, or agribusiness? Will Congress expect all of them to draw up business plans for Congress to evaluate? The whole notion is patently absurd.
My preferred approach is to let the marketplace decide the fate of the auto companies, just as it does all other companies. In the meantime, the government should focus on helping out the workers themselves who would be potentially affected by a bankruptcy. These workers should not get any more insurance or protection than workers at other US companies, nor should they receive less. I do not doubt that a bankruptcy would have some negative short-term consequences for the US macroeconomy, but that is no different than any other major loss of jobs. If we start meddling in the economy to prevent companies from failing, in the long-run all we will really end up doing is to ensure that fewer companies end up truly succeeding. That is a consequence we should all hope to avoid.
Thursday, December 4, 2008
Monday, December 1, 2008
The Future of Free Market Conservatism
Richard Posner and Gary Becker discuss this on their joint blog. Both offer very thoughtful insight on the matter. Richard Posner would welcome the death of conservatism, and of liberalism. He recommends a more pragmatic, nonideological approach to policymaking. Gary Becker agrees to a point, but notes that without a framework to interpret facts, we have little guidance when it comes to policymaking. See Posner's entry here, and Becker's entry here.
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