Monday, April 13, 2009
As Competitive as a Rigged Game
If a public plan becomes part of any new health care bill, do not be deceived by those who call it a source of "competition" for private plans. It would be about as much competition as an athlete faces when his opponent is secretly doping up behind closed doors. To read more, go here.
Our Civic Duty
No, it is not patriotic to pay higher taxes, but it is even less patriotic to force a small minority of people to pay for all the goodies that you vote for. In short, everyone should pay taxes. Ari Fleischer makes the case here.
Monday, March 30, 2009
Friday, March 20, 2009
Obama's Anti-Republican Defense Plan
In case you haven't heard, the White House will now have its own "kitchen garden." The catch? There will also be a beehive. What better way to scare off Republicans from going to the White House than to put guard bees there. I'm not sure if it would work, but it just might if I were an elected official...
Tuesday, March 10, 2009
Stem-Cell Reversal
President Obama has now reversed Bush's restriction on federal funding for stem cell research that would result in the destruction of embryos. Obama is entitled to do that. However, he went a step further by claiming that this was a sign that his Administration would not "politicize science." Translation: if you believe that there are moral boundaries for scientific inquiry, then you are basing your decisions on ideology instead of science. Interestingly enough, everybody, including President Obama, believes in moral boundaries for research. Somehow I doubt that Obama is in favor of certain forms of animal testing, for instance. Here is an excerpt from a piece from the Wall Street Journal today:
"The claim about taking politics out of science is in the deepest sense antidemocratic. The question of whether to destroy human embryos for research purposes is not fundamentally a scientific question; it is a moral and civic question about the proper uses, ambitions and limits of science. It is a question about how we will treat members of the human family at the very dawn of life; about our willingness to seek alternative paths to medical progress that respect human dignity."
"The claim about taking politics out of science is in the deepest sense antidemocratic. The question of whether to destroy human embryos for research purposes is not fundamentally a scientific question; it is a moral and civic question about the proper uses, ambitions and limits of science. It is a question about how we will treat members of the human family at the very dawn of life; about our willingness to seek alternative paths to medical progress that respect human dignity."
Saturday, February 21, 2009
Obama's New Deficit Claims
President Obama now claims that he wants to cut the deficit in half by 2013. By his calculations, since Bush handed him a $1.3 trillion deficit, Obama's goal is to bring that down to $533 billion. ...oh yeah, except there is one problem: The 2008 deficit was $1.3 trillion only because of the one-time $700 billion TARP bill. Without that, the deficits under Bush never even approached $1.3 trillion, and in fact, never even hit $533 billion. It is a good bit of political maneuvering if Obama can pull off this bait and switch.
Friday, February 6, 2009
Krugman's True Expertise
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.
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.
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.
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