Hangups of the Heterodox (Vaguely Wonkish)
Thomas Palley and Simon Wren-Lewis have been having a back andforth over heterodox economics versus garden-variety saltwater economics, and their role in making sense of the economic crisis. Palley accuses Wren-Lewis and me of “flimflam”; Wren-Lewis wonders what he’s talking about.
Actually, I think I know what’s going on here, but first a point about flimflam. Palley tells us that
The essence of Keynes’ economics was the liquidity preference theory of interest rates and rejection of the claim that price and nominal wage flexibility would ensure full employment. New Keynesians abandon both. They replace liquidity preference theory with loanable funds interest rate theory and they use price and nominal wage rigidity to explain cyclical unemployment.
My reaction was, what? New Keynesians assert — as Keynes did, although I don’t think it matters for this debate what he said — thatboth liquidity preference and loanable funds are true. There are conditions under which one or the other is the main one to focus on — at full employment, loanable funds are crucial, in a liquidity trap, liquidity preference. But no modern Keynesian, new or paleo, forgets about the importance of liquidity preference.
And as for wage and price inflexibility as the cause of unemployment — grrr. I’ve written again and again on this subject, pointing out that in a liquidity trap price flexibility probably makes things worse, not better; Gauti Eggertsson and I have analyzed the paradox of flexibility in a New Keynesian model.
It’s hard to escape the impression that Palley here is engaging in his own version of the right-wing myth of the stupid progressive economist; he’s so sure that mainstream Keynesians have unlearned all the important lessons that he hasn’t bothered to read what we actually write.
So what’s this all about then? Palley goes on in both posts about the evils of the marginal productivity theory of distribution; like Wren-Lewis, I don’t see what this has to do with analyzing the crisis, one way or another. But I think I do understand where this is coming from. There’s a long if bizarre tradition among some left-leaning economists that sees the notion that factors of production are paid their marginal products — or even that this is a useful first cut when thinking about the factor distribution of income — as somehow implying an acceptance of the moral right of capitalists to keep their spoils. This doesn’t really make sense, but you do see attacks on marginal productivity theory cropping up in weird places — e.g., in Jamie Galbraith’s oddly off-center attack on Thomas Piketty.
And what’s going on here, I think, is a fairly desperate attempt to claim that the Great Recession and its aftermath somehow prove that Joan Robinson and Nicholas Kaldor were right in the Cambridge controversies of the 1960s. It’s a huge non sequitur, even if you think they were indeed right (which you shouldn’t.) But that’s what seems to be happening.
ECO 348, The Great Recession: Links to Slides
Wrapped up the class yesterday. Here, in one place, are links to the lecture slides (all pdfs). If you’re wondering about lecture 3, it was snowed out, and the material folded into other classes.
The Other Christie Scandal
What is it that makes self-proclaimed centrists such easy marks for right-wing con men? Actually, it’s not that much of a mystery: the centrist creed is that the two parties are symmetrically extremist, and this means that there must, as a matter of principle, be Serious, Honest Republicans out there — so such people must be invented if they don’t actually exist. Hence the elevation of Paul Ryan despite clear evidence of his con-artist nature.
And hence, also, the love affair with Chris Christie.
That affair ended up in a breakup over Bridgegate, but the evidence of Christie’s true nature was obvious all along. I wrote two years ago about his fiscal fakery, and in particular the way he tried to silence independent critics of his budget projections via crude, vicious personal attacks.
Now Vox tells us that the critics were in fact completely right, and that Christie’s budget projections were absolutely as unrealistic as they said.
Can we say that someone who tries to browbeat anyone daring to question rosy scenarios is someone who should never, ever be allowed near higher office? And can we also say that there’s something very wrong with pundits who failed to see the obvious about this guy?
On Progressive Econoblogging
Chris House replies graciously to my critique of his critique. However, I have some further thoughts here. The crucial question, it seems to me, is what econobloggers — and in particular, those who happen to be political progressives — are doing, and what they should be trying to do.
House sees the kind of blogging I and a number (but not a largenumber, which is important) of other people are doing as a matter of preaching to the choir, talking in the echo chamber, whatever. And he therefore argues that we should bend over backward to avoid reinforcing our audience’s prejudices.
But I see myself, and Mark Thoma, and Brad DeLong, and Mike Konczal, and Simon Wren-Lewis, and a few others as something quite different — as voices in the wilderness.
Now, you may say that it’s a pretty cushy wilderness — and in my case it definitely is; not just monetarily, but my spot at the Times is a dream gig for many journalists, I have a million Twitter followers, etc. etc. You may also say that there is indeed a choir that hears my preaching — and for sure there is; plenty of liberals read me for reassurance in what they already believed.
But other people also read me — often with distaste, but still they do hear what I say. What I and other econobloggers write is heard at the ECB, the IMF. the European Commission, CBO, the White House, Treasury, and so on. So there is some outreach.
And on the other hand, while it may be a comfortable wilderness, it’s a wilderness all the same. Politics and policy are overwhelmingly dominated by what I call the Very Serious People — people who insist that deficits are our most pressing problem, that high unemployment must be a matter of inadequate skills, that low marginal tax rates on the rich are essential for growth. Behind the conventional wisdom of the VSPs lies a vast mass of power and prejudice. As Ezra Klein once pointed out in connection with Alan Simpson, the influence of the deficit scolds is so great that by and large the press abandons any notion of objectivity and simply assumes that the VSPs are right and what they want is good.
And against all this power of conventional wisdom — which is often, by the way, at odds with basic economic analysis and the preponderance of evidence — you have … a handful of progressive economics bloggers. Some of them — well, mainly me — have prominent perches. But it’s still a very unequal match.
So I see no reason to bend over backwards to annoy my most loyal readers. I won’t ever say anything I don’t believe to be true, and I try not to sheer away from saying things my fan club will dislike. But shocking the liberal bourgeoisie is not how I see my job.
ECO 348, The Great Recession: The New Normal
Slides here (pdf).
The Folly of Prudence
Many American roads are in pretty bad shape — I can attest to that, after driving up to Massachusetts and back for family business last week. When you combine that fact with the underlying macroeconomic situation, of which more in a minute, the case for spending substantial sums on repair seems obvious.
But Obama’s proposal for what is actually a modest infrastructure program appears to be going nowhere, thanks to a fight over how to pay for it.
Which brings me back to something I started saying way back in 2008, which is still true: when you’re in a liquidity trap, virtue becomes vice and prudence becomes folly. Asking how we pay for infrastructure may seem prudent, but it is in fact deeply foolish.
Think about it: what would the true costs be of repairing our roads? It wouldn’t divert capital from other investments — capital has no place to go, and markets are practically begging the federal government to borrow funds and put it to work:
It also wouldn’t divert labor from other uses: unemployment among construction workers remains high:
So it’s deeply irresponsible NOT to spend this money, and foolish to worry about financing.
Clearly, however, we’ve learned nothing from five-plus years of depression economics.
The Hunt for False Equivalence
America, it goes without saying, has a powerful, crazy right wing. There’s nothing equivalent on the left — yes, there are individual crazy leftists, but nothing like the organized, lavishly financed madness on the right.
But centrists have a very hard time acknowledging this asymmetry; they love to assert that both sides are equally wrong — and often seem to feel the need to invent extreme positions when they don’t actually exist.
Which brings me to this critical piece by Chris House. A while back House declared that both Ed Prescott and yours truly say crazy things; when asked for an example of me saying something remotely equivalent to something like Prescott’s declaration that there is no evidence that Fed policy matters, he never did answer.
Now House takes me and Noah Smith to task for preaching to the left-wing echo chamber in what we wrote about the Tom Sargent speech that’s making the rounds. And once again I have to wonder whether he actually read what I wrote, or simply assumed that it must be over the top.
First, House apparently missed the fact that I was explicitly notattacking Sargent; instead, I was questioning the efforts of people at AEI to promote a speech given in 2007, before the financial crisis, as the essence of wisdom in a world suffering a prolonged slump.
Second, House criticizes me for questioning the tradeoff between inequality and growth — but without quoting what I actually said. Here it is:
So, about the not so time-dependent points: Sargent declared as a principle, “There are tradeoffs between equality and efficiency.” Well, every economist would agree that Cuban-type equality is bad for efficiency. But would reducing our current level of inequality reduce efficiency? That’s far from clear: there are a number of reasons to believe that high levels of inequality have adverse effects on economic growth – and evidence to that effect is coming not from fringe leftists but from places like the IMF.
That seems pretty qualified to me — not a general assertion that there is never a tradeoff, but a suggestion that at current levels of inequality the tradeoff isn’t clear, backed by a link to serious research. What should I have said? Must one refuse to mention IMF research because it might reverberate in the echo chamber?
If you ask me, the real echo chamber here is the centrist echo chamber — and yes, it exists. In this chamber everyone knows that people like me are just as bad as the crazies on the right, and they know it because everyone says it. But where is the evidence?
Paradigming Is Hard
Mark Thoma sends us to Justin Fox, who tries hard to be sympathetic to the latest hard science/engineering guy bustling in to show those dumb economists how to do it. But as Fox clearly realizes, the reason we don’t have a new economic paradigm isn’t that economists are dumb, or even that all of them are rigid in their beliefs (obviously some are, or I wouldn’t have as many arguments as I do.) The reason, instead, is that it’s hard.
Specifically: we have a body of economic theory built around the assumptions of perfectly rational behavior and perfectly functioning markets. Any economist with a grain of sense — which is to say, maybe half the profession? — knows that this is very much an abstraction, to be modified whenever the evidence suggests that it’s going wrong. But nobody has come up with general rules for making such modifications.
So, on the behavioral side, clearly people aren’t perfectly rational — but there are lots of ways to be slightly stupid, and it’s very hard to come up with a general theory about which of these ways they will choose in any given situation. Behavioral economics is a fine thing, but it’s more a collection of interesting and sometimes useful observations than a general, well, paradigm that can offer guidance across a wide range of cases.
Meanwhile, markets also fail much of the time — but while we know a fair bit about what happens to particular markets in practice, we don’t seem close to a general paradigm here either.
So how do you do useful economics? In general, what we really do is combine maximization-and-equilibrium as a first cut with a variety of ad hoc modifications reflecting what seem to be empirical regularities about how both individual behavior and markets depart from this idealized case. And people using this kind of rough-and-ready approach have done really well since 2008, on everything from inflation to interest rates to the effects of austerity.
But here’s the thing: economists have done their work this way for generations. So it’s really not a new paradigm. If anything, the true new paradigm was the attempt to justify everything with maximization and equilibrium — but that’s the paradigm that failed.
Now maybe, someday, someone will find a way to do something truly new — integrate neuroscience into economics for real, not as a marginal research topic, or turn agent-based models into a useful tool. I’m for it! But merely noting the foolishness of some economists and calling for a new paradigm in the abstract won’t get us there.
Health Care Politics In One Sentence
The politics of Obamacare are clearly starting to shift. It’s not that the public is coming to love it — not yet, anyway. But it’s less and less of a bogeyman, with polls suggesting a majority of the public against flat-out repeal. So there’s increasing pressure on Republicans to lay out an alternative — and continuing surprise about their inability to articulate one.
But this is an example of why it sometimes helps, even in straight political reporting, to understand how policy works. Here’s the essential fact about health care policy, which in turn fundamentally shapes health care politics:
Obamacare looks the way it does because it has to.
Once again, for those who missed it: if you want to cover people with preexisting conditions, you must have community rating. If you want to have community rating without a death spiral — that is, if you want to keep an acceptable risk pool — you have to have an individual mandate. If you want to have an individual mandate, you have to have subsidies for lower-income Americans. And that’s Obamacare: a three-legged stool, with all three legs essential.
Republicans can’t offer an alternative because there isn’t one (aside, that is, from single-payer). Their plan, such as it was, was to wait for the plan to implode, so they would never be put on the spot; since that isn’t happening, Plan B is to bob and weave and avoid the question until the midterms. That’s all there is.
A Monetary Puzzle
OK, color me puzzled. I’ve seen a number of people touting thisBank of England paper (pdf) on how banks create money as offering some kind of radical new way of looking at the economy. And it is a good piece. But it doesn’t seem, in any important way, to be at odds with what Tobin wrote 50 years ago (pdf) — indeed, the BoE paper cites Tobin extensively. And I have always thought of money inTobinesque terms, even if I sometimes use shorthand descriptions that can be misread if you take them out of context; the same is true of many economists.
Furthermore, the key Tobin insight — which is fully consistent with the BoE analysis — is that while banks are indeed more complicated creatures than the mechanical lenders of deposits we like to portray in Econ 101, this doesn’t mean either that they have unlimited ability to create money or that they are somehow outside the usual rules of economics. Don’t let monetary realism slide into monetary mysticism!
Macroeconomics and Class Warfare
Back when Obama was proposing a spending plan to boost the economy, and some of us were pleading for a bigger plan, it was common to hear people from both the right and the crazy centerdeclaring that it was all a ruse, an attempt to smuggle in liberal priorities under the guise of fiscal stimulus. This was, as it happens, completely false – and in the case of the right-wingers, a case of projection. After all, Obama didn’t try to sell permanent spending increases as short-run stimulus – but Bush did exactly that when pushing his tax cuts.
And what’s more, it wouldn’t have worked. If anything, your best bet is to try it the other way – to push proposals that will stimulate the economy while also building infrastructure and/or reducing inequality, and to make the long-run, class-warfare aspects the heart of your sales pitch.
This may seem odd. Shouldn’t it be easier to sell win-win ideas, which will make everyone or almost everyone better off? Well, it would be if the public “got” Keynesian economics. But even educated readers tend not to get the idea that the economy as a whole can suffer from inadequate demand (hey, lots of U. of Chicago professors don’t get it either.) And I don’t think it’s for want of efforts to get the point across.
The key sticking point is right at the beginning. Never mind monetary and fiscal policy; the very notion that the economy can suffer from too little spending turns out to be inherently difficult. When I give public talks, I get some traction (I think) by asking people what happens if everyone tries to cut his or her spending at the same time, then pointing out that my spending is your income and your spending is my income. But I don’t think it sticks for many people: the appeal of the economy-as-household metaphor usually takes over.
I’m not making this judgment entirely based on gut feelings. We do have some metrics here – imperfect metrics, but still useful. Look, for example, at book sales: Has there ever been a monster bestseller about fighting recessions, or even about growth for its own sake? I don’t think so. The blockbusters are always, one way or another, about us versus them – going head to head, competing in a flat world, or now trying to stop the rise of the one percent. In saying this I don’t mean to denigrate the last entry: Piketty’s book is awesomely good, and deserves all the acclaim it’s getting. But it is notable that in a time of deeply depressed labor markets, our biggest thing is long-run inequality.
Or closer to home, I do of course track how my columns do on the most-emailed list; and there’s no question that inequality gets a bigger response than demand-side macro.
This doesn’t mean that we should (or that I will) stop trying to get the truth about depression economics across. But it’s an interesting observation, and I think it has implications for how politicians should go about doing the right thing.
ECO 348, The Great Recession: Secular Stagnation
Slides here (pdf).
My Head Talks Yet Again
On Stephanopoulos tomorrow. As I understand it, William Kristol and I will debate whether multiplicative shocks to wealth accumulation really do cause the right tail of the distribution to approximate a power law.
Is A Banking Ban The Answer?
OK, a genuinely interesting debate on financial reform is taking place. I’m not even sure where I stand. But it’s certainly worth talking about.
Atif Mian and Amir Sufi draw our attention to proposals to either mandate or create strong incentives for 100-percent reserve banking, coming from Martin Wolf and, more surprisingly, John Cochrane. Equally surprising — at least to me — is that Cochrane seems more aware of the difficulties of the issue.
The basic idea both writers share is that banks as we know them — institutions that issue promises to pay money on, or almost on, demand, while holding liquid assets that cover only a fraction of that potential demand — are inherently subject to runs, self-fulfilling losses of confidence. So they propose that we aim to eliminate such institutions; there would still be things we call banks, but they would simply be custodians of government-issued liquid assets.
Wolf, unless I’m reading him wrong, seems to identify the whole issue with one particular form of short-term debt — bank deposits. This seems an oddly narrow view given the nature of the 2008 crisis, which involved very few runs on deposits but a massive run on shadow banking, especially repo — overnight lending that in a fundamental sense fulfilled the functions of deposit banking but also created the same kind of risks. Cochrane gets this, and calls for a “Pigouvian tax” — i.e., the kind of tax economics textbooks tell us we should have on pollution — imposed on any form of “run-prone short-term debt”.
So, three thoughts.
First, Wolf’s omission is a big one. If we impose 100% reserve requirements on depository institutions, but stop there, we’ll just drive even more finance into shadow banking, and make the system even riskier.
Second, Cochrane’s proposal calls for a remarkable amount of government intervention in finance; it makes liberal proposals for a transactions tax look like minor nuisances. Cochrane insists that we can easily run our economy without dangerous short-term private debt — that we can easily set things up so that the manager of your index fund sells a tiny piece of your stock portfolio every time you use a debit card at 7-11. Is this right?
READ MORE...Friday Night Music: Arcade Fire, Wake Up
Busy week, I’m actually very tired, and have been indulging in old favorites to get me through. So an old performance, emotionally uplifting, from the band that got me into indie music.
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