And Robert Skidelsky explains what John Maynard "We'll Keep Dancing 'Till We Die" Keynes really meant by "In the long run we are all dead":
And Robert Skidelsky explains what John Maynard "We'll Keep Dancing 'Till We Die" Keynes really meant by "In the long run we are all dead":
An Open Letter to the Harvard Community: Last week I said something stupid about John Maynard Keynes. Asked to comment on Keynes’ famous observation “In the long run we are all dead,” I suggested that Keynes was perhaps indifferent to the long run because he had no children, and that he had no children because he was gay. This was doubly stupid. First, it is obvious that people who do not have children also care about future generations. Second, I had forgotten that Keynes’ wife Lydia miscarried.
Niall is wrong. His suggestion was not doubly stupid. There is more.
Niall speaks of Keynes's "In the long run we are all dead" as if it is a carpe diem argument--a "seize the day" argument, analogous to Marvell's "To His Coy Mistress" or Herrick's "To the Virgins"--and Ferguson sees his task as that of explaining why Keynes adopted this be-a-grasshopper-not-an-ant "party like we're gonna die young!" form of economics, or perhaps form of morality.
But that is not it at all.
Little more than quotes from Skidelsky's three-volume Keynes biography strung together, with a little commentary and occasional quibbling…
J. Bradford DeLong Professor of Economics, U.C. Berkeley
Econ 115 Lecture
September 29, 2009
5,562 words: September 29, 2009
Paul Krugman observes:
Not Everything Is Political: Clive Crook demands that I engage respectfully with reasonable people on the other side, but somehow fails to offer even one example of such a person. Not long ago Crook was offering Paul Ryan as an exemplar of serious, honest conservatism, while I was shrilly declaring Ryan a con man. But I suspect that even Crook now admits, at least to himself, that Ryan is indeed a con man…
John Maynard Keynes:
The Great Slump of 1930: This is a nightmare, which will pass away with the morning. For the resources of nature and men's devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life… and will soon learn to afford a standard higher still. We were not previously deceived.
But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time — perhaps for a long time…
[T]he [Quantity] Theory [of Money] has often been expounded on the further assumption that a mere change in the quantity of the currency cannot affect k, r, and k',--that is to say, in mathematical parlance, that n is an independent variable in relation to these quantities. It would follow from this that an arbitrary doubling of n, since this in itself is assumed not to affect k, r, and k', must have the effect of raising p to double what it would have been otherwise. The Quantity Theory is often stated in this, or a similar, form.
Now "in the long run" this is probably true. If, after the American Civil War, that American dollar had been stabilized and defined by law at 10 per cent below its present value, it would be safe to assume that n and p would now be just 10 per cent greater than they actually are and that the present values of k, r, and k' would be entirely unaffected. But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean will be flat again.
Seven Myths about Keynesian Economics: The claim that Keynesians are indifferent to the long-run is one of many myths about Keynesian economics…. This has it backwards. Conservatives who oppose Keynesian economics are not concerned enough about short-run economic problems, particularly unemployment, and failing to address our short-run problems can bring long-run harm…. Keynesians care very much about the long run, but they do not go along with the idea that neglecting short-run issues is the best way to solve our long-run problems.
Henry Blodget writes:
The source appears to be a rather remarkable screed by Gertrude Himmelfarb in a rather McCarthyite vein, that manages to get a lot about Keynes's economics and his family life substantially wrong in a very short space, which in turn appears to be based on the views of Joseph Schumpeter:
Abba Lerner (1943): "Functional Finance":
The first financial responsibility of the government (since nobody else can undertake that responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment. The government can increase total spending by spending more itself or by reducing taxes so that taxpayers have more money left to spend. It can reduce total spending by spending less itself or by raising taxes….
Jonathan Portes reminds me that his which (macro)-economists are worth listening to? piece is from last June--and that I noticed it at the time. Clearly I need to recognize that my internal memory is full, and need to Google everything in order to find out what I know…
Jonathan came up with a small (and gratifying to me) whitelist of economists whom one should presume are to be taken seriously--because they have a coherent framework for looking at the world, and have broadly been correct in their forecasts since the world changed in 2007. It consists of:
And he sets forth a very small greylist of people whose analytical framework is neither clear nor transparent:
And he presents a blacklist of institutions: "[those] writing editorials at the Financial Times, macroeconomic forecasters at the OECD, the European Department at the IMF (up until recently - their recent stuff on both UK and eurozone has been pretty good), the senior leadership at the Bank of England and the Treasury, and probably worst of all senior economic policymakers at the ECB and European Commission. Oh, and the credit ratings agencies."
But he does not present a blacklist of individuals--a list of economist-goats, of people using a badly-flawed framework who have been repeatedly proven wrong since 2007 and have failed to mark their beliefs to market, whether because they do not believe in marking their beliefs to market, because they are seeking high office, because they are playing to a base that they hope will reward them, or for some other reason.
He suggests that readers come up with such a list.
So here is my start: a few people who, when I see their byline at the head of a piece, I now tend to presume that they are likely to get something badly wrong. In the order in which they have crossed my desk recently: Niall Ferguson, Allan Meltzer, Peter Schiff, Tim Geithner, Wolfgang Schäuble, Robert Lucas, Anders Aslund, John Taylor, Michael Boskin, Alberto Alesina.
UPDATE: Commenters add: John Cochrane, Glenn Hubbard, Alan Greenspan, Casey Mulligan, Eugene Fama, Hans-Werner Sinn, James Bullard, David K Levine, Luigi Zingales, Robert Barro, Douglas Holtz-Eakin,
And there are some commenters add who I would deny are really economists at all: Ed Prescott, Steve Landsburg, Robert Murphy, Robert Samuelson,
And I would transfer from the commenter-added-blacklist to the greylist: James Hamilton, Raghuram Rajan, Gregory Mankiw,
I really wish that Jonathan Portes had written this before I had to give my talk on economists as public intellectuals yesterday…
Not the Treasury view...: Which (macro)-economists are worth listening to?: [W]hen economists argue about the correct stance of policy, who should we (policymakers, commentators, and the general public) listen to?… I [had] pointed out that not only was the government's decision in 2010 to cut the deficit too quickly doing considerable economic damage, but that this was both predictable and predicted by economists such as Paul Krugman and Martin Wolf. Their response was essentially "how were we to know which economists to listen to? Others were saying the opposite".
J. Bradford DeLong
Each of the first two volumes of Robert Skidelsky's biography of John Maynard Keynes--Hopes Betrayed, and The Economist as Saviour--was an astonishing intellectual achievement. Now that it is complete, it is clear that as a whole the three-volume biography is the finest biography of an economist that I have ever read, or that I ever expect to read. However, this third volume--Fighting for Britain--does not quite measure up to its predecessors. Nevertheless, it is still a superb book. It falls short only because its predecessors have raised the bar so very high indeed.
A dose of reality for the dismal science: A casual perusal of 20th-century economic history, let alone more rigorous econometric analysis, turns up multiyear periods in the UK and US following the second world war, and in Belgium, Italy, and Japan in the past 20 years, when public debt was greater than 90 per cent of GDP but nothing much happened. Either stagnation in economies led to slowly rising debt levels, as in Italy or Japan of late, or growth returned and debt levels declined, as in the UK and US in the 1950s. The latter two escaped the black hole of debt without an austerity rocket booster…. [S]low growth is at least as much the cause of high debt as high debt causes growth to slow – which if you stop to think about it, as some of us did before this week, makes more sense. The current UK economy is exhibit A for such a dynamic…. On the other hand, public debt is sometimes incurred by spending on constructive things with a positive return, such as infrastructure and education. So it is common sense that slow growth is always bad for debt accumulation, but not all debt accumulation is bad for growth. Thus, the causality runs more dependably from growth to debt than vice versa….
Right now I am in the middle of a long project with Larry Summers on fiscal policy in a depressed economy. It has a lot of moving parts. Right now, however I am finding it difficult to make progress because it is not clear to me who the audience for this--who we should be trying to convince of what.
So let me, right now, try to spend tonight telling you what I think but rather what I think others think.
Whenever I read Abba Lerner (1943) or his latter-day disciples, I find myself puzzled by their near-certainty: they know that fiscal expansion and contraction can keep employment high and inflation equal to expectations, and that monetary expansion can keep interest rates so low that there is no government budget financing constraint that binds.
As with so much else, a remarkably large measure of clarity can be achieved quickly by casting their argument in Hicksian (1937) IS-LM terms.
This year I am on sabbatical--which means I do not teach. And I do miss it. Thus, from my perspective at least, this next hour is going to be an hour of pure fun.
I hope it will be an hour of pure fun for you all as well.
As Bob Strom said, right now in this MBA class you are transitioning from studying micro to studying macroeconomics. You are moving away from studying that part of economics where you talk about how the market system works well: how supply balances demand to make the maximum possible amount and value of win-win deals, and how people respond to the incentives they’re given to change their behavior. To the extent that things go wrong in microeconomics--to the extent that when you step back and look at the situation you say "Geewillickers! I really wish this had not happened!"--it is because you wish that you or the market system had not given people the incentives that it in fact did.
I (or somebody) should run a history of economic thought conference to celebrate the seventieth anniversary of Abba Lerner's "Functional Finance" in the fall…
Milton Friedman on Abba Lerner:
Milton Friedman and Rose Friedman, Two Lucky People: We were affected very differently by the Keynesian revolution—Lerner becoming an enthusiastic convert and one of the most effective expositors and interpreters of Keynes, I remaining largely unaffected and if anything somewhat hostile….
Lerner was trained at the London School of Economics, where the dominant view was that the depression was an inevitable result of the prior boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by “easy money” policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms.
Noahpinion: Kauffman forum video: Blogging and your economics career: I was unfortunately unable to attend the Kauffman Economics Bloggers' Forum this year. In lieu of a personal appearance, Brad DeLong asked me to do a quick video on the topic of how blogging might affect one's career in economics. So here is that video. It's a topic I've covered before, so not a ton of new stuff here if you're a regular reader. But with the video version, you get to see my office bookshelf! Awesome!
An economist deeply focused on public policy and politics. A Virginian living in the twentieth century. And yet as I scan through his collected works…
There are two references to "Lyndon Johnson"--one to his refusal to follow his economic advisors' advice to shrink aggregate demand in 1967-8, and a second to "the redistributionist zeal of Lyndon Johnson's 'Great Society'…"
There is one reference to "voting rights" advocating the removal of the franchise from public employees:
There are two references to "African", both of them citations to G.F. Thirby in the South African Journal of Economics:
And there are 29 references to "black"--28 of them references to Duncan Black, author of The Theory of Committees and Elections, and one a reference to black ink on white paper:
My mind is officially blown...
Something to remember.
A Brief Note on Macroeconomics and Ethics: I want to acknowledge Karl Smith’s very gracious and brave response to my piece on economics in the crisis. And I’d also like to add a small further thought….
[D]isagreement will happen. Economics is a hard subject, people will come to different provisional conclusions, and some of them will, in retrospect, turn out to have given very bad advice. That’s a shame but not a sin…. Ken Rogoff and I differ seriously on the relative risks of public debt and failure to spend on job creation. One of us is wrong, which means that the other is giving bad advice…. But this is an argument in good faith.
What bothers me, and should bother you, about much of this debate is that it pretty clearly is not in good faith. Too many economists and commentators on economics are clearly playing for a political team; too many others are clearly playing professional reputation games. Their off-the-cuff reactions to policy issues were wrong and foolish, and I think they know in their hearts that they messed up; but instead of trying to remedy the fault, they’re trying to defend the property values of their intellectual capital.
And that really is a sin…. This really matters to millions of people, and refusing to think clearly because you don’t want any negative thoughts about the papers you and your friends have been writing the past few decades is unforgivable.
World’s Wrongest Man Ventures Latest Prediction: Michael J. Boskin — former George W. Bush economic adviser, Hoover Institute fellow, and staunch advocate of conservative anti-tax doctrine — appears today, as is his wont, in The Wall Street Journal op-ed pages to warn that the Democratic president’s economic policies will lead us to misery…. Four years ago, Boskin penned a Journal op-ed whose thesis was captured in the headline, “Obama’s Radicalism Is Killing The Dow.” That was the signal for the Dow to go on a tear…. In 1993, Bill Clinton enacted an economic program centered around some public investment, coupled with deficit reduction with higher taxes on the rich. Boskin was very, very sure it would fail…. He made a series of predictions: “The new spending programs will grow more than projected, revenue growth will be disappointing, the economy will slow, and the program will reduce the deficit much less than expected.” Boskin repeated his prophecies of doom in a summerlong media blitz. Boskin labeled Clinton’s plan “clearly contractionary,” insisted the projected revenue would only raise 30 percent as much as forecast by dampening the incentive of the rich, insisted it would “take an economy that might have grown at 3 or 4 percent and cause it to grow more slowly,” and insisted anybody who believed in it would “Flunk Economics 101.” (The preceding pre-Internet quotes are all via a Lexis-Nexis search.) As it happened, literally every Boskin prediction turned out to be the opposite of reality….
Boskin decided to take his talents back to Washington. He had spotted a brilliant new economic mind in Texas governor George W. Bush. "These people were immensely impressed with him, how quick he was to pick stuff up," Boskin said. "His instincts were all very good, very much market-oriented; that created a very, very favorable impression." Boskin… did return to public punditry to insist that George W. Bush’s tax cuts would reduce revenue by far less than the official forecasts predicted….
Now, in defense of Boskin, he is probably suffering from a large dose of bad luck on top of a horrendously wrong ideology…. If you chained a thousand Boskins to a thousand keyboards for a thousand years, eventually one of them would make a correct prediction…. [I]n addition to being in thrall to a rigid and disproven ideology, Boskin suffers from unbelievably bad timing. Any investors who have actually put real money on the line after listening to him deserve the punishment they’ve received.
I see that today, in the Journal of Australian Political Economy, Mike Beggs has taken his 2011 Jacobin essay up to the top of the Temple of Huitzilpochtil, ripped its heart out with an obsidian knife, and left it dead on the ground. The most important paragraph--and my favorite paragraph--is missing. The paragraph reads, as Beggs evaluates my critique of David Harvey's word-salad:
[O]n the point at issue, [whether boosting government spending would boost employment, DeLong] was right – it is a question of interest rates, not of the number of bonds that can be sold. When Harvey went on to clarify his argument, it was only with some casual empiricism of his own. He noted that he was hardly the only one to be making the argument that East Asian central banks could stop collecting US Treasuries, so that “the track of long-term treasury interest rates may go the way of the housing market data in just a couple of years (if not months).” This was an argument you could read in mainstream business pages; there was nothing particularly Marxist about it. Now that we are more than a couple of years down the track, DeLong still looks right: the yields on long-term Treasury bonds are, as I write in July 2011, about the same as they were in February 2009, when the exchange took place. The limits to stimulus have been political, not financial.
With that paragraph in place, Beggs's argument that David Harvey and others should abandon their Zombie Marx was powerful and compelling: Beggs argued--correctly!--that their obedience to Zombie Marx led them to say things that were wrong, silly, and eminently mockable by people like me.
With that paragraph gone, the heart is missing from Beggs's essay. Beggs's argument that David Harvey and others should abandon their Zombie Marx is now--what? It is aesthetic--that Beggs's is "a more elegant treatment of relative prices"--and careerist--"I have discussed aspects of how this integration could take place, through an engagement with the Keynesian concept of liquidity preference and particularly post-Keynesian structuralist versions of it (Beggs, 2011: chapters 3, 10)"--and thus much, much weaker.
Thus these edits strike me as a big mistake on Beggs's part: to argue that people should change how they think to avoid saying things that are wrong is praiseworthy, to argue that people should change how they think because Beggs thinks that his way is prettier and because it would boost Beggs's citation count has much less point…
Brad DeLong, May 1, 2009, twenty one and a half months ago: "I think the odds are one-in-three that in two years we wish we would have done more [than the Recovery Act], and that the odds are close to zero that in two years we wish we would have done less."
**J. Bradford DeLong
University of California at Berkeley and NBER
+1 925 708 0467
May 1, 2009
In March I got a note from Ward Hanson asking me to come down here to Stanford and talk about:
the impact of the Stimulus Bill on jobs creation... the contrast between the Romer/Bernstein estimates of the benefits of the stimulus plan versus... Cogan, Taylor et al. that estimate/argue that there will be very little benefit.... I've got agreement from the "Taylor group" to present, as well as Martin Giles of the Economist Magazine to serve as a moderator...
So I said yes. And Tuesday afternoon I sat down to reread Romer and Bernstein (2009), which I had read before, and Cogan, Cwik, Taylor, and Wieland (2009), which I had not, and I ran into a problem. On page 2 Cogan et al. write that their Figure 1 shows how Romer and Bernstein think government spending affects the economy along with:
exactly the same policy change... in another study... by one of us [John Taylor]... the results are vastly different.... [T]he Romer-Bernstein estimates apparently fail a simple robustness test, being far different from existing published results of another model...
This surprised me. I had talked to Christy. I had talked to Jared. I knew that their intention had been to pull standard models off the shelf and use them.
So I dug—and found that Cogan et al.’s claim of “exactly the same policy change” was simply wrong. Romer-Bernstein model an increase in government spending with the Federal Reserve expanding and keeping on expanding the money supply in order to keep the short-term Treasury Bill interest rate the same. Taylor (1993) models an increase in government spending with the Federal Reserve contracting the real money supply to push the short-term Treasury Bill interest rate up over time as unemployment falls and inflation creeps up. There is no “robustness” problem with Romer-Bernstein at all: the results are different because the policy changes are different.
Brad DeLong : The Agenda with Steve Paikin: Rethinking Keynes: I am looking for is a good survey of where the wingnut idea that John Maynard Keynes did not care about the long run came from.
It is not true. Even the General Theory Keynes thought of as a book that was at least as concerned with the long run than the short run--the idea that the Keynesian model is about the short run and the classical model about the long run is a post-1947 creation of the MIT- and Yale-based neoclassical synthesis. Keynes throughout his writings worries about Malthusian forces, about the economic possibilities for our grandchildren, about secular stagnation, and about a host of other long-run issues.
Our Children’s Economics: The economics profession has not had a good crisis. Queen Elizabeth II may have expected too much when she famously asked why economists had failed to foresee the disaster, but there is a widespread sense that much of their research turned out to be irrelevant. Worse still, much of the advice proffered by economists was of little use to policymakers seeking to limit the economic and financial fallout.
Will future generations do better? One of the more interesting exercises in which I engaged at the recent World Economic Forum in Davos was a collective effort to imagine the contents of a Principles of Economics textbook in 2033. There was no dearth of ideas and topics, participants argued, that existing textbooks neglected, and that should receive more attention… behavioral finance… embed[ding] analysis of recent experience in the longer-term historical record… randomized trials and field experiments… 'big data'… the likelihood that large data sets will have significantly enhanced our understanding….
Overall, however, the picture was one in which the economics of 2033 differed only marginally from the economics of today…. [N]othing in the next 20 years as transformative as Alfred Marshall’s synthesis of the 1890’s or the revolution initiated by John Maynard Keynes in the 1930’s….
This presumption… almost certainly… reflects the same error made by scholars of technology who argue that all of the radical breakthroughs have already been made…. [W]e can’t say what the next revolution in economic analysis will be, but more than a century of modern economic thinking suggests that there will be one…. The outcome will be messy. But the economics profession will also become more diverse and dynamic – and our children’s economics will be healthier as a result.
Project Syndicate: Across the North Atlantic region, central bankers and governments seem, for the most part, helpless in restoring full employment to their economies. Europe has slipped back into recession without ever really recovering from the financial/sovereign-debt crisis that began in 2008. The United States’ economy is currently growing at 1.5% per year (about a full percentage point less than potential), and growth may slow, owing to fiscal contraction this year.
Industrial market economies have been suffering from periodic financial crises, followed by high unemployment, at least since the Panic of 1825 nearly caused the Bank of England to collapse. Such episodes are bad for everybody – workers who lose their jobs, entrepreneurs and equity holders who lose their profits, governments that lose their tax revenue, and bondholders who suffer the consequences of bankruptcy – and we have had nearly two centuries to figure out how to deal with them. So why have governments and central banks failed?
In 2012, the twenty political-economy weblogs that I most often visited were:
How should I change this list in 2013?
I went to http://technorati.com and searched for the top weblogs on "economics". After pruning the list of things that I found clearly unsuitable, I found myself with 50 candidates for my frequent-reading list (yes, there is overlap):
That leaves me with three questions:
What other political-economy weblogs should I add to my candidates for frequent reading?
Which of those on my candidate list should I add to my frequent-reading list?
And what things on my frequent reading list should I drop?
I see that over at Naked Capitalism, the commenters are talking about John N. Grey, whose try for the Stupidest Man Alive prize was his statement that:
Financial markets are moved by contagion and hysteria. Mesmer and Charcot are better guides to the new economy than Hayek or Keynes...
I very much doubt that John N. Gray has ever read a word written by John Maynard Keynes. But it is never too late!
So it is time to once again, give the mike to John Maynard Keynes, and reprint the excellent Chapter 12, "The State of Long-Term Expectation" from The General Theory of Employment, Interest and Money:
WE have seen in the previous chapter that the scale of investment depends on the relation between the rate of interest and the schedule of the marginal efficiency of capital corresponding to different scales of current investment, whilst the marginal efficiency of capital depends on the relation between the supply price of a capital-asset and its prospective yield. In this chapter we shall consider in more detail some of the factors which determine the prospective yield of an asset.
The considerations upon which expectations of prospective yields are based are partly existing facts... partly future events which can only be forecasted... future changes in the type and quantity of the stock of capital-assets and in the tastes of the consumer, the strength of effective demand from time to time during the life of the investment under consideration, and the changes in the wage-unit in terms of money.... We may sum [these] up... as being the state of long-term expectation....
It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain.... For this reason the facts of the existing situation enter, in a sense disproportionately, into the formation of our long-term expectations; our usual practice being to take the existing situation and to project it into the future, modified only to the extent that we have more or less definite reasons for expecting a change....
The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention. But economists have not analysed it carefully.... Our conclusions must mainly depend upon the actual observation of markets and business psychology.... The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make any such estimate are often so much in the minority that their behaviour does not govern the market....
James Buchanan Is Dead.
Daniel Kuehn gets it right, I think, on the significance of the career of the late Nobel Prize-winning economist James Buchanan:
He got a lot right, with public choice and constitutional economics. He also got a lot quite wrong, particularly his take on the political economy of the Keynesian revolution. But he certainly was a talented and productive economist well deserving of his Nobel prize.
I would go somewhat further: he got a lot right that desperately needed to be gotten right and that nobody else would have gotten right in his absence. He made a difference in economics at more than the margin, which is something you can say of very few economists.
Is there a consensus? Clearly there was a consensus as of early 2008…. Everyone agreed that the core business of macroeconomic management should be handled by central banks using interest rate adjustments to meet inflation targets. In the background, central banks were assumed to use a Taylor rule to keep both inflation rates and the growth rate of output near their target levels. There was no role for active fiscal policy such as stimulus to counter recessions, but it was generally assumed that, with stable policy settings, fiscal policy would have some automatic stabilizing effects…. It was generally agreed that this approach to macroeconomic policy, combined with financial deregulation had produced a ‘Great Moderation’ in the volatility of economic activity>This broad consensus was destroyed by the Global Financial Crisis and the Great Recession, but it wasn’t replaced by anything resembling a real debate. Rather, different groups have gone off in different directions. Academic macro went on more or less as before…. Central banks have, in effect, treated the entire period since 2008 as a Schmittian “state of exception”, during which normal rules cease to apply. They have used the crisis to push governments to adopt “reforms” favored by the financial sector, such as cutting welfare benefits and other areas of public expenditure. But their central concern has been to restore the status quo ante, and the exclusive primacy of monetary policy, as soon as possible. From the central bank viewpoint, the restoration of low and stable inflation after the shocks of the 1970s is their crowning achievement and one to be maintained at any cost….
From my perspective, the remarkable thing about Sargent and Lucas is that it is very, very, very hard to write down a model in which expansionary monetary policy has effects on production and employment when the economy is away from the ZLB and in which expansionary fiscal policy does not have effects on production and employment when the economy is at the ZLB. In fact, I have not figured out how it could possibly be done. I understand Prescott's aversion to expansionary fiscal policy because he does not believe in expansionary monetary policy either. I don't understand Sargent's and Lucas's aversion…
Paul Krugman: Ideology and Economics:
http://www1.rollingstone.com/extras/Deposition-Transcript-of-Glenn-Hubbard.pdfMatt Taibbi observes:
Glenn Hubbard, Leading Academic and Mitt Romney Advisor, Took 1200 an Hour to Be Countrywide's Expert Witness: What's fascinating in the deposition is the way Hubbard repeatedly tries to avoid answering the question about what kind of research he did, or didn't do…. His sneering annoyance shines through as brightly as it did in Inside Job, but this time he couldn't just say, "You've got three more minutes." Here, for instance, he actually tries to play dumb when asked if he looked into Countrywide's origination practices:
Q. Did you make any inquiry into how Countrywide actually originated its loans?
A. I'm not sure exactly what you mean by that.
Macro, what have you done for me lately? What has macro done for the human race in the last 40 years?… Today, in 2012, do we know much more about the "shocks" that cause recessions than we knew in 1972?… The question of whether these shocks are mainly "real" or mainly "monetary" is not settled…. [T]he actual cause of recessions is basically still one huge mystery.
What about the question of how the economy responds to the shocks?… [I]n terms of impulse responses… we have as many different guesses as we have macro theory papers. And macro theory papers are as numberless as the stars in the night sky.
What about the question of policy? Do we know how governments can damp out the swings in the business cycle? Here there seems to be very little agreement… huge diversity of opinion on both the efficacy and the proper conduct of monetary policy, fiscal policy, and other recession-fighting measures. That there is no consensus means that the question is still unanswered…. [M]odern macro models - at least, the DSGE variety - are basically not regarded as useful by private industry…. Given this state of affairs, can we conclude that the state of macro is good?…
[The] policy consensus (basically interest rate targeting by the Fed, with a Taylor Rule… [that led to the] Great Moderation… [was] mostly inspired by the Volcker episode rather than by the models that came after it; the New Keynesian "consensus" was always rather fragile, accepted by central banks but pooh-poohed by the academics that Krugman calls "freshwater" macroeconomists; and Taylor-type rules were originally estimated as Fed reaction functions, describing Fed behavior rather than prescribing it….
San Diego, CA: Manchester Grand Hyatt, Elizabeth Ballroom F
Panel Moderator: J. BRADFORD DELONG (University of California-Berkeley)
What would people like to see happen here? What questions should I ask the four panelists?
If Noah Smith does not want to call what I see as serious and significant deficiencies “failures of technique”, then what does he suggest that I call them?
Noahpinion: Macro, what have you done for me lately?: Paul Krugman says the state of macroeconomics is rotten. Steve Williamson disagrees…. On the question of whether macro is divided into warring "schools", I'd say Williamson is 85% right, and Krugman only 15%. Yes, there are some systematic disagreements, but they're not very bitter or rancorous, and everyone uses mostly the same "language". The old "freshwater"/"saltwater" distinction is still there to a limited degree among older faculty, but younger faculty don't seem to see much of a dividing line…. So if collegiality and similarity of technique are measures of a field's health, then macro is doing quite well...
I think that is wrong. It depends, I think, on what you take "technique" to mean:
More elaborately: our gracious host would really like to be just a little bit to the left of a technocratic center, and to debate those just a little bit to his right about optimal policies within a shared objective function, and pretending that it is a technical and not a political discussion. But because shit is fucked up and bullshit, and because everyone at all on the right has spent forty years (at least) doing their damndest to make sure shit is is fucked up and bullshit, even the smallest gesture in that direction is not so much reconciliation as collaboration. And so our host has sads. (So, for that matter, did Uncle Paul, before he learned to relish their hatred.) The realization that this applies to economists --- that much of the discipline is not a branch of science or even of dialectic, but merely of rhetoric (and not in an inspirational, D. McCloskey way either) --- cannot come too soon. Whether someone who still assigns Free to Choose to callow freshmen, in 2012, is really in a position to complain about the absurdities of Casey Mulligan is a nice question; but recognizing that half your erstwhile colleagues were always mere ideologists is a step in the right direction.
Four years ago there were quite a number of economists of reputation and thought to be of note who stridently and aggressively argued that the increases in federal spending in the Recovery Act would not boost employment and production: consider Gary Becker of the University of Chicago, Casey Mulligan of the University of Chicago, David K. Levine of Washington University in St. Louis, John Cochrane of the University of Chicago, Robert Lucas of the University of Chicago, Edward Prescott of Arizona State University, Eugene Fama of the University of Chicago, Luigi Zingales of the University of Chicago, Michele Boldrin of Washington University in St. Louis, and a host of others.
What is sauce for the goose is sauce for the gander.
If extra federal spending and reduced tax collections in the Recovery Act could not boost production and employment, the reduced federal spending and increased tax collections from going over the fiscal cliff cannot reduce production and employment and does not risk sending the American economy into renewed recession.
Yet not a one--not a single one--of the economists who were so strident in their condemnations of the ineffectiveness of the Recovery Act is out there now saying that the fiscal cliff is not of concern. None of them. Zero. Nada. Shunya. Sifr.
And not a one of them--save for perhaps Richard Posner--has manned up to admit that back then they were bullsh@t artists, blathering without having done their homework.
And yet not a one of them is out there now reversing the polarity of their "analysis" of 2009, and arguing that going over the fiscal cliff will have no significant effect on production and employment.
Ignorance as an excuse: Via Greg Mankiw I read a response to the argument by Peter Diamond and Emmanuel Saez that the top marginal tax rate in the US should be raised to about 73%…. The authors… present a contrast between the willingness of Peter Diamond to offer a concrete policy recommendation with the answers that two other Nobel Prize winners (Tom Sargent and Chris Sims) gave after receiving their prize. When asked in 2011 what should the government do to help growth, Sims answered…. "If I had a simple answer, I would have been spreading it around the world."
The authors praised Sims' answers as the "model of how academic economists should behave when facing questions about specific policy."… [T]his [is]… an odd and depressing conclusion…. I understand that some of what we do as academics is not useful enough for policy makers…. But, as Sims points out in his statement, one can find answers to those questions after careful thinking and a lot of data analysis. That's what Diamond and Saez have done…. The authors of the response… [say] "they can be pretty sure that the answer if significantly lower than 73%". Isn't this a simple answer?…
Diamond and Saez presents their arguments and data analysis in a way that is at least as competent as any other analysis on the same subject. They can be criticized on their assumptions or calculations, but not on their willingness to advance the knowledge on an issue of great policy relevance. If any, they should be praised.
John Maynard Keynes, May 23, 1939:
It is not an exaggeration to say that the end of abnormal unemployment is in sight. And it isn't only the unemployed who will feel the difference. A great number besides will be taking home better money each week.
The Grand Experiment has begun. If it works--if expenditure on armament really does cure unemployment--I predict we shall never go back all the way to the old state of affairs. Good may come out of evil. We may learn a trick or two which shall be useful when the day of peace comes.
If we can cure unemployment for the wasted purpose of armaments, we can cure it for the productive purposes of peace.
But, alas, it is true.
Noahpinion: Public perceptions of freshwater macro: CATO scholar and Forbes writer Timothy B. Lee is hardly what you'd call a liberal. Nevertheless, he's written a scathing column on conservatives' "Reality Problem". He mentions Nate Silver denialism, climate change denialism, and evolution denialism, but this part especially caught my eye:
On macroeconomics, a broad spectrum of economists, ranging from John Maynard Keynes to Milton Friedman, supports the basic premise that recessions are caused by shortfalls in aggregate demand. Economists across the political spectrum agree that the government ought to take action…. But rather than engaging this debate, a growing number of conservatives have rejected the mainstream economic framework altogether, arguing--against the views of libertarian economists like Friedman and F.A. Hayek--that neither Congress nor the Fed has a responsibility to counteract sharp falls in nominal incomes….
This is a point of view I hear expressed more and more frequently, not just in liberal circles, but in libertarian ones as well. It is an accusation that I myself have been unwilling to make, though I don't rule it out either. If this is becoming the conventional wisdom, it represents serious trouble for freshwater macro…. [F]reshwater macroeconomists have not gone out of their way to eschew political motivations. Casey Mulligan, a well-known labor economist who claims that government benefits caused the slump, entitled his book "The Redistribution Recession" - an obvious jab at liberals. Conservatives who cite "policy uncertainty" as the root of our woes routinely fail to identify the Debt Ceiling Standoff of 2011 as the high point of uncertainty (as serious scholarly analysis suggests), instead focusing on supposed anticipation of socialist redistribution…. And freshwater economists confronted with the question of "Why did the financial crisis of 2008 occur?" routinely state--in the absence of evidence--that the root cause was government policy encouraging lending to poor people. All of this does not look good...
Duncan Black watches Casey Mulligan continue to refuse to mark his beliefs to market in any way:
Eschaton: The Worst Person In The World: Casey Mulligan. The list of people I thought were smart when I was a grad student, but who are actually f@#$king idiots, grows.
Paul Krugman says--correctly--he is too busy to engage. He is correct. Paul has other much better things to do with his time:
Soup Kitchens Caused the Great Depression: Some readers have been asking me to reply to Casey Mulligan’s latest attack on my recent book. Um, no. Life is short, and if I spent my time responding to every attack on yours truly — or indeed, every thing Mulligan himself writes that I consider foolish — I would have no time to do anything else. So let me just outsource this to John Quiggin…. Quiggin does an admirable job…
This can't be right -- I don't trust the ranking -- but I can't help but be amused at being ranked ahead of CNN's Political Ticker (and just behind The Caucus at the NYT). According to the Technorati Top 100:
Howard Davies: "Economics in Denial":
In an exasperated outburst, just before he left the presidency of the European Central Bank, Jean-Claude Trichet complained that, “as a policymaker during the crisis, I found the available [economic and financial] models of limited help. In fact, I would go further: in the face of the crisis, we felt abandoned by conventional tools.” Trichet went on to appeal for inspiration from other disciplines – physics, engineering, psychology, and biology – to help explain the phenomena he had experienced. It was a remarkable cry for help, and a serious indictment of the economics profession, not to mention all those extravagantly rewarded finance professors in business schools from Harvard to Hyderabad….
I have sometimes been referred to as if my name were "Coauthor"--as in "Lawrence Summers and Coauthor argue". And I have even--once or twice--seen Larry referred to as "Coauthor".
But I have never before seen Larry edited out of existence completely. But here it is:
Tyler Cowen: When it comes to the lacklustre recovery from the financial crisis, the dominant left-wing narrative has been shaped by Paul Krugman and other Keynesians. The main villain in the piece is austerity. In this view, if only Western governments had the guts to borrow and spend more money, economic recovery would have been much quicker. Instead, the doctrines of the "Austerians" have ruled, and spending cuts have left much of the West in an economic torpor or even brought a downward spiral. It has become a common view - promoted by the University of California at Berkeley economist Brad DeLong - that more government borrowing and spending might have paid for itself through boosting economic growth, a kind of "Laffer Curve" for the Left…
The paper is:
J. Bradford DeLong and Lawrence H. Summers (2012), "Fiscal Policy in a Depressed Economy", Brookings Papers on Economic Activity 2012:1 (Spring) http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2012_spring_bpea_papers/2012_spring_BPEA_delongsummers.pdf