J. Bradford DeLong's Blog, page 431

Comment of the Day: Howard: : "There are a handful of con...

Comment of the Day: Howard: : "There are a handful of conservatives...

...jennifer rubin, max boot, bill kristol, john podhoretz, ric wilson, and stuart stevens all quickly come to mind, and i may be missing some - who are going to emerge from the trump years with their heads held high for their willingness to stand up for reality, and sykes is turning out to be one of the most on-the-money...

Should-Read: Jason Fruman: On Twitter: "Hahahahahahahahah...

Should-Read: Jason Fruman: On Twitter: "Hahahahahahahahahahahahahahahahahaha...": "It is hard to know where to start on Treasury's comments on their analysis of dynamic scoring...

...But a few points.... "[Treasury] had published research... spur enough economic growth to offset the deficits..." No it has not. The two reports I am aware of contradict this claim���not producing needed growth even for more radical, paid for plans. https://www.treasury.gov/resource-center/tax-policy/Documents/Report-Summary-Dynamic-Analysis-2006.pdf https://www.treasury.gov/resource-center/tax-policy/Documents/Report-Improve-Competitiveness-2007.pdf. "Treasury will be releasing information on how the tax plan does under various growth rates." Do they think we're idiots? You can already get that from OMB and CBO. https://www.whitehouse.gov/sites/whitehouse.gov/files/omb/budget/fy2018/ap_2_assumptions.pdf https://www.cbo.gov/sites/default/files/115th-congress-2017-2018/reports/52370-breakout-appendixb_0.pdf. "Mnuchin has worked with the Council of Economic Advisers on growth projections." I love CEA, but they do not have anything resembling the sophistication of models that the Treasury career staff have���which is why Treasury career staff have done this dynamic analysis in the past. "We support transparency". HahahahahahahahahahahahahahahahahahahahahahaHahahahahahahahahahahahahahahahahahahahahahaHahahahahahahahahahahahahahahahahahahahahahaHahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahaha.

Must-Read: Paul Krugman: Leprechaun Economics, With Numbe...

Must-Read: Paul Krugman: Leprechaun Economics, With Numbers: "8% is a reasonable number for after-tax required return...

...with a 35% tax rate, this means a pre-tax rate of 12.3%. Cut the tax rate to 20%, and the pre-tax return should fall to 10%. The increment of capital should have a rate of return roughly halfway between, 11.15%. Tax Foundation asserts that capital inflows will be enough to raise GDP more than 3%, which is wildly implausible. But let���s go with it for the sake of argument. This means inflows of around 30 percent of pre-CCC [annual] GDP. So how much does this raise foreign investment income? The answer is, 8% times 30%, or 2.4 percent of GDP out of a GDP rise of 3.45 percent in my example. In other words, the true gain to the US is 1.05%, not 3.45%. That���s a big difference, and not in a good way....

Even if you believe the whole ���we���re a small open economy so capital will come flooding in��� argument, it buys you a lot less economic optimism than its proponents imagine...

Should-Read: Paul Krugman: Everybody Hates the Trump Tax ...

Should-Read: Paul Krugman: Everybody Hates the Trump Tax Plan: "Gary Cohn, Donald Trump���s chief economic adviser, met with a group of top executives... asked to raise their hands if lower taxes would lead them to raise capital expenditures...

...only a handful did. ���Why aren���t the other hands up?��� asked Cohn, plaintively. The answer is that C.E.O.s, living in the real world of business, not the imaginary world of right-wing ideologues, know that tax rates aren���t that important a factor in investment decisions. So they realize that even a huge tax cut wouldn���t lead to much more spending. And with that realization, the rationale for this tax plan, such as it is, falls apart, leaving nothing but a scheme to make the rich���especially those who rake in investment income rather than working for a living���richer at everyone else���s expense....

Their claim is that cutting taxes on corporate profits would lead to an explosion in private investment and faster economic growth.... About that economic growth: Foreign investors would be earning profits and taking them home. So much���probably most���of any growth we would get from cutting corporate taxes would accrue to the benefit of foreigners, not Americans. But don���t worry too much about this stuff. Most serious economic analyses agree with those C.E.O.s who disappointed Gary Cohn....

Why are Republicans even trying to do this? It���s bad policy and bad politics, and the politics will get worse as voters learn more about the facts. Well, last week one G.O.P. congressman, Chris Collins of New York, gave the game away: ���My donors are basically saying get it done or don���t ever call me again.��� So we���re talking about government of the people, not by the people, but by wealthy donors, for wealthy donors. Everyone else hates this plan���and they should.

Comment of the Day: I have evoked some rants from Robert ...

Comment of the Day: I have evoked some rants from Robert Waldmann...

Robert Waldmann: Monday Smackdown: Oh Dear!: "It isn't exactly Robert Waldmann's critique...

...In 1982 someone told me that he thought macroeconomics had taken a wrong turn and commenced a sterile research program which would last decades and be fruitless. That's a lot more impressive than saying such a thing now.

Who was that guy? Oh yeah, his name was Brad DeLong.

He was explaining why he had chosen history and econometrics as fields.

Experiments? Bah, humbug!

I don't know where to put this, but I have a theory as to why people call simulations experiments: If you are dealing with something you don't understand, you attempt to learn how it works with experiments. The perception that theoretical work assisted by computers is experimental is due to the fact that no one understands what drives the behavior of modern DSGE models.

This is one of their defects. One use of a model is to clarify thought. A model which is mysterious like a cell (or an economy) can't clarify thought. If you need to do numerical experiments to understand the behavior of your model, it has failed one of the purposes of models. If it yields bad predictions, it has failed the other purpose. The sense that theoretical macro is experimental is just another aspect of its failure as theory. It isn't reality, but it is almost as incomprehensible as the real world. This is not a good thing.

@Shameful: No. Something which can be tested with a numerical experiment is a conjecture not a hypothesis. It is mathematics not social science. With numerical experiments, one can learn about one's model. One can't learn about the real world. Now mathematicians don't accept numerical experiments as a replacement for proofs. That is, numerical experiments are low quality mathematics. As mathematics they aren't theorems, they are examples. But they are low quality mathematics and not science at all.

Now they are also fun. Understanding the behavior of a complex model feels like learning about the world. It is much easier than proving theorems (rigour is tiresome) or collecting new data. It feels like research and also feels like a video game (fun). It's not science. It's not even like writing up the results of numerical experiments (ugh). It's not good. It's calling me. Sorry I have to simulate my model. I can't remember the fiddle factors that made it fit the data. I had them once and I must find them.

Kids Don't Let This Happen To You.

@JEC Oh my. I teach PhD level macro so I better have an answer to that one. I think we have more to say about growth than about the cycle. The Solow growth model is weirdly useful even though it is so simple that it seems that it can't possibly be. Now economic historians have adopted it, but Solow was a macroeconomist. Newer models challenge it in interesting ways.

I think an IS curve and a Phillips curve with what used to be called static expectations is, by far, the most useful model for policy makers. There is some point in reviewing the arguments that these models can't work (out of sample -- for conditional forecasts of the effects of policy etc) on the way to noting that they work better than newer models. That is, to tell kids don't use them because they are very simple, use them because they work. Not much for 45 years of effort by very smart people, but something.

Krugman and Blanchard are macroeconomists. They have a lot of useful things to say. Their stuff is published on a blog and Peterson Institute Working papers, but it can be taught to graduate students (or undergraduates but that's a strength). It is obvious that they have a lot to say which you average smart person doesn't understand the first time they explain it. This is also true of Brad (here) but he's an economic historian, pundit, blogger, moralist oh hell you're here you know.

Here I think Krugman especially has 2 points useful to graduate students:

Old Keynesian economics with an IS very useful (the fact that they studied it already as undergraduates doesn't mean they can't be told that).

Everything which is different in New Keynesian economics can be explained with 2 periods: the present and the long run. This demystifies it and shows that the assumption that there is only one possible long run steady state (or balanced growth path) and the economy converges to it is central to all the implications of new vs old Keynesian economics. Also worth noting there is no evidence this has anything to do with reality.

So that's lecture 1. Now I have to plan lecture 2.

I object to another word in the sentence���'only'. I will modify it to answer your objection: "The only place that we can do [thought] experiments is in dynamic stochastic general equilibrium (DSGE) models." The assertion is that all models are general equilibrium models.

Now back when I was a student, general equilibrium models were Walrasian models with price taking agents. Perfect competition was one of the assumptions. That's what the phrase meant. Now the equilibrium which is general is Nash equilibrium. Imperfect competition is a standard assumption. The triumph of imperfect competition was the Eichenbaum, Cristiano and Evans model and it was a triumph because it meant that people who worked next to great lakes had admitted that people who worked nearer to the Atlantic Ocean were more nearly correct.

But nothing has ever supported the argument that anything is gained by assuming the world is in Nash equilbrium. There are two problems. By itself the assumption of Nash equilibrium implies nothing at all���it can't impose discipline on our theory. Only if you require plausible assumptions about tastes and technology does it imply anything. Yet, standard models have confessedly implausible assumptions. It is argued that it is necessary to assume Nash equilibrium to impose discipline but fine to assume things which are absurd and contradicted by micro data. The arguments are opposite. Not only is it impossible for them both to be true, it is impossible for both to be false.

Longer rant here: http://rjwaldmann.blogspot.it/2012/03/modern-macroeconomic-methodology-modern.html

The history of efforts to base macro on Nash equilibrium is, as our host Brad notes, what one would expect from a fundamentally misguided research project. With great effort you can make the new improved models behave like the old models. Once this is achieved, nothing at all has been gained. The hope might be that once the model is fiddled to fit 10 aspects of old Keynesian models (now considered stylized facts not proper good economic DSGE models) then it will fit the 11th. This is what happens in a nondegenerative reasearch program. But consistently, the new high brow high tech DSGE models require one fiddle factor for every moment of the data they match. This is what happens when one's approach is worthless and one's core assumptions are false.

Also, all macroeconomists I know agree with all of this.

What is "the distinction between adding elements that take the model closer to reality (heterogeneous agents, bounded rationality, financial sector etc.) and a fiddle factor?"

Simple. If you observe micro data to model heterogenous agents, it is not a fiddle factor. If you assume whatever distribution of traits allows you to fit aggregate moments, the parameters of the distribution are fiddle factors. Similarly, if the financial sector is estimated with financial data, it's not a fiddle factor. If there are unexplained and unobserved financial factors which enable you to fit aggregates, they are fiddle factors.

Finally, and difficultly, if your model of agents without rational expectations is based on psychological experiments (or again micro data) it is not a fiddle factor.

The key distinction is that in any legitimate science there isn't one arbitrary factor for every phenomenon to be explained (I am quoting Einstein from memory).

Only if you can kill two birds with one stone do you have any business submitting an article for publication.

If a model with parameters chosen (and latent variables invented) to fit moments gives good out of sample forecasts, then you might be on to something. If the forecasts are about as good as univariate time series models, you have wasted your time.

It is a fact that the Smets-Wouters model works equally well when Cosma Shalizi randomly renamed the time series, say replacing the nominal interest rate with hours worked (actually on average the random permutations gave higher likelihoods than the standard DSGE model).

This is what one would expect with a totally wrong, utterly worthless modelling strategy.

I have another question. Is there ever a time to drop a research program and start over as if no one had tried to explain the phenomena? If not, why are you so sure people should have stuck with alchemy and the 4 humours theory of disease? If so, why don't you think DSGE macro is at that stage?

Should-Read: Martin Wolf: A bruising Brexit could shipwre...

Should-Read: Martin Wolf: A bruising Brexit could shipwreck the British economy: "The UK economy remains the most regionally divided in Europe...

...Inner London is the richest region in Europe. The other regions (apart from the rest of London and the southeast) are far poorer.... Gross domestic product per head has also only regained pre-crisis levels in London and the southeast.... Various categories of insecure work have greatly increased. In 2016, for example, 2.8 per cent of all people in employment were on zero-hours contracts.... It must be hard for people working under such contracts to have much control over their lives.

The UK���s level of inequality is among the highest in Europe.... People might wonder, given UK performance, what these business leaders have done to justify such huge increases. They might also point to the facts that the UK���s average productivity per hours worked is among the lowest among high-income countries and, still worse, productivity has flatlined since the crisis.... Last, but not least, on this list of failings, UK investment is exceptionally weak.... Spending on research and development is also relatively weak.... This is not a vigorous and healthy economy well able to take the shock of substantially worse access to its most important markets.... Economic disappointment must have been among the reasons for the Brexit vote. Yet the Brexit shock, combined with the UK���s underlying weaknesses, is likely to make the disappointment for many still more severe. The UK has embarked on a risky voyage in a leaky boat. Beware a shipwreck.

Should-Read: Matthew Yglesias: Watch CEOs admit they wonï...

Should-Read: Matthew Yglesias: Watch CEOs admit they won���t actually invest more if tax reform passes: "A telling and important moment...

...Awkward.... John Bussey... asks the CEOs in the room, ���If the tax reform bill goes through, do you plan to increase investment���your companies��� investment���capital investment,��� and requests a show of hands. Only a few hands go up, leaving Cohn to ask sheepishly, ���Why aren���t the other hands up?��� The reason few hands are raised is there���s little reason to believe that the kind of broad corporate income tax cut Republicans are pushing for will induce much new investment. A tax plan that was specifically designed to reduce taxation of new investments might do that. But most corporate profits are, of course, the result of activities undertaken in the past. So a broad cut in corporate tax rates is a windfall for what in tax policy jargon is called ���old capital,��� as well as for monopoly and quasi-monopoly rents and various other things that have nothing to do with incentivizing new investment.

The biggest immediate winners, in fact, would be big, established companies that are already highly profitable. Apple, for example, would get a huge tax cut even though the company���s gargantuan cash balance is all the proof in the world that the its investments are limited by Tim Cook���s beliefs about what Apple can usefully take on, not by a limited supply of cash or a lack of profitability...

Comment of the Day: Six Faces of Right-Wing Chain-Forging...

Comment of the Day: Six Faces of Right-Wing Chain-Forging Economist James Buchanan...: It's by, well, me:

What seems to me a very strange comment on Twitter from Henry Farrell https://twitter.com/henryfarrell/status/931227926779047937, who appears to deny that he (and Steve Teles) bend over backwards to be "fair" to Buchanan, while providing no such charity to McLean:

As I read our essay, our positive claims are (1) that public choice has some intellectual value and (2) that Buchanan saw himself as engaged in a project of counter-entrenchment. For the rest, we extend to Buchanan only that minimal form of intellectual generosity we'd all like-that when someone is accused of looking to protect the Southern way of life against the civil rights movement, masterminding Pinochet's constitution, & being the sinister intellectual Svengali behind the rise of the anti-democratic right, one would like to see supporting evidence.

As we explicitly note in the essays, we would not at all be discomfited if evidence emerged showing that either Buchanan or other public choicers had problematic views or pasts-on the basis of my run-ins with Charles Rowley, I know that there is a lot of nutty thinking there. But basic standards of intellectual argument demand that if you make very strong claims, you had better have good evidence. The reason MacLean's book is a bad one is that it does not have such evidence, and grossly misinterprets the evidence it has.

It reads as though you are interpreting our essays as an intervention in a political fight within economics. They are not. They are interventions in a fight about the standards that one ought to have when one makes strong arguments as an academic in the public sphere. Finis.

But I read this as a strange denial���indeed, as an explicit admission that they bend over backward to be "fair" to Buchanan���in a way that I think winds up being unfair to their readers. I think this largely because I do not see McLean as making "very strong claims". I read this as, essentially, what I said: a hermeneutic of immense charity towards Buchanan; a hermeneutic of immense suspicion against McLean. As I said, I think Will Wilkinson gets it right:

My response:

Like I said: a hermaneutic of enormous charity directed in favor Buchanan; a hermeneutic of enormous suspicion directed against McLean.

"If you make very strong claims, you had better have good evidence". The claim that an upper class mid-20thC white southerner looks to protect the Southern way of life against the civil rights movement is not a "very strong" claim: it is the default assumption of everyone.

"Masterminding Pinochet's constitution"; the claim that Mt. Pelerin circles were deeply, deeply committed toward making the Pinochet regime a success, and that they had frequent discussions among themselves and Chileans about how to turn the admittedly regrettable excesses into a proper Lykourgan moment is not something anybody has ever denied. That Friedman and Buchanan hoped to get their ideas into the government of the Chicago Boys is not a "very strong claim", but obvious.

And as for "being the sinister intellectual Svengali behind the rise of the anti-democratic right", I always assumed that Buchanan was trying to use the Kochtopus to fund both public choice and the rollback of the New Deal", there I think McLean oversteps. Buchanan was not as pro-democracy as Friedman, but not as anti-democratic as Hayek and company. The unanimity-beyond-the-veil-of-ignorance assumption did exercise a definite pull, at least after he gave up seeing Massive Resistance as a useful ally.

It's interesting: the breach of academic standards that drives me batshit in this whole thing is Buchanan's promise to Darden that only "'Manchester' liberals who emphasize individual freedom as the central feature of the good society" and "Western conservatives who emphasize the importance of Western traditions in preserving the good social order" need apply for his patronage and mentorship. This used to drive Mancur Olson absolutely batshit too.

That seems to me that is worth making a stink about: we certainly do not operate that way here at the B.

Must-Read: @dashching seems like an unhappy camper todayï...

Must-Read: @dashching seems like an unhappy camper today���unhappy with the Tax Foundation setting forth a model that (a) they know is inaccurate even on their own methodologies, and (b) based on a methodology���that the medium-run drag on growth from a larger deficit does not exist���that I do not believe can be defended in a professional manner:

Chye-Ching Huang: @dashching on Twitter: "A Tax Foundation dynamic score that no-one should pay any attention to an indication of what this bill would do for growth...

...Two major problems:

Unlike mainstream models, the Tax Foundation's ignores deficits. Would be very strange for lawmakers concerned about deficits to rely on a model that ignores them https://t.co/CUBxnAop6e.

Further, @gregleiserson has identified two major additional conceptual errors with the model https://t.co/IHv2iIYeoP, that don't seem fully resolved. These are not errors modeling specific proposals, but affect the model's results, every time it runs...

Should-Read: Douglas L. Campbell: Ancestry and Developmen...

Should-Read: Douglas L. Campbell: Ancestry and Development: the Power Pose of Economics?: "George Mason... asked me to present my work joint with Ju Hyun Pyun, taking down the "genetic distance to the US predicts development"...

...This has evolved into an Amy Cuddy��"Power Pose" situation, in which Spolaore and Wacziarg refuse to admit that there is any problem with their research, and continue to run income-level regressions and write papers using genetic distance which do not include a dummy for sub-Saharan Africa, but exclude that region instead.... The remaining question is how robust the genetic distance-development relationship is in Europe. In fact, there is already a paper, by Giuliano, Spilimbergo, and Tonon, saying that the impact of genetic distance on both trade and GDP in Europe is not robust.... The early drafts of that paper also said something about GDP in Europe, while the published version stripped out GDP precisely because the referees���likely Spolaore or Wacziarg���wouldn't allow it....

Wacziarg has now posted regressions on his website used by this referee, so I gather that he must be the author... had some very choice words for this paper... "Giuliano, Spilimbergo and Tonon, the authors of this paper are clearly referring to an old (2006) version, which contained numerous errors and imprecisions."... I'm curious... what kind of "errors and imprecisions"?... I decided to check if Giuliano, Spilimbergo, and Tonon were really that careless, or whether Spolaore and Wacziarg were, once again, wrong... on the metro ride from Dupont Circle to George Mason, I fired up Stata to check how robust the results were when we exclude sub-Saharan Africa....

It's amazing to me that these two Harvard PhDs would want to continue to push this, and to stake their reputations on this.... They now have written an additional 5-6 papers, it seems, repeating the same mistakes, even after they became aware that their results are not robust.... In their new paper, they've gone back to the cross-country income regressions, which they previously conceded were not robust. I guess they were hoping that their comments over at Gelman's blog (and at Marginal Revolution) would be forgotten. In any case, if Spolaore and Wacziarg want to respond with more gibberish, I'll yield to them the floor...