J. Bradford DeLong's Blog, page 434

Comment of the Day: Robert Waldmann: Monday Smackdown: Oh...

Comment of the Day: Robert Waldmann: Monday Smackdown: Oh Dear!: "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.

Monday Smackdown: Oh Dear!

A correspondent asks whether or not this is unfortunate:

Lawrence J. Christiano, Martin S. Eichenbaum, and Mathias Traban: On DSGE Models: "Macroeconomic policy questions involve trade-offs between competing forces in the economy...

...The problem is how to assess the strength of those forces for the particular policy question at hand. One strategy is to perform experiments on actual economies. Unfortunately, this strategy is not available to social scientists. The only place that we can do experiments is in dynamic stochastic general equilibrium (DSGE) models. This paper reviews the state of DSGE models before the financial crisis and how DSGE modelers have responded to the crisis and its aftermath. In addition, we discuss the role of DSGE models in the policy process...

It is, the bolded sentence especially.

For one to, in one's fifth sentence, demonstrate that one is unclear about what the meaning of scientific "experiment" a la Galileo is, is, as the Fish in the Pot in The Cat in the Hat would say, "not a good game".

Look: new Keynesian models were constructed to show that old Keynesian and old Monetarist policy conclusions and rules of thumb were relatively robust, and were not blown out of the water by rational expectations. They were built to show that the irrelevance-of-real-variables-to-systematic-policy results were extremely fragile. Lucas and company then followed Prescott off into the la-la-land of RBCs, taking a residual error and claiming it was their fundamental driving exogenous variable. The DSGE framework was then constructed so that new Keynesians could talk to RBCites.

None of this has, so far, materially advanced the project of understanding the macroeconomic policy-relevant emergent properties of really existing industrial and post-industrial economies.

Look: DSGE models are like:

And old Keynesian and Monetarist models are like:

Wherever DSGE models produce conclusions at odds with old Keynesian and Monetarist models, it is still the case that we find the DSGE models at fault. And so we then go back to rework them. To believe that we are conducting scientific "experiments" a la Galileo with them is like thinking that we could be bounded in a nutshell and still count ourselves the kings of infinite space���and so climbing inside of nutshells and then sitting there in the dark.

Now things could change. Only 70 years, after all, separates the first image above from this:

But if people really do think that illustrative simulations of how an economy would behave if it had a Calvo Fairy are scientific "experiments" a la Galileo, then things are highly unlikely to change.

Should-Read: Charles J. Sykes: Year One: The Mad King: "B...

Should-Read: Charles J. Sykes: Year One: The Mad King: "Bret Stephens... sought to explain the capitulation of the conservative movement by citing the Polish poet Czeslaw Milosz...

...whose book, The Captive Mind, described the process of how Milosz���s colleagues willingly submitted to Stalinism. ���They wanted to believe,��� Stephens said:

They were willing to adapt. They thought they could do more good from the inside. They convinced themselves that their former principles didn���t fit with the march of history, or that to hold fast to one���s beliefs was a sign of priggishness and pig-headedness. They felt that to reject the new order of things was to relegate themselves to irrelevance and oblivion. They mocked their former friends who refused to join the new order as morally vain reactionaries...

Today, a year into the Trump era, that description feels hauntingly familiar. Whatever their protestations to the contrary, Republicans find themselves in what has become Trump���s party, and they risk being permanently tainted by both his character and his anti-immigrant, America First policies. More than a year and half ago, Romney said the party faced a ���time for choosing.��� Apparently, the GOP has chosen. As a result, both moderates and principled conservatives find themselves cast out from a party many of them no longer recognize. Maybe it���s time to move on.

Must-Read: Claudia Goldin: How to Win the Battle of the S...

Must-Read: Claudia Goldin: How to Win the Battle of the Sexes Over Pay (Hint: It Isn���t Simple): "Billie Jean King... the United States Open... 1972... 10,000 dollars. Ilie N��stase, her male counterpart, won 25,000 dollars...

...Ms. King fought hard for equal rights and, on the tennis court, she won. By 1973, men and women received the same prizes at the Open.... That is not the reality in the overall labor market, however.... Fighting to eradicate discriminatory employment practices is absolutely needed, of course.... Unequal treatment in hiring and in the work setting is real.... Yet... the time demands of many jobs can explain much of the pay difference, a finding that has sobering implications. Eliminating the gender earnings gap will require changes in millions of households and thousands of individual workplaces....

The gap is a statistic that changes during the life of a worker. Typically, it���s small when formal education ends and employment begins, and it increases with age. More to the point, it increases when women marry and when they begin bearing children. Using the data that shows women earn 81 cents for each dollar earned by men, when the careers of recent college graduates start, the gap is much smaller: 92 cents for each male dollar. By the time college-educated women are 40 years old, they earn 73 cents.... Correcting for time off and hours of work reduces the difference in the earnings between men and women but doesn���t eliminate it....

Women disproportionately seek jobs���including full-time jobs���that are more likely to mesh with family responsibilities, which, for the most part, are still greater for women than for men. So, the research shows, women tend to prefer jobs that offer flexibility: the ability to shift hours of work and rearrange shifts to accommodate emergencies at home. Such jobs tend to be more predictable, with fewer on-call hours and less exposure to weekend and evening obligations. These advantages have a negative consequence: lower earnings per hour, even when the number of hours worked is the same....

Certain job characteristics have a big impact on the gender earnings gap... Subject to strict deadlines and time pressure... Expected to be in direct contact with other workers or clients... Instructed to develop cooperative working relationships... Assigned to work on highly specific projects... Unable to independently determine their tasks and goals Occupations with a lower level of these characteristics (like jobs in science and technology) show smaller gaps.... Men���s earnings tend to surge when there are fewer substitutes for a given worker, when the job must be done in teams and when clients demand specific lawyers, accountants, consultants and financial advisers. Such differences can account for about half the gender earnings gap. These findings provide more nuance in explaining why the gap widens with age and why it is greater for women with children...

Should-Read: Paul Krugman: Trump and Ryan Versus the Litt...

Should-Read: Paul Krugman: Trump and Ryan Versus the Little People: "Consider four hypothetical taxpayers.... First is the poster child family Paul Ryan keeps talking about...

...a family with two children making $59,000 a year. In the first year of the Cut Cut Cut Act, such a family would indeed receive a tax cut... from... loss leaders to help sell the plan.... By 2027, with the plan fully phased in, that exemplary family would actually be facing a significant tax increase....

Second... someon... further up the scale... [who] still works for a living.... ���Wall Street['s]��� Gordon Gekko sneers at ���a $400,000-a-year working Wall Street stiff flying first class and being comfortable.���... Once you take lost deductions into account, especially reduced deductions for state and local taxes, he almost certainly ends up facing a tax hike....

But what about owners of small businesses? Under current law, their business income is ���passed through��� to their personal income, and taxed accordingly. The Cut Cut Cut Act would instead allow people with such income to pay only 25 percent... [but] the G.O.P. bill imposes rules that... limit the 25 percent rate to ���passive��� income recipients.... You get the full tax break only if you own a business but don���t, you know, actually run it.

Finally... Eric Trump... inherit[s]... a business he doesn���t run.... He���ll get his inheritance tax-free.... He���ll get to pay a low tax rate on his business income. And his stocks will pay higher dividends, because the G.O.P. bill also sharply cuts corporate tax rates....

So when Gary Cohn... says that the bill���s goal is ���to deliver middle-class tax cuts to the hard-working families in this country,��� he���s claiming that up is down and black is white.... You might wonder how Republicans imagine that they can get away with this.... Anyone who has paid attention to U.S. politics knows.... First, they will lie.... Second, they will try to distract working-class voters by stoking racial animosity...

Should-Read: Laura Tyson and Lenny Mendonca: Facing the F...

Should-Read: Laura Tyson and Lenny Mendonca: Facing the Four Structural Threats to US Democracy: "As California has shown, structural barriers to good governance can be eliminated through citizen-driven reforms...

...The California legislature has cleaned up redistricting, introduced ���top two primaries��� and an aggressive disclosure system, reformed term limits, eliminated a supermajority rule for state budgetary measures, and improved the ballot-initiative process. As a result, the legislature has become dramatically more effective, and its approval rating has gone from just 14% seven years ago to 57% today���its highest level since 1988. There is little reason to believe that Congress will reform itself. But if the movement for progressive federalism continues to gain momentum and push through meaningful state- and local-level reforms, federal lawmakers will not be able to maintain the status quo indefinitely. With a renewed confidence in democracy, citizens can take action to ensure that elected officials are governed by the right incentives, and motivated to pursue bipartisan solutions to the country���s problems.

If California can do it, so can other states. America���s founders created the Tenth Amendment precisely because they worried about dysfunction in the capital. It���s time we used it.

Should-Watch: Ta Nehisi Coates: When Every Word Doesn't B...

Should-Watch: Ta Nehisi Coates: When Every Word Doesn't Belong to Everyone:

A white student asks author @tanehisicoates if it's cool to rap along to songs with the n-word in it, and Coates responds brilliantly. pic.twitter.com/2NGf81oK8o

— Matt (@mattwhitlockPM) November 10, 2017

Weekend Theology Corner: Elizabeth Bruenig: A better sex ...

Weekend Theology Corner: Elizabeth Bruenig: A better sex ethic

Excellent! It could however have been shorter. I suggest:

Shorter Elizabeth Bruenig: "In matters of sexual morality, as in all other matters, do unto others as you would have them do unto you, and love thy neighbor as thyself."

Or:

Still-Shorter Grigua's Prayer Version: "Don't be a dick!"

A Certain Lawyer, willing to justify himself: "And who is my neighbor?"

To which there are two answers:

Issa ibn Yusuf: "A certain man went down from Jerusalem to Jericho, and fell among thieves..."

Shorter Issa ibn Yusuf: "You're being a dick."

For the Weekend: Stephen Vincent Benet: The Devil and Daniel Webster XI

For the Weekend: Stephen Vincent Benet: The Devil and Daniel Webster XI http://gutenberg.net.au/ebooks06/0602901h.html: "He started off in a low voice, though you could hear every word...

...They say he could call on the harps of the blessed when he chose. And this was just as simple and easy as a man could talk. But he didn't start out by condemning or reviling. He was talking about the things that make a country a country, and a man a man.

And he began with the simple things that everybody's known and felt���the freshness of a fine morning when you're young, and the taste of food when you're hungry, and the new day that's every day when you're a child. He took them up and he turned them in his hands. They were good things for any man. But without freedom, they sickened.

And when he talked of those enslaved, and the sorrows of slavery, his voice got like a big bell. He talked of the early days of America and the men who had made those days. It wasn't a spread-eagle speech, but he made you see it. He admitted all the wrong that had ever been done. But he showed how, out of the wrong and the right, the suffering and the starvations, something new had come. And everybody had played a part in it, even the traitors.

Then he turned to Jabez Stone and showed him as he was an ordinary man who'd had hard luck and wanted to change it. And, because he'd wanted to change it, now he was going to be punished for all eternity. And yet there was good in Jabez Stone, and he showed that good. He was hard and mean, in some ways, but he was a man. There was sadness in being a man, but it was a proud thing too.

And he showed what the pride of it was till you couldn't help feeling it. Yes, even in hell, if a man was a man, you'd know it. And he wasn't pleading for any one person any more, though his voice rang like an organ. He was telling the story and the failures and the endless journey of mankind. They got tricked and trapped and bamboozled, but it was a great journey. And no demon that was ever foaled could know the inwardness of it���it took a man to do that.

The fire began to die on the hearth and the wind before morning to blow. The light was getting gray in the room when Dan'l Webster finished. And his words came back at the end to New Hampshire ground, and the one spot of land that each man loves and clings to. He painted a picture of that, and to each one of that jury he spoke of things long forgotten. For his voice could search the heart, and that was his gift and his strength. And to one, his voice was like the forest and its secrecy, and to another like the sea and the storms of the sea; and one heard the cry of his lost nation in it, and another saw a little harmless scene he hadn't remembered for years. But each saw something. And when Dan'l Webster finished he didn't know whether or not he'd saved Jabez Stone. But he knew he'd done a miracle. For the glitter was gone from the eyes of judge and jury, and, for the moment, they were men again, and knew they were men.

"The defense rests," said Dan'l Webster, and stood there like a mountain. His ears were still ringing with his speech, and he didn't hear any thing else till he heard Judge Hathorne say, "The jury will retire to consider its verdict."

Should-Read: Edward Luce: The House of Trump and the Hous...

Should-Read: Edward Luce: The House of Trump and the House of Saud: "Mr Trump���s $110bn triumph was as close as you come to a 'fake deal'...

...But the Saudis gave Mr Trump what he wanted: an eye-poppingly tweetable shopping list; cash for his daughter���s initiative; a gold carpet welcome; and the mutual goal of erasing Barack Obama���s legacy. Mr Trump is now repaying the Saudis with interest.... Crown Prince Mohammed... launched a power grab.... Mr Trump tweeted that the crown prince and his father ���know what they are doing���.... The purge followed a visit to Saudi Arabia last month by Jared Kushner, Mr Trump���s son-in-law, who stayed up half the night discussing strategy with the crown prince.... It is unclear if Mr Trump is aware of what he has unleashed���or cares either way. But his support for MbS betrays two principles of US foreign policy. The first is to stoke a religious war. Mr Trump���s America is now firmly on the Sunni side of the regional Sunni-Shia conflict.... Mr Trump���s US is uninterested in Middle Eastern stability.

The second is to give succour to pluto-populist strongmen. Few more richly deserve a corruption inquiry than the Saudi royal family. Yet the crown prince���s pretext has no more credence than Mr Xi���s equivalent drive in China���or indeed Mr Trump���s vow to ���drain the swamp��� in Washington. These are feints to win populist applause while tarnishing rivals. What each shares is a yen to personalise power.... It is worth noting what Mr Trump did on his way to Asia ��� his most important trip as president.... He stopped off at the Trump Hotel in Hawaii, which is ���tremendously successful���, the White House spokesperson pointed out. It showed a president who cannot tell the difference between the national interest and his family business. It was the kind of self-dealing you would expect from a Saudi royal. But I repeat myself.