Friday, September 11, 2009

Lapses in Economic Analysis

Professor Cochrane explains how Professor Krugman's contribution is disproportionate.

Some related posts of mine:

47 comments:

hayek2009 said...

like prof Cochrane says, it is simply sad the level at which Krugman has sunk.

Don said...

The issue of the Stimulus is interesting. First of all, I'm never sure what people mean when they use the term. Following the Chicago Plan of 1933 as I read it, a Stimulus means that the Govt will borrow money during an Economic Downturn, and not raise taxes to pay for the spending. That's it. That's what I mean by a Stimulus. I actually believe that Keynes agrees with this.

Having said that, the question becomes what should the Govt borrow money for? What should it spend money on? That is a different question than the question of whether or not to have a Fiscal Stimulus during an Economic Downturn. It is also a totally different question then the question of Govt Borrowing under other Econ Conditions. We're simply addressing the problem of a Financial Crisis.

What is happening now is that the Stimulus is being used as a proxy argument for the usefulness of Govt Spending in general, or the general size of Govt Spending and Intervention in the economy. It shouldn't be. That is a mistake. In fact, after WW II, this same argument occurred, causing many of my heroes to hedge a bit about a Stimulus during an Econ Downturn, due to a fear of the Ratcheting Effect or the Road to Serfdom Effect. That's what's happening now on one side of the argument. The other side wants to Ratchet.

I think that the current size of govt has more to do with Special Interests and Political Compromise, so I don't think that this crisis will ultimately be about ratcheting, but, rather, which Special Interests will prove more powerful in the end.

I believe that a Stimulus makes sense for the same reason that the signers of the Chicago Plan did: It can complement QE, and there are serious needs during an Econ Downturn that the govt needs to address, without raising taxes at that time to pay for those needs. I've even put forth an incentives based argument for that.

As for the personal invective on the blogs that I read, I find it distasteful and disheartening. In general, Econ Blogs are of a very high quality of argumentation and relatively civil. That's the main reason that I follow econ Blogs than more general Political Blogs, even though my qualifications for commenting on Econ Blogs are far less than commenting on general Pol Blogs.

I can also sympathize with Prof. Cochrane. I don't like it when other commenters attack me personally or insult me. Of course, I also don't like the fact that I don't get a lot of support for my comments, but that's another matter. However, I just read past the invective. That's why I can enjoy Krugman, De Long, Mulligan, and Posner, among others. Believe me, all of you have a very high level of interesting points to make.

I also felt that Prof. Cochrane might agree with me about the difference between Econ and Pol Econ. I think that the second is more important, and that the job of the first is to help us make decisions in Pol Econ. Hence, I agree with this:

"Therefore, we have to examine the “ifs.” And those ifs are, as usual, obviously not true. For example, the theorem presumes lump-sum taxes, not proportional income taxes. Alas, when you take this into account we are all made poorer by deficit spending, so the multiplier is most likely negative. The theorem (like most Keynesian economics) ignores the composition of output; but surely spending money on roads rather than cars can affect the overall level. "

As for math, I don't like it, so I generally assume that the author of the paper has done a decent job and examine the conclusions. I did the same thing while a graduate student in philosophy when reading papers laced with logic. I simply didn't take the time to do the derivations. Since I was a Pragmatist at heart, I didn't see any problem with this. Later in life, I met a famous math prof from Chicago, who became a good friend of mine, who told me that's what most people do.

Don said...

cont...


In the end, I agree with most of Prof. Cochrane's Econ comments. It is true that partisanship can cause people to be uncivil. But I'd like to make one more point: I had a friend who wrote a sports column for a major paper. I noticed that his columns were far more strident than he was in general. He told me that's because he was being paid to be contentious.

Don the libertarian Democrat

Tino said...

Remember this is not only a supply problem; it is also a demand problem. The readers of the NYT and the leftist blogosphere don’t WANT serious economics; they want low-brow partisan attacks.

The fragmentation of the ideological market has the problem that the consumers want complex debate, to be told what they already agree with. That’s why you get Sean Hannity and Paul Krugman.


Krugman (absurdly) claimed that Clinton caused high growths in the 90s by reducing the deficit. Now the Democrats support high deficits, so Krugman writes an op-ed defending deficits. His audience is too partisan,

Once he made his name in public explaining and defending free trade. Recently Democrats have felt the need of protectionist rhetoric against China, buy America provisions etc. So Krugman has started to write op-eds defending protectionism.

There is a reasonably objective measure of Pundit Partisanship index.

http://www.lyinginponds.com/2008/

Paul Krugman compets, and regularly beats, Ann Coulter as the most partisan pundit in the US.

He was the most partisan pundit in 2002, 2005, 2008, second most partisan in 2003, 2004, 2007.

It has been clear for a long time that Paul Krugman the public intellectual is not a academic economists, he is just leveraging his past credentials as an economist to pursue a new career as a low quality pundit. The sooner other economists realize this and stop treating Krugman with respect the better.

Tino said...

PS.

The problem is not “civility”, it’s his intellectual dishonestly.

Rather than confront the opponents argument he aggressively uses straw-men (“Milton Friedman claimed downturns are only cause d by the state”, “the mere occurrence of a downturns prows Keynesian fiscal policy is good”, “Chicago school thinks recessions are theoretically impossible” etc.)

If he had been civil, but still lying his readers about economic theory, the state of the debate and 70 years of empirics, would it have been better?

Sheng said...

"“Irrationality” and “spend like a drunken sailor” are pretty superficial compared to all the fascinating things economists are writing about it these days." How true.

Not to flatten Casey, but I think your paper about housing collapse due to unfulfilled technology innovation expectations is stimulating, and the accompanied blog on how to compare and test implications of different theories is deep and powerful. I like it.

Jonathan Weinstein said...

1. Cochrane: "Keynes thought the government should pay people to dig ditches and fill them up." This misrepresents Keynes in an exactly analogous manner to go the misrepresentations Prof. Cochrane bemoans, which accuse people of believing their models are literally true. Keynes wanted to make the counter-intuitive point that it is at least *possible* that such ditch-digging would be beneficial. I am sure that he and all of his followers recognized it would be better to do something constructive with the spending. Whether the current stimulus money has been spent wisely is a separate issue.

Prof. Cochrane may have intentionally exaggerated Keynesianism as a bit of rhetoric, assuming readers would recognize the exaggeration.

2. If we take seriously the idea that no one can consistently beat the market, shouldn't we conclude that any hedge funds or investment banks making big profits *must* have huge hidden risks? If these implied risks are big enough to require bailouts, shouldn't they be regulated? Or perhaps the gains taxed more heavily, if the public must cover the losses. Efficient market theory doesn't prevent financiers from making a killing at the public expense if they experience gains and losses asymmetrically. This is point is made better at more length in "Hedge Fund Wizards" by Dean Foster and Peyton Young, bepress. Neither Krugman nor Cochrane gets into the meat of financial regulation, which Cochrane seems to recognize as a central topic post-crash (and on which I do not claim much expertise.)

Jonathan Weinstein, Northwestern University

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nicole said...

what people mean when they use the term. Following the Chicago Plan of 1933 as I read it, a Stimulus means that the Govt will borrow money during an Economic Downturn, and not raise taxes to pay for the spending. That's it. That's what I mean by a Stimulus.

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