The macro wars

September 17th, 2009

Paul Krugman’s piece on “Why did economists get it so wrong” has attracted a vitriolic response from John Cochrane, reproduced here. Krugman’s piece was strongly worded, but the reply ups the ante, and I expect further escalation. Economics conferences in the next few years are going to be interesting events.

Given that, as Krugman himself notes, disagreements between economists were notably mild until the crisis erupted, what is going on here?

I’m visiting Berkely at present and just had a chat with Brad DeLong. These are some of the thoughts I had about the great macroeconomics wars as a result.

One important element that can’t be ignored is the effect political partisanship, which is much more bitter in the US now than in most other places. It’s not so much Republicans vs Democrats as Republicans vs anti-Republicans. Krugman has been a leading figure in rejecting the idea that the Republican party represents a serious viewpoint that should be accorded respect, even in disagreement. Not surprisingly, the members of the intellectual class still associated with the Republican Party (relatively few, these days, but still dominant in the Economics Department of the University of Chicago) intensely dislike Krugman’s writing for the NYT.

But more important, I think, is the hole in the intellectual landscape opened up by the crisis. As regards macroeconomics, the pre-crisis near-consensus described by Krugman included a lot of “freshwater” macroeconomists whose intellectual roots go back to the New Classical/Real Business Cycle literature of the late 1970. This literature initially suggested that there was no possible role for monetary or fiscal policy unless people had mistaken expectations and drew the implication that a sufficiently credible and determined government could eliminate inflation without any serious cost in terms of output and employment, a theory tested to destruction by the Thatcher government.

Given the empirical difficulties encountered by strong forms of these views, most of the freshwater economists were prepared to make some concessions. As regards monetary policy, they were willing to accept some use of interest rates to target inflation, while arguing against “fine tuning” designed to stabilise the economy – during the Great Moderation it was easy enough to conclude that macro instability was a problem of the past, a claim made explicitly by Robert Lucas.

Similarly, it was easy enough to accept the implication that, in certain extreme circumstances like those of the Great Depression, the standard tools of monetary policy might prove ineffective necessitating direct use of fiscal policy to expand the money supply. In the absence of any perceived risk of a Depression, it was easy enough to make this concession while arguing against any use of active fiscal policy.

In the wake of the crisis, this position was untenable. If you supported fiscal policy at all, it was clear that a massive stimulus was needed. In fact, the arguments of Barro and others that Keynesians had overestimated the multiplier effects of fiscal stimulus implied that the required stimulus was even larger than Keynesian estimates would suggest.

Moreover, there is, as Brad DeLong and others have pointed out, no coherent position under which fiscal policy is totally ineffective while monetary policy is at least partly effective. And the only plausible conditions under which policy is totally ineffective is if the macroeconomy is always in (or close to) equilibrium. So, it’s essentially impossible to believe in recessions and unconditionally oppose fiscal policy.[1]

So we see Cochrane forced all the way back to Say’s Law, the claim that it is logically impossible for (planned) supply to exceed (planned) demand, since willingness to supply, say, labour implies willingness to demand goods. Cochrane accuses Krugman of wanting to scrap the macroeconomics of the last forty years[2] but then makes it clear enough that he wants to dump Keynes and everything that has been written since.

Arguments about Say’s Law are unlikely to be resolved by logical disputation. The only way to address them is to look at the historical record of the economy over the last couple of centuries. If you see stability, interrupted only by the occasional ill effects of government policies, you’ll accept Say’s Law. If you see regular crises, except for a few exceptional periods when macroeconomic stabilization policies have appeared to work, you’ll reject it.

fn1. Except for those who can always find some government program or another to blame, even for a case as clear cut as the 1890s Depression in Australia.

fn2. This charge is broadly correct, but I think the correct answer is the one anticipated by Cochrane. Economics did indeed take a wrong turn in the 1970s, responding to the breakdown of (one version of) Keynesianism. We need to find a new and better response, and much of the work of the past 40 years will have to be be discarded or reinterpreted as a result.

  1. Freelander
    September 17th, 2009 at 07:41 | #1

    The results of the Australian stimulus package make it difficult to believe the various Keynes haters versions of the Great Depression and the ineffectiveness of a well thought out a fiscal stimulus when people are too scared to spend. The highly contrived ‘alternative’ explanations of the historic record seem nothing more than mathematical sophistry. Sure you can always fit sufficiently complicated models to past data if you have enough parameters, but where they fail is in providing effective policy responses. According to their Panglossian world fiscal policy shouldn’t have worked, but it did. In science that is the point at which you discard their theories.

  2. Ryan Lanham
    September 17th, 2009 at 07:48 | #2

    What is surely suffering is public confidence in economics. It seems none of them have a very strong scientific outlook right now. Markets do break. Governments don’t know how to fix them without major crises in the wake such as debt and currency malfunctions. Whichever group of academics is declared the most righteous, surely the losers are those of us who must live with what seems more and more like quackery tied to political agendas, one side or the other.

  3. Alice
    September 17th, 2009 at 08:16 | #3

    Well JQ – here is some more news…on macroeconomics. It may have limited time as a subject for broad business students in many unis now. The CPA has apparently dropped the requirement for a separate unit of macro for professional accounting qualifications (and we all know the foreign students in first year choose accounting because of the points thingy…). It can now be combined with micro.
    So expect more micmac subjects and only one economics unit required…of course its all about who gets the take of the foreign students dollar is my skeptical view..if they get through undergrad… faster.. the CPA gets more (and unis get less). I can see the Macro RIP signs being made…who will continue these important debates in the future? Someone needs to straighten out the immigration points system for particular subject choices or all else will be begging on the roads that lead to Accounting.

  4. Alice
    September 17th, 2009 at 08:26 | #4

    JQ – this comment intrigues me. “Economics did indeed take a wrong turn in the 1970s, responding to the breakdown of (one version of) Keynesianism.”

    I question whether Keynesianism (or one version) really break down at all in the 1970s. Or did Governments misapply inappropriate policies even earlier in the 1960s that had nothing to do with what Keynes would have suggested…the key is in those arguments that raged back in the 1970s when the fault lines emerged…

  5. Lord
    September 17th, 2009 at 10:14 | #5

    The freshwater frustration seems to be their inability to offer any solutions. The saltwater frustration with them is they deny any solutions exist or there is even a problem to solve.

  6. Fran Barlow
    September 17th, 2009 at 10:32 | #6

    As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.

    Maybe they were romantics rather than economists? ;-)

    When old age shall this generation waste,
    Thou shalt remain, in midst of other woe
    Than ours, a friend to man, to whom thou say’st,
    “Beauty is truth, truth beauty,” – that is all
    Ye know on earth, and all ye need to know.
    Keats, Ode to a Grecian Urn

  7. Fran Barlow
    September 17th, 2009 at 10:32 | #7

    oops Ode on a Grecian Urn …

  8. September 17th, 2009 at 12:06 | #8

    “Economics conferences in the next few years are going to be interesting events.”

    H*rs*sh*t. They’re going to be the same as they always were, only now Krugman, too, will get the Stiglitz treatment.

    At least in the States; YMMV.

  9. jquiggin
    September 17th, 2009 at 13:19 | #9

    I think you’re misreading the balance of opinion, Ken. As the recent G20 summit showed, outright opposition to stimulus is a pretty marginal position in policy circles in most countries, and this is also true in the Australian economics profession. The RBC/freshwater crowd are stronger in the US, but they’ve lost a lot of ground, and I would say are in the minority now.

  10. TerjeP (say tay-a)
    September 17th, 2009 at 13:25 | #10

    Disagreement over the validity of Says law seems to keep quite regular company with disagreement about the meaning of Says law.

    Where is Steve Kates when he is needed?

  11. TerjeP (say tay-a)
    September 17th, 2009 at 13:36 | #11

    Alice – why do accountants need to know macroeconomics? I can appreciate that they need to be able to adjust for inflation (a shift in the value of the unit of account) but do they really need to know much about the origins of inflation. It’s Martin Place, Sydney, but knowing this doesn’t help them in the counting of beans. Surely macroeconomics is for economists.

  12. TerjeP (say tay-a)
    September 17th, 2009 at 13:47 | #12

    JQ – sorry this is off topic but I know you are interested in the debate about old media versus new media. Tim Andrews (writing from the USA) has posted an interesting article on this topic on the ALS blog. He outlines three major news breaks in the last month that the mainstream media has missed or ignored. One lead to a high level resignation and another to congress making funding cuts, in both cases before the old media had even noticed. Another entailed a million people marching in the streets with only footnote references from the old media.

    http://blog.libertarian.org.au

    What is going on here?

  13. iain
    September 17th, 2009 at 14:03 | #13

    Agree with Cochrane about needing to be really looking at all the reasons for the 08 recession (peak oil may be helpful-but probably not on Cochrane’s radar), and at possible solutions other than inflationary money supply. There are other ways to get money circulating other than printing it or giving it away. Wasn’t it Keynes who wrote that we have more to learn from Gesell than from Marx?

  14. Michael of Summer Hill
    September 17th, 2009 at 14:14 | #14

    TerjeP (say tay-a), the truth is Obama’s overall approval rating now stands at 63%, the same as last month.

  15. carbonsink
    September 17th, 2009 at 14:24 | #15

    fn1. Except for those who can always find some government program or another to blame

    It is truly a very odd religion.

  16. TerjeP (say tay-a)
    September 17th, 2009 at 14:27 | #16

    MoSH – thats nice. But why are you telling me this? Is it relevant to something that I’ve said. Because I don’t think I’ve ever had much to say (good or bad) regarding Obama. Is Obama an opponent of Says Law or some such thing?

  17. nanks
    September 17th, 2009 at 14:29 | #17

    TerjeP (say tay-a) :
    JQ – sorry this is off topic but I know you are interested in the debate about old media versus new media. Tim Andrews (writing from the USA) has posted an interesting article on this topic on the ALS blog. He outlines three major news breaks in the last month that the mainstream media has missed or ignored. One lead to a high level resignation and another to congress making funding cuts, in both cases before the old media had even noticed. Another entailed a million people marching in the streets with only footnote references from the old media.
    http://blog.libertarian.org.au
    What is going on here?

    why does mr andrews think that 9/11 was perpertrated by the Arab/American community? Is that another scoop?
    from the article-
    “On September 11, 2001, the Ella Baker Centre issued a statement that “Community-based organizations led by people of color will hold a ‘Solidarity Gathering’ and candlelight vigil on Wednesday night to support the Arab-American community”. Let this sink in for a moment. The day of the worst terrorist attack on U.S. soil, and Van Jones’ organization expresses solidarity not with the innocent victims, but with the perpetrators.”

  18. TerjeP (say tay-a)
    September 17th, 2009 at 14:48 | #18

    Nanks – Your point is valid. I had the same thought myself when I read that passage. But you’re knit picking. Van Jones was forced to resign following an online inquiry into his past(including his advocacy of the view that the US government deliberately permitted 911). A major scalp was taken due to a major controversy. Yet that controversy wasn’t even reported let alone unearthed by the traditional media (until after he resigned).

    The article is Tims not mine. I just think it is interesting and topical and I agree with the general thesis that new media is changing the rules of the game.

    Does the media have a left wing or right wing bias? Personally I think it has a mainstream bias? And personally I think that’s a problem. I would rather it was representative of all view points across the spectrum rather than some sort of averaging machine.

  19. Michael of Summer Hill
    September 17th, 2009 at 14:55 | #19

    TerjeP (say tay-a), really, I wonder who said ‘I don’t buy the idea that Obama is some terrible socialist menace’. Not that I disagree.

  20. nanks
    September 17th, 2009 at 14:55 | #20

    I agree with the point about the mainstream media being past its use-by, but I think many people gave up on MSM as a source of quality information years back. We get a bit of a biased impression here in Aus (and maybe the US is similar). The UK still had good mainstream press the last time I lived there.

  21. TerjeP (say tay-a)
    September 17th, 2009 at 15:01 | #21

    MoSH – I presume you’re quoting me from another context. Even if I did say that I’m still wondering what your point is.

  22. Alice
    September 17th, 2009 at 15:01 | #22

    @TerjeP (say tay-a)
    Terje – Accountants do all sorts of things which I would consider a macro understanding essential…how about accounting for exchange rates or even accounting for any hedge instruments. Its not all finance that does that.

  23. Michael of Summer Hill
    September 17th, 2009 at 15:10 | #23

    No TerjeP (say tay-a), I am not misquoting you they are your exact words.

  24. jquiggin
    September 17th, 2009 at 15:11 | #24

    Terje, you need the same reality check given to Sukrit a little while ago. All credible estimates of the crowd in Washington are below 100 000. The Van Jones stuff was standard rightwing Swiftboating – the proponents immediately moved on to the impeccably centrist Cass Sunstein. The ACORN stuff was run endlessly on Fox. (BTW, I didn’t need to check any of these, and I’d already blogged one)

    If you think these pathetic efforts by the Republican slime machine (+Rathergate!!) represent the future of journalism, you’re sadly misled. The same people pushing this stuff went right along with the MSM in peddling lies about weapons of mass destruction, covering up the catastrophe in Iraq, making excuses for torture etc etc. They actively promote delusionism on climate change, DDT, stem cell research, evolution and so on.

  25. September 17th, 2009 at 15:37 | #25

    Alice,
    Just FYI – accounting for exchange rates is not done. Exchange rates are used in assessing a value for some assets (like assets held overseas or forward contracts). In those cases a macro understanding is not needed – you use the prevailing market rate on the relevant day(s) from a source like Bloomberg.
    On the hedge instruments – again, no understanding needed. Use the relevant market price and/or exchange rate on the relevant day(s).
    The standards essentially dictate (in descending order of preference) three possible sources of prices:
    1. The sell price (less costs to sell) in an active market (as defined in the standards)
    2. The value assigned in a recent transaction, or
    3. A modelled value using a model that is “generally accepted” for valuing items of that type.
    No macro knowledge needed. It is probably better to leave most accountants out of that area.

  26. TerjeP (say tay-a)
    September 17th, 2009 at 16:30 | #26

    MoSH – I don’t memorise everything I ever say but I’m happy to assume you have quoted me correctly (a link might still help). I do identify with the position expressed in the quote. However I’m still left wondering what your point is given that you agree with the quote anyway.

  27. TerjeP (say tay-a)
    September 17th, 2009 at 16:39 | #27

    JQ – thanks for looking at it and for sharing your assessment.

    p.s. you know my position on the war, WMD and torture. For those that don’t I opposed the war, actively criticised claims of significant and meaningful WMD in Iraq and I’ve never supported torture. On foreign policy I think the GOP backed a looser in GWB, although before he was elected President he made all the right noises.

  28. jquiggin
    September 17th, 2009 at 16:44 | #28

    Terje, I do know your position which is why I was surprised to find you endorsing this stuff. The Fox News/warbloggosphere attacks contributed to making the MSM even worse than they already were, and these cases are prime examples, where the author is complaining that lies/tabloid video exposes/ginned up political scandals didn’t get even more attention than they did.

    Complicity in this stuff has pretty much killed off libertarianism as a plausible contender for the support of anyone interested in freedom.

  29. Michael of Summer Hill
    September 17th, 2009 at 16:59 | #29

    TerjeP (say tay-a), I think JQ has said it all.

  30. TerjeP (say tay-a)
    September 17th, 2009 at 17:40 | #30

    JQ – I don’t think it is accurate to say I was “endorsing this stuff”. I said it looked interesting and I solicited feedback. I sometimes do the same with articles you have written and we have quite a few areas of disagreement. I certainly don’t claim to know the facts of these cases beyond what Tim has reported. Part of why I seek comment in a left leaning blog such as yours is to flush out any obvious deficiencies in the thesis. Plus you have commented on new media old media previously.

    p.s. It was quite exciting to learn from MoSH that Obama is popular. Who would have thought that you could be President of the USA and also popular. ;-)

  31. Michael of Summer Hill
    September 17th, 2009 at 18:18 | #31

    TerjeP (say tay-a), the truth is Obama the socialist was already popular before entering politics and what a difference a clean skin like Obama is making to the highest office in the land.

  32. TerjeP (say tay-a)
    September 17th, 2009 at 18:43 | #32

    Before he entered politics he was obscure.

  33. Michael of Summer Hill
    September 17th, 2009 at 18:47 | #33

    TerjeP (say tay-a), your ignorance is showing. Do some reading.

  34. TerjeP (say tay-a)
    September 17th, 2009 at 18:58 | #34

    I’m addicted to reading. Your not helping.

  35. TerjeP (say tay-a)
    September 17th, 2009 at 18:59 | #35

    p.s. I don’t know why you get off being so rude. Perhaps you’re nicer in person.

  36. Alice
    September 17th, 2009 at 19:16 | #36

    @TerjeP (say tay-a)
    I thought about your question before as to why accountants need a unit of macro. A) it was dumb question Terje and b) my answer was equally dumb.
    People with accounting qualifications often do end up running firms or in senior exec positions…and understanding of macro would / should be de rigeur…it helps.

  37. Alice
    September 17th, 2009 at 19:27 | #37

    @Andrew Reynolds
    Andrew – what can I say but dumber and dumber – the Chicago Booth school shows us that models and over reliance on math models is myopic and inward looking…Krugman is right. Cochrane is dummy spittingn and incredibly wrong. Where oh where has Greenspan gone? Why dont we ask him??…he came the closest to admitting his models were stuffed.

  38. Alice
    September 17th, 2009 at 19:34 | #38

    And here is Andy telling me that accountants should just buy someone else’s computer model and learn to push the appropriate statistical buttons…

    The world moves on but the models dont Andy or not fast enough – hence the GCF (oops) investment in new robot technology lags todays human intelligence…thats why. What is this? Push button Accounting managers welcome to apply?

    Andy – what a disgrace you are for selling your soul to automatrons…I dont know quite what to do with you!

  39. Alice
    September 17th, 2009 at 19:36 | #39

    @Andrew Reynolds
    The point is to see it coming Andy…..not to just bean count it when it arrives.

  40. Alice
    September 17th, 2009 at 19:39 | #40

    You see…thats the tragedy of Cochrane…he only has his narrow like minded friends at Booth to prop up his ego now…he virtually even says as much. I think Cochrane imploded actually.
    One robot down…and keep it up Krugman!!

  41. TerjeP (say tay-a)
    September 17th, 2009 at 21:02 | #41

    People with accounting qualifications often do end up running firms or in senior exec positions…and understanding of macro would / should be de rigeur…it helps.

    So do people with engineering degrees and science degrees. However we don’t teach macro economics in engineering degrees and science degrees.

  42. Jill Rush
    September 17th, 2009 at 21:47 | #42

    Could we say that irrantional exuberance has been replaced by irrational irritability brought on by having all of life’s certainties eroded and credibility trashed.

    We have seen increasing levels of strange behaviour from the Liberal/Nationals over the past few days where behaviour is far from mild. Not only have those who espouse right wing ideology lost economic credibility they have also lost power in other ways. No wonder they are lashing out at those they feel are responsible for their angst. The credo is that attack is the best form of defence – although even that belief is difficult to sustain. Economics conferences will be interesting in the future as new paradigms are debated and the right wing attempts to regain credibility.

  43. September 17th, 2009 at 23:44 | #43

    Alice,
    Anyone who saw it coming would be able to count things of a lot more worth than beans.

  44. September 17th, 2009 at 23:51 | #44

    Terje,
    Fortunately not many Keynesian economists get there. :)

  45. TerjeP (say tay-a)
    September 18th, 2009 at 01:09 | #45

    Andrew – I don’t think that’s true. A lot of business execs think the government stimulus was both necessary and effective.

  46. jcb
    September 18th, 2009 at 05:21 | #46

    “Economics did indeed take a wrong turn in the 1970s, responding to the breakdown of (one version of) Keynesianism. We need to find a new and better response, and much of the work of the past 40 years will have to be be discarded or reinterpreted as a result.” JQ

    I wonder what such a reinterpretation would look like. It might have to go back further than the late-1970s. Even politically liberal post-WW2 American keynesian economists lived in a country with a world-dominant (and comparatively prosperous) economy. It’s tough to maintain skepticism under those circumstances, particularly when the profession enjoyed such growing prestige. In retrospect, a lot of what passes for Old Keynesian and New Keynesian in the US may in future seem to have been fundamentally “Classical” — at least in its acceptance of the natural tendency toward general equilibrium. Keynes was reinterpreted as an special case of classical principles, though an influential one, whose economic remedies were called upon under limited conditions — recessions, liquidity traps. Most of the skeptical keynesian impulse was diverted into the study of “frictions” or “imperfections” of the classical model. Even behavioral economics, so far, exists as a piecemeal critique of classical assumptions about rational behavior.

    Perhaps the real distinction between contemporary economists ought to be between those who believe that economies naturally tend toward equilibrium (allegedly like physical systems) and those who believe that they are evolving, non-equilibrating systems (like biological, human, or historical ones). The distinction, then, would be between the descendants of David Ricardo, on one hand, and T.R. Malthus, on the other. Virtually every celebrated name in economics would fall into the first category, even Marx (a “Left-Ricardian” who believed the closed system would explode of its own accord, leading to a steady-state end of history). It would also include contemporary Freshwater (and many of the Saltwater) economists.

    Malthus deserves to be re-discovered as the progenitor of an alternative to the contemporary classical version of economics, particularly his 1820 Principles of Political Economy (and especially Book 2). It’s on Google:

    http://preview.tinyurl.com/le4gpu

    Keynes did indeed write a well-known admiring essay, calling Malthus “the first of the Cambridge economists.” Not only did this work influence Keynes, but Malthus was the first (?) political economist to discuss the relationship of the distribution of wealth to economic growth (too much landed inequality is bad), and to suggest that getting a country out of a recession might require government sponsored public works. From this perspective, Keynes (and only a few of his self-proclaimed contemporary followers) would be seen as fundamentally a “Right-Malthusian” who tried to save capitalism. (Others of his self-proclaimed contemporary followers would be seen as fundamentally classical economists with only the faintest soupcon of eau de Keynes.) A “Left-Malthusian” would be someone who took Malthus’ analysis of the relationship between the division of landed property and economic growth (Bk.2, Sec.7) more to heart than his defense of security of property (and primogeniture) — and who extended his discussion of landed property to all forms of wealth.

    “If only Malthus, instead of Ricardo, had been the parent stem from which nineteenth-century economics proceeded, what a much wiser and richer place the world would be to-day!” [Keynes, 1933]

  47. Alice
    September 18th, 2009 at 06:59 | #47

    @jcb
    Says “I wonder what such a reinterpretation would look like. It might have to go back further than the late-1970s. Even politically liberal post-WW2 American keynesian economists lived in a country with a world-dominant (and comparatively prosperous) economy.”

    The US launched a major war and kept it going for years…starting from a position close to or at full employment (Vietnam). Keynesians would / should know that would cause inflation. And that inflation got spread like a virus around the world and when the oil shock came BOOM! There was no Keynesian common sense in that. So tell me, did Keynesianism really fail or did the US govt stray from implementing any semblance of sound Keynesian policy in the management of their own economy in the 1960s (and of course, being so large an economy, the instability transmits to a lot of other economies notwithstanding those countries own good managements).

  48. September 18th, 2009 at 09:38 | #48

    jcb,
    Kates dealt with the Keynes/Malthus thing well by clearly showing that Keynes built on Malthus. Check out his “Say’s Law and the Keynesian Revolution”.
    BTW – I do not treat that as a good thing. Malthus has been shown to be wrong many more times than he has been shown right.

  49. September 18th, 2009 at 09:41 | #49

    Terje,
    Most of those are accountants, lawyers or engineers. Not many economists in the upper ranks. I wonder why.

  50. Alice
    September 18th, 2009 at 10:20 | #50

    @Andrew Reynolds
    You make broad sweeping statements like “not many economists in the upper ranks. I wonder why?” based on what Andy…your exceptional intuition? Groundless, factless and baseless observation. You may want to check Warren Buffets qualifications Andy. (knockout blow from Alice – yes!!)!

  51. September 18th, 2009 at 10:25 | #51

    Alice, “not many” allows for some, so citing just one is hardly a knockout blow. Also, did you not realise that declaring victory on blog threads is a classic sign of insecurity?

  52. September 18th, 2009 at 10:25 | #52

    …and you consistently agree with Buffett, then? Nice to hear.
    More seriously, though – check out the smiley face above.

  53. Alice
    September 18th, 2009 at 10:55 | #53

    @Andrew Reynolds
    Ok Andy and Jarrah – how about Mark M Zandi who founded economy.com and sold out very handsomely to Moody’s Investor Services in 2005 putting his net worth to eight figures… By the way, despite his considerable net worth, Mr Zandi doesnt agree with your liberal views. In 2006 he stated….

    “Our tax policies should be redesigned through the prism that wealth is being increasingly skewed,” Mr. Zandi said, arguing that higher taxes on the rich could help restore a sense of fairness to the system and blunt a backlash from a middle class that feels increasingly squeezed by the costs of health care, higher education, and a secure retirement.”

    I quite agree.

  54. Alice
    September 18th, 2009 at 10:55 | #54

    What smiley face?

  55. September 18th, 2009 at 11:12 | #55

    Alice,
    That’s two – and both from the USA. On the tax thing – you still have not read Carney, have you?
    If Zandi believes that he is perfectly free to donate some of his eight figures to the government. I think Pres. Obama would accept a cheque (oops – check).
    .
    The smiley face in a comment generally indicates a gentle dig and/or a joke. You seem to have fallen for this one – or maybe your browser can’t show them. Get FireFox if so.

  56. Alice
    September 18th, 2009 at 12:01 | #56

    It was on the prev page…Not only Zandi Andy. Prof Q gets a mention page 18 SMH today… and when you consider this..
    “Seventy-five percent of the chief executives in a sample of 100 publicly traded companies had a net worth in 2004 of more than $25 million mainly from stock and options in the companies they ran, according to a study by Carola Frydman, a finance professor at the Massachusetts Institute of Technology’s Sloan School of Management. That was up from 31 percent for the same sample in 1989, adjusted for inflation.”
    Zandi was right and he made his comment before the GFC Andy. Wealth has been skewed towards the rich over twenty or thirty years of tweakings of the tax system. Frydman also notes
    “The growing use of options as a form of pay helps to explain the sharp rise in the number of very wealthy households. But so does the gradual dismantling of the progressive income tax, Ms. Frydman concluded in a recent study.”
    The dismantling of tax progressivity under liberal policies clearly needs to be reversed. This is an key essential reform.
    http://www.nytimes.com/2006/11/27/business/27richer.html?pagewanted=3&ei=5070&en=2264f44fc03ad16c&ex=1165381200

    PS another wealthy economist? John J Moon, MD of Metalmark Capital (Private Equity Firm).
    Andy give up on that one (Few economists make it to the top)…all sorts of individuals and all sorts of qualifications can end up wealthy.

  57. September 18th, 2009 at 12:27 | #57

    Alice,
    Which is one of the great benefits of capitalism. :) (smiley face there too, in case you missed it).

  58. TerjeP (say tay-a)
    September 18th, 2009 at 12:42 | #58

    Alice – if advocates of high taxes for the wealthy actually focused those taxes on people with a net worth in the 8 figures then they would cause nowhere near as much harm or protest. However our top income tax rate cuts in around $180k and this typically represents somebody with a career who has got there mostly on the merit of their labour skills not via invested capital. The relativity between their income and those that sit below them in career path isn’t usually extreme.

    Personally I’d be supportive of a land tax which is a tax on one form of wealth. Of course “supportive” presumes that the purpose of the revenue is to reduce the tax burden elsewhere. Perhaps we could increase local land rates and abolish state payroll taxes.

  59. Alice
    September 18th, 2009 at 12:59 | #59

    @Andrew Reynolds
    _ _
    o o Andy this is the best I can do! No benefit if rich end up in Wall St casino!
    ^^

  60. September 18th, 2009 at 13:28 | #60

    Alice,
    Yes – there is. If they succeed and make money out of it then the wealth has been used well by productive businesses to drive improvements in the broader economy. If not, the wealth has been transferred to others who may make better decisions.
    .
    To go OT for a while (apologies, PrQ) that reminds me of what one of my history teachers taught me about the Rum Rebellion. Macarthur and friends are normally portrayed as the villans of the piece as they rebelled and also treated many others harshly. He said this is correct, they did and they deserve to be castigated for that – but the capital they accumulated and their entreprenuership also drove the development of the sheep industry in Australia that made many, many others wealthy and created a lot of employment.
    On balance, then, were they good or bad for Australia?

  61. jcb
    September 18th, 2009 at 13:38 | #61

    @Andrew Reynolds

    “In a former work [the Essay on Population] I endeavoured to trace the causes which practically keep down the population of a country to the level of its actual supplies. It is now my object to shew what are the causes which chiefly influence these supplies, or call the powers of production forth into the shape of increasing wealth.” T.R. Malthus, 1820 (Principles of Political Economy, Bk. 2,Ch.1,Sec.1.)

    Which of these two works by Malthus “has been shown to be wrong many more times than . . . right”? And by whom?

  62. gerard
    September 18th, 2009 at 13:48 | #62

    it’s obviously true that skills in accounting and finance, law or many types of engineering are vastly more useful to the running of a business than is economic theory. how often does a business manager draw an isocost line through an isoquant map to determine production levels? I doubt that most microeconomics ever gets used by businesses. Micro would replace most of its current abstract, angels-on-a-pinhead content with practical techniques from Operations Research if it wanted to be a serious practical subject.

    So Andrew is right, although he has no reason to single out ‘Keynesian’ economists. Keynesian economists at least make an effort to observe reality, unlike the neoclassicals who simply construct their own, besides which it’s micro and not macro that supposedly pertains to the running of a business.

  63. September 18th, 2009 at 14:07 | #63

    jcb,
    OK – Malthus did take many ideas from Say, Smith, Mill and Ricardo and in doing so he was right. The analysis he took from them, though, and ran with was wrong. He clearly misunderstood them all. Keynes, unfortunately, took that even further and (IMHO) was even more incorrect in his misunderstanding.
    Malthus, though, in his Essay on Population was demonstrably wrong. Global population in 1820? Global population now? Oops.

  64. Freelander
    September 18th, 2009 at 14:36 | #64

    “as Krugman himself notes, disagreements between economists were notably mild until the crisis erupted, what is going on here?”

    I think I have an explanation. The freshwater models were and are much ‘prettier’ than the alternatives, and amongst (apparently) useless things, what other criteria is there to evaluate models than prettyness. The crisis has concentrated minds on less vacuous criteria (as crises often do). Old, but far less elegant, explanations have once more provided an effective remedy. The consequent loss of status for the freshwater ‘artists’ and their models may have been simply too much to bear.

    In the aftermath, Cochrane and the other freshwater sleuth’s are now attempting to find the ‘real’ cause of the 08 GFC which reminds me of OJ’s life long quest to find out who really murdered his ex-wife. Give them time though, sixty years on they had managed to tell pretty good (real business cycle) stories about the ‘real’ causes of the Great Depression. But how many people back in the 1930′s would have believed those stories?

    I have to agree with Krugman: “The math of real business cycle models is much more elegant than that of New Keynesian models, let alone the kind of models that make room for crises like the one we’re in; that makes RBC models seductive, but it doesn’t make them any less silly.”

    My score Krugman v Cochran? 1-0

  65. September 18th, 2009 at 14:38 | #65

    Terje, contrary to the claims in the post at ALS, the 9/12 rally was featured on the front page of the Washington Post, while a larger anti-war rally in 2002 was buried inside. I think you will find that the media is biased towards the interests of the people that own it.

  66. jquiggin
    September 18th, 2009 at 16:08 | #66

    To restate Terje, any word said by Fox, Drudge or the warblogosphere is a lie, including “a” or “the”. Sad to say, ALS is part of this circle of lies. For all practical purposes, libertarianism has been killed by the fatal embrace of the Repugs.

  67. Rationalist
    September 18th, 2009 at 16:31 | #67

    Economics ideology and “war” is silly anyway. Government tends to simply go with what works.

  68. nanks
    September 18th, 2009 at 16:38 | #68

    Rationalist :
    Government tends to simply go with what works.

    I will treasure this

  69. Alice
    September 18th, 2009 at 16:44 | #69

    @Andrew Reynolds
    Andy – did you actually read that Krugman article?
    You say “If they succeed and make money out of it (ie casino style gambling on Wall St) then the wealth has been used well by productive businesses to drive improvements in the broader economy.”
    Andy billions just EVAPORATED ie went straight into the ether (all those savers funds, all those unemployed now, all those Mum’s and Dads hard earnt nest eggs, all those councils savings of rates, all those government’s savings of our taxes).

    If anyone thinks that Wall st before the GFC was closer to an efficient market than Keynes Casino, they are living in denial land and this seems to be the defining feature of liberalism doesnt it? Bernanke virually denied there was a bubble in housing (bubble – what bubble? The one that just burst), other liberalist / markets economists suggested high unemployment is the result of workers choosing to go off on vacation… FAMA said he hated the word bubble and that “house buyers were very careful” meaning the US house prices were not a bubble and could be trusted. Now that is serious denialism Andy.

    Now Andy, you tell me, is Denialism (capital D) written into the liberalist’s / markets / efficient markets / mathemagians / neo liberals economists handbook? Do they have to swear on the bible that they will deny all economic ills before they get to join? Some of these economists like Cochrane make themselves look totally and utterly stupid to the ordinary man on the street. There is no use having their precious and complicated maths if ITS NOT WORKING and not only is it not working, they cant even see its not working (or see the woods for the weeds).

    My score – Krugman 1. Cochrane disqualified for using mathematics dishonestly.

  70. Alice
    September 18th, 2009 at 16:53 | #70

    I meant mathemagicians.

  71. Alice
    September 18th, 2009 at 17:06 | #71

    @gerard
    Gerard – micro pertains to running a business (making sure you have the right quantities of meat and gravy in the pie). You are quite correct. Macro pertains to running the business through economic cycles and being able to recognise when people would rather buy plain meat pies rather than your gourmet duck filo pastry pies.

  72. ABOM
    September 18th, 2009 at 17:21 | #72

    Micro pertains to unrealistic theoretical models about hypothetical rational all knowing humans (who don’t exist in real life). Macro consists of assuming these all knowing humans stuff up on such a regular and consistent basis that government (a collection of similar – but somehow different – all knowing humans) have to step in to bail out the rational micro humans.

    No one explains why we assume economic agents are all knowing. No one explains why this doesn’t work at the maco level, requiring massive intrusion into the market by people even dumber than the market participants themselves – govt.

    However if you shut up and repeat the models and graphs on a piece of paper at the end of the semester, you’ll pass. Which is all that really matters.

  73. Alice
    September 18th, 2009 at 17:48 | #73

    ABOM – I was being tongue in cheek with Gerard and you are (always) right, there is nothing rational about it except the P, C, D or HD on the paper.

  74. Michael of Summer Hill
    September 18th, 2009 at 18:07 | #74

    ABOM, I don’t know what you do in life but this is complete tripe ‘…people even dumber than the market participants themselves – govt’? Who do you think sets macro-economic policies correcting market-failure?

  75. ABOM
    September 18th, 2009 at 18:17 | #75

    “Market failure”??? Ha Ha Ha! How about “govt correcting central bank failure – which is itself a branch of govt.”

  76. Michael of Summer Hill
    September 18th, 2009 at 18:19 | #76

    ABOM, explain yourself.

  77. Sebastian
    September 18th, 2009 at 18:35 | #77

    @ABOM
    I don’t know how you were taught economics, but my professors always went to great pains to explain that the models that are studied in economics courses are always abstractions that aren’t meant to be completely realistic. The most commonly used example is the roadmap, which shows you how to get from point A to point B, but does not depict every pothole, tree, house etc, or the doctor who studies how a healthy human body works before discussing what can go wrong with it.

    Assuming the omniscience and rationality of agents in all situations is a big assumption that obviously doesn’t translate into reality, but I don’t think any serious neoclassicals have ever asserted this is the case, at least not any I know. And Austrians definitely don’t.

    Which brings me to Krugman’s latest disgrace. Much like Say’s Law, there seems to be a wilful misinterpretation of what the actual hypothesis states. Of course the market makes mistakes, and if the information at hand isn’t accurate its pricing won’t be accurate. But it also begs the question, how is government going to do a better job? Do they have some godlike genius working for them who can somehow divine the true market price? And if so, why isn’t he/she making millions of dollars elsewhere?

    It is an abuse of deductive logic to say that since the current order (bastardised Keynesianism/Keynesianism by stealth/Militant Keynesianism, and yes, I will continue to assert we are dealing with one of the many guises of Keynesianism despite your kicking and squealing) has collapsed, we need to return to the “Old Keynesianism”.

    You continually mention the 70s saying “Keynesianism works fine, yet something went wrong, and as soon as we can define the problem everything’ll be hunky dory” and yet you ridicule those who do not accept your version of events apropos the 1890s financial crisis (and that it is possible to unearth material that challenges your ‘official’ version shows that it’s not ‘clear-cut’).

    Krugman is no longer an economist anyway. His work with trade was good, but now he is a hyper-partisan columnist for a newspaper whose days are hopefully numbered. While this article is meant to be satire, it could almost be true:
    http://www.huffingtonpost.com/andy-borowitz/krugman-could-turn-into-m_b_134477.html

    And that’s coming from the uber-liberal (as in social democrat) Huffington Post. Krugman is, quite simply, the Michael Moore of economics.

    In short, how many versions of Keynesianism/”The One True Faith” do we need to go through before we can discard it?

    Cochrane: 1, Krugman: 0

  78. Sebastian
    September 18th, 2009 at 18:37 | #78

    At the risk of getting banned, I just wish to clarify that not all the above post was addressed to ABOM – only the first 2 paragraphs.

  79. TerjeP (say tay-a)
    September 18th, 2009 at 18:54 | #79

    John – I do appreciate you responding to the article by Tim Andrews that I linked to. However I think dialogue is generally more persuasive than statements (especially ones that claim that “the” is a lie). So perhaps if you commented directly on the ALS blog or directly at Tim Andrews personal blog where the original version of his article resides or even if you carved out a spot on your own blog for a fullsome discussion we might get further. Otherwise I have to hassle Tim to follow up here in the midst of a macro economic discussion and I suspect that it would get tedius.

    Just sayin.

  80. Michael of Summer Hill
    September 18th, 2009 at 19:05 | #80

    Sebastian, in reference to ‘….is government going to do a better job? Do they have some godlike genius working for them who can somehow divine the true market price? To answer YES, for it seems the RBA has made a ‘mozza’ from buying and selling in the market-place.

  81. September 18th, 2009 at 19:30 | #81

    MoSH,
    Of course – how silly of me. The government is all wise and perfectly capable of stepping in and correcting any and every little mistake the market makes.
    The government is all wise and can see the future, in the full knowledge of all of the probable and possible consequences of its actions.
    .
    (AR then backs away slowly, looking for an exit)

  82. Ernestine Gross
    September 18th, 2009 at 19:32 | #82

    1. “So we see Cochrane forced all the way back to Say’s Law, the claim that it is logically impossible for (planned) supply to exceed (planned) demand, since willingness to supply, say, labour implies willingness to demand goods. ”

    2. “Arguments about Say’s Law are unlikely to be resolved by logical disputation.”

    JQ, you may be right regarding 2. above if one considers the endless and, IMHO, useless disputations in macro-economics involving ‘school of thought’.

    Isn’t Cochrane aware of Radner’s 1972 model of a competitive private ownership economy with a sequence of commodities and share markets with rational expectations (defined a little different from Lucas)? In Radner’s model with incomplete markets the outcome is an equilibrium that has the property of minimising the value of excess supply (ie Say’s Law does not hold). Radner called this equilibrium a pseudo equilibrium. Some call it now a Radner equilibrium.

    I suggest, those familiar with Radner’s and subsequent work in math econ are less surprised about the empirical evidence than the ‘school of thought’ people.

    I know I’ve made this point many times on your blog. It seems not often enough. Interestingly, you’ve always allowed my posts to get through despite the obvious repetition.

  83. Michael of Summer Hill
    September 18th, 2009 at 19:38 | #83

    Andrew Reynolds, you obviously underestimate what government’s can and cannot do. Just read up on what is happening in Germany and the government’s threat to fully nationalise banks unless they pick up their game.

  84. September 18th, 2009 at 20:12 | #84

    MoSH,
    I have no doubt that governments can do some very silly things. Was that your point?

  85. Alice
    September 18th, 2009 at 22:42 | #85

    @Sebastian
    ABOm – yu have one thing completely and seriously wrong (and you are letting your adherence to free markets cloud your vision) – Krugman is more honest and right and less of a lying bastard than Cochrane. I might agree with you on the gambling banksd but you can at least acknowledge defeat on the fact that the dominant schooln of neo lliberlaism has run into a brick wall – you said it yourself…so why dry foul on Krugman? There is no rationality. He is saying what you said so what is your objection ABOM?

    You cant be in Andy’s team and mine at the same time and you are smarter than that.
    For christ sakes ABOM. You are not an idiot. Dont damn Krugman because its against your creed. Damn Cochrane …. because he is a liar – a mathematical liar. You know it and I know it.

  86. Alice
    September 18th, 2009 at 22:59 | #86

    @Sebastian
    Let me just get one thing staright for Sebastian

    The idiots from the Chicago Booth school dunmped Kenesianism (but worse thn that they dumped Friedman). They decided, in their wisdom they would dump the greatest and second greatest econmists of this century. Keynes was great because he provided a solutionto the great depression. Friedman was great because he provided a solution to command economies that had grown stagnant under State rule. Both offered something positive when it was needed.

    The offspring who have distorted Friedman’s ideas have provided no solution to any crisis and instead have created crises and have pretended they were better than than those economists that offered a solution.

    To those at Chicago booth I say…go back to your models, admit failure, get over your egos and get on with the job.

  87. ABOM
    September 19th, 2009 at 00:06 | #87

    Alice, no mention of Mises or Rothbard? Or Ron Paul?

    After all we’ve shared, all I’ve done for you (I tried to save you with gold but I don’t know if you took my mad rant seriously).

    You are still in the thrall of the mainstream. You still think JQ has the answers. He’s a govt stooge like MoSHie.

    I love you too much to allow you to be led toward superficial zombie Keynesianism, which is nothing but a deadend of war and world govt. Come into the light. Don’t be afraid of anarchy. Freedom works. Order without law is possible.

  88. ABOM
    September 19th, 2009 at 00:10 | #88

    Let’s compromise. Let’s both read Minsky together. In bed.

  89. Michael of Summer Hill
    September 19th, 2009 at 07:33 | #89

    ABOM, I suggest you read a simple book by Peter Kennedy called Macroconomics for starters to get some idea about economics otherwise you are one poor lost soul who says muchado about nothing.

  90. Freelander
    September 19th, 2009 at 08:04 | #90

    While there is certainly no need to worship him, Keynes recognised that humans are not automatons (and that he could be wrong). There is and was no need to wait for ‘Behavioural Economics’ to get to the point of being an aesthetic masterpiece (as Cochrane seems to suggest) before using insights about human behaviour (that many people have) when analysing economic problems. Besides, the psychology literature is not undeveloped and even if it is not particularly aesthetic psychology makes a better claim to being science than many parts of economics. Components of the success of the Australian stiumulus package were probably due to the speed with which the package happened. The package didn’t allow time for the fear to set in. After the initial shocks people were scared. After the government said it was going to do something big and the cheques started rolling out, people were thinking maybe it won’t be so bad, some probably even thought ‘the government will save us’. Then retailers did better than they were anticipating and they were thinking likewise. If the fear had been allowed to set in, if the initial package was started, say, three months later, it probably would have been much less effective. Roubini’s approach suggests that, as well as understanding and using models, a modest amount of thinking combined with a knowledge of history can be worthwhile when analysing economic problems.

  91. Michael of Summer Hill
    September 19th, 2009 at 08:41 | #91

    Freelander, maybe you should have included some unknown unknowns like the fear of being spooked by an uncertain future making many pay off credit debt at a faster rate.

  92. Alice
    September 19th, 2009 at 10:32 | #92

    @ABOM
    Lol ABOM. All is forgiven…until next time..
    There are more important arguments than ours…Sebs out of the sin bin on early release! Trust me ABOM, Cochrane is a zombie economist robot of the very worst variety….
    (I bet I get moderated for using the phrase “early release”)

  93. Alice
    September 19th, 2009 at 10:34 | #93

    No I didnt…amazing.

  94. Alice
    September 19th, 2009 at 10:37 | #94

    @Freelander
    Freelander….so you acknowledge animal spirits can be herded? Sounds Keynesian to me.

  95. Alice
    September 19th, 2009 at 10:43 | #95

    @ABOM
    ABOM – there are decent governments and then there are crooks and criminals posing as governments. Look at State Labor. We need a more effective way to get governments and ministers out before their time is up (with severe penalties). Look at the way a succession of NSW Labor governments have been handing out free taxi plates to Mr Cabcharge (SMH today) and look at the mess taxis are in (and thats just a drop in the ocean of how State Labor has been feeding its members from the taxpayers purse). Criminals ABOM. Yet until we disconnect them ALL from the donations trough we will vote in another colour much the same.

  96. Alice
    September 19th, 2009 at 10:44 | #96

    @Alice
    Ive come to the conclusion its time to end the farce of State Governments altogether.

  97. September 19th, 2009 at 10:51 | #97

    “the success of the Australian stiumulus package”

    What success? What causal link have you identified?

    “The package didn’t allow time for the fear to set in.”

    This is basically the only positive I can think of, as the GFC was as much a crisis of confidence as anything else. Of course, that implies that any further stimulus is redundant, since measures of confidence have rebounded.

  98. gerard
    September 19th, 2009 at 10:59 | #98

    …my professors always went to great pains to explain that the models that are studied in economics courses are always abstractions that aren’t meant to be completely realistic

    Or even remotely realistic. My micro professor instructed everybody: “Don’t think too much, or this all becomes nonsense”. For anybody who has experience in the hard sciences, the lack of rigor in economics is pathetic. If one admits that the models only work under assumptions that are patently false, then that is an admission that the model itself is false. The Pythagoreans asserted that all numbers were rational, by “assuming” away the existence of the irrationals, despite knowing that they existed.

  99. Alice
    September 19th, 2009 at 11:02 | #99

    @Sebastian
    Says…”Krugman is, quite simply, the Michael Moore of economics.” That is actually a great compliment. I have no doubt Michael Moore assisted the US people to get rid of the republican government and the mad views rampant within the Bush Admninistration.

  100. September 19th, 2009 at 11:02 | #100

    “We need a more effective way to get governments and ministers out before their time is up ”

    Recall elections. Which I’m glad to see the NSW Liberals considering, though they stole it as a policy from the LDP.

    “Look at the way a succession of NSW Labor governments have been handing out free taxi plates to Mr Cabcharge (SMH today) and look at the mess taxis are in”

    Taxi plates are a rort on the public to begin with, and are now (predictably) exposed as a magnet for corruption. Solution – get rid of them, free the market for taxis.

    Alice, re States, my preferred option is to dissolve States and local councils and replace them with regional governments that are in between in size and number, boundaries based on watershed geography. Never gonna happen, but one can dream.

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