"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister

"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."

- Daenerys Targaryen

"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"

- Tyrion Lannister

"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."

- Jorah Mormont

"These bad people are what I'm good at. Out talking them. Out thinking them."

- Tyrion Lannister

"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."

- Michael Barone

"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker

Saturday, November 30, 2013

Mark Thoma’s classic crack — “I’ve learned that new economic thinking means reading old books”

We don't need new ideas, we need "old" ideas.

New Thinking and Old Books Revisited by Krugman
I learn from Francesco Saraceno that some people are attacking me for, as they see it, defending an economic orthodoxy that has failed. It’s kind of an odd place to find myself, given how critical I’ve been of the way the economics profession has dealt with the crisis. But it’s not entirely unfair: I am quite skeptical of people whose response to the sorry state of affairs is to declare that what we need is a whole new field.

Why my skepticism? I’m all for new ideas that add to our understanding. But ideas like that aren’t easy to come by! Mark Thoma’s classic crack — “I’ve learned that new economic thinking means reading old books” — has a serious point to it. We’ve had a couple of centuries of economic thought at this point, and quite a few smart people doing the thinking. It’s possible to come up with truly new concepts and approaches, but it takes a lot more than good intentions and casual observation to get there.

So, for example, what do I say when I read something like this from someone who apparently considers himself a bold rebel against orthodoxy?
“Rational thinking is an important aspect of human nature, but we have imagination, we have ambition, we have irrational fear, we are swayed by other people, we get indoctrinated and we get influenced by advertising,” he says. “Even if we are actually rational, leaving it to the market may produce collectively irrational outcomes. So when a bubble develops it is rational for individuals to keep inflating the bubble, thinking that they can pull out at the last minute and make a lot of money. But collectively speaking . . . ”
My answer, to put it in technical terms, is “Well, duh.” Maybe grad students at some departments, who are several generations into the law of diminishing disciples, really don’t know that rational behavior is at best a useful fiction, that markets aren’t perfect, etc, etc. But does this come as news to Robert Shiller? To Ben Bernanke? To Janet Yellen? To Larry Summers? Would it have come as news to Irving Fisher or Walter Bagehot?

The question is what you do with this insight.

There is definitely a faction within economics that considers it taboo to introduce anything into its analysis that isn’t grounded in rational behavior and market equilibrium. But what I do, and what everyone I’ve just named plus many others does, is a more modest, more eclectic form of analysis. You use maximization and equilibrium where it seems reasonably consistent with reality, because of its clarifying power, but you introduce ad hoc deviations where experience seems to demand them — downward rigidity of wages, balance-sheet constraints, bubbles (which are hard to predict, but you can say a lot about their consequences).

You may say that what we need is reconstruction from the ground up — an economics with no vestige of equilibrium analysis. Well, show me some results. As it happens, the hybrid, eclectic approach I’ve just described has done pretty well in this crisis, so you had better show me some really superior results before it gets thrown out the window.

Oh, and if you think you’ve found a fundamental logical flaw in one of our workhorse economic models, the odds are very strong that you’ve just made a mistake.

Does this mean that nothing should change in the way we teach economics? By no means — it’s quite clear that the teaching of macroeconomics has gone seriously astray. As Saraceno says, the simple models that have proved so useful since 2008 are by and large taught only at the undergrad level — they’re treated as too simple, too ad hoc, whatever, to make it into the grad courses even at places that aren’t very ideological.

Furthermore, to temper your modeling with a sense of realism you need to know something about reality — and not just the statistical properties of U.S. time series since 1947. Economic history — global economic history — should be a core part of the curriculum. Nobody should be making pronouncements on macro without knowing a fair bit about the collapse of the gold standard in the 1930s, what actually happened in the stagflation of the 1970s, the Asian financial crisis of the 90s, and, looking forward, the euro crisis.

I’d put my oar in for history of thought, too. Watching highly trained economists reinvent old economic fallacies suggests to me that there would be real payoff to requiring that students have some idea how the current leading doctrines got to where they are.

But must we reconstruct all of economics? No. Most of what we need, at least for now, is in those old books.

textbook economics

It used to be different. The preeminent economist Robert Samuelson once said "I don't care who writes a nation's laws, or crafts its treatises, if I can write its economics textbooks." And he was the one writing its textbooks for a long while. In the first version of his blockbuster textbook Economics (1948), the study of macroeconomics came first. And institutions were emphasized before the more abstract microeconomics that start off the education now. One of the central ideas was the “fallacy of composition,” or how things true of individual people or markets were not true of the aggregate behavior of the economic system.

That should be Paul not Robert, as a commenter notes.

Friday, November 29, 2013


...Even using the inflation measure favored by the Bank of Japan, which includes energy but excludes fresh foods, Japanese prices rose 0.9 percent over the last year, which is still far below the 2 percent that the bank is aiming for.

Just as currency markets priced in higher inflation last winter and spring, inflation that is just now starting to materialize, if markets perceive that the government is taking the uptick in prices as victory, things could swing the other way just as quickly.

In other words, the record on Abenomics is so-far, so-good. There is a lot more reason for optimism that the world's third-largest economy has a true recovery underway than there was a year ago, and the most recent inflation data is an important part of that story. But nobody in Japan should be partying like it's 1989.

via DeLong:
Jennifer Thompson and Ben McLannahan: Japan inflation data offer fillip to Shinzo Abe: "Japan is on track to win its war on deflation with the latest consumer price inflation figures showing the highest reading since the country slipped into deflation 15 years ago. Core consumer price index inflation, which excludes fresh food but includes energy, hit 0.9 per cent in October, up from 0.7 per cent the previous month and in line with economists’ expectations. Excluding both fresh food and energy, it reached 0.3 per cent, the highest reading since 1998, indicating that rising energy costs alone were not the sole factor in inflationary pressure..."
Williamson has a lot of equations running around — fearful plumbing, as Rudi Dornbusch would have put it — but the essence of this story, whether he realizes it or not, involves movements in the Wicksellian natural rate of interest — the real interest rate that would match savings and investment at full employment.

George Selgin Relives the Sixties by David Glasner

Thursday, November 28, 2013


Liberalism Will Survive Obamacare  by John Cassidy
On one level, the “bed-wetters”—according to Franklin Foer, the editor of the revitalized New Republic, this is the term that White House officials reserve for the Administration’s worrywart supporters—are obviously right. The launch of healthcare.gov has been horrendously botched, and Obama’s misleading statements about what would happen to Americans who wanted to keep their individual policies have come back to bedevil him. In Foer’s words, the Administration “has stifled bad news and fudged promises; it has failed to translate complex mechanisms of policy into plain English; it can’t even launch a damn website. What’s more, nobody responsible for the debacle has lost a job or suffered a demotion.” 
Actually, that isn’t quite accurate...
On one hand it's obviously bad that White House officials didn't nail healthcare.gov's launch. But it's heartening that they aren't panicking over the media feeding frenzy. They seem to be making progress. One possible explanation is they got more confidence after winning the government shutdown and being proven right.


BERLIN — After five weeks of negotiations, Chancellor Angela Merkel’s conservatives reached an agreement on Wednesday with their Social Democratic rivals on a program for a new coalition government, with concessions to the left that pleased labor leaders and almost immediately drew criticism from business interests.
The 185-page document calls for establishing a national minimum wage — a first for the country — as well as increased pensions for some recipients and early retirement eligibility for others. It would offer dual citizenship to Turks and other foreigners who are born and raised in Germany, and it promises a new law by next summer to revitalize plans for renewable energy.

More broadly, though, it reaffirms Germany’s current course in Europe, much criticized by southern Europeans as burdening them with austerity. And the plans for improving Germany’s ailing infrastructure seemed likely to fall far short of the extra 7 billion euros, or $9.5 billion, a year in spending that a commission of government experts said was needed.
Germany’s important business lobby echoed fears expressed by the government’s Council of Economic Advisers this month that Ms. Merkel and her partners were moving away from the labor and welfare overhaul policies of the last Social Democratic chancellor, Gerhard Schröder. Those policies [sic] are widely seen as a foundation for the country’s success in overcoming the 2008 financial crisis and weathering the euro zone’s troubles since.

bubbles and Obamacare

Dead Filipinos and Housing Bubbles Are Not Good News by Dean Baker
Neil Irwin gave us a list of five economic trends to be thankful for this Thanksgiving. Two of the items do not belong there, or at least not without serious qualification.
Three good items from Irwin:
2) Fewer layoffs.

4) More job openings.

5) Debt burdens keep on falling. The ratio of Americans' income going to meet debt obligations has plummeted in recent years, as consumers have both reduced debt burdens (by paying them down and in some cases defaulting) and benefited from lower interest rates. The debt service ratio was only 9.89 percent in the second quarter, hovering near an all-time low of 9.84 percent from late 2012 (the data go back to 1980). That ratio was 13.5 percent in the third quarter of 2007, before the crisis. Congratulations, America! You're making progress in getting your household debts to a more manageable level.

And all five trends are a reminder that, even, as dark as the economy has looked in recent years, there are still some happier things going on that are worth toasting.

John Cassidy Explains That Those Parts of ObamaCare That Are “Liberal” Are Working Very Well by DeLong
And what about the liberals—the ones who pushed the White House to pursue something more radical than a souped-up version of Romneycare? Even if the A.C.A. were to collapse before it got going—and as I’ve said several times, I don’t expect this will happen—they wouldn’t be routed; they would be vindicated. Far from slinking away and conceding that their grand plans had failed, they would once again take up the campaign, which has been active in various forms since the nineteen-sixties, for the public option, and perhaps even a single-payer system…

Wednesday, November 27, 2013

mainstream macro

Attacks on mainstream economics and reforming economics teaching by Simon Wren-Lewis

The Trouble With Economics Is Economists by Krugman

I thought Bill Maher's final show of 2013 was good with guests Dan Savage, Katty Kay, Wendell Pierce, and Paul Begala.

fiscal stagnation

Fiscal Drag in 2013 by Menzie Chinn
From Torsten Slok at Deutsche Bank:
[F]iscal drag in 2013 is 2.4%, ie if GDP growth in 2013 ends up being 1.7% then if we had not had the fiscal drag then GDP growth would instead have been 4.1% (=1.7% + 2.4%). ..

...Translated into nonfarm payrolls this means that instead of having nonfarm payrolls at 186k - the average monthly number so far for this year - then nonfarm payrolls would have been more than 400k...

IMF bailouts

NYT Says Obama Administration Thinks the Government Has Obligation to Protect Investors Who Are Too Dumb to Judge Risk by Dean Baker

I.M.F. Shifts Its Approach to Bailouts

Monday, November 25, 2013

China and job creation

That may be a bit of an overstatement, but the comments from Yi Gang, a deputy governor at China's central bank, deserved much more attention than they received. According to Bloomberg, YI announced that the bank would no longer accumulate reserves since it does not believe it to be in China's interest. The implication is that China's currency will rise in value against the dollar and other major currencies.

This could have very important implications for the United States since it would likely mean a lower trade deficit. Since other developing countries have allowed their currencies to follow China's, a higher valued yuan is likely to lead to a fall in the dollar against many developing country currencies. A reduction in the trade deficit would mean more growth and jobs. If the deficit would fall by 1 percentage point of GDP (@$165 billion) this would translate into roughly 1.4 million jobs directly and another 700,000 through respending effects for a total gain of 2.1 million jobs.

Since there is no politically plausible proposal that could have anywhere near as much impact on employment, this announcement from China's central bank is likely the best job creation program that the United States is going to see. It deserves more attention than it has received.