It is time again for Around the Traps. We again have some riveting articles. Noah Smith has eventually taken his extended blog holiday BUT his guests have been prolific and Noahlike in quality.
I do not have anything under David Giles as I thought there weren't any articles this week suitable for we people who do not specialise in econometrics. Sorry Dave. ( Has sounds of 2001!)
Football is finished and Cricket yet to start and batching on sunday so updating over the week-end. done and dusted
I will not comment but merely copy it for every body to read. It is long but so very worth it to read and understand..
Macro workers and macro wars
A long post I’m afraid, even with extensive use of footnotes. But I really think it is much more productive to try and understand someone’s opposing point of view than just be rude about it.
Most academic macroeconomists are just trying to advance the discipline by getting their papers published, and are certainly not consciously trying to defend some ideological viewpoint. As a result, there are lots of macroeconomists producing high quality work in a wide variety of diverse areas. There are many interesting new ideas being explored. Furthermore this work can be appreciated by most fellow researchers. Unlike the 60s and 70s, where members of different schools of thought talked across each other, we now have a shared language as a result of the microfoundation of macro. My own view is that as a result macro today is much more interesting than macro was back then. Furthermore, this work can be useful to policymakers, as Paul Krugman outlines in the case of monetary policy here.
Ahh - that may have made you pause for thought. Isn’t that the same Paul Krugman who says there is something “deeply wrong with economics”.Who talks about how ideology and politics distort the advice that economists - and perhaps particularly macroeconomists - give to policymakers. And who suggests that in many cases policymakers would be better off thinking about good old IS-LM than any of this more modern stuff.
One of the problems when Paul Krugman does this is that it gets on the nerves of many academic macroeconomists, who would much rather identify with the sentiments I express in my first paragraph. Economists like Tony Yates, for example. I suspect they see Paul Krugman’s attacks on the state of macroeconomics as akin to a personal attack on their own and colleagues work, and as a result they can go way over the top in reaction. I think this is understandable, but it is wrong.
As I see it both points of view are correct. As Stephen Williamson argues, in one sense macroeconomics is flourishing. Take the example of financial frictions. There is now a wealth of papers out there exploring different types of friction, in large part responding to events of just the last five years. This is hardly the response of a moribund, out of touch discipline. And as Krugman says, sometimes this work can be useful to policymakers. But that is not the acid test for the integrity of a supposedly scientific discipline. In days of old, policymakers made much use of astrology. The acid test is when the discipline tells policymakers something they do not want to hear, and unites behind this implication of its models and the data.
Nearly fifteen years ago I began working with DSGE models looking at monetary and fiscal interactions.  Doing this work taught me a lot about how fiscal policy worked in New Keynesian models. Iunderstood more clearly why monetary policy was the stabilisation tool of choice in those models, but also why fiscal policy - appropriately designed - was also quite effective in that role if monetary policy was absent (individual countries in the Eurozone) or impaired (the ZLB). Why New Keynesian models? Because if you were interested in business cycle stabilisation, that is the framework that most involved in that area (academics and policymakers) were using. So when we hit the ZLB, the reaction of policymakers in using fiscal stimulus seemed logical, entirely appropriate and fully in line with current theory.
I also found that in these models the basics of Barro’s tax smoothing hypothesis continues to apply, so if you needed to reduce debt, you should do so as gradually as possible. This also seemed like as robust a result as one can get in macro.
The acid test for macro came in 2010. Policymakers, for a variety of reasons, went into reverse with fiscal policy. Austerity replaced stimulus around the world. If academic macroeconomists had been true to their discipline, they would have been united in saying that our standard models tell us this will reduce output and raise unemployment. They would have said that if markets allow, the time to reduce debt is when the ZLB comes to an end, and then it should be done gradually. Many did say that, but many did not. This division at least encouraged policymakers to continue with austerity.
So macroeconomists as a collective failed this test, repeating errors made in the 1930s. But unlike the 1930s, it did not have ignorance as an excuse.
This is a crucial point that many on both sides tend to ignore. In 2010, the standard business cycle model was the New Keynesian model, and the implications of that model for the efficacy of appropriately designed fiscal policy are clear. So to blame the failure of 2010 on the current dominant macro model is just wrong. You may not like that model, but it cannot be blamed for the widespread adoption of austerity, or the ambivalent attitude of many macroeconomists towards that policy change.
So in my view macroeconomists, not the dominant macroeconomic model, failed. Why? The easy answer is to say that macroeconomists were too influenced by ideology, but I think for most (not all) it is the wrong answer, as I said in my opening paragraph. I think for most (not all) it is not simple politics, so in that respect I agree with Stephen Williamson.  So what is it?
Here is one possible answer. First I have to appeal to macroeconomists who learnt their trade after the New Classical revolution to consider where the now dominant methodology in macro came from. If you start your history of macro thought in 1980, then everything can seem nicely progressive. First there were RBC models, applying basic micro to macro. The data showed that this framework could not explain how monetary policy appeared to work, so to resolve this puzzle New Keynesian theory was developed.
But it was not like that at all. 
Macro started well before 1980. Its theoretical basis may have been shaky, but it was a scientific discipline in the Popperian sense. The New Classical revolution attempted to kill off Keynesian ideas, and deny the importance of aggregate demand. In that respect it now seems clear, because of the dominance of New Keynesian theory, that this was regressive rather than progressive.
Yet in many who were part of the New Classical revolution, or who were taught by its leaders, there remains a deep antagonism to Keynesian ideas. This was not enough to prevent the emergence of New Keynesian theory, but the NK model built upon rather than challenged the RBC framework, and it could always be dismissed with an assertion about price flexibility. As a result, in certain places NK theory was tolerated rather than embraced, or was quietly marginalised.
This attitude was facilitated by another aspect of the revolution. Although it failed to kill Keynesian economics, it did succeed in changing how macro was done. Microfoundations macro did not just become an important way of explaining the economy, it became the only acceptable way. Now we can debate the wisdom of that. But I think it is very difficult to deny that this methodological revolution reduced the discipline that data can provide on model proliferation. It becomes far too easy to say ‘but in this model something different happens’, even if there is compelling empirical evidence that said model is not applicable.  
I think this may help explain why a good proportion of macroeconomists failed to advocate fiscal stimulus in 2009 and call the consequences of subsequent austerity.  Now you may disagree with my view that this represented a failure for macroeconomists as a whole. What I want to convince you of here is that my view that it did, and perhaps similar views of others, does not amount to an assertion that modern macro is fundamentally flawed, and that those working within it are wasting their time. While the New Classical revolution may have moved macro many steps forward, in condemning Keynesian ideas it took one large step backwards, and the consequences of that mistake are still with us.
 In part this was a reaction to a different policy decision. The work of various economists before the formation of the Euro had suggested that countercyclical fiscal policy should be a key stabilisation tool for individual Eurozone members. That work was ignored by policymakers, and they were backed up by a significant number of macroeconomists, in part using other models that focused on free rider problems and fiscal dominance. How this all turned out is another story, but once again the collective of academic macroeconomists hardly covered itself in glory.
 Personally, I do not think the actions of some eminent economists who ignore their economics when batting for their favoured politicians is critical here, regrettable though it is. Nor on its own were the comments of other eminent macroeconomists who appeared not to have kept up with the literature, although as I suggest here I think this was indicative. Both could have been isolated examples, quickly brushed aside. More revealing is this survey, where although 46% of economists agreed that the US stimulus was a good policy, a large 40% were uncertain or did not answer. That is just one survey, but it reflects a similar division amongst the macroeconomists I know, and the views you find on the web. See, for example, the quote from Tom Sargent in Stephen Williamson’s post. Now I think some of this 40% are equivocal about fiscal stimulus (and therefore not too worried about austerity) because of a deep distrust of government intervention or the state. Whatever the merits of this mistrust, this is exactly the ideology and politics that Paul Krugman and I complain about. I think some others of this 40% take a view that monetary policy is still up to the job, even at the ZLB. I have talked about this most recently here. This post provides a third possible explanation, although I am sure there are others. (I tried to be comprehensive here.)
 Getting the history of macro thought right is important for other reasons as well. As I suggested here, the structure of NK models may owe as much to the need to work with rather than against the then dominant RBC paradigm, as to any intrinsic empirical merits of that structure.
 I have tried to argue that economists working in central banks take more notice of the data, which helps explain why the NK model is dominant there, but Stephen Williamson disagrees.
 Another arguable consequence is that modelbuilding became too conformist. The charge that some element of a model is ad hoc and lacks microfoundations hangs like a Sword of Damocles over modelbuilders. Probably too much intolerance of alternative methodologies came with this revolution as well. I think this is part of any explanation of why so little work was done on financial frictions before 2008, as Mark Thoma suggests. Again I am not arguing that the methodology is wrong, but instead that it may have certain perhaps unintended and unfortunate consequences. In my own experience if you talk to many microeconomists about DSGE in macro they can be quite critical: for example about how narrow the micro used is, or how obsessed with technicalities the analysis can become. Sometimes they can be downright dismissive.
 You could argue that ideology lay behind the New Classical revolution’s attempt to kill off Keynesian economics, and I do not really know enough to agree or disagree. What I do think is that most of those involved in the revolution thought that they were just exposing deficient theory, which in many cases they were.
Two articles yesterday show why the ALP will lose this coming election.
First John Quiggin in a pretty good piece argues that the ALP should be aggressively defending their record and pursuing the Howard record because Keynesian economics has been vindicated through the GFC.
I wholeheartedly agree of course since I have written about this previously. Only mad people and liars think otherwise. The evidence is quite simply overwhelming.
However John misses the point. Even if Rudd and Bowen were at a Keating type level of economic persuasion ,and they are not, it is far too late to make a large dent in the economic debate. If you have withdrawn from the debate for 4 or 5 years you cannot make up for it in 3 or 4 weeks.
Grogs Gamut examines whether there has been a wages breakout or not.Again in this debate only airheads and madman have argued that there is one occurring.
The RBA would be raising rates if this was happening and would be extremely vocal about it.
As it is they are almost mute on the subject and for good reason. Wages are simply doing what they normally do when the economy weakens. There has not been a skerrick of evidence around to suggest the labour market has become more regulated and that wages are behaving differently now than in the past.
The point here is a half decent political party should be ramming these points home. That they are not show how poor political operators they have been.
Poor political operators with little to no political smarts in them do not deserve to win elections and never ever should complain.
I have stated previously I always vote against the incumbent government after two terms. This is enough time to embark on any major reforms. Any time after this and the government gets stale and becomes lacklustre. The history of Australia bears this out convincingly.
However I am in the electorate of Bennelong. The two major candidates are like chalk and cheese.
Jason Yat-Sen Li , the ALP candidate,is as impressive a candidate as I have ever met. He is a local, quite personable, is very good on the subjects he understands and is honest about subject areas he is less than comfortable with.
John Alexander, The Liberal member, is the complete opposite. He is easily the most unimpressive candidate I have ever met. Let us just say as a candidate he makes a great tennis player.
This I appear to be in a quandary. I believe in a change of government but if I vote in such a way I vote for a very unimpressive person.
Yes in actual fact the decision who to vote for is easy and no I want be changing my voting policy at all.
It is time yet again for Around the Traps. I try to put articles in subject order as much as possible. hence this week there is a small debate on maths in economics and another on Keynes and Kalecki. Noah Smith has yet to take a break and the Fifth Test is on.
updates tomorrow and sunday but my youngest son is in the grand final on Saturday!! ( alas his team lost!)
I have said previously It matter who wins the election as they will have to put very similar policies in practice anyway.
Just on the political front, in particular economics see John Quigginand Ricardian Ambivalence. They view things differently of course and favour the ALP and the Coalition respectively to win when push comes to shove.
However last night I was reminded by a friend of a possible scenario which would involve something different to the above.
To outline this we must go back to the last years of the previous Government. Without a GFC to distort revenue flows the Government could only have surpluses. However Peter Boxall, then Head of Finance, came up with a variation of the classical theory in economics. He said the Government should merely aim to regularly have the surplus at 2% of GDP. Ken Henry and most at the RBA argued against this saying if you merely kept to that target it meant a de facto easing in fiscal policy.
Howard and Costello were assured this was the best policy to follow. We then got to an overheated economy because easing fiscal policy when there is no output gap will naturally lead to inflation.
Even when this was occurring the Government was told by Costello the RBA would not raise rates in an election year.Ken Henry believed Glen Stevens would act no matter whether there was an election or not . Anybody who knows Glen would have known that and he even said so in Parliamentary testimony. So it is amazing the Coalition was taken so much by surprise when the RBA did raise rates during the 2007 election campaign. John Howard is still very bitter about this decision despite being told by Ken Henry this was likely when the budget was being drawn up.
Now imagine a coalition victory but a bloodbath amongst the public service alah John Howard 1996. Let us say Peter Boxall or some-one similar is appointed to head of Treasury.
What if we see austerity measures introduced now. By that I mean the public sector detracts substantially from growth in a significant way.This article then becomes very interesting reading.
Austerity measures introduced when nominal GDP is well below trend and expected to remain there for some time is highly likely to exacerbate the domestic slowdown perhaps even bring on a recession UNLESS lower interest rates and a lower exchange can offset fiscal contraction. World economic growth might even recover to assist as well.
HOWEVER these are all simply hopeful outcomes. None of them appear to have any legs at present.
Adopting austerity when all three are occurring is very sensible. Adopting them when very few if any are occurring is simply ignoring the European experience.
I have had another debate with the dear lady at Writing on the Castle Walls. Here is what she says.
( Just for historical brevity here is what I have said about the Watershed episode and Job in DChere and an update on Kate Beckett hereandhere.)
I do have a lot of time for this lady and her views and I like her a lot however I find myself in disagreement over these issues.
What I am going to attempt to do is show how Kate Beckett cannot go to DC and cannot get engaged YET!
First of all let us examine the DC job from a number of perspectives and in no particular or importance.
1) Relationship. Both Castle and Beckett realise you cannot have a relationship and this job. It involves long hours ( without the pay to 'compensate'). Imagine Castle comes to DC. He does little during the day and waits for her to come home. When she does come home she is physically exhausted and emotionally spent. Now remember two things. They are very bad at talking to each other and the only thing they have gong for them is a healthy sex life. Beckett would be irritable coming home. Castle a tad too as he is waiting for her company. She just wants to have a bath and go to bed. He wants more. This leads to arguments and tension.
Moreover Beckett is not likely to be in the mood for sex. She needs rest.The workday is very exhausting. Castle already knows about this from his experience with Gina. She was in a high paying executive publishing job at Black Pawn. However the long hours of work meant very little sex!
We should also take into account how important the professional relationship is for Caskett. They both thrive on it as they are partners. They need each other to solve crimes. This interlinks and is vital for their emotional relationship. Without the professional relationship the whole relationship would deteriorate if not dissolve!
There is no need to say having children is totally out of the question with this job but I said it anyway.
The choice is Caskett or DC. Both agree on that or is Beckett being portrayed as that silly she can have her cake and eat it too.Shades of Demming?
2) Experience. Beckett's only experience of the Agency is Stack. The man is a transparent liar, arrogant, willing to go outside the law, incompetent and a braggart.He asks one of the most stupidest questions one ever hears. Where do you think you will be in five years time. Also remember her team solves a murder in a day that the super agency couldn't in a year! After such an experience why would any sensible person go near the Agency?
3) Ambitions A person who is ambitious and career driven is easy to spot. Kate Beckett is not such a person. We learnt this in the very first episode. We learnt further in the second series she gets her kicks from putting murders behind bars. Moreover after Castle's birthday she agreed with him in looking forward to solving another 100 more murders. Suddenly out of nowhere Beckett has changed. Why?
What has occurred that would mean her idealism has ended and she wants a new career? It rarely if ever happens in a very short time. This is a gradual thing but not here!
4) Networking. Beckett goes into the interview having done no preparation at all. She could have rung up both Will Sorensen and Jordan Shaw to find out about the interviewer and the job but didn't. If they didn't know personally they probably did know someone who could have helped her. No-one but no-one goes into an interview so ill prepared. She probably didn't ask many questions because of this. This is not the action of an intelligent woman. It speaks volumes about the interviewer as well!
5) Job. She keeps on saying that this is a great job but only talks in banal generalities. Most people can easily point to a lot of specific reasons why a job is a great job. Not Beckett. Why?
6) Hypocrisy Beckett rejected Sorensen because he was transferred to Boston yet she expects Castle, who earns a lot more money than she will ever do, to follow him no matter what or she expects the relationship to break up. either way it is not a good look for Beckett.
7) Gates Gates gives Beckett her highest recommendation. This makes no sense at all. She has suspended Beckett from duty. Furthermore it was only recently Beckett broke several regulations when 'guarding' Vaughn. Thus either Gates is very devious or incompetent! We have no evidence she is devious.
Although we all want to see Castle and Beckett married getting engaged now is madness. The couple have pretty basic communication problems. These have to be worked out before one even contemplates marriage.
Being unable to talk to each other is pretty common amongst divorced couples.
Beckett has yet to experience her watershed moment. Hence her attempt to run away from the relationship could occur again when her silly and irrational fears present themselves again as they must.Beckett doing a runner when they are married would be curtains ,emotionally, for both as neither would or could recover.
Although people would say both are in love with each other you need more than just being in love to get married. One might ask how a person in love could contemplate doing a runner or a pursue job which must end any relationship.
When Castle proposes he says 'whatever you decide'. There is a big problem. This means they are not a couple. Both He and She are merely two individuals who have sex. They do not go out for fear of being seen together.If they were a couple then they would decide not her! They need to become a couple before getting engaged. They clearly are not a couple yet. Joint decisions mean sacrifices and compromises. It is all about OUR life it is NEVER about MY life. Thus if Cattle had said 'whatever WE decide' then that would have indicated they were indeed a couple as it is they are merely two individuals in a relationship
Therefore Beckett cannot go to DC and they need to wait before contemplating marriage. Beckett has been portrayed as an unintelligent woman. This needs to be rectified quickly. We need answers to pretty basic questions . We need to know why the series has become so contradictory and inconsistent and it all needs to be done in the first episode of series 6.
Marlowe has a lot of work to catch up on!
Time for Coldplay/Castle video. This is fabulous. This is for the wonderful lady from Writing on the Castle Walls. May you live long and prosper!
Early last week I saw Harry Clarke had written something and so made a comment on his blog BUT the comment went into the ether. I thought little of it until I wrote something at John Quiggin's blog and the same thing happened. with my suspicions now well and truly at a high level I then attempted to congratulate Ken Parish on a number of thoughtful pieces at Club Troppo and then attempted a comment at Lavatus Prodeo. all comments went into the ether. I then went to a few different blogs overseas but all wordpress and the same thing happened. This never happened at blogs that were not om Wordpress.
I then contacted Jacques Chester dictator of Ozblogistan to see if he knew how to fix it. The short answer was no he didn't have an answer but to contact all blogs to see if they could overcome the problem.
John Quiggin is the only blog here where you can contact a person so I sought out John to see if he could help me at least comment on his blog.
Alas after several conversations and several theories the same thing was occurring all the time. He suggested trying a new name but I am not going to do that. I rather like Not Trampis ( even though Tony the Teacher is the ONLY person to pick up the deliberate mistake in spelling).
I actually do not comment a lot these days. not enough time, reading all the articles I put up on Around the Traps on Friday is time consuming in itself and
I find in my free time I am reading , writing and commenting on Castle a lot so ab present I am not all that bothered.
It is time for Around the Traps.
Interesting week yet again. David Giles has a great linked article on elementary statistics which is a must read so we do not get into bad habits. do not forget Kaiser Fong or Good Stats Bad Stats for easy to understand statistics articles. There are debates over Milton Friedman and the Pigou effect as well. Ken Parish has thoughtful articles on the refugee debate in Australia.
It is all happening.
wow Noah Smith is taking a break BUT has some people writing in his place
no Refereeing and Cricket doesn't start until 14/9 so I can update all week-end.