Matt Nolan

Fama, Krugman, Cochrane, and all that jazz

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In all seriousness I’m sick to death of this damned argument over what the accounting identity Savings=Investment means (I am sure you are too – but I get to write the blog posts and I need to vent.  My apologies).

I never, for the life of me, expected such a substantial dispute to develop between economic experts on what it meant. These guys are more than smart enough to know what they are saying – which implies to me that they are hiding/twisting their value judgments to get the solution they want. Grrrrr.

Still Fama started it by stating that S=I always holds (true) and that this implies that government spending can’t influence employment (huh?). Then when the critics came raining in (they are mentioned here) he framed his view a little more – and randomly said that Brad Delong had the only potential criticism of his view. This annoyed me as Arnold Kling and Bryan Caplan had already discussed the enormous logical mis-step that he had taken – and he “answered it” by ignoring them …

Lets get back to his framing of the issue and discuss it:

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Matt Nolan

Remember history when thinking of Keynesian economics

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Over at Think Markets Mario Rizzo follows the advice of Paul Krugman and discusses what Keynes has actually said about infrastructure spending (ht Greg Mankiw):

Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle

So infrastructural investment is good when we are in some sort of reinforcing hole where effective demand is deficient and “will not” go back to our primary equilibrium. However, Keynes appears to be deriding infrastructural investment as a way to smooth the “economic cycle”.

I see this quote as justification for the idea that, if we have multiple pareto ranked equilibrium and a large shock government can help – but if we have a temporary shock to demand infrastructural investment is not the way (furthermore it says nothing about structural shocks, which is part of the current story). I don’t actually think this conclusion leads to an ability to dismiss either the view of Krugman, or the views of Mankiw – given that they ultimately have different beliefs on what is the proper description of the current events we are facing …

Matt Nolan

Obama disagrees with me

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No doubt people here know that I am concerned about any stimulus package that comes out without realising that “potential output” has taken a knock. I believe that people out there that are nervous about the stimulus package have the same concern in mind.

However, it appears that Obama does not feel the same way 🙁

Our workers are no less productive than when this crisis began. Our minds are no less inventive, our goods and services no less needed than they were last week or last month or last year. Our capacity remains undiminished

Well, if he believes that the economy’s capacity is undiminished, and he believes the CBO’s potential output estimates, and he ALSO believes the economy then won’t recover then he can justify some stimulus. However, if the capacity of the economy really is undiminished he should make it clear WHY the economy won’t recover and then focus any government intervention into solving this specific problem.

Of course, I do think capacity has been diminished – at least a little. If this is solely the cause (which I’m not necessarily saying) there is little that the government can do – other than helping to reduce the cost of market adjustment …

Matt Nolan

A structure for our value judgments

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Earlier I mentioned that Paul Walker and myself had different ideas surrounding the need for a stimulus in the US. Fundamentally I think he is completely against while I see scope for some stimulus.

Over at Brad Delong’s blog he mentions a description of the stimulus by Kevin Murphy.

The structure he describes is below:

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Matt Nolan

Market panic: Should we trust it?

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Mark Perry at Carpe Diem has an excellent post comparing the 1991/92 recession to the current recession in terms of “media reporting”.

As he illustrates in his post, the constant comparisons to the Great Depression also occurred during this time – even though for the US it was a relatively mild recession.

Although I am a little more pessimistic about the current outlook for economic growth than Mark Perry is, I agree with his point, and think that it is especially relevant to today – there is often an incentive for people to exaggerate the severity of a crisis (to sell papers, or extract surplus from government).  As a result, instead of just buying the hype, economic commentators should try to keep in mind what is fundamentally going on – whatever you think that is 😉

In terms of New Zealand we should also remember that 1991/92 was a terrible recession – unemployment reach 12% and average income (according to the GNDI) fell 10%.  Even a repeat of this type of recession is a cause of concern for us here in little old NZ.

Matt Nolan

Arnold Kling on the economics profession

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Arnold Kling from Econlog has an excellent post on the debates between economists. One of the best quote for me was:

There are economists making the case against the stimulus in ways that I find unpersuasive (Eugene Fama, for example). But the economists making the case for the stimulus are not doing a very good job, either.

There is no definitive answer. Those that are selling stimulus as the ONLY possibility are merely using a different set of value judgments than those selling the market as perfectly self-correcting. Ultimately, as Arnold says:

My advice to Will Wilkinson would be to distrust one-handed economists when it comes to macro

Economic models are incredibly useful for framing a situation like the one we are in now. However, don’t let the ideology of certain economists be more persuasive just because it is from economists.

I would add that by far the most balanced economic discussion on the crisis has come from Econlog and Marginal Revolution. And the reason that there description has seemed so balance is because they are TRANSPARENT with their value judgments – massively different to many of the other US economists on the blogsphere.