Matt Nolan

The failure of contemporary macroeconomic theory?

/7 Comments/in , , /by

Macroeconomics may have incentive problems, and there may be a lot of room for improvement or refocus, but I think saying that “contemporary macroeconomic theory has failed” is going too far.

Now, I’ve shown myself to be no fan of some of the economics that has, and will, be performed – I quoted approvingly when Dani Rodrik said that some economists had abused the theory. Similarly I nodded my head when Arnold Kling said the same thing. When Agoraphilia pointed out that the “rational expectations hypothesis” is constrictively narrow (namely in how it treats beliefs and expectations) I jumped around in an orgy of agreement.

However, I don’t think we can call contemporary macroeconomics on its predictive failures and then not attack the rest of the economics discipline on similar grounds.

Read more

goonix

Bernanke on ‘too big to fail’ and incentives

/in , /by

Yesterday Federal Reserve Chairman Ben Bernanke gave a speech to the Council of Foreign Relations. I heard a few soundbytes on Radio NZ National on my way home last night and was particularly interested in his comments on the concept of ‘too big to fail’.

Bernanke identifies that in a crisis, authorities have strong incentives to prevent the failure of large, interconnected firms, due to the negative externalities that arise from their failure. Such firms might be considered ‘too big to fail’.

However, Bernanke also identifies the undesirable effects that stem from the belief of market participants that a particular firm is considered too big to fail: Read more

Matt Nolan

Wealth destruction?

/13 Comments/in /by

Can wealth have really been destroyed if it never really existed?

“Between 40 and 45 percent of the world’s wealth has been destroyed in little less than a year and a half (*)

I don’t see this as wealth destruction.  Fundamentally, people have realised that wealth they thought existed doesn’t exist.  House prices will not be as high in 20 years as they thought, the value of capital is not as high as the firm owner expected.

Realising this, firms and households are cutting back expenditure – they have spent too much on the past, by borrowing on wealth that would never appear.

The fear is that households and firms will over-react.  They may suddenly believe that their wealth level is lower than it really is, and they may buckle down too much.

Ultimately, what the author of that quote is arguing about it is an issue of expectations – not of “wealth creation or destruction”.  Once we realise this, it becomes obvious that trying to “increase wealth levels” by arbitrarily throwing money at people isn’t the answer – managing expectations is the answer.  Maybe …

Matt Nolan

Micro and macro: How to view them together

/13 Comments/in , , /by

In a comment to a post on Anti-Dismal about a post on the Standard, which I have also commented on here, Clinton Smith said:

If you think that macroeconomics is the same as microeconomics because of where the word economics comes from, you’ve got a long way to come.

I thought I should lay down what I think – and so I did in the comments at Anti-Dismal:

Methodologically macroeconomics should simply be applied microeconomics. Microeconomics is the general discipline, and macroeconomics is a specific application (and set of value judgments) that can be used for (economy-wide) policy.

Trying to do macro without an understanding of micro is like trying to fix a machine without knowing how it works – hence why so many “non-economists” (I hate that term) get lost.

This is how the macro-micro distinction rolls around in my head – but of course, it is not necessarily that simple.  Do you guys have any idea about how I could improve this distinction – I think a set of posts might be in order for discussing this issue.

Matt Nolan

Debating the paradox of thrift

/6 Comments/in /by

I’m sick today – and since economics and sickness don’t really roll together I can’t say much.

However, it looks like Econlog has been busy with authors discussing the paradox of thrift.

Robert Murphy is against it, Bryan Caplan is against a policy solution, and Arnold Kling disagrees with both of them.

How I feel about this has been described previously here, and summed up here.  Feel free to say what you think about the issue here 🙂

Matt Nolan

Dom post article: The technocrat’s tax

/6 Comments/in , , /by

Article:

Give an independent body (akin to the RBNZ) the ability to set tax rates

Discuss (but preferably read the article first 🙂 )