Matt Nolan

Are macroeconomists ignoring the research program of the last 30 years?

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There is a large set of people saying that macroeconomists have just ignored what they have researched over the last 30 when trying to deal with the recession. In fact, many of the posts I have written could be seen as tacitly agreeing with this point of view.

However, my answer to the posted question would be NO – macroeconomists are not ignoring their recent research.

Many people may then ask: Why are people giving Keynesian, or IS/LM, style explanations to the crisis? Why do economists differ so heavily in what they think is the right policy? Why do they differ on what they think is actually going on!

My answer would be that macroeconomists are using old school language to EXPLAIN the conclusions they have reached with more modern methods. People are more comfortable with the idea of IS/LM etc, and so macroeconomists can use this type of language to explain what they are doing – even though it isn’t the real justification 😛 . I don’t particularly like this – but I’m sure I do it myself 🙁

Economists also disagree so heavily about PRESCRIPTIONS and DESCRIPTIONS. This is because the recent “research program” has not removed the importance of value judgments – fundamentally, people may agree on a general framework but there is no central model for stating the values of the parameters in a given game.

Even if economists could agree with that, the importance of game theory has opened up the realm of the FOLK THEOREM and MULTIPLE EQUILIBRIUM. Fundamentally, macroeconomists can now explain anything in multiple ways – making any explaination by itself empirically empty. Microeconomists discovered this a long time ago – and it is still a vexing methodological issue.

So macroeconomists are not ignoring recent research – recent research just hasn’t put macroeconomics in a position where it is all encompassing and all powerful. Something that some macroeconomists need to realise methinks 😀

Matt Nolan

Why I’m glad to be a forecaster in New Zealand …

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Boing boing links to an article on economic reporting in the United Arab Emirates:

Instead of moving toward greater transparency, the emirates seem to be moving in the other direction. A new draft media law would make it a crime to damage the country’s reputation or economy, punishable by fines of up to 1 million dirhams

So if you report on the crisis – you become a criminal.  That would be one hell of a way to destroy the industry I work in 😛

I think that the UAE has decided that information on the crisis is dangerous – and preventing that information will lead to improved outcomes.  Sounds like they have taken Robert Shiller’s views to the extreme …

Matt Nolan

Quote of the day – tax cuts paying for themselves

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This is from Alex Tabarrok:

Mark Thoma makes fun of Judd Gregg for thinking that tax cuts pay for themselves. Mark is right to make fun. What a ridiculous thing to believe. All the good economists know that it is spending increases that more than pay for themselves.

😀 . BTW, this is sarcasm – which is why it is awesome 😉

Also, apologises for the lack of substantial updating – I am extremely busy doing that “predicting things” stuff that I always say economists shouldn’t do …

Matt Nolan

The issue of data

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I will give people a little more time to write comments on this post on economists and predictions before I discuss it – let me say that I’m very happy with the two comments (from HH and Kimble) so far.

There is a related issue that I think needs a bit of attention before we start discussing these things – data. Statistics New Zealand does an excellent job getting together data and putting together clear, transparent, and useful, data series. However, even with all the hard work they put into the process there will always be some issues with the data, namely:

  • Not all the survey responses arrive, or arrive at the same time – implying that there is constant revisions to the data,
  • Changes in methods mean that there is constant revisions to the data
  • Changes in methods implies that some data series for the same thing (eg private consumption over time) are incompatible,
  • Seasonal adjustment and trend estimates can be subject to an “end point bias” – which implies that the figure we have at the time is different to the “true” figure that will be available in the future,
  • Quality adjustment is a subjective process – but the adjustments are not always transparent,
  • In a country like NZ sufficiently disaggregated data cannot be released,
  • In a small country the “timeliness” of surveys can be poor (GDP is out three months after the event for example),
  • The length of data series – for many types of statistics there just isn’t much data!
  • Even if the definitions of what the data does is transparent – the data will often be misused by people interpreting it.

What does all this mean – well, even though Statistics NZ does the best job in getting data that is possible, and even though economists might make the best use of the data that they can, it takes a long time (several years) until it is clear (in a quantifiable sense) what has actually happened.

Matt Nolan

Don’t bail out F&P

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Almost unsurprisingly F&P is struggling in the current environment. Given that we are experiencing a global recession there was always going to be a huge fall off in demand for appliance products (something that hasn’t really happened in New Zealand yet interestingly).

Stuff has already put up a few articles on the event (* and *) and Bruce Sheppard has suggested a bail out. Let me just say that I am completely against a bail out.

Now, if F&P is still in a position where it will be profitable in the medium term, but drastic conditions in the credit market prevent F&P gaining any finance, I could accept the government loaning money to F&P temporarily at a high rate of interest. Bailing out F&P should not be an option – after all, what is growth promoting about forcing all of society to cover businesses mistakes?

As far as I can tell they are in trouble as their debt was denominated in foreign currency and the value of the NZ dollar collapsed. Now excuse me if I’m wrong – but isn’t this just hedging on their part. A few months ago they were complaining that the dollar was too strong and was reducing the profitability of their manufacturing. Now that the dollar is weak (improving the return on what they make) they have lost out on their debt. By denominating their debt in foreign currency they were hedging their losses stemming from a high dollar – why should we be bailing them out when the tide turns?

Update:  Kiwiblog and Anti-Dismal more explicitly discuss the moral hazard problem.

Matt Nolan

Average vs Marginal: The most common mistake in economics

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Something I have noticed over time is that there is always a mass of confusion surrounding average vs marginal costs (or benefits) in economics.

Although there is some confusion with fixed vs variable costs as well (an issue that I believe is closely related) the issue of average vs marginal costs appears ohh so often.

Greg Mankiw mentions a case from the paper recently here.  I remember a case where it was important that was blogged about here.

Now, the difference is important as it is “marginal” costs and benefits that determine decisions (implicitly) not average costs and benefits.  However, if people are often confused between the two is it not possible that many people do make decisions based on the average?  There are a lot of interesting questions implicit here – something we should discuss over the next week 😉 – eg do people choose marginal when describing average?  does this confusion serve some “evolutionary” purpose?