jamesz

Does macroeconomics have a right-wing bias?

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Noahpinion:

…it’s really hard to make a DSGE model in which government policy plays a useful role in stabilizing the business cycle. By contrast, it’s pretty easy to make a DSGE model in which government plays no useful role, and can only mess things up. So what ends up happening? You guessed it: a macro literature where most papers have only a very limited role for government. …Thus, the conservative slant of modern macro comes not from the weight of evidence, but from the combination of publication bias and the inherent unwieldiness of the DSGE framework.

Update: The comments below make it clear that I should have explained what I think is interesting about this quote, and it’s got nothing to do with DSGE in particular. It is the general point that assumptions are often made for tractability, rather than realism, yet still influence our conclusions. It isn’t possible to control for the unrealistic assumptions; if it were we wouldn’t have made them. That means our conclusions will be biased by assumptions we’ve made only for convenience and we need to bear that in mind when considering the policy implications of our models. For example, if our model assumes perfect competition and our conclusions rely on prices adjusting then we might need to be a little sceptical.

jamesz

Behavioural politics

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Niclas Berggren:

This study analyzes leading research in behavioral economics to see whether it contains advocacy of paternalism and whether it addresses the potential cognitive limitations and biases of the policymakers who are going to implement paternalist policies. The findings reveal that 20.7% of the studied articles in behavioral economics propose paternalist policy action and that 95.5% of these do not contain any analysis of the cognitive ability of policymakers. This suggests that behavioral political economy, in which the analytical tools of behavioral economics are applied to political decision-makers as well, would offer a useful extension of the research program.

This paper will be music to Eric’s ears!

HT: MR

jamesz

How does theory stack up to the data?

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Levine and Zheng review the evidence:

The relationship between economic theory and experimental evidence is controversial. One could easily get the impression from reading the experimental literature that economic theory has little or no significance for explaining experimental results. The point of this essay is that this is a tremendously misleading impression. Economic theory makes strong predictions about many situations, and is generally quite accurate in predicting behavior in the laboratory. Most familiar situations where the theory is thought to fail, the failure is to properly apply the theory, and not in the theory failing to explain the evidence. …The idea that experimental economics has somehow overturned years of theoretical research is ludicrous.

jamesz

Wellbeing and GDP

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Plenty has been written on the inadequacy of GDP as a measure of welfare and numerous alternative measures have been constructed. Given the proliferation of alternatives, we might wish to know what additional informational content they have over and above GDP. Grimes et al presented a paper at this year’s NZAE conference that investigates the power of the measures in predicting migration flows over the past fifty years. Essentially it estimates the additional information about a country’s attractiveness for migration that the wellbeing measures contain, over and above any income (GNI) differences.

[There] is clear evidence that migration flows respond to relative material wellbeing of countries …[We] find also that the Life Satisfaction measure adds further information over and above material wellbeing. …Thus while clearly important for predicting an objective wellbeing outcome, an index of material wellbeing is an insufficient index for measuring aggregate wellbeing for potential migrants; some measure of broader life satisfaction (that is uncorrelated with material wellbeing factors) must also be included in the definition of aggregate wellbeing…

Looking at the coefficients in their tables it seems that the life satisfaction measure is about half as important in determining migration decisions as income differences. Other measures of wellbeing turn out not to significantly influence migration decisions, over and above incomes and life satisfaction differences. Impressively, Grimes et al are able to explain 50-60% of migration flows using just these two variables!

If you’re interested in non-GDP measures of wellbeing I recommend reading the whole paper: it’s short, packed with good stuff, and brings some much needed empirical evidence to the discussion of which factors matter for welfare.

jamesz

How to live without money

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A German lady has lived without money for sixteen years and thinks it’s great:

In the beginning, she did odd jobs around her hosts’ homes, like gardening or window washing, to earn her keep. These days, people usually don’t expect anything in return.
…
When seasons change, she gives away old clothing and waits for new ones to come along. When they do––usually donated by hosts or friends––she calls them ‘miracles’, rather than charity.
…
[S]he coaches a group of student environmentalists from Muenster, Germany’s BUND Youth in the ways of bartering. At a local market, they managed to turn that pencil into a fistful of fruit.

So she started off by bartering labour and progressed to simply living off the generosity of others. Perhaps there are useful lessons here beyond exemplification of the generosity of many people but I don’t see them. Why is this apparently an environmentally friendly and admirable endeavour?

If you want to know more about the lessons she has to share, she has a website: Living without money

HT: Interest

Matt Nolan

Careful reading statements – the July 12 OCR

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Over at NBR, Rob Hosking suggests that the RBNZ is saying a couple of things following today’s statement – a couple of things I believe they are not saying.  Implicitly these are:

  1. Relative to June, the Bank wants a lower average official cash rate in the coming years (so a lower track, and potentially a cut to the OCR).
  2. The Bank feels that the “neutral” interest rate is lower (as this is how a level of the OCR goes from stimulatory to not stimulatory).

The reason for this view is the change to the last line of the statement between June and July – it has gone from having “stimulatory” in it to not having stimulatory in it.  This is true, but I feel it is being taken out of context – note that in April stimulatory was also missing.  Furthermore, the rest of the statement is banging on about how the Bank’s view is unchanged since June … a pretty clear signal that their view is unchanged.

In order to flesh out the argument Hosking states:

It suggests the OCR is going to remain lower for longer, especially when put alongside economic forecasts in the previous statement which said New Zealand’s capacity for economic growth is now lower than previously because of high debt levels and the need to rebuild from recent shocks, both economic and geological.

It is true that the RBNZ “lowered potential”.  However, lowering potential implies that the Bank needs to do less to stimulate the economy – not more.  All other things equal, lowering potential growth output, or shrinking the output gap, suggests that rate will be HIGHER going forward – not lower.

Although I appreciate that it is difficult to read these statements, and that Hosking is right to try to read into slight changes in wording by the Bank – I feel that the interpretation he has given to today’s statement goes a little too far.  In truth, the Bank has reiterated what they said in June – rates are staying at current levels for a while, unless Europe goes bang.