How many economists are monetarists?

Reading the econ blogosphere and talking to macroeconomists, you would think that the monetarists have triumphed. With the coming of QE3, the hard-money faction has suffered a decisive defeat in the policy arena. Mike Woodford is being hailed as a hero for our times, and the notable resemblance of QE3 to NGDP targeting has won Scott Sumner many accolades as well. Monetarism - broadly, the notion that economic fluctuations should be stabilized entirely through the monetary policy of an independent central bank - appears in the ascendance.

Except that the rest of the economics profession has apparently not gotten the message. The Economist has conducted a survey of economists from various walks of life - the NBER, business economists, and "independents". The question: What has been holding back America's recovery from the Great Recession? And here, in two pretty graphs, are the answers:

Basically, we see the following facts:

1. Most of these economists believe that slow recoveries are a natural result of financial crises.

2. The "policy uncertainty" trope has a good number of followers, despite the fact that there is probably substantial (and entirely political/partisan) disagreement as to what sort of policies people are worried about (socialist Obamacare, crazy Republican debt brinksmanship, or just a general failure of America's political institutions?).

3. A lot of economists seem to believe in fiscal stimulus.

4. Most economists do not think that monetary policy has been a big factor in the slow recovery.

All of these results are interesting, but to me, the last one is huge. Milton Friedman claimed that the Fed caused the Great Depression by keeping monetary policy too tight. Ben Bernanke agreed with this view. This survey shows that most economists (or, at least, most of those surveyed; it was not a random sample of the profession) now think that Milton Friedman was utterly wrong. 

This seems like a big deal to me because it signals a general lack of confidence in macroeconomics as a field. In recent years, most mainstream academic macro has modeled recessions as being due to demand shocks, and has focused on monetary policy as the most appropriate - or indeed the only - policy countermeasure. Fiscal stimulus is such a distant second that it might as well be running in a different race. Monetary policy - optimal rules, targets, expectations management - was and is considered the..er...gold standard of what macro has to offer the world in terms of practical, applicable engineering. What this survey shows is that many economists believe that our best macroeconomic policy engineers are unable to build any sort of useful machine.

How would I respond if I took this survey? Basically, I agree that there is probably some force that holds back recoveries after financial crises (and we don't entirely understand what that force is, though many think it's related to gross indebtedness). And I think that uncertainty about external shocks is a huge deal - I wouldn't be surprised if there were "ringing" or "boomerang" effects as the crisis filtered slowly around the world and back. Also, I think we could have given the economy a much bigger boost by doing a lot more road and bridge repair. So except for the "policy uncertainty" part, I agree with the majority or surveyed economists.

And monetary policy? It's hard to say. It's not a topic I understand well, despite having taken classes on it and read a fair number of papers. I'm not sure it's a topic that more than a handful of people understand well, given the propensity of respected monetary policymakers to say such odd things (and such different things over time). I'm still open to the idea that better monetary policy could have had us back on our feet in a jiffy after 2009, but I'm definitely far from convinced...

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Hard money and the gerontocracy

There is a huge divide between economists and the rest of the populace when it comes to inflation. Economists generally focus purely on the efficiency/growth effects of inflation - whether monetary easing can boost output, etc. Most normal people ignore this issue entirely, and mistakenly equate "inflation" with "falling real wages" (which is absurd, but 99% of people seem to make this mistake). But then there are lots of people who seem to care about the redistributive effects of inflation. These effects are real, and potentially big, and economists often ignore them.

Who loses from inflation? "Net nominal lenders". These are people who own a lot of non-inflation-adjusted bonds, and not a lot of stocks, and who get less of their income from wages. Who are these people? They are old people.

Owning lots of bonds, and not much stock, is the wise thing to do when you're old. Stocks are riskier than bonds, and old people can't afford to take as much risk - this is the core idea of "life-cycle investing". Also, obviously, old people have a lot of savings (and hence a lot of income from investments), and not much in the way of wage income. So old people tend to be hurt by unanticipated inflation, while young people are generally helped.

That is the basic idea behind this new paper by Jim Bullard, Carlos Garriga, and Christopher Waller of the St. Louis Fed. they make a model (basically, a variant on the simple old "overlapping generations" model) in which the government wants to please its citizens, but can't enact Social Security or other methods of income transfer. Instead, the government uses inflation to help whichever group has the heftiest demographic weight. If the country's population is tilted toward the elderly, deflation is used to maximize social welfare; if there's a baby boom on, inflation is the most utilitarian policy.

OK, so how does this toy model connect to the real world? In the real world, we are perfectly able to do things like Social Security, so we don't need to use inflation/deflation to redistribute between the young and the old. But in the real world, different age groups may use the political process to skew monetary policy anyway. Or as Bullard et al. put it:

When the old have more influence over this redistributive policy, the economy has...a lower or negative rate of inflation. By contrast, when the young have more influence...wages are relatively high and [there is] a relatively high inflation rate... 

In this paper, we have allowed [our math model] to “stand in ”for the political processes that society uses to make decisions concerning redistributional policy... 

[S]ociety could use other [policies] to achieve similar goals, so we interpret the …findings here as...taking the existing distortionary tax system as fixed and immutable.

Furthermore, they contend, the broad patterns of inflation and deflation seem to follow the age structures of developed countries. Consider the cases of the U.S. and Japan:

It certainly looks like there's a correlation.

Now, for this to be what's really going on, old people must exert some sort of control over the Fed. We typically think of the Fed as independent, apolitical, and technocratic - not the type of institution that would be swayed by the selfish desires of one cohort of the population to extract rents from its descendants. But who knows; maybe the legendary political strength of the elderly somehow filters through to the brain of the Fed chairman.

And if that's true, it means that elderly countries will have a much harder time fighting recessions. If old people's desire for the redistributive benefits of low inflation overwhelms the need for the Fed to boost growth, then we're going to have a much tougher time ending our current stagnation...to say nothing of Japan, where hard money is much more of a cult even than here in the States, and which has been mired in near-deflation for decades.

So next time you throw up your hands and wonder why the Fed isn't doing more to boost the economy, remember Jim Bullard's paper...it might be all Grandma and Grandpa's fault!

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New Atlantic column: the Alternative Asia Plan

I have a new column up at the Atlantic, about the benefits of large-scale immigration from Asia. Key excerpts:

For most of its history, America was the "Alternative Europe"..."Alternative Europe" was a winning strategy for us. But that strategy is mostly played out...The United States still needs people...But we're not going to get our new people from Europe... 

East Asia, South Asia, and Southeast Asia together have over half the world's population, but Asians make up only 5% of the United States. If our ethnic makeup was a portfolio of stocks, we would be severely underweight Asia. 

Asia is important not just because it is huge, but because it is growing rapidly...Geopolitics, too, will be centered on Asia... 

Adding diversity to our melting pot will speed up America's inevitable and necessary transition from a "nation of all European races" to a "nation of all races." The sooner that happens - the sooner people realize that America's multi-racialization is a done deal - the quicker our political debate can shed its current ethnic overtones and go back to being about the issues... 

But we need to act now, because the window of opportunity for large-scale Asian immigration will not stay open for much longer...We probably have only two more decades in which to transplant large numbers of Asians to our shores. (This is in contrast to Africa, whose high fertility levels will make sure it remains a plentiful source of immigrants for at least another century.)... 

This, then, is the "Alternative Asia Plan." America began as a nation of Europeans and Africans; it is now a nation of Europeans, Africans, and Latin Americans. It must become a nation of Asians as well.

Basically, the reasons for immediate large-scale targeting of Asian immigration is three-fold:

1. Immigration from Europe and Latin america has trickled off, while immigration from Africa will be available essentially indefinitely; the window for Asian immigration is short, and is now.

2. Strong ties with Asia are important for geopolitics.

3. Asian immigration will make our cultural and racial mix more representative of the globe.

20 or 30 years from now, expect to see me writing about the "Alternate Africa Plan"...

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A monetary policy pop quiz

I freely admit that I don't understand monetary policy incredibly well. Sure, I solved some New Keynesian models in my field classes. I remember what happens in equilibrium. And I taught intro macroeconomics a few times, and learned all the standard kiddie models - money demand, loanable funds, AD-AS, long-run and short-run Phillips curves. I saw the "Friedman Rule" derived a couple times. But there is much about monetary policy I don't understand. First, I don't understand all of the particulars of how monetary policy is actually conducted. Second, I don't have much intuition for what happens far away from the equilibria in most models, especially if the equations that define the equilibrium are not linearized. Finally, I do not understand what would happen if this or that assumption of the models I know were dropped, or how plausible alternative, non-mainstream models are. All I know, really, are: A) the linearized equilibria of New Keynesian sticky-price models, similar models like Mankiw's "sticky information" models, B) some "New Classical" models like the Lucas Islands and RBC models, and C) some heuristics and hand-wavey ideas from the age of Milton Friedman and Paul Samuelson.

So I'm really not sure what to think when I read things like this pronouncement from two years ago by Narayana Kocherlakota:

[I]f the FOMC maintains the fed funds rate at its current level of 0-25 basis points for too long, both anticipated and actual inflation have to become negative. Why? It’s simple arithmetic. Let’s say that the real rate of return on safe investments is 1 percent and we need to add an amount of anticipated inflation that will result in a fed funds rate of 0.25 percent. The only way to get that is to add a negative number—in this case, –0.75 percent. 

To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation.

Is this right? Do permanently low interest rates eventually lead to permanent deflation? My instincts say that this cannot be true. My instincts say that printing more money cannot lead to deflation at long time scales - if you wait long enough, an increase in the supply of money will decrease money's value.

So what would happen if the Fed kept interest rates at zero forever? Would inflation rise to a new, higher average level and stay there, or would it keep accelerating until hyperinflation resulted and the real interest rate plunged to negative infinity? I'm not sure.

OK, so let's think about the opposite policy. What if the Fed tried to keep the nominal interest rate at, say, 50% forever? First of all, could it do that, or would it empty out its balance sheet and have to give up, like an emerging market trying to maintain a currency peg? And if a 50% real interest rate caused deflation - which seems like it would certainly happen - then the real interest rate would be above 50%. That would make govt. bonds a much more attractive proposition than the stock market or any other private asset, so it seems like everyone would abandon the real economy and stampede into govt. bonds. with the whole country earning >50% real rates of return, we'd all get rich really quick...this seems physically impossible to sustain for very long.

OK, so you see my problem. I just don't understand the extremes of monetary policy. So instead of making any pronouncements, I want to conduct a pop quiz. This quiz has two short-answer problems. Please answer in the comments, as concisely and succinctly as possible.

Problem 1

Suppose that the Fed targets only one interest rate, a short-term nominal interest rate, and that its only tool is Open Market Operations (it cannot provide any "forward guidance" or communicate with the public at all). Suppose that at date T, the Fed decides to keep the interest rate at zero in perpetuity, and remains unwaveringly committed to this decision for all time > T.

a) Describe the time path of the price level (or inflation/deflation), starting at time T, and going forward to infinity (or until the policy ends).

b) Describe the sequence of Open Market Operations that the Fed will conduct.


Problem 2


Suppose that the Fed targets only one interest rate, a short-term nominal interest rate, and that its only tool is Open Market Operations (it cannot provide any "forward guidance" or communicate with the public at all). Suppose that at date T, the Fed decides to keep the interest rate at 50% in perpetuity, and remains unwaveringly committed to this decision for all time > T.

a) Describe the time path of the price level (or inflation/deflation), starting at time T, and going forward to infinity (or until the policy ends).

b) Describe the sequence of Open Market Operations that the Fed will conduct.


I'm looking forward to reading your answers...


Update 1: Answers are coming in...keep em coming! Mark Thoma sends this video of George Evans explaining a New Keynesian model.

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Hive minds of various kinds

One common racist characterization of East Asians is that they are hive creatures, working and thinking collectively like bees or ants, lacking individuality or creative thought. This trope has always annoyed me, but after I lived in Japan, and saw Japanese people behaving more individualistically than most of the Americans I knew, it really became my pet peeve. So you can understand why I am predisposed not to be particularly charitable toward papers with titles like "National IQ and National Productivity: The Hive Mind Across Asia".

The paper, written by Garett Jones of George Mason University and published last year in Asian Development Review, does not argue that people in East Asian countries are unique in forming a "hive mind". It simply claims that they are better at it. The paper's thesis is that IQ is a fundamental ingredient for many of the things that make a country rich. High-IQ people, Jones argues, 1) are more patient and hence tend to save more, 2) cooperate more, and 3) support more free-market policies.

Cooperation is what Jones labels the "hive mind". It's interesting that he chooses to make the "hive mind" phrase part of the paper's title, since the result about cooperation is only one among several main points in the paper. Why? I'm guessing that the existence of the racist "Asian hive mind" trope is not irrelevant to Jones' choice of title. Economists often style themselves as bold, iconoclastic free-thinkers, willing to think and speak the truth when others are constrained by political correctness. To fulfill this self-image, they often go out of their way to say politically incorrect things. This in turn leads other people (i.e. liberals) to respond emotionally, which reinforces economists' self-image of themselves as rational thinkers, and also reinforces their public reputation as racists, sexists, etc. It's a stable equilibrium. But really it just represents an elaborate form of mugging for attention.

Anyway, on to the substance of Jones' paper. The first main claim is that high IQ leads to patience (think of the marshmallow experiment), and hence to higher rates of savings and higher capital-to-output ratios. Well, that may be true, but I feel like it ignores the time-series aspect of the data. For example, few would argue that Japan's average national IQ has dramatically decreased over the past 30 years. But their household savings rate has plummeted from over 16% in 1980 to 2% or less today:

This means Japanese households now save less than American households. How can we square this fact with Jones' IQ-patience-savings based theory of national wealth? I'm not sure we can. Even if IQ does have an effect on savings, we can't expect it to dominate over long periods of time.

Next, Jones makes the argument that high-IQ people cooperate more, and that cooperation raises national wealth. To support this, he cites a large number of game-theory experiments. But it is far from clear to me that this kind of small-group cooperation can easily scale up to the level of a nation, or even a corporation. Again take the example of Japan. Though most Westerners think of pre-modern Japan in terms of its unified and isolationist Edo Period, that was actually just a brief aberration after a long history of bloody internecine warfare, samurai intrigue and assassination, and factionalist strife. In World War 2, Japan's inter-service rivalry put America's to shame, and military staff meetings would often end in brawls between Army and Navy officers. In modern Japanese corporate culture, the public face of harmony is loosely plastered over a seething morass of factionalism that makes it notoriously difficult for Japanese companies to match the nimble strategic shifts of American firms. And don't even get me started on Japanese politics. 

So while I don't deny that Japan is reknowned for small-group cooperation, even if we grant Jones' hypothesis that this cooperation is driven by high IQs, it does not seem always to scale up to larger groups.

Finally, Jones contends that high IQs correlate with support for free-market policies. (This is interesting, since free-market policies seem to be a sort of individualistic belief, the opposite of what you think of when you hear the words "hive mind". Wonder why "Asian Individualism" didn't make its way into the title?) The data here is a paper by Jones' fellow George Mason economist, Bryan Caplan. However, that paper used data only from the United States. It is frankly absurd to argue that the results can be extended to whole nations. Why is it absurd? Because if you try, you'll see that plain, well-known facts baldly contradict Jones' thesis. Using Jones' IQ data set, Scandinavian countries have higher average IQs than America. So if Jones is right, Scandinavia should be more pro-free-market than America. But the opposite is true. (And East Asian countries, while less socialist than Europe nowadays, were not exactly known for their embrace of free markets in the 20th Century.)

Oh, and let's talk about Jones' data set. His data on national IQ comes entirely from the work of Richard Lynn. In his 2002 book, IQ and the Wealth of Nations, Lynn shows North Korea as having a higher national average IQ than Sweden. First of all, right off the bat, that tells me that Lynn's methodology must be crap on a stick. Second of all, it strongly suggests what that methodology in fact was - it's pretty clear Lynn just assumed that since North Koreans are the same race as South Koreans, they must have a similar national average IQ. In other words, Lynn's "data" basically just uses "IQ" as a polite term for "race". (By the way, many others have looked at Lynn's dataset much more closely than have I, and have reached conclusions similar to mine; see, for example, here and here. Hat tip to Cosma Shalizi for pointing these out in an email).

Anyway, in addition to making a few questionable or downright silly arguments, Jones' paper does not do a lot to dispel the "economists are racists" stereotype. What it does do is strengthen my belief that there is a "hive mind" of a different sort at work in certain corners of the economics profession - a self-propagating set of conventional wisdoms and stereotypes that manages to leap from researcher to researcher, department to department...

Update: I really should also mention that part of my antipathy toward this paper comes from the fact that I'm about to come out with a column in support of higher Asian immigration, which Jones also calls for at the end of his paper. I just do not want to be tarred by association with this kind of "research"...

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EconoTrolls: An Illustrated Bestiary

In your journey through the Econ Blogosphere, you will be beset by a great many curious and interesting species of EconoTroll. At first you may be intimidated by their voluminous use of insider jargon, their rough-and-tumble personal attacks, their strenuous insistence that you read the complete works of their movements' founders before participating in any discussion, and above all their sheer persistence and apparent surplus of spare time. But fear not, noble traveler, for I have taken it upon myself to create this Illustrated Bestiary, in order to prepare you for (most of) the characters you will encounter on your way...
_________________________________________________________________________________

An Illustrated Bestiary of the Econ Blogworld

Libertarians

"Run for your life from any man who tells you that money is evil. That sentence is the leper’s bell of an approaching looter."

How they see themselves:

How the world sees them:

Favorite blog: EconLog

Favorite dead economist: Milton Friedman

Will appear in response to posts regarding: Trade, the environment, third-world labor, patents, immigration, education, the environment, sugary soft drinks, anything really

Craziest idea: Eliminate public education and legalize crack 

Special attack: Soaring rhetoric

Secret weakness: memories of the parties they didn't get invited to in college

Notes: This species of troll appears to be on the wane, as left-leaning college women have broadened their taste in men considerably, blunting the anti-liberal ressentiment that led to an explosion in the young angry libertarian male population...

Post Keynesians

"[I]t is always the outliers that are pushing back the curtain of ignorance. It's not the zebra in the middle of the herd, safely away from predators and mishaps, who finds the new food sources for the herd, or alerts the group to impending dangers."

"I'm not going to provide the links, but I called the crisis more precisely than any of those people."

How they see themselves:

How the world sees them:

Favorite blog: Steve Keen's Debtwatch

Favorite dead economist: Hyman Minsky

Will appear in response to posts regarding: Who predicted the economic crisis first

Craziest idea: That anyone is listening

Special attack: Anger

Secret weakness: the fear that Paul Krugman has said everything they've thought of, but better

Notes: When not engaged in bitter denunciation of the "neoclassicals" who supposedly pushed them out of their once-hallowed place in the halls of academia, this species can actually have quite a lot of interesting things to say...

Market Monetarists

"NGDP, NGDP, NGDP, NGDP."

How they see themselves:

How the world sees them:

Favorite blog: The Money Illusion

Favorite dead economist: No one. The spot is being reserved for Scott Sumner, along with thousands of life-sized terra cotta grad students.

Will appear in response to posts regarding: Monetary policy, macroeconomics, any word containing the letters "NGDP"

Craziest idea: Pegging the monetary policy of the world's leading nation to an obscure and highly illiquid futures market

Special attack: NGDP-style kung fu

Secret weakness: Supply shocks

Notes: Having now effectively swayed the Federal Reserve and won essentially all of the Econ Blogosphere to their way of thinking, the Market Monetarists can hardly be classified as "trolls" any longer...

Republicans

"[T]here are 47 percent...who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them...And so my job is not to worry about those people."

How they see themselves:

How the world sees them:

Favorite blog: The Wall Street Journal editorial page

Favorite dead economist: Art Laffer

Will appear in response to posts regarding: taxes, politics, taxes

Craziest idea: Difficult to say, but probably a tie between bankrupting the country with debt, privatizing the prison system, invading Iraq, cutting funding for science, dishing out billions in pork to well-connected no-bid contractors, throwing millions of harmless marijuana users into nightmarish prisons, repressing gays, disenfranchising black voters, forcing millions of "illegal" immigrants into second-class citizen status, and blocking any sensible policy reform through the abuse of supermajority tactics in the Senate...

Special attack: Taking over the entire United States for three decades

Secret weaknesses: hot liberal chicks, fatty food

Notes: See also History, American, all

Austrians

"Cue hyperinflation in 5...4...3..."

"With real money backed by real gold, America experienced the greatest boom in any nation's history. Things were great and the American people flourished."

"No math needed. Read Rothbard. Economics (human action) is logic. Beautiful, simple logic."

How they see themselves:

How the world sees them:

Favorite blog: Zero Hedge

Favorite dead economists: Ludwig von Mises, Murray Rothbard

Will appear in response to posts regarding: Monetary policy, the gold standard, gold, and possibly pyrite

Craziest idea: That fractional reserve banking and fiat money are a conspiracy by the Rothschild family to take away people's freedom

Special attack: Real money, backed by real gold

Secret weakness: cannot withstand being subjected to intellectual contempt

Notes: For more on this odd and often frightening species of troll, please consult the fieldwork of the intrepid naturalist J. Bradford DeLong...

Modern Monetary Theorists

"Sorry, just to expand that further.....the currency would appreciate, but as there would be no market for government debt the govt would be forced to monetize. The increase in currency in circulation would offset the appreciation due to Acme share price increase. Assuming that the rise in Acme share price was due to the vast increase in demand for those shares as a consequence of the total rejection of govt debt as a savings vehicle, it is possible that the effect on the currency would be neutral..."

How they see themselves:

How the world sees them:

Favorite blog: yours

Favorite dead economists: G.F. Knapp, Wynne Godley

Will appear in response to posts regarding: Government debt

Craziest idea: That all of economics can be derived from a few simple accounting identities

Special attack: Jargon, jargon, and more jargon

Secret weaknesses: Mark-to-market accounting, logic

Notes: It has been said of this species of EconoTroll that holding a discussion with one is akin to "administering a Turing Test to a computer designed to impersonate an acute schizophrenic." Travelers are advised to proceed with extreme caution. Fortunately, this dangerous species has many natural enemies, and often the clever wayfarer can escape in the fracas between a Modern Monetary Theorist and an Austrian, Republican, or New Classical.

Marxists

"[it is] simple self-evident reality that the international monetary system was created by, and remains founded on, US military power. "

"capitalism will not be around for ever. An engine of infinite expansion and accumulation cannot, by definition, continue for ever in a finite world."

How they see themselves:

How the world sees them:

Favorite blog: None. Blogs are tools of capitalist oppression. Comment trolls of the world, you have nothing to lose but your word verification!

Favorite dead economist: Marx, duh.

Will appear in response to posts regarding: (actually, not sure about this one)

Craziest idea: Take your pick

Special attack: David Graeber

Secret weakness: the Postmodernist Essay Generator

Notes: We have not seen this species around much in recent years, but the tales of their infestations in far earlier times still make for lively campfire entertainment...

Scientists

"[M]acro is mostly a 'science' without falsification. In other words, it is barely a science at all. Microeconomists know this. The educated public knows this. And that is why the prestige of the macro field is falling."

How they see themselves:

How the world sees them:

Favorite blog: Noahpinion

Favorite dead economist: Are you kidding? That's the only good kind!

Will appear in response to posts regarding: Economic methodology, statistics, math

Craziest idea: That economists should do experiments

Special attack: the "economics isn't science" taunt

Secret weaknesses: bad posture, the knowledge that economists get paid more than they do

Notes: This troll, which periodically ventures into the Econ Blogworld, attempts to intimidate its enemies by the puffing up of its Physics Credentials in a strange sort of dominance display. This tactic can easily be defeated by immediately presenting the troll with a deceptively difficult or even insoluble math problem, and then ridiculing the troll for failing to solve it in short order.

New Classicals

"Krugman's blog post mainly tells us that his deficit in macro-knowledge persists."

"Get a life, Krugman!"

How they see themselves:

How the world sees them:

Favorite blog: New Monetarist Economics

Favorite dead economists: Frederic Bastiat

Will appear in response to posts regarding: Macroeconomics, history of economics, fiscal policy, stimulus, monetary policy

Craziest idea: That recessions are caused by a combination of A) people forgetting technology, B) people suddenly deciding to take vacations, and C) fear of future socialism by liberal politicians

Special attack: Dissing you anonymously on Econ Job Market Rumors

Secret weakness: the econ job market

Notes: This type of troll, long confined to a series of deep caves in Minnesota, emerged into the surface world and began marauding the landscape in response to attacks by the wizard Krugman. It is the sworn duty of all New Classicals to hunt down their antagonist and make him pay for his crimes. This makes them relatively harmless to travelers not affiliated with this grudge battle...

Uncategorizable

"The magical policy is MY GUARANTEED INCOME plan to auction the unemployed we can put 30M people to work 40 hours per week in less than 1 year this platform immediately reduces the cost of organizing and rehabbing the 12M homes that ARE gong from being owner occupied to rentals and my plan SOLVES for immigration [truncated]" 

How they see themselves:

How the world sees them:

Favorite blog: ...and how many times have you made a single argument against giving taxpayers the freedom to choose which government organizations they give their taxes to you've made ZERO arguments against tax choice don't you think it's just a little strange that you can't even make one argument [truncated] 

Favorite dead economist: ...against tax choice? I don't think it's strange...you know why? Because I know that you really don't want to embarrass yourself. there is no argument about them taking our jobs because IF the employer could hire the cheaper subsidized American he would the left over jobs are ones where there is true unfilled demand    [truncated]

Will appear in response to posts regarding: ...WHY DID YOU BLOCK ME mostly at the low end this field work that robots haven’t replaced yet by his definition my policy is magical bend to my will you haven’t proven yourself enough to get to take potshots why not just root for rampant fires to wipe out the unemployed [truncated]

Craziest Idea: ...when confronted with an insurmountable obstacle it's a good idea to break the obstacle down into smaller components that are easier to handle this is the divide and conquer strategy you'll never convince each and every taxpayer [truncated]

Special attack: ...you are just afraid to engage with my ideas because you know that i am intellectually as far beyond you as homo sapiens is beyond a slug why don't you come over here to boycott the entire government but you certainly will be able to convince every taxpayer to boycott at least one government organization [truncated]  

Secret weakness: nerve gas

Notes: The less said about this most fearsome species of troll, the better.

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Engineering vs. "Science" in macroeconomics

I like Simon Wren-Lewis a lot, not just because he has a beard, but because he's one of the few people still talking about macroeconomic methodology, a subject dear to my heart if not exactly a crowd-pleaser. In this post, he discusses Greg Mankiw's famous partition of macroeconomists into "scientists and engineers".

For those who don't know the history involved, let me give a condensed version. 

1. Before Robert Lucas, macroeconomists used mostly "aggregate" models - stick labor and capital and money etc. into some equations, and out pop GDP and inflation, or something like that.

2. Then Robert Lucas came along and said "These equations might look like they fit the data, but as soon as you try to actually use the equations to make policy, people will see what you're doing and change how they behave. And then your equations will stop working completely." Some people resisted this idea, but eventually it won, and people stopped using the old style of models. (Lucas got a Nobel for this, and for insisting that people use "rational expectations" models...see #3.)

3. People asked Lucas, "OK, so what do we do instead?" Lucas said "Your models have to be based on things that won't be changed by policy. What people want to consume, for example, or the technology that we use to produce things. Those things can't be changed by the government, right?" And everyone said "Uhhh, no, guess not." So Lucas said "OK, base all your models on those things, and you'll be OK. Also, you should assume that people have 'rational expectations'." To which the world replied "Uhhh, OK." Of course, this sort of modeling required the use of microfoundations.

4. The first to take up this challenge was Lucas' friend Ed Prescott. He made a model where the business cycle was caused by changes in technology - if we invent more stuff than usual we get a boom, if we invent less than usual we get a recession. Also, he allowed for business cycles to be caused by changes in people's desire to work - if people suddenly got lazy, we could have a recession. Lucas gave this model his unofficial stamp of approval. (Prescott's model, called the "RBC" model, won him a Nobel.)

5. However, some people came along and said "Wait a second, Prescott's model doesn't fit the facts. In this model, a recession is basically just a big shortage of everything; in a shortage, inflation should go up. But in the past, especially the Great Depression, inflation often goes down in a recession. Recessions must be caused by some kind of general glut, not a general shortage. In other words, there must be some kind of 'aggregate demand shock'." To which the RBC people replied: "Oh yeah? Let's see you put that in math!"

6. So the people who wanted to model aggregate demand shocks thought of some plausible ways that a "general glut" could happen. Greg Mankiw, for example, came up with the idea that "menu costs" could keep people from changing prices. Other people focused on contract theory, money illusion, and other "frictions" that could cause general gluts. But these ideas, though probably pretty realistic, were all very very hard to put into the type of model that Prescott had used (called a "DSGE" model).

7. Then came along a guy named Guillermo Calvo, who thought of a fix: Just assume that some magical force (the "Calvo fairy") keeps people from changing their prices, and voila! Aggregate demand shortage! This mechanism, although obviously a fantasy, was very easy to put into DSGE models. So a bunch of people started doing that. Mike Woodford, for example, used the idea to make models of how monetary policy could stabilize the economy, canceling out shocks to aggregate demand while also guarding against inflation. These models came to be known as "New Keynesian" models, since Keynes had also argued that aggregate demand was what caused recessions. They were also called "saltwater" models, because they were made primarily by people on the coasts, especially at Harvard.

8. The RBC people, who were also called "New Classicals" or "freshwater" (since many worked at the University of Minnesota and the University of Chicago), fought back, deriding the New Keynesians, or saying that the new Calvo-based models didn't satisfy the Lucas Critique.

And here we are today. Wow, OK, that took slightly longer than I thought, but anyway, let's go on.

The 2006 paper by Mankiw about "scientists vs. engineers" should be seen in this historical context, as an attempt to make peace between New Classicals and New Keynesians. If you read it, especially after reading the earlier Robert Barro "good guys and bad guys" diss paper, you'll see it's a very political document. It's basically saying "Look, you New Classical guys are like scientists; you're trying to understand how the world works on a deep level. We New Keynesians are more like engineers; our models may not match what's really going on at the micro level, but they fit the big macro facts, so they're useful for policymaking." Very politic...remember, scientists are generally thought to be smarter than engineers. In fact, Mankiw's distinction reminds me very much of Stephen Jay Gould's attempt to get anti-evolution folks off his back by dividing science and religion into "separate magisteria".

By defending New Keynesian models as "engineering", Mankiw was - I think - essentially admitting that the New Keynesian movement had not really satisfied the Lucas Critique. The DSGE structure of the models was a head-fake in the direction of microfoundations, but by including things like Calvo pricing, the New Keynesian models were really more in the spirit of the old, pre-Lucas "aggregate" models. But the "scientists vs. engineers" idea was also a kind of defense of that old "aggregate" approach - it said "For the purposes of short-term policy making, all you really need is a model that fits the macro data; you don't need something that really represents what's going on at a deep level." In other words, it was very, very similar to the stuff that Simon Wren-Lewis writes on his blog all the time.

But I do not like Mankiw's "scientists vs. engineers" distinction, because although I think it gets the "engineers" part right, I don't really think what the New Classical folks do is especially similar to what actual scientists do. (Mankiw is trying to be a nice guy, a uniter instead of a divider. I am a different sort of guy, for whom dissent and argument are a natural part of the truth-finding process. So don't be surprised if I am less politic than he.)

The whole idea and the whole appeal of New Classical models is that they are microfounded on things that don't change with respect to policy - human tastes and preferences, and technology. The New Classical macroeconomists do often try to match the parameters of these microfoundations to micro data (this is called "calibration"). But rarely if ever do they bother to see if the equations themselves are an accurate description of how economic agents behave. As a result, as I argue in these old posts (Post 1, Post 2), the microfoundations in RBC-type models are almost certainly terribly misspecified descriptions of microeconomic behavior and markets. 

As my advisor (and Greg Mankiw's advisee) Miles Kimball tweeted today when we discussed this topic: "the 'micro foundations [used by New Classicals are] usually not very serious, they're often more like imaginary engineering than science."

Note that if the microfoundations are misspecified, it doesn't matter whether a model satisfies the Lucas Critique or not. Even if "tastes and technology" really are policy-invariant things, if tastes and technology don't really work the way the model says they work, the model will not give you useful advice about policy.

Now, terrible microfoundations might not lead to a terrible model. But if by some lucky happenstance, crappy microfoundations produce a model that matches the macro facts, then it might as well be one of those "aggregate-only" models that Greg Mankiw labels "engineering". In this case, RBC has no theoretical advantage over a New Keyneisan model.

So basically, I charge that the New Classical/RBC/freshwater macroeconomics paradigm is not really science, and not really like science...not yet, anyway. In science, evidence rules all; if a model doesn't fit the evidence you toss it out. And I don't think the microfoundations we have seen in freshwater models pass muster (yet). Until they do, I think that "engineering" - the aggregate models of VARs, or the Calvo-pricing New Keynesian models, etc. - are all we've got.

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