Lars Syll approvingly quotes Hyman Minsky denouncing IS-LM analysis as an “obfuscation” of Keynes; Brad DeLong disagrees. As you might guess, so do I.
There are really two questions here. The less important is whether something like IS-LM — a static, equilibrium analysis of output and employment that takes expectations and financial conditions as given — does violence to the spirit of Keynes. Why isn’t this all that important? Because Keynes was a smart guy, not a prophet. The General Theory is interesting and inspiring, but not holy writ.
It’s also a protean work that contains a lot of different ideas, not necessarily consistent with each other. Still, when I read Minsky putting into Keynes’s mouth the claim that
Only a theory that was explicitly cyclical and overtly financial was capable of being useful
I have to wonder whether he really read the book! As I read the General Theory — and I’ve read it carefully — one of Keynes’s central insights was precisely that you wanted to step back from thinking about the business cycle. Previous thinkers had focused all their energy on trying to explain booms and busts; Keynes argued that the real thing that needed explanation was the way the economy seemed to spend prolonged periods in a state of underemployment:
[I]t is an outstanding characteristic of the economic system in which we live that, whilst it is subject to severe fluctuations in respect of output and employment, it is not violently unstable. Indeed it seems capable of remaining in a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.
So Keynes started with a, yes, equilibrium model of a depressed economy. He then went on to offer thoughts about how changes in animal spirits could alter this equilibrium; but he waited until Chapter 22 (!) to sketch out a story about the business cycle, and made it clear that this was not the centerpiece of his theory. Yes, I know that he later wrote an article claiming that it was all about the instability of expectations, but the book is what changed economics, and that’s not what it says.
More of my Business Insider interview, this time about monetary policy, here.
Tomorrow there’s a conference on Rethinking Economics at NYU, live streaming here. I’ll be talking about bad macro with Willem Buiter and Jamie Galbraith from 1 to 2:30.
I’m going on Channel 4 in a couple of hours, and doing more homework. One thing that is likely to come up is the fact that some reputable economists (pdf) have concluded that Scotland-on-the-pound would be OK. What’s my answer?
It is, in short, that this analysis doesn’t seem to reflect the unpleasant things we’ve learned from the euro crisis. To be blunt, the reassurances from the working group sound like the kind of thing euro defenders used to say pre-2010. Unfortunately, we’ve discovered that sharing a currency without sharing a government is a lot more dangerous than even euro skeptics realized.
We are told, for example, that Scotland need not worry because its fiscal position is relatively strong. But that was true — or appeared to be true — of Spain and Ireland before the euro crisis. What we’ve learned, alas, is that a seemingly strong fiscal position can evaporate very fast in a crisis — especially if banks need to be bailed out. In that context, it’s interesting to note that Scotland’s banks are very big relative to the size of the country, because they serve much of the UK. Nothing wrong with that as long as you have a political union; but without, what’s to prevent an Irish-type situation in which a small country is trying to bail out big banks?
We’re also told that the Bank of England would of course provide liquidity — in effect, act as lender of last resort — to Scottish banks. Are we sure about this? It took the ECB years to step up to the plate in the euro crisis, in part because it turned out that you needed a lender of last resort to governments as well as fInancial institutions; even now, the ECB’s efforts rely to an important extent on a bluff, in the sense that nobody knows what would happen if OMT were actually required. Assuming that England — possibly an England run by a Conservative-UKIP coalition! — would be there when needed is a big leap of faith.
An earlier version of this blog post misspelled the given name of the president of the National Front in France. It is Marine Le Pen, not Marie.
Let me say that I do understand why some people would like to be out of David Cameron’s UK — just as some of us coastal liberals occasionally wonder what America could be like without the old Confederacy. But getting currency realities right is crucial. The European project is a noble idea, and the euro is a grand gesture in support of that idea — but the willingness to ignore macroeconomics for the sake of that grand gesture may end up making Marine Le Pen president of France. You really have to get these things right, or else.
The FT has a pretty decent article on the emerging doctrine of “Draghinomics”, which looks a lot like Blanchardnomics, which looks a lot like Krugmanomics — hey, we all studied macro at MIT in the mid 1970s. But I was struck by this bit:
One other senior eurozone official attending the Italian forum which gathers together policy makers, business people and academics said: “Structural reforms are key. Those countries that have made these efforts are performing better: Ireland, Spain and Portugal. Italy and France should think a little bit about this.”
Yep, Spain offers a useful lesson for France:
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For those of us not part of the structural reform cult, the story of Spain is this: the country experienced a full-scale depression when its housing bubble burst; this depression has led to a gradual, painful “internal devaluation” as labor costs come down, making Spain more competitive within Europe; and as a result, Spain is finally starting a slight recovery, with its growth rate in recent quarters (but only in recent quarters) higher than France. To see this as a triumph of structural reform requires preconceptions so strong it’s hard to see why you would even bother looking at data.
Declaring Scotland independent would mean a big disruption of existing economic and financial arrangements. As Simon Wren-Lewis says, the preponderance of professional economic opinion is that this disruption would leave Scotland worse off, but that is a point we can argue. However, that is not the argument the independence movement is making; what they have been telling voters is that there would be no disruption — in particular, that Scots could continue using the pound, and that this would pose no problem.
This is an astonishing claim to make at this point in history. Economists (starting with my late colleague and friend Peter Kenen) have long argued that sharing a currency without fiscal integration is problematic; the creation of the euro put that theory to the test. And the results have been far worse than even the harshest critics of the euro imagined, with euro Europe doing worse at this point than Western Europe did in the 1930s:
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And an independent Scotland using the British pound would arguably be in even worse shape. Europe has somewhat stabilized recently thanks to Mario Draghi’s support for debtor countries — but Draghi is able to do this, in large part, because he is answerable to the whole euro area, not just Germany. An independent Scotland would be dependent on the kindness of the Bank of, um, England, with no say whatsoever in that bank’s policy.
I’ve read quite a lot of the independence literature, and it shows no appreciation for the dangers involved. What Scottish voters should do is look hard at the experience, just across the North Sea, of divorcing currency from statehood; it’s not encouraging.
I’ve often remarked on the remarkable tenacity of the inflationista doctrine (Santellinomics? CNBCnomics?) among investors, given the fact that believing the people who have been warning about soaring inflation and interest rates would have lost you a lot of money. How much money? Cordell Eddings at BrookingsBloomberg puts a number to it: $1 trillion in gains on U.S. government bonds since QE began. Actually, this is arguably a low estimate; if you really believed in this stuff, you wouldn’t just have failed to hold US debt, you would have bet against it — as, for example, John Paulson (as described in the article) and Eric Cantor did.
And let’s be clear: those of us who understood the nature of liquidity traps predicted low rates of both interest and inflation from the beginning — in the face of loud declarations that this was absurd, that big deficits and rapid expansion of the monetary base would of course be inflationary. This has to be one of the most dramatic examples in the history of economics of a surprising, successful prediction.
Yet as far as I can tell, not one of the people who signed the infamous 2010 letter accusing Bernanke of debasing the dollar has admitted having been wrong, or shown even a hint of reconsidering. More to the point, perhaps, the doctrine has retained much of its hold. Look at the comments on that Bloomberg piece; most of them either declare that we do too have high inflation, but the feds are hiding it in Area 51, or that the data don’t matter because the Fed is manipulating rates (hey, it can do that without adverse consequences? Then why not?)
As I’ve written on a number of occasions, I think it’s fundamentally about affinity fraud. The consumers of this stuff like the attitude of the inflationistas — their hostility to helping the poor, their disdain for snooty professors, etc. And so they trust them no matter how bad their past results have been.
Very busy, so no substantive posting today. But I did want to share a thought from the past few days. I posted about the surprisingly good news, at least so far, on Obamacare premiums for 2015 — and as usual was met with a wall of rage from the right. The idea that this thing might be working inspires a level of anger nothing else (except maybe climate science) matches.
No news there. Nor is it news that such people know things that ain’t so. But there’s something I’ve noticed from the combination of reactions to what I write and researching past coverage of Obamacare. It goes like this: a lot of the untrue beliefs people have about Obamacare come not so much from outright false reporting as from selective reporting. Every suggestion of bad news gets highlighted — especially, of course, but not only by Fox, the WSJ, etc.. But when it turns out that the news wasn’t really that bad, these sources just move on. There are claims that millions of people are losing coverage — headlines! When it turns out not to be true — crickets! Some experts claim that premiums will rise by double digits — big news! Actual premium numbers come in and they’re surprisingly low — not mentioned.
The result is that most news consumers — who form impressions rather than trying to work out details — have the sense that it’s been all bad news. This is true even for people who don’t rely on Fox — I get asked about the scary premium hikes by people on the Upper West Side! And of course for those who do get their news from Fox, well, they know, just know, that Obamacare has reduced the number of Americans with insurance and caused premiums to double or something, even though even their favorite news source isn’t saying such things.
We need a term for beliefs based on reports that have been superseded; maybe fossils instead of zombies. Anyway, it’s striking.
Claims that there is a huge “skills gap”, that much of our unemployment is structural, reflecting an inadequately prepared work force or something like that, generally rest on claims that we have an unusual situation in which many jobs are vacant even as many workers remain unemployed. For example, at the beginning of this year Jaime Dimon co-authored a piece on the alleged skills gap that began,
Today, nearly 11 million Americans are unemployed. Yet, at the same time, 4 million jobs sit unfilled. This is the “skills gap”—the gulf between the skills job seekers currently have and the skills employers need to fill their open positions.
Of course, there are always both unfilled job openings and unemployed workers; claims of an exceptional skills gap would only have some justification if the tradeoff between unemployment and vacancies — the so-called Beveridge curve — had worsened substantially. And for a while there were many claims that this had in fact happened.
But some analysts argued that this was a misreading of the data — the Beveridge curve always looks worse during a recession and the early stages of recovery, then returns to normal as recovery proceeds. And sure enough, researchers at the Cleveland Fed find that the supposed shift in the Beveridge curve has vanished:
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And, refreshingly, they even indulge in a bit of discreet and forgivable snark:
Observers have followed the Beveridge curve during the recession and the recovery to glean some insight into potential structural changes in the labor market. Whether or not a shift implies an actual structural change—specifically, a decline in the matching efficiency of the labor market—is still debatable. However, one thing is clear: there is no shift to begin with.
Chris Dillow makes a good point about economics and maybe public affairs in general: There is often a tendency to go for simple stories that aren’t true –as H.L. Mencken said, “For every complex problem there is an answer that is clear, simple, and wrong.” But it also often happens that the answer is simple, but people refuse to accept that simple answer. That is, the reverse of Mencken’s proposition also applies: For every simple problem there is an answer that is murky, complex, and wrong.
Dillow uses stock-picking as an example; I find myself thinking (surprise) about macroeconomics. Why is output so low and jobs so scarce? The simple answer is inadequate demand — and every piece of evidence we have is consistent with that answer. But Very Serious People pretty much refuse to accept that simple answer; it must be a workforce with the wrong skills (so where are the premium wages for workers with the right skills?), geographic mismatch (where are the states with booming wages?), and so on. It must, they insist, be a difficult problem with no easy answers — when everything says that “spend more” is the answer, full stop.
A lot of this is political — demand-side stories are inconvenient for those who want to use the slump as an excuse to dismantle social protections etc. But I don’t think that’s all of it; there is a deep desire on the part of people who want to sound serious to believe that big problems must have deep roots, and require many hours of solemn deliberation by bipartisan panels.
So how do you know whether public discourse on an issue is ignoring the complexities or introducing gratuitous complexity? Do your homework! It’s really that simple.
Ezra Klein directs us to the latest from the Kaiser Family Foundation, which asks what the average Obamacare 2015 premium increase will be for those places for which we have full information — and finds that premiums will actually decline slightly. Ezra tries to get us to appreciate just how good the Obamacare news has been with a thought experiment:
Imagine taking a time machine back to 2010 and telling Republicans in Congress, who were arguing that the CBO was wildly underestimating Obamacare’s cost, that the law would be cheaper than predicted and, at least in the states that accepted its Medicaid dollars, cover more people than the Congressional Budget Office thought. After the laughing and mocking and the calling of security, let’s say you offered this prediction in the form a of a bet. What odds do you think Obamacare’s critics would have offered? 2:1? 5:1? 10:1?
But you don’t have to go back to 2010. Look at John Cochrane in late 2013, taking it for granted that Obamacare would implode in a death spiral within a few months. Look at The Hill just four months ago, telling us that double-digit premium hikes were coming.
One question we might ask here is, why is the news so good? The answer, I’d suggest — although I hope the real experts will weigh in — is that we’re actually seeing the opposite of a death spiral; call it a life spiral. For one thing, the huge surge in enrollments late in the day meant that the risk pool this year is better than insurers expected, and they now expect 2015 to be better still. Also, importantly, big enrollments mean that more insurers are entering the market, increasing competition. And, of course, the better the deal the more people will sign up: success feeds success.
Another question we might ask: Is our conservatives learning? Are those who bought into the death spiral stories, who seized on every hint of bad news, asking themselves how they got it so wrong? Are they, maybe, considering the possibility that they’re listening to the wrong people, that maybe Jon Gruber knows what he’s talking about and John Goodman is a hack?
The stakes in this year’s midterms aren’t as high as in some elections; Republicans are sure to retain control of at least one house, Obama will still be president, so gridlock continues. Still, some things will be at stake — for example, whether the Congressional Budget Office turns into an adjunct of the Heritage Foundation. And whatever happens, it will be held up as giving somebody or other a mandate for something or other. So it’s definitely interesting to watch.
What also makes it interesting for social science wonks is that there is now a clear divide on methodology. Basically, how much weight should you put on polls, versus fundamentals like the known party lean of states. This matters a lot because the map gives Republicans a big advantage (in part because Democrats won in some normally very red states in 2008), but polls have tended to look somewhat better for Democrats than the fundamentals would lead you to expect.
So we have a range of models. The Times model is the most Republican-leaning — it gives 60 percent odds of Republican control, down thanks to the interesting developments in Kansas. Sam Wang at Princeton is at the other end, although I’m finding his latest update a bit confusing — I think he’s saying 90 percent odds of Democratic control if the election were held today, but only 65 percent for election day, since stuff happens.The Monkey Cage says 53 percent Republican chance, Dailykos says Dems 56 percent, Huffington Post was saying Dems 52 percent before the Kansas upheaval.
I don’t have a dog in this fight — not my field, and I haven’t done the homework to make my own judgment about different approaches. It is interesting that nobody seems to be predicting a GOP blowout, despite the map and Obama’s low ratings — which is consistent with the view that presidential approval ratings don’t mean what they used to thanks to extreme partisanship.
Anyway, fun stuff, except that this is my country and the fate of the world hinges on having the right people in office. Enjoy.
“It is ideas, not vested interests, which are dangerous for good or evil.” So declared Keynes at the end of The General Theory; although I don’t think he appreciated the extent to which vested interests can buy the ideas they want to hear. Anyway, this seems relevant to Brad DeLong’s flashback to 2009, when I was lamenting bad ideas from freshwater economists and Justin Fox was dismissing them as having no influence on policy.
As Brad says, it turned out that the bad ideas mattered a lot; Henry Farrell and John Quiggin (pdf) explain why. The reality was that the Keynesian policy consensus of early 2009, such as it was — and it wasn’t much, even then — was fragile. Key actors with real power — Republicans in the US, Germany, and the Trichet-era ECB — were strongly anti-Keynesian by instinct. They were temporarily bowled over by the vocal Keynesian consensus among economists who had strong public platforms, but were ready to grab hold of seemingly credentialed people willing to offer justifications for austerity and hard money.
And a quorum of economists obliged. Alesina-Ardagna expansionary austerity never got a lot of traction among policy-oriented macroeconomists, but the Harvard connection meant that it was good enough to give the austerians an intellectual fig leaf; the same for Reinhart-Rogoff and the 90 percent of doom. Having John Cochrane insist that Keynesian economics had been proved wrong and nobody was teaching it helped the austerian case even though it was completely untrue; so did having Robert Lucas accuse Christy Romer of being intellectually corrupt. Bad economic ideas didn’t really drive bad policy, but they acted as enablers for bad policy instincts.
And the people who promulgated these bad ideas therefore have a lot to answer for.
