Cost-Push

Postmodern-ish Economics

Mon, 22 Oct 2012 21:11:56 -0400

One of the themes I’ve been running with lately is the need for a serious meta-appraisal of the economics discipline from the perspective of how vested money and power in society directly or indirectly shapes schools of thought. I don’t want to get too far into the weeds of poststructuralism and Foucault and “but, like, it’s all about power structures dude” though.

This weekend the New York Times ran a profile on Glenn Hubbard ~~essentially~~ actually called him an economic mercenary. I’m disappointed that the profile didn’t follow this thread and instead launched an unnecessarily personally attack against the guy, because there may be some merit behind the mercenary hyperbole.

Case in point, I’ve seen Hubbard blast president Obama for the shoddy recovery with a straight face, even as Reinhart & Rogoff (who aren’t liberal hacks by any means) have put together empirical evidence that financial recessions are worse than regular ones, and post-2008 fits the recovery curve of a financial crisis almost exactly.Of course there’s also another study that says “not so”, and Hubbard and other Romney supporters have been quick to cite this while ignoring the other. Noahpinion did an excellent breakdown of the two studies already, which basically says a. you can make data say anything you want it to if you pick and choose the right kinds, and b. Reinhart and Rogoff are more convincing i.e., financial recessions really are different.

I know Hubbard is a smart and thoughtful guy, so when he writes off excellent research for the sake of blasting the president, I think he really is acting as a mercenary, and he’s not the only one. It takes a certain kind of intellectual contortion to claim to practice economic science* and maintain the kind of selective vision which denies good evidence that would interfere with your worldview, and indirectly the worldview of the people that pay for your studies and consulting gigs.

In a sense, investigating the politics of the Hubbards and Krugmans of the world is not what I’m after because the politicization of their thought is a non-issue. They’ve chosen to expose themselves in this way. They are just the surface current of the really interesting dynamics that lie beneath. Hubbard is an overtly political economist by choice but you would have to be stupid not to realize how lucrative it can be to support the worldview of vested interests in one way or another. To put it another way, I bet one of the reasons there are no saltwater/freshwater opposing schools of physics—the science economics loves to compare itself with—is because there’s not a lot of vested interest in making sure Newtonian gravity conforms to your worldview.

*These are Greg Mankiw’s—another prominent Romney supporter—own words that go in the front of his undergrad textbooks. But to his credit, or perhaps not, Mankiw tends to sink into the wallpaper whenever the Romney camp says something economically outrageous, like having sympathy for going back on the gold standard.

Postscript: Reinhart & Rogoff basically call out the Romney team for their selective vision in this Bloomberg Op-Ed.

Post-Postscript: No sooner do I draft this thing, and Krugman writes a post on essentially the same topic. But Krugman isn’t immune from having selective vision, including some Reinhart-Rogoff work that worked against a Keynesian/Krugman worldview.

4(e pluribus unum). The Capital of capital exhibit at the Museum...

Mon, 16 Jul 2012 14:34:02 -0400

4(e pluribus unum). The Capital of capital exhibit at the Museum of the City of New York.

isomorphismes: In other news, Art Laffer has become a parody of...

Fri, 13 Jul 2012 13:36:01 -0400

isomorphismes:

In other news, Art Laffer has become a parody of himself.

Deliberately misrepresenting the flat tax. Making it sound like that is a tax cut for most Americans, when in fact the effective tax rate for everyone making under $100k is already under 12%.

If what you really want to do is raise taxes on the poor and cut taxes on the rich, why don’t you just come out and say it, Art?

Conflating simplicity of tax returns with elimination of tax brackets.

In FY2008, 34% of Americans owed no income tax. Of course, if you push their rates up, the rich don’t have to pay as much. Duh!

Poverty is caused by high tax rates and welfare. Quick, tell Somalia!

Brings up sin taxes as a distraction, like a magician’s trick.

No estimates of how much income is being “accelerated” from 2013 into 2012, only statements that the number is huge.

Of course when the tax rates rise on the rich, they’re all going to flee the US. Because ceteris paribus it’s in their interest to do so. All other things considered, the first thing I do every morning is ask what tax rates are on various activities I could engage in and various countries I could move to.

The sign is negative, therefore the magnitude is large.

Also austerity is equivalent to growth, although later on he contradicts that and says a lot of government spending is necessary. (Wonder whether he wants to cut health benefits, elderly benefits, military protection, or government jobs?)

Some government spending is wasteful (again no discussion of magnitude—.00001% or 10%?) therefore austerity.

Ricardian Equivalence, because I say so.

Twisted reasoning like “Poor people are poor because of disincentives to work, but rich people would pay all of their tax if only you didn’t ask so much of them.” However not going to prove any of that, it’s just “common sense”.

This passes for argument: “Come on, you know that.” (I count four.)

Because, incentives. Because, markets.

If you laugh and squeal while you say it, you’re right.
 
I would love to have a less cynical view of the world than that any yahoo who claims taxes can be vastly reduced on the rich with no negative consequences to anyone gets banquets in his honour, funding from “think tanks”, and handed the reins of policy. But this sh*t tests me.

Searching for something positive to say…at least he said the goal of government is to get poor people to be prosperous.

“Agents are assumed to form rational expectations based on...

Sun, 10 Jun 2012 16:18:29 -0400

“Agents are assumed to form rational expectations based on complete information…”

Note: Obviously this is not my own work. I’m unsure about the source, but the author is credited in the illustration.

Let's Call it A Currency War?

Mon, 04 Jun 2012 13:51:00 -0400

I’m just spitballing here, but how about this variant on Matt Yglesias’s FED/ECB foreign-exchange war scenario. In his story, the ECB and the FED somehow get into a currency war that forces each to buy tons of the others’ assets, and therefore provides the monetary stimulus both currencies need. I hesitate to speculate on where we would find the Gavrilo Princip to spark such a thing.

On the other hand, as long as we’re speculating, what if things keep heading south in the Eurozone and we get a huge flight-to-quality in the Dollar? I think it’s very reasonable to say the Fed doesn’t want a sharply appreciated Dollar right now, and that would mean the Fed starts the presses. Might the Fed decide to set a floor on the Dollar, Switzerland-style? I doubt that particular scenario because the Dollar is an entirely different animal than the Franc for obvious reasons. Also, as pointed out here, the Swiss National Bank didn’t actually have to buy many Euros; the market decided this policy was credible and gave up buying Francs. That’s bad news for using Forex intervention as a monetary stimulus.

Again, this is all speculative. This summer is going to be very interesting for macroeconomics, with the Eurozone on life support, QE3 maybe peaking around the corner, China slowing down, etc etc etc. Scenarios like this outline that maybe—just maybe— things might go wrong in the right way (for some of us anyway).

EDIT: FT Alphaville calls the US Dollar Index the most important chart in the world right now, and it speaks to my point. The dollar is in high demand, and there’s already not enough to go around. We need some more. The question is how to get the Fed to do that.

"How were they compensated on an annual basis? Were they paid a salary and a bonus, and was the bonus..."

Thu, 31 May 2012 16:16:00 -0400

“How were they compensated on an annual basis? Were they paid a salary and a bonus, and was the bonus a function of the profitability of the group, or was the bonus a function of the hedging ability of the group? If you can answer this question — and it definitely has an answer to it; it’s not a metaphysical question — you will have your answer as to whether it was proprietary trading or hedging. I don’t know the answer, but I know the answer exists, and I know that certainly the government can get that answer with a single phone call.”

- Andrew Lo (MIT), speaking about JP Morgan

Do you know what's best for you?

Tue, 29 May 2012 14:42:00 -0400

I was having a discussion with a friend ( a so-called political scientist) the other day, and I felt compelled to defend my discipline, which is unusual considering the healthy doses of skepticism I apply to economics daily. So I’m going to make a small digression into the realm of normative judgments (BAD!) and moral philosophy.

Way back in 2009, I was a political science major and I enjoyed it for the most part. What bothered me though—especially in retrospect— was the sloppiness of some of the arguments I was encountering. How is it that a discipline that calls itself political science can get away with loosely defining a small group of people as elites that are somehow in the position to manipulate the feelings and motivations of the unsuspecting masses?

The elite argument seems plausible to me, but only in the sense that elite is defined entirely by context or not at all and simply left to the reader’s assumptions, and the argument becomes plausible because we can insert whatever meaning we see fit instead of making the author go through the trouble of explaining what he/she means by elite.

It’s sloppy, plain and simple. It’s one of those arguments that makes sense from a distance but not at close range. Tell me who is an elite in the USA today. Is it the Koch Brothers? is it the 1%? The answer is clearly yes, but is it because they have great wealth, access to lawmakers, or are they just skilled at bamboozling the general public (or can pay people who are skilled at deception).

It’s not just sloppy, it’s also smacks of being condescending. For all the justified criticism against the ways economics chooses to theorize human behavior, it usually assumes people know what is best for themselves because people are rational, utility-maximizing, etc. A good deal of political theory assumes people don’t know what is good for themselves. Then again, a lot of alternative economic thought also does this. Karl Marx relied explicitly on the idea of workers having a “false-consciousness.”

Finally, and this is why the topic is relevant for me, I believe a lot of progressive/liberal economic policy leaves itself open to this critique. Whenever Elizabeth Warren claims that consumers need to be protected from predatory lending, the right answers that liberals think poor people are stupid. Of course, I think this is bogus and there is a difference between being stupid and being deliberately misled. But whenever I ask myself, “why does the working class consistently vote against its own interests?”, I am making the assumption that I know what is best for some people and they do not. It makes me uneasy, and I think it’s a real problem when trying to sell progressive policy to the people that arguably stand to benefit.

"Research is a Wall Street product. Back in the days of the dot-com bust, the charge was that this..."

Fri, 25 May 2012 10:46:23 -0400

“

Research is a Wall Street product. Back in the days of the dot-com bust, the charge was that this product was worthless – designed to sell shares, not provide a true picture of the health of companies or the likely prospects of making money by investing. The charge in the Facebook case is that the research is valuable – and therefore should have been made generally available, not only to select clients. The logical end-point of this kind of reasoning is that the Wall Street houses shouldn’t provide research – they should just offer product and let the clients decide what they want to buy, without “selling” it on the merits. Except this is exactly what the major Wall Street houses did with the mortgage-backed CDOs and other structured products that destroyed the world economy. And they have been criticized for that as well.

All of this rumination is not intended to serve as a defense of Wall Street’s practices. It’s intended to argue that trying to insure that information disseminated by Wall Street is both accurate and generally available is a fool’s errand. Accurate information is valuable, and therefore expensive. You can police the margins – and those margins may well have been crossed in this case – but the problem in intrinsic to the fact that information asymmetries arise naturally all the time, and information asymmetries are the main way people make money.

Ultimately, the way to make Wall Street work better for everybody is probably just to tax it more heavily.

”

- Noah Millman (via pegobry)

Two things. First, here’s the Fed’s ten year forward...

Wed, 23 May 2012 15:57:00 -0400

10YBreakeven over past 3 years

10Y Breakeven past month

Two things. First, here’s the Fed’s ten year forward breakeven rate over the past three years. This is interesting because it basically tells us the market’s inflation expectations by taking the difference between normal and inflation-indexed Treasury yields (explanation here).

What’s more interesting—and as I’ve tried to illustrate on this graph— is that QE and QE-esque programs seem to follow prolonged dips. When the breakeven falls below two percent for some time the large scale asset purchases have followed. It’s hard to see given the axes on this graph, but that’s because I don’t have access to full Bloomberg data. (who do you think I am?)

Now here’s where it gets really interesting. As the second graph shows, we scraped the 2 percent mark last week. The rate has recovered a bit since then, but the prolonged trend is definitely downward—look back at the first graph to drive this home.

So is QE3 coming or is she going to stand us up again? Definitely maybe. I’d keep an eye on where the breakeven rates are going over the next month. Keep your wallet on hand to buy some equities in July!

Note: You could also look at alternative indicators, like the 5year-5year breakeven rate, and it would tell you essentially the same thing for QE2/Twist. They currently haven’t come down quite as far as the ten-year though. If you believe the Fed cares about long-term inflation expectations, then the ten-year is as believable an indicator as the others.

Edit 5/24: Changed my wording a little because I was being a bit sloppy before.

Weirdly hilarious price stability video from the ECB. Not...

Tue, 22 May 2012 15:04:43 -0400

Weirdly hilarious price stability video from the ECB. Not available in Greek as far as I can tell. I guess they’ll never know why <2% is so important for them.

In regards to previous post, this is sorta relevant. Actually I...

Mon, 14 May 2012 18:27:00 -0400

In regards to previous post, this is sorta relevant. Actually I just find excuses to post it in any context.

Gotta resist the urge to reblog every FT Alphaville post, but...

Mon, 14 May 2012 18:25:11 -0400

Gotta resist the urge to reblog every FT Alphaville post, but this graph is just too good to pass up. The ECB is undershooting (!) it’s inflation target and still won’t budge on easing. The beatings will continue until bond yields improve…

ftalphaville:

“Failed monetary policy — the one graph version”… That’s The Market Monetarist, and it is Joseph’s favourite monetary policy chart. More detail at the link.

Photo

Sun, 13 May 2012 14:04:43 -0400

"In other words, JP Morgan Chase, entirely without any help from the government has lost, in this one..."

Fri, 11 May 2012 19:21:35 -0400

“In other words, JP Morgan Chase, entirely without any help from the government has lost, in this one set of transactions, five times the amount they claim financial regulation is costing them.”

- Barnie Frank piles on. HT Peter Thal Larsen. (via ftalphaville)

Empirically confirmed relationship: The Confidence Curve Any...

Thu, 03 May 2012 02:23:15 -0400

Empirically confirmed relationship: The Confidence Curve

Any class with ‘studies’ in the title shifts both curves exogenously to the right.
High level math classes shift the curves to the left, possibly into negative territory.

No Sheila Bair, the Fed isn't pushing us into another bubble

Mon, 23 Apr 2012 16:21:00 -0400

EDIT: Asute reader (wow! a reader!) moiracathleen points out I misspelled Bair’s name—I said Barr originally. Whoops, that was a mistake on my part. I’ve fixed it. What I haven’t fixed is the rest of the post, because I think my assessment of Bair’s opinion doesn’t rest on the way I’ve spelled her name. As for the fact that Greenspan never finished his PhD…the internet seems to believe otherwise. I’m also not talking about Greenspan, whose possible missteps are the subject for many a possible future post. I also don’t disagree with everything Bair has to say about the financial sector. I happen to think investment banking could use a strong—FDICesque— father figure. I do think she’s wrong about interest rates right now and debtpocalypse in the short/medium term. See below.

____

Sheila Bair (former FDIC chair in case you’re asking) joins the weird traveling choir of bond vigilantes, Austrian wannabes, and inflation nutters that think the Fed is keeping rates too low for too long again. Is she right? Here’s her scenario:

As we saw in the years leading up to the subprime crisis, yield-hungry investors are taking on more and more risk. Pension managers are investing in hedge funds, and gullible investors are buying up junk bonds. Meanwhile, low-yielding assets pile up on the balance sheets of more risk-averse banks.

What’s alarming about this? I can’t tell. What Sheila Bair would call ‘irrational exuberance’ I would call ‘investing.’ First of all, pushing investors into riskier assets was a goal of the original QE programs (edit: here’s Brad DeLong’s great summary of QE), since the Fed depressed the price of Treasury Bonds (by buying so many of them) that investors would look higher up the yield-curve and in essence start to move capital to where it was needed again. This was one of the points of the program.

Second, low-yielding assets may be piling onto risk-averse balance sheets, but the doomsday scenario Bair points to, “if interest rates spike suddenly,” is actually the exact opposite of what the Fed has committed to do until 2014. Why on earth would this happen unless the Fed wakes up tomorrow and finds out inflation is out of control (it isn’t).

If Bair is trying to tell us that it’s 2006 all over again, I don’t think that’s the case. Gullible investors may be investing in junk bonds (I believe we call these people ‘suckers’ and they exist independently of what Ben Bernanke does), but it’s not the systematic mispricing we saw before the crash. As far as I can tell, Bair is concerned about a. investors behaving normally and b. a hypothetical spike in interest rates that isn’t happening (seriously).

There’s also a healthy dose of debt-apocalypse doomsaying towards the end. Bair calls the USA “the healthiest horse in the glue factory”, which is why so many investors are fleeing from Europe to US Bonds (again, why is this a bubble?). I guess so, but being the healthiest horse in the glue factory still means you’re the healthiest horse. An optimist would say that horse has exorbitant privilege.

"The authors have made a huge effort to expound the model clearly, but even they cannot prevent the..."

Sat, 21 Apr 2012 20:14:46 -0400

““The authors have made a huge effort to expound the model clearly, but even they cannot prevent the calculations from degenerating at times into a near-impenetrable soup of CES algebra.””

- J. Peter Neary, Of Hype and Hyperbolas:Introducing the New Economic Geography or My Saturday Nights as of Late

I can’t think through a rational expectations argument...

Fri, 20 Apr 2012 17:52:55 -0400

I can’t think through a rational expectations argument for/against QE3 without ending up in an awful infinite loop, which I’ve summarized in flowchart form. It’s ~~very~~ extremely likely I haven’t given this enough thought, but I swear I’ve heard every one of these points used to justify/demolish QE3 in the past few months. Rational expectations. Jeez.

Sigh Greg Mankiw, or Judging a Book by its Cover

Thu, 19 Apr 2012 21:14:27 -0400

Greg Mankiw’s Sunday NYT piece on the case for federalism could be argued on the merits of diffusive power structures like, uhh, federalism but I’m not going to do that. Why? Because Mankiw manages to use economics textbooks—one of the best examples of uncompetitive, inefficient, rent-seeking markets—as an example of the boundless glory of competitive markets. So thanks Greg Mankiw, for recognizing that econ textbooks—not just what’s in them but the books themselves—are such a great metaphor for what’s wrong with an undergraduate econ curriculum.

For the record, I used Glenn Hubbard’s book in my intro course way back when during freshman year [which totally had nothing to do with the fact that Hubbard is the dean of my business school and everything to do with the superior merits of Hubbard’s book v. others’ books in a competitive marketplace (which is in itself a metaphor for the political capture of markets by powerful and monied interests BUT NEVERMIND THAT OK?!?)] I ended up buying an old edition of Mankiw’s intermediate macro book off of Ebay for fifteen bucks instead of the $130 demanded for the new one, and I still got an A in that class. Figure out the metaphor for yourself on this one.

But what I actually think is most hilarious about Economics “textbooks” is that they’re textbooks at all. They look like physics or chemistry books with their big heavy hardcover bindings and boring-ass cover art. They borrow the rigor of the hard sciences and slap it onto our conjectures, which we get to call ‘laws’ and ‘theorems’ because they are printed in big heavy books that are a pain to carry around and can’t be had in digital format because that would endanger the monopoly printing rights of the publisher!

Kidding aside, this could be dangerous. We need to have good and earnest discussions about the standards of rigor we can reasonably expect to apply to our discipline, and that discussion is happening—if mostly in the blogosphere. There is plenty of merit in approaching economic problems with mathematical rigor, but as this paper by Andrew Lo and Mark Mueller from MIT points out very well, this can lead to ‘Physics Envy.’ I doubt it’s a coincidence that introductory economics books look like their physics counterparts while the more advanced theory I use now is wrapped in a more modest package (that can be had for free as a pdf I might add). It’s disingenuous to wrap these ideas in the veneer of the hard sciences, especially for students that are likely to never plumb the depths of the models they see in these books.

Great Expectations

Sat, 14 Apr 2012 00:04:00 -0400

I’ve had a glance at Gary Shilling’s four part (!) Bloomberg series on whether the US is facing another recession in 2012 and it’s a little like watching one of AMC’s dramas. It’s fascinating, but the bad news just keeps coming until I want to curl up in a ball and weep. This is why I never made it past season three of Breaking Bad.

Gary Shilling reads the fundamentals.

Anyway, just a note from part four:

It seems that, until recently, investors have been ignoring the big picture of the still-weak economic recovery and focusing instead on the Fed. That is partly what generated the robust first-quarter gains for stocks and other risky investments while Treasuries slumped. The sole focus, it appears, is on liquidity created by the Fed. If investors believe the central bank is about to dump more money into the system, stocks soar. If Bernanke hints that the liquidity tap is closed for now, stocks tank. This narrow focus suggests that investors aren’t happy with the fundamental state of the economy.

So markets expected the ‘put’ but now it seems like it won’t happen. Sure, that makes sense. I’m just not sure about the implication Shilling draws from this, mainly that investors don’t like the fundamental state of the economy. All we know is that the market priced in the expectation of a boost in asset prices that would come from another round of easing, and then it turned out that this is no longer likely. It tells us exactly nothing about what “the market” thinks about fundamentals. Simon Wren-Lewis wrote about how the financial press acts as augur for the markets without actually having a clue, and I think this may be a variant on that.

If anything, the Fed has suggested things are looking up on the fundamentals side (eh…maybe) and that is why QE3 is no longer necessary. So if that’s the case, then shouldn’t the market believe the Fed and think that fundamentals are looking slightly up, even if the promise of more cheap liquidity is no longer in the cards?

Otherwise this problem turns into one of those “Well the Fed knows that I know that I expect the Fed to do X, and therefore the Fed will do Y, but I know that I know that the Fed will do Y, so the Fed will actually do….” Which really gets to the heart of the expectations problem for me. How do you disentangle what everyone is thinking about everyone else’s expectations? Rational expectations. Jeez.