Category Archives: PSST and Macro

WaPo Watch

Posted on by

The idea would be to have regular analysis of the bias in the Washington Post. One reader emailed encouragement but suggested that the New York Times is more influential.

My guess is that I do not want to take this on as a regular job. Instead, I might try it for a few weeks to try to develop a model for how it ought to be done. Then we can think about creating some sort of franchise to do it.

The goal is to create something that editors the Post might look at and recognize that there are reasonable indications of bias. Ideally, editors would start to think about how their priorities, headlines, and lead paragraphs could be altered to be less biased.

Below is a first pass at a weekly analysis. For the main news section, the emphasis will be on stories and op-eds related to Donald Trump. For stories, I will tally positive, negative, and neutral, based on bias or spin. As long as there is no spin involved, then I consider the story neutral, even if it reflects on Mr. Trump very favorably or very unfavorably.

For op-eds, I don’t begrudge the paper running negative op-eds on Mr. Trump. I think that the job of the op-ed writer is often to complain and “speak truth to power.” The Post showed bias, in my view, by regularly running op-eds favorable to the Administration with Mr. Obama in office. I will make note of any op-eds that are favorable to Mr. Trump. I expect that in many weeks that tally will be zero, and I am not saying that it should be otherwise.

I will look at other biases in the front section, as well as in the Style section that covers arts and culture and in the Metro section that covers local news. For the Sunday Outlook section of op-ed essays and book reviews, I will tally the slant of non-Trump pieces. I will count the number that appeal to closed-minded progressives, the number that appeal to closed-minded conservatives or libertarians, and the number that offer something to people with open minds.

Read below the fold for the first week’s analysis.
Continue reading →

Regulation and Sustainability

Posted on by

Concerning a new EPA regulation, Jennifer Ko writes,

many industry and environmental groups have failed to address one important aspect of biofuel regulations—the effect that increased ethanol use will have on dwindling water supplies in the United States. Jay Famiglietti, a senior water scientist at the U.S. National Aeronautics and Space Administration, questions the prudence of policy decisions that drain stressed water supplies to irrigate water-intensive crops. Many of the nation’s top ethanol producing states sit in the “breadbasket” of America where farmers irrigate crops, such as corn, using water from underground aquifers. In Kansas, the main source of water—the largest basin of freshwater in the United States—is dwindling rapidly, in part due to the water used up by massive acres of crops earmarked for ethanol production.

If policymakers fail to consider the relationship between energy and water, Famiglietti warns that “consequences will be huge.”

Pointer from Mark Thoma.

In Specialization and Trade, I argue that market prices tend to do a better job than environmentalist intuition at indicating sustainability. Water tends to be under-priced, in part because agricultural interests lobby for low prices. They also lobby for higher ethanol mandates. And the EPA, which is supposedly here to protect the environment, helps the agricultural interests.

Trust and Banks

Posted on by

Erika Vause writes,

No institution more clearly relies on trust than the bank. That is precisely what makes banks a lightning rod for suspicion. From the time modern banking emerged, it has been the subject of intense misgivings. Many of these suspicions are with us still.

This issue gets much more attention in Specialization and Trade than it does in standard economic textbooks, but reading Vause’s essay makes me think that there is even more involved. The role of materialism is one example. That is people, including most economists, want to see value reduced to tangible properties of things, such as capital and labor input. A prerequisite for understanding finance is a willingness to acknowledge the large intangible components of value, including the components that consist of trust and financial intermediation.

President Nixon’s Wage and Price Controls

Posted on by

Burton A. Abrams and James L. Butkiewicz write,

We uncover and report in this paper evidence that Nixon manipulated his New Economic Policy to help secure his reelection victory in 1972. He became convinced that wage and price controls were necessary to grab the headlines away from the defeatist abandonment of the Bretton Woods Agreement and the closing of the U.S. gold window. Nixon understood the impact of his wage and price controls, but chose to trade off longer-term economic costs to the economy for his own short-term political gain.

Pointer from Tyler Cowen. The paper is based on President Nixon’s secret tapes.

I think that Nixon’s New Economic Policy is under-studied by economists. At the time, many people though that the central policy was getting rid of the gold peg and that wage and price controls were a “cover.” The cover worked, both in the short term and the long term, as people focused on the wage and price controls then and now.

The conventional story of the inflation of the 1970s is that Fed Chairman Arthur Burns printed a lot of money. But as you know, I need to fined a different explanation. My alternative is that abandoning fixed exchange rates set off an inflationary wave, starting with traded goods but spreading elsewhere.

It was less than two years later that OPEC was able to quadruple the dollar price of oil. After that, inflationary psychology took over. Even though we retained price controls on refined petroleum products, such as gasoline, this regime probably raised costs (such as gasoline shortages) more than if prices had been allowed to rise.

What alternative did the Nixon Administration have? The U.S. had been losing reserves of gold and foreign currency at an unsustainable pace. Higher domestic interest rates would have stemmed the outflow, but this would have been unpopular. A lower government budget deficit would have raised net domestic saving (T-G + S-I) and reduced the outflow from the trade deficit, but Mr. Nixon did not go for that, either.

Et tu, Tyler?

Posted on by

Tyler Cowen writes,

inflation would leave many workers with permanently lower wages, as in essence the central bank would be giving them a wage cut that their own employers probably would not have dared. Maybe wages would adjust upward over the years, but workers would not be guaranteed this recompense.

I disagree with many of the views that are either explicit implicit in this column.

1. I do not endorse the view that economy-wide increases in prices help to increase employment by lowering real wages. To put this another way, I do not endorse the view that the real wage rate is countercyclical.

2. I do not endorse the view that the Fed can fine-tune the rate of inflation.

3. I do not endorse the view that higher inflation would be easier to live with. Prices are signals, and higher inflation creates more distortion in those signals.

Confirmation Bias in Macroeconomics

Posted on by

Prakash Loungani writes,

The evidence shows the “cycs” have been proved largely right. U.S. unemployment has fallen pretty much in line with the recovery in output. U.S. states where growth was stronger than the national average had declines in unemployment greater than the national average. And looking across the globe, countries which experienced more rapid growth than the global average — a group which includes the United States and the United Kingdom — had declines in unemployment greater than the global average.

Pointer from Mark Thoma. His point is that this vindicates the theory of aggregate demand. My response: as opposed to what? A theory that output and employment are totally unrelated? Whose theory is that? In fact, employment and output should be correlated whether one is telling a PSST story or an aggregate demand story.

The usual notion of confirmation bias is that people over-rate findings that favor their preferred point of view. But macroeconomists go beyond this. They take findings that are completely neutral in their implications for one point of view vs. another and claim that these findings confirm their preferred point of view.

Janet Yellen raises some good questions

Posted on by

She said,

Prior to the financial crisis, these so-called representative-agent models were the dominant paradigm for analyzing many macroeconomic questions. However, a disaggregated approach seems needed to understand some key aspects of the Great Recession.. . .

More generally, studying the effects of household and firm heterogeneity might help us better account for the severity of the recession and the slow recovery.

Pointer from Mark Thoma.

You might have to go much farther than Yellen has in mind in thinking in terms of heterogeneity of firms, workers, and households. At some point, it ceases to be macro.

And there is this:

the influence of labor market conditions on inflation in recent years seems to be weaker than had been commonly thought prior to the financial crisis. Although inflation fell during the recession, the decline was quite modest given how high unemployment rose; likewise, wages and prices rose comparatively little as the labor market gradually recovered.

I disagree with the standard models of inflation, including the monetarist model. Specialization and Trade offers my answers to all of Ms. Yellen’s questions.

Two Pointed Questions Posed as Tweets

Posted on by

1. From Josh Hendrickson:

I don’t get it. Everyone has a model; whether they use math/graphs/words. Why are only models w/math denigrated?

Other things equal, it is harder to understand what is going on in a math presentation. Other things equal, insisting on math restricts the sort of assumptions you can work with to those that you find tractable.

That would suggest that verbal arguments dominate mathematical arguments. I am not going to insist that this is always the case, but I think it does create a presumption in favor of verbal arguments. Yes verbal arguments can be vague. But a lot of hand-waving goes on in mathematical papers as well.

So the way I would put it is that today there is a strong presumption in favor of expressing models (or, to use my preferred term, interpretive frameworks) in mathematical terms. I would like to see the presumption go the other way.

Pete Boettke has an essay/post that is pertinent and aligns with my views. Strongly recommended.

2. From someone with the Twitter handle “representative agent’:

I’m thinking about PSST as a business cycle theory. what are its most distinctive implications?

One important implication is that unemployed workers will not be hired back into the same jobs they had before. I believe that in the 1950s, there were recessions that were primarily inventory corrections, so that after you went through a couple of quarters with automobile manufacturers and their suppliers laying off workers, those workers got recalled. Those examples run counter to PSST.

A related implication is that just “boosting demand” in general will not do much to deal with unemployment. The adjustments that are needed are specific to workers located in specific parts of geographic/industry/skill space. It predicts that just throwing money at, say, the green energy industry, will not necessarily increase employment.

Another implication is that shocks to sectors that are closely connected to other sectors (as might be shown by a network graph) will have more effects than shocks to sectors that are more isolated. That may explain why the crash of the dotcom bubble did very little, but shocks to the energy sector in the 1970s and to the banking sector at other times have had severe impacts.

The Greenspan Fed

Posted on by

Reviewing Sebastian Mallaby’s biography of Alan Greenspan, Randall Kroszner writes,

The Fed has limited instruments at its disposal—primarily its control over short-term interest rates—and trying to use this tool for “bubble bursting” while still addressing the Fed’s traditional mandates for full employment and low and stable inflation could lead to conflicting prescriptions. Better, Mr. Greenspan believed, to be ready to clean up the debris if a bubble were to burst, as in 1987. Mr. Mallaby argues that the inflation-targeting framework, which focused central banks world-wide on the goal of low and stable inflation in response to their bad behavior in the 1970s when they eased credit in the short run to boost employment, provided an intellectual underpinning for Mr. Greenspan’s approach.

Indeed, it is useful to go back to what economists were thinking back when Olivier Blanchard was writing that “the state of macro is good.” The idea was that the GDP factory slumped when there were inflation “surprises,” in which prices increased more slowly than expected, leading to real wages that were too high. So if the Fed kept the inflation rate predictable (and it might as well shoot for a predictable rate that was low), then everything would be fine.

Some remarks:

1. Now, journalists want to paint Greenspan as a great free-marketeer, as if he spent his career fending off cries for more financial regulation. In fact, there was a consensus in the 1980s that inter-state banking had to arrive and that the Glass-Steagall separation of investment banking from commercial banking was being eroded by innovation. The deregulation that ratified these changes would have happened under any conceivable Fed chairman at that time. Moreover, the deregulation was accompanied by what banking officials were convinced at the time were stronger and more effective regulations regarding safety and soundness. They were particularly proud of risk-based capital regulations, and it was the market-oriented economists of the Shadow Regulatory Committee who warned that those were not adequate to prevent a crisis.

2. The “(dis-)inflation surprise” theory of economic slumps is now gone. The closest thing remaining is Scott Sumner’s slower-nominal-GDP theory of slumps. That one works for the post-financial-crisis recession because real GDP went way down, which (a) meant that nominal GDP growth was slower than previously and (b) tautologically, there was a slump. I am troubled by the tautology aspect.

3. However, the Keynesians who dominate the current macro conversation have different theories. Some like to tell a story about consumer debt. Many like to tell a story about a liquidity trap.

4. Speaking for macroeconomists in general Blanchard is now open to many different ideas. However, the one idea that they will not consider changing is the GDP factory. Thus, the idea that patterns of sustainable specialization and trade matter is not on the radar screen.

PSST and 1946

Posted on by

Commenter Handle asks,

As a first guess, would a PSST theory also predict significant disruption and delay in establishing a healthy ‘new normal’ from such a substantial and rapid transformation in the overall economy as accompanied the huge changes from the post-war demobilization? Would we expect the same thing to happen today?

I think that the rapid adaptation of the economy to peacetime in 1946 and 1947 is surprising from the perspective of patterns of sustainable specialization and trade. I have a couple ideas, both speculative.

1. Workers were much more mobile after the war. Having been overseas, a move to another city did not seem daunting. Also, men had met men from other parts of the country. A guy could say, “My buddy Joe, who lives in California, says that there are jobs near where he lives, and he can help me get settled there.”

2. Economic activity was much less geographically concentrated than it is today. My guess is that the percentage of counties where net business formation was positive was much higher than it is now.