Robert's Stochastic thoughts: 9/1/14

Thursday, September 25, 2014

The usual comment on Wren-Lewis

Simon Wren-Lewis has a very thoughtful post on what went wrong in Macroeconomics. I wrote the same thing I always do (see below). I also tried to answer his questions.

I will write a second comment. I will try to respond to your questions. I wasn't an economist in the 70s so (as usual) I don't know what I am talking about.

"So why didn’t this happen? Why did we have a revolution which overturned an existing methodology and temporarily banished Keynesian theory, rather than an adaptation and augmentation of what was then mainstream?"

"Was the attraction of overturning orthodoxy too strong, as it is for a minority of heterodox economists today? "

I think this attraction was very strong. There is something else. A couple of Economists from U Minnesota mentioned Harvard for no clear reason -- I think there was and is an element of Midwestern pride (neither of the economists is originally from the USA). In particular a distasteful aspect of appeals to common sense or judgment is that they are and must be assertions of intellectual authority. Math has the appealing feature that a proof is a proof and does not rely on the authority of the person stating it.

" Did an ideological imperative of dismissing Keynesian ideas play a role?" I think it definitely did. Friedman, Lucas, Prescott and Barro are very ideological. The models change but the policy proposals remain the same. Views on methodology change (Sargent asserted that Lucas and Prescott were all in favor of testing models as null hypothesis until he rejected their favored models).

"To what extent was the hostile reaction of many in the macroeconomic establishment to eminently sensible ideas like rational expectations responsible? "

I think the extremely hostile reaction played an important role (of course, I don't think that rational expectations is a sensible idea).

"Was the attraction of a methodology where at least you could be sure you were consistent too enticing, ? "

Here I would say that mathematics was enticing. Writing papers that look like Physics except the variables have different meanings is enticing.

"perhaps encouraged by increasing segmentation between theoretical and empirical macro? "

I'm quite sure this came later. In the 70s and early 80s new Classicals developed new empirical tools and did a lot of empirical work. I think theoretical macro separated from empirical macro when the data kept saying that new Classical models were not good approximations to reality.

So far, I have made no progress towards understanding how a few departments were so influential. Here I think that hard work and the passion due to fanaticism were important. The general rightward political shift also must have mattered. I think that the loony left managed to cast discredit on Republican Keynesians somehow. But I really don't understand how and why it happened.

I have two other thoughts.

If macro theory (or non theory or ad hoc models or whatever) were about as good as it is would ever be in 1973, PhD candidates and junior faculty would still have to present something new. In fields which aren't progressing a new and crazy original contribution is preferable to an unoriginal contribution. Here I think the trouble is that some questions in macro are too simple and have for decades been answered well enough to serve. I think it is very easy to fit consumption and investment without theory -- 1960s equations fit well out of sample.

If aggregates depend on expectations which are not rational nor adaptive nor anything which can feasibly be modelled, then the problems of stabilizing output and even of forecasting can't be solved. If so the only reasonble thing to do is to try something and if it fails badly try something completely different.

I think many of the questions are too easy and have been answered (but young researchers can't afford to accept this) and the unanswered questions are too hard (I fear unanswerable).

Now my usual boring pointless comment

Here I am again more certain than ever that this comment serves no useful purpose. You support an eclectic approach and not the utter rejection of all of the past 40 years of theoretical macroeconomics. I guess this must seem obviously reasonable to you and to basically everyone. However, while you have very often stated this view, I don't recall much in the way of argument, evidence or even examples.

"Microfounded models could have shown the kind of errors that can arise in more empirically based models when theory is ignored or only applied piecemeal, "

for example ? To be sure such errors can arise, one should point to examples of such errors arising. The classic example is the 1960s era Keynesian ad hoc assumption that the Phillips curve is a structural relationship. This error never happened. It may well be that going to the data armed only with common sense and verbal arguments leads to errors which would have been avoided if one used formal theory. But to claim that such errors occured, one should cite them with authors, dates, titles, Journal titles volume and page numbers.

"However I also think the new ideas that came with that revolution were progressive. I have defended rational expectations, I think intertemporal theory is the right place to start in thinking about consumption, and exploring the implications of time inconsistency is very important to macro policy, as well as many other areas of economics. I also think, along with nearly all macroeconomists, that the microfoundations approach to macro (DSGE models) is a progressive research strategy."

I note that the word "progressive" appears twice. I think it is very useful, too useful. To argue that something is progressive, one need not point to achievements. The word is consistent with the claim that the approach will in the future yield valuable fruits. I recall reading in 1982 Sargent expressing the hope that realistic micro founded models which could be taken seriously and confronted with the data would be developed in the following 30 years. I say time is up.

I also note "to start". Now the claim that something is the right place to start can't be disproven. The claim is that something good will happen. I know of no evidence against the view "(6) Changes in expectations of the relation between the present and the future level of income. — We must catalogue this factor for the sake of formal completeness. But, whilst it may affect considerably a particular individual’s propensity to consume, it is likely to average out for the community as a whole. Moreover, it is a matter about which there is, as a rule, too much uncertainty for it to exert much influence." Keynes 1936 chapter 8 section II.

I have 2 3 final questions.

1. What evidence could possibly convince you that intertemporal theory is not the right place to start in thinking about consumption ?

2. What evidence could possibly convince you that DSGE isn't a prgressive research program ?

3. What could the data do which they have failed to do in the past 40 years ?

Wednesday, September 24, 2014

Ballance at Vox ?

Ezra Klein has an excellent post on the closed feedback loop conservabubble where the obamacare is failing. One aside illustrates a few things. The first is that I find it much easier to criticize than to praise -- I can't help myself. The second is that the rule that an essay should include a "to be sure" and a "both sides" is very strong. The third is related to Drum's rule -- if you have to search comment threads for evidence that people of type X have crazy opinion Y, you have really found evidence against your conclusion.

the aside is

(Of course, information loops can go the other way, too: a lot of liberals probably don't know that of the much-discussed 8 million enrollees in Obamacare's insurance exchanges, new data suggests only about 7.3 million stuck around as paying members.)

It is, of course, true that a lot of liberals don't know about the 7.3 million as it is true that a (smaller) lot of liberals never heard about the 8 million -- political junkies can't imagine how little normal people know about public affairs.

That said, Klein's argument is so weak that, if I didn't trust his integrity, I would suspect that he was trying to convince people that all loopy information loops loop right. 7.3/8 >90% . The fraction is at the upper end of predictions. political junky liberals have been reading forecasts that the ratio will be about 90% for months from, for example, Charles Gaba .

The 7.3 million number was trumpeted at liberal sites

Trusting Klein's integrity as I do, I think the aside really does provide strong evidence for the opposite of its apparent claim.

First the news for the ACA has to be very good indeed for "only about 7.3 million" to be the example of not as good as the rest of it news for the ACA.

Second, the hack gap is huge. New liberal alternatives to the MSM (shuch as Talking Points Memo and VOX) play it straight. In fact, liberals like Klein feel the need to add a bit of Ballance.

Well at least I sincerely honestly believe this. Klein's critique of Klein and people like him is so feeble and his obvious interest in convincing people of the opposite of his stated claim means that my confidence that he didn't make an invalid argument on purpose indicates my absolute faith in his integrity.

Saturday, September 20, 2014

"Might" make right II -- a comment on Chait.

"Might" makes right. You can take almost any indefensible claim P and make it the defensible claim "P might be true". "Might" is the ultimate weasel word. It should be obvious that it appears in a conclusory sentence only when the writer knows perfectly well that he (or she) doesn't have a case. Yet it appears very often.

Jonathan Chait recently criticised "Tom Frank, author of What's the Matter With Kansas?" . The post was devastating (as Chait's critiques often are I mean talmost always are I mean hey I can't think of an exception).

More recently he chose to write about Kansas. Obviously he felt the need to refer to "What's the Matter with Kansas" and "The Wizard of Oz." He had a problem. He sumarized his actual views on recent events in Kansas and "What's the Matter with Kansas" perfectly with the (brilliant as usual) paragraph

Brownback’s biggest mistake was to forget a lesson Frank made well: Even in Kansas, tea-party populism requires the maintenance of a ruse. One needs cultural elites and other enemies to bash in broad daylight while doing the dark work of plutocracy behind the scenes. Openly conducting class warfare on behalf of the rich is no way for a pseudo populist to get ahead.

Now I haven't read "What's the Matter with Kansas" but all of the dozens of summaries of it which I have read present that as the central theme of the book. Recent polling data do as much as so few data points possibly could to suggest that Frank was totally right.

But Chait doesn't want to just agree with Frank. So he focuses on a separate issue and recent data from Kansas provides essentially no evidence one way or the other "Frank audaciously proposed that Democrats address their catastrophic standing in Kansas, and places like it, not by moving toward the center but away from it, by embracing populist economics. "

Chait correctly notes that the Democrats in Kansas didn't do this. Thus he should conclude that data from Kansas provides no evidence one way or the other about what would happen if they did do this. But having brought up the argument, he chose not to conclude that he had nothing new to say and so rather dressed up the nothing he had to say as something.

Chait wrote a sentence which is as vapid as most of his writing is incisive. "In fact, as much as Kansas provides liberals a happy story line in an otherwise difficult campaign season, it also offers a lesson that might give progressive Democrats pause."

This is, as usual, brilliant prose. But in this case the skill is used to obfuscate. We have the "might" which makes right watering down a "give ... pause". I risk nothing when I write that something should give someone who made an argument pause. It almost always is perfectly safe to propose that someone pause and think some more. If the person is standing in front of a speeding car, it is unsound to propose a pause for further reflection. Otherwise it is a proposal so mild that it is safe to make.

But Chait knows that he doesn't have new evidence for a case against populism, so he waters down the water with a "might".

Aside from picking on prose, I do have an actual argument. Chait relies on the magic word "center" without defining it. He is hinting at the argument that elections are won by racing to the center. The problem is that the word has two completely different definitions, even when used as a term of art by political scientists. It sometimes means a point midway between Republicans in Congress and Democrats in congress (as in DW-Nominate scores) or halfway between voting for Democrats and voting for Republicans (this is red district vs blue district scores). Here by construction the center is between the two parties, so for Democrats moving left is moving away from the center.

In contrast the center towards which it is good strategy to race is the position held by the median voter. Frank's point (as summarized in the quoted Chait paragraph) is that Republicans can win lots of elections, even if their positions on bread and butter populist v plutocrat issues are far to the right of the median positions of US adults. The logic is partly that they can obfuscate, partly that they can lie, and mostly that ideology is multi dimensional, and that people also vote based on the "social issues" (really the pelvic issues).

This means that a move from the current Democratic main stream towards more populism might be a move towards the views of the median voter, hence a move towards the center by this second definition. In fact a solid majority of US adults support higher taxes on high incomes, while the offical Democratic main stream position is that the ACA surtax and the expiry of Bush cuts for incomes over $400,000 for an individual $450,000 for a household are enough. Most US adults and the left fringe of elected Democrats supported increased social security pensions and increased Medicare and Medicaid spending. Basically the median US adult is markedly more populist than the median elected Democrat. I challenge Chait to find a poll and a roll call vote which don't fit this pattern.

So Frank makes the audacious proposal that Democrats would win more elections if their policy proposals were closer to the policies supported by the median voter.

"Might" makes Right I -- a comment on Sargent

"Might" makes right. You can take almost any indefensible claim P and make it the defensible claim "P might be true".

"Might" is the ultimate weasel word. It should be obvious that it appears in a conclusory sentence only when the writer knows perfectly well that he (or she) doesn't have a case. Yet it appears very often.

Greg Sargent wishes he were naive enough to believe that the fact that most voters agree with the Democrats' anti ISIS policy and disagree with Republicans' alternative proposal means that the issue will help Democrats in the mid terms. In fact he knows better. So he whips out the mighty "might" and concludes "But on the other hand, if Republicans really want to make these elections about national security, you’d think it just might prompt some media pressure on GOP candidates to say what course of action against ISIS they support and to clarify whether they support another ground war in the Middle East."

I agree that this won't happen.

His post is here. My comment is there and also below.

As I began reading this post I almost had the impression that you were going to argue that the fact that the US public rejects the Republicans' proposed response to ISIS implies that the issue won't help the GOP in November, but then I thought to myself "no Greg Sargent can't be that naive." I now know you aren't.

I think by "could -- or at least should" you mean "should" and believe "should -- but almost certainly won't."

The post illustrates intellectual distress caused by being a serious commentatator advising a country (indeed a world -- it's not just the USA) which doesn't take the responsibilities of self rule seriously.

with a "Perhaps" (which means "I know perfectly well that") you concede that candidates win with slogans and "keeping their own ideas vague". I am sure you also know that US elections tend to be decided as if they were referendums on the President, that the President and his party are held responsible for everything and, finally and quite separately, fear makes people Conservative (I am appealing to psychological research but I admit that I won't provide a link).

In the end you are so desperate that you rely on the fact that "might" makes right. Your concluding sentence includes the word "might". As written it is true. Anything at all might happen. A big enough majority of voters might consider competing policy proposals and the evidence which suggests which is better. And pigs might fly.

Who can deny that somethign might happen. For all I know the GOP might make a useful contribution to the policy debate.

So yes indeed the fact that most voters agree with the Democrats' policy and disagree with the Republicans' proposed alternative might determine how the issue affects the mid terms. But that's not the way to bet.