Refuted economic doctrines

The link for #3 is broken (missing an “h”).

I can’t get #3 to open.

The error message reads:
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I love it. I’d been thinking about the same thing after coming across the following a couple of days ago:

What a had-headed science when ulitmately nothing can be disproved. If the bubble has not broken it is because we are not yet in the long run. If the irrational noise trader makes more money than the rational trader it is because we are not yet in the long run — for only in the long run can the complexity of the economic relationships be known with statistical reliability!

That’s Paul Davidson from 1999.

I wouldn’t include the Great Moderation in the list of “doctrines” as rather it was just an economic phenomenon that came to an end. Between 1984 and 2005 output volatility (and that of other aggregates) WAS less than half what it was 1948-1984. Standard deviation of (1st diff in) GDP of .54 in the latter period, vs. a st.dev. of 1.21 in the earlier one. Similar numbers hold for hours worked and estimated productivity.

And if you believe Gali and Gambetti in the AEJ Macroeconomics, Vol 1, Issue 1, it wasn’t just luck. So the trick is not to consign a very real economic phenomenon to the dustbin of history but to figure out what caused it and what ended it.

Other than that I’d agree with 4) and 5) but on 1) and 2) it depends on how far you want to push it (as discussed in regard to the EMH here previously)

Also refuted — the deeply naive hypothesis that Keynesian economists were honest people. Post boy number one: Paul Krugman.

How much of the great moderation comes from counting the 72-83 period in with the rest of post WW2? If we compare 45-71 and 84-08, does this pronounced decline in volatility hold up? I’m actually asking because I don’t know the answer. The first period certainly had much greater increases in median standard of living, especially risk-adjusted and accounting for debt accumulation, so I’d want to see a lot of volatility decline to make up for that. Actually, I don’t think there could possibly have been enough volatility in the earlier period to compensate. And we look to be headed now into a period worse than the 70’s following a shorter period of stability.

John maybe you can give the following a shot as well:

– if we don’t overpay the bosses, we’ll be run by idiots – we know now that overpay has attracted the idiots

– every kind of protection is ‘protectionism’ and every act of ‘protectionism’ is just one of the infinite number of attributes of The Devil – we know now that this reduces every kind of protection to a vanishing negative such that the one & only measure for future success of our offspring is whether they were born from the overpaid idiots above

– performance pay makes people work harder and the harder they work the better they perform – we know now that the only result of performance pay is that office hours are extended and sucking up to the boss is before long the only remaining human art whilst productivity per hour becomes the second vanishing negative ensuring that – when our offspring comes of age – they can forever be enslaved as underpaid idiots worshipping the latest versions of Paris Hilton

– if we don’t overpay the bosses, we’ll be run by idiots – we know now that overpay has attracted the idiots

I wonder if there is a natural limit – around 4-8x the average salary you tend to attract the best person for a job, at 400x the average salary you tend to attract the greediest person to a job?

Although I think #8 sounds like one of those astonishingly weird Austrians, whose general advice is that the economy should serve to make most people poorer cause, well, they deserve to be, he is right to remember that very recently we experienced a recession. One of the things I find highly amusing about the rightwing economists sudden revival of Ricardian equivalences and the like is that these economic bogies apparently only arise if a Democrat is in the White House. But when a Republican is in the White House, creating massive deficits, not a peep would you hear from Fama or Mankiw.

I think the chiefk, the no. 1 refuted economic doctrine is the assumption that somehow we are starting out with a fully private side economy. It is astonishing to hear economists assume that we have full employment and not stop for a second to reflect that, since the 1940s, all that means is that the private sector employs around 80 percent of the employable in the most laissez faire developed economy – the U.S. In Australia, I think the average is about 75 percent. In other words, if we had to rely on the private sector since WWII, we would have persistant, Great Depression style unemployment. This empirical fact would, one would think, somehow insinuate itself into the models of even the most Fresh of the Freshwater economists – yet one looks in vain for any compromise with the reality of all the developed economies of the past 60 some years.

So – no. 1 fallacy would seem to me to be the pretence that we don’t live in a mixed economy. Everything else follows.;

roger, Greg is in fact the internet’s most obsessive Austrian.

Martin, I was wondering the same thing myself but couldn’t find anything substantial that would address that question. Usually there’s just talk of evidence for a ‘structural break’ around 1984/5. But eyeballing the graphs in the above mentioned Galli and Gambetti and drawing perhaps unwarranted conclusions (I’m looking at the unconditional ones) it looks like the volatility of output was lower for 48-73 by a little bit (say a 1.25 sd vs. one around 1.4 for 74-84) but not as low as the post 85 (the unconditional one being about .7 (the fact this is the unconditional one is what makes it slightly different from the numbers I gave above).
So if you were to compare output volatility 48-71 to 85-05 yes the decline would still hold up but the difference wouldn’t be as big.

Interestingly the lower volatility in the earliest period 48-73 looks like it’s mostly due to lower volatility in hours worked whereas in the same period productivity volatility was about as high as it was 74-84. Part of the big decline in volatility 85-05 is due to the fact that the volatility of BOTH hours worked and labor productivity declined. This makes one wonder about how specifically the Great Moderation is being reversed currently.

Isn’t there a fourth possibility for the GM – every time a recession was predicted, governments engineered an increase in debt to paper over the cracks, and two decades was the limit of how long the system could bear the continually growing debt burden?

Re:22, let us start with the question of under what circumstances we would call the “GM” a statistical blip, because I would love to learn something about innovative data mining techniques. From my humble point of view, there have been two declared recessions in America (right?) between 1984 and 2004 (the unsneezable-at twenty years in question?), which gives us two observations of the volatility of the business cycle during the GM. Now you can slice that up into twenty observations, and you can carefully pick countries that didn’t have economic problems during the period and throw them in with the US, but if our question is how volatile the business cycle is from peak to trough…

Two data points is nothing to laugh at! People who study WWI would love to have a second data point. However, on the whole it’s pretty easy to call a blip a blip. If I won the lottery twice that would certainly be nothing to sneeze at, but it would still be a statistical blip.

As for the innuendo, re-read 10, with special attention to the disjunction. I just think people unjustified causal claims. (Now you have me trying to come up with dirty puns on “Taylor curves” and “Volcker”…)

Notsneaky,

If one subscribes to the view that Greenspan’s reaction to decrease interest rates as an orthodox response to the internet bubble was one major factor in the current crisis, then it’s pretty hard to defend the Great Moderation.
Making good money for a long time by transporting nitroglycerin is not necessarily a good business idea, when there is evidence that you can easily blow up.

But other than that, I don’t see that how the current crisis refutes much of anything that was not refuted before. The strong forms of EMH were refuted for anyone with good sense — but that doesn’t mean, by itself, that in a comparative institutional welfare analysis, strongly market oriented systems don’t fare better than the alternatives.
For privatization, one really needs to scratch the barrel to claim that somehow the current crisis changes anything in the discussion about the merits of privatizing public utilities and the like.

Similarly, can one really claim that the severity of the crisis has some non-negligible correlation with following or not following supply-side policies? It seems like just another case of the crisis being an opportunity for some to ride their hobby horses.

The strongest case is for number 4 — but maybe the lesson is that there should be provisions for conservative investments, a lesson that many in the financial word could follow profitably.

I think the crisis changed a lot in the sociology of the economic profession, mainly that people who where somewhat impervious to good critiques might be more open-minded. But I don’t think that the quality of the critiques has changed much due to the current crisis. And the good critiques of many economic models don’t have only implications that fit with John Q.’s political tastes.

“there have been two declared recessions in America (right?)”

Wrong. There’s been a dozen or so.

I’m gonna go watch the Super Bowl, will reply later.

http://www.cis.org/articles/2007/back1007.html

The nation’s immigrant population (legal and illegal) reached a record of 37.9 million in 2007.

Immigrants accounted for one in eight U.S. residents in 2007, the highest level in 80 years. In 1970 it was one in 21; in 1980 it was one in 16; and in 1990 it was one in 13.

Do you think that might have had an effect on income levels? I think so, especially when so many are unskilled.

Your points #2 (end of privatization) and #4 (end of IRAs) struck me as related. In Pittsburgh (Obligatory remark: Go Steelers), there has been a fair bit of privatization and are proposals for more. The privatization isn’t done for efficiency or ideology. The privatization is being done to meet the obligations of the defined-benefits pension plan of the city. There isn’t a Republican or free-marketer involved in city government. It’s all Democrats, nearly all of whom are were they are because of the support of a union-based political machine (of which the public sector unions are now the biggest group).

Retired and current employees are allowing/abetting the sale of the city’s assets, and thereby future union jobs, in an attempt to fund their own retirement (and very probably failing at it). These are not small sales. They sold the water system years ago and are now talking about selling all of the parking garages because their pension fund took as big of a hit as everybody’s 401k.

I guess my general point is private retirement took a huge hit, but none of the alternatives look much better. The idea of retiring while you are healthy (or least being able to do so in comfort) is more likely to be the eventual victim of any crisis that gets too deep.

Martin, yeah the measurement issue has gotten attention. The classic paper here, even before anyone started talking about a Great Moderation, is Christina Romer’s analysis of the data which attributed the decline in volatility since WWII on better data in the latter period. Basically, more measurement error in the earlier period amplified the volatility.

There might be something to this but the decline between the earliest period 48-73 and 74-85 sort of speaks against it.

As to adjustments and making sure we’re comparing like to like, I’m pretty sure that the GDP data is used consistently (the changes in inflation measurement coming out of the Boskin commission – which would be the biggest source of difference here – can be and were applied retroactively). I’m a little less sure about the definition of the unemployment rate but I doubt the difference in measurment would be that much. Where specifically did you see this argument made?

“But presumably the fact of interest is not strictly speaking the standard deviation on quarterly output, but the severity of the expansion and the recession relative to total growth over the course of the business cycle.”

No, the whole point is to separate the growth part from the volatility part (detrend the data). You can have (low growth, low volatility) economies, economies (low growth, high volatility) economies, (high growth, low volatility) economies and (high growth, high volatility economies). But this is called the Great MODERATION, not the Great Moderation AND the Great Increase In Growth Rates. Which isn’t to say that growth rate is not important (in fact I’m quite sympathetic to the view that it is almost all that is important) just that it’s a different question. There’s a difference between a mean and a variance.

Stock and Watson’s preferred explanation was, AFAIK, the “good luck hypothesis”, or in other words, no casual interpretation, shocks hitting the economy just got smaller for awhile there. So what you’re saying is that the “doctrine” of “good luck” has been refuted?

So, specifically, what doctrine, rather than an observed empirical fact (however “historical” it may now well be) has been refuted?

I have recently met a clear indicator that “trickle-down” economics has failed. I recently heard the estimable (and I’m sure economically literate) Sen. John Kyl (R-Delusion) say that we should not do a big jobs stimulus package because that would only be “trickle-down” econmics, while tax cuts would give money directly to people. Kyl certainly seemed to understand that “trickle-down” economics was a bad thing, though he was most interested in distorting what it was.

(Kyl did not much note that most of the money in tax cuts would go to rich people and that they would be unlikely to spend much of that money, but never mind. Nor did he seem to think that funding jobs, whose wages went directly to workers, was anything but a trickle-down situation.)

Refuted, maybe, b ut you can’t wean the economists from their fairy tales. Thus, Glaeser, explaining it all to us in the TNR:

‘This crisis, which has buffeted every bourse and rocked every government, had humble origins. It began with ordinary homes in Las Vegas and Miami and Cleveland. The arcane magic of mortgagebacked securities meant that few observers realized just how sensitive the entire world had become to fluctuations in the American housing market, but that is exactly what happened. The troubles began, as is well known, in the subprime market, where a bout of extreme optimism led investors to think that the dross of no-down-payment loans to high-risk borrowers could be transformed into the gold of triple-A securities.”

Of course, total bullshit, mistaking an effect – the extension of credit – for a cause. The cause, of course, was thirty years of battering the bargaining power of labor, so that median household incomes barely crept up in the eighties, had a flurry of good increases in the late nineties, and then came to a standstill until about 2006. And since all robbery of the masses requires political covering, at the same time households were battered and single earning households became double earning households, the government systematically removed limits and regulations on the credit sector, allowing households to, in essence, give themselves the raises they weren’t getting through master card and your friendly WashMu teaser rate mortgage.

Glaeser doesn’t get it. He’s paid not to get it. His career is dedicated to not getting it. Like the pinhead #36, but in a more urbane voice, he is a groupie of the upper five percent quintile. Except, unlike the music industry, where the groupies follow the stars, in economics, the groupies sing the songs for their favorite stars – those taking home the just rewards of their innovations, their LBOs, Junk bonds, cds-es, and other fine and beautiful pilferings. The groupies, of course, always find plenty of space in the media – the NYT is overflowing with U of Chi people at Freakonomics or Economix willing to spread the most insane propaganda in order to keep the asymmetry in wealth goig just a little bit longer

@JQ

Your claim to be an economist is of similar character to asserting one is Frenchman because he can speak the French language. You speak with a sociologist’s accent.

The fallacy arises from the non-factual nature of at least one premise. If you want to jerk me off with language, I’ll have fun, but it doesn’t make your assertion about “trickle down” any more sound.

You contend “trickle down” doesn’t happen. I’m living in a world of enormous wealth and comfort, almost none of which I created. If it didn’t trickle down (which is non-economic rhetoric anyway), how did I get access to all this great stuff?

To understand household income, in context of asserting something about (non-) increased utility or welfare, you must consider non-wage compensation and the sort of goods the wage component can purchase. Most of what the bottom quintile enjoys in 2009 could not be afforded by anyone in 1969.

To pick one example, there were no statins in 1969. Today, the lowest earners can choose to buy these life-saving drugs for less than an hour’s wage. Tell me how people who are not dead thanks to widespread cheap medicine are not better off.

Further, to discuss household income requires a thorough analysis of what “household” means. You touched on that, but seem to drop the inquiry when you saw something that fit your view.

But, thanks for visiting my blog. Non-economists are welcome there, too.

Ah, but John, while all these new-fangled economic doctrines have been refuted, Say’s Law is making a comeback. Or maybe it’s the Treasury View, I’m not sure. Anyway there seems to be some Conservation of Bullshit principle at work. And Paul Krugman has reduced Tyler Cowen to babbling incoherence with an argument that looks like something out of an introductory macroeconomics textbook circa 1980. It’s all very depressing.

John:
I’m no economist, but I did read your essays with some interest, and I think a modicum of understanding. Your data refuting the trickle-down hypothesis are compelling, but I do think foxmarks makes a good point, even if he does so in an asinine way. Can you explain in a non-snarky way how you would refute his point? I think Roger’s point @50 is interesting, but it’s not a refutation; he allows that we’ve all gotten wealthier in some respects, and makes that the basis for saying that wealth redistribution should be painless. It doesn’t refute the underlying claim that we’ve all gotten wealthier.

I’m sorry, John. Now that I know that despite a lifelong career in economics you are secretly a sociologist, I’ll have to ignore everything you say from now on.

M. Gordon: Foxmark’s argument has nothing to do with “trickle-down economics”. I’m not even sure he knows what the term means. Well-functioning market economies can produce great wealth; no one is arguing otherwise. Trickle-down is a specific claim that we need to cut taxes on the rich.

Walt: You seem to be taking a very narrow definition of “trickle down economics”. John’s definition of “trickle down economics”, from his post, is that “financial deregulation and favorable tax treatment of capital income, will ultimately benefit everybody”. It doesn’t state that it will equalize incomes, or benefit everybody equally. John seems to take as a given that we have been following policies that fit the first part of the definition. He points to stagnation in income as evidence that it has failed. But, if everybody IS, in fact, better off, because goods are cheaper and wonders abound (cell phones, the electric interwebs, medical marvels), then it seems difficult to claim that it has been disproven. This is not to say that it has been proven, but I would say its demise has been greatly exaggerated.

I’m living in a world of enormous wealth and comfort, almost none of which I created. If it didn’t trickle down (which is non-economic rhetoric anyway), how did I get access to all this great stuff?

Trickle up? No, that’s not it: how about “syphon up”… “syphon off”? Anyway, I am sure you get the idea…

I think what’s enlightening is that even if you go begging for a serious discussion you can’t get anything other than snark around here.

Okay, so THAT I accept as a reasonable argument. If I am understanding you correctly (parsing the jargon as best I can with my mere physicist’s brain), we can basically discount improvements in quality of life that can be reasonably attributed to the public sector, since funding for these are pretty much orthogonal, at best, or antithetical, at worst, to the philosophy underlying “trickle down economics”, and then ask if there’s any other real improvement, and your answer is, essentially, no. I think there’s a lot of complicated issues about how to measure all these things and assess them, but that’s obviously what the pros are paid for. All I wanted was a reasonable counter proposition on the table. I’m still disappointed with the stable of CT regulars, though.

“But is it fair to criticize Keynes for the worst possible application of his policy?”

If I advocated a policy which involved asking alcoholics to engage in moderate drinking, would I be responsible for the subsequent binges, DTs, and drunk driving?

Counter-cyclical spending probably does work, but it can not be applied by real-world politicians in a democracy, and asking them to is just encouraging them to run continual deficits. Shouldn’t he have realized this? So, yes, I think he bears some of the blame.

I don’t think nor ever thought that the Great Moderation was due to financial liberalization in the first place. I also never got the impression that was the main explanation for it either (the main explanations either being ‘good luck’ or a better monetary policy).

What about improved supply-chain management and the shift in production and employment from goods to services? Especially since the volatility of output has declined by much more than the volatility of sales (and the volatility of household income and consumption have not declined at all).

People in the Soviet Union became demonstrably more rich from 1917 through 1991. Therefore trickle-down economics works.

Because individuals tend to move from one part of the income distribution to another over the course of their lifetimes, it makes no sense to compare the overall income distribution of one society to the overall income distribution of another society to see if one society is doing better than the other.

It’s clear that your ability to define things is not to be trusted, yourself included.

Perhaps the strongest claim refuted by all this is that the financial industry is so wise and benevolent that they should be given a large share of control of monetary policy at the expense of democratic checks and balances. I refer to the independence of central banks (let’s set aside the argument about whether the Fed is public or private; it is a hybrid, with both interests represented in the FOMC. Don’t know how it works outside the US). The Fed has now bought garbage for trillions to save the banks, without asking anyone and refusing to tell anyone the specifics. I think this will and should be a major issue as the implications become clear.

Lemuel, yes, I’m aware of that and may have wandered off-topic some, but the general topic of this thread is economic ideas that have been undermined by recent events, not just the Great Moderation. The specific notion I was talking about in terms of inflation measure was the spectacular growth attributed to the last couple of decades by Milton Friedman among others. I seem to recall him claiming that economic liberalization since 1980 had created the greatest increase of wealth of any comparable timespan in history. Asset inflation seems relevant to that claim. As for multiple measures of inflation, sure, but it would seem that the measuer the Fed actually uses to set monetary policy does not include asset inflation, as the Fed did not seem to consider the last several years as a high inflation period. Consider that home owners spend a huge portion of their income on the homes, it seems like that would have been considered an inflationary period had home prices been measured at face value, rather than in rental equivalents.

John, your refuted economic beliefs seem to be sort of the charter used by the NYT to select the economists to which it gives space – if the economist believes every one of those things, he gets to write op eds and join in the fun at the Economix blog. Of which two recent entries really made me laugh. One is by the ever wrong Casey Mulligan, McCain’s economic advisor and the guy who thinks our spike in unemployment is caused by a rash of lazyitis – really, the workers of america are gettin’ too much money! Today he is proposing that the commercial real estate market is doing extra well, in spite of the naysayers. He uses a typically whacky, cherry picked chart that shows commercial real estate did not bubble as much as residential – wow, talk about one of your strong proofs! As one commenter pointed out, in the real world, in which there are money market funds invested in commercial real estate, like TIAA-CREF real estate fund, losses last year stood at 17 percent.

But Mulligan is well known as a Friedman apparatchik. What I find more amusing are economists like Glaeser. His post on the super bowl celebrating sun belt real estate was a hoot – and an unconscious indicator that the economics mainstream still has its dead talons firmly clenched in the magic idea of the self-correcting market. This is what he said about Phoenix:

“The fact that Phoenix has experienced a 42 percent housing price drop since its June 2006 peak is a sign of the area’s strength, not weakness. The high housing prices were always unsustainable, because of Phoenix’s capacity to build. Unrestricted supply meant the price boom was always a mirage. The decline in prices reflects the ability of Phoenix’s great growth machine to create inexpensive housing. ”

Only an economist could get the NYT to publish such gobbledy gook. Imagine if our weatherpersons applied the self adjusting model to weather reports: good news! A hurricane is approaching the city!