Economics/Finance

I’m a bit hesitant to link to this (as I’m not an elderly right wing economist, I’m worried I might be accused of “belittling the other”), but it’s super-duper awesome! Charles Rowley, familiar to long time CT readers for his “ruminations”:https://crookedtimber.org/2003/07/20/worldly-philosophers/ on the corruption of the profession of political science (we’re all in hock to the federal government) and his “bizarre attack”:https://crookedtimber.org/2009/07/28/anger-and-greif/ on Avner Greif (see “here”:http://www.springerlink.com/content/e4477g1412453627/ for Greif’s reply), “now has his own blog”:http://charlesrowley.wordpress.com/. It’s everything that one might possibly hope for. My favorite so far is the bit telling us that:

bq. the massive fist of free market ideas once again will smash through the false consciousness of Keynesian dreams, and voters will rush to elect leaders such as Margaret Thatcher and Ronald Reagan

‘cos it’s a level of rhetorical styling that I haven’t seen since I used to pick up the newsletter of the Maoist International Movement (the title is a bit of a misnomer; the cadres all seem to hang out in Ann Arbor, Michigan) when I was a graduate student in statistics boot camp. But the Obama=Sykes, Larry Summers=Fagin “post”:http://charlesrowley.wordpress.com/2009/12/05/youve-gotta-pick-a-pocket-or-two-boys/ runs a very close second:

bq. The question that remains to be answered is whether the futures of Larry and Barack will mirror those of Fagin and Sykes. Will some fortuitous Oliver chance across the paths of these shady characters before they can fulfill their dreams while destroying the market system that created the wealth that they covet? Will both meet the dreaded drop in 2012, if not before? Or will pocket-picking accelerate to the point at which Atlas Shrugs and the wealth-creators remove themselves from the economy, leaving those who cannot create wealth to share in the economic collapse of a negative-sum game as the United States begins a long decline into economic mediocrity?

This is a man who was surely born to blog. Update your bookmarks.

Update: “The Fun Continues”:http://charlesrowley.wordpress.com/2009/12/08/a-great-deal-of-ruin-in-a-nation/

bq. As private investment is increasingly crowded out by government expenditures, and as entrepreneurship is dashed by national socialist policies – as indeed was the case in the US throughout the the first two administrations of FDR – the once-powerful engine of the US economy will sputter and then die. Unlike in 1945, in 2019 the United States will not bestride a shattered world economy like some hegemonic Colossus. Rather its _state capitalist,_ [HF: emphasis in original] social market economy will struggle just to maintain existing living standards, while newly-emergent, vibrant market economies demonstrate to a former master the awesome power of laissez-faire capitalism.

If Tyler Cowen hadn’t confirmed that this blog was the genuine article, I’d suspect it of being a clever fraud perpetrated by an old-school lefty – the ‘Staatsmonopolistischer Kapitalismus=Nationalsozialismus’ identity has fallen out of fashion since the collapse of the GDR, and it is rather odd to see it being revived as a defense of free markets.

I recall a short but striking conversation with the formidable Piero Sraffa at the Economics Faculty cocktail party after Dennis Robertson’s Marshall Lectures. I well knew that it was Sraffa whom Wittgenstein had described as his mentor during the gestation of the Philosophical Investigations, but I still ventured a rather simple-minded remark about the obvious importance of the fact-value distinction to the social sciences. He turned on me his charming smile and glittering eyes. Did I really suppose that one could switch from fact to value as if simply moving a handle? His voice rose and his Italian accent grew sharper. “Fact, value! Value, fact! Fact, value! Value, Fact! FACT, VALUE! VALUE, FACT!” I beat a swift and chastened retreat. — W.G. Runciman, Confessions of a Reluctant Theorist, 18.

In response to some comments, I’ve written a little bit about the representative agent assumption in Dynamic Stochastic General Equilibrium Models. I argue that, given the underlying DSGE assumptions, you won’t get very much extra by including heterogeneous agents.

But, I intend to say in the “Where next” section, it seems likely that heterogeneous and boundedly rational individuals, interacting in imperfect and incomplete markets will generate ’emergent’ macro outcomes that are not obvious from the micro foundations. Of course, this is going to be a prospectus for a theory, not the theory itself.

In the meantime, comments on my snippet would be much appreciated.

Update Looking at the responses, I think just about everyone has missed the point, which suggests that maybe I didn’t make it very well.

I’m not saying that heterogeneity doesn’t matter, but that introducing (tractable) heterogeneity into a DSGE model isn’t likely to yield radically different predictions about macroeconomic outcomes. If that’s correct, then if you think DSGE models work well (for some evaluative procedure), you can be relaxed about using representative agents. And if you don’t think DSGE models work well, the representative agent assumption isn’t the problem, or at least it isn’t the only problem.

Since my statement of the situation didn’t help much, I’ll present it as a question instead. Can anyone point me to a DSGE-style model that derives strongly non-classical results from the introduction of heterogeneity? Or, failing that, does anyone have a convincing argument that such results should emerge?

I’m aware of course that, in general, anything can happen with aggregation across heterogeneous agents, so I’m not much interested in arguments for agnosticism starting from that point. End update

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“Via Mark Thoma”:http://economistsview.typepad.com/economistsview/2009/10/the-pundits-dilemma.html, Mark Liberman presents us with “The Pundit’s Dilemma”:http://languagelog.ldc.upenn.edu/nll/?p=1824.

Overall, the promotion of interesting stories in preference to accurate ones is always in the immediate economic self-interest of the promoter. It’s interesting stories, not accurate ones, that pump up ratings for Beck and Limbaugh. But it’s also interesting stories that bring readers to The Huffington Post and to Maureen Dowd’s column, and it’s interesting stories that sell copies of Freakonomics and Super Freakonomics. In this respect, Levitt and Dubner are exactly like Beck and Limbaugh.

We might call this the Pundit’s Dilemma — a game, like the Prisoner’s Dilemma, in which the player’s best move always seems to be to take the low road, and in which the aggregate welfare of the community always seems fated to fall. And this isn’t just a game for pundits. Scientists face similar choices every day, in deciding whether to over-sell their results, or for that matter to manufacture results for optimal appeal.

In the end, scientists usually over-interpret only a little, and rarely cheat, because the penalties for being caught are extreme. As a result, in an iterated version of the game, it’s generally better to play it fairly straight. Pundits (and regular journalists) also play an iterated version of this game — but empirical observation suggests that the penalties for many forms of bad behavior are too small and uncertain to have much effect. Certainly, the reputational effects of mere sensationalism and exaggeration seem to be negligible.

(to avoid falling into my own version of this dilemma, I should acknowledge straight up that while I’m disappointed with the Freakonomics phenomenon _ex-post_, I was quite optimistic _ex-ante_ )

From the NYT on the remarkable profitability of Goldman Sachs

A big reason for Goldman Sachs’s blowout profits this year has been the willingness of its traders to take big risks — they have put more money on the line while other banks that suffered last year have reined in such moves. Executives say there are big strategic gaps opening up between banks on Wall Street that are taking on more risks, and those that are treading a safer path.

Hmm. I’d be willing to take big risks if I knew the Fed and the US Treasury were standing by, ready to pick up all my losing bets. In the circumstances, the guys at GS doubtless stand amazed at their own moderation in creaming off a mere $20 billion for the year.

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I just heard this from a passing radio and initially didn’t quite believe it. Ostrom, in particular, is a terrific choice. She’s at the other end of the spectrum defined on one side by Freakonomics. Which is to say her work is not flashy, it’s very thorough, and it arrives at, you know, correct answers. I bet the Political Scientists are very, very happy today.

I finally read Gillian Tett’s Fools Gold, an account of the development of the derivatives industry centered on credit default swaps (CDS) and collateralised deposit obligation (CDOs) that collapsed so spectacularly last year. The discussion is excellent, but still, I think, too charitable to these instruments and their creators. Tett’s main source is the group at JP Morgan who pioneered many of these derivatives and, largely, got out before the crash. Their line, unsurprisingly, is that the problem was not with the concept as they developed, but its abuse by latecomers.

But a close reading of Tett’s account yields a different story. These innovations were defective from day one.

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Paul Krugman’s piece on “Why did economists get it so wrong” has attracted a vitriolic response from John Cochrane, reproduced here. Krugman’s piece was strongly worded, but the reply ups the ante, and I expect further escalation. Economics conferences in the next few years are going to be interesting events.

Given that, as Krugman himself notes, disagreements between economists were notably mild until the crisis erupted, what is going on here?

I’m visiting Berkely at present and just had a chat with Brad DeLong. These are some of the thoughts I had about the great macroeconomics wars as a result.

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Reading the current US debate on health care from the outside is pretty dispiriting. It is an example of what happens to rational debate in circumstances of inequality where vested interests and partisan pundits can distort discussion by throwing loads of noise, fear and disinformation into the conversation. Still, that’s no reason not to try to have a conversation about which principles ought to obtain, and I think for that it is hard to beat Ronald Dworkin’s paper “Justice in the Distribution of Heath Care”, _McGill Law Journal_, 38 (1993), pp. 883-98 (though I’m looking at the reprint in Clayton and Williams eds _The Ideal of Equality_ ).

Dworkin’s “central idea”:

bq. … we should aim to make collective, social decisions about the quantity and distribution of health care so as to match, as closely as possible, the decisions that people in the community would make for themselves, one by one, in the appropriate circumstances, if they were looking from youth down the course of their lives and trying to decide what risks were worth running in return for not running other kinds of risks. (C&W, 209)

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Megan McArdle has a post up grousing about how ‘but we have rationing already’ arguments are facile. Pardon me for not seeing her point (although I am willing to concede there may be overuse of the term, as we shall see). Let’s say the rationing in question is some guaranteed minimum coverage (public option). Obviously minimum is not maximum. That’s what people mean when they call it ‘rationing’, and that’s an ok use of the word. But lets start by noting that, paradigmatically, rationing needs two elements: it provides a minimum for everyone in a group by forbidding anyone from getting more than a certain maximum. Rationing means using the latter mechanism to ensure the former result. In that sense, the proper thing to say is that the guaranteed minimum coverage doesn’t really involve rationing.

Suppose, instead, we were talking about a guaranteed minimum income (as was proposed in the 70’s, and as such free market luminaries as Milton Friedman thought made a certain amount of economic sense, if memory serves.) Lots of folks would be opposed to guaranteed minimum income today (to put it mildly), but would anyone say a guaranteed minimum income was bad economics because it would amount to ‘rationing of the money supply”? And fiat rationing (as McArdle says) is inefficient. I don’t think economists would see this as a problem. Why not? Because there is no reason why the volume of money overall should be a function of – critically constrained by – some minimal income provision. That’s just not how the money supply would be determined: there wouldn’t be some iron economic law that there couldn’t be more money than everyone times the minimum. [click to continue…]

Belgium has one of the highest per capita public debts in the EU, and a pension system whereby the workers pay for the pensions. So there is a serious challenge of keeping the public pension system viable and sustainable in the near future when the population will be aging.

According to the Dutch-language Belgian newspaper “De Standaard”:http://www.standaard.be/Artikel/Detail.aspx?artikelId=BE2D2NEF, Belgian politicians have decided that the best qualified candidate for the position to lead the Belgian National Office for Pensions will not be appointed. The reason? He is Dutch-speaking, and it was decided that appointing him would bring the balance of francophone versus Dutch speaking high office public servants in danger. [click to continue…]

I’m not writing about the debates over health insurance (as, indeed, I am not writing about most policy debates), because I simply don’t think I’m informed enough to say anything very useful about the pros and cons of the specific options under discussion. Still, “this”:http://www.marginalrevolution.com/marginalrevolution/2009/07/the-uninsured-adverse-selection-problem-or-distribution-problem.html by Alex Tabarrok struck me as a bit odd. [click to continue…]

That’s “a headline”:http://news.bbc.co.uk/1/hi/uk/8147890.stm at the BBC. So it would seem that they do rather less damage to the UK economy tham the various banking groups that needed rescuing ….

Daniel Davies will be moderating a salon with George Soros at “FireDogLake’s Book Salon”:http://firedoglake.com/booksalon/ tomorrow – should be fun …