Wednesday, February 17, 2010

Assorted Musings

Here are some assorted musings:

(1) Menzie Chinn does a one-year anniversary review of the evidence on Obama's fiscal stimulus and concludes that 1.6 to 2.5 million jobs were created. Given the poor state of the economy this conclusion is based on counterfactual analysis (i.e How much worse would the economy have been had there been no stimulus?). John Taylor says these results are built into the models that make them. Arnold Kling agrees and explains why from a Bayesian perspective:
In Bayesian terms, the weight of the modeler's priors is very, very high, and the weight of the data is close to zero. The data are essentially there just to calibrate the model to the modeler's priors.
This debate will not be settled anytime soon. It also ignores another important question that requires counterfactual analysis: how many jobs would have been saved or created had monetary policy been more aggressive? Recall that monetary policy does not lose its efficacy just because its policy rate hits zero: unconventional monetary policy can still affect aggregate demand in a meaningful way by altering inflation or price level expectations. If you are not convinced just ask Michael Woodford, Paul Krugman, or Scott Sumner for starters.

(2) Tyler Cowen makes the case for the value added tax (VAT) and then asks for good arguments against it. Here is a big one: the VAT does not allow the public to fully internalize the true cost of the federal government. This problem would be particularly pronounced now if the VAT were enacted since about half the the U.S. population pay no federal taxes. If we want voters to make informed decisions about government programs they need to know the true costs and benefits of those programs. While the VAT might widen the tax base and help shrink the deficit in the near term it would also serve to only further externalize the true cost of government spending. In turn, this may eventually lead to a further widening of the budget deficit.

(3) Nick Rowe addresses some of the problems with the Post Keynesian/Chartalist theory of money. As someone who was their poster boy of what is wrong with mainstream macro over the past weekend in the comment section of this post , it is refreshing to see Nick Rowe assess some of their views. Among other things, we learn that they lack a theory of the price level. (We also learned from the earlier post that the money supply and the monetary base are completely and always endogenous. Robert Mugabe, therefore, is a victim not the perpetrator of Zimbabwe's hyperinflation!)

(4) I am a parent of young children and am an economist. Here I learn that I can be a better parent by utilizing my skills as an economist! My wife will love this one.

(5) Who says brain drain in the developing world is a bad thing? Laura Freschi says brain drain has unfairly received a bad rap.


  1. New Keynesian models leave the price level indeterminate as well according to John Cochrane.

    Yes, I think the chartalist bubble is closing to reaching its Minsky moment. A perfectly valid point about endogeneity of money supply under interest rate rules has flowered into an extraordinary theory of how to guarantee full employment by printing lots of luvverly money (ooh, sorry, not printing, adding to bank reserves).
    I love the Hayek quote about how "Mr Keynes aggregates conceal the fundamental mechanisms at work". He could of course equally well have aimed that barb at the monetarists, and a fortiori it can be aimed at the chartalists.

    On Menzie Chinn and the fiscal stimulus...dear Lord, what rubbish these econometricians do serve us! The good Mr Chinn should saunter over to Hayek's Nobel lecture on "The Pretence of Knowledge" and let it sink deep into his neurons.

  2. While on the subject of the price level, I wondered if you had seen Ricardo Reis's recent paper on dynamic measures of inflation ? This gives a substantially different measure of inflation in the 2005-2007 period. His DPI shows inflation running at around 8% at this time. This would be further evidence that monetary policy was extraordinarily lax.

  3. Okay, I need to read that paper. Both you and Bill Woolsey keep talking about it. Bill, has interesting things to say about it on his blog.

  4. I'm on Nick Rowe's side of the debate, but I think your defense of Mr. Mugabe is not justified. I may be wrong, but according to Post Keynesians it is the Governor of Central Bank Mr. Gono with his endogenous monetary base who is the victim of the policies of Mr. Mugabe.