miércoles, septiembre 09, 2009

Economistas dulces y salados

Hace unos días el New York Times publicó un extenso y provocador ensayo de Paul Krugman, en el que trata de responder a la cuestión del porqué los economistas no vieron venir la crisis que hoy soportan EEUU y demás economías. En el texto el autor repasa la controvertida evolución de la teoría y política macroeconómica, en la que hasta hace poco los economistas aparentemente habían llegado a la conclusión que atravesaban por una “era dorada de la profesión”. Pero, dice el autor, no reconocían que habían fracasado en toda la línea en la explicación y el pronóstico de las últimas recesiones, en especial de la actual. Si bien hay varios que sí la vieron, sólo se refiere muy merecidamente a Robert Shiller de Yale.

Atribuye esa ceguera al hecho de que habían sustituido la elegancia, envuelta en impresionantes modelos macroeconométricos, a costa de la ‘verdad’. Es decir, seguían insistiendo en la visión idealizada de una economía en la que individuos racionales interactúan en mercados perfectos. Con lo que perdieron de vista, cuando menos, “las limitaciones de la racionalidad humana que a menudo culmina en burbujas y reventones; los problemas de instituciones que quiebran; las imperfecciones de los mercados -en especial de los financieros- que pueden llevar a explosiones repentinas e impredecibles; y los peligros que crean los reguladores que no creen en la regulación”.

En tal sentido su ataque va dirigido principalmente contra los economistas dulces (‘freshwater’ economists), llamados así porque enseñan en universidades ubicadas a la vera de ríos o lagos (privilegiando a las de Chicago y Minnesota), contrastándolos con los economistas salados (‘saltwater’ economists) pertenecientes a las escuelas keynesianas de economía de las costas oceánicas (obviamente las de Boston y algunas de California), a las que él mismo pertenece, pero a las que también les propina alguna cachetadita.

Aunque no dice que debemos reconstruir la macroeconomía desde cero, sí plantea que es imperativo modificarla profundamente sobre algunas nuevas bases. Son tres las ‘lecciones’ que Krugman propone a los economistas si no quieren seguir haciendo papelones: Reconocer y aceptar que los mercados financieros no son perfectos, ni eficientes; que el enfoque económico keynesiano sigue siendo el mejor para entender y enfrentar las depresiones y recesiones; y que deben incorporar las realidades de las finanzas -a partir de las lecciones que ofrece la ‘economía del comportamiento’- en sus teorías y políticas macroeconómicas.

Sin duda ese texto (www.nytimes.com/2009/09/06/magazine/06Economic-t.html) sacará chispas -y hará historia- entre los economistas de allá y seguramente también en nuestro medio. Que es lo que parece buscar adrede el Premio Nobel más reciente, aunque sabe bien que es igualmente delicioso bañarse en el lago de Michigan como en las playas californianas, así como un buen chifa solo lo es si combina adecuadamente dulce con salado.


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Amplíe imagen con el puntero

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P.D.: ¡Y SE PRENDIÓ LA MECHA! (Setiembre 12, 2009)

Como era de esperarse, la reacción al texto de Krugman (publicado el 6 de este mes en la página MM36 de la edición de Nueva York) ha sido inmediata y, en algunos casos, violenta. Los economistas de agua salada han respondido bastante dulcemente, mientras que los de agua dulce lo han hecho agriamente, como Ud. podrá comprobar en la selección de textos que reproducimos a continuación.

Se trata de varios artículos: siete, que responden a un picante ‘cuestionario’ del National Journal; uno, del más golpeado por Krugman (Cochrane): otro que responde a Krugman exante (Robert Lucas); y el final que es del propio Krugman sobre el rol de las matemáticas en economía.

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Professor Krugman's Opus
http://economy.nationaljournal.com/2009/09/professor-krugmans-opus.php#1352514

Interrogantes que le planteó a varios economistas John Maggs del NationalJournal.com (setiembre 8, 2009):
What do you think of Paul Krugman's lengthy and provocative argument "

How Did Economists Get it So Wrong?" in Sunday's New York Times Magazine? Is his taxonomy of competing schools of macroeconomics a fair one? And his account of which failed and how? Krugman says the crisis points to a muddy future for economic theory and a greater legitimacy for behavioral economics, among other conclusions. Is he right? Las 7 respuestas que llegaron hasta ayer:
1.
James K. Galbraith, Professor of Economics, University of Texas Responded on September 11, 2009 10:26 AM
“Of course, there were exceptions to these trends: a few economists challenged the assumption of rational behavior, questioned the belief that financial markets can be trusted and pointed to the long history of financial crises that had devastating economic consequences. But they were swimming against the tide, unable to make much headway against a pervasive and, in retrospect, foolish complacency.”
Paul Krugman, New York Times Magazine, September 6, 2009
Amen.
In two sentences, Professor Paul Krugman, Nobel Laureate in Economics for 2008, has summed up the failure of an entire era in economic thought, practice and policy discussion.
And yet, there is something odd about the role of this short paragraph in an essay of over 6,500 words. It’s a throwaway. It leads nowhere. Apart from one other half-sentence, and three passing mentions, it’s the only discussion of those economists who got it right. Only one is mentioned by name. Their work is not cited. Despite having been right on the greatest economic questions of a generation, they are unpersons in his tale.
Forgive me for pointing out that on this topic I’m Roald Amundsen to Paul’s Robert Falcon Scott. I got there first. My complaint, entitled “How The Economists Got It Wrong,” ran in
The American Prospect NINE years ago (VER: http://www.autisme-economie.org/sites/autisme-economie.org/IMG/article_PDF/article_a42.pdf). I would not now repeat the unkind things I said then about Paul, but the conclusion is still right:
“Leading active members of today's economics profession, the neoclassical generation now in its forties and fifties, have formed themselves into a kind of Politburo for correct economic thinking. As a general rule ‑ as one might generally expect from a gentleman's club ‑ this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen. ... They oppose the most basic, decent and sensible reforms, while offering placebos instead. They are always surprised when something untoward (like a recession) actually occurs. And when finally they sense that some position cannot be sustained, they do not reexamine their ideas. They do not consider the possibility of a flaw in logic or theory. Rather, they simply change the subject. No one loses face, in this club, for having been wrong.... And still less is anyone from the outside invited in.”
As Paul notes, some economists did get it right. This was also true a decade back, when the immediate problems were the Asian and Russian crises, and inequality, and the technology bubble. There’s nothing much new about this problem. Paul knows this. Yet he doesn’t push for the rehabilitation of those who were right. There is no movement here, to break open the field, to diversify and to reconstruct, to change the personnel and the hierarchy of departments, journals, textbooks and reputations. And until that happens, what is called the “mainstream” in macroeconomics will continue to run dry.
The question of who got it right, and why, deserves more attention, and I plan to take it up in another place.
Meanwhile, others have noted below that in Washington the academic macro-economists carry no weight. How could they? They have had nothing to say to the policy community for decades. Try to persuade a Member of Congress, of either party, that recessions are self-correcting, that stimulus is offset by saving to pay off the eventual increase in taxes (and therefore useless), or that the Federal Reserve should ignore unemployment. It can’t be done. Yet such rubbish has been a staple of textbook economics, and academic macro, for decades.
(On this point, consider the wonderfully-titled paper by Robert Solow, delivered to the 60th birthday conference for Joe Stiglitz at Columbia in October, 2003. It was called, “Dumb and Dumber in Macroeconomics.” Sitting next to my distinguished Yale classmate Ernesto Zedillo, as we listened to it, I remarked that I always hoped that if one could only close one’s eyes for thirty years, this would all go away. He said, “Yes, it was a very good time to go into public service.”)
Still, on certain critical issues the “impressive-looking” and “gussied-up” cult of free markets did dominate policy. Where the cult served the lobby culture, it tended to win out. Right up to the crisis, this was true of attitudes toward financial deregulation and privatization, toward the repeal of Glass-Steagall, and in the dismissive approach taken to those (like the FBI!) who warned about massive mortgage fraud and the impending housing bust. It was true of those who thought the Federal Reserve could wave its wands and guarantee that the “Great Moderation” would long continue. It is true -- today -- of the reflexive deficit-worriers who are well-represented among my colleagues below.
Even the mostly-sensible policy economists have not yet fully rethought their assumptions -- even now.
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2. Martin Baily, Senior fellow, Brookings Institution Responded on September 8, 2009 4:52 PM I agree with Krugman that academic macroeconomics went haywire some years ago. Many economists got out of academic macroeconomics because there seemed to be no way to fight the emerging and mistaken consensus. One place that fought the good fight for sensible macroeconomics was Brookings, where the Brookings Papers on Economic Activity remained true to sensible macroeconomics at the price of losing credibility with the academic profession.
What is less clear is whether actual macroeconomic policymaking in Washington was greatly influenced by the papers in the economics journals. My experience in the Clinton Administration in the 1990s, including the interactions with the Federal Reserve, suggested that actual stabilization policy was governed by a pragmatic view of the economy that combined the important lesson from Keynes about the potential instability of the economy together with what we learned subsequently in the postwar period, including the substantial power of monetary policy—something that Keynes downplayed.
The pragmatic consensus among policymakers failed miserably in this crisis because the postwar period lulled us into a false sense of security. We believed that adjusting short term interest rates and using occasional fiscal policy were all that was needed to avoid a major recession. After all, there was almost uninterrupted economic growth from the mid 1980s until 2007, despite some pretty big shocks to the economy, including the technology bust and the 9/11 attacks. The policy failure was a very bad one, but it is hard to blame it on an excessive reliance on economic theory.
Give some credit to the Chicago School. Following the Great Depression and the war, there was a massive expansion of government regulation in areas such as transportation and telecommunications. George Stigler and Milton Friedman pointed to the problems created by such regulation and the tendency of regulators to be influenced or captured by the companies they are supposed to regulate. The deregulation movement started under Carter and was supported by Ted Kennedy as well as Republicans, and overall it has had beneficial effects. Why should the government decide which airline flies between two cities and what fare is charged? In studies of productivity in many industries and many countries, research by the McKinsey Global Institute (that I worked on) showed that poorly executed regulation has held back economic performance in many countries. Those policymakers that embraced deregulation and competition have seen the payoffs, including the UK, Australia, China and the United States.
As I said earlier, the successes of macroeconomic stabilization policy resulted in a complacency that contributed to the current crisis. The success of industry-level deregulation policies also caused problems. It encouraged the deregulation of the electricity sector without adequate safeguards and with disastrous consequences in California and elsewhere. It encouraged the deregulation of the financial sector and, more importantly, to a laxity by regulators who failed to appreciate excessive risk taking and the inherent instability of this sector. The consequences are the ones that Krugman describes so forcefully.
Krugman blames bad economic theory for the crisis, while I question whether economic theory really was as influential as he assumes. But at the least, economic theory did provide the intellectual rationale for policy and regulatory failures that helped get us into this mess.
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3.
Isabel Sawhill, Senior fellow, Brookings Institution Responded on September 8, 2009 2:01 PM Krugman is right that economics is now more about the elegance or beauty of ideas and their mathematical exposition than about shedding light on real world problems.
As he notes, even the pragmatists among us (“the saltwater economists”) have not found a way to reconcile Keynesian theories with our continuing belief in the ability of individual markets to equilibrate supply and demand. Behavioral economics has helped to wean a new generation of economists from the earlier fixation on perfect rationality along with full and unbiased information, equally available to both buyer and seller in a market, but the microeconomic foundations of macroeconomics still need shoring up.
In the meantime, those of us who work in Washington in policy-advising or policy-making positions quickly learn that theoretical answers are nowhere near as useful as empirically-generated answers based on common sense conceptual frameworks.
The sad thing, in my view, is the resources that are wasted teaching the best and the brightest in today’s graduate schools that the ticket to success is a theoretically and mathematically derived answer to some trivial question. I agree that Krugman may have overstated or oversimplified his case in order to make it useful to the general reader but I very much welcome the debate I hope this will provoke.
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4. Rob Atkinson, President, Information Technology and Innovation Foundation
Responded on September 8, 2009 12:30 PM In thinking about the causes of the financial collapse I have been puzzled as to how so many knowledgeable people in Washington and on Wall Street did not realize that the long history of housing prices, at least since WWII, has followed a pretty steady trend and that the dramatic increase above trend that began in the early part of this decade simply could not be sustainable and had to revert to the mean – either gradually, or as we have seen, dramatically.
Krugman provides the answer: the dominant neo-classical economics doctrine equates value with price. If value equals price, then the price of housing – or any other commodity – is always priced appropriately. And if this is the case, then normal rules of lending and other financial tools generally will work. When it’s not, they don’t as we saw.
As such, Krugman is right to call for bringing the reality of human irrationality, institutions, culture, and technology, back into economics, as they once were before the mathemetization of economcs drove them out. But even with this, Krugman he can’t free himself from the dominant view that price equals value, when he states that “U.S. households have seen $13 trillion in wealth evaporate" in the recession.
But most of this 13 trillion didn't disappear. My house is still here. The companies in which my mutual funds own stock are still there . All that changed was the prices at which American asset owners can sell their assets fell by $11.2 trillion. But the prices that buyers have to pay for those assets also fell by $11.2 trillion.
This gets to the real challenge for neo-classical economics: refocusing the discipline on the real economy and not the monetary economy. Focusing on the former means asking a set of questions like, how are organizations innovating to develop new products, services and business models, and how can government help facilitate that process? How are entrepreneurs starting new high-growth companies? Are workers getting the skills they need to complement production changes in organizations? These and other questions get to the heart of what the new economics should be about: how does society create and expand real (as opposed to asset value) wealth.
This means not just bringing back institutions and people into economics as Krugman rightly argues that Keynesian economics does. It means bringing back technology and innovation as central to the process of growth, not as neo-classical economics holds, exogenous. So Keynesianism is not the only alternative to the failures of neo-classical economics: innovation economics is (what has been also termed, new-growth theory, structuralist-evolutionary economics, or institutional economics).
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5.
Charles Calomiris, Professor of Financial Institutions, Columbia University
Responded on September 8, 2009 10:42 AM Professor Krugman's article, like much of his journalism, was hastily drafted and factually incorrect. He presents a caricature of the finance and economics professions and shows little knowledge of what actually went wrong with the markets and how much the sources of the crisis had been causes of concern by economists prior to the crisis.
One of the most humorous aspects of the article was its view that the efficient markets hypothesis was at the heart of the inability to see the bubble coming. If Krugman had bothered to read any of the finance journals for the past two decades he would have noticed a remarkable transformation of the profession away from adherence to the efficient markets hypothesis. Behaviorism is in, as are theories of market imperfections due to asymmetric information, and theories of agency (how money managers make purposeful investment errors because of conflicts between their interests and their clients'). It is hard to combine these ideas into an overarching theory of asset pricing, but in the past decade many scholars are starting to integrate asymmetric information theoretical perspectives from corporate finance (how firms raise funds) into models of asset pricing. So much for Krugman's knowledge of finance.
And Krugman also thinks that because he failed to see the subprime collapse coming that means the profession failed to see problems brewing. Not true. Many of us had been arguing for some time that Fannie's and Freddie's politically driven subsidies would create systemic risk in the mortgage market. Paul Krugman, on the other hand, argued as late as July 14, 2008, in his New York Times column, that F&F had no exposure to subprime, which he said followed from a legal prohibition of their involvement in subprime. This was siimply made up, like many of his columns. There is no such prohibition, and when the dust had settled it became clear that more than half of the total subprime exposure was in the hands of F&F. Of course, it was hard to know that prior to 2008, since F&F did such a good job disguising the magnitude of their subprime exposures with creative bookkeeping. F&F crossed the Rubicon in 2004, when they decided to make markets in no docs mortgages, and produced a tripling of subprime originations in that year. Then, in 2006, when firms like Goldman and Deutsche were heading for the hills, given the obvious signs that the subprime market was in for a tumble, F&F continued to make the market, leading to the continuation of peak origination volumes through the first quarter of 2007, which substantially increased losses from the crisis.
And many people also noted that the Fed was keeping money much too loose from 2002-2005. The Fed departed dramatically from its Taylor rule-determined levels of the fed funds rate throughout that period, often by more than a full percentage point below what would normally have been the fed funds rate, in light of inflation and unemployment at that time.
Also, some of us complained that Congress in 2006 was wrong to pressure, through its legislation that year, the ratings agencies to loosen their standards on subprime backed CDOs (this "anti-notching" initiative is still a little known fact). A dozen academics signed an open letter to the SEC in March 2007 complaining that its implementation of the new law would make an already excessively risky situation even worse.
And many of us had complained that prudential bank regulation, especially the Basel rules and the reliance on internal risk modeling by banks, was far too lax and did not measure risk accurately, and specifically, that it was far too permissive in its treatment of mortgages and their securitizations.
Indeed, the limited 10-year lookback rule for stress testing subprime securitizations was a subject of widespread criticism (the topic of my keynote lecture to an association of risk managers in February 2007), since that failed to build into the stress tests any reasonable possibility of a decline in housing prices. And I was not alone in that concern.
Professor Joseph Mason and Joshua Rosner also wrote papers in 2006 and early 2007 pointing to other flaws in the procedures used to rate subprime mortgage securitizations, and Rosner had been predicting a collapse of this market since mid-2006 on the basis of those concerns.
So much for Krugman's grasp of the facts.
All of which leads me to suggest a new word for the economics lexicon: "Krubbish": defined as the reporting by economists who care more about making headlines and scoring points for the left than they do about thoughtful public debate.
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6.
Ted Truman, Senior Fellow, Peterson Institute for International Economics Responded on September 8, 2009 10:13 AM Paul Krugman is broadly correct. Too many academic economists have been looking for truth under the lamppost rather than tackling the really difficult problems that do not lend themselves to elegant, mathematical solutions. Of course, as an economist and in order to be clear, Krugman had to simplify his own argument, and some will say oversimplify. The distinction between fresh water and salt water is broadly correct except that here on the Potomac the waters mix. I am sure that Krugman will offend many because some of the corrective trends, for example with respect to behavioral economics are already underway, but he has stirred up a good debate.

7.
Jeffrey Frankel, Professor of Capital Formation and Growth, Harvard University
Responded on September 8, 2009 9:36 AM
(Fuente: www.rgemonitor.com/financemarkets-monitor/257657/why_did_economists_get_it_so_wrong_krugman_is_right).

The Queen of England during the summer
asked (ver: http://www.guardian.co.uk/uk/2009/jul/26/monarchy-credit-crunch) economists why no one had predicted the credit crunch and recession. Paul Krugman points out that, inasmuch as economists can almost never predict the timing of recessions (and don’t claim to be able to), the real questions are worse. The real questions are, rather how macroeconomists (most of us) could have gotten it so wrong as to believe that: (i) a severe recession like this was not even looming ahead as a danger, and (ii) a breakdown of many of the world’s most liquid financial markets, in New York and London, was not possible.To anyone wondering about these questions, I recommend Krugman’s essay in the New York Times Sunday magazine, September 6: “How Did Economists Get it So Wrong?” (Ver: www.nytimes.com/2009/09/06/magazine/ 06Economic-t.html?_r=1). I think he has it exactly right.
I would only add that he is modest in skipping over one point: during Japan’s lost decade of growth in the 1990s Paul
forcefully drew (ver su libro: The Return of Depression Economics) from the Japanese experience the implication that a severe economic breakdown was, after all, possible in a modern industrialized economy – a breakdown that both was reminiscent of the Great Depression and was outside the ken of modern macroeconomic theory. But macroeconomics went on as before (ver comentario de su libro en Los Angeles Times: http://articles.latimes.com/2008/dec/01/entertainment/et-book1). (Likewise with the stock market correction of 1987, the LTCM crisis of 1998, and the dotcom bust of 2000-01. I do think, however, that our field did a better job with the emerging market crises of 1994-2001, in part because it was considered permissible to argue that financial markets in this case were highly imperfect.)
Even the cartoons in the NYT article are good… except that I have never seen Olivier Blanchard in a double-breasted suit. But Robert Lucas definitely merits a place there: when given one page to defend orthodox economists regarding the crisis in a
recent Economist essay (ver: “In Defense of the Dismal Science”, que reproducimos más abajo por su relevancia), he actually thought it was a useful rebuttal to point out that critics are repeating arguments they have made before. And he also thought it was useful to explain: “The term “efficient” as used here means that individuals use information in their own private interest. It has nothing to do with socially desirable pricing; people often confuse the two.” — as if it is not the latter question that the public is wondering about.
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How did Paul Krugman get it so Wrong? Por: John H. Cochrane (1). http://faculty.chicagobooth.edu/john.cochrane/research/Papers/krugman_response.doc

Many friends and colleagues have asked me what I think of Paul Krugman’s New York Times Magazine article, “
How did Economists get it so wrong?”
Most of all, it’s sad. Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses. If a scientist, he might be a global-warming skeptic, an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all.
It gets worse. Krugman hints at dark conspiracies, claiming “dissenters are marginalized.” Most of the article is just a calumnious personal attack on an ever-growing enemies list, which now includes “new Keyenesians” such as Olivier Blanchard and Greg Mankiw. Rather than source professional writing, he plays gotcha with out-of-context second-hand quotes from media interviews. He makes stuff up, boldly putting words in people’s mouths that run contrary to their written opinions. Even this isn’t enough: he adds cartoons to try to make his “enemies” look silly, and puts them in false and embarrassing situations. He accuses us of adopting ideas for pay, selling out for “sabbaticals at the Hoover institution” and fat “Wall street paychecks.” It sounds a bit paranoid.
It’s annoying to the victims, but we’re big boys and girls. It’s a disservice to New York Times readers. They depend on Krugman to read real academic literature and digest it, and they get this attack instead. And it’s ineffective. Any astute reader knows that personal attacks and innuendo mean the author has run out of ideas.
That’s the biggest and saddest news of this piece: Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do. “Irrationality” and advice to spend like a drunken sailor are pretty superficial compared to all the fascinating things economists are writing about it these days.
How sad.

That’s what I think, but I don’t expect you the reader to be convinced by my opinion or my reference to professional consensus. Maybe he is right. Occasionally sciences, especially social sciences, do take a wrong turn for a decade or two. I thought Keynesian economics was such a wrong turn. So let’s take a quick look at the ideas.
Krugman’s attack has two goals. First, he thinks financial markets are “inefficient,” fundamentally due to “irrational” investors, and thus prey to excessive volatility which needs government control. Second, he likes the huge “fiscal stimulus” provided by multi-trillion dollar deficits.

Efficiency. It’s fun to say we didn’t see the crisis coming, but the central empirical prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going – neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences. Krugman knows this, so all he can do is huff and puff about his dislike for a theory whose central prediction is that nobody can be a reliable soothsayer.
Krugman writes as if the volatility of stock prices alone disproves market efficiency, and efficient marketers just ignored it all these years. This is a canard that Paul knows better than to pass on, no matter how rhetorically convenient. (I can overlook his mixing up the CAPM and Black-Scholes model, but not this.) There is nothing about “efficiency” that promises “stability.” “Stable” growth would in fact be a major violation of efficiency. Efficient markets did not need to wait for “the memory of 1929 … gradually receding,” nor did we fail to read the newspapers in 1987. Data from the great depression has been included in practically all the tests. In fact, the great “equity premium puzzle” is that if efficient, stock markets don’t seem risky enough to deter more people from investing! Gene Fama’s PhD thesis was on “fat tails” in stock returns.
It is true and very well documented that asset prices move more than reasonable expectations of future cashflows. This might be because people are prey to bursts of irrational optimism and pessimism. It might also be because people’s willingness to take on risk varies over time, and is lower in bad economic times. As Gene Fama pointed out in 1970, these are observationally equivalent explanations. Unless you are willing to elaborate your theory to the point that it can quantitatively describe how much and when risk premiums, or waves of “optimism” and “pessimism,” can vary, you know nothing. No theory is particularly good at that right now. Crying “bubble” is empty unless you have an operational procedure for identifying bubbles, distinguishing them from rationally low risk premiums, and not crying wolf too many years in a row.
But this difficulty is no surprise. It’s the central prediction of free-market economics, as crystallized by Hayek, that no academic, bureaucrat or regulator will ever be able to fully explain market price movements. Nobody knows what “fundamental” value is. If anyone could tell what the price of tomatoes should be, let alone the price of Microsoft stock, communism would have worked.
More deeply, the economist’s job is not to “explain” market fluctuations after the fact, to give a pleasant story on the evening news about why markets went up or down. Markets up? “A wave of positive sentiment.” Markets went down? “Irrational pessimism.” ( “The risk premium must have increased” is just as empty.) Our ancestors could do that. Really, is that an improvement on “Zeus had a fight with Apollo?” Good serious behavioral economists know this, and they are circumspect in their explanatory claims so far.
But this argument takes us away from the main point. The case for free markets never was that markets are perfect. The case for free markets is that government control of markets, especially asset markets, has always been much worse.
Krugman at bottom is arguing that the government should massively intervene in financial markets, and take charge of the allocation of capital. He can’t quite come out and say this, but he does say “Keynes considered it a very bad idea to let such markets…dictate important business decisions,” and “finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a `casino.’” Well, if markets can’t be trusted to allocate capital, we don’t have to connect too many dots to imagine who Paul has in mind.
To reach this conclusion, you need evidence, experience, or any realistic hope that the alternative will be better. Remember, the SEC couldn’t even find Bernie Madoff when he was handed to them on a silver platter. Think of the great job Fannie, Freddie, and Congress did in the mortgage market. Is this system going to regulate Citigroup, guide financial markets to the right price, replace the stock market, and tell our society which new products are worth investment? As David Wessel’s excellent In Fed We Trust makes perfectly clear, government regulators failed just as abysmally as private investors and economists to see the storm coming. And not from any lack of smarts.
In fact, the behavioral view gives us a new and stronger argument against regulation and control. Regulators are just as human and irrational as market participants. If bankers are, in Krugman’s words, “idiots,” then so must be the typical treasury secretary, fed chairman, and regulatory staff. They act alone or in committees, where behavioral biases are much better documented than in market settings. They are still easily captured by industries, and face politically distorted incentives.
Careful behavioralists know this, and do not quickly run from “the market got it wrong” to “the government can put it all right.” Even my most behavioral colleagues Richard Thaler and Cass Sunstein in their book “Nudge” go only so far as a light libertarian paternalism, suggesting good default options on our 401(k) accounts. (And even here they’re not very clear on how the Federal Nudging Agency is going to steer clear of industry capture.) They don’t even think of jumping from irrational markets, which they believe in deeply, to Federal control of stock and house prices and allocation of capital.

Stimulus
Most of all, Krugman likes fiscal stimulus. In this quest, he accuses us and the rest of the economics profession of “mistaking beauty for truth.” He’s not clear on what the “beauty” is that we all fell in love with, and why one should shun it, for good reason. The first siren of beauty is simple logical consistency. Paul’s Keynesian economics requires that people make logically inconsistent plans to consume more, invest more, and pay more taxes with the same income. The second siren is plausible assumptions about how people behave. Keynesian economics requires that the government is able to systematically fool people again and again. It presumes that people don’t think about the future in making decisions today. Logical consistency and plausible foundations are indeed “beautiful” but to me they are also basic preconditions for “truth.”
In economics, stimulus spending ran aground on Robert Barro’s Ricardian equivalence theorem. This theorem says that debt-financed spending can’t have any effect because people, seeing the higher future taxes that must pay off the debt, will simply save more. They will buy the new government debt and leave all spending decisions unaltered. Is this theorem true? It’s a logical connection from a set of “if” to a set of “therefore.” Not even Paul can object to the connection.
Therefore, we have to examine the “ifs.” And those ifs are, as usual, obviously not true. For example, the theorem presumes lump-sum taxes, not proportional income taxes. Alas, when you take this into account we are all made poorer by deficit spending, so the multiplier is most likely negative. The theorem (like most Keynesian economics) ignores the composition of output; but surely spending money on roads rather than cars can affect the overall level.
Economists have spent a generation tossing and turning the Ricardian equivalence theorem, and assessing the likely effects of fiscal stimulus in its light, generalizing the “ifs” and figuring out the likely “therefores.” This is exactly the right way to do things. The impact of Ricardian equivalence is not that this simple abstract benchmark is literally true. The impact is that in its wake, if you want to understand the effects of government spending, you have to specify why it is false. Doing so does not lead you anywhere near old-fashioned Keynesian economics. It leads you to consider distorting taxes, how much people care about their children, how many people would like to borrow more to finance today’s consumption and so on. And when you find “market failures” that might justify a multiplier, optimal-policy analysis suggests fixing the market failures, not their exploitation by fiscal multiplier. Most “New Keynesian” analyses that add frictions don’t produce big multipliers.
This is how real thinking about stimulus actually proceeds. Nobody ever “asserted that an increase in government spending cannot, under any circumstances, increase employment.” This is unsupportable by any serious review of professional writings, and Krugman knows it. (My own are perfectly clear on lots of possibilities for an answer that is not zero.) But thinking through this sort of thing and explaining it is much harder than just tarring your enemies with out-of-context quotes, ethical innuendo, or silly cartoons.
In fact, I propose that Krugman himself doesn’t really believe the Keynesian logic for that stimulus. I doubt he would follow that logic to its inevitable conclusions. Stimulus must have some other attraction to him.
If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it. Each dollar so transferred, in Krugman’s world, generates an additional dollar and a half of national income. The analogy is even closer. Madoff didn’t just take money from his savers, he essentially borrowed it from them, giving them phony accounts with promises of great profits to come. This looks a lot like government debt.
If you believe the Keynesian argument for stimulus, you don’t care how the money is spent. All this puffery about “infrastructure,” monitoring, wise investment, jobs “created” and so on is pointless. Keynes thought the government should pay people to dig ditches and fill them up.
If you believe in Keynesian stimulus, you don’t even care if the government spending money is stolen. Actually, that would be better. Thieves have notoriously high propensities to consume.

The crash.
Krugman’s article is supposedly about how the crash and recession changed our thinking, and what economics has to say about it. The most amazing news in the whole article is that Paul Krugman has absolutely no idea about what caused the crash, what policies might have prevented it, and what policies we should adopt going forward. He seems completely unaware of the large body of work by economists who actually do know something about the banking and financial system, and have been thinking about it productively for a generation.
Here’s all he has to say: “Irrationality” caused markets to go up and then down. “Spending” then declined, for unclear reasons, possibly “irrational” as well. The sum total of his policy recommendations is for the Federal Government to spend like a drunken sailor after the fact.
Paul, there was a financial crisis, a classic near-run on banks. The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks. A generation of economists has thought really hard about these kinds of events. Look up Diamond, Rajan, Gorton, Kashyap, Stein, and so on. They’ve thought about why there is so much short term debt, why banks run, how deposit insurance and credit guarantees help, and how they give incentives for excessive risk taking.
If we want to think about events and policies, this seems like more than a minor detail. The hard and central policy debate over the last year was how to manage this financial crisis. Now it is how to set up the incentives of banks and other financial institutions so this mess doesn’t happen again. There’s lots of good and subtle economics here that New York Times readers might like to know about. What does Krugman have to say? Zero.
Krugman doesn’t even have anything to say about the Fed. Ben Bernanke did a lot more last year than set the funds rate to zero and then go off on vacation and wait for fiscal policy to do its magic. Leaving aside the string of bailouts, the Fed started term lending to securities dealers. Then, rather than buy treasuries in exchange for reserves, it essentially sold treasuries in exchange for private debt. Though the funds rate was near zero, the Fed noticed huge commercial paper and securitized debt spreads, and intervened in those markets. There is no “the” interest rate anymore, the Fed is attempting to manage them all. Recently the Fed has started buying massive quantities of mortgage-backed securities and long-term treasury debt.
Monetary policy now has little to do with “money” vs. “bonds” with all the latter lumped together. Monetary policy has become wide-ranging financial policy. Does any of this work? What are the dangers? Can the Fed stay independent in this new role? These are the questions of our time. What does Krugman have to say? Nothing.
Krugman is trying to say that a cabal of obvious crackpots bedazzled all of macroeconomics with the beauty of their mathematics, to the point of inducing policy paralysis. Alas, that won’t stick. The sad fact is that few in Washington pay the slightest attention to modern macroeconomic research, in particular anything with a serious intertemporal dimension. Paul’s simple Keynesianism has dominated policy analysis for decades and continues to do so. From the CEA to the Fed to the OMB and CBO, everyone just adds up consumer, investment and government “demand” to forecast output and uses simple Phillips curves to think about inflation. If a failure of ideas caused bad policy, it’s a simpleminded Keynesianism that failed.

The future of economics.
How should economics change? Krugman argues for three incompatible changes.
First, he argues for a future of economics that “recognizes flaws and frictions,” and incorporates alternative assumptions about behavior, especially towards risk-taking. To which I say, “Hello, Paul, where have you been for the last 30 years?” Macroeconomists have not spent 30 years admiring the eternal verities of Kydland and Prescott’s 1982 paper. Pretty much all we have been doing for 30 years is introducing flaws, frictions and new behaviors, especially new models of attitudes to risk, and comparing the resulting models, quantitatively, to data. The long literature on financial crises and banking which Krugman does not mention has also been doing exactly the same.
Second, Krugman argues that “a more or less Keynesian view is the only plausible game in town,” and “Keynesian economics remains the best framework we have for making sense of recessions and depressions.” One thing is pretty clear by now, that when economics incorporates flaws and frictions, the result will not be to rehabilitate an 80-year-old book. As Paul bemoans, the “new Keynesians” who did just what he asks, putting Keynes inspired price-stickiness into logically coherent models, ended up with something that looked a lot more like monetarism. (Actually, though this is the consensus, my own work finds that new-Keynesian economics ended up with something much different and more radical than monetarism.) A science that moves forward almost never ends up back where it started. Einstein revises Newton, but does not send you back to Aristotle. At best you can play the fun game of hunting for inspirational quotes, but that doesn’t mean that you could have known the same thing by just reading Keynes once more.
Third, and most surprising, is Krugman’s Luddite attack on mathematics; “economists as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” Models are “gussied up with fancy equations.” I’m old enough to remember when Krugman was young, working out the interactions of game theory and increasing returns in international trade for which he won the Nobel Prize, and the old guard tut-tutted “nice recreational mathematics, but not real-world at all.” How quickly time passes.
Again, what is the alternative? Does Krugman really think we can make progress on his – and my – agenda for economic and financial research -- understanding frictions, imperfect markets, complex human behavior, institutional rigidities – by reverting to a literary style of exposition, and abandoning the attempt to compare theories quantitatively against data? Against the worldwide tide of quantification in all fields of human endeavor (read “Moneyball”) is there any real hope that this will work in economics?
No, the problem is that we don’t have enough math. Math in economics serves to keep the logic straight, to make sure that the “then” really does follow the “if,” which it so frequently does not if you just write prose. The challenge is how hard it is to write down explicit artificial economies with these ingredients, actually solve them, in order to see what makes them tick. Frictions are just bloody hard with the mathematical tools we have now.

The insults.
The level of personal attack in this article, and fudging of the facts to achieve it, is simply amazing.
As one little example (ok, I’m a bit sensitive), take my quotation about carpenters in Nevada. I didn’t write this. It’s a quote, taken out of context, from a bloomberg.com article written by a reporter who I spent about 10 hours with patiently trying to explain some basics. (It’s the last time I’ll do that!) I was trying to explain how sectoral shifts contribute to unemployment. Krugman follows it by a lie -- I never asserted that “it take mass unemployment across the whole nation to get carpenters to move out of Nevada.” You can’t even dredge up a quote for that monstrosity.
What’s the point? I don’t think Paul disagrees that sectoral shifts result in some unemployment, so the quote actually makes sense as economics. The only point is to make me, personally, seem heartless -- a pure, personal, calumnious attack, having nothing to do with economics.
Bob Lucas has written extensively on Keynesian and monetarist economics, sensibly and even-handedly. Krugman chooses to quote a joke, made back in 1980 at a lunch talk to some business school alumni. Really, this is on the level of the picture of Barack Obama with Bill Ayres that Sean Hannity likes to show on Fox News.
It goes on. Krugman asserts that I and others “believe” “that an increase in government spending cannot, under any circumstances, increase employment,” or that we “argued that price fluctuations and shocks to demand actually had nothing to do with the business cycle.” These are just gross distortions, unsupported by any documentation, let alone professional writing. And Krugman knows better. All economic models are simplified to exhibit one point; we all understand the real world is more complicated; and his job is supposed to be to explain that to lay readers. It would be no different than if someone were to look up Paul’s early work which assumed away transport costs and claim “Paul Krugman believes ocean shipping is free, how stupid” in the Wall Street Journal.
The idea that any of us do what we do because we’re paid off by fancy Wall Street salaries or cushy sabbaticals at Hoover is just ridiculous. (If Krugman knew anything about hedge funds he’d know that believing in efficient markets disqualifies you for employment. Nobody wants a guy who thinks you can’t make any money trading!) Given Krugman’s speaking fees, it’s a surprising first stone for him to cast.
Apparently, salacious prose, innuendo, calumny, and selective quotation from media aren’t enough: Krugman added cartoons to try to make opponents look silly. The Lucas-Blanchard-Bernanke conspiratorial cocktail party celebrating the end of recessions is a silly fiction. So is their despondent gloom on reading “recession” in the paper. Nobody at a conference looks like Dr. Pangloss with wild hair and a suit from the 1800s. (OK, Randy Wright has the hair, but not the suit.) Keynes did not reappear at the NBER to be booed as an “outsider.” Why are you allowed to make things up in pictures that wouldn’t pass even the Times’ weak fact-checking in words?
Well, perhaps we got off easy. This all was mild compared to Krugman’s vicious obituary of Milton Friedman in the New York Review of Books. But most of all, Paul isn’t doing his job. He’s supposed to read, explain, and criticize things economists write, and preferably real professional writing, not interviews, opeds and blog posts. At a minimum, this leads to the unavoidable conclusion that Krugman isn’t reading real economics anymore.

How did Krugman get it so wrong? So what is Krugman up to? Why become a denier, a skeptic, an apologist for 70 year old ideas, replete with well-known logical fallacies, a pariah? Why publish an essentially personal attack on an ever-growing enemies list that now includes practically every professional economist? Why publish an incoherent vision for the future of economics?
The only explanation that makes sense to me is that Krugman isn’t trying to be an economist, he is trying to be a partisan, political opinion writer. This is not an insult. I read George Will, Charles Krauthnammer and Frank Rich with equal pleasure even when I disagree with them. Krugman wants to be Rush Limbaugh of the Left. I still want to be Milton Friedman, but each is a worthy calling.
Alas, to Krugman, as to far too many ex-economists in partisan debates, economics is not a quest for understanding. It is a set of debating points to argue for policies that one has adopted for partisan political purposes. “Stimulus” is just marketing to sell Congressmen and voters on a package of government spending priorities that you want for political reasons. It’s not a proposition to be explained, understood, taken seriously to its logical limits, or reflective of market failures that should be addressed directly.
Why argue for a nonsensical future for economics? Well, again, if you don’t regard economics as a science, a discipline that ought to result in quantitative matches to data, a discipline that requires crystal-clear logical connections between the “if” and the “then,” if the point of economics is merely to provide marketing and propaganda for politically-motivated policy, then his writing does make sense. It makes sense to appeal to some future economics – not yet worked out, even verbally – to disdain quantification and comparison to data, and to appeal to the authority of ancient books as interpreted you, their lone remaining apostle.
Most of all, this is the only reason I can come up with to understand why Krugman wants to write personal attacks on those who disagree with him. I like it when people disagree with me, and take time to read my work and criticize it. At worst I learn how to position it better. At best, I discover I was wrong and learn something. I send a polite thank you note.
Krugman wants people to swallow his arguments whole from his authority, without demanding logic, or evidence. Those who disagree with him, alas, are pretty smart and have pretty good arguments if you bother to read them. So, he tries to discredit them with personal attacks.
This is the political sphere, not the intellectual one. Don’t argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let’s just not pretend this has anything to do with economics, or actual truth.

(1) University of Chicago Booth School of Business. Many colleagues and friends helped, but I don’t want to name them for obvious reasons. Krugman fans: Please don’t bother emailing me to tell me what a jerk I am. I will update this occasionally, so please pass on the link http://faculty.chicagobooth.edu/john.cochrane/research/Papers/#news not the document.

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EE.UU. - Las escuelas económicas, frente a frente
Pablo Pardo
Fuente: Offnews.info, setiembre 14, 2009 (www.offnews.info/verArticulo.php?contenidoID=17464).
Las escuelas económicas, frente a frente. En EEUU hay dos tipos de economistas: los de agua dulce y los de agua salada. Los 'dulces' trabajan en el interior del país y son muy liberales. Los 'salados' están en las costas y están más influenciados por Keynes. Meltzer, el mayor monetarista vivo, es uno de los fundadores de la primera escuela, y Rajan, autor del libro 'Salvar al capitalismo de los capitalistas', lidera la segunda.
DE AGUA DULCE
«El 'muy grande para dejarlo caer' no vale»
En el último año, Allan Meltzer -al que la muerte de Milton Friedman en 2006 dejó como el mayor monetarista vivo- ha tenido ocasión de comprobar la capacidad de fracaso del capitalismo. Pero eso no le ha hecho dudar de su confianza en el mercado. Este profesor de la Universidad Carnegie-Mellon, cuyo conocimiento de la Reserva Federal le convierte en la referencia mundial a la hora de analizar este organismo, sigue defendiendo la no intervención del Estado en la economía. Para él, el dogma de la religión capitalista no tiene por qué sufrir con los pecados de esta crisis. «El capitalismo sin fracaso es como la religión sin pecado: no funciona».
Pregunta.- ¿Qué hemos aprendido con la debacle de Lehman?
Respuesta.- Lo principal es que tenemos que abandonar la idea de que hay instituciones financieras «demasiado grandes para dejarlas caer». Ése fue el mayor problema. Durante años, la Reserva Federal salvó a los bancos con el famoso Greenspan put (una expresión que hace referencia a las put options, en las que una de las partes adquiere el compromiso de comprar un activo si éste cae de un determinado precio).
P.- El Greenspan put no se aplicó con Lehman.
R.- Ése fue el problema. La Administración y la Fed no advirtieron de que iban a cambiar su operativa. El resultado fue que estuvieron a punto de convertir la recesión en una calamidad mundial. Deberían haber rescatado a Lehman. O, si no, Bernanke debería haber ido al Congreso y haber dicho: «Hagan algo». Pero no lo hizo. ¡Tras años rescatando bancos, dejan caer al más grande!
P.- ¿Qué otras enseñanzas hay?
R.- La crisis ha reforzado la importancia de un prestamista de último recurso que inyecte liquidez cuando sea necesario. Y ha dejado claro que hay que desincentivar la creación de gigantes bancarios. Como ya ha propuesto el secretario del Tesoro, Tim Geithner, cuanto más grande sea un banco, más reservas deberá tener.
P.- Ese aspecto de la reforma del sistema regulatorio le gusta. Pero ha criticado otros, como el que la Fed tenga más competencias.
R.- Las instituciones deben tener una visión clara de lo que son. Si tienen objetivos muy diferentes, los resultados son malos. El de la Fed debería seguir siendo realizar la mejor política monetaria posible.
P.- Usted ha sido muy crítico con los sistemas de compensación del sector financiero.
R.- No estoy a favor de decirle a la gente lo que debe ganar, sino de un sistema de compensación que tenga en consideración los riesgos que está tomando cada empleado de un banco. Pero rechazo introducir más regulación, porque es estática; el sistema financiero, dinámico. Piense en Basilea (un acuerdo entre los bancos centrales y reguladores para modernizar la supervisión): el objetivo del acuerdo era reforzar la solidez de los bancos, así que les obligó a tener más capital si aumentaban el riesgo. Los bancos esquivaron la regulación poniendo los activos con más riesgo fuera de su balance.
DE AGUA SALADA
«Estamos más seguros... hasta cierto punto»
En la primavera de 2005, el entonces economista jefe del FMI Raghuram Rajan empezó a preparar un discurso para un homenaje a Alan Greenspan. Su idea era confirmar que las acciones de la Reserva Federal reforzaban la estabilidad del sistema financiero. Pero, cuanto más investigaba, más llegaba a la conclusión contraria. El resultado de ese estudio fue un ejemplo de honestidad intelectual y también una muestra de linchamiento académico.
Rajan expuso su tesis en agosto y explicó los peligros de una parálisis en el mercado interbancario. Y habló en voz alta del riesgo de las titulizaciones de hipotecas.
Para algunos de sus colegas fue como si este profesor de Chicago -acaso el mayor economista financiero del mundo, candidato al Nobel, y el economista jefe más joven del FMI- se hubiera vuelto loco. Larry Summers, hoy el máximo asesor económico de Obama, dijo: «Rajan está totalmente equivocado».
Pregunta.- ¿Se siente vindicado por los hechos?
Respuesta.- No estoy seguro de que vindicado sea la palabra correcta. Es triste que hayamos llegado a esto. No prestamos la debida atención a una serie de problemas, y el resultado es que hemos perdido el 5% del PIB mundial y eso, en términos de sufrimiento humano, es inmenso. Pero no es menos cierto que hemos evitado una pérdida del 20% del PIB mundial, que es lo que hubiera supuesto una Gran Depresión.
P.- ¿Estamos más seguros que hace un año?
R.- Estamos más seguros… hasta cierto punto. Hace un año estábamos en mitad de un pánico, y los gobiernos tomaron acciones para restablecer la confianza. Pero la cuestión es, ¿somos ahora más inmunes a una crisis? Ahí, yo creo que no hemos progresado mucho.
P.- Muchos dicen que el marco regulatorio es muy favorable a los bancos. Su sucesor en el FMI, Simon Johnson, publicó en mayo un artículo titulado El golpe tranquilo, acusando a Wall Street de haber tomado el control del Gobierno estadounidense.
R.- Hay tres elementos en esa cuestión. Uno es el poder. Wall Street tiene poder. Pero cualquier sector que pone dinero en las campañas electorales tiene poder. Observe la reforma sanitaria: está siendo negociada entre la Administración y las empresas del sector.
El segundo factor es si Wall Street ha erosionado el sistema regulatorio en exceso. ¿Tenemos un sistema de capitalismo de amiguetes (crony capitalism)? [Es el término utilizado por el FMI para definir a países donde el Gobierno y la oligarquía económica están entrelazados]. A mí esa tesis no me persuade. Pero claro que hay cuestiones preocupantes: mire la cantidad de antiguos alumnos de Goldman Sachs que hay en el Gobierno de EEUU.
El tercer punto es que, cuando estás en una crisis, tienes que actuar deprisa, y la gente con la que mantienes consultas es también la gente a la que tienes que ayudar. Es muy difícil tomar decisiones sin ningún sentimiento de camaradería, sin la idea de que estamos todos en el mismo barco. Pero yo no veo ningún indicio de favoritismo en los rescates de 2008.
El Mundo (España)
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An Open Letter to Paul Krugman

David K. Levine

John H. Biggs Distinguished Professor of Economics, Washington University in St. Louis
Setiembre 18, 2009 (www.huffingtonpost.com/david-k-levine/an-open-letter-to-paul-kr_b_289768.html).

Dear Paul:I was reading your article How Did Economists Get It So Wrong
. Who are these economists who got it so wrong? Speak for yourself kemo sabe. And since you got it wrong - why should we believe your discredited theories?
It is a sad fact that whenever something bad happens people will claim that it means that they were right all along, and other people will listen to them. A professional prosecutor frustrated by the fact that you can't beat confessions out of suspects? Wait until September 11 and try again and this time call it the "Patriot Act." A progressive who would like to see higher taxes and more government programs? Wait until there is an economic crisis and call it a "fiscal stimulus bill." Here we are, the recession is over and we've spent 10% of the money...Not the 200% you thought we needed to end the recession.
It is a daunting task to bring you up to date on the developments in economics in the last quarter century. I know that John Cochrane
has tried to educate you about what we've learned about fiscal stimulae in that period. But perhaps a I can highlight a few other developments? You seem under the impression that economists had resolved their internal disputes before the financial crisis. So that means you haven't followed the debate about the causes of depressions between Peter Temin on one side and Timothy Kehoe and Ed Prescott on the other? You say that we think that the "central problem of depression-prevention has been solved." Has it not? Are you forecasting that this recession will turn in to a depression? But of course "More important was the profession's blindness to the very possibility of catastrophic failures in a market economy." That would be the profession that hasn't been reading what the profession has written? Perhaps you should go look at that controversial book Kehoe and Prescott [2007], Great Depressions of the 20th Century. Or you might read Sargent, Williams and Zhao [September 2008], "Conquest of Latin American Inflation". Wouldn't it be nice if people had some idea of what was being written before criticizing it?
Let us talk more seriously about the supposed failure of the economics profession. You say "Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems." The predictive failure is not a problem of the field - it is a problem for those who are under the impression that we should be able to predict crises. Do you number yourself in this bunch? Do physicists get it wrong because their theory says that they cannot predict where a photon shot through a sufficiently narrow slit will land? Economic models are like models of photons going through slits. Just as those models predict only the statistical distribution of photons, so our models only predict the likelihood of downturns - they do not predict when any particular downturn will occur. Saying "most economists failed to predict the downturn" is exactly like saying most physicists failed to predict the impact of the twelfth photon passing through the slit.
More to the point: our models don't just fail to predict the timing of financial crises - they say that we cannot. Do you believe that it could be widely believed that the stock market will drop by 10% next week? If I believed that I'd sell like mad, and I expect that you would as well. Of course as we all sold and the price dropped, everyone else would ask around and when they started to believe the stock market will drop by 10% next week - why it would drop by 10% right now. This common sense is the heart of rational expectations models. So the correct conclusion is that our - and your - inability to predict the crisis confirms our theories. I feel a little like a physicist at the cocktail party being assured that everything is relative. That isn't what the theory of relativity says: it says that velocity is relative. Acceleration is most definitely not. So were you to come forward with the puzzling discovery that acceleration is not relative...
Of course some people did predict the crisis. Some might even have been smart enough to know that if they consistently predict the opposite of a consensus point forecast, eventually they will be right when everyone else is wrong. If I say every year: there will be war; there will be an asset market crash; there will be a recession; there will be famine; we will run out of oil - eventually I'll be right. These kind of predictions are only meaningful if more people than can be attributed to random good luck got it right at the right time or if whatever method they used to reach that conclusion is replicable. Or does the ability to replicate results fall under the category of "not very interesting because that would be an elegant theory?"
But let's turn to what you say are our deeper failures. We "turned a blind eye to the limitations of human rationality that often lead to bubbles and busts." It makes me feel physically ill that a distinguished economist could be so ignorant of his own profession. As a random example, how about my student Felipe Zurita's thesis on speculation written in 1998
? There are endless papers written about bubbles and busts - some assuming rationality, some not. Some are experimental, some are theoretical, some are empirical. There are economists who have devoted their entire careers to studying bubbles. There is a fellow named Stephen Morris. He isn't what you would call a fringe member of the economics profession - he's the editor of Econometrica which, as you know, is one of the leading journals in economics. He has written extensively about bubbles. I take it you aren't familiar with his work. Perhaps you should walk down the hall and stick your head in his office and ask him about it? Each crisis - in Mexico, in South-east Asia, in Argentina - had generated hundreds of papers examining how and why the crisis took place.
Efficient markets? Where have you been for the last quarter century? The modern theory of how financial markets incorporate information is that they do so imperfectly. The technical device is that of noise traders originating in a 1985 paper of Admati. But I think you knew of the idea earlier. In 1980 when you were a visitor at MIT, you participated in a graduate student seminar...in which I presented a paper starring noise traders...
Do we really need some sort of behavioral model to understand why asset prices fall abruptly? If opinions about asset values change, prices must fall abruptly - it isn't irrational to run for the exits when the theater is on fire. In addition to a beautiful 1983 paper of Steve Salant there is a large literature on bank runs and contagion, not to speak of credit and collateral cycles. If there was some sort of irrationality involved in a panic, prices ought to bounce right back the next day when everyone wakes up and sheepishly realizes that they were wrong. In fact asset prices seem to be tracking news of fundamentals pretty well - gradually recovering as we get better news about fundamentals.
Has behavioral economics offered anything that would help to solve the market failures that characterized this crisis? Was it herd behavior or animal spirits? Or was it risks that were not being priced? Serious economists like Lasse Pedersen
try to analyze how liquidity risks created systemic problems and think about how to incorporate them into our understanding of how to ameliorate future crises. They don't shake their heads and revert to discredited static theories of the 1930's.
Crises have been ubiquitous throughout history. While we can't forecast them we do know how to learn from them. And we certainly have a good idea what not to do in response: do what Chile did successfully - fail banks and recycle them, not do what Japan did unsuccessfully - keep the zombie banks limping feebly around. Like me you saw the bank bailout plan for what it was - not a necessary step to save the credit sector from collapse but a give-away of taxpayer money to investment bankers. But the stimulus plan? How can you be arguing for more? Since we are recovering before most of the stimulus money has entered the economy - isn't that evidence it isn't needed? How can you write as if you are proven right in supporting it?
Regards, David

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Los mejores dulces llevan una pizca de sal

Por: Óscar Landerretche M.*, En “¿Qué pasa?”, no. 2006, setiembre 19, 2009 (
(www.quepasa.cl/articulo/7_895_9.html#comentarios).

La economía como disciplina ha desarrollado instrumental tremendamente útil, que nos sirve para entender los problemas actuales. Pero la práctica de la economía requiere de cierto escepticismo, no sólo respecto de las voces interesadas que tratan de capturarla, sino también de los entusiasmos académicos.
*
Dani Rodrik en Culpen a los Economistas, No a la Economía se hace la pregunta de si el pobre desempeño de los reguladores financieros, de los entusiastas de la hipótesis de mercados eficientes y de los gurús del mercado en esta crisis, debiera llevarnos a "…quemar los libros que tenemos y reescribirlos desde cero".
Su respuesta es no. Y yo estoy de acuerdo.
La crisis actual no se entiende sin teorías de agencia y mercados imperfectos. Las políticas implementadas no serían posibles sin microeconometría aplicada. Los problemas de gobernanza de bancos y reguladores serían abrumadores sin economía política. La discusión sobre la nueva arquitectura financiera global es imposible sin la teoría de organización industrial. Y, finalmente, respecto de la macro: el manejo global de la crisis, a mi juicio, logró convertir lo que venía a ser una depresión en una recesión seguida de un período lento de recuperación. No es poco. La última vez que el mundo entró en depresión, terminó implosionando políticamente.

Dulces y salados

A juicio de Paul Krugman, en el debate macroeconómico contemporáneo ha predominado exageradamente lo que en Chile conocemos como economía neoclásica (o economía de agua dulce, por surgir de las universidades de los grandes lagos como Chicago y Minnesota) por sobre la economía neokeynesiana (o economía de agua salada, por surgir de las universidades de las costas de EE.UU. como MIT, Harvard o Berkeley).
La dulce economía neoclásica tendría una postura contraria a la regulación de mercados y una visión "schumpeteriana" de las recesiones, que las entiende como un fenómeno natural de creación destructiva, que no justifica activismo alguno, particularmente el fiscal.
La salada economía neokeynesiana tendría una mayor disposición regulatoria y hacia el activismo anticíclico fiscal.
El predominio de los dulces sobre los salados habría generado una complacencia entre los reguladores respecto de las burbujas financieras y habría hecho esclerótica la reacción del Estado frente a la crisis.
Estando de acuerdo en lo grueso con Krugman, discrepo de algunos de sus juicios más categóricos. En particular no creo que haya nada perjudicial en que los dulces sigan obstinadamente su agenda de investigación e intenten predominar en el ámbito público. Como diría un gringo, eso es fair game. Además, la visión "schumpeteriana" no sólo es interesante: también es útil. El problema es que no es la única visión útil. Si durante mucho tiempo los dulces fueron tan predominantes que se volvieron empalagosos, no es culpa de ellos. El problema es que los salados capitularon metodológicamente: se desalinizaron.
La desalinización tuvo buenas razones, malas razones y peores razones.
Las buenas son que en épocas de normalidad, fluctuaciones regulares y plazos cortos, los métodos y evidencias de la economía dulce más pura tenían robustez. Estas técnicas fueron y continúan siendo extremadamente útiles. En este sentido, la desalinización tiene algo de honestidad intelectual.
Las malas razones son las falencias que aún tienen los salados modelos de economía y finanzas del comportamiento, de macroeconomía fuera de equilibrio, y de políticas de desarrollo de largo plazo. Estos modelos no han logrado el nivel de universalidad analítica de los modelos dulces y tampoco han logrado masificarse (como sí lo logró la macro keynesiana en su tiempo). Por ejemplo, el maestro Krugman habla de los elegantes modelos de Nobu Kiyotaki. El estudio de los modelos de Kiyotaki es iluminador, es cierto, pero aún no se encuentran en un estado que les permita ser usados cotidianamente en las decisiones de política macro.
Las peores razones son que durante mucho tiempo fue muy rentable ser o parecer dulce. Si se era dulce se tenía más influencia política, éxito en los organismos multilaterales, se abrían prospectos de carrera en la banca de inversiones y se entraba a los circuitos de las escuelas de negocios. La verdad es que muchos se desalinizaron a propósito, como una estrategia política y profesional.

Mezcladores de aguas

El proceso de desalinización fue potente e irrevocable. Tuvo muchos motores. Para entenderlo hay que releer La Estructura de las Revoluciones Científicas, de Thomas Kuhn. No es la primera vez que este tipo de cosas pasan. Y no sólo en la economía.
En mi opinión, el enfoque correcto respecto del uso de teoría y evidencia para la toma de decisiones se encuentra en un accesible libro llamado Banco Central: Teoría y Práctica, de Alan Blinder. Sus lecciones, modestamente, creo que son extensivas para la política fiscal y financiera. Blinder argumenta que el ejercicio intelectual de modelación es fundamental para la salud técnica de los practicantes de la macro. Pero, acto seguido, reconoce que nadie sabe cuál es el modelo "correcto" de la economía de mercado moderna. Las interrelaciones son muy complejas, los parámetros constantemente cambian, y los cambios de régimen son frecuentes.
Blinder sugiere trabajar con una cartera exigente pero iconoclasta de modelos, excluir las predicciones extremas y trabajar sobre la base de algo así como un promedio. Y en el proceso de comparación entre lo que los modelos predicen y lo que el sentido común y la realidad indican, usar el insustituible criterio del practicante. Blinder, por así decirlo, nos llama a ser economistas de estuario: mezcladores de aguas.
La economía como disciplina ha desarrollado instrumental útil que nos sirve para entender los problemas actuales. Pero la práctica de la economía requiere de cierto escepticismo, no sólo respecto de las voces interesadas en capturarla, sino también de los entusiasmos académicos.
Volviendo a Rodrik: "La economía puede, en el mejor de los casos, aclarar las opciones para quienes toman decisiones; no puede elegir por ellos… Cuando los economistas no se ponen de acuerdo, el mundo queda expuesto a diferencias legítimas de opinión… Es justamente cuando coinciden demasiado cuando el público debería tener cuidado".
Como diría la señora Juanita: "Los mejores dulces llevan una pizca de sal".
* Director de la Maestría en Políticas Públicas de la U. de Chile. Asesor Económico Frei 2010.

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In defence of the dismal science Autor: Robert Lucas Agosto 6, 2009 www.economist.com/businessfinance/displayStory.cfm?story_id=14165405
In a guest article, Robert Lucas, the John Dewey Distinguished Service Professor of Economics at the University of Chicago, rebuts criticisms that the financial crisis represents a failure of economics.

THERE is widespread disappointment with economists now because we did not forecast or prevent the financial crisis of 2008. The Economist’s articles of July 18th on the state of economics were an interesting attempt to take stock of two fields, macroeconomics
and financial economics, but both pieces were dominated by the views of people who have seized on the crisis as an opportunity to restate criticisms they had voiced long before 2008. Macroeconomists in particular were caricatured as a lost generation educated in the use of valueless, even harmful, mathematical models, an education that made them incapable of conducting sensible economic policy. I think this caricature is nonsense and of no value in thinking about the larger questions: What can the public reasonably expect of specialists in these areas, and how well has it been served by them in the current crisis?
One thing we are not going to have, now or ever, is a set of models that forecasts sudden falls in the value of financial assets, like the declines that followed the failure of Lehman Brothers in September. This is nothing new. It has been known for more than 40 years and is one of the main implications of Eugene Fama’s “efficient-market hypothesis” (EMH), which states that the price of a financial asset reflects all relevant, generally available information. If an economist had a formula that could reliably forecast crises a week in advance, say, then that formula would become part of generally available information and prices would fall a week earlier. (The term “efficient” as used here means that individuals use information in their own private interest. It has nothing to do with socially desirable pricing; people often confuse the two.)
Mr Fama arrived at the EMH through some simple theoretical examples. This simplicity was criticised in The Economist’s briefing, as though the EMH applied only to these hypothetical cases. But Mr Fama tested the predictions of the EMH on the behaviour of actual prices. These tests could have come out either way, but they came out very favourably. His empirical work was novel and carefully executed. It has been thoroughly challenged by a flood of criticism which has served mainly to confirm the accuracy of the hypothesis. Over the years exceptions and “anomalies” have been discovered (even tiny departures are interesting if you are managing enough money) but for the purposes of macroeconomic analysis and forecasting these departures are too small to matter. The main lesson we should take away from the EMH for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles. If these people exist, we will not be able to afford them.
The Economist’s briefing also cited as an example of macroeconomic failure the “reassuring” simulations that Frederic Mishkin, then a governor of the Federal Reserve, presented in the summer of 2007. The charge is that the Fed’s FRB/US forecasting model failed to predict the events of September 2008. Yet the simulations were not presented as assurance that no crisis would occur, but as a forecast of what could be expected conditional on a crisis not occurring. Until the Lehman failure the recession was pretty typical of the modest downturns of the post-war period. There was a recession under way, led by the decline in housing construction. Mr Mishkin’s forecast was a reasonable estimate of what would have followed if the housing decline had continued to be the only or the main factor involved in the economic downturn. After the Lehman bankruptcy, too, models very like the one Mr Mishkin had used, combined with new information, gave what turned out to be very accurate estimates of the private-spending reductions that ensued over the next two quarters. When Ben Bernanke, the chairman of the Fed, warned Hank Paulson, the then treasury secretary, of the economic danger facing America immediately after Lehman’s failure, he knew what he was talking about.
Mr Mishkin recognised the potential for a financial crisis in 2007, of course. Mr Bernanke certainly did as well. But recommending pre-emptive monetary policies on the scale of the policies that were applied later on would have been like turning abruptly off the road because of the potential for someone suddenly to swerve head-on into your lane. The best and only realistic thing you can do in this context is to keep your eyes open and hope for the best.
After Lehman collapsed and the potential for crisis had become a reality, the situation was completely altered. The interest on Treasury bills was close to zero, and those who viewed interest-rate reductions as the only stimulus available to the Fed thought that monetary policy was now exhausted. But Mr Bernanke immediately switched gears, began pumping cash into the banking system, and convinced the Treasury to do the same. Commercial-bank reserves grew from $50 billion at the time of the Lehman failure to something like $800 billion by the end of the year. The injection of Troubled Asset Relief Programme funds added more money to the financial system.
There is understandable controversy about many aspects of these actions but they had the great advantages of speed and reversibility. My own view, as expressed elsewhere, is that these policies were central to relieving a fear-driven rush to liquidity and so alleviating (if only partially) the perceived need for consumers and businesses to reduce spending. The recession is now under control and no responsible forecasters see anything remotely like the 1929-33 contraction in America on the horizon. This outcome did not have to happen, but it did.

Not bad for a Dark Age
Both Mr Bernanke and Mr Mishkin are in the mainstream of what one critic cited in The Economist’s briefing calls a “Dark Age of macroeconomics”. They are exponents and creative builders of dynamic models and have taught these “spectacularly useless” tools, directly and through textbooks that have become industry standards, to generations of students. Over the past two years they (and many other accomplished macroeconomists) have been centrally involved in responding to the most difficult American economic crisis since the 1930s. They have forecasted what can be forecast and formulated contingency plans ready for use when unforeseeable shocks occurred. They and their colleagues have drawn on recently developed theoretical models when they judged them to have something to contribute. They have drawn on the ideas and research of Keynes from the 1930s, of Friedman and Schwartz in the 1960s, and of many others. I simply see no connection between the reality of the macroeconomics that these people represent and the caricature provided by the critics whose views dominated The Economist’s briefing.

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Mathematics and economics
– Paul Krugman setiembre 11, 2009 (http://krugman.blogs.nytimes.com/2009/09/11/mathematics-and-economics/)
I’ve been getting some comments from people who think my magazine piece
was an attack on the use of mathematics in economics. It wasn’t.
Math in economics can be extremely useful. I should know! Most of my own work over the years has relied on sometimes finicky math — I spent quite a few years of my life doing tricks with constant-elasticity-of-substitution utility functions. And the mathematical grinding served an essential function — that of clarifying thought. In the economic geography stuff, for example, I started with some vague ideas; it wasn’t until I’d managed to write down full models that the ideas came clear. After the math I was able to express most of those ideas in plain English, but it really took the math to get there, and you still can’t quite get it all without the equations.
What I objected to in the mag article was the tendency to identify good math with good work. CAPM is a beautiful model; that doesn’t mean it’s right. The math of real business cycle models is much more elegant than that of New Keynesian models, let alone the kind of models that make room for crises like the one we’re in; that makes RBC models seductive, but it doesn’t make them any less silly.
And conversely, you can have great work in economics with little or no math. I can’t pull up papers now, but as I recall, Akerlof’s market for lemons had virtually no explicit math in its main exposition; yet it was transformative in its insight.
So by all means let’s have math in economics — but as our servant, not our master.

Le siguen: ¡102 comentarios! Así que ya tienen para pasarla bien este domingo.


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En Lima, por el momento, han llamado la atención –sin mayores comentarios de parte de sus autores, por la escasez de espacio- sobre el texto de Krugman, Oscar Ugarteche (“La crítica de Krugman”, set. 12:

www.elcomercio.com.pe/impresa/notas/critica-krugman/20090912/340938) y el propio Gregorio Samsa (“Economistas dulces y salados”, set.9: www.elcomercio.com.pe/impresa/notas/economistas-dulces-salados/20090910/340042).


Habrán de aparecer bastantes más textos ilustrativos sobre el ‘gran debate’ en los próximos días. Para estudiantes de Macroeconomía son de lectura obligatoria (tendrán un control el día sábado).

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An Economics of Magical Thinking

Roman Frydman and Michael D. Goldberg | Sep 24, 2009
From FT.com (Reproducido en: www.rgemonitor.com/globalmacro-monitor/257740/an_economics_of_magical_thinking
Confidence seems to be returning to markets almost everywhere, but the debates about what caused the worst crisis since the Great Depression show no sign of letting up. Instead, the spotlight has shifted from bankers, financial engineers and regulators to economists and their theories. This is not a moment too soon. These theories continue to shape the debate about fiscal stimulus, financial reform, and, more broadly, the future of capitalism, which means that they remain a danger to all concerned.
Unfortunately, the assumptions that underpin these theories are largely inscrutable to those without a Ph.D. in economics. Indeed, the debate is full of terms that mean one thing to the uninitiated and quite another to economists.
Consider “rationality.” Webster’s Dictionary defines it as “reasonableness.” By contrast, for economists, a “rational individual” is not merely reasonable; he or she is someone who behaves in accordance with a mathematical model of individual decision-making that economists have agreed to call “rational.”
The centrepiece of this standard of rationality, the so-called “Rational Expectations Hypothesis”, presumes that economists can model exactly how rational individuals comprehend the future. In a bit of magical thinking, it supposes that each of the many models devised by economists provides the “true” account of how market outcomes, such as asset prices, will unfold over time.
The economics literature is full of different models, each one assuming that it adequately captures how all rational market participants make decisions. Although the free-market Chicago school, neo-Keynesianism, and behavioural finance are quite different in other respects, each assumes the same REH-based standard of rationality.
In other words, REH-based models ignore markets’ very raison d’etre: no one, as Friedrich Hayek pointed out, can have access to the “totality” of knowledge and information dispersed throughout the economy. Similarly, as John Maynard Keynes and Karl Popper showed, we cannot rationally predict the future course of our knowledge. Today’s models of rational decision-making ignore these well-known arguments.
The unreasonableness of this standard of rationality helps to explain why macroeconomists of all camps and finance theorists find it hard to account for swings in market outcomes. Even more pernicious, despite these difficulties, their models supposedly provide a “scientific” basis for judging the proper roles of the market and the state in a modern economy.
But incoherent premises lead to absurd conclusions - for example, that unfettered financial markets set asset prices nearly perfectly at their “true” fundamental value. If so, the state should drastically curtail its supervision of the financial system. Unfortunately, many officials came to believe this claim, known as the “efficient markets hypothesis,” resulting in the widespread deregulation of the late 1990s and early 2000s. That made the crisis more likely, if not inevitable.
Public opinion has swung to the other extreme, as complacency about the need for financial regulation has been replaced by calls for greater oversight by the state to control the unstable behaviour of financial markets.
Behavioural economists have uncovered much evidence that market participants do not act like conventional economists would predict “rational individuals” to act. But, instead of jettisoning the bogus standard of rationality underlying those predictions, behavioral economists have clung to it. They interpret their empirical findings to mean that many market participants are irrational, prone to emotion, or ignore economic fundamentals for other reasons. Once these individuals dominate the “rational” participants, they push asset prices away from their “true” fundamental values.
The behavioural view suggests that swings in asset prices serve no useful social function. If the state could somehow eliminate them through a large intervention, or ban irrational players by imposing strong regulatory measures, the “rational” players could reassert their control and markets would return to their normal state of setting prices at their “true” values.
This is implausible, because an exact model of rational decision-making is beyond the capacity of economists - or anyone else - to formulate. Once economists recognise that they cannot explain exactly how reasonable individuals make decisions and how market outcomes unfold over time, we will no longer be stuck with two polar extremes concerning the relative roles of the market and the state.
For the most part, asset prices undergo swings because participants must cope with ever-imperfect knowledge about the fundamentals that drive prices in the first place. So long as these swings remain within reasonable bounds, the state should limit its involvement to ensuring transparency and eliminating market failures.
But sometimes price swings become excessive, as recent experience painfully shows. Even accepting that officials must cope with ever-imperfect knowledge, they can implement measures - such as guidance ranges for asset prices and changes in capital and margin requirements that depend on whether these prices are too high or too low - to dampen excessive swings.
Such measures require policymakers to exercise discretion, rather than simply rely on fixed rules. That might not please most economists, but it would leave the market to allocate capital while holding out the possibility of reducing the social costs that arise when asset swings continue for too long and then end, as they inevitably do, in sharp reversals.
Roman Frydman, professor of economics at New York University, and Michael D. Goldberg, professor of economics at the University of New Hampshire, are the authors of Imperfect Knowledge Economics: Exchange Rates and Risk.
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P.D: Un texto relacionado con el ‘debate’ (se trata de la reseña del nuevo libro de Skidelsky, el mejor biógrafo de Keynes, titulado “Keynes: The Return of the Master”):


Back in Demand
Gregory Mankiw, Harvard University
Fuente: Wall Street Journal, setiembre 21, 2009

http://online.wsj.com/article/SB10001424052970204518504574417810281734756.html

John Maynard Keynes. The name, by itself, is something of a Rorschach test for economists. More than half a century after the death of this famed Cambridge University professor, he remains among the most controversial figures in the field. The recent economic crisis has raised Keynes's profile yet again and further stoked the debate over his contributions.
Most macroeconomists—that is, those who study the ups and downs of the overall economy—fall into one of two broad camps: Keynes admirers or Keynes detractors. When these groups cross paths, the result is the ivory-tower equivalent of a spitball fight.
To admirers, Keynes was nothing short of the savior of the capitalist system. His "General Theory of Employment, Interest and Money" (1936) proposed a diagnosis and remedy for the calamity known as the Great Depression. According to Keynes, economic downturns are not a fundamental indictment of the market economy. Rather, recessions and depressions arise from insufficient aggregate demand. A smart government can remedy the problem with its monetary and fiscal policy—say, by printing up some money and spending it. Once the right policies are put in place, the thinking goes, the world is safe again for free markets.
To detractors, Keynes was an economist whose reach exceeded his grasp: He tried to replace classic economic principles with new ones of his own, but what he offered was vague and incomplete. Keynes's many followers have tried to give his theory analytic rigor, but with only limited success. Despite these intellectual deficiencies, the detractors say, Keynesians recklessly push their ideas in the political arena, where they often lead to high inflation and excessive budget deficits. The fiscal policy of the Obama administration is a case in point. When the White House pushed for a massive increase in infrastructure spending to create jobs, it was taking a page from the Keynes playbook.
There is no doubt where Robert Skidelsky stands. A professor at the University of Warwick, he is the author of a magisterial three-volume biography of Keynes. After his years of research, he is a true believer. In "Keynes: The Return of the Master," Mr. Skidelsky makes the case for Keynes—not only for his place in the history of economic thought but also for his relevance today. To understand the global economic crisis of the past year, he says, we need more unadulterated Keynes.
In the Keynesian view as channeled by Mr. Skidelsky, the credit crunch happened because policy makers "succumbed to something called the efficient financial market theory: the view that financial markets could not consistently misprice assets and therefore needed little regulation." We must now aim at "treating symptoms." Thus: "Global aggregate demand is collapsing; extra spending is needed to revive it." In the long term, he says, we need "an expanded public sector, and a more modest role for economics as tutor of governments."
In his preface, Mr. Skidelsky says that he is a historian, not an economist. The book bears out the claim, in both its strengths and weaknesses. Mr. Skidelsky is most engaging when he draws on his biographical work. Keynes, we are reminded, had a fascinating life. He was a widely read intellectual who wrote accessibly for the general public. He advised world leaders on the crucial issues of the day and socialized with the artists and writers of the Bloomsbury group. But most of "Keynes" is devoted to ideas, not history, and here Mr. Skidelsky is not playing his strong suit. To economists his discussion of macroeconomic theory will seem pedestrian and imprecise. To laymen it will seem abstract and hard to follow.
As an ardent fan, Mr. Skidelsky fails to give Keynes's intellectual opponents their due. In academic circles, the most influential macroeconomist of the last quarter of the 20th century was Robert Lucas, of the University of Chicago, who won the Nobel Prize in 1995. His great contribution to the discipline was to analyze how government policies influence the economy in part through their effect on people's expectations—a lesson that Keynes would likely have appreciated but that early followers of Keynes often ignored.
Yet Mr. Skidelsky chooses to make Mr. Lucas sound like some kind of idiot savant, more interested in playing with mathematical models than in trying to understand how the world actually works. Mr. Lucas, we are told, is following in the tradition of the "French mathematician Leon Walras [who] pictured the economy as a system of simultaneous equations." The very idea is made to sound slightly crazed.
This brings us to the biggest problem with "Keynes." Mr. Skidelsky admits to being poorly trained in the tools that economists use: "I find mathematics and statistics 'challenging,' as they say, and it is too late to improve. This has, I believe, saved me from important errors of thinking."
Has it, really? Mr. Skidelsky would like to think that his math-aversion allows him to focus on the big ideas rather than being distracted by mere analytic details. But mathematics is, fundamentally, the language of logic. Modern research into Keynes's theories—I have conducted such research myself—tries to put his ideas into mathematical form precisely to figure out whether they logically cohere. It turns out that the task is not easy.
Keynesian theory is based in part on the premise that wages and prices do not adjust to levels that ensure full employment. But if recessions and depressions are as costly as they seem to be, why don't firms have sufficient incentive to adjust wages and prices quickly, to restore equilibrium? This is a classic question of macroeconomics that, despite much hard work, is yet to be fully resolved.
Which brings us to a third group of macroeconomists: those who fall into neither the pro- nor the anti-Keynes camp. I count myself among the ambivalent. We credit both sides with making legitimate points, yet we watch with incredulity as the combatants take their enthusiasm or detestation too far. Keynes was a creative thinker and keen observer of economic events, but he left us with more hard questions than compelling answers.

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What About Microeconomics?
Robert W. Crandall y Clifford Winston, en: Forbes; octubre 5, 2009.
In a recent New York Times Magazine article, Paul Krugman laments the current state of macroeconomics (the study of the determinants of an economy's level of output and employment) that blinded us to the forces that, in his view, caused the current recession. However, he never mentions the state of microeconomics.
Microeconomics is the study of how firms and consumers make decisions in markets and how the government tries to address conditions that lead to "bad" decisions. And it has not suffered any serious intellectual setbacks from the current Great Recession. Indeed, the causes and cures of this recession are more about microeconomics than about macroeconomics.
Microeconomists' theoretical and empirical contributions have taught us that market failures do exist but that the government rarely, if ever, can be counted on to correct those failures efficiently. Nothing in the last two years has undermined microeconomic analyses that influenced the deregulation of the airline, trucking, railroad, natural gas, crude oil, telecommunications and cable television markets. These deregulatory successes have not been compromised by the market failures that originated in the financial sector and are at the heart of the Krugman lament. But even if Krugman could uncover a theory that integrates irrational exuberance in financial markets with macroeconomic performance, it would hardly guarantee improved performance of government regulators. Nor would it enhance our considerable knowledge of how markets correct after sharp downturns.
The market failure that generated the current crisis is by now well-known: the rapid growth of subprime mortgages and the failure of many homebuyers and investors to understand and properly weight credit risks. Unfortunately, banks and rating agencies underestimated the probability of a major decline in housing prices and believed that they could measure the interrelatedness of credit risks. Financial firms, consumers and regulators did not adequately account for outliers--very low-probability events--that turned out to be important, leading to a wave of financial institution failures that caused great pain to the real economy.
Most of the defaults were centered in regulated financial institutions that purchased, securitized and even invested in the subprime and Alt-A mortgage debt that triggered the financial collapse. Even some of Bernie Madoff's operations were subject to federal regulation. Notably, though posting large losses, unregulated financial institutions, such as the large hedge funds, have not required the government's assistance to survive.
Calls for improved financial market regulation are understandable, because unregulated mortgage brokers offered many households mortgages that they subsequently could not afford once home prices stopped rising. But these brokers did so only because regulated financial institutions willingly bought those mortgages. Many of the dodgiest mortgage products ended up in off-balance-sheet entities of regulated financial institutions less than 10 years after Enron collapsed when its off-balance-sheet entities imploded.
Krugman argues that economists need new models that incorporate irrational behavior in financial markets. But will such theoretical models keep regulators from making the same mistakes when the next speculative bubble occurs?
Now that we are well into the Great Recession, little evidence exists that the proliferation of Treasury and Federal Reserve bailout operations is bringing us out of it any more rapidly than we might have expected from normal market forces. A major easing of monetary policy should prove helpful, but will there be any evidence that the various twists and turns in the Troubled Asset Relief Program (TARP) or the Term Asset-Backed Securities Lending Facility (TALF) actually shortened the recession? And plenty of economists question the efficacy of the stimulus package, given the slow disbursement of funds and the use of these funds on a variety of dubious projects.
On the other hand, there is substantial evidence that consumers and firms generally learn--and learn quickly--from market failures attributable to imperfect information. Both have moved aggressively to shore up their balance sheets. Risky, subprime mortgage originations have all but disappeared. Indeed, there is little historical evidence that the costs of alleged information failures have merited much attention. The events of the last few years were surely different, but their possibility was not ruled out by established microeconomic theory.
In retrospect it will be clear that markets responded quite well to the financial crisis, generating an economic recovery--much as they always do. No emergency government action addressed the problems in the housing market created by excessive speculation and by the encouragement of non-creditworthy buyers to assume large mortgages. As economists would expect, recovery in housing could occur only when prices fall to sustainable levels, excess inventories are drawn down through a reduction of new starts, and financial institutions write down the debt that they issued on over-valued houses. All of those market corrections are well underway and have little to do with TARP, TALF or government seizure of Fannie Mae and Freddie Mac.
Equally important, the credit markets have stabilized and credit spreads have narrowed substantially, particularly for firms that have managed their balance sheets well. Microsoft has recently issued bonds that sold at very low spreads over Treasuries. Even the concern over credit-default swaps issued by large, troubled financial institutions now appears to have been overstated as large volumes of those positions have been successfully unwound with little systemic effect.
Throughout this economic crisis, no one has presented credible evidence that the deregulation of transportation, energy and communications markets has been a mistake. Whatever the market failures in the early 20th century, government efforts to correct them failed. Deregulation was and still is the correct policy in those sectors.
Moreover, it will be quite difficult for policymakers to improve financial regulation other than by directly regulating leverage more carefully. In the meantime, Americans can rest assured that financial markets are quite sensitive to the interrelatedness of credit default risks and that renewed efforts are being made--and will continue to be made--to manage financial risks more effectively with a theory of finance that goes beyond a focus on the "mean and variance" of returns and pays appropriate attention to risks at the tails of the distribution. The next financial market failure will result in still another advance in the market's ability to manage risk and in the unsettling realization that government can do little to prevent markets from failing and to improve how they self-correct.
Robert W. Crandall and Clifford Winston are senior fellows at The Brookings Institution. Winston is the author of Government Failure Versus Market Failure (Brookings, 2006).

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POST-DATA SORPRENDENTE (agosto 26, 2015): ¿Krugman plagiando ideas ajenas?

Resulta que no fue Krugman –como yo suponía- quien inventó la dicotomía entre economistas dulces y salados, sino que fue Robert Hall… ¡en junio de 1976! Véase su texto: “Notes on the current state of Empirical Macroeconomics” (http://web.stanford.edu/~rehall/Notes%20Current%20State%20Empirical%201976.pdf).

Fue el siguiente texto el que me alertó sobre ese ‘detalle’ (¿es que Krugman no lo conocía cuando ‘inventó’ la mencionada diferenciación?):

Freshwater and Saltwater Economists: A Creation Story

Diciembre 16, 2013             Fuente: Conversable Economist - Timothy Taylor


Back in the late 1970s, when I was first shaking hands with economics, the standard dividing line in macroeconomics was phrased as "monetarists" vs. "Keynesians." But that distinction was already becoming obsolete. Robert Hall stakes a claim to rephrasing the main dividing line in macroeconomics back in 1976 a way that has largely stood the test of time, as between "freshwater" and "saltwater" macroeconomists. As Hall wrote at the time:

"As a gross oversimplification, current thought can be divided into two schools. The fresh water view holds that fluctuations are largely attributable to supply shifts and that the government is essentially incapable of affecting the level of economic activity. The salt water view holds shifts in demand responsible for fluctuations and thinks government policies (at least monetary policy) is capable of affecting demand. Needless to say, individual contributors vary across a spectrum of salinity." 

In a footnote, Hall offers a few examples which will give a smile to academic economists, if no one else:

"To take a few examples, [Thomas] Sargent corresponds to distilled water, [Robert] Lucas to Lake Michigan, [Martin] Feldstein to the Charles River above the dam, [Franco] Modigliani to the Charles below the dam, and [Arthur] Okun to the Salton Sea."

For those not up on their southern California geography, the Salton Sea is the largest lake in California. It is formed by the occasional long-ago overflow of the Colorado River, but it has no natural outlet--except for evaporation. Thus, as various kinds of salinity wash through the soil and into the Salton Sea, its salinity kept rising, making it saltier than the ocean.

As Hall points out, the old-style differentiation between monetarists and Keynesians was based on views about the effects of monetary and fiscal policy. Keynesians back in the 1950s typically believed that the supply of money and credit was not an important factor in determining the business cycle. Monetarists like Milton Friedman argued that it was. By the mid-1970s, the monetarists had won that argument and Keynesian thinking of that time often discussed both fiscal and monetary policies. As Hall wrote in 1976: "The old division between monetarists and Keynesians is no longer relevant, as an important element of fresh-water doctrine is the proposition that monetary policy has no real effect. What used to be the standard monetarist view is now middle-of-the-road, and is widely represented, for example, in Cambridge, Massachusetts."

At a more detailed level, Hall attributed much of the difference between the freshwater and saltwater macroeconomists to their views on expectations. In the freshwater view of that time, it was typically argued that economic actors had excellent foresight about the future effects of various policies--what is often called "rational expectations." In certain economic models with rational expectations, adjusting the money supply has no effect, because all economic actors can see what i happening and adjust all prices and wages accordingly. As Hall wrote in 1976: "By now, everyone more than a few yards from the ocean's edge bows in the direction of rational expectations."

But how much rationality was really likely? As Hall drily noted, some of the models seemed to presume that all economic actors had rationality "[e]qual to that of an MIT Ph.D. in economics with 9 years of professional experience." But even at that time, economists were experimenting perspectives on macroeconomic behavior. Some economists used information lags, in which people might take time to develop their rational expectations. Others thought about "adaptive expectations," in which people looked backward at what had  happened, but didn't make forward-looking predictions in the way that true rational expectations would require. Still others looked at reasons why prices or wages might not adjust, with a particular focus on contracts or other kinds of "sticky prices," which would later grow into a "New Keynesian" saltwater view of the economy.  As Hall wrote: "Macroeconomists of more brackish persuasions are skeptical of the explanatory value of information lags, and have developed a major alternative within the framework of rational economic behavior. The basic idea is that buyers and sellers of labor services rationally enter into contracts that fix the wage in money terms for some time into the future."

There was a time, not all that long ago back in the mid-2000s, when a number of economists thought that they had successfully put together a consensus macroeconomic model. It built on the freshwater ideas that macroeconomic models should be built on microeconomic behavior and the important of expectations of individual agents, while still allowing for the possibility of saltwater ideas like the stickiness of prices, the economic losses from recessions, and a role for government policy in ameliorating recessions.  For one explanation of these efforts at building a consensus model, see the article by Jordi Galí and Mark Gertler in the Fall 2007 issue of the Journal of Economic Perspectives,  
"Macroeconomic Modeling for Monetary Policy Evaluation." Just to be clear, a shared model doesn't mean that macroeconomists would all agree. It means that economists with differing perspectives can use the same overall structure for analysis and argue about whether certain parameters have high or low values. This focuses the intellectual disputes in a useful way. But this consensus model, like pretty much all existing macroeconomic models, failed the test of providing a useful framework for understanding the Great Recession. The freshwater and saltwater camps separated again.

Here is one quibble with what Hall wrote back in 1976.  He argued: "As I see it, the major distinguishing feature of macroeconomics is its concern with fluctuations in real output and unemployment. The two burning questions of macroeconomics are: Why does the economy undergo recessions and booms? What effect does conscious government policy have in offsetting these fluctuations?" At the time when Hall was writing, this statement seemed accurate to me. The very idea of macroeconomics as a distinctive field grew out of that extraordinary recession called the Great Depression, and in the following decades up to the mid-1970s, the concern over economic fluctuations largely defined the field of macroeconomics.

But although this change wasn't yet visible in 1976 when Hall was writing, the U.S. economy had just entered a lengthy period of productivity slowdown. We were in the process of witnessing a period of enormous economic catch-up from Japan, soon to be followed by Korea and other nations of East Asia, and now in turn being echoed by rapid growth in China, India, and other emerging economies. Looking ahead, the U.S. economy faces challenges about whether it can return to and sustain a strong rate of growth into the future. In the aftermath of the Great Recession, many of the old arguments about causes of business cycles and policies for ameliorating them have obvious relevance.  But to me, macroeconomics should also be about the long-term patterns of economic growth.

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