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Luis Katz

Macroeconomist specialized in Industrial policy (automotive industry)

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January 27th, 10:26am 0 comments

Brad DeLong: The British Economy Is Now Doing Worse than it Did in the Great Depression

January 26, 2012

Posted
January 27th, 10:24am 0 comments

Two Percent Is Not Enough - NYT - krugman

January 26, 2012, 11:31 am — Updated: 11:31 am -->

Two Percent Is Not Enough

I’m being asked for comments on the Fed’s low-rates-until-2014 announcement. It’s a step in the right direction — and it has had a visible effect on markets, pushing long-term rates down, which is all good.

But why is the inflation target only 2 percent?

Actually, I understand why; the inflation hawks are still a powerful force that must be appeased. But the truth is that recent experience has made an overwhelming case for the proposition that the 2 percent or so implicit target prior to the Great Recession was too low, that 4 or 5 percent would be much better. Even the chief economist at the IMF says so. (OK, in real life it’s Olivier Blanchard, who is a very smart and also flexible-minded macroeconomist who just happens to be at the IMF for now — and I’m glad that he is!)

The thing is, if we’re going to lock in a formal inflation target, now would be a good time to get it right, instead of waiting until the memory of the crisis fades and everyone gets complacent again.

So this isn’t the Fed policy transformation we’ve been waiting for. But better than nothing.

Posted
January 25th, 11:56am 0 comments

Brad DeLong: Paul Krugman Is Grateful to Be Lectured on Professional Etiquette by John "Fairy Tales" Cochrane

Paul Krugman Is Grateful to Be Lectured on Professional Etiquette by John "Fairy Tales" Cochrane

Paul:

A Bizarre Turn In The Stimulus Debate (Boring): Wow. Just wow. John Cochrane puts up a post that to all appearances amounts to a complete retreat from his previous denunciations of deficit spending in a recession. But he simultaneously denies having ever held the position everyone thought he held, and denounces me and Brad DeLong as big meanies. I’ll outsource the analysis to Noah Smith.

Just for reference, if you want to know what I was reacting to, here’s my original Dark Age post, and some further Cochrane quotation. Notice, by the way, the highly polite declaration that anyone who believed in stimulus was telling “fairy tales”; it goes with Lucas’s highly polite dismissal of Christy Romer’s stimulus analysis as “shlock economics.” I’m so glad to be lectured now on professional etiquette.

Anyway, see if you can reconcile all that with what Cochrane now claims he believed all along.

Paul on the Dark Age:

A Dark Age of macroeconomics (wonkish): Here’s Fama:

The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another.

And here’s Cochrane:

First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both.1 This is just accounting, and does not need a complex argument about “crowding out.”

Second, investment is “spending” every bit as much as consumption. Fiscal stimulus advocates want money spent on consumption, not saved. They evaluate past stimulus programs by whether people who got stimulus money spent it on consumption goods rather save it. But the economy overall does not care if you buy a car, or if you lend money to a company that buys a forklift.

There’s no ambiguity in either case: both Fama and Cochrane are asserting that desired savings are automatically converted into investment spending, and that any government borrowing must come at the expense of investment — period.

What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship. Yes, savings have to equal investment, but that’s not something that mystically takes place, it’s because any discrepancy between desired savings and desired investment causes something to happen that brings the two in line.

And Paul on Robert Lucas's inability to… I guess "inability to discount" is the best way to describe it:

A Note On The Ricardian Equivalence Argument Against Stimulus (Slightly Wonkish): [E]ven if you assume that the [Ricardian Equivalence] doctrine is right, it does NOT imply that government spending on, say, infrastructure will be met by offsetting declines in private spending. In other words, Robert Lucas was betraying a complete misunderstanding of his own doctrine when he said this:

If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that’s just a monetary policy. We don’t need the bridge to do that. We can print up the same amount of money and buy anything with it. So, the only part of the stimulus package that’s stimulating is the monetary part.

[…]

But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder — the guys who work on the bridge — then it’s just a wash. It has no first-starter effect. There’s no reason to expect any stimulation. And, in some sense, there’s nothing to apply a multiplier to. (Laughs.) You apply a multiplier to the bridge builders, then you’ve got to apply the same multiplier with a minus sign to the people you taxed to build the bridge. And then taxing them later isn’t going to help, we know that.

This remark was followed, by the way, by a smear against Christy Romer:

Christina Romer — here’s what I think happened. It’s her first day on the job and somebody says, you’ve got to come up with a solution to this — in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning.

So she scrambled and came up with these multipliers and now they’re kind of — I don’t know. So I don’t think anyone really believes. These models have never been discussed or debated in a way that that say — Ellen McGrattan was talking about the way economists use models this morning. These are kind of schlock economics.

Maybe there is some multiplier out there that we could measure well but that’s not what that paper does. I think it’s a very naked rationalization for policies that were already, you know, decided on for other reasons.

I’ve tried to explain why Lucas and those with similar views are all wrong several times...

Posted
January 23rd, 7:41am 0 comments

Brad DeLong: William Hazlitt's Political Essays: The Character of Mr. Burke

William Hazlitt's Political Essays: The Character of Mr. Burke

William Hazlitt's Political Essay: "The Character of Mr Burke":

It is not without reluctance that we speak of the vices and infirmities of such a mind as Burke's: but the poison of high example has by far the widest range of destruction: and, for the sake of public honour and individual integrity, we think it right to say, that however it may be defended upon other grounds, the political career of that eminent individual has no title to the praise of consistency. Mr Burke, the opponent of the American war, and Mr Burke, the opponent of the French Revolution, are not the same person, but opposite persons -- not opposite persons only, but deadly enemies.

In the latter period, he abandoned not only all his practical conclusions, but all the principles on which they were founded. He proscribed all his former sentiments, denounced all his former friends, rejected and reviled all the maxims to which he had formerly appealed as incontestable. In the American war, he constantly spoke of the right of the people as inherent, and inalienable: after the French Revolution, he began by treating them with the chicanery of a sophist, and ended by raving at them with the fury of a maniac. In the former case, he held out the duty of resistance to oppression, as the palladium and only ultimate resource of natural liberty; in the latter, he scouted, prejudged, vilified and nicknamed, all resistance in the abstract, as a foul and unnatural union of rebellion and sacrilege. In the one case, to answer the purposes of faction he made it out, that the people are always in the right; in the other, to answer different ends, he made it out that they are always in the wrong -- lunatics in the hands of the royal keepers, patients in the sick-wards of a hospital, or felons in the condemned cells of a prison.

In the one, he considered that there was a constant tendency on the part of the prerogative to encroach on the rights of the people, which ought always to be the object of the most watchful jealousy, and of resistance, when necessary: in the other, he pretended to regard it as the sole occupation and ruling passion of those in power, to watch over the liberties and happiness of their subjects. The burthen of all his speeches on the American war, was conciliation, concession, timely reform, as the only practicable or desirable alternative of rebellion: the object of all his writings on the French Revolution was, to deprecate and explode all concession and all reform, as encouraging rebellion, and as in irretrievable step to revolution and anarchy.

In the one, he insulted kings personally, as among the lowest and worst of mankind; in the other, he held them up to the imagination of his readers, as scared abstractions. In the one case, he was a partisan of the people, to court popularity; in the other, to gain the favour of the Court, he became the apologist of all courtly abuses. In the one case, he took part with those who were actually rebels against his Sovereign: in the other, he denounced as rebels and traitors, all those of his own countrymen who did not yield sympathetic allegiance to a foreign Sovereign, whom we had always been in the habit of treating as an arbitrary tyrant.

Nobody will accuse the principles of his present Majesty, or the general measures of his reign, of inconsistency. If they had no other merit, they have, at least, that of having been all along actuated by one uniform and constant spirit: yet Mr Burke at one time vehemently opposed, and afterwards most intemperately extolled them: and it was for his recanting his opposition, not for his persevering in it, that he received his pension. He does not himself mention his flaming speeches in the American war, as among the public services which had entitled him to this remuneration.

The truth is, that Burke was a man of fine fancy subtle reflection; but not of sound and practical judgment, nor of high or rigid principles. -- As to his understanding, he certainly was not a great philosopher; for his works of mere abstract reasoning are shallow and inefficient: -- nor was he a man of sense and business; for, both in counsel and in conduct, he alarmed his friends as much at least as his opponents: -- but he was an acute and accomplished man of letters -- an ingenious political essayist. He applied the habit of reflection, which he had borrowed from his metaphysical studies, but which was not competent to the discovery of any elementary truth in that department, with great facility and success, to the mixed mass of human affairs.

He knew more of the political machine than a recluse philosopher; and he speculated more profoundly on its principles and general results than a mere politician. He saw a number of fine distinctions and changeable aspects of things, the good mixed with the ill, and the ill mixed with the good; and with a sceptical indifference, in which the exercise of his own ingenuity was obviously the governing principle, suggested various topics to qualify or assist the judgment of others.

But for this very reason, he was little calculated to become a leader or a partizan in any important practical measure. For the habit of his mind would lead him to find out a reason for or against any thing: and it is not on speculative refinements, (which belong to every side of a question), but on a just estimate of the aggregate mass and extended combinations of objections and advantages, that we ought to decide or act. Burke had the power of throwing true or false weights into the scales of political casuistry, but not firmness of mind (or, shall we say, honesty enough) to hold the balance. When he took a side, his vanity or his spleen more frequently gave the casting vote than his judgment; and the fieriness of his zeal was in exact proportion to the levity of his understanding, and the want of conscious sincerity.

He was fitted by nature and habit for the studies and labours of the closet; and was generally mischievous when he came out; because the very subtlety of his reasoning, which, left to itself, would have counteracted its own activity, or found its level in the common sense of mankind, became a dangerous engine in the hands of power, which is always eager to make use of the most plausible pretext to cover the most fatal designs. That which, if applied as a general observation on human affairs, is a valuable truth suggested to the mind, may, when forced into the interested defence of a particular measure or system, become the grosses and basest sophistry.

Facts or consequences never stood in the way of this speculative politician. He fitted them to his preconceived theories, instead of conforming his theories to them. They were the playthings of his style, the sport of his fancy. They were the straws of which his imagination made a blaze, and were consumed, like straws, in the blaze they had served to kindle. The fine things he said about Liberty and Humanity, his speech on the Begum's affairs, told equally well, whether Warren Hastings was a a tyrant or not: nor did he care one jot who caused the famine he described, so that he described it in a way that no one else could. On the same principle, he represented the French priests and nobles under the old regime as excellent moral people, very charitable, and very religious, in the teeth of notorious facts, -- to answer to the handsome things he had to say in favour of priesthood and nobility in general; and with similar views he falsifies the record of our English Revolution, and puts an interpretation of the word abdication, of which a schoolboy would be ashamed.

He constructed his whole theory of government, in short, not on rational, but on picturesque and fanciful principles; as if the king's crowns were a painted gewgaw, to be looked at on gala-days; titles an empty sound to please the ear; and the whole order of society a theatrical procession.

His lamentations over the age of chivalry, and his projected crusade to restore it, are about as wise as if any one from reading the Beggar's Opera, should take to picking of pockets: or, from admiring the landscapes of Salvator Rosa, should wish to convert the abodes of civilized life into the haunts of wild beasts and banditti. On this principle of false refinement, there is not abuse, nor system of abuses, that does not admit of an easy and triumphant defence; for there is something which a merely speculative enquirer may always find out, good as well as bad, in every possible system, the best or the worst; and if we can once get rid of the restraints of common sense and honesty, we may easily prove, by plausible words, that liberty and slavery, peace and war, plenty and famine, are matters of perfect indifference. This is the school of politics, of which Mr Burke was at the head; and it is perhaps to his example, in this respect, that we owe the prevailing tone of many of those newspaper paragraphs, which Mr Coleridge thinks so invaluable an accession to our political philosophy.

Burke's literary talents were, after all, his chief excellence. His style has all the familiarity of conversation, and all the research of the most elaborate composition. He says what he wants to say, by any means, nearer to more remote, within his reach. He makes use of the most common or scientific terms, or the longest or shortest sentences, of the plainest and most downright, or of the most figurative modes of speech. He gives for the most part loose reins to his imagination, and follows it as far as the language will carry him. As long as the one or the other has any resources in store to make the reader feel and see the thing as he has conceived it, in its nicest shades of difference, in its utmost degree of force and splendour, he never disdains, and never fails to employ them.

Yet, in the extremes of his mixed style, there is not much affectation, and but little either of pedantry or coarseness. He everywhere gives the image he wishes to give, in its true and appropriate colouring: and it is the very crowd and variety of these images that have given to his language its peculiar tone of animation, and even of passion. It is his impatience to transfer his conceptions entire, living, in all their rapidity, strength, and glancing variety, to the minds of others, that constantly pushes him to the verge of extravagance, and yet supports him there in dignified security --

Never so sure our rapture to create,
As when he treads the brink of all we hate.

He is the most poetical of our prose writers, and at the same time his prose never degenerates into the mere effeminacy of poetry; for he always aims at over powering rather than at pleasing; and consequently sacrifices beauty and delicacy to force and vividness. He has invariable a task to perform, a positive purpose to execute, an effect to produce. His only object is therefore to strike hard, and in the right place; if he misses his mark, he repeats his blow; and does not care how ungraceful the action, or how clumsy the instrument, provided it brings down his antagonist.

Posted
January 23rd, 6:49am 0 comments

Argentina-Brasil olvida el déficit de 28 mil millones que acumuló la Argentina en la relación bilateral - Beristain - Tiempo argentino

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Explicación extraoficial de la posición del gobierno argentino en la negociación con Brasil?

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January 20th, 10:05am 0 comments

Krugman - Mistakes and ideology

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January 17th, 10:45am 0 comments

Reed-GM urged to shift Chevrolet output-FT

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January 9th, 11:45am 0 comments

How Austerity Is Killing Europe - NYR

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January 3rd, 12:55pm 0 comments

USA 2012 economy by 6 economists - NYT - Fluharty

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January 3rd, 11:31am 0 comments

Brad DeLong: Department of "Huh?!": John Cochrane and Ricardian Equivalence Edition I

Department of "Huh?!": John Cochrane and Ricardian Equivalence Edition I

"Ricardian Equivalence"--a theory not believed in by David Ricardo--is the claim that when the government cuts lump-sum taxes or increases lump-sum transfers in the present and balances this by a credible announcement that it will increase lump-sum taxes in the future such a shift in the economy has no effect on spending, prices, production, or interest rates. For Ricardian Equivalence to hold, we need for:

  • people to be able to borrow and lend as much as they want at the market interest rate.
  • people to be your standard non-myopic economic agents.
  • people to care only about the subjective utility of their descendants.
  • everybody to leave a positive bequest to each of their descendants.
  • everybody to have some descendants.
  • nobody immigrates or emigrates.

To the extent that people cannot borrow and lend at the market interest rate, that people are myopic, that people care about descendants in other ways than seeking to maximize their subjective utility, that people don't leave bequests to all their descendants, that people don't have descendants, and that people immigrate or emigrate, Ricardian Equivalence will fail. How much it will fail depends on the magnitudes, etc., but fail it does.

John Cochrane writes:

The Grumpy Economist: "Ricardian Equivalence," which is the theorem that stimulus does not work in a well-functioning economy

This definition of a "well-functioning economy" is not something I understand.

In a well-functioning economy, it is usually the case that people immigrate and emigrate, die childless, disinherit individual descendants, care about their descendants in other ways than seeking to maximize their subjective utility, cannot borrow and lend unlimited amounts at the market interest rate, etc., etc. Yet the fact that these things hold--things that break Ricardian Equivalence--does not mean that the economy is not well-functioning.

You might as well say that in a well-functioning capital market, it doesn't matter how much debt a firm issues because the Modigliani-Miller Theorem tells us that if a firm sells bonds and buys stock investors can still maintain the same ownership stake in the firm by buying the newly-issued bonds as they sell some of their stock back to the firm. This misses the point entirely. Many capital markets that I would call well-functioning are markets in which Modigliani-Miller fails.

Indeed, I cannot think of a capital market I would call well-functioning in which Modigliani-Miller holds.

Posted