from Dean Baker
By now almost everyone knows of the famous Excel spreadsheet error by Harvard professors Carmen Reinhart and Ken Rogoff. It turns out that the main conclusions from their paper warning of the risks of high public sector debt were driven by miscalculations.
When the data are entered correctly, this hugely influential paper can no longer be used to argue that the United States or other wealthy countries need fear a large growth penalty by running deficits now. There is no obvious reason that governments can’t increase spending on infrastructure, research, education and other services that will both directly improve people’s lives and foster future growth.
With the advocates of austerity on the run this is a great time to pursue the attack. The public should understand that the often expressed concerns about long-term growth, the future, and the well-being of our children are simple fig-leafs for inhumane policies that deny people (a.k.a. the parents of our children) work and redistribute income upward. Read more…
Economic Thought - History, Philosophy, and Methodology
An open access, open peer review journal from the World Economics Association
Vol 2, No.1, 2013 – Special Issue on Ethics and Economics
|Ontological Commitments of Ethics and Economics
|Codes of Ethics for Economists: A Pluralist View
Sheila C Dow
|No Ethical Issues in Economics?
|Professional Economic Ethics: Why Heterodox Economists Should Care
|And the Real Butchers, Brewers and Bakers? Towards the Integration of Ethics and Economics
Volunteers needed to start WEA national chapters. If interested, email firstname.lastname@example.org
WEA Young Economists (Facebook Group – 8 days old – 260 members – join today)
from David Ruccio
Ecuador’s president Rafael Correa [ht: ke] has been elected to a third term in power.
What policies has your government pursued in order to reduce inequality?
Latin America holds the grim title of most unequal region in the world, and the Andean countries are the most unequal part of that region. This is why it was crazy to apply the neoliberal system, supposedly based on competition and the liberation of the market, in countries like Ecuador in recent decades. What competition were they talking about? It was a massacre. Now we are reducing inequality, and poverty with it, through a combination of four things. Firstly, making the rich pay more taxes. We have instituted a much more progressive taxation system, and people now actually pay their taxes—collection has doubled. These resources, together with oil revenues and the money saved by reducing the debt burden, can be devoted to education, health and so on. This is the second point: giving equality of opportunities. People no longer have to pay for healthcare or education, which were quite expensive for the poor—school enrolment cost $25 per child, but is now completely free; some children are given books and uniforms too.
Thirdly, Read more…
from Lars Syll
Last year Bank of England’s Andrew G Haldane and Benjamin Nelson presented a paper with the title Tails of the unexpected. The main message of the paper was that we should no let us be fooled by randomness:
For almost a century, the world of economics and finance has been dominated by randomness. Much of modern economic theory describes behaviour by a random walk, whether financial behaviour such as asset prices (Cochrane (2001)) or economic behaviour such as consumption (Hall (1978)). Much of modern econometric theory is likewise underpinned by the assumption of randomness in variables and estimated error terms (Hayashi (2000)).
But as Nassim Taleb reminded us, it is possible to be Fooled by Randomness (Taleb (2001)). For Taleb, the origin of this mistake was the ubiquity in economics and finance of a particular way of describing the distribution of possible real world outcomes. For non-nerds, this distribution is often called the bell-curve. For nerds, it is the normal distribution. For nerds who like to show-off, the distribution is Gaussian. Read more…
from Dean Baker
Every January the public is treated to tales of the World Economic Forum, a gathering of the world’s rich and a select few who are invited there to educate and/or entertain them. Most of us will never have the honor of getting on the inside, so we must rely on media accounts to give us the picture. It turns out that these accounts might be more informative than intended.
Reuters reported on a talk given by Clinton Treasury Secretary and former Obama National Economic Adviser Larry Summers. According to the Reuters account, Summers said:
In 1993, here’s what the situation was: Capital costs were really high, the trade deficit was really big, and if you looked at a graph of average wages and the productivity of American workers, those two graphs lay on top of each other. So, bringing down the deficit, reducing capital costs, raising investment, spurring productivity growth, was the right and natural central strategy for spurring growth. That was what Bob Rubin advised Bill Clinton, that was the advice Bill Clinton followed, and they were right.
This segment is so striking because it is completely wrong in a very big way. Read more…
Yesterday Tyler Cowen [University of George Mason] and Dean Baker [CEPR] offered opposing analysis and views regarding Keynesian economics and the effect that proposed military and healthcare budget cuts in the US are likely to have on unemployment. Below are key passages from their columns (Cowen’s and Baker’s). Who is correct? Read, discuss and vote. The debate and the poll will remain open until 25 February. Only comments that engage with the discussion will be posted. The voting box is at the bottom of this post.
Here are Cowen’s main arguments: Read more…
from Jayati Ghosh
All too often people in countries experiencing financial crisis are told that the road to recovery necessarily involves pain, that fiscal austerity and cuts in spending that adversely affect the lives of ordinary citizens are necessary costs of correction of macroeconomic imbalances and the consequent adjustment that is considered essential for recovery. This is repeated so often that it is now taken as received wisdom by policy makers and civil society alike – yet in fact it is not true at all. It can actually be plausibly argued that in several situations the reverse is correct, that attempts to reverse economic downswings through cuts in public spending are counterproductive and makes matters much worse. This is clearly evident for all to see in the case of crisis-ridden countries in the Eurozone, for example.
And there are also positive counter-examples that show how taking into account the concerns and requirements of ordinary citizens (and paid and unpaid workers in particular) can work as a positive macroeconomic strategy that actually provides a route out of crisis. Sweden provides an example of a country that responded to the financial crisis by explicitly recognizing and attempting to reduce the pressures on workers, and particularly women workers whose needs are often the last to be considered in such periods of crisis. Sweden incorporated measures to maintain or ensure favourable conditions of women’s work and life into its broader economic recovery strategy. Read more…
Economic metrics are used to describe the world. Enormous amounts of money are spent on measuring GDP, employment, wages, unemployment, inflation, consumer and producer confidence, debt, money, the price level and whatever. These metrics show us if inequality is rising or if unemployment is going down. But these metrics are not just, or even mainly, gathered for the sake of science.
They also play a role in economic policy and are often designed to enable this. Some of these metrics like government debt as a percentage of GDP, are even used to call entire countries to account – they surely are part of ‘the language of power’.
But are we measuring the right metrics? And do we measure them in the right way? Or are our insights and policies biased because we’re looking at biased and incomplete metrics? And are we looking at them in the right way? Or do they act as blindfolds? Who decides anyway and on which grounds about the very definitions and about the money spent on gathering the data?
These kinds of questions are being discussed in the World Economics Association internet conference on The political economy of economic metrics. The conference, which is led by Merijn Knibbe and Dirk Bezemer, is now open here http://peemconference2013.worldeconomicsassociation.org/ Anyone may take part.
from Dean Baker
The accolades for Timothy Geithner came on so thick and heavy in the last week that it’s necessary for those of us in the reality-based community to bring the discussion back to earth. The basic facts of the matter are very straightforward. Timothy Geithner and the bailout he helped engineer saved the Wall Street banks. He did not save the economy.
We can’t know exactly what would have happened if we did not have the TARP in October of 2008. We do know there was a major effort at the time to exaggerate the dangers to the financial system in order to pressure Congress to pass the TARP.
For example, Federal Reserve Board Chairman Ben Bernacke highlighted the claim that the commercial paper market was shutting down. Since most major companies finance their ongoing operations by issuing commercial paper, this raised the threat of a full-fledged economic collapse because even healthy companies would not be able to get the cash needed to pay their bills.
What Bernanke neglected to mention was that he personally had the ability to sustain the commercial paper market through direct lending from the Fed. He opted to go this route by announcing the creation of a Fed special lending facility to support the commercial paper market the weekend after Congress voted to approve the TARP. Read more…
from Lars Syll
Almost a hundred years after John Maynard Keynes wrote his seminal A Treatise on Probability (1921), it is still very difficult to find statistics textbooks that seriously try to incorporate his far-reaching and incisive analysis of induction and evidential weight.
The standard view in statistics – and the axiomatic probability theory underlying it – is to a large extent based on the rather simplistic idea that “more is better.” But as Keynes argues – “more of the same” is not what is important when making inductive inferences. It’s rather a question of “more but different.”
Variation, not replication, is at the core of induction. Finding that p(x|y) = p(x|y & w) doesn’t make w “irrelevant.” Knowing that the probability is unchanged when w is present gives p(x|y & w) another evidential weight (“weight of argument”). Running 10 replicative experiments do not make you as “sure” of your inductions as when running 10 000 varied experiments – even if the probability values happen to be the same. Read more…
from Peter Radford
It takes a particular type of gall for someone hiding behind the comfort of a cozy tenured professorship to yelp about the way in which unions distort the otherwise – presumably – smooth operation of a mainstream style economy. Apparently one person’s guarantee is another’s structural impediment.
This really stinks. It reeks of hypocrisy. It is devoid of ethical self-understanding. It is just rotten.
But it happens all the time. Far too often.
Today’s Financial Times has another in its series focusing on America’s so-called debt problem. This one is decidedly on the side of the austerity seekers. It is written by Ken Rogoff who seems determined to tarnish the good name he earned when he co-authored a book called “This Time is Different” in which he correctly highlighted that recoveries subsequent to a financial melt down are more difficult and prolonged. Unfortunately he drew some conclusions from his data that have a somewhat tenuous cause and effect connection. Read more…
from Lars Syll
Knowing the contents of a toolbox, of course, requires statistical thinking, that is, the art of choosing a proper tool for a given problem. Instead, one single procedure that I call the “null ritual” tends to be featured in texts and practiced by researchers. Its essence can be summarized in a few lines:
The null ritual:
1. Set up a statistical null hypothesis of “no mean difference” or “zero correlation.” Don’t specify the predictions of your research hypothesis or of any alternative substantive hypotheses.
2. Use 5% as a convention for rejecting the null. If signiﬁcant, accept your research hypothesis. Report the result as p < 0.05, p < 0.01, or p < 0.001 (whichever comes next to the obtained p-value).
3. Always perform this procedure … Read more…
The European Commission grossly underestimates the effects of German domestic demand expansion
By Leon Podkaminer
The European Commission’s recent study ‘Current Account Surpluses in the EU’ suggests that an expansion of domestic demand in Germany would have only negligible effects on the trade deficits of its EU partners. Rough calculations indicate that these effects may actually be larger, by a factor of 5 or more. Read more…
from Lars Syll
There are unfortunately a lot of neoclassical economists out there who still think that price and wage rigidities are the prime movers behind unemployment. What is even worse – I’m totally gobsmacked every time I come across this utterly ridiculous misapprehension -is that some of them even think that these rigidities are the reason John Maynard Keynes gave for the high unemployment of the Great Depression. This is of course pure nonsense. For although Keynes in General Theory devoted substantial attention to the subject of wage and price rigidities, he certainly did not hold this view.
Since unions/workers, contrary to classical assumptions, make wage-bargains in nominal terms, they will – according to Keynes – accept lower real wages caused by higher prices, but resist lower real wages caused by lower nominal wages. However, Keynes held it incorrect to attribute “cyclical” unemployment to this diversified agent behaviour. During the depression money wages fell significantly and – as Keynes noted – unemployment still grew. Thus, even when nominal wages are lowered, they do not generally lower unemployment. Read more…
Paul Krugman and Steve Randy Waldman both have a gift for writing. But when they write about base money their prose becomes fuzzy and vague, at least to me. Just like the writing of many market monetarists, by the way. I’ve tried to figure out where and why I lose track of all this writing. It turns out to be the concept of ‘base money’, as it’s used by these writers (or by me). The point is: there are in fact different kinds of base money and Krugman and Waldman do not really seem to differentiate between the different kinds. What’s the matter? Different organisations produce different kinds of money in our society. A (non-exhaustive) list: Read more…
from Lars Syll
In many statistical and econometric studies R2 is used to measure goodness of fit – or more technically, the fraction of variance ”explained” by a regression.
But it’s actually a rather weird measure. As eminent mathematical statistician David Freedman writes: Read more…
from David Ruccio
The current spectacle of infighting is one more reason mainstream economics must fall.
It’s not that we needed any more reasons—since, for all their claims to the mantle of science, mainstream economists have continued to move back and forth between contrasting positions. It’s unemployment, no it’s inflation. Fiscal stimulus works best; what we really is expansionary austerity. Let’s see more monetary easing; but watch out for policy uncertainty. And so on and so forth.
But the debate among mainstream economists has entered a new stage—with one group endorsing Team Republican, arguing that “The negative effect of the administration’s ‘stimulus’ policies has been documented in a number of empirical studies,” while the other group accuses them of “giving economics a bad name.” Read more…
from Dean Baker
Jeffrey Sachs has played a useful role in challenging the economic orthodoxy in many areas over the last three years. However, when he tries to tell us that the current downturn is structural not cyclical he is way over his head in the quicksand of the orthodoxy.
Let’s start with his simple bold assertion: Read more…
from John Schmitt
Within the economics profession, the standard explanation for rising inequality over the last three decades is that we have been experiencing a long-term shortage of college-educated workers. Technological progress, the story goes, has increased demand for the kind of highly skilled workers that colleges produce, but, young people have not been going to college in sufficient numbers to meet that demand. The result, these economists argue, is that the earnings of the third or so of the workforce with a college degree have pulled ahead of the rest, creating a widening gap between the top and bottom of the income scale. Read more…
from Robert R Locke
I think the people in this blog need to show more leadership. That might be hard to understand for those who are use to thinking of the economy as a self-regulating mechanism and of economists as observers and thinkers. But the economic crisis is too important to be left to passivity.
The problem area is not difficult to identify. It is not socialism versus capitalism or free enterprise versus government, as neoliberal, tea party ideologues would have it. The problem that real world bloggers need actively to investigate and manage is a massive system of private investor capitalism at the heart of today’s economy. It emerged from five post WWII mostly noneconomic phenomena: First the information revolution that spun out of the Pentagon during the Cold War, which allows twenty-four hour a day trading of financial packages on money markets worldwide. Two, the end of the Cold War, which opened up vast stretches of the former Communist world to private investor capitalism in an integrated system of stock markets and financial service, Three, the growth of institutional investors in associations like private pension funds that funnel unprecedented amounts of money into private equities, hedge funds, and investment banks. Four, the rapid growth of business schools and departments of finance economics that preach an ideology of unrestrained private investor capitalism and furnish investor capitalism’s skilled labor force, and Five, the development of neoliberalism in economics that justifies the ethical bankruptcy of investor capitalism. Read more…