Posts Tagged ‘economics’

P1-BM854C_OUTLO_G_20130825172704

The Wall Street Journal uses this chart to illustrate a story on a new report issued by Morgan Stanley on “Inequality and Consumption.”*

Morgan Stanley’s research suggests weaker-than-usual consumption at the lower end of the income ladder helps explain why this economic recovery has been particularly anemic.

“It has taken more than five years for U.S. households to ‘feel’ like they are in recovery,” write economists Ellen Zentner and Paula Campbell in the report, entitled “Inequality and Consumption.”

Before the recession, they say, “the expansion of credit simply delayed the day of reckoning from declining incomes and rising inequality.”

Apparently, economists at Standard & Poor’s and Morgan Stanley have begun to understand the macroeconomic effects of rising inequality, a problem that legions of mainstream academic economists have simply ignored.

 

*I haven’t yet been able to obtain a copy of the report itself. I will write about it as soon as I do.

Update

Here are some other charts from the report (courtesy of Marketwatch):

MW-CU639_gini_c_20140922105451_ZH

MW-CU641_low_wa_20140922105810_ZH

MW-CU643_median_20140922110117_ZH

MW-CU647_con_vs_20140922110839_ZH

aD48E.So.91 copy

Special mention

WolveM20140922A_low RallT20140922_low

Murner.Nerrenbeschwerung.kind

Mainstream economics has been a disaster, especially since the crash of 2007-08. It wasn’t able to predict the onset of the crisis. It didn’t even include the possibility of such a crisis. And it certainly hasn’t been a reliable guide to getting out of the crisis.

And yet economist after economist has been stepping forward—even on the liberal side of things—to try to convince us that things are pretty much OK in the land of mainstream economics.

Just the other day, Paul Krugman tried to convince us that, leaving aside the failure to predict the crisis or even envisioning the possibility of a crisis occurring, mainstream models “did a pretty good job of predicting how things would play out in the aftermath.” The problem, for Krugman, all comes down to the “bad behavior” of some economists who have been more interested in defending partisan turf than in getting things right.

Now, Mark Thoma wants to argue that the macroeconomic models—including the “dynamic stochastic general equilibrium” models that have become the stock-in-trade of mainstream macroeconomics for the past couple of decades—are just fine. The problem, as Thoma sees it, is not with the theory or the models but with the questions economists have been asking.

What neither Krugman nor Thoma wants to admit is those very same models—hydraulic IS-LM in the case of Krugman, the rational expectations, dynamic optimizing, and representative agents of DSGE—actually direct the behavior of economists and delimit the questions they can ask. Those models are so many theoretical lenses on the world, which determine how the economists who use them interpret the world.

I understand: Krugman and Thoma desperately want to keep the precious baby. But that also means we’re stuck with the increasingly dirty bathwater.

26up-jared-master675

 

You know the story: Xi and his San tribe are “living well off the land.” They are happy because of their belief that the gods have provided plenty of everything, and no one among them has any wants. One day, a Coca-Cola bottle is thrown out of an airplane and falls to Earth unbroken. But the bottle eventually causes unhappiness within the tribe, leading the elders to believe it’s an “evil thing” which the gods were “absent-minded” to send them. Xi then travels to  the edge of the world and throws the bottle off the cliff. He then returns to his tribe and receives a warm welcome from his family.

I wonder if Paul Krugman expects to receive a warm welcome from the economics family after throwing the prediction bottle over the cliff.

Hardly anyone predicted the 2008 crisis, but that in itself is arguably excusable in a complicated world. More damning was the widespread conviction among economists that such a crisis couldn’t happen. Underlying this complacency was the dominance of an idealized vision of capitalism, in which individuals are always rational and markets always function perfectly.

I actually agree with Krugman on this point. Economic prediction is, in fact, impossible and the really crazy feature of mainstream economic models is the fact that endogenous crises simply can’t occur. Exogenous factors, sure, but nothing internal to the models can lead to a crash. Their idealized vision of capitalism, absent an external event (such as a credit crunch or an increase in the price of oil), simply leads to a full-employment, price-stable equilibrium.

But, wait, doesn’t the entire edifice fall when—on its own terms—the ability to correct predict is dispensed with? The whole rationale of giving up realistic assumptions about the economic system has been the ability to accurately and correctly predict the movements of the economy. That’s the mantle of predictive science that has been used, since at least the mid-1950s, to expunge all other economic theories and approaches from the discipline.

Mainstream economists can’t have it both ways: to celebrate their models for their predictive ability and then to dispense with prediction when, as in 2007-08 (just as in 1929), their models clearly failed. We need something better.

As for their track record since the crisis broke out, well, they haven’t fared much better—at least to judge by where we stand right now. Krugman, for his part, wants to stick with the hydraulic mechanisms of the textbook economic models, which “did a pretty good job of predicting how things would play out in the aftermath,” and declare that “too many influential” economists must be crazy.

rethinkecon

The Rethinking Economics conference starts this morning in New York City.

Here’s a link [pdf] to the schedule. The live-stream can be found here.

Sorensen-1-9

Special mention

August 31, 2014 wuc140903-605_605

 

96636_600

This, according to the Obama administration, is what “a broad array of ideological views” [ht: br] looks like:

  • Paul Krugman (Princeton University), Alan Blinder (Princeton University), Claudia Goldin (Harvard University), Anat Admati (Stanford University), Erik Brynjolfsson (Massachusetts Institute of Technology), and Roland Fryer (Harvard University), who were among the economists invited to have lunch with President Obama on 18 June; and
  • Martin Feldstein (Harvard University), Robert Hall (Stanford University), Ben Bernanke (former Federal Reserve Chairman), Edward Glaesar (Harvard University), Luigi Zingales (University of Chicago), Kevin Hassett (American Enterprise Institute), and Melissa Kearney (the Hamilton Project), who were invited for lunch yesterday.

Apparently, that’s what we’ve come to in this country, when “consulting a wide variety of perspectives” is in fact limited to a discussion within a narrow range, from the extreme right to mainstream liberalism. No one who actually offered a real sense of the impending crisis before 2007-08. Nor anyone who is critical of capitalism and is seriously thinking about alternative economic institutions.

The problem is not just that Obama is only listening to a narrow set of views. The list of invitees to the two gatherings also serves as an official stamp of approval—that these economists’ views are worth listening to, and all other approaches to economic analysis can be safely marginalized.