What Did Tyler Cowen Say and Mean In His Original Post?

Generally speaking, neo-classical economists found out about Mason's post from Marginal Revolution's Tyler Cowen. It's a quick post:

The new macroeconomic thinking, some of it is good, note that about half of it runs counter to long established empirical truths that never have been overturned (as always, so much faith in that Lucas supply curve!).

I think I've done a pretty good job of pointing out that some of Mason's points are good, and that some of this other points (and I love this subtle slam) — runs counter to long established empirical truths that have never been overturned — are coming from left field.

But what did he mean by "so much faith in the Lucas supply curve"?

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There are some really deep theoretical holes in macroeconomics. In short, it's hard to come up with a theory of why open market operations would influence the economy at all. And, the Keynesian assertion that monetary policy could shift the aggregate demand had little in the way of foundations for the first 35 years economists were teaching it.

At the time Lucas was working on this in the early 1970's, the focus of macroeconomics was shifting from fiscal to monetary policy. So most of his work is about the latter, although it extends to the former.

Lucas was the first one to show how rational, optimizing, people could respond to policy in a way that created a correlation between monetary policy and output that was structural and causal.

The core problem is that rational, optimizing, people should be able to figure out that monetary policy is ... scammy. It's just hard to come up with a way in which 1) agents who were comfortable with their portfolio could 2) be made offers through open market operations that they will turn down until one that is too good to be true comes along, and 3) and change their real behavior as a result of their particular portfolio shuffle ... especially since the portfolio of the whole country would remain unchanged.

Lucas solved this by showing that if agents formed expectations of policy, and then were met with a somewhat different policy, that the unexpected portion of policy might produce effects. Those effects include something like the Phillips Curve, and a correlation between lowering interest rates and the output going up.

There are 3 big problems with this. 

• If it's only the unexpected part of policy that works, how do you form a policy at all with the goal of the most important part being unexpected? 
• The empirical evidence showed that these effects just weren't that big.
• The correlation of aggregate demand policy with output rising is only a correlation. Most of aggregate demand policy is expected, and therefore not-causal. The causal part comes from the fraction of aggregate demand policy that was unexpected.

Cowen's point is that Mason is celebrating the "Biden stimulus package" because it contains mostly expected stuff, with a some unexpected stuff thrown in, that the evidence tends to show won't do much. Mason is either thinking that Lucas was wrong (a rare thing), that a lot more of the ARPA was unexpected than seems so, or that somehow unexpected policy has recently gotten much more powerful. These seem fanciful.

" ... Progressives like Heather Boushey and Jared Bernstein ..."

This is from the top of Mason's post, but I waited until I'd touched on all his points to add this one. 

Here's the whole quote:

The fact that people like Lawrence Summers have been ignored in favor of progressives like Heather Boushey and Jared Bernstein, and deficit hawks like the Committee for a Responsible Federal Budget have been left screeching irrelevantly from the sidelines, isn’t just gratifying as spectacle. It suggests a big move in the center of gravity of economic policy debates.

A couple of things that make macro so hard are 1) lots of people out in the public have opinions, but not many of them invest the time and effort to make them informed, which is fine except that 2) they're also vocal, while 3) they are overconfident, 4) may listen to people who have no expertise in macroeconomics. Some of those points are covered in the original Why Is Macro So Hard post from 11 years ago.

And the whole thing is conditioned by what I call the Bridge's Weight Limit Problem. I fear this is exactly what's going on right now. 

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Which has what all to do with Jared Bernstein?

I'll preface this by saying that I am not a liberal progressive. But I do read a lot that is written by them so that I can keep up on current viewpoints. And in that vein, I like Jared Bernstein a lot. I think he writes well, I don't think he's too insulting to people he's opposed to, and he has some good ideas. Check him out.

Except ... Jared Bernstein isn't an economist. 

But he plays one in the White House.

Bernstein is a member of the Council of Economic Advisors in the Biden White House This is usually 3 public people, plus some staff economists. There's no requirement that these people be economists, but 1) they usually are, and 2) people out in the public assume that they must be. Not so.

But when Bernstein was your age ... he majored in ... wait for it ... Music with a specialization in double bass performance. 

Then he got a master's degree in Social Work. 

Then he got a Ph.D. in something called Social Welfare. This is not a typical major. I have no idea what it is, but I can imagine. Anyway, it's one of those degree names that universities invent, that doesn't really help students get a job, because no one knows exactly what it is. It may be sad, but all employers want to do is have you select a major as a bin into which they can group you with others: a unique sounding major does zero for the job applicant, but might do quite a lot for the university professor who doesn't feel at home in their current department.

None of this actually bothers me. I am being truthful when I wrote that I like to hear what Bernstein has to say.

What bothers me, and should bother you is this asymmetry: 

• Do you think that if there was a White House Council of Social Welfare, that it would be OK to have an economist on it? 
• Do you think that these degree programs in Social Work and Social Policy employ any economists?
• Do you think any of the main professional outlets for double bass performers — orchestras, symphonies, and philharmonics — would be OK if an economist showed up and started talking about the difference between vibrato and tremolo?
  

BTW: Bernstein's masters is from Hunter College, which is part of CUNY, where Mason works.

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I know far less about Heather Boushey. Google Scholar here we come! 

First, she has a lot more works and citations than I do. That's good.

But, she doesn't work at a university. She works at a think tank or advocacy group.

And she doesn't publish much in peer-reviewed outlets: Feminist Economics [2006] and [2008], Sociology [2009], Review of Social Economy [2008], Review of Political Economy [1997], [2002], and [2008], NWSA Journal [2003], Journal of Poverty [2002], [2006], and [2012], European Journal of Economics and Economic Policies [2015], International Journal of Health Services [2005], Review of Radical Political Economics [2020], New Labor Forum [2010], NCJW Journal [2006], Eastern Economic Journal [2005], Science and Society [2004], Journal of Labor and Society [2004], and that's about it. I am not sure that Juncture [2016], Challenge [2004], [2012], and [2014], Dissent [2012] and [2014] are considered peer-reviewed; I don't think so. Anyway, for someone who has had a Ph.D. for roughly 25 years, and now holds a position in the White House ... this isn't a lot.

She has published a lot of books. The thing is: at most universities, books don't count much towards tenure. The reason is that they are read and approved by editors, not people in your field. 

FWIW: Your Handbook is under contract with a publisher. They've mostly asked me about what I want on the cover. It's not inspiring.

And she has a lot of reports from think tanks and advocacy groups. These sound impressive, but count for very little academically. They can get cited a lot, but the cites are mostly in books (see above) and newspaper articles.

My point is not to argue that Boushey doesn't know her stuff, or isn't active. Instead, it's to make clear that she has not moved in the same circles as most other economists, and pretty much everyone who's ever been a member of the CEA.

Also, recall from my earlier post "Economists of Other Denominations" that one of the issues with Marxist/radical/heterodox/post-Keynesian economists is that it's not a huge group, so they have fewer journals to publish in, fewer peers to review their stuff, and fewer opportunities for co-authoring.

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I think Mason specifically mentioned Bernstein and Boushey for a reason. It is to emphasize a complete break with the economic advice traditional within the Democratic Party. I do not think many non-economists understand this.

In conjunction with my earlier post entitled "Stimulus Misgivings" in which I called Biden's statement that "There is a consensus among economists left, right, and center that ... we can't spend too much" a Trump-worthy lie, I now conclude that the President is being told by non-economists what economists think. I do not think many people understand this.

Lastly, I should mention that the chair of the Council of Economic Advisors is Cecilia Rouse, who has had an admirable economics career. BUT, neither Rouse, nor Bernstein, nor Boushey can be remotely considered a macroeconomist. This is problematic when the White House is kinda' sorta' the ultimate macro institution.

Mason's Epilogue

I needed a word for Mason's last 7 unnumbered paragraphs, so this is it.

Note that at the top he says that thinking about economic policy has changed, but at the bottom he says there is no theory for this yet, and it isn't in the textbooks. Is it just me, or does this sound like one of those hotel commercials where the guest is so well-rested they have superpowers?

Mason also wonders what macroeconomics would look like if AD shocks had permanent effects, and we were not eventually constrained by long-run aggregate supply. I think this is easy to piece together in terms of the AD-SAS-LAS model that I teach in principles. In that model, the economy starts on LAS, an AD shift opens a triangle (with one edge along the LAS), and this is closed down slowly by SAS shifting in the direction that makes the triangle smaller. We end up back on the LAS, but typically at a different price level. I think it's easy to modify this so it works in the way described by Mason: SAS doesn't shift, the triangle remains, and it is slowly closed off by LAS shifting right (due to accumulation of labor, capital, and technology) until equilibrium is achieved again. The problem I see with this is that the initial story of SAS shifting is due to people working too much, and asking for nominal wage increases. To me, it seems that Mason is either asserting that 1) people can't be pushed to work too much, or 2) people won't bargain for higher wages when they are pushed too much. I'd say these are possible, but I'm not sure they are plausible.

But his middle 3 paragraphs seem to contradict all this. It sounds like he envisions something like this, but in which the economy is never off the LAS (thus the constraint on employment growth ... this is like saying the LAS can shift to the right only so fast). But he also asserts that there could/would be higher wage growth, but this is the SAS shifts not happening that I mentioned in the previous paragraph. I can't see how they both happen and don't happen? Or how the most important input cost to enterprises, wages, is supposed to go up without that being transmitted into output prices? This could happen if output demand was very elastic, so that suppliers got the burden of the cost shift, but how do we make elasticity do what Mason wants??

Then there's the last paragraph:

... a generation of mainstream macroeconomic theory was retconned ...

That's pretty offensive. Retconned is a newer portmanteau word in the English language. It means that after the fact you changed your story to match what happened before. I think the implication of retconning in new classical macroeconomics is just ... unbelievably ignorant. In the 70's and into the very late 80's, those new classical macroeconomists were ... out there. Lots of people thought they were crazy, and even dangerous. If anything, it was the politicians and the bureaucrats of the 80's and 90's who retconned, as they struggled to figure out what parts of what they were already doing could be justified by the new theories that were getting confirmed left and right. Part of this was the recognition that monetary economists going back as far as Patinkin in the mid-50s, and more popularly to Friedman in the 60's — who were largely ostracized by polite society — had been right all along.

In the end, I think the title of the post is pretty informative. We're now in a world in which the political plan doesn't have much underlying economic theory. Who's going to retcon in response to that?

ARPA and ARRA

 Mason uses one terminology, based on acronyms formed from the titles of Congressional bills.

I prefer the more public label.

So

• ARPA = "Biden's Stimulus package"
• ARRA = the 2009 "Obama stimulus package"
  

Mason's # 10: The Government Is Better at Stuff than the Private Sector Is

Says who?

Lack of faith in the efficiency of government is not a strictly American phenomenon. 

... The institutional and ideological obstacles to shifting activities from for-profit to public provision are still formidable.

It's interesting that Mason wrote that, and yet never made clear whether or not he thinks those obstacles are a waste of time. 

I get that he thinks government is more efficient. Fair enough. Then does that quote mean that he thinks the obstacles are misplaced, or the people placing the obstacles are misinformed?

To me ... this is a just-so story.

Mason's # 9: Aggregate Demand is Chronically Weak

Mason needs to get out more.

Amazon. Is. All. Demand. That's their business.

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I learned from Chris Fawson (a friend from Utah State) to always check arguments for asymmetry. If someone is going to say one thing on one side of the argument, without admitting the opposite will generally happen on the opposite side, you should be suspicious of them.

So consider 2 alternatives: AD is perpetually being pushed to the right, or AD is being perpetually pushed to the left.

In the first case, the side effect should be inflation. In the second it should be deflation.

If Mason is right ... where's the deflation?

If Mason is right ... and we push AD hard right, is he expecting inflation?

No to both: Mason's position instead seems to be that inflation is disconnected from AD on both ends. How so?? 

No, really, which point of his argument explains that?

Mason's # 8: Means-Testing Is Not Easy

I wholeheartedly agree. I think the people who write laws and regulations involving means-testing are completely clueless about how difficult it is in practice.

And I think at the end, Mason says the key thing:

In order to exclude a relatively small number of high-income families you risk letting many lower-income families fall through the cracks.

I would go further. Stop worrying  about whether the rich are getting aid from the government at all: there just aren't that many rich people and the marginal amount they'd benefit is minute. Focus on getting as much into the hands of people who need it, with fewer strings attached. Walmart gets this. Politicians and bureaucrats do not.

Mason's # 7: Direct Visible Spending Is Better

I agree.

Do note that Mason does not say we should substitute direct spending for indirect spending. But without that, his position is actually 1) more spending is better, and 2) once you're committed to that it should be direct.

Mason's # 6: Work Incentives Don't Matter Much

Again, I am inclined to agree with Mason here, with the extremely strong caveat that they don't seem to make much difference for the poor.

He is right that the $600 extra unemployment benefit seems to have pushed few people to actually choose unemployment.

On the other hand, evidence from when Congress did this sort of thing in 2009 as part of the "Obama stimulus package" points strongly to the idea that people receiving unemployment benefits don't seem to find very many jobs ... until those benefits are about to run out.

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A lot of the motivation for means testing of welfare benefits (this is where he is referring back to Clinton's reforms) is that there had been too much carrot and not enough stick. So the shift back to sending out more checks is going back to the systems that bothered enough people to get them changed in the 90s. A lot of Democrats were in favor of that at the time, and those sort of Democrats seem to be a target of Mason.

On the other hand, the idea of just sending out checks instead of our huge system of overlapping welfare programs was originally a conservative or even Libertarian approach. The point here is that the problem is not the poor it is the bureaucrats being paid to help the poor. Most of them work for agencies who survival depends on the existence of poor that need to be helped, so they are unlikely to actually ever reduce the number of people needing aid. It's make-work for people with certain college degrees. The idea with sending out checks is that it actually helps the poor without helping the middle and upper class white collar workers of anti-poverty agencies.

On this point, Mason is silent. He asserts that incentives don't help the poor get into jobs, but he doesn't consider if incentives might keep others in their jobs.

A parallel idea is that sending checks would be cost efficient if we substituted this for all those agencies; it's a sad fact that most of the money allocated to fight poverty pays people who fight poverty rather than getting into the hands of the poor. Unfortunately, the sudden switch to issuing checks during the pandemic/lockdown has created parallel systems that cost more.

Keep in mind while thinking about what Mason wrote that, 1) the public perception is that the "Biden stimulus package" was mostly about sending checks to people, while 2) 80% of the funds were allocated to government agencies and politically connected institutions. This makes me thing the "bait and switch" worked, and the bureaucrats are laughing all the way to the bank. What is scary here is that people are forgetting how strongly the Washington D.C. metropolitan area has risen in the ranks of rich cities over the last 15 years. It didn't used to be a place you moved to to get rich.

Mason's # 5: The Size of the Debt and Deficit Don't Matter

I completely agree with Mason on this one. 

There is just not much solid evidence to support the common public perception that government borrowing makes much difference to anything. This is just cheap talk on the part of deficit hawks.

The critical point here is Ricardian equivalence. Government debt is just a promise of future taxes. So the tradeoff is between paying for government with current taxes or future taxes. And it seems to me that for most people ... taxes are taxes.

What I draw from that is that we should argue a lot more about whether the government spending is a good idea or a bad one, and a lot less about how we pay for it. And yeah, there's a lot of dumb stuff in the "Biden stimulus package", like bailouts for underfunded pensions run by states and municipalities.

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On the other hand, the huge point that everyone in our legacy media and political arena miss is that what's important is not government debt but whether you can make payments on the debt you have. No country gets into trouble with their debt until they stop paying their debtholders in a timely fashion. The U.S. has never done that. What we should be worried about is how they are going to afford that flow of payments, particularly if interest rates rise and bonds need to be refinanced.

Do note that Larry Summers has made this point strongly, and used it to support more traditional Democratic fiscal policy. His point is that as interest rates get lower, the costs of expansionary fiscal policy drop. In this vein, right now is a good time to go big. 

Of course, Summers has been pushed out of these debates by saying something along the lines of "I didn't mean that big".

Mason's # 4: The Economy Has, for a Long Time, Been Much Weaker Than Neo-Classicals Admit

To me, this is a strange point. Mason is arguing that pretty much everyone who isn't progressive has been fibbing to themselves about the strength of the economy for a long time. This seems implausible to me: you can't fool all of the people all of the time.

In thinking about an analogy, it's like NFL coaches of the 2020's saying that all those great coaches (say, Lombardi, Shula, Walsh, Johnson, Dungy) of the past were benighted. They could have scored a lot more points if only they'd thrown the ball more like we do today. Yet this totally ignores that rule changes about when and how hard you could hit players on a passing play reduced the risk, and thus increased the use and effectiveness of passing. A similar argument could be made about 3 point shooting in basketball, or swinging for the fences in baseball. To me, what these share with the macroeconomic position of Mason is a focus on just two variables in a multivariate situation. In other words ... omitted variables bias.

Now, literally, I don't think Mason is guilty of that. But I wonder about how the various components are weighted in his thinking.

This is important because I absolutely agree with Mason on the importance of strong labor markets to reduce inequality. I'm just not sure we get there with expanded government spending which gets roughly cancelled by expanded by government finance through deficits and taxes.

Which brings me to the last point: lots of Democratic politicians and progressives generally think the economy was weak from 2009-14 because the "Obama stimulus package" was not big and aggressive enough. I find this dubious, since it was the biggest in history in real terms, the recession of 2007-9 was not the biggest since the of World War II, the worst of the recession was over by the time the stimulus package was passed, and the spending was heavily backweighted so that much of did occur in just those later years. Having said all that, observational equivalence implies that the evidence in their favor and in mine may not be able to sort this out very well. So maybe they're right. I don't think so, but let's say I'm not 90-10 against their position either ... maybe 70-30.

Price Index Measurement Uncertainty

I hope I have you convinced that how a price index is measured influences what we think of as the rock solid concept of real GDP. And, of course, there's the selection bias issue with price indices mentioned in the Barro text.

Now we've got a new problem. The Carson Report posts that the BLS is "Missing Prices: Half of the CPI IS Based on Imputed Price".

Since the pandemic, the standard practice of personal visits, which historically accounted for three-fourths of price quotes, was temporarily discontinued. Instead, price data was obtained entirely from online sources or through telephone interviews.

It's really bad with data on shelter. The value of owner occupied housing has always been imputed: what we know about houses is their value as real estate, but not how much value the homeowners get out of living there. They impute that from rental data. Except now:

... In the past year, all of the rent data was collected by telephone, far above the two-thirds average. Also, roughly thirty-five percent of rents every month were uncollected. While that sounds high, and it is, before the pandemic uncollected rent response rates ran consistently in the high twenties. 

During the pandemic, a record number of rents were unpaid. Still, data collectors classified due rents as fully paid if the landlord "expect payment in full, regardless of when." 

With no proof of current or future payment, word-of-mouth rents are included in the CPI to estimate primary residence rents and implied rents for owner housing. But house prices based on actual transactions, with proof of payment, are not.

The value of owner occupied housing has always been imputed: what we know about houses is their value as real estate, but not how much value the homeowners get out of living there. They impute that from rental data.

One More Suez Visualization

When doing macro, you learn that stuff like this tends to happen again (like SARS coming back after 16 years), so it's useful to be able to know where to search for it. 

This visualization shows the re-routing of ship traffic in response to the closure of the Suez Canal:

 

Here's my source (which is not the original). The time stamp wasn't clear of the time zone, but it can narrow down this image to 50-60 hours after the Ever Given ran aground.

Different services use different colors for types of ships, so I'm not sure what they all mean here (although orange must be oil tankers, since there's a bunch of them in the oil fields off of Angola).

Ships really do travel in sea lanes, which outline the shortest route from one place to another. The one at 9 o'clock is going to Rio, 10 o'clock to the U.S., 11 o'clock to western Europe, 11:30 along Africa's coast, 1 o'clock to the Suez Canal and the Persian Gulf, and 2 o'clock to the outlet of the deepwater Strait of Malacca which leads to East Asia. Ships to the south of that are going individually to the shallow but more direct Sunda Strait, the off the beaten track Lombok strait, and sparsely populated western Australia.

The density of ships on that 2 o'clock sea lane is higher because ships have already shifted to that route to go to western Europe while avoiding the Suez. It may not look like it, but the extent of what's shown of that at 2 o'clock sea lane goes more than halfway across the Indian Ocean. So increased traffic showing up there already should not be surprising. 

There is no corresponding density increase on the west side because the split to go one way or another is much further to the north, and around northwestern Africa. In this visualization, any of those diverted ships aren't on the screen yet.

The trip around the Cape of Good Hope from Asia to western Europe takes about 30% more time and fuel than going through the Suez.

Mason's # 3: He Thinks This is About Hysteresis, I Think It's About Stochastic Trends

Mason's third point is that the macroeconomy is characterized by hysteresis (no argument there), and that hysteresis is an important factor in understanding the situations we get into (neo-classical economists tend to view this as an examined issue that was found to be not that important). 

What the heck is hysteresis? It's the name in sciences for processes that go one way, but can't be reversed to get to the same point. 

Heating water and then cooling it off has no hysteresis: we can turn cold water into hot water, and then back into cold water. 

But making glass and then breaking it does: we can turn sand into glass, but not glass into sand.

For macroeconomics, the issue is if we push a policy that takes the economy down a certain path, and we don't like where it ends up, can we reverse the policy and end up where we started?

At the level of individuals in the macroeconomy, this is almost certainly true. If we measure your "employability", and then pursue a policy that makes you unemployed, is it possible to return you to the same level of "employability", or do you forever have a dark mark on your resume? The answer seems to be the latter.

But at the level of the whole economy, we do seem to be able to undo stuff like recessions and depressions. That's part of what we see in that 150 years of logged real GDP from Barro that I started the semester with.

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On the other hand, if the data we get about measuring the economy displays stochastic trends, this suggests that there's never any reversion to some trend line. Once we're below, we can stay below it. BUT, once we're below it, we can also have a shock that takes us back above that trend too.

Mason is saying we can get locked in below where the trend might have taken us. And that a really big aggregate demand policy might be what is needed to get us out of that rut.

The time series is saying that (if we have a stochastic trend) that we can be below where that trend would have been for a long time, maybe even forever, but we're not locked into that. The time series is saying that if a really big aggregate demand policy could bump us back up, that we'd be able to see that in the data. 

My take is that we really don't see that. That's a new classical macroeconomic position. And honestly, if you'd told me that in the 80's and 90's I would not have believed you. But I got convinced by the data and the time series analysis.

This Is an Experiment

See if you can view this video of another class in Zoom:

Topic: ECON-2020-32R-Sp21 Date:Mar 29,2021 11:59 AM Mountain Time (US and Canada) Recording-1(464 MB) 

https://suu-edu.zoom.us/rec/play/CqvS_pxSw7JdriHD8PzQQ8Bkh7Pk4go5Q4X3sK7-4RElqnGfXCVtH-H2mAOtHh7OpusXBhcmt8HjlPOu.nXZaLF-Huip34BGA link

Passcode: g#yMqRZ4

You don't have to watch the whole thing, just let me know if it works. I'll ask in class.

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I haven't figured out how I want to use this yet. I might like a different video better than this one.

But the goal here is that I mentioned the "beer game" in my post about the ship blocking the Suez Canal. 

I can't have you play the beer game in this class, but I can show you how it works in another class.

The beer game is used in classes, often in logistics but I find it useful in macroeconomics to illustrate how small shocks to a system get propagated into bigger ones.

Why We Have More than One Index Number

I'd never seen this before:

 

Too late for this semester's lectures, but it will be here next year when I explain that we really can't average a Laspeyres and a Paasche index.

Supply Lines

The world is having problems with logistics. Cargo ships are backed up just about everywhere. This is mostly COVID-19 related. Some of it has to do with how much everyone is ordering. But a bigger part has to do with whether the port and land transport facilities are working at full speed. They aren't. So there's a backlog.

This predates the problems in the Suez Canal.

The kind of backlog of container ships that we’re seeing now started around the end of last year, said Kip Louttit, executive director of the Marine Exchange of Southern California.

“We jumped from zero to one container ships at anchor to about 35 the first of January,” he said.

Ships are waiting longer inside the port, too, according to Gene Seroka, executive director of the Port of Los Angeles, and fulfillment centers are overloaded.

“When a container is waiting at a warehouse, it’s now sitting for about eight days. And that’s usually three and a half days during pre-pandemic times,” Seroka said.

And now we've had a ship blocking the Suez for 5 days, by what's very close to the largest ship in the world, with no end in sight (although it could just as easily be tomorrow as next month). Here's an image from Daily Overview showing the traffic jam:

The Red Sea is on the right. The specks are anchored ships. The canal is at the top left, with the blockage in the corner. As of today, there are about 320 ships anchored at either end of the canal. And while longer than the Panama Canal, the Suez is capable of handling ships about 3 times as large.

I tried to find a decent map that shows the importance of the Suez Canal to global trade, and I gave up. All the choloropleths and cartograms I found seemed rather biased by map scaling issues to show the Suez as narrow rather than busy. So frustrated I didn't link to any. Anyway, about $5B of goods passes through the Suez Canal, each way, each day. That's the size of ... Italy.

The alternative to going through the Suez is to go around Africa, which adds about a third in time and costs to the trip. That's a lot of potential inflation.

Anyway, macroeconomists need to keep an eye on this one.

P.S. Those who had me for principles may have been lucky enough (I don't do it every semester, but there are many videos of classes playing it on the internet) to do the "Beer Game" simulation in class.This is a classic classroom simulation (originally based 60 years ago on beer distribution) that gets at the problem of disrupted supply chains. In short, you can readily get something called a bullwhip effect where ripples from a single disturbance reverberate through an entire system.

Some Economic History Jargon You Need to Know: Neo-classicals and New Classicals

There's some jargon here you need to keep on top of.

Neo-classical economics is one thing.

New Classical macroeconomics is a different thing, and is a subset of neo-classical economics.

Neo-classical economics is the micro-oriented ideas that go back almost 150 years. Stuff based on supply and demand, equilibrium, optimization, rationality, and so on.

New Classical macroeconomics is the research program that started in the early 1970's, and that is still ongoing. Lots of Nobel Prizes were awarded for this work: Lucas, Kydland, Prescott, Sargent, maybe Barro (who probably won't get one due to personal animosity), plus big contributions from the time-series winners Engle, Granger, Sims, and Hansen. These were the people who got the profession to back off of Keynesian macroeconomics by arguing that if we took our micro optimization and rationality seriously, that it would be really hard to influence the economy with the aggregate demand policy which politicians love so much.

A lot of the catechism that Mason refers to comes from partially dismantling Keynesian macroeconomics and replacing it with New Classical insights. 

When Tyler Cowen remarks in a linked post that Mason is dismissive of a lot of empirical results that were never disproved, it's these ones. They're definitely inconvenient to Mason. But to Cowen and me, they're still correct.

Mason's # 2: Dismissing that Fears of Overheating Might Be Warranted

This one has gotten a lot of criticism from others, so I'll link to those as I further develop this series of posts.

As a whole ... this reads like it was written by someone who is young (and can't remember) and naive (and didn't want to learn). Inflation has not been a problem in developed countries for 35 years. It was a huge problem from the late 60s to the early 80's, pervasive through time, and shared cross-sectionally across countries. Yet Mason seems to downplay the worry.

I really like that he talks about downturns as distinct and different. That's what my (rather Keynesian) dissertation was about 30 years ago. So I tend to agree.

I have evolved. When Mason talks about complex coordination problems ... it's an argument also made by Austrian bloggers like Arnold Kling, and in tough theory papers like those by Ricardo Caballero. I like this point too.

Next he goes after positive shocks. What he's really driving at is a branch of neo-classical theory called real business cycles. It argues (amongst other things) that what we observe in the economy is the effect of unobserved shocks to technology and other things. The thing is, the time series analysis we're doing in class actually measures those shocks and shows that quite a lot of them do seem to be positive.

Having said that, I loved this quote:

There are no “positive shocks” for the same reason that there are lots of poisons but no wonder drugs.

Mason is probably an awesome professor if he drops bombs like that in class. I don't even know if I agree with it; I just like it.

So there actually are models in which there are only negative shocks. These are called plucking models. I do feel that the neo-classical literature has not explored these sufficiently.

He sums up with this:

In real economies, demand shortfalls are much more frequent, persistent and damaging than is overheating.

This is the one that makes me think "young and naive". In some sense, one of the great victories of new-classical macroeconomics over the last 40 years has been putting forth an argument about inflation being from overheating, and offering a policy prescription (that worked!!!).

To me, he's saying we don't need to worry about that antiquated neo-classical economics inflation concern, because its new classical macroeconomics branch solved it for us. The dissonance is stunning.

Do note that I don't disagree with his point about demand shortfalls, only his dismissal of the opposite of those.

Mason's # 1: The Statistics We Use to Assess Whether the Labor Market Is Healthy Are Intentionally Chosen to Make Things Look Better Than They Are

I agree that the unemployment rate is not representative of the true economic situation. I don't know a macroeconomist who would disagree with this, or with Mason's points. So I'm not sure why it is such a big deal to say this. In critical thinking, they call this a straw man argument. 

I actually posted on this blog about 6 weeks ago that the unemployment rate is less representative this time around than it usually is. 

What I see as missing from Mason's point is that even if the unemployment rate is wrong, it's ups and down still tell us something important. It went up by more than it ever has before last spring, which corresponds with how we all felt about the lockdowns. And it's coming down faster than ever before, which again corresponds with how we felt about the relaxation of the lockdowns. 

I think maybe Mason is really driving at the idea that there's a "natural rate of unemployment" where we should stop trying to push it downward further. I'm fine with him not liking that, and I think the experience of 2018-9 after the tax reform tends to support that. The phrase this is being used a lot this spring is that it's time to "run the economy hot". I think the difference between progressives and neo-classicals on this is how hot.

Mason also writes:

... We should also look at the employment-population ratio, and also at more direct measures of workers’ bargaining power like quit rates and wage increases.

You can find the employment-population ratio on FRED. Mason sees weakness there since the Great Recession. I see a big hump from 1985 to 2005 when the baby boomers were in prime working age. To me, the big dropoff in the 2007-9 recession is baby boomers deciding this is the time to choose early retirement (the oldest of them were 61 when the recession hit).

Quit rates are tracked by a BLS data project called JOLTS (Job Openings and Labor Turnover Survey), which only goes back o 2001. The best source for this is the cool graphs published on Calculated Risk every month or so. Here's the one from December:

 

No one really knows what quits looked like before this, but to me this says they are not trending worse over the last 20 years, but do fluctuate up and down with the economy. 

As to wage increases, this is part of why I teach you about price indices so deeply. What really matters is the real wage. And forming that depends on the price index you use. Use the CPI and real wages look terrible. Use something else and ... not so much.

Mason's Introduction: Politicians Have Pushed Economists Out of the Discussions About Economics Within the Democratic Party

Now let's go back to what Mason actually wrote that first got Tyler Cowen's attention over at Marginal Revolution. From Mason's initial post:

... Those who see it as a decisive break with neoliberalism. Both the Clinton and Obama administrations entered office with ambitious spending plans, only to abandon or sharply curtail them (respectively), and instead embrace a politics of austerity and deficit reduction. From this point of view, the fact that the Biden administration not only managed to push through an increase in public spending of close to 10 percent of GDP, but did so without any promises of longer-term deficit reduction, suggests a fundamental shift.

What does Mason mean by neoliberalism? This is how the Democrats were affected by that rightward shift of both parties that put Clinton and Obama to the right of Kennedy and Johnson.

I'm a bit bothered by that last sentence. Mason does not seem to have accepted the evidence that whether it's financed with debt or taxes doesn't matter — it's still financed with money coming from us. He is right though, that complaining about effects on deficits appears to have been an effective whinge that gets peoples' attentions, and that it's absent this time around.

Mason continues;

The fact that people like Lawrence Summers have been ignored in favor of progressives like Heather Boushey and Jared Bernstein ...

He may be right. If he is, this is a huge deal. Summers is at the core of macroeconomics over the last 40 years. He might be a lock for a Nobel Prize (although to me, he's always seem just a little below that level). And Summers is huge in Democratic politics: 7 years in Treasury under Clinton, 2 years in the Cabinet at Secretary of the Treasury, a top position in the White House at the start of the Obama administration, Chief Economist at the World Bank. That's a serious resume for a Democrat. 

Unfortunately, I think the attitude of progressives towards Summers is analogous to a child sticking their fingers in their ears and saying "Nah nah nah, they can't hear you!". 

This part is the worst:

To be clear, the bill did not pass because some economists out-argued other economists. It was a political outcome that was driven by political conditions and political work.

I do get the political conditions: lots of people need help, and even more want it.

And I get that the Democrats control both Congress and the White House. 

What bugs me about this bald statement — and I agree with Mason that it is true — is that we would object if this happened in any other area. Time for analogies: can you imagine if the football coaches were overruled on the field by the owners in their private boxes; can you imagine if the orchestra conductor was replaced between symphony movements by the big donor from the audience; can you imagine if your Dad was making your favorite meal and he was pushed out of the kitchen by your Mom's step-Uncle Louie from Canoga Park?

I am not being Chauvinist here (you may need to look that word up, since it has many meanings). But I think that in any other area if decisions about that area were being made, we'd want someone with some expertise in that area making the decisions. But this is not how macroeconomic policy works any more.

This is not to say that the Biden or any other administration doesn't employ and consult a lot of macroeconomists. Instead, macroeconomic policy is an area in which we routinely accept the macroeconomic viewpoints of people who are less than experts.

So what Mason is saying (and I agree with him) is that we're seeing politicians and bureaucrats not looking up some theory and evidence to justify their decisions, but rather making the decisions and claiming that theory justifies them. If so, I'd like to know what theory. Increasingly it seems to be a combination of "we know best", "shut up", and "you're just mean".  Am I wrong for thinking there should be more to it than that?

Back to Mason:

Still, from my [Mason's heterodox] parochial corner, it’s interesting to think about the economic theory implied by the bill. Implicitly, it seems to me, it represents a big break with prevailing [neo-classical] orthodoxy.

Here's how he describes that orthodoxy (catechism is an interesting choice of words):

Over the past generation, macroeconomic policy discussions have been based on a kind of textbook catechism that goes something like this: Over the long run, potential GDP grows at a rate based on supply-side factors — demographics, technological growth, and whatever institutions we think influence investment and labor force participation. Over the short run, there are random events that can cause actual spending to deviate from potential, which will be reflected in a higher or lower rate of inflation. These fluctuations are more or less symmetrical, both in frequency and in cost. The job of the central bank is to adjust interest rates to minimize the size of these deviations. The best short-term measure of how close the economy is to potential is the unemployment rate; at any given moment, there’s a minimum level of unemployment consistent with price stability. Smoothing out these fluctuations has real short run benefits, but no effects on long-term growth. The government budget balance, meanwhile, should not be used to stabilize demand, but rather should be kept at a level that ensures a stable or falling debt ratio; large fiscal deficits may be very costly. Finally, while it may be necessary to stabilize overall spending in the economy, this should be done in a way that minimizes “distortions” of the pattern of economic activity and, in particular, does not reduce the incentive to work.

I could pick at parts of that, but I won't (Cochrane does, linked in a separate post). I'm willing to let it ride as a decent one-paragraph-attempt to describe the theoretical landscape backing up policy in D.C., and that gets taught to undergraduates in principles classes.

Then Mason makes a jump:

Policy debates — though not textbooks — have been moving away from this catechism for a while. ... The size and design of ARPA is a more consequential rejection of this catechism. Without being described as such, it’s a decisive recognition of half a dozen points that those of us on the left side of the macroeconomic debate have been making for years.

ARPA is the acronym for the "Biden" stimulus package. 

That last quote relies on nebulous "policy debates". I'm not sure how debate-like these are. But I've seen them, and you may have to. In another post I link to posts from Tyler Cowen where he discusses the problems with these debates, which he describes as "Twitter Economics".

For my part, I would describe these as the sort of policy debates that policy-oriented non-economists have amongst themselves, after they've told all those buzzkill economists to take a hike. I have seen this this going back to the late 80's, and this is exactly what I meant when I wrote about the Marxist/radical/heterodox/post-Keynesian economists at the U in the 90's "not getting out that much".

I don't for a minute want to exclude the voices of non-economists from discussions like this. But I'd at least like to have a referee or facilitator present to say things, like "yeah, it doesn't work that way ... we looked". Cowen makes the point in some of his posts about this that Mason and progressives are asserting the incorrectness of multiple neo-classical positions that have never been disproved with data.

Do Not Believe the Political Party Labels — Think for Yourself About Who Is/Was More Conservative or Progressive

In this section, I'm focused on economic issues, not social ones.

The Democrats have always been to the left of the Republicans.

But the national mood shifts left and right too. And both parties shift with it.

So  I don't think you can reasonably argue that every Democratic administration is to the left of every Republican administration. Instead, my view of the last 60 years is like this (I am putting the right at the top, and the left at the bottom, because Google/Blogger is pretty limited in how I could array them left to right on your screen and get it to look OK):

Political Right

• Reagan (R)
  
• Bush I (R)
  
• Bush II (R)
  
• Clinton (D)
  
• Carter (D)
  
• Obama (D)
  
• Nixon (R)
  
• Ford (R)
  
• Kennedy (D)
  
• Johnson (D)

Political Left

This surprises many people. How dare I put Obama to the right of Nixon? Well, because Obama didn't do dumb, controlling, lefty stuff like wage and price controls. Sure Obama liked the environment, but Nixon created the EPA. Yes, Obama got us Obamacare, but a national healthcare plan was something Nixon wanted and didn't achieve.

Anyway, if you get my drift, there was a big rightward shift starting (a little) with Carter, and we're about 20 years into a more leftward shift that started with the realignment of power within Congressional Republicans starting in the late 90's (at that time, scandals were used to push out fiscal conservatives and replace them with social conservatives who were pretty liberal with spending other peoples' money).

So where do I see Biden? I'm not sure. He was sold to the voters as being a little bit to the right of Obama. We're going to have to live through the next 4 years to find out if that's true. Mason's view is not encouraging.

Personally I didn't believe that. But it didn't matter that much to me: in 2016 the parties put up the worst pair of candidates in my voting lifetime, and in 2020 our country somehow came up with something worse.

Fiscal Policy Is Oversold Anyway

 

A reason that I am not too perturbed by the big 3 fiscal policy moves of the last year is that I think they are overrated.

Do note that most of the people who are telling you these fiscal policy moves are going to save the day are ... the people who voted for them or signed them.

Also note that they usually just talk about how great the spending is.

The thing is (and students who had me for principles know this) there's this thing called Ricardian equivalence. On the surface it's the idea that there is no evidence that financing government spending with taxes or borrowing is more harmful one way or the other. But more importantly, it gets at some core Keynesian ideas that the multiplier for spending is larger than that for taxes (possibly), or that the multiplier for borrowing is even smaller, so that deficit spending can be beneficial on net.

The appropriate metaphor for this is that the government is telling us that if we take money out of one pocket (taxes) and put it in a different pocket (spending) that you can be richer. This seems implausible. The Keynesian argument is that the we don't mind them taking the money out of the first pocket as much as we like it when they return it to the second pocket. Maybe.

What I draw from this is that we should think of fiscal policy as being neutral until we see otherwise. To me this means that we should not be very happy when one party spends, or too scared when the other one worries about the costs. If you're a really serious Republican, or a really serious Democrat because of the economics ... stop.

Why Observational Equivalence Means You Should Read Mason, But Could Also Mean He's Wrong (or Right)

 

My personal view on all of this is that I don't agree with Mason's arguments, but I might agree with some of his conclusions. I'm part of the neo-classical hegemony after all.

BUT, macroeconomics is a field with a lot of flux, and there's a lot of stuff we don't know. I'm definitely willing to entertain his position. And I'd like to think I'd shift mine if in 10 years he's proved right. Macro is weird enough that this is sensible (and FWIW, I shifted in the direction of being more neo-classical through the 90's because the results in the literature seemed stronger in that direction).

Also, there's a phenomenon in macroeconomics that is hugely important and often forgotten. It's called observational equivalence. Macroeconomics is mostly a non-experimental science, and observational equivalence means that after the fact, the data we see is often consistent with more than one explanation. So it's possible that the neo-classicals and progressives can co-exist because the data just isn't that sharp.

And, I'm very much willing to give other people a shot at being in charge. It's easy not to be a control freak when you're a macroeconomist because there's so much variability in routine economic events ... that seem so important in the short-run, and so unimportant after the passage of several years. (In some sense, this is why I'm suspicious of economic data about China: it's quite possible the CCP is right about how to run an economy, but this would come out of variability in the data, which China just does not have since it seems to be run by control freaks).

So Who Is J.W. Mason?

 

So, who's J.W.Mason? I didn't know, so I looked him up. Academics do this with Google Scholar. He's an assistant professor with quite a few recent publications, and he is getting cited for them. He has one publication at a big mainstream journal (AEJ:M). He's currently at CUNY. He labels himself as heterodox.

He blogs at J.W.Mason, and there's an about page with more details there. He got his Ph.D. from U. Mass-Amherst. He looks like an up and comer in the non-neo-classical-economics world.

He's also on the staff and has published through a think tank called the Roosevelt Institute. Thinks tanks are a tough thing to figure out as an academic. On the one hand they publish interesting stuff. On the other hand, it's more advertised through the press than peer-reviewed. Most think tanks are funded through private and public grants. It's well known that granting organizations tend to be further to the political left than the general public, rather like the legacy media and academia. So my view of this is that it's typical of someone who calls themself heterodox, but only indicative of accessible scholarship rather than innovative scholarship.

What Did Mason Write?

Here's the skinny: Mason's post argues — as a progressive — that the "Biden" stimulus package is a big progressive win, and that it repudiates neo-classical economists ... even if they're Democrats. 

And as a corollary that it's politics driving theory, more or less because the politicians are right about the economy and the neo-classicals have gotten it all wrong.

(No need to read the linked post at this point. I will go into a lot of detail about it in later posts. Just linked here for completeness).

Economists of Other Denominations

 

This is not to say that there are not other approaches. It is to say that the level of dominance of neoclassical economics is along the lines of Alabama scheduling SUU for an early season football game. 

These alternatives go by a number of different names: Marxist, radical, heterodox, post-Keynesian ... and lately progressive.

There are departments that specialize in this, and individual professors, but they are scattered: the University of Utah, the University of Massachusetts at Amherst (the main campus), UC-Berkeley, UC-Riverside, the University of Michigan, the University of Tennessee, the New School for Social Research, my alma mater the University at Buffalo-SUNY, Notre Dame University, CUNY, New Mexico State, to name several. Some on that list may be out of date; it's not like I keep up on this stuff.

Importantly, this strain is often also found in schools of public policy. That sounds like something no one could be opposed to: who could be against programs where they teach you about how government works. Unfortunately, they now mostly teach only how a progressive government might work. Some of these programs even require zero economics for an education about what government can and should do. My impression is that this shift started with the Humphrey School at the University of Minnesota about 40 years ago, but I could be wrong.

One of the things I notice about economists in this group is that they publish in a smaller set of journals that often doesn't intersect much with the ones neo-classical economists use. They have fewer journals to publish in, fewer peers to review their stuff, and fewer opportunities for co-authoring. 

(I am reminded of a one-liner from a movie about 20-somethings back in the 90s ... Reality Bites maybe. One friend tries to convince another that he's a loser and needs to give up on his band. He replies "But, we're really big in Belgium").

Personal Opinion: I worked at the U back in the 90's. I liked the Marxist/radical/heterodox/post-Keynesian people I worked with, and a normal fraction of them were "really smart". But my impression was that in an academic sense they "didn't get out much", and seemed unaware of much of what was going on in neoclassical economics. My takeaway was that maybe schools that want them should have 2 departments: one for "economics" and one for "radical economics". Notre Dame actually had an arrangement like this at the time.

(Neoclassical) Economics and Economists

 

It is fair to say that what passes for economics at almost all levels could be called neoclassical economics.

Economics is a field. Neoclassical is an approach to that field. Probably every economist you've met is neoclassical (although Dave Berri has his doubts about this approach). Probably every economist you've ever heard speak is a neoclassical economist.

While the neoclassical approach was cemented into place more recently, this is the tradition that goes back to Adam Smith, and comes down to us through most of Ricardo's work, Bentham, the Mills, Marshall, Jevons, Menger, Clark, Walras, Pigou, Keynes, most of the Nobel Prize winners, and so on.

It has a number of characteristics. At the individual level, people try to do the best they can. They optimize. They are also rational, in that there is some internal consistency in how they combine doing the best they can along different dimensions of their lives. Firms behave the same way. Firms and individuals make jointly voluntary exchanges which make them both better off. Market failures do happen, and there is a role for government to correct them; although the self-interest of government officials might get in the way.

Neoclassical economics definitely qualifies as WEIRD (look that up in the Handbook). It is an intellectual tradition that started out English, but is now thoroughly American too. It is dominant in all the English speaking countries, Japan, Hong Kong, the Scandinavian countries, the Netherlands, Estonia, and it's becoming dominant in Spanish speaking countries both in Europe and Latin America. Its dominance is less total in other parts of the world, but it's often still there.

General Outline of My Plan for Covering the Issues Surrounding Mason's Post

 

This is a huge series of posts. Do eventually read all of the J.W. Mason blog post. But you probably want to read my background posts in my table of contents first.

Those of you who had me for principles are familiar with my "Why Is Macro So Hard" Powerpoint lecture. Those who didn't have me can type those words into the search bar to the right, and find a plethora of posts. I haven't bothered to link generally to those in this discussion; this post will relate to about a dozen of them to one degree or another.

Macroeconomics has been abuzz on the internet this past week, discussing Mason's post. As is often the case in economics these days, it's Tyler Cowen who brought the post to everyone's attention (no need to read this one).

A Table of Contents for that Big Post I've Been Warning You About Entitled "Uh Oh: Politics as Macroeconomic Theory"

I am not sure when I am going to get this thing done. There's so many connected ideas. So I'll go back to what Id did for the 2017 tax reform: put up a table of contents, break the post into pieces, and post and link them as I get them done.

You should not have to feel like you have to start this right away, or read it all at once.

Do try, at least the first time around, to read these in the order they are posted. 

Of course, at this point, I make no guarantees that I won't update items linked towards the top, or add new ones.

And don't forget that this is a blog. If you're going to just do them one by one, you need to scroll UP. Also, there are other unrelated posts mixed in along the way.

General Outline of My Plan for Covering the Issues Surrounding Mason's Post

(Neoclassical) Economics and Economists

Economists of Other Denominations 

What Did Mason Write? (the short version) 

So Who Is J.W. Mason?

Why Observational Equivalence Means You Should Read Mason, But Could Also Mean He's Wrong (or Right)

Fiscal Policy Is Oversold Anyway

Do Not Believe the Political Party Labels — Think for Yourself About Who Is/Was More Conservative or Progressive 

Mason's Introduction: Politicians Have Pushed Economists Out of the Discussions About Economics Within the Democratic Party

Mason's # 1: The Statistics We Use to Assess Whether the Labor Market Is Healthy Are Intentionally Chosen to Make Things Look Better Than They Are 

Mason's # 2: Dismissing that Fears of Overheating Might Be Warranted

Some Economic History Jargon You Need to Know: Neo-Classicals and New Classicals  

Mason's # 3: He Thinks This is About Hysteresis, I Think It's About Stochastic Trends

Mason's # 4: The Economy Has, for a Long Time, Been Much Weaker Than Neo-Classicals Admit

Mason's # 5: The Size of the Debt and Deficit Don't Matter

Mason's # 6: Work Incentives Don't Matter Much 

Mason's # 7: Direct Visible Spending Is Better 

Mason's # 8: Means-Testing Is Not Easy

Mason's # 9: Aggregate Demand is Chronically Weak 

Mason's # 10: The Government Is Better at Stuff than the Private Sector Is

ARPA and ARRA 

Mason's Epilogue

" ... Progressives like Heather Boushey and Jared Bernstein ..." 

What Did Tyler Cowen Say and Mean In His Original Post 

John Cochrane's Response to Mason

Tyler Cowen On "Running the Economy Hot" 

Tyler Cowen's "Decades of Evidence on the Cyclicality of Real Wages"

Larry Summers: 'least responsible' Economic Policy In 40 Years

Tyler Cowen on Twitter Economics, Plus Tufte on Sanders' People in 2016 

Noah Smith On the New Macro

And Don't Forget Candidate Clinton in 2008

What Bugs Me About All of This

Discussion Roundup for 4/6: Where Progressives Fit In, Plato, Axioms vs. Conclusions, Observational Equivalence, and How We Got the Mix Mason Likes

Discussion Roundup for 4/8

Turkey

Every semester I do this class, a country comes up in the macroeconomic news that I could not have anticipated at the start of the semester.

This year it's Turkey, which is in a crisis of its own creation right now. It's not clear how big this one will get.

*****************************************

In aggregate, Turkey is well into the 90th percentile as far as size goes (it's a tad smaller than Italy, which is one of the big 4 in western Europe).

It is further down in per capita real GDP — around the 60th percentile.

Want a comparable? Think Mexico.

*****************************************

Historically, predominantly Sunni Moslem Turkey (where they speak a language that is not Indo-European or Arab) was the mortal enemy of Russia and Austria. Up until 3 centuries ago, Turkey was the aggressor. In short, Turkey was a player. As it became weaker, it became the victim, and no longer was considered a Great Power. Imperial Germany cultivated Ottoman Turkey before World War I, while Austria-Hungary, Russia, and later Italy fomented unrest and then wars of independence inside its borders. The Ottomans made a bad move joining the Central Powers in World War I. 

After the war, revolution overthrew the sultans, and Turkey turned secular and increasingly western (you know ... The Orient Express and all that). Nazi Germany cultivated them to join the Axis powers in World War II, and Turkey rightly declined to get involved. After that, Turkey became one of the major non-American military powers in NATO. By the 90's, Turkey was looking like a developed country.

And then, in my opinion, the Europeans blew it. Turkey had been attempting to join western European economic organizations going back to 1959. They met all the qualifications. Easily. But the process has been repeatedly stalled (there is a huge Wikipedia site on this, because the process has been so sordid). Over the last 30 years, the EU has repeatedly admitted smaller, poorer countries, including Greece which systematically lied about its macroeconomic data to get in. While they still go through the diplomatic motions, in my opinion, Turkey as a culture has given up on the EU.

Since 2003, Turkey has been ruled by a dictator named Recep Erdogan. It hasn't been pretty. But he's popular, and in many ways Turkey has been a successful country under his leadership. But the country is no longer secular, and is increasingly oriented towards the Middle East rather than Europe.

*****************************************

So what's happened so far?

In principles, we usually stress that a central bank that is independent of the government and political forces is a good thing for reasonable monetary policy. The independence of Turkey's central bank has declined under Erdogan. Currently, the central bank of Turkey (hereafter TCMB) gets its objectives from the government, although it has been free to use

Last week Erdogan abruptly fired the Governor of the TCMB. He was already the 3rd in 2 years. He was an ally of Erdogan, as were the previous Governors. But that wasn't good enough. His transgression appears to have been fighting inflation by raising interest rates. 

“It is as complete a surprise as I can remember in 20-plus years of doing this job,” said Paul McNamara, an investment director at GAM Investments in London, who manages emerging-market debt funds.

In the wake of this, Turkey's exchange rate dropped by about 10%, as did its stock market. The thing to really pay attention to is how much holders of Turkey's government debt have to pay to insure against potential default. That popped up to about 5% since last week:

The cost of insuring Turkey’s government debt against default leapt sharply Monday, rising by the end of European trading to an annual cost equivalent of $442,000 for every $10 million of bonds over a five-year contract. That is up from $306,000 at Friday’s close...

The new Governor of the central bank appears to be more of a political hack:

The problem for Turkey is less that the central bank is under Mr. Ergogan’s control and more that he seems likely to misuse that control.

Contrary to the consensus view that higher interest rates tame inflation, the Turkish president believes they push it higher by increasing firms’ borrowing costs. This is probably why he dismissed Mr. Agbal, who tightened policy again last week. Mr. Kavcioglu’s articles in the local press suggest that he agrees with Mr. Erdogan and may lower rates again. He has also written that the lira has been kept too strong and undermined Turkey’s competitiveness.

This is wishful thinking. The textbook link between interest rates and inflation may not be strong in Western countries, but they don’t suffer from regular currency crises. In emerging markets, most inflation comes from precipitous falls in the exchange rate, which increases import costs, and so the main focus of the central bank must be the currency.

 But, of course, the 10% drop in the value of the Turkish Lira since last week probably means that worsening inflation is already a done deal.

So, keep an eye on the news and what is said about Turkey. The situation is very fluid.

 

Some Macroeconomics of Bitcoin Mining

You may have seen the piece entitled "The Debate About Cryptocurrency and Energy Consumption" originally posted at TechCrunch, and later syndicated through Pocket.

Anyway, it makes some valid comparisons like this:

... bitcoin miners are expected to consume roughly 130 Terawatt-hours of energy (TWh), which is roughly 0.6% of global electricity consumption. This puts the bitcoin economy on par with the carbon dioxide emissions of a small, developing nation like Sri Lanka or Jordan. Jordan, in particular, is home to 10 million people. It’s impossible to say how many people use bitcoin every month, and they certainly use it less often than residents in Amman use Jordanian dinars. But CoinMetrics data indicates more than 1 million bitcoin addresses are active, daily, ...

And, 

The Ethereum ecosystem uses enough energy every year to power the nation of Panama.

These two are valid because they are flow to flow comparisons. 

BTW: Remember all the graphs about power in Texas? The state uses about 75,000 Mw-hours. The 130 figure above is annualized (according to the source), but works out to about 16,000 Mw-hours.

The article also makes some less valid ones like this:

If the bitcoin market cap were ranked as a country ...

Bitcoin would come in fifth place behind Japan. 

This is a nonsense comparison since the total value of Bitcoins is a stock variable, and the GDP of Japan is a flow variable.

Vaccinations In the EU

If you haven't been paying attention ... the EU appears to be badly goofing up its vaccine rollouts. And, there is a growing 4th wave of infections over there, leading to new lockdowns.

Much of the vaccine rollout trouble appears to be nothing other than politics=deaths.

First off, recognize how amazing it is that we have vaccines at all. Prior to the last year, a safe and effective vaccine for any coronavirus has never been developed. But now we have a bunch.

Even so, we should not be surprised if some of the ones in development were duds. In the U.S., Merck abandoned its vaccine when it became clear it did not work. In France, the Pasteur Institute also abandoned theirs. Two other French companies have so far failed to finish their vaccine development.

Meanwhile, the UK's AstraZeneca developed its own vaccine, and the UK has done a solid job of vaccinated its population. The UK happened to leave the EU last year.

The AstraZeneca vaccine has been made available to the EU at cost, and they have not been very interested in taking it. Further, there are reports popping up from all over the EU of incidents of side effects .. which haven't seemed to crop up elsewhere.

Here's some data on vaccination rates:

I have not included everyone. 

Israel, the UAE, and Chile are all small countries that contracted to get vaccines early. 

The US and the UK developed vaccines and are using them.

Russia and China also developed vaccines (to much fanfare), but both lack the capability to ramp up their production.

One would think that the big 3 countries in the EU (which have been hit harder then the US) would be vaccinating as much as the UK and the US. They aren't.

Largest Historical Real GDP

BS asked after class the other day, at what point did the U.S. become the largest economy in the world. 

My off-the-top-of-my-head answer was sometime between the end of the Civil War and the start of World War I. I suspected it was even before the Spanish-American War, when informed experts thought Spain would win easily, and in which it had trouble even winning battles much less the whole war.

But that question can be answered factually from the Maddison Project data (discussed in earlier posts like this one). 

In this data, the entities are contemporary countries, so it's necessary to combine them together to estimate the GDP of empires. Also, not every country has data for every year. This is the data for 1880. The U.S. first passed the U.K. in 1879. Bear in mind that this is the UK as currently constituted. It does not inlcude their colonial empire. This was (as in the case with China in the 21st century) a result of greater population: at that time per capita real GDP in the UK was $5,879/yr. while in the U.S. it was $4,866.

Country	Real GDP In Billions of 2011 International Dollars per Year
USA	246
U.K.	204
Germany	175
France	136
Italy	96
Japan	50
Spain	50

Keep in mind that in 2011 International Dollars, the current GDP of the U.S. is about $20,000B/yr.

Here are the figures for 1913, the last year of peace before World War I. The current country is given, followed by the country and its empire in parentheses (for the countries on which we have data).

Country	Real GDP In Billions of 2011 International Dollars per Year
USA	791 (816)
UK	368 (712)
Russia	485
Germany	479
China	343
France	238 (244)
Italy	174
Austria-Hungary	133
Japan	113 (124)
Canada	59
Argentina	51
Australia	45
Mexico	36
Brazil	32

I've added a few countries for curiosity's sake. China was not really a united country at this time, and the large number indicates 4 times as many people as the U.S., but real GDP per capita that was less than a tenth of the U.S. The UK is so large because India was the major economic component of its empire. Towards the bottom I've added Argentina, along with other countries that have now surpassed it.

Bodies (Optional)

I have gotten ... hmmm .... hmmmmmm ... hmmmmmmmmmmmmmmmmmmm ... interesting feedback from students about the money that is in the "Biden Stimulus" package for the Disaster Relief Fund and funeral expenses related to COVID-19.

This allocation is addressing a ridiculously large problem that most people are unaware of, that a few people want to deny, and that the politicians and bureaucrats would rather ignore.

Anyway, if you're interested, everything is on the internet somewhere. So I bring you the videolog Ask a Mortician, and her post from 3 weeks ago about the problems they're having in Los Angeles.

And if you don't know, the COVID-19 waves have been hitting different places in different magnitudes at different times ... and LA got it really bad this winter.

If you had told me a year ago that this sort of thing would be a macroeconomic problem, I would not have believed you (although there were videos back then of crematoria in China running 24 7).

And yes, AOC is right in that video clip towards the end. If you are the next of kin for someone who dies of COVID-19, you are responsible for covering the daily costs of "storage" until the industry can catch up.

Another View of the "Biden Stimulus" Package

 I cannot vouch that this is from the CBO, but I also don't have any reason to think it isn't:

Of course, always keep in mind that with fiscal policy, the money to pay for all this is coming from ... American families too.

Lotsa' Details about the "Biden Stimulus" Package

Here's a report from Rabobank on the "Biden Stimulus" package.† It's got all sorts of economic details, as well as some discussion of the politics.

Officially it's called "The American Rescue Plan of 2021", and it was signed yesterday.

† Rabobank is a Dutch multinational financial services firm. It's nothing special, but they do make a lot of their reports for investors publicly available. Also, not being American, they're probably a decent neutral take on American issues.

Western Europe Hasn't Been Doing that Great

Macroeconomists have been noting for about 20 years that something may be wrong with the economies of Western Europe. And not just with the peripheral countries, but with the big four (Germany, France, the UK and Italy). 

John Cochrane (and here) recently posted about this on his blog.† The post entitled "The puzzle [sic] of Europe" is the one we looked at in class.

I doubt the issue is new to him. So I think he's just using his bully pulpit to bring it to the attention of others. Anyway, here's the money quote:

The average European is about a third or more worse off than the average American, and it's getting worse.

What the heck happened? It could happen here too. Maybe it already has, just not as bad.[emphasis original]

This should be profoundly unsettling for economists. Everyone thinks free trade is a good thing. The European union, one big integrated market, was supposed to ignite growth. It did not. The grand failure of the world's biggest free trade zone really is a striking fact [emphasis is mine] to gnaw on.

I am not sure to what extent the Biden administration will turn out like the Obama administration. But, I can tell you that from 2009-17 there was a lot of talk in blue states of emulating the European model. To a macroeconomist ... this sounded like crazy talk.

There's more: 

These are huge numbers. The worst estimates of climate change are 7% of GDP in 2100.

That number may come as a surprise to you. Lots of people say climate change is an existential threat. Macroeconomists say ... gee  ... we actually measure this stuff, and we come up with a much smaller number.

Anyway, taking that as a given, the decline of western Europe over the last 1-2 generations is economically larger than climate change is going to be, and by a lot.

Do note that he excludes Germany from his analysis. Probably because the German numbers look bad in the 90's for a wholly different reason: the absorption of the backwards East Germany by West Germany.

† Personal opinion: John Cochrane is on my medium-list for a Nobel Prize in the next 20 years. You don't have to like his views or research results, but he is definitely someone who should be on your radar screen. Also, he writes op-ed pieces for the legacy media quite often, which you should probably read when you spot them.

More On Texas' Blackouts

There's some revisionism afoot on the internet.

Wind power supporters are saying that the blackouts were because of gas power plants going offline when needed the most. 

They are right. 

But they're also selectively interpreting the data to make themselves look good.

The natural gas cheerleaders are saying that the whole thing started with windmills being shut down.

They are right too.

But their position also happens to be correct. Here's why.

Let's repost the two charts from last week. Here's power production during the worst of the crisis.

 

The big drop off in gas is clearly visible in the top right. When the going got tough, power from gas dropped by about 15,000 MW. That's a big deal, and far larger than the perhaps 7,000 MW drop from wind at the same time.

But, lets look at the other graph showing a more normal period:

 

Wind power fluctuates a lot, but it stays in the 10-20,000MW range. So it was down about 10,000 MW when the graph at the top starts. The gas burning plants stepped in, and ramped up their production from the 10-20,000 MW range, by about 25,000MW! And then they had shutdowns.

So yeah, gas failed, but only after saving the day for several days in a row. Using the same day the previous year as a baseline, power from natural gas was 91% higher this year, while power from wind was 72% lower.

In fairness, let's make clear that gas was always the backup plan for a failure of wind. And the backup plan failed. But, you get to the backup plan because the plan failed first.

Blaming the gas companies is like an army retreating, and blaming the rearguard for being overwhelmed. It may be correct, but call it what it is: cowardly.

Student Loan Forgiveness and Your Taxes

Forgiveness. Who the heck thought up such an awful sounding word?

Anyway, this is a post in 2 parts.

• The bill passed by the Senate does not include any student loan forgiveness.
• The bill passed by the Senate does include a provision for a window of 6 years in which student debt, if forgiven later, will not be taxed.

Yeah. It's weird. DM asked after class to explain what was up with the second point.

What is student loan forgiveness? It means that the government is going to pass a law that you don't have to pay back your loans. No one is proposing that this be 100%. Usually, some fixed amount like $10K or $50K is tossed around.

Can the government actually do that? Well, yeah, they probably could. Here's the thing that just about no one who voted for the Democrats this year because of student loans was thinking about: the loan is still someone else's money, so if you don't have to pay it back, the government is asserting that it will do so on your behalf. Of course that will put upward pressure on taxes, or downward pressure on spending. Pick your poison. I suspect that people would not be as jazzed about student loan forgiveness if it was paired with sending smaller social security checks to grandma.

Is student loan forgiveness a decent idea? I hate to rain on your parade, but it's about the economically dumbest idea politicians have ever come up with. (In fact, it was called exactly that by Justin Wolfers, a prominent progressive economist). The reasons are pretty simple: 1) college is an investment, you're the only one getting the reward so you should pay the costs, 2) there is very little quality control about what students actually get out of those investments, and debt forgiveness rewards poor choices, and 3) most people don't go to college and there's a strong tendency for people who are affluent to begin with to end up there.

Here's the nasty part. Debt forgiveness is considered to be income by the IRS. So it is taxable.† It gets worse. Debt forgiveness is counted completely in the year in which the debt is forgiven. So it can also bump you into higher brackets where more tax is collected. Here's an example:

• Prior to student debt forgiveness, you are a poor alum in a lousy job making $22,400 per year. You take the standard deduction of $12,400, leaving $10,000 to be taxed mostly in the 10% bracket. So you owe roughly $1,000. Not fun, but doable.
• Now, with student loan forgiveness of, say, $50,000, your income pops up for one year to $72,400. You take the standard deduction to get down to $60,000. But the way that brackets work is that you 10% of the first $10,000, plus 12% of the rest up to $40,000, plus 22% of anything past that. That is, $1,000 + $3,600 + $4,400 = $9,000. And until you work out a payment plan, you owe 9 times as much in tax, all at once, in cash. That's a big problem.

Back to the political wackiness. Forgiving student loan debt is not that popular with politicians because they know how screwy an idea it is. BUT, it's in the Overton Window this year, and if they pass it they might get re-elected. However, they did not put it in the proposed stimulus package because they do not have the votes to pass it, and didn't want it to be the reason the whole bill is voted down. 

Instead, they fixed the taxation of student loan forgiveness in case they get the votes to pass it in the future.

Except there's a problem (two actually ... the second is that I read up about this point about 2 months ago, and I can't find the cite right now). Anyway, it's likely that student load forgiveness would be ruled unconstitutional. I can't recall the argument, but I think it was along the lines that if the government didn't make the loan, it doesn't have standing to change the law governing the loan after it's made. Since all student loans are made through private entities (even when they say automatic federal loan), this would seem to be a dealbreaker. Of course, in sports and politics, the usual strategy is to break the rule first, and then see if a foul is called.

† Personal story added for emotional valence. I will be dealing with this on my family's taxes. My son broke his arm up at the U 18 months ago. And, while it was covered by insurance, the out-of-pocket expenses ran to a few thousand dollars. I told my son to pay them, and we would see about helping him out (sounds harsh, but he'd already tapped deeply into us for money that year, so we all agreed it was sensible). But COVID ‡ He lost his job, he was paying rent on an apartment he wasn't living in, and so on. You get the drill. So I picked up the payments (and like a dummy had my name put on the account), but in short, we still owed until about 3 months ago when the University Hospital forgave a lot of outstanding medical debts (presumably to be COVID sensitive during the holidays). It was not a ton of money: under $1,000. Here's the thing. It's debt forgiveness so it's taxable income at both the state and Federal levels. Further, since it is an addition to my income, the marginal rate that applies to it is the highest tax bracket that applies to our household. So I'll have to give almost half of it back, all at once, even though I had a string of small upcoming payments that would not have been hard to pay.

‡ Personal story added because it's made other students laugh. We have a cute saying in our household: "plague rules". It means something is being done differently because 2020-21 has just not been normal or OK. In this case, plague rules means I was paying the medical bill, even though I was not riding the Bird (while bummed out and late) when it crashed.