tag:blogger.com,1999:blog-17232051.post946751592293145035..comments2024-03-28T03:16:14.104-04:00Comments on Noahpinion: Filling a hole or priming the pump?Noah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger23125tag:blogger.com,1999:blog-17232051.post-29848169349336328292012-01-30T21:07:06.939-05:002012-01-30T21:07:06.939-05:00Noah, Interesting post. I think the discussion o...Noah, Interesting post. I think the discussion of multiple equilibria is motivated by two distinct cases. In the early 1980s the unemployment rate in both the US and France soared to over 10%. In the US it fell quickly, and it France it stayed near 10% permanently. There are two possible explanations for this difference; multiple equilibria in France or French labor market rigidities. (My hunch is rigidities.) The next question is whether the US today is more like the US in the 1980s or France in the past 30 years. This is where I think people need to be careful. In my view the most plausible explanation is some of each, after all, the US unemployment rate does seem to be falling, but more slowly than many natural rate models would predict.<br /><br />Kantoos has some interesting observations on your post. He notes that one flaw in the Keynesian model is that the same interest rate can be associated with very different demand outcomes. He suggests replacing interest rates with NGDP as both an indicator and a target of monetary policy. Interestingly, the logic he uses is also applicable to Farmer's proposal to target stock prices. NGDP (futures) targeting and stock index targeting are simply alternative ways out of the zero rate bound.Scott Sumnerhttps://www.blogger.com/profile/15864819372390187247noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-22959575247182487432012-01-24T16:54:13.199-05:002012-01-24T16:54:13.199-05:00I think it's both.
National income rises dire...I think it's both.<br /><br />National income rises directly from the hiring, and there are hopefully knock-on effects. Or at least, small counter-effects.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-15311452060094581942012-01-20T19:46:14.699-05:002012-01-20T19:46:14.699-05:00Roger,
You said it's implausible that governm...Roger,<br /><br />You said it's implausible that government expenditures will raise confidence in the private sector. Isn't the point of government hiring not to increase government expenditures in and of themselves, but to increase consumer spending by those employed through stimulus? If private sector confidence isn't restored by consumer purchases, what can it be restored by? Do businesses not expand in the face of increased demand because they think their customers might be temporary government employees? Do you have any data to support your conjecture?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-72025770577378041832012-01-20T02:25:10.553-05:002012-01-20T02:25:10.553-05:00Question - Is the capital really just 'sitting...Question - Is the capital really just 'sitting there', or is it all wasting it's time in super-fast Investment Banking deals?<br /><br />I think the money was in banking, if you look at the increase in 'skim' by financial services, you have twice as much money tied up in finance as you used to, and nobody investing in production.<br /><br />I'd love to see some data on finance as a percentage of GDP and business investment over a period of years. I think the lure of over 10% return on 'crap' kept money away from firms that could have been profitable at 6% or 8% interest.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40224917484763500752012-01-19T13:12:22.138-05:002012-01-19T13:12:22.138-05:00What if the "coordination problem" is a ...What if the "coordination problem" is a failure to coordinate produce of "safe" assets in sufficient quantity?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-59161305009362542792012-01-19T12:31:33.511-05:002012-01-19T12:31:33.511-05:00Stephen Williamson: "That's not quite ri...Stephen Williamson: "That's not quite right, at least speaking for myself. Krugman has made it quite clear that he is an IS/LM guy, though occasionally you can read multiple equilibrium reasoning into what he says. "<br /><br />That's the *whole idea* of what Krugman's saying.Barry DeCiccohttps://www.blogger.com/profile/04735814736387033844noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-1708352703378710732012-01-18T21:58:21.549-05:002012-01-18T21:58:21.549-05:00Roger says that quantitative easing jump starts th...Roger says that quantitative easing jump starts the economy through wealth effects. While loose monetary policy was necessary to save the money markets it is a temporary fix. As a middle aged investor I am leery of investing in the American markets and I refuse to touch American banks precisely because the markets are so distorted by government action that no one knows what the real value of anything is. So I sold some shares, sold the long bonds, paid off the margin loan and sit on more GICs than I really want.Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-82729778353853676532012-01-18T21:47:31.110-05:002012-01-18T21:47:31.110-05:00Ah, but what if it's not optimal?
At Steve Wi...Ah, but what if it's not optimal?<br /><br />At Steve Williamson's blog I wrote:<br /><br />Have you seen this paper?<br />http://ideas.repec.org/p/nbr/nberwo/17063.html<br /><br />Suppose govt. normally fails to provide an efficient level of government investment (partially nonrival capital like infrastructure, etc.). Suppose that crises provide a political impetus to partially correct this govt. failure. That would make stimulus quite effective, as long as it comes in the form of govt. spending on public capital goods (also recall Baxter & King 1993).<br /><br />The multiple equilibria could be political-economic equilibria related to levels of public capital investment...<br /><br />Maybe we live in an economy with multiple equilibria. Maybe some recessions knock us down to a bad equilibrium. And maybe the temporary elimination of political-economic constraints on optimal public investment can knock us back to a higher equilibrium. In that sort of world, fiscal policy has both long-run and short-run ("stimulus") effects.<br /><br />Given the fact that our main piece of anecdotal evidence that fiscal policy is important is <i>war</i>, this seems like an idea worth pursuing...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-4428320373701964772012-01-18T21:22:58.654-05:002012-01-18T21:22:58.654-05:00@Noah
Adding productive capital does not change th...@Noah<br />Adding productive capital does not change the conclusions, as long as we assume that the government was picking capital optimally before the recession hit.Roger Farmerhttp://www.rogerfarmer.comnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-73317576154620208062012-01-18T19:41:37.858-05:002012-01-18T19:41:37.858-05:00@Roger: Thanks lots for dropping by!
One thing I...@Roger: Thanks lots for dropping by! <br /><br />One thing I'd be interested to see is whether your analysis of stimulus changes when government capital is in the model, as in Baxter & King 1993.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-18409073430267515132012-01-18T19:30:29.395-05:002012-01-18T19:30:29.395-05:00Bryan Caplan pointed out a distinction between fil...Bryan Caplan pointed out a distinction between filling and priming a while back, though didn't evince any awareness of multiple-equilibrium models (he himself seems to accept sticky-wage market failure).<br />http://econlog.econlib.org/archives/2011/09/keynesianism_vs.htmlWonks Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-67014233036339974172012-01-18T19:11:25.134-05:002012-01-18T19:11:25.134-05:00Thanks for drawing attention to co-ordination fail...Thanks for drawing attention to co-ordination failure models Noah. Let me clarify a couple of points about how my views differ from those of the new-Keynesians. <br /><br />First; as you point out in your post, I have been working on a new generation of co-ordination failure models in which a high unemployment equilibrium can persist forever. The clearest exposition of these models is here<br /><br />http://www.rogerfarmer.com/NewWeb/PdfFiles/fa-con-cra.pdf<br /><br />I call these, second generation coordination failure models. They are different from the first generation models that Stephen refers to (for example, Farmer-Guo (1994) JET). First generation co-ordination failure models have multiple non-stationary equilibrium paths all converging to the same steady state. Second generation models have multiple steady state equilibria. This is a significant difference since first generation models, like new-Keynesian and classical models, cannot account for persistent high unemployment. Second generation models can.<br /><br />Second; Steve is correct that I am reluctant to support large fiscal stimulus programs. I have written two papers on the role of fiscal stimulus in second-generation co-ordination failure models, one in an overlapping generations model here<br /><br />http://www.rogerfarmer.com/NewWeb/PdfFiles/Farmer_Roger_Carnegie.pdf<br /><br />and a second paper joint with Dmitry Plotnikov, in a representative agent framework here<br /><br />http://www.rogerfarmer.com/NewWeb/PdfFiles/Farmer-Plotnikov.pdf<br /><br />In both of these models, a fiscal stimulus will decrease unemployment. But if confidence remains low, the fix will be temporary. In both models, the fiscal stimulus reduces welfare because it crowds out private consumption. <br /><br />Recall that in Keynesian models, increased government expenditure is supposed to "crowd in" private consumption. That is the whole idea behind the consumption-income multiplier. My reading of the evidence is that "crowding in" (an increase in consumption caused by an increase in government purchases) is not supported by the data.<br /><br />If fiscal stimulus is to have a permanent effect in the models I work with, it must work through a non-economic mechanism. One channel would be a temporary boost to employment that restores the confidence of the private sector by influencing market psychology: A confidence booster. That is a possibility. But I think it is implausible that increased government expenditure will have that effect.<br /><br />My reading of the evidence is that consumption depends primarily on wealth rather than income. That was the lesson of work by Ando and Modigliani, Modigliani, and Friedman in the 1950s. It is for that reason that I support interventions in the asset markets that try to jump-start the economy and reduce unemployment by boosting private wealth. That, in my view, is what quantitative easing has done.Roger Farmerhttp://www.rogerfarmer.comnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-72086708992833018862012-01-18T15:48:06.251-05:002012-01-18T15:48:06.251-05:00If you have a non-linear function of multiple vari...If you have a non-linear function of multiple variables you can have multiple local extrema. Classic first order (linear) models do not show such behavior because they cannot. It would be interesting to see a plausible model that actually exhibited multiple STABLE equilibria.<br /><br />The truth is probably that we are all Bayesians constantly updating our models and predictions on basis of current events. If we predict the economy will do badly then it will. Keynesian stimulus works (1) by generating a self fulfilling illusion of relative prosperity and (2) simply by being one half of a counter cyclical policy (the politicians always forget the other half).Absalonhttps://www.blogger.com/profile/09131268683451462949noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-64810191031847903532012-01-18T11:40:11.097-05:002012-01-18T11:40:11.097-05:00@Steve:
Thanks for catching the error...I was thi...@Steve:<br /><br />Thanks for catching the error...I was thinking of a different Angeletos paper, from a few years back!Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-64549526747457017572012-01-18T11:27:41.284-05:002012-01-18T11:27:41.284-05:00Noah,
On Farmer's views see this:
http://www...Noah,<br /><br />On Farmer's views see this:<br /><br />http://www.economywatch.com/economy-business-and-finance-news/persistent-unemployment-stemming-from-a-lack-of-confidence.19-09.html<br /><br />He sounds like Bullard, actually.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-78072328787732969912012-01-18T11:13:00.097-05:002012-01-18T11:13:00.097-05:00Noah,
"Bullard and Williamson say that this ...Noah,<br /><br />"Bullard and Williamson say that this is the type of model that modern supporters of fiscal stimulus really have in mind."<br /><br />That's not quite right, at least speaking for myself. Krugman has made it quite clear that he is an IS/LM guy, though occasionally you can read multiple equilibrium reasoning into what he says. I don't think you'll find multiple equilibrium in anything that DeLong or Christina Romer talk about. On the other hand, I was talking to Roger Farmer (clearly a multiple equilibrium Keynesian) at the ASSA meetings, and he is definitely not a supporter of fiscal stimulus.<br /><br />"...it's hellishly hard to make those models both tractable and predictive..."<br /><br />I'm not sure about the tractable part. Look at Farmer/Guo (1994) JET. The predictive part is certainly a problem. By definition, a multiple equilibrium model has problems with prediction.<br /><br />Angeletos/LaO: I don't think that's the solution to your problem. I see their model as indistinguishable from Prescott's. Note in particular that equilibrium is unique.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-52400451994604461992012-01-18T10:50:22.240-05:002012-01-18T10:50:22.240-05:00Exactly, the Keynesian cross tells us that as aggr...Exactly, the Keynesian cross tells us that as aggregate demand changes, there must be a change in the static equilibrium where Y=E. So if E falls we move to a new equilibrium with lower Y, and there is no reason why the economy should return to its previous output, unless E increases.<br /><br />On to that comparative static analysis, people have added a dynamic story about inventories to explain how you reach the new equilibrium, but that's a sideshow really.econojonhttps://www.blogger.com/profile/11836028530972814027noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-44281652620762531612012-01-18T09:56:56.732-05:002012-01-18T09:56:56.732-05:00@econojon:
Hmm, maybe! The Keynesian Cross is a s...@econojon:<br /><br />Hmm, maybe! The Keynesian Cross is a static model, actually...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-83738229075432314752012-01-18T08:32:27.510-05:002012-01-18T08:32:27.510-05:00A couple of thoughts. First, I don't think you...A couple of thoughts. First, I don't think your characterization of the Keynesian cross is quite correct. When you speak of a buildup of inventories, I guess you mean when Y < E. Obviously, this process comes to an end eventually, but that doesn't imply employment will recover. Instead you get stuck in a new equilibrium with lower Y. <br /><br />As for New Keynesian models, Paul Krugman seems to think he has demonstrated that the economy won't recover if in a liquidity trap. He thinks expectations of inflation are crucial in such circumstances. I'm not sure if he's right, but I'd trust him over Steven Williamson any day.econojonhttps://www.blogger.com/profile/11836028530972814027noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-88428863460798679182012-01-18T06:41:26.400-05:002012-01-18T06:41:26.400-05:00New Keynesian DSGE models ARE dynamic (hint, what ...New Keynesian DSGE models ARE dynamic (hint, what does the D in DSGE stand for?) and they ARE about describing disequilibrium, i.e. output that is persistently deviating from its 'natural' or 'flexprice' level, as well as describing the saddle paths they may follow.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-62532423807529957152012-01-18T04:01:56.402-05:002012-01-18T04:01:56.402-05:00Obviously a chronic lack of demand is going to cru...Obviously a chronic lack of demand is going to crush expectations. Just like booming GDP growth boosts expectations. It's positive feedback. Nothing new there.<br /><br />Also, I'm with 'reason'. The whole concept of equilibrium models is a massive intellectual failure.<br /><br />Economies are dynamic dis-equilibrium organisms. All life is.<br /><br />IS-LM liquidity trap theory is based on flawed assumptions, but is an ok approximation of a balance sheet recession in its policy prescriptions.<br /><br />But they key thing is that you don't need IS-LM to understand a balance sheet recession. You just need to understand the dynamics of credit creation and destruction by individuals borrowing and repaying loans.<br /><br />The stock of credit is a key determinant of the flow of transactions in the economy. That's why credit growth drives GDP growth and aggregate demand.BTnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-1632461270414144412012-01-18T03:21:18.837-05:002012-01-18T03:21:18.837-05:00Isn't the real point that you are building equ...Isn't the real point that you are building equilibrium models but the real world is about individual agents reacting to their individual situation - and that reaction doesn't necessarily move the world towards equilibrium (if such a thing exists). Please, please, please, consider building proper dynamic models.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-53955079494163639602012-01-18T01:18:54.284-05:002012-01-18T01:18:54.284-05:00"when actually you have a mental model of an ..."when actually you have a mental model of an economy riddled with coordination failures and multiple equilibria, where stimulus is all about expectations."<br /><br />Precisely, and Keynes would agree. It is good mental models that count, not mathematical ones.Luke Leahttps://www.blogger.com/profile/11290760894780619646noreply@blogger.com