tag:blogger.com,1999:blog-17232051.post4403200186230896076..comments2024-03-18T22:32:52.802-04:00Comments on Noahpinion: Are macroeconomic methods politically biased?Noah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger71125tag:blogger.com,1999:blog-17232051.post-40860290127993545272012-08-26T06:47:38.527-04:002012-08-26T06:47:38.527-04:00BINGO. That's how you do it. That's how ...BINGO. That's how you do it. That's how every science has done it. Before physics was "unified", there was a theory of optics, a theory of ballistics, a theory of waves, etc.... you used whichever one seemed to fit the problem best.<br /><br />After it was "unified", you STILL figured out which phenomena were "dominant" and ignored the rest.<br /><br />The Lucas critique is asinine and unscientific. A theory which works in a limited domain is far better than a theory which *doesn't give accurate predictions at all*.neroden@gmailhttps://www.blogger.com/profile/07475686367097445497noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-21869188299061459822012-04-13T14:00:44.063-04:002012-04-13T14:00:44.063-04:00It's interesting that you see DSGE modelling p...It's interesting that you see DSGE modelling politically biased. <br /><br />It's true that in most DSGE models the role of government is minimal; but this is rather the set up of the models, not a result derived from such models. Please correct me if I'm wrong but I couldn't recall a published paper which uses DSGE model to show that it is best to have a small government. <br /><br />Bear in mind that DSGE models developed nowadays are mainly for central bankers to analyse the effects of alternative monetary policy rules. They are not specifically designed for the evaluation of fiscal policies. To study the effects of a certain public policy, economists use microeconometric methods, not DSGE models.<br /><br />Of course, by saying this I assume that the Central Bank is reasonably independent from the government. How (or how not) independent it is in reality is another topic of discussion.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-19798775082288012002012-03-03T22:03:54.182-05:002012-03-03T22:03:54.182-05:00Richard Serlin, very interesting comments.
Espe...Richard Serlin, very interesting comments. <br /><br />Especially in your second you implicitly highlight a major background assumption that causes a lot of the trouble: seeking a global optimum. <br /><br />In contrast, other scientific models -- climate models for example -- aren't seeking optima, they are just trying to accurately simulate what happens. (Climate models and many others are micro-founded to a large extent, but this is not a big deal either way.) <br /><br />My question as a non-economist is "Why is seeking global optima a major focus?" Especially since it makes models much less tractable! (As you correctly explain.) <br /><br />Obviously in general our economy doesn't achieve a global optimum. Indeed there are intractability results to show it can't, and also instability results to show there is almost certainly no stable global optimum. <br /><br />Does the economic profession have some deep commitment to this unrealistic requirement? If so, that is a big part of the problem. <br /><br />I don't know that we could find tractable models if global optima were dropped. But certainly a necessary step toward positive economics is to build models that approximate the world closely, and requiring global optimality runs completely counter to that.jedhttps://www.blogger.com/profile/11258416181053973027noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-62550222828591052502012-02-29T11:19:25.328-05:002012-02-29T11:19:25.328-05:00Noah,
This is a great post. I make a similar poin...Noah,<br /><br />This is a great post. I make a similar point here:<br /><br />http://unlearningeconomics.wordpress.com/2012/01/13/why-does-neoclassical-framing-matter/<br /><br />though my point is more general - that certain institutions are presented as 'intervening', which opens the door for the politics of 'not intervening' and protecting existing institutions (also known as conservatism).Unlearningeconhttps://www.blogger.com/profile/13687413107325575532noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-81552556655093040372012-02-27T20:16:53.998-05:002012-02-27T20:16:53.998-05:00OK, I get the idea behind the Lucas critique a lit...OK, I get the idea behind the Lucas critique a little better, but it's *still* misguided. It's like asking for a model of chemistry which works for liquids, solids, and superheated plasmas. <br /><br />You figure out which elements of government policy are critical and devise *different* economic models depending on what the state of those elements is.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-85256004961498666042012-02-27T20:14:23.483-05:002012-02-27T20:14:23.483-05:00Why did anyone pay any attention to the "Luca...Why did anyone pay any attention to the "Lucas critique?" It's an erroneous critique.<br /><br />It is known that the structure of the economy is determined by the laws and customs of the society, and that those are maintained by government -- they are *government policy*. A model which does not include parameters for government policy and other local social decisions is clearly just bullshit.<br /><br />Lucas's critique, as you describe it, appears to have no validity at all. Why were people reacting to it as if it did?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-23688157261897771712012-02-26T08:27:51.205-05:002012-02-26T08:27:51.205-05:00"But I contend that in the case of DSGE model..."But I contend that in the case of DSGE models, conservative policy recommendations don't emerge because they come from the best models, but only because they come from the easiest models. "<br /><br />Best thing I've read in awhile right here. I am an Undergrad Economics student (who does a fair amount of reading ahead) who has been particularly struck by exactly what you are talking about in the quote I pulled from your post. All the models we are learning, (and all the models I've read ahead about), make assumptions which allow for nice clean mathematical explanation - As you said, the models are desirable, because they are easy to work with. While I see the value in fairly simple mathematical models, it seems to me that they have become a crutch for the discipline. "Simplifying assumptions" are all well and good, but it seems to me that many important variables and outcomes are lost and forgotten, they never come back into the picture. It's likely that those who pursue grad school credentials find some of the omitted factors coming back into play, but it also seems from my reading ahead, that for some they never do. <br /><br />Further, we have a glut of undergrads (the amount which demand outstrips supply in my school's econ faculty is unreal) who are going to be going out into the world where they will spout their halfcocked ideas about how the economy works. And they will know they are "right" because from the get go they had it shovelled down their throats that economics does positive analysis, that it is unbiased and scientific. Undergraduate economics rarely teaches students to think critically at all, what a shame. <br /><br />Anyways, I really enjoyed your post. Despite my apparent disillusion with the field of Economics, I do plan to attend grad school. It is nice to know that there are those out there who think critically about the material and are interested in finding new ways to approach it. In a way Economics is an exciting field because even its foundations are far from certain. It feels like a discipline that is still very young, a ripe for some pretty big paradigm shifts in the near future.Dave Macnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-42131778095918192392012-02-25T03:11:22.494-05:002012-02-25T03:11:22.494-05:00Global optimization can be an incredibly difficult...Global optimization can be an incredibly difficult thing with very complicated, high dimensional functions, or just impossible to do, that is to find the true global solution, and be able to prove you found it (or be sure with a high degree of probability that you're close with a given amount of precision). It's not something you just brush away, oh we have ways of handling that. We do have nice ways of handling it for some pretty uniform simple functions, but for the kind of very realistic, very high dimensional models I'm thinking of, forget it. Not if you have all of the super computers in the world.<br /><br />Google this; ask a math prof. who works in this area, or just look at the Traveling Salesman problem. It's nothing in complexity and non-uniformity compared to the models I'm thinking of, and yet its global optimization has been worked on by top mathematicians for decades. <br /><br />I ran into global optimization a lot as a PhD student, and read up on it and talked to professors in the finance and math departments about it. It's a huge problem. In many cases, you just do your best (and I did commonly saw just local optimization used for papers published in respected journals), but you have no good systematic way of knowing if you came even close to the true global optimum.<br /><br />So there is definitely an incentive to really make unrealistic simplifying assumptions to be able to solve, to optimize, the model. If, on the other hand, you were free from the worry of precise global optimization, and you just wanted a good simulator to test what other models say, to test strategies, and hypotheses, then you could be free to construct a really realistic and supercomplicated model. And that could be really useful. <br /><br />After all such computer simulations are used in many other sciences, as pure simulators, without trying to make them way less realistic so they are solvable. Examples include nuclear physics and aerodynamics.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-47384401113169037652012-02-24T19:38:52.780-05:002012-02-24T19:38:52.780-05:00@Chops,
Lucas could vote for Obama because they ar...@<a href="http://noahpinionblog.blogspot.com/2012/02/are-macroeconomic-methods-politically.html?showComment=1329858875621#c7760367096351676679" rel="nofollow">Chops</a>,<br />Lucas could vote for Obama because they are both conservatives. Your universe of economic discourse (like the US generally) lost its left wing long ago.<br /><br />What <a href="http://noahpinionblog.blogspot.com/2012/02/are-macroeconomic-methods-politically.html?showComment=1329808539909#c4634197440439726585" rel="nofollow">Will</a> said about emergence, the utter futility of micro-based macro and the astonishing insularity and backwardness of the persistence of the endeavour.Alphonsehttps://www.blogger.com/profile/02441923856941011283noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-74092775991625032512012-02-24T18:24:01.601-05:002012-02-24T18:24:01.601-05:00Great post, indeed. I always try to point out to m...Great post, indeed. I always try to point out to my students the fact, that governemnt spending is taken as bringing zero utility to consumers as a point in case of this argument. However, one thing i have to add. I think that economics is laissez faire/right wing oriented, and rigthly so. The point which should economics stress at any time is the costs of any action and problems inherent to government solutions. And I would claim that people from non-economics field are more likely to analyze problem than to suggest solution which takes into consideration the cost-benefit analysis, or the incentive complications associated with this. And traditionally, the divide is in terms of righ-left is indeed in terms of government activism.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-74382636856353066292012-02-23T19:41:17.465-05:002012-02-23T19:41:17.465-05:00Definitely your post provides a great and useful r...Definitely your post provides a great and useful resource every reader must adhere. This is truly a must read and admire. Thanks a lot for sharing!Liberal BiasĀ http://liberalbias.com/noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-25563333854052746642012-02-23T15:57:04.471-05:002012-02-23T15:57:04.471-05:00This is getting silly. Economists use computers to...This is getting silly. Economists use computers to solve their models, especially macroeconomists. Models used for obtaining quantitative results will almost certainly only be able to be solved using a computer. Closed forms are useful for learning about a mechanism, but will be useless quantitatively.. and this is well understood. Economists who do work that requires lots of computation understand that a local optimum is not the same as a global optimum. There are plenty of strategies for dealing with this. Also, no one should be limited to having to solve their model on a laptop.. there are plenty of resources out there, some even free.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-5442004742176446142012-02-23T14:55:45.646-05:002012-02-23T14:55:45.646-05:00Conesnail and Noah,
As a PhD student in finance, ...Conesnail and Noah,<br /><br />As a PhD student in finance, I found that we always super simplified our models, making them a lot less realistic, so that they could be solved in closed form (i.e. you could find the optimum, like best portfolio strategy, with math, not a computer). Or, sometimes we would let the computer do the optimization. But there, a big problem was that I commonly saw people using local optimization algorithms to find the global optimum. And this was in situations where the state space was riddled with local optimums. So your "solution" was super dependent on where you had the algorithm start looking. And even if you used a global optimization routine, they just weren't nearly good enough to do much better.<br /><br />What I always wanted to do (but never had time) was to construct a truly realistic model. It wouldn't be solvable in closed form, or reliably with a global optimization program, but it would be fantastic as a simulator, for testing the solutions that come from the prestigious closed form, and other simplified models. You could plug in the strategies that they say are optimal, and then see how high an NPV, or GDP, or expected utility, etc. they create. Then, you could use your intuition about where those models are unrealistic to come up with a new strategy (vector of parameter values) and see if it beats it (or you could use your new strategy as a starting point, and then run the local optimization program from there).<br /><br />In this way we could keep looking for better and better strategies, which could give us just better strategies, as well as better intuition. And, it gets at the complaint that we can't test well in econ like in the harder sciences. With a great, very realistic simulator, even if we can't solve it globally, due to infinite and varied local optima, we can use it as a great simulator and tester.Richard H. Serlinhttps://www.blogger.com/profile/09824966626830758801noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-32861279988447303972012-02-23T12:35:02.963-05:002012-02-23T12:35:02.963-05:00Consesnail:
:)Consesnail:<br /><br />:)Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-34754696427188200532012-02-23T10:05:29.975-05:002012-02-23T10:05:29.975-05:00I find 2 things absolutely telling in this summary...I find 2 things absolutely telling in this summary<br /><br />1. Your models are incredibly simplistic given the complexity of the problem. Therefore they have no predictive power. How can this possibly be ok? In science (I'm a scientist) a model with virtually no predictive power would hold no sway whatsoever in any scientific field I know of. Clearly, you need to get alot more complex and God knows you have enough data to model.<br /><br />2. The idea that "a more complex model would require a supercomputer..." is basically a non-starter. Why the heck is that? Why would you guys not be using the most powerful computational tools available to model what is clearly a very complex problem? A climate scientist that said that they can't make their model more complex and therefore more predictive because it won't run on their laptop would not get very far. Why should the standards in economics be so much lower? It seems, given recent events, that the importance of the problem might warrant it.<br /><br />Put it all together, and you guys just seem like wimps. Considering how much influence economists have, it's a little scary to witness the soft intellectual underbelly of the field.conesnailnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-78917956613226153592012-02-23T05:48:54.854-05:002012-02-23T05:48:54.854-05:00I laugh at Stephen Williamson's comment. "...I laugh at Stephen Williamson's comment. "Serious theory"? "[Prescott] likes to think about serious economics. He's a scientist. So is Lucas." Ha, ha.<br /><br />And, of course, Noah never said he wasn't willing to learn from Prescott.<br /><br />And the question of political bias in the post was addressing a comment from Williamson.<br /><br />Anyways, we see that one of the co-authors on a well-regarded series of papers on noise trading doesn't think Williamson does science. Clearly, economists differ among themselves on what are scientific norms or whether DSGE models, more or less, conform to them. I doubt Williamson is willing or able to clarify such differences.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-24445780125653511372012-02-22T22:13:40.097-05:002012-02-22T22:13:40.097-05:00Zen Babu:
All those paper are general equilibrium...Zen Babu:<br /><br />All those paper are general equilibrium models; only two of them (one by krusell and one by boldrin) don't have a real quantitative exercise and are theoretical, the others do. My point, again, is that DSGE have been (and are) widely used to analyze situations in which the free market allocation is not pareto optimal and in which there is space for the government to step in. These are not business cycles models (well actually Rios Rull's paper is), because that's not what they want to study...you can always add some aggregate uncertainty and make it a business cycle model...like in...Krusell-Smith.<br /><br />Noah: I agree it's hard, but it doesn't seem to me that the fact that it's hard is pushing the profession to ignore those frictions as you claim...quite the opposite (especially far from the oceans).<br /><br />Anyway, I guess we agree to disagree?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-60480628673382033672012-02-22T20:20:38.109-05:002012-02-22T20:20:38.109-05:00Why worry about political bias.
Well, it was just...<i>Why worry about political bias.</i><br /><br />Well, it was just a thought... ;)<br /><br /><i>Go talk to Ed Prescott.</i><br /><br />You think Prescott would talk to me???<br /><br /><i>I'll write you a post this week to explain it more carefully.</i><br /><br />Thanks!!Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-57893291779176576482012-02-22T18:57:34.047-05:002012-02-22T18:57:34.047-05:00Thanks for attaching the link to Smets-Wouters.Thanks for attaching the link to Smets-Wouters.Anonymoushttps://www.blogger.com/profile/14235846531323511190noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-27047341108157794432012-02-22T18:24:17.488-05:002012-02-22T18:24:17.488-05:00Noah,
No one from the Minnesota school, broadly d...Noah,<br /><br />No one from the Minnesota school, broadly defined, uses the term "DSGE" in the way you're using it. Why are you hung up on what DSGE is anyway? That's completely unimportant - semantics. You have to understand first what the Minnesota program is all about. It's just using serious theory to think about macroeconomic questions. That's it. Why worry about political bias. Go talk to Ed Prescott. Ignore what he tells you about the Tea Party and such, and get him talking about something interesting. You'll actually learn something. I always do when I talk to him. The guy just likes to think about serious economics. He's a scientist. So is Lucas. So is Sargent. I'll write you a post this week to explain it more carefully. This whole thing is not well understood by the profession I think.Stephen Williamsonhttps://www.blogger.com/profile/01434465858419028592noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-2357143707936439612012-02-22T17:42:29.933-05:002012-02-22T17:42:29.933-05:00Anon with the research papers :
None of the pape...Anon with the research papers : <br /><br />None of the papers you linked to is a business cycle macro paper. They are all, by and large, exploring partial equilibrium optimality conditions in a DSGE framework. <br /><br />For example, <br /><br />1) Krusell's paper shows that tax on capital income would be substantially less than 100% even if the government did not care about capital accumulation. That is neither here nor there for the purpose of this debate/ post.<br /><br />2) Boldrin's paper imagines a world where students don't get loans (!!) and thereby defines the role of public financing of education to be utility-increasing by construction. Then it finds the optimal rate of return on public financing/ state pensions for this arrangement to be pareto efficient. <br /><br />3) Krueger's paper finds the optimal tax rate given income and wealth inequality and the risk of unemployment/ wage cuts. It ignores deadweight losses. <br /><br />Sure, there is wage rigidity, incomplete markets, overlapping generations and intertemporal optimization. But none of that is used to argue/ explain/ explore output, inflation or unemployment. <br /><br />These are all partial equilibrium optimization papers using DSGE techniques. They are consistent within their universe and their referenced-paper universe, producing the right mathematical result given a set of 100 standard assumptions and one new modification. None of them is calibrated to data. And none of them has anything to do with business cycle theory. <br /><br />What was your point again?Ritwikhttps://www.blogger.com/profile/00616694597577112758noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-42377269976028340712012-02-22T17:20:41.874-05:002012-02-22T17:20:41.874-05:00Anon:
My point is not that it's impossible to...Anon:<br /><br />My point is not that it's <i>impossible</i> to make DSGE models where govt. has a role. My point is that it's <i>hard</i> - i.e., that it's computationally costly, and often ends up requiring unrealistic simplifying assumptions. And my argument is not that no one is publishing DSGE papers supporting govt. intervention; obviously many people are. My point is that there is that the aforementioned limitations imposed on these models by the clunkiness of the DSGE framework leaves the papers open to more criticism than they would otherwise be.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-43331936198010394672012-02-22T13:21:55.687-05:002012-02-22T13:21:55.687-05:00the overall point is that the DSGE tools have been...the overall point is that the DSGE tools have been widely employed to find good reasons to have the government stepping in. When you consider heterogeneity, incomplete markets and so on, there can be plenty of good reasons for that. All the modern literature that consider these issues speaks the DSGE language, and the paper I have posted are just a little example of it! [Side note: there's no need to have 7 shocks-including a markup shock that is indistinguishable from a preference shock in the model, lol - to get a role for government]. The "fathers" of this literature are, by the way, all intellectual "sons" of those conservative minds that introduced the DSGE models. So my impression is that the claim by Steve Williamson is correct (dsge is just the language of modern macroeconomics and it's not a conservative or a democratic language) and that your argument doesn't make a lot of sense if you consider what is the state of macro today (see those paper, or this: http://www2.econ.iastate.edu/tesfatsi/SomeThoughtsOnStateOfMacro.Kocherlakota2009.pdf)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-30370073964816663802012-02-22T11:03:03.435-05:002012-02-22T11:03:03.435-05:00Darf:
See this paper that I linked to in the post...Darf:<br /><br />See <a href="http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2010_fall_bpea_papers/2010fall_edgegurkaynak.pdf" rel="nofollow">this paper</a> that I linked to in the post.<br /><br />Anon:<br /><br />Thanks for all the links (I only knew the Krusell paper and the Sargent paper). But what is your overall point?...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-68597227483851725342012-02-22T09:40:58.802-05:002012-02-22T09:40:58.802-05:00You seem to be saying that all models that we have...You seem to be saying that all models that we have now are barely better than no information. I wonder what you think government policy should be in an environment of almost complete ignorance?Darf Ferrarahttps://www.blogger.com/profile/00396174363474177403noreply@blogger.com