Mike Konczal

Roosevelt Institute Fellow

Recent Posts by Mike Konczal

  • Yellen, Summers and Rebuilding After the Fire

    Jul 24, 2013Mike Konczal

    There is no Bernanke Consensus. This is important to remember about our moment, and about how to evaluate what comes next for the Federal Reserve. What we have instead is the Bernanke Improvisation, a series of emergency procedures to try to keep the economy from falling apart, and perhaps even guide it back to full employment, after normal monetary policy hit a wall.

    With the rumor mill circulating that Larry Summers could be the next Federal Reserve chair instead of Janet Yellen, it’s worth understanding where the Fed is. Bernanke has been like a fireman trying to put out a fire since 2008. What comes next is the rebuilding. What building codes will we have? What precautions will we take to prevent the next fire, and what are the tradeoffs?

    This makes the next FOMC chair extremely important. While you are inside a burning building, what the fireman is doing is everything. But deciding how to rebuild will ultimately make the big difference for the next 30 years.

    The next FOMC chair will have three major issues to deal with during his or her tenure. The first is to determine when to start pushing on the brakes, and thus where we’ll hit “full employment.” The second is to decide how aggressively to enforce financial reform rules [1]. Those are pretty important things!

    But the new FOMC chair has an even bigger responsibility. He or she will also have to figure out a way to rebuild monetary policy and the Federal Reserve so that we won’t have a repeat of our current crisis. And in case you’ve missed the half-a-lost-decade we’ve already gone through, this couldn’t be more important.

    Monetary policy itself could be rebuilt in a number of directions. It could give up on unemployment, perhaps keeping the economy permanently in a quasi-recession to somehow boost a notion of “financial stability” instead. Or it could evolve in a direction designed to avoid the prolonged recession we just had, which could involve a higher inflation target or targeting something like nominal GDP.

    But the default, like many things in life, is that inertia will win out, and some form of muddling forward will continue on indefinitely. The Federal Reserve will maintain a low inflation target that it always falls short of, and the economy will never run at its peak capacity. Attempts at better communications and priorities will be abandoned. And even minor recessions will run the risk of hitting the liquidity trap, making them far worse than they need to be.

    The inertia problem is why having a consensus builder and convincer in charge is key, and it is a terrible development that these traits are being coded as feminine and thus weak. As a new governor in 1996, Janet Yellen argued the evidence to convince Alan Greenspan that targeting zero percent inflation was a bad idea. (Could you imagine this recession if inflation was already hovering at a little above zero in 2007?) The next governor will be asked to gather much more complicated evidence to make even harder decisions about the future of the economy - and Yellen has a proven track record here.

    Yellen has been at the forefront of all these debates. As Cardiff Garcia writes, she runs the subcommittee on communications and has spent a great deal of time trying to figure out how these unorthodox policies impact the economy. The debate about what constitutes full employment has become muted among liberal economists because unemployment has been so high, but it will come back to the fore after the taper hits. Yellen has been thinking about this all along. Crucially, she has come the closest of any high-ranking Fed official to endorsing a major shift of current policy - in this case, to something like a nominal spending target. This will become important to however we rebuild after this crisis.

    As a quick history lesson, there were two major points where a large battle broke out on monetary stimulus. The first was the spring and summer of 2010, when there were serious worries about a double-dip recession. This ended when Bernanke announced QE2, which immediately collapsed market expectations of deflation. The second was in the first half of 2012, when an intellectual consensus was built around tying monetary policy to future conditions, ending with the adoption of the Evans Rule.

    I can’t find Larry Summers commenting on either of these situations, either in high-end academic debates or in the wide variety of op-eds he’s written. The commenters at The Money Illusion couldn’t find a single instance of Summers suggesting that monetary policy was too tight in the past five years. Summers was simply missing in action for the most important monetary policy debates of the past 30 years, while Yellen was leading them. And trying to shift from those debates into a new status quo will be the responsibility of the next FOMC chair.

     

     

    [1] Given what this blog normally covers, I’d be remiss to not mention housing and financial reform. During the Obama transition, Larry Summers promised “substantial resources of $50-100B to a sweeping effort to address the foreclosure crisis” as well as “reforming our bankruptcy laws.” This letter was crucial in securing votes from Democrats like Jeff Merkley for the second round of TARP bailouts. A recent check showed that the administration ended up using only $4.4 billion on foreclosure mitigation through the awful HAMP program, while Summers reportedly was not supportive of bankruptcy reform.

    And as Bill McBride notes, Yellen was making the correct calls on the housing bubble and its potential damage while Summers was attacking those who thought financial innovation could increase the risks of a panic and crash.

    It’s difficult to overstate how important the Federal Reserve is to financial regulation. Did you catch how the Federal Reserve needs to decide about the future of finance and physical commodities soon, with virtually no oversight or accountability? Even if you think Summers gets a bum rap for deregulation in the 1990s, you must believe that his suspicion of skepticism about finance - for instance, the reporting on his opposition on the Volcker Rule - is not what our real economy needs while Dodd-Frank is being implemented.

    Follow or contact the Rortybomb blog:

      

     

    There is no Bernanke Consensus. This is important to remember about our moment, and about how to evaluate what comes next for the Federal Reserve. What we have instead is the Bernanke Improvisation, a series of emergency procedures to try to keep the economy from falling apart, and perhaps even guide it back to full employment, after normal monetary policy hit a wall.

    With the rumor mill circulating that Larry Summers could be the next Federal Reserve chair instead of Janet Yellen, it’s worth understanding where the Fed is. Bernanke has been like a fireman trying to put out a fire since 2008. What comes next is the rebuilding. What building codes will we have? What precautions will we take to prevent the next fire, and what are the tradeoffs?

    This makes the next FOMC chair extremely important. While you are inside a burning building, what the fireman is doing is everything. But deciding how to rebuild will ultimately make the big difference for the next 30 years.

    The next FOMC chair will have three major issues to deal with during his or her tenure. The first is to determine when to start pushing on the brakes, and thus where we’ll hit “full employment.” The second is to decide how aggressively to enforce financial reform rules [1]. Those are pretty important things!

    But the new FOMC chair has an even bigger responsibility. He or she will also have to figure out a way to rebuild monetary policy and the Federal Reserve so that we won’t have a repeat of our current crisis. And in case you’ve missed the half-a-lost-decade we’ve already gone through, this couldn’t be more important.

    Monetary policy itself could be rebuilt in a number of directions. It could give up on unemployment, perhaps keeping the economy permanently in a quasi-recession to somehow boost a notion of “financial stability” instead. Or it could evolve in a direction designed to avoid the prolonged recession we just had, which could involve a higher inflation target or targeting something like nominal GDP.

    But the default, like many things in life, is that inertia will win out, and some form of muddling forward will continue on indefinitely. The Federal Reserve will maintain a low inflation target that it always falls short of, and the economy will never run at its peak capacity. Attempts at better communications and priorities will be abandoned. And even minor recessions will run the risk of hitting the liquidity trap, making them far worse than they need to be.

    The inertia problem is why having a consensus builder and convincer in charge is key, and it is a terrible development that these traits are being coded as feminine and thus weak. As a new governor in 1996, Janet Yellen argued the evidence to convince Alan Greenspan that targeting zero percent inflation was a bad idea. (Could you imagine this recession if inflation was already hovering at a little above zero in 2007?) The next governor will be asked to gather much more complicated evidence to make even harder decisions about the future of the economy - and Yellen has a proven track record here.

    Yellen has been at the forefront of all these debates. As Cardiff Garcia writes, she runs the subcommittee on communications and has spent a great deal of time trying to figure out how these unorthodox policies impact the economy. The debate about what constitutes full employment has become muted among liberal economists because unemployment has been so high, but it will come back to the fore after the taper hits. Yellen has been thinking about this all along. Crucially, she has come the closest of any high-ranking Fed official to endorsing a major shift of current policy - in this case, to something like a nominal spending target. This will become important to however we rebuild after this crisis.

    As a quick history lesson, there were two major points where a large battle broke out on monetary stimulus. The first was the spring and summer of 2010, when there were serious worries about a double-dip recession. This ended when Bernanke announced QE2, which immediately collapsed market expectations of deflation. The second was in the first half of 2012, when an intellectual consensus was built around tying monetary policy to future conditions, ending with the adoption of the Evans Rule.

    I can’t find Larry Summers commenting on either of these situations, either in high-end academic debates or in the wide variety of op-eds he’s written. The commenters at The Money Illusion couldn’t find a single instance of Summers suggesting that monetary policy was too tight in the past five years. Summers was simply missing in action for the most important monetary policy debates of the past 30 years, while Yellen was leading them. And trying to shift from those debates into a new status quo will be the responsibility of the next FOMC chair.

     

     

    [1] Given what this blog normally covers, I’d be remiss to not mention housing and financial reform. During the Obama transition, Larry Summers promised “substantial resources of $50-100B to a sweeping effort to address the foreclosure crisis” as well as “reforming our bankruptcy laws.” This letter was crucial in securing votes from Democrats like Jeff Merkley for the second round of TARP bailouts. A recent check showed that the administration ended up using only $4.4 billion on foreclosure mitigation through the awful HAMP program, while Summers reportedly was not supportive of bankruptcy reform.

    And as Bill McBride notes, Yellen was making the correct calls on the housing bubble and its potential damage while Summers was attacking those who thought financial innovation could increase the risks of a panic and crash.

    It’s difficult to overstate how important the Federal Reserve is to financial regulation. Did you catch how the Federal Reserve needs to decide about the future of finance and physical commodities soon, with virtually no oversight or accountability? Even if you think Summers gets a bum rap for deregulation in the 1990s, you must believe that his suspicion of skepticism about finance - for instance, the reporting on his opposition on the Volcker Rule - is not what our real economy needs while Dodd-Frank is being implemented.

    Follow or contact the Rortybomb blog:

      

    Federal Reserve banner image via Shutterstock.com

    Share This

  • Brooks’s Recovery Gender Swap

    Jul 17, 2013Mike Konczal

    How are men doing in our anemic economic recovery? David Brooks, after discussing his favorite Western movie, argues in his latest column, Men on the Threshold, that men are "unable to cross the threshold into the new economy." Though he'd probably argue that he's talking about generational changes, he focuses on a few data points from the current recession, including that "all the private sector jobs lost by women during the Great Recession have been recaptured, but men still have a long way to go."

    Is he right? And what are some facts we can put on the current recovery when it comes to men versus women?

    Total Employment

    Men had a harder crash during the recession, but a much better recovery, when compared with women.

    Indeed, during the first two years of the recovery expert analysis was focused on a situation that was completely reversed from Brooks' story. The question in mid-2011 was "why weren't women finding jobs?" Pew Research put out a report in July 2011 finding that "From the end of the recession in June 2009 through May 2011, men gained 768,000 jobs and lowered their unemployment rate by 1.1 percentage points to 9.5%. 1 Women, by contrast, lost 218,000 jobs during the same period, and their unemployment rate increased by 0.2 percentage points to 8.5%."

    How does that look two years later? Here's a graph of the actual level of employment by gender from the Great Recession onward:

    If you squint you can see how women's employment is flat throughout 2011, when men start gaining jobs. Since the beginning 2011, men have gotten around 65 percent of all new jobs. That rate started at 70 percent, and has declined to around 60 percent now. So it is true, as Brooks notes, that women are approaching their old level of employment. But the idea that the anemic recovery has been biased against men is harder to understand. The issue is just a weak recovery - more jobs would mean more jobs for both men and women, but also especially for men.

    Occupations

    But maybe the issue is the occupations that men are now working. As Brooks writes, "Now, thanks to a communications economy, [men] find themselves in a world that values expressiveness, interpersonal ease, vulnerability and the cooperative virtues." This is a world where they either can't compete, or won't. The testable hypothesis is that men are doing poorly in occupations that are traditionally female dominated.

    However the data shows that men are moving into female-dominated occupations, and taking a large majority of the new jobs there.

    How has the gendered division of occupations evolved since 2011? Here is first quarter data from 2011 and 2013 of occupations by gender from the CPS. As a reminder, your occupation is what you do, while your industry is what your employer does. Occupation data is much noiser, hence us moving to quarterly data:

    Ok that's a mess of data. What should we be looking for in this?

    First off, men are moving into occupations that have been traditionally gender-coded female. Office support jobs, which Bryce Covert and I found were a major driver of overall female employment decline from 2009-2011, are now going to men. Men have taken 95 percent of new jobs in this occupation, one that was only about 26 percent male in 2011. We also see men taking a majority of jobs in the male-minority service occupations. Men are also gaining in sales jobs even while the overall number of jobs are declining. That's a major transformation happening in real-time.

    (Meanwhile, it's not all caring work and symbolic analysts out there. There's a massive domestic energy extraction business booming in the United States, and those jobs are going to men as well. If you were to break down into suboccupations this becomes very obvious. Men took around 100 percent of the over 600,000+ new "construction and extraction" jobs, for instance.)

    It'll be interesting to see how extensive men moving into traditionally female jobs will be, and to what extent it'll challenge the nature of both them and that work. Much of the structure of service work in the United States comes from the model of Walmart, and that comes from both Southern, Christian values and a model of the role women play in kinship structures and communities.

    As Sarah Jaffe notes in her piece A Day Without Care, summarizing the work of Bethany Moreton, "Walmart...built its global empire on the backs of part-time women workers, capitalizing on the skills of white Southern housewives who’d never worked for pay before but who saw the customer service work they did at Walmart as an extension of the Christian service values they held dear. Those women didn’t receive a living wage because they were presumed to be married; today, Walmart’s workforce is much more diverse yet still expected to live on barely more than minimum wage."

    How will men react when faced with this? And how will their bosses counter?

    Follow or contact the Rortybomb blog:

      

     

    How are men doing in our anemic economic recovery? David Brooks, after discussing his favorite Western movie, argues in his latest column, Men on the Threshold, that men are "unable to cross the threshold into the new economy." Though he'd probably argue that he's talking about generational changes, he focuses on a few data points from the current recession, including that "all the private sector jobs lost by women during the Great Recession have been recaptured, but men still have a long way to go."

    Is he right? And what are some facts we can put on the current recovery when it comes to men versus women?

    Total Employment

    Men had a harder crash during the recession, but a much better recovery, when compared with women.

    Indeed, during the first two years of the recovery expert analysis was focused on a situation that was completely reversed from Brooks' story. The question in mid-2011 was "why weren't women finding jobs?" Pew Research put out a report in July 2011 finding that "From the end of the recession in June 2009 through May 2011, men gained 768,000 jobs and lowered their unemployment rate by 1.1 percentage points to 9.5%. 1 Women, by contrast, lost 218,000 jobs during the same period, and their unemployment rate increased by 0.2 percentage points to 8.5%."

    How does that look two years later? Here's a graph of the actual level of employment by gender from the Great Recession onward:

    If you squint you can see how women's employment is flat throughout 2011, when men start gaining jobs. Since the beginning 2011, men have gotten around 65 percent of all new jobs. That rate started at 70 percent, and has declined to around 60 percent now. So it is true, as Brooks notes, that women are approaching their old level of employment. But the idea that the anemic recovery has been biased against men is harder to understand. The issue is just a weak recovery - more jobs would mean more jobs for both men and women, but also especially for men.

    Occupations

    But maybe the issue is the occupations that men are now working. As Brooks writes, "Now, thanks to a communications economy, [men] find themselves in a world that values expressiveness, interpersonal ease, vulnerability and the cooperative virtues." This is a world where they either can't compete, or won't. The testable hypothesis is that men are doing poorly in occupations that are traditionally female dominated.

    However the data shows that men are moving into female-dominated occupations, and taking a large majority of the new jobs there.

    How has the gendered division of occupations evolved since 2011? Here is first quarter data from 2011 and 2013 of occupations by gender from the CPS. As a reminder, your occupation is what you do, while your industry is what your employer does. Occupation data is much noiser, hence us moving to quarterly data:

    Ok that's a mess of data. What should we be looking for in this?

    First off, men are moving into occupations that have been traditionally gender-coded female. Office support jobs, which Bryce Covert and I found were a major driver of overall female employment decline from 2009-2011, are now going to men. Men have taken 95 percent of new jobs in this occupation, one that was only about 26 percent male in 2011. We also see men taking a majority of jobs in the male-minority service occupations. Men are also gaining in sales jobs even while the overall number of jobs are declining. That's a major transformation happening in real-time.

    (Meanwhile, it's not all caring work and symbolic analysts out there. There's a massive domestic energy extraction business booming in the United States, and those jobs are going to men as well. If you were to break down into suboccupations this becomes very obvious. Men took around 100 percent of the over 600,000+ new "construction and extraction" jobs, for instance.)

    It'll be interesting to see how extensive men moving into traditionally female jobs will be, and to what extent it'll challenge the nature of both them and that work. Much of the structure of service work in the United States comes from the model of Walmart, and that comes from both Southern, Christian values and a model of the role women play in kinship structures and communities.

    As Sarah Jaffe notes in her piece A Day Without Care, summarizing the work of Bethany Moreton, "Walmart...built its global empire on the backs of part-time women workers, capitalizing on the skills of white Southern housewives who’d never worked for pay before but who saw the customer service work they did at Walmart as an extension of the Christian service values they held dear. Those women didn’t receive a living wage because they were presumed to be married; today, Walmart’s workforce is much more diverse yet still expected to live on barely more than minimum wage."

    How will men react when faced with this? And how will their bosses counter?

    Follow or contact the Rortybomb blog:

      

     

    Business people armwrestling image via Shutterstock.com.

    Share This

  • Mirowski on the Vacuum and Obscurity of Current Economics

    Jul 9, 2013Mike Konczal

    I just finished reading Philip Mirowski’s Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown. It’s fantastic, wonderfully dense, packed with ideas running from Foucault through how game theorists botched the TARP auction design. It provides a stunningly detailed summary of topics economic bloggers would be interested in, ranging from the debate on the Efficient Market Hypothesis after the crisis, the structure of the Mont Pelerin Society, to the way conservatives spread the idea that the GSEs caused the financial crisis. If you like Mirowski’s other works, you'll love this. Mirowski is an economist and a historian, and has a knack for showing the evolving arguments and justifications and contexts for economic ideas and approaches. I'm writing a longer review of it, but I'll be bringing up pieces of it here.

    I wanted to include this part on the issue of the vacuousness within economics at this moment. Mirowski:

    “Third, it would appear that the corporeal solidity of a live intellectual discipline would be indicated by consensus reference text that help define what it means to be an advocate of that discipline. Here, I would insist that undergraduate textbooks should not count, since they merely project the etiolated public face of the discipline to the world. But if we look at contemporary orthodox economics, where is the John Stuart Mill, the Alfred Marshall, the Paul Samuelson, the Tjalling Koopmans, or the David Kreps of the early twenty-first century? The answer is that, in macroeconomics, there is none. And in microeconomics, the supposed gold standard is Andrew Mas-Collel, Michael Whinston, and Jerry Green (Microeconomic Theory), at its birth a baggy compendium lacking clear organizing principles, but now slipping out of data and growing a bit long in the tooth. Although often forced to take econometrics as part of the core, there is no longer any consensus that econometrics is situated at the heart of economic empiricism in the modern world. Beyond the graduate textbooks, the profession is held together by little more than a few journals that are designated indispensable by some rather circular bibliometrics measures, and the dominance of a few highly ranked departments, rather than any clear intellectual standards. Indeed, graduates are socialized and indoctrinated by forcing them to read articles from those journals with a half-life of five years: and so the disciplinary center of gravity wanders aimlessly, without vision or intentionality. The orthodoxy, so violent quarantined and demarcated from outside pretenders, harbors a vacuum within its perimeter.

    Fourth, and finally, should one identify specific models as paradigmatic for neoclassical economics, then they are accompanied by formal proofs of impeccable logic which demonstrate that the model does not underwrite the seeming solidity of the textbooks. Neoclassical theory is itself the vector of its own self-abnegation. If one cites the canonical Arrow-Debreu model of general equilibrium, then one can pair it with the Sonnenschein-Mantel-Debreu theorems, which point out that the general Arrow-Debreu model places hardly any restrictions at all on the functions that one deems “basic economics,” such as excess demand functions. Or, alternatively, if one lights on the Nash equilibrium in game theory, you can pair that with the so-called folk theorem, which states that under generic conditions, almost anything can qualify as a Nash equilibrium. Keeping with the wonderful paradoxes of “strategic behavior,” the Milgrom-Stokey “No Trade theorem” suggests that if everyone really were as suspicious and untrusting as the Nash theory makes out, then no one would engage in any market exchange whatsoever in a neoclassical world. The Modigliani-Miller theorem states that the level of debt relative to equity in a bank’s balance sheet should not matter one whit for market purposes, even though finance theory is obsessed with debt. Arrow’s impossibility theorem states that, if one models the polity on the pattern of a neoclassical model, then democratic politics is essentially impotent to achieve political goals. Markets are now assert to be marvelous information processors, but the Grossman-Stiglitz results suggest that there are no incentives for anyone to invest in the development and refinement of information in the first place. The list just goes on and on. It is the fate of the Delphic oracles to deal in obscurity.” (p. 24-26)

    Konczal here. The entire book is that intense. A few thoughts:

    - To put the first point a different way, the complaint I hear most when it comes to the major graduate textbooks is that they function as cookbooks, or books full of simple recipes each designed to do a single thing. Beyond micro, this is especially true for the major texts in macroeconomics and econometrics. The macroeconomics piece gives the sense that it’s designed to pull attention away from the major visions and towards little puzzle pieces that don’t connect into any kind of bigger picture.

    Scanning the "What's New?" part of the new 2012 edition of the standard, entry-level graduate macro text, it seems like there's nothing new for the crisis. (If it is mentioned, I didn't see it.) If you are an energetic, smart graduate student who really wants to dissect the economic crisis, you essentially have to sit out the first half of your macroeconomic coursework before you get to something that has to do with a recession as a regular person would understand it. It's clear what has priority within the education of new economists.

    I wonder how much the move to empirical methods and experiments are less about access to computing power and data sets (or, ha, issues of falsification), and more about the fact that the ability to innovate on the theory side has broken and it is now impossible to break new ground. How many enfante terribles in economics are theorists these days? I assume any substantial break from standing theory is immediate exclusion from tenure-setting journals.

    - I love this magic trick analogy from Mirowski for frictions within DSGE: “By thrusting the rabbit into the hat, then pulling it back out with a different hand, the economist merely creates a model more awkward, arbitrary, and unprepossessing [that also] violate[] the Lucas critique in a more egregious fashion than the earlier Keynesian models these macroeconomists love to hate” (p. 284).

    - The mention of the “excess demand function” reminded me whether stability issues are covered anymore. The book The Assumptions Economists Make makes a big deal about the lack of stability analysis in how economists discuss general equilibrium (also see Alejandro Nadal here).

    To clarify in English, have you ever heard of the “Invisible Hand” metaphor? Markets equilibrate supply and demand with prices across the whole economy. Stability is the question of “under what circumstances (if any) does a competitive economy converge to equilibrium, and, if it does, how quickly does this happen?”

    Will these concerns come back into graduate education and discussion with the crisis? I got a chance to check out the new 2011 Advanced Microeconomic Theory by Jehle and Reny, which seems to be the new, more mathematically tight, alternative to Mas-Collel (1995) for graduate microeconomics.

    One the first page of their chapter for general equilibrium: “These are questions of existence, uniqueness, and stability of general competitive equilibrium. All are deep and important, but we will only address the first.” Wow. That’s a massive forgetting from Mas-Collel, which covers these issues, even if superficially, to give student an understanding that they are there.

    Going forward, if you ask a new economist “could the economy just stay this way forever?” or “could more commodity trading push prices further away from a true price?” (pretty important questions!) you will probably get a smug “we’ve proven the Invisible Hand handles this decades ago.” Little will he or she know that a gigantic, inconclusive debate occurred about these issues, but they’ve simply been excised down the memory hole.

    Follow or contact the Rortybomb blog:

      

     

    I just finished reading Philip Mirowski’s Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown. It’s fantastic, wonderfully dense, packed with ideas running from Foucault through how game theorists botched the TARP auction design. It provides a stunningly detailed summary of topics economic bloggers would be interested in, ranging from the debate on the Efficient Market Hypothesis after the crisis, the structure of the Mont Pelerin Society, to the way conservatives spread the idea that the GSEs caused the financial crisis. If you like Mirowski’s other works, you'll love this. Mirowski is an economist and a historian, and has a knack for showing the evolving arguments and justifications and contexts for economic ideas and approaches. I'm writing a longer review of it, but I'll be bringing up pieces of it here.

    I wanted to include this part on the issue of the vacuousness within economics at this moment. Mirowski:

    “Third, it would appear that the corporeal solidity of a live intellectual discipline would be indicated by consensus reference text that help define what it means to be an advocate of that discipline. Here, I would insist that undergraduate textbooks should not count, since they merely project the etiolated public face of the discipline to the world. But if we look at contemporary orthodox economics, where is the John Stuart Mill, the Alfred Marshall, the Paul Samuelson, the Tjalling Koopmans, or the David Kreps of the early twenty-first century? The answer is that, in macroeconomics, there is none. And in microeconomics, the supposed gold standard is Andrew Mas-Collel, Michael Whinston, and Jerry Green (Microeconomic Theory), at its birth a baggy compendium lacking clear organizing principles, but now slipping out of data and growing a bit long in the tooth. Although often forced to take econometrics as part of the core, there is no longer any consensus that econometrics is situated at the heart of economic empiricism in the modern world. Beyond the graduate textbooks, the profession is held together by little more than a few journals that are designated indispensable by some rather circular bibliometrics measures, and the dominance of a few highly ranked departments, rather than any clear intellectual standards. Indeed, graduates are socialized and indoctrinated by forcing them to read articles from those journals with a half-life of five years: and so the disciplinary center of gravity wanders aimlessly, without vision or intentionality. The orthodoxy, so violent quarantined and demarcated from outside pretenders, harbors a vacuum within its perimeter.

    Fourth, and finally, should one identify specific models as paradigmatic for neoclassical economics, then they are accompanied by formal proofs of impeccable logic which demonstrate that the model does not underwrite the seeming solidity of the textbooks. Neoclassical theory is itself the vector of its own self-abnegation. If one cites the canonical Arrow-Debreu model of general equilibrium, then one can pair it with the Sonnenschein-Mantel-Debreu theorems, which point out that the general Arrow-Debreu model places hardly any restrictions at all on the functions that one deems “basic economics,” such as excess demand functions. Or, alternatively, if one lights on the Nash equilibrium in game theory, you can pair that with the so-called folk theorem, which states that under generic conditions, almost anything can qualify as a Nash equilibrium. Keeping with the wonderful paradoxes of “strategic behavior,” the Milgrom-Stokey “No Trade theorem” suggests that if everyone really were as suspicious and untrusting as the Nash theory makes out, then no one would engage in any market exchange whatsoever in a neoclassical world. The Modigliani-Miller theorem states that the level of debt relative to equity in a bank’s balance sheet should not matter one whit for market purposes, even though finance theory is obsessed with debt. Arrow’s impossibility theorem states that, if one models the polity on the pattern of a neoclassical model, then democratic politics is essentially impotent to achieve political goals. Markets are now assert to be marvelous information processors, but the Grossman-Stiglitz results suggest that there are no incentives for anyone to invest in the development and refinement of information in the first place. The list just goes on and on. It is the fate of the Delphic oracles to deal in obscurity.” (p. 24-26)

    Konczal here. The entire book is that intense. A few thoughts:

    - To put the first point a different way, the complaint I hear most when it comes to the major graduate textbooks is that they function as cookbooks, or books full of simple recipes each designed to do a single thing. Beyond micro, this is especially true for the major texts in macroeconomics and econometrics. The macroeconomics piece gives the sense that it’s designed to pull attention away from the major visions and towards little puzzle pieces that don’t connect into any kind of bigger picture.

    Scanning the "What's New?" part of the new 2012 edition of the standard, entry-level graduate macro text, it seems like there's nothing new for the crisis. (If it is mentioned, I didn't see it.) If you are an energetic, smart graduate student who really wants to dissect the economic crisis, you essentially have to sit out the first half of your macroeconomic coursework before you get to something that has to do with a recession as a regular person would understand it. It's clear what has priority within the education of new economists.

    I wonder how much the move to empirical methods and experiments are less about access to computing power and data sets (or, ha, issues of falsification), and more about the fact that the ability to innovate on the theory side has broken and it is now impossible to break new ground. How many enfante terribles in economics are theorists these days? I assume any substantial break from standing theory is immediate exclusion from tenure-setting journals.

    - I love this magic trick analogy from Mirowski for frictions within DSGE: “By thrusting the rabbit into the hat, then pulling it back out with a different hand, the economist merely creates a model more awkward, arbitrary, and unprepossessing [that also] violate[] the Lucas critique in a more egregious fashion than the earlier Keynesian models these macroeconomists love to hate” (p. 284).

    - The mention of the “excess demand function” reminded me whether stability issues are covered anymore. The book The Assumptions Economists Make makes a big deal about the lack of stability analysis in how economists discuss general equilibrium (also see Alejandro Nadal here).

    To clarify in English, have you ever heard of the “Invisible Hand” metaphor? Markets equilibrate supply and demand with prices across the whole economy. Stability is the question of “under what circumstances (if any) does a competitive economy converge to equilibrium, and, if it does, how quickly does this happen?”

    Will these concerns come back into graduate education and discussion with the crisis? I got a chance to check out the new 2011 Advanced Microeconomic Theory by Jehle and Reny, which seems to be the new, more mathematically tight, alternative to Mas-Collel (1995) for graduate microeconomics.

    One the first page of their chapter for general equilibrium: “These are questions of existence, uniqueness, and stability of general competitive equilibrium. All are deep and important, but we will only address the first.” Wow. That’s a massive forgetting from Mas-Collel, which covers these issues, even if superficially, to give student an understanding that they are there.

    Going forward, if you ask a new economist “could the economy just stay this way forever?” or “could more commodity trading push prices further away from a true price?” (pretty important questions!) you will probably get a smug “we’ve proven the Invisible Hand handles this decades ago.” Little will he or she know that a gigantic, inconclusive debate occurred about these issues, but they’ve simply been excised down the memory hole.

    Follow or contact the Rortybomb blog:

      

     

    Share This

  • Can the Taper Matter? Revisiting a Wonkish 2012 Debate

    Jun 25, 2013Mike Konczal

    Last week, Ben Bernanke tested the waters for “tapering,” or cutting back on the rate at which he carries out new asset purchases, and everything is going poorly. As James Bullard, the president of the Federal Reserve Bank of St. Louis, argued in discussing his dovish dissent with Wonkblog, “This was tighter policy. It’s all about tighter policy. You can communicate it one way or another way, but the markets are saying that they’re pulling up the probability we’re going to withdraw from the QE program sooner than they expected, and that’s having a big influence.”

    But if you really believe in the expectations channel of monetary policy, can this even matter? Let’s use this to revisit an obscure monetary beef from fall 2012.

    Cardiff Garcia had a recent post discussing the fragile alliance between fiscalists and monetarists at the zero lower bound. But one angle he missed was the disagreements between monetarists, or more generally those who believe that the Federal Reserve has a lot of “ammo” at the zero lower bound, over what really matters and how.

    For instance, David Becksworth writes, “What is puzzling to me is how anyone could look at the outcome of this experiment and claim the Fed's large scale asset programs (LSAPs) are not helpful.” But one of the most important and influential supporters of expansionary monetary policy, the one who probably helped put the Federal Reserve on its bold course in late 2012, thinks exactly this. And that person is the economist Michael Woodford.

    To recap, the Fed took two major steps in 2012. First, it used a communication strategy to say that it would keep interest rates low until certain economic states were hit, such as unemployment hitting 6.5 percent or inflation hitting 2.5 percent. This was the Evans Rule, which used what is called the expectations channel. Second, the Fed started purchasing $85 billion a month in assets until this goal was hit. This was QE3, which used what is called the portfolio channel.

    In his major September 2012 paper, Woodford argued that the latter step, the $85 billion in purchases every month, doesn't even matter, because "'portfolio-balance effects' do not exist in a modern, general-equilibrium theory of asset prices." At best, such QE-related purchases "can be helpful as ways of changing expectations about future policy — essentially, as a type of signalling that can usefully supplement purely verbal forms of forward guidance." (He even calls the idea that purchases matter "1950s-vintage," which is as cutting as you can get as a macroeconomist.)

    To put it a different way, the Fed's use of the portfolio channel only matters to the extent that the Fed isn't being clear in its written statements about future interest rate policy and other means of setting expectations.

    Woodford specifically called out research by the Peterson Institute for International Economics’ (and friend of the blog) Joseph Gagnon. Contra Woodford, Gagnon et al concluded in their research, “[QE] purchases led to economically meaningful and long-lasting reductions in longer-term interest rates on a range of securities [that] reflect lower risk premiums, including term premiums, rather than lower expectations of future short-term interest rates.” (Woodford thinks that expectations of future short-term interest rates are the only thing at play here.)

    Woodford's analysis of this research immediately came under attack in the blogosphere. James Hamilton at Econobrowser noted that “Gagnon, et. al.'s finding has also been confirmed by a number of other researchers using very different data sets and methods.” Gagnon himself responded here, defending the research and noting that Woodford’s theoretical assumptions “are violated in clear and obvious ways in the real world.“ (If you are interested in the nitty-gritty of the research agenda, it is worth following the links.)

    For our purposes, what can the taper explain for us? Remember, in Woodford’s world of strict expectations, QE purchases don’t matter. Since the purchases don't matter, moving future purchases up or down at the margins, keeping the expected future path of short-term interest rates constant, shouldn't matter either. Raising the $85 billion to $100 billion wouldn't help, and lowering it to $70 billion wouldn't hurt, unless Bernanke also moved the expectations of future policy.

    The taper was a test case for this theory. Bernanke meant to keep expectations of future short-term interest rates the same (there was no change to when interest rates would rise) while reducing the flow of QE purchases. But from our first readings, it has been accepted by the market as a major tightening of policy. This strikes me as a major victory for Gagnon and a loss for the strongest versions of the expectations channel.

    Of course, the taper could be a signal that Bernanke has lost his coalition or is otherwise going soft on expansionary policy. If that’s the case, then according to the stronger version of the expectations theory, QE3 should never have been started, because it adds no value and is just another thing that could go wrong. Bernanke should just have focused on crafting a more articulate press release instead. This doesn't seem the right lesson when a body of research argues purchases are making a difference.

    An objective bystander would say that if the taper is being read as tightening even though future expectations language is the same, it means that we should be throwing everything we have at the problem because everything is in play. That includes fiscal policy. As Woodford writes, “[t]he most obvious source of a boost to current aggregate demand that would not depend solely on expectational channels is fiscal stimulus.” We should be expanding, rather than contracting, the portfolio channel, while also avoiding the sequester and extending the payroll tax cut. Arguments, like Woodford's, about the supremacy of any one approach tend to get knocked down by all the other concerns.

    Follow or contact the Rortybomb blog:

      

     

    Last week, Ben Bernanke tested the waters for “tapering,” or cutting back on the rate at which he carries out new asset purchases, and everything is going poorly. As James Bullard, the president of the Federal Reserve Bank of St. Louis, argued in discussing his dovish dissent with Wonkblog, “This was tighter policy. It’s all about tighter policy. You can communicate it one way or another way, but the markets are saying that they’re pulling up the probability we’re going to withdraw from the QE program sooner than they expected, and that’s having a big influence.”

    But if you really believe in the expectations channel of monetary policy, can this even matter? Let’s use this to revisit an obscure monetary beef from fall 2012.

    Cardiff Garcia had a recent post discussing the fragile alliance between fiscalists and monetarists at the zero lower bound. But one angle he missed was the disagreements between monetarists, or more generally those who believe that the Federal Reserve has a lot of “ammo” at the zero lower bound, over what really matters and how.

    For instance, David Becksworth writes, “What is puzzling to me is how anyone could look at the outcome of this experiment and claim the Fed's large scale asset programs (LSAPs) are not helpful.” But one of the most important and influential supporters of expansionary monetary policy, the one who probably helped put the Federal Reserve on its bold course in late 2012, thinks exactly this. And that person is the economist Michael Woodford.

    To recap, the Fed took two major steps in 2012. First, it used a communication strategy to say that it would keep interest rates low until certain economic states were hit, such as unemployment hitting 6.5 percent or inflation hitting 2.5 percent. This was the Evans Rule, which used what is called the expectations channel. Second, the Fed started purchasing $85 billion a month in assets until this goal was hit. This was QE3, which used what is called the portfolio channel.

    In his major September 2012 paper, Woodford argued that the latter step, the $85 billion in purchases every month, doesn't even matter, because "'portfolio-balance effects' do not exist in a modern, general-equilibrium theory of asset prices." At best, such QE-related purchases "can be helpful as ways of changing expectations about future policy — essentially, as a type of signalling that can usefully supplement purely verbal forms of forward guidance." (He even calls the idea that purchases matter "1950s-vintage," which is as cutting as you can get as a macroeconomist.)

    To put it a different way, the Fed's use of the portfolio channel only matters to the extent that the Fed isn't being clear in its written statements about future interest rate policy and other means of setting expectations.

    Woodford specifically called out research by the Peterson Institute for International Economics’ (and friend of the blog) Joseph Gagnon. Contra Woodford, Gagnon et al concluded in their research, “[QE] purchases led to economically meaningful and long-lasting reductions in longer-term interest rates on a range of securities [that] reflect lower risk premiums, including term premiums, rather than lower expectations of future short-term interest rates.” (Woodford thinks that expectations of future short-term interest rates are the only thing at play here.)

    Woodford's analysis of this research immediately came under attack in the blogosphere. James Hamilton at Econobrowser noted that “Gagnon, et. al.'s finding has also been confirmed by a number of other researchers using very different data sets and methods.” Gagnon himself responded here, defending the research and noting that Woodford’s theoretical assumptions “are violated in clear and obvious ways in the real world.“ (If you are interested in the nitty-gritty of the research agenda, it is worth following the links.)

    For our purposes, what can the taper explain for us? Remember, in Woodford’s world of strict expectations, QE purchases don’t matter. Since the purchases don't matter, moving future purchases up or down at the margins, keeping the expected future path of short-term interest rates constant, shouldn't matter either. Raising the $85 billion to $100 billion wouldn't help, and lowering it to $70 billion wouldn't hurt, unless Bernanke also moved the expectations of future policy.

    The taper was a test case for this theory. Bernanke meant to keep expectations of future short-term interest rates the same (there was no change to when interest rates would rise) while reducing the flow of QE purchases. But from our first readings, it has been accepted by the market as a major tightening of policy. This strikes me as a major victory for Gagnon and a loss for the strongest versions of the expectations channel.

    Of course, the taper could be a signal that Bernanke has lost his coalition or is otherwise going soft on expansionary policy. If that’s the case, then according to the stronger version of the expectations theory, QE3 should never have been started, because it adds no value and is just another thing that could go wrong. Bernanke should just have focused on crafting a more articulate press release instead. This doesn't seem the right lesson when a body of research argues purchases are making a difference.

    An objective bystander would say that if the taper is being read as tightening even though future expectations language is the same, it means that we should be throwing everything we have at the problem because everything is in play. That includes fiscal policy. As Woodford writes, “[t]he most obvious source of a boost to current aggregate demand that would not depend solely on expectational channels is fiscal stimulus.” We should be expanding, rather than contracting, the portfolio channel, while also avoiding the sequester and extending the payroll tax cut. Arguments, like Woodford's, about the supremacy of any one approach tend to get knocked down by all the other concerns.

    Follow or contact the Rortybomb blog:

      

     

    Share This

  • What’s New in the New Surveillance State?

    Jun 11, 2013Mike Konczal

    I had a post at Wonkblog over the weekend, “Is a democratic surveillance state possible?”

    In some sense, the issue of the government spying and collecting data on its citizens isn’t a new problem. One of my favorite tweets of the past week was Brooke Jarvis noting "Collapsing bridges alongside massive spy networks... Ah, the Jeffersonian ideal of government."

    The United States has been tracking, observing, and surveilling its citizens for centuries. That includes that long-standing form of communication, the mail. As Senator Lindsey Graham just said, “In World War II... you wrote a letter overseas, it got censored...If I thought censoring the mail was necessary, I would suggest it.”

    From the Census in the Constitution to the Cold War spy network (including the NSA, founded in 1952 through the Executive Branch), maybe this should be seen as a continuation of an old issue rather than a brand new one. But I think there are genuinely new and interesting problems with the 21st century Surveillance State and the brand new digital technologies that create the foundations for it. What’s new about the new surveillance state?

    1. It’s always on and always has been. Old acts of surveillance had to be triggered and were forward-looking. However, we now spend so much of our lives online, and that is always being recorded. As the leaker Edward Snowden said in his interview, “they can use this system to go back in time and scrutinize every decision you've ever made, every friend you've ever discussed something with. And attack you on that basis to sort to derive suspicion from an innocent life and paint anyone in the context of a wrongdoer."

    To the extent that old surveillance was capable of going back, it was by checking old records or interrogating old sources. And there the concept of amnesia comes into play.

    2. It will never forget. “Amnesia” is a normal front line of defense. People forget things. Clear memories, stories, and ideas become grey. Photos and documents get lost with time. Trying to piece together history will necessarily involve a lot of missing gaps and poor recollection.

    Not with the surveillance state. Cheap digital storage means that clear, easily replicable data will exist for the foreseeable future.

    3. It scales easily. If the FBI was keeping records on 100 people in the 1950s, and it then wanted to monitor 1,000 people, it would probably need 10 times as many resources. Certainly it wouldn’t be effortless to scale up that level of surveillance.

    As we can see in the age of Big Data and fast computing, this is no longer the case. The resource costs of accessing your phone’s metadata history versus all phones’ metadata history is going to be (somewhat) trivial. And the fact that there’s no amnesia means that you’ll always have access to that extra data.

    4. It’s designed to be accessible. As Orin Kerr emphasizes, digital data here isn’t collected or surveilled via the human senses. A person can’t simply “peek” into your email the way they could peek at your physical mail. Instead devices need to be installed to access and make sense of this data. Private sector agents will do this, because it is part of their business model to make this information accessible. These access points will also be accessible to government agents under certain conditions - part of the major debate over the PRISM program is under what conditions the government can actually access these devices.

    5. It’s primarily driven by the private sector. Broadly speaking, measures of democratic accountability and constitutional protections do not extend to the private sector. More on this soon, but things like the Freedom of Information Act to the Administrative Procedure Act to our whole regime of transparency laws do not apply to outside businesses. The government has worked with private groups before on surveillance, but here it is in large part driven by private agents, both for contractors and information gathering.

    6. It predicts the future for individuals using mass data. Surveillance has generally used mass data to either predict or determine future courses of action on a mass scale. For instance, Census data is used to allocate federal money, or predict population growth. Alternatively, it uses individual data to analyze individual behavior - asking around and snooping to dig up dirt on someone, for instance.

    The surveillance state, however, allows for using mass data to predict the actions of individuals and groups of individuals. This is what generates your Netflix and Amazon suggestions, but it is also now providing the basis for government actions. As Kieran Healy notes, this would have been interesting back in the American Revolution.

    This is distinct from the normal Seeing Like a State (SLS) critique of how states see their citizens. Some think states produce “a logic of homogenization and the virtual elimination of local knowledge...an agency of homogenization, uniformity, grids and heroic simplification” (SLS 302, 8). But rather than flatten or homogenize its citizens when observed under bulk conditions, it actually creates a remarkably individualized image of what its citizens are up to.

    What else is missing, or shouldn't have been listed? You could view these as a technological evolution of what was already in place, and in some ways that would make sense. But the technology has opened a brand new field. This existed before the War on Terror, and will likely exist afterwards; dealing with the laws and institutions behind this new state is crucial. As the technology has changed, so must our laws.

    Follow or contact the Rortybomb blog:

      

     

    I had a post at Wonkblog over the weekend, “Is a democratic surveillance state possible?”

    In some sense, the issue of the government spying and collecting data on its citizens isn’t a new problem. One of my favorite tweets of the past week was Brooke Jarvis noting "Collapsing bridges alongside massive spy networks... Ah, the Jeffersonian ideal of government."

    The United States has been tracking, observing, and surveilling its citizens for centuries. That includes that long-standing form of communication, the mail. As Senator Lindsey Graham just said, “In World War II... you wrote a letter overseas, it got censored...If I thought censoring the mail was necessary, I would suggest it.”

    From the Census in the Constitution to the Cold War spy network (including the NSA, founded in 1952 through the Executive Branch), maybe this should be seen as a continuation of an old issue rather than a brand new one. But I think there are genuinely new and interesting problems with the 21st century Surveillance State and the brand new digital technologies that create the foundations for it. What’s new about the new surveillance state?

    1. It’s always on and always has been. Old acts of surveillance had to be triggered and were forward-looking. However, we now spend so much of our lives online, and that is always being recorded. As the leaker Edward Snowden said in his interview, “they can use this system to go back in time and scrutinize every decision you've ever made, every friend you've ever discussed something with. And attack you on that basis to sort to derive suspicion from an innocent life and paint anyone in the context of a wrongdoer."

    To the extent that old surveillance was capable of going back, it was by checking old records or interrogating old sources. And there the concept of amnesia comes into play.

    2. It will never forget. “Amnesia” is a normal front line of defense. People forget things. Clear memories, stories, and ideas become grey. Photos and documents get lost with time. Trying to piece together history will necessarily involve a lot of missing gaps and poor recollection.

    Not with the surveillance state. Cheap digital storage means that clear, easily replicable data will exist for the foreseeable future.

    3. It scales easily. If the FBI was keeping records on 100 people in the 1950s, and it then wanted to monitor 1,000 people, it would probably need 10 times as many resources. Certainly it wouldn’t be effortless to scale up that level of surveillance.

    As we can see in the age of Big Data and fast computing, this is no longer the case. The resource costs of accessing your phone’s metadata history versus all phones’ metadata history is going to be (somewhat) trivial. And the fact that there’s no amnesia means that you’ll always have access to that extra data.

    4. It’s designed to be accessible. As Orin Kerr emphasizes, digital data here isn’t collected or surveilled via the human senses. A person can’t simply “peek” into your email the way they could peek at your physical mail. Instead devices need to be installed to access and make sense of this data. Private sector agents will do this, because it is part of their business model to make this information accessible. These access points will also be accessible to government agents under certain conditions - part of the major debate over the PRISM program is under what conditions the government can actually access these devices.

    5. It’s primarily driven by the private sector. Broadly speaking, measures of democratic accountability and constitutional protections do not extend to the private sector. More on this soon, but things like the Freedom of Information Act to the Administrative Procedure Act to our whole regime of transparency laws do not apply to outside businesses. The government has worked with private groups before on surveillance, but here it is in large part driven by private agents, both for contractors and information gathering.

    6. It predicts the future for individuals using mass data. Surveillance has generally used mass data to either predict or determine future courses of action on a mass scale. For instance, Census data is used to allocate federal money, or predict population growth. Alternatively, it uses individual data to analyze individual behavior - asking around and snooping to dig up dirt on someone, for instance.

    The surveillance state, however, allows for using mass data to predict the actions of individuals and groups of individuals. This is what generates your Netflix and Amazon suggestions, but it is also now providing the basis for government actions. As Kieran Healy notes, this would have been interesting back in the American Revolution.

    This is distinct from the normal Seeing Like a State (SLS) critique of how states see their citizens. Some think states produce “a logic of homogenization and the virtual elimination of local knowledge...an agency of homogenization, uniformity, grids and heroic simplification” (SLS 302, 8). But rather than flatten or homogenize its citizens when observed under bulk conditions, it actually creates a remarkably individualized image of what its citizens are up to.

    What else is missing, or shouldn't have been listed? You could view these as a technological evolution of what was already in place, and in some ways that would make sense. But the technology has opened a brand new field. This existed before the War on Terror, and will likely exist afterwards; dealing with the laws and institutions behind this new state is crucial. As the technology has changed, so must our laws.

    Follow or contact the Rortybomb blog:

      

     

    Share This

Pages