Sunday, January 1, 2012

The First Day of the Rest of Your Life (or At Least the Election Cycle)

Happy 2012, everyone. Between now and November, we're bound to see something really special! It's only January 1st, but so far wow--

Brad DeLong gets on my bandwagon with his take on the latest Iowa poll:
  • Says Anything 24%
  • Newsletter 22%
  • Man on Dog 15%
  • Three Wives 12%
Fun figuring out who's who. Steve Benen helps with the analysis:
The results, however, come with a very important caveat: the Iowa Poll was conducted Tuesday through Friday, and the results from the first two days were quite different from the last two days.
[T]he four-day results don’t reflect just how quickly momentum is shifting in a race that has remained highly fluid for months. If the final two days of polling are considered separately, Santorum rises to second place, with 21 percent, pushing Paul to third, at 18 percent. Romney remains the same, at 24 percent.
“Momentum’s name is Rick Santorum,” said the Register’s pollster, J. Ann Selzer.
(h/t Paul Krugman)

Matthew Yglesias, now over at Slate, predicts a vibrant economy for 2012. I'm a natural-born optimist, so I want to believe his take:
This increase in economic activity will boost state and local tax revenue and end the already slowing cycle of public sector layoffs. Re-employment in the construction, durable goods, and related transportation and warehousing functions will bolster income and push up spending on nondurables, restaurants, leisure and hospitality, and all the rest. Happy days, in other words, will be here again.
None of that means we’ll remember 2012 as the best of times. What we’re talking about is a spurt of rapid employment growth from a low base, not a tight labor market and rapidly rising wages like we had in the late ’90s. But compared with the past four years, it’ll look like a magnificent boom.
Unless, that is, policymakers screw it up. If you imagine a world in which several million people go from unemployed to daily commuting, and large numbers of people abandon their roommates and get a place of their own, then there are likely going to be spikes in the prices of gasoline, rent, and other commodities. This will temporarily push inflation above normal levels and increase pressure on the Fed to tighten money and nip the boom in the bud. The central bank’s recent statements indicate that they won’t do this, but they haven’t been as clear as they should be. Betting against policymaker screw-ups is a risky proposition—the Eurozone elite managed to spend the entire fall acting in bizarre and counterproductive ways—but barring a trade-destroying natural disaster, we’re looking at a recovery, if we want one.
 Would be nice, wouldn't it? Then again, who would want to screw up our economic policy at this point?

A commenter at David Andolfatto's blog -- where he once again appears to distort models to prove that Paul Krugman's attack on Robert Lucas was unjustified -- named Jefferson Smith explains what is really going on in the econ blogosphere wars (it's in a comment that I don't know how to link to, so here it is in its entirety because it's spot on and absolutely hilarious; kudos!):
Jefferson Smith said...
Like other commenters, I'm a little puzzled as to why we're spending all this effort to read between the lines of speakers who are still with us and have every opportunity to clarify their remarks themselves if they choose to. However, since that's what's afoot, let me return the favor you're doing Lucas and explain what I believe Krugman is really saying. I will attempt as best I can to express this mathematically.

As I understand it, economists propose models (M) designed to explain data (D) in such a way as to produce a generally accurate picture of what's actually happening in the world. The goal is:

M + D = F

where F is, approximately, the facts -- what we see actually happening, like interest rates rising or falling and such. (Sorry, your site here isn't allowing me to do the wavy equal sign for approximation. My own model will be accordingly limited. But, onward.)

Once we have a proven model, we can use it to decide upon policies (P):

M -> P

The problem is that rightist economists have a PREFERRED set of policies. Call this P(r). Of course, so do liberal/left economists; let's call this one P(k), with "k" standing for Keyenesian or Krugmanite, as you wish. What's been happening in recent years is that M(r), the models preferred on the right, when added to D, do not equal or approximate F. But M(k), the liberal / Keyesian models, do. Therefore, M -> P(r) doesn't hold; a correct M appears to imply P(k).

Krugman has devoted tens of thousands of words over these last few years to chronicling the right's various responses to this. One popular one has been to deny or redefine D, replacing actual D with a right-preferred D(r): claims, for instance, that inflation is up even though it isn't. Similarly with F, which has given way on the right to a mythical F(r) -- a world in which, for instance, Spain was profligate before the crash, Ireland is doing well now, and, more to the immediate point, stimulus spending didn't help the U.S. economy. All of these are attempts to shore up the implausible view that, because P(r) MUST be the correct policies, the model we should be using is M(r):

M = M(r)

even though it's increasingly clear that

M = M(k).

What Krugman is saying about Lucas is that he has found yet another strategy for aligning M and M(r): simply redefine M(r) -- where "r" means both rightist and, for this purpose, Ricardian -- to be something other than it is. In other words, there is now a "Lucasian" M(r), which we'll call L(r). Your analysis above is an attempt to explicate and defend this special kind of Ricardian modeling.

So here's where I think you're talking past Krugman. He doesn't mean that Lucas "doesn't understand" Ricardian equivalence in the sense that he fails to grasp the way M(r) would be explained in textbooks. He means that Lucas willfully insists that M(r) is really L(r), because his ultimate goal is to save P(r) against an F that refuses to point to that outcome. He is also unhappy that

M(k) + D = F -> P(o)

where P(o) is the set of policies advocated in the Obama administration by people like Christine Romer. So as a further rhetorical flourish, he insults Romer in the way you've mathematically tried to justify.

Hope this helps. Happy new year.
The debate continues here and here. Fun stuff! Happy New Year indeed.

1 comment:

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