Category: Uncategorized
The luck of the Irish
Ireland now has had two quarters of considerably stronger than expected growth, it’s now both gnp and gdp, and domestic demand (!) is up, and borrowing rates are down, though employment remains miserable. Even I am surprised by the positive signs here (I never bought the doctrine of expansionary fiscal austerity, though I saw austerity as necessary for Ireland), and yet now Paul Krugman claims to have expected this all along:
Look, standard Keynesian models, open-economy version, tell a very clear story about what happens when a country pegs its exchange rate at a level that leaves its industry uncompetitive. The country doesn’t stay depressed forever: high unemployment leads to actual or at least relative deflation, which gradually improves cost-competitiveness, which leads to rising net exports and gradual expansion. In the long run, full employment is restored; it’s just that in the long run we’re all, well, you get the picture.
Somehow, reading Krugman, I had the expectation that fiscal austerity would lead to falling output and deflationary pressures and downward spirals for some time to come, at least for open economies with fixed exchange rates in suboptimal currency unions. But put the generalities aside, what were the published claims and predictions about Ireland?:
Here Krugman says Ireland is “gaining nothing” and attacks Trichet for denying “stagnation.” Late 2010 Krugman tells us that the “Irish are suffering from plunging incomes,” “confidence is not improving,” and investors are fleeing the country. No mention of the just around the corner recovery in output and aggregate demand, maybe it didn’t fit the word count. We were told, however, that “confidence just keeps draining away.”
Here is a March 2011 interview where Krugman says (this is the newspaper paraphrasing him, maybe he was misquoted):
Ireland, Greece and Britain are examples of how spending cuts have failed to bring a rise in confidence or benefit growth or the jobs market.
In early 2011 Krugman noted that Ireland’s “medium-term” prospects look “desperate” and he calls it an especially hard case within the eurozone. No mention of the pending recovery in output and aggregate demand.
April 2011, here we are told, discussing Ireland and Greece together, that contractionary policies will shrink output. A similar point was made in 2009, concerning incomes.
Here he graphed the borrowing rate for Ireland and pointed out it was rising because of austerity; in reality the graph continued to update after his post and it shows the rate plunging right after the post was made; yes some of that was EU aid but that same aid has hardly led to falling rates for the other crisis countries.
About a week ago, Brad DeLong pointed out that for the vulgar Keynesian view the long run can stretch for as long as fifteen years. That wasn’t an estimate of when unemployment would go back to normal, but rather of when some version of “classical” macro would start to hold again.
Sorry guys, it is better to admit you were wrong and have what I call a “Horatio moment.” (Here Krugman claims that the austerity advocates have to invent a mythical version of Keynesian economics to claim a false victory.)
You still don’t have to believe that immediate fiscal contractions are expansionary; in general they’re not, but you can still have been wrong about Ireland. The simplest lesson to at least try on is that internal devaluation sometimes does better on the AD side than we are inclined to think, or that real factors mattered more than expected, or a bit of both. Or try Karl Smith’s ideas. It’s not all about the downward spiral, although this was one scenario laid out in Keynes. We should and will await more data, not to mention data revisions, but in the meantime it is correct to be surprised by the much-better-than-expected Irish growth performance, and at a difficult global time at that; you can’t claim the American and European growth locomotives pulled them out of the slump. This expert on the Irish economy offers a sector-by-sector breakdown of the new numbers and he too admits he was surprised.
Addendum: No one is calling Ireland a “success,” nor should we be committed to the view that Ireland can survive the coming storm of eurozone defaults. Don’t let anyone turn this into an “us vs. them” debate on austerity, but rather keep your eye on the ball, namely predictions about how Ireland would fare post-austerity. Nor is the relevant comparison how much of the old output has been won back. Start with the advent of the austerity, circa 2009, and graph your 2009 and 2010 predictions against what actually happened. It ain’t a pretty picture, and I’ll be the first to admit (and apparently I am) that my predictions were incorrect.
Assorted links
1. Jazz for cows, via Chris F. Masse, excellent video.
3. New Cochran and Harpending blog.
4. Interesting interview with Robert Lucas and why he voted for Obama.
5. The pessimism and optimism of Matt Yglesias.
6. Rumored version of the EU plan in the works, involves lots of leverage! Not ready until November 4th, according to this report. Caveat emptor, but to me it sounds plausible as a prediction. Can work if Germany is willing to guarantee the trillions.
Assorted links
1. Are we now in a pure credit economy?
2. Exploding markets in everything, law clerks edition.
3. www.timetravelfund.com. “Morlocks aside…”
4. One theory of cocktail prices.
5. Department of unintended consequences, Star Wars edition.
Self-constraint markets in everything the culture that is Japan
OKITE is a Japanese alarm clock app. It’s designed to help users wake up, but with a twist: it sends embarrassing messages to the user’s Twitter account every time they hit snooze.
“From today on I’m going to head to work via unicycle.”
“I want to buy a fast red Ferrari and a horse!”
“Just as I thought, I want to become a stewardess.”
Here are further examples, all in Japanese.
For the pointer I thank Jordan, a loyal MR reader.
Assorted links
1. Is rugby dying in rural New Zealand?
2. Is the Volcker rule basically gone?
3. Reverse HSAs for Medicaid? (is the state budget nearly gone?)
4. Skepticism about faster than light travel by neutrinos.
5. Denisovan DNA.
Assorted links
1. Lecture by David Stockman, the end of sound money and the triumph of crony capitalism. I disagree with much of it, but a bracing perspective.
2. Facing death, Philip Gould looks back.
3. What Karl Smith is optimistic about.
4. Printed weapons.
5. New law and economics blog for hedge funds, credit risk etc.
Did life come to the universe quite rapidly? (speculative)
Hydrogravitional-dynamics (HGD) cosmology of Gibson/Schild 1996 predicts that the primordial H-He4 gas of big bang nucleosynthesis became proto-globular-star-cluster clumps of Earth-mass planets at 300 Kyr. The first stars formed from mergers of these 3000 K gas planets. Chemicals C, N, O, Fe etc. created by stars and supernovae then seeded many of the reducing hydrogen gas planets with oxides to give them hot water oceans with metallic iron-nickel cores. Water oceans at critical temperature 647 K then hosted the first organic chemistry and the first life, distributed to the 1080 planets of the cosmological big bang by comets produced by the new (HGD) planet-merger star formation mechanism. The biological big bang scenario occurs between 2 Myr when liquid oceans condensed and 8 Myr when they froze. HGD cosmology explains, very naturally, the Hoyle/Wickramasinghe concept of cometary panspermia by giving a vast, hot, nourishing, cosmological primordial soup for abiogenesis, and the means for transmitting the resulting life forms and their evolving chemical mechanisms widely throughout the universe. A primordial astrophysical basis is provided for astrobiology by HGD cosmology. Concordance ΛCDMHC
cosmology is rendered obsolete by the observation of complex life on Earth.
That’s quick (two million years after the Big Bang)! Here is much more (pdf), hat tip goes to Christian Bok on Twitter.
The future of work
“Online education will move from the add-on to the centerpiece,” Cowen told me. “Higher education will move towards a hybrid approach with top faculty teaching online, and motivational coaches working with students on a personal level.” Cowen sees the hybrid model making college education more affordable. He envisions new job opportunities in statistics, search, programming, and logic, “since you need people behind smart machines.” Cowen also envisions job growth in the motivational sector.
A link is here.
Assorted links
1. When will the world have its first trillionaire? In real terms I say never, marginal tax rates will rise to capture the rents, one way or another.
2. What’s in Fred Hersch’s iPod? Very good post, via Jeff.
3. “What is to be done about this cacophony of copulation?”
4. About what is Bryan optimistic and pessimistic?
5. The 1987 Robocop commercials (video). And the new TLS blog.
Cognitive style influences belief in God
From Shenhav A, Rand DG, Greene JD:
Some have argued that belief in God is intuitive, a natural (by-)product of the human mind given its cognitive structure and social context. If this is true, the extent to which one believes in God may be influenced by one’s more general tendency to rely on intuition versus reflection. Three studies support this hypothesis, linking intuitive cognitive style to belief in God. Study 1 showed that individual differences in cognitive style predict belief in God. Participants completed the Cognitive Reflection Test (CRT; Frederick, 2005), which employs math problems that, although easily solvable, have intuitively compelling incorrect answers. Participants who gave more intuitive answers on the CRT reported stronger belief in God. This effect was not mediated by education level, income, political orientation, or other demographic variables. Study 2 showed that the correlation between CRT scores and belief in God also holds when cognitive ability (IQ) and aspects of personality were controlled. Moreover, both studies demonstrated that intuitive CRT responses predicted the degree to which individuals reported having strengthened their belief in God since childhood, but not their familial religiosity during childhood, suggesting a causal relationship between cognitive style and change in belief over time. Study 3 revealed such a causal relationship over the short term: Experimentally inducing a mindset that favors intuition over reflection increases self-reported belief in God.
The link is here and for the pointer I thank Razib Khan on Twitter.
Greece and Benford’s Law
To detect manipulations or fraud in accounting data, auditors have successfully used Benford’s law as part of their fraud detection processes. Benford’s law proposes a distribution for first digits of numbers in naturally occurring data. Government accounting and statistics are similar in nature to financial accounting. In the European Union (EU), there is pressure to comply with the Stability and Growth Pact criteria. Therefore, like firms, governments might try to make their economic situation seem better. In this paper, we use a Benford test to investigate the quality of macroeconomic data relevant to the deficit criteria reported to Eurostat by the EU member states. We find that the data reported by Greece shows the greatest deviation from Benford’s law among all euro states.
The full article is here, hat tip goes to Chris F. Masse.
Assorted links
1. Should it be illegal to discriminate against the unemployed? (is this proposed new law one of the worst ideas ever?)
2. Roland Fryer wins a MacArthur.
3. A credit theory of the recent recession (pdf), in graphs, worth scrolling through.
About what am I optimistic and pessimistic?
Rahul asks:
Reading Tyler’s views on the great stagnation, American deficit, American politics, the Euro, Greece, Medicare, Social Security, climate issues etc. I hardly see a sliver of optimism anywhere.
What things is Tyler really optimistic about?
Beware the fallacy of mood affiliation! (Choosing a view to correspond to an overall desired or appropriate mood.) And don’t overrate the importance of the public sector. A few points:
1. I am a utility optimist and a revenue pessimist; better that than the other way around.
2. Many readers of TGS neglect the last section of the book which notes that a) the great stagnation is going to end, and b) we’ve already made the critical breakthrough, namely internet/computers/smart machines, we just haven’t seen most of the gains yet and they may take longer than most people expect. I’ll be writing more on this.
3. I am a pessimist about the euro but not Europe. The continent will do fine once it gets past this mess, albeit with some suffering along the way.
4. I am optimistic about most social issues, such as the increasing felicity of marriage.
5. I am optimistic about how well immigration will go.
6. I am optimistic about human cognition and the Flynn effect.
7. I am optimistic about the future progress of medical care, albeit with some lags.
8. I am increasingly optimistic about the WMD terrorism issue, though I am not sure if I am in absolute terms an optimist on this issue. The terror groups don’t seem very robust or well-organized, and that may be for reasons which are intrinsic to their operations and ideology.
9. I am optimistic about most developing countries and this is a significant issue.
10. I am a pessimist about climate change and biodiversity, though most other environmental issues seem fine or at least manageable and possibly improving.
11. I am a pessimist about how we treat animals.
12. I am an optimist about restaurants in northern Virginia.
Assorted links
Is the eurozone crisis a sovereign fiscal crisis?
It is fashionable to say no (Greece aside), citing the low reported deficits before the crisis. Spain even had a budget surplus for a while.
Yet the correct answer is “yes, the eurozone crisis is a sovereign fiscal crisis.”
It is not only a fiscal crisis, by any means, but a sovereign fiscal crisis it is and not just ex post.
Let’s say a government had on paper a balanced budget, but wrote a very large naked put, large relative to gdp. That is not a fiscally sound position, even though it may look OK in the published budget. If the implicit financial position becomes a vulnerable one, that government is then insolvent or nearly insolvent, even though you can point to their ex ante balanced budget.
That situation is analogous to the EU, pre-crisis. The implied naked put was the commitment of governments and banking systems to maintain a one-to-one price between euros in German banks and euros in the banks of the periphery countries. That position has now gone bad.
In bad times, and when accounting gimmicks are rampant, a government’s fiscal policy is best understood as a portfolio of options positions, not in terms of a static balance sheet.
To point to the initial balance sheet is to miss why the whole system didn’t work in the first place.
That said, it remains the case that fiscal austerity on the published balance sheet isn’t a solution. The governments either have to stop writing the naked puts or prove they can make good on them.