Sunday, April 24, 2016

Hysteresis and 9/11

Noah Smith says I got mad at Gerald Friedman. What makes me mad are cheap shots like this:
Honestly why would anyone positively cite Joan Robinson - she literally endorsed the economy of North Korea
In the 1970’s, there were very few women graduate students seeking Ph.Ds in economics. One of my professors suggested we need more role models like Joan Robinson. I would say his office made me think of what libraries must have looked like in the 19th century except for the fact that it was dominated by papers by Dr. Robinson. She may have been very liberal but she was also a first rate economist. Her The Economics of Imperfect Competition for example should be required reading for all Econ 101ers. But let me get straight to the point by asking what Brad DeLong meant here:
These are principal causes of "hysteresis". I do not believe that the output gap is the zero that the Federal Reserve currently thinks it is. But it is very unlikely to be anywhere near the 12% of GDP needed to support 4%/year real growth through demand along over the next two presidential terms. We could bend the potential growth curve upward slowly and gradually through policies that boosted investment and boosted the rate of innovation. But it would be very difficult indeed to make up all the potential output-growth ground that we have failed to gain during the past decade of the years that the locust hath eaten
The comments from JW Mason to my post indicate a couple of things. He is mad at me and he is also interpreting these lines differently than I do. I will offer an analogy to what Brad was saying that goes back to the fall of 2001, which was very painful for residents of New York City. I bet a lot of my neighbors on the morning of September 12, 2001 wishes they had Brad’s “magic wand” so it would be September 10 with the Twin Towers still standing and those 3000 lost souls still alive. Maybe it was the home run from Mike Piazza but many New Yorkers quickly wanted the rebuilding of the World Trade Center to start very soon. Sure it would take time but then again we had a 1.8% output gap at the end of 2001 according to even perhaps a conservative CBO estimate. And many of us were angry that the politicians took so long to get this rebuilding started. But we did and the World Trade Center is rebuilt. And in the current economy, many of us are saying we need to rebuild the subway system, Penn Station, and even our airports. My complaint with Friedman as well as Mason is that they are claiming liberal economists argue we are at full employment and should not be doing fiscal stimulus. Here is one of JW’s examples:
LMGTFY: I'm directly quoting his post. Really, are you incapable of imagining that genuine disagreement is possible on this issue?
This is sad as I have noted that there is disagreement on the size of the output gap with Brad noting it may be bigger than others think. Brad also is arguing that aggregate demand stimulus alone could raise the employment to population ratio to 62.5%. So Brad cannot be one of those liberal economists who is arguing we should not do vigorous fiscal stimulus now. Nor can this charge be levied at Krugman, Stiglitz, or Summers. So who are they referring to? Noah notes:
On Twitter, Mason clarified that when he talks about "the people running the show," he meant the Republicans, not Krugman, the Romers, et al.
OK! Are these folks those “establishment economists”? If JW is referring to Robert Lucas, the term “liberal” is odd. And if the Federal Reserve is listening to Lucas, I will concede this is a big mistake. In my post, my anger was from the blatant misrepresentation of what others have been saying. I was applauding the efforts to enhance the original Gerald Friedman attempt at analysis. I will just say this. If Bernie Sanders does become President, he is going to need a credible economic model even before we sit down at our next Thanksgiving feast. Waiting until a few graduate students present their findings next summer will not be soon enough. But let me get to what I think Noah’s point was:
Friedman and Mason seem to be arguing that our belief about the facts should be driven, at least in part, by our desire to avoid a feeling of powerlessness. They also seem to be saying that if the facts seem to support conservative policies, even a tiny bit, we should reinterpret the facts. I don't like this approach. It seems anti-rationalist to me, and I think that if wonks behave this way, they'll end up recommending lots of bad policies.
This is really a damning comment on the level of that “schlock economics” charge levied at Romer by Lucas. Look – when I was in school, I was told politics is cool. I will admit Bernie Sanders is considered hip, which is fine. Noah is suggesting economists should be nerds, which is likely good advice. Call me a nerd.

5 comments: said...

On the matter of Joan Robinson and North Korea, this is not as silly as many think. When she visited Pyongyang in 1964 in fact North Korea had a substantially higher real per capita income than did South Korea, which basically had no growth during the 1950s under Syngman Rhee, while the DPRK followed a Stalin model of forced industrial growth, which can work for awhile and did so in North Korea. Pyongyang was largely rebuilt from the Korean War, while Seoul was not, which she accurately reported. She basically visited there at (or just after) the moment when this gap with North Korea on top was at its maximum point. By then South Korea was growing more rapidly and would soon catch up and then way surpass North Korea. Given how far the comparison has gone the other way it is easy to forget that it was the other way in the early 60s (or as is more likely, most people simply do not know).

OTOH, where I would say she is more open to criticism is that for a period of time she was quite impressed with Mao and Maoism and defended some pretty awful stuff in China, although it is my understanding that she moved off that position by the time she died. In any case, dissing her because of her statements about the North Korean economy just make the disser look like an ignorant fool.

Jack said...

"These are principal causes of "hysteresis"." First, we should all recognize that the phrase should be economic hysteresis inn order to acknowledge that this is once more an example of social scientists taking a recognized concept from the physical sciences, hysteresis, and attempting to apply that concept to explanations of macro-behavioral phenomenon. In effect is sounds scientific, but that's about the extent of the validity of such an application. So how then can the "principal causes" of an inauthentic conceptualization, which may have no validity, be identified? Co-opting a scientific concept does not validate the application of that concept to a less than scientific conceptualization.

Homer Paxton said...

She was perhaps the most readable economist I have ever read!

JW Mason said...

I think we agree that DeLong claims that a fall in demand reduced GDP on the order of 10%, but that an increase in demand can raise it only on the order of 4%. I think this is a strong claim.

Insofar as current output affects productivity growth, the effective laborforce, etc. there is no reason to believe these effects are asymmetric. And there is lots of evidence that they are in fact symmetric -- see for instance Laurence Ball's work on hysteresis, which finds that periods of high and low unemployment have similar long run effects.

If you believe that temporary demand shifts can have permanent effects on output, this strengthens rather than weakens the case for expansionary policy -- unless you have strong arguments that this effect is one way only. Where are those arguments?

Note that the Romer and Romer response to Friedman explicitly assumed there are no long run effects of demand. Pointing out his assumption that fiscal policy has persistent effects is the most damning criticism they make of him. Yet when DeLong says that the failure to provide adequate stimulus in 009 has permanently reduced output, he is making exactly the same assumptions about persistent effects of fiscal policy that Friedman did. Who do you agree with, DeLong or the Romers?

The fastest growth in the 20th century in the US came in the late 1930s and 1940s. Most people would say that very rapid growth was made possible because of the low level of activity in the depression. Do you disagree with this? Do you think it is just a coincidence that the deep fall in output in the early 1930s was followed by rapid growth that returned GDP to the earlier trend? If it was a coincidence, are you suggesting that the rapid growth of the WWII period could have continued indefinitely? And if you don't think it was just a coincidence, then why isn't similar catchup possible today?

As for whether I'm mad. Well, you described me as "dishonest" and "lying." Those comments were picked up by Noah Smith and Brad DeLong, people with much bigger platforms than mine, and used to make the case that I am a political opportunist who doesn't care about the truth. You did this from the comfort of anonymity, while I write under my own name, with my own reputation at stake. So yes, I'm a little mad.

JW Mason said...

I notice you are playing the same game, quoting Noah's (totally false) claims about me. It's a nice trick. You say I'm a liar, Noah speculates about why I'm a liar, and then you quote his speculations.

If you are a decent person, you won't claim that I am a liar, that I am indifferent to the truth, unless you have much stronger reason than our disagreement here. If you are a decent person, you won't go attacking other people's reputations unless you are willing to put your own at stake too.

That's all from me.