Arithmetic and Heritage Foundation’s Chief Economist

Heritage Foundation has a new “chief economist”?

That's why Heritage's most recent hire could mark a potential return to normalcy and respectability for the foundation. The new man is Stephen Moore, most recently of the Wall Street Journal's editorial page, who is joining Heritage as its chief economist. He has previously worked at Heritage in the 1980's, the Cato Institute, and Club for Growth before spending the last nine years at the Journal.

I’ve read some of what Stephen Moore has written in the past and I was shocked that anyone would call him an economist. But I hear he did receive an M.A. in economics over 30 years ago. But seriously. Paul Krugman notes:

Moore has adamantly denied that the demand side can ever matter, at all. And he has done so in flat-out know-nothing terms: hey, never mind “fancy theories” that conflict with “common sense”.

Never mind fancy theories – let’s talk about 3rd grade arithmetic. Several years ago, Moore tried to convince his National Review readers that corporate income was subject to a 73% effective tax rate by summing the 35% corporate tax rate with an 38% individual rate faced by high income households. Never mind that this calculation ignores the deferral benefits most corporate tax attorneys get – it is just incredibly bad math as was pointed out by Kevin Drum and Brad DeLong. Suppose your shares in IncrediblyBadTaxPlanning Corporation generated $100 in pretax income in 2013 and they actually paid you a $65 dividend immediately. You pay a 38% tax on the $65 – not the $100. That comes to $24.70 – not $38. Brad found another arithmetic error with his:

Wall Street Journal Total Fail: Stephen Moore Takes a Weighted Average of 2% and 48% and Gets 50

Stephen Moore really did write:

Federal workers on balance still receive much better benefits and pay packages than comparable private sector workers, the Congressional Budget Office reports. The report says that on average the compensation paid to federal workers is nearly 50% higher than in the private sector, though even that figure understates the premium paid to federal bureaucrats. CBO found that federal salaries were slightly higher (2%) on average, while benefits -- including health insurance, retirement and paid vacation -- are much more generous (48% higher) than what same-skilled private sector workers get.

Let’s generously assume that the weight for benefits should be 30%. Then the weighted average is less than 16%. I’m told that Stephen Moore is not trying to deceive his readers as he actually believes the nonsense he writes. But then my question is why would anyone call someone who is this challenged by simple arithmetic their “chief economist”?

The Wisdom of Robert Waldman

 At Angry Bear:

"The assumption of a unique exogenous long run growth path absolutely does not follow from the D, S, G or E parts of DSGE. It is a separate assumption –a methodological a priori not an implication of other standard
 assumptions."

Amen.

Fallacy vs. Fallacy

"It may be reading too much into recent experience, but one could also argue that under certain constraints the lump of labour fallacy is no fallacy at all." -- R.A., The Economist Free Exchange blog

So much for the lump of labor, then, but how about the fallacy of the null-hypothesis significance test? Although not quite as alliterative and comical as the lump of labor, the latter fallacy has the merit of referring to something economists actually do -- and frequently do wrong, as Stephen Ziliak and Deirdre McCloskey argued in their book, The Cult of Statistical Significance.

I want to call attention to a rare direct encounter between the fallacy of the lump of labor and the fallacy of the null-hypothesis significance test that was highlighted in an Associated Press story,"Will Surge of Older Workers Take Jobs From Young?"  at the beginning of the year. The AP story revolved around a research report from the Boston College Center for Retirement Research, "Will delayed retirement by the baby boomers lead to higher unemployment among younger workers?"

After trotting out the ersatz theory of the lump of labor as a red herring and/or stalking horse, the authors of the report, Alicia Munnell and April Wu, conducted a regression analysis to find out if there was any "crowding out" of youth by increased employment of older people. To make a long story short, Munnell and Wu didn't find any crowding out.

To be more precise, however, what they actually "found" was no statistically significant association between older workers' employment and young people's unemployment. Surprising as it may sound, the two finding are not identical. In this particular case, there may be grounds to suspect that the statistical result yields no credible information about whether or not there is an effect.

Explaining why gets a bit technical, so bear with me. Munnell and Wu point out, in a footnote, that their model has excluded the state unemployment rate "when outcome variables are age-specific unemployment/employment rates by state, due a to a high degree of collinearity." Superficially, that sounds like a reasonable thing to do because otherwise the said high degree of collinearity would confound the results of the analysis. But is it? You can take the collinearity out of the model but you can't take it out of the sample you are studying.

Here's what Kevin Arceneaux and Gregory A. Huber wrote about multicollinearity in 2007 (emphasis added):

First, where MC exists, it is a basic characteristic of a sample. No amount of statistical machinations, however clever or sophisticated, will allow a researcher to identify the independent effects of regressors that are obfuscated by MC. A simple way to diagnose MC is to calculate the pairwise correlations between potentially collinear independent variables or to calculate Variance Inflation Factor scores (Gujarati 1992). If MC obscures the independent effects of certain variables, a joint significance test will nonetheless allow the researcher to test whether the variables are statistically significant as a group. 

Second, omitting variables from a regression model in an effort to eliminate MC is a cure certainly worse than the disease. This method requires strong assumptions about values of parameters and potentially introduces bias into the remaining model coefficients. At the very least, researchers who drop variables in this way are making the assumption that an omitted variable, X, has no effect on Y, rather than demonstrating so. 

Third, especially in small samples, where even moderate MC can make finding statistically significant coefficients for individual covariates with a real effect on Y less likely, the lack of statistical significance of a coefficient estimate should not be taken as grounds for concluding that the variable has no effect. In small samples, MC can reduce statistical power dramatically, obscuring effects where they exist and leading researchers to make inferential errors if they decide to drop a seemingly extraneous variable.

To sum up: collinearity is a characteristic of the sample, omitting variables is a cure worse than the disease and lack of statistical significance should not be taken as evidence of no effect. At the very least, then, one would expect Munnell and Wu to cushion their reported results with academic qualifications and cautions. But no.

Let's take a look at how an earlier economist, using prose instead of regression analysis dealt with the same issue that Munnell and Wu study. Harold L. Sheppard,"The Issue of Mandatory Retirement," (1978)

In times of prosperity and worker scarcity, however, discrimination against older workers can still prevail, all of which suggests that the phenomenon cannot be strictly understood within narrow economic variables. But regardless of the economic environment, much of our thinking regarding mandatory retirement and its relationship to job opportunities may, in the opinion of some economists, reflect the time-honored and -worn doctrine of other economists of a fixed lump-of-labor theory, that regardless of economic policies, there are only so many jobs to be passed around, and that the only remaining issue is how to ration them among would-be workers of varying socioeconomic categories. 

In this connection, there are other aspects of the retirement issue that should be noted; for example, a special form of involuntary retirement just as compelling as a formal mandatory retirement age. In my own analysis of data from the Department of Labor's National Longitudinal Survey, it was determined that the level of area unemployment may influence the rate of early retirement. For instance, in areas with an unemployment rate of more than 6 percent in 1973, 31 percent of white males 60-64 were retired, compared to 28 percent in areas with 4.1-6.0 percent unemployment, and only 24 percent in areas with 4 percent or less unemployment. This is a type of involuntary retirement that is rarely noted. 

The other economic doctrine somewhat in contrast to the fixed-lump-of-labor one is that an increase in employment (or in this case, the retention of a given group of workers), through a variety of policies, produces sufficient purchasing power to stimulate the further hiring by employers of all, or many, of the remaining cohort of would-be workers. According to this purchasing power doctrine, then, it is possible to remove so many "older" workers from the labor force that total purchasing power declines, support costs go up, and the resources for hiring other cohorts thereby are diminished -- and few, if any, win. However, there has been no systematic and reliable testing of either of these doctrines.

Note that other economic doctrine! Might this be a case of fallacy vs, fallacy vs. fallacy? 

Labour Markets: "A crazy explanation for what is happening to workers"

Ryan Avent at the Economist:

"It may be reading too much into recent experience, but one could also argue that under certain constraints the lump of labour fallacy is no fallacy at all."

One could, couldn't one?

Origin of the Term "Econoblogosphere": An Egomaniacal Post

Oh, I cannot resist.  I am going to claim to be the original neologizer of the now widely used term, "econoblogosphere."  Miles Kimball has just posted a video on its .future , which has also been linked to by the intrepid Mark Thoma on his links for 01-17-2014.  I have also seen it increasingly used by, well, lots of widely read people, including Paul Krugman and many others.  So, I am going to lay out my claim to be the first to coin the term and use it in, well, the eonoblogosphere, indeed anywhere in cyberspace or any other space, :-).

I did so in my very first post on this blog, back on September 2, 2007, not in the title, but in the body of the message, when I introduced myself to readers of this blog.  It appears on line 5 of the second paragraph.  I cannot say for sure that it is the first such usage, however, I know that when I used it there, I had not seen it before and consciously made it up.  Now, I have done some checking, inspired by this missive by Miles, googling all sorts of combinations, names, years, dates, this and that, and it appears that shortly after my post on September 2, others started using it later that month, Andrew Samwick on Sept. 22 and Felix Salmon on Sept. 29, being the first two I could find, but none others prior to them.

I am not going to claim that they got it from me, although this is not out of the question as Tyler Cowen had posted about me posting at Econospeak just before my first post on his Marginal Revolution, so maybe they checked it out and got it from there.  However, more likely is that at least one if not both of them thought it up on their own.  The term "econobloggers" had been floating around for months, so it was an obvious neologism to make.  This is probably one of those cases of near simultaneous independent invention that often happens, such as with Newton and Leibniz for the calculus (obviously a much less important issue than this one, :-))., but I am going to stake my ground here and now as probably being the first to have done so, until someone proves otherwise, :-).

Barkley Rosser

Added and see first comment:  Have since found earlier use on November 13, 2006 by Mark Newmark of Newmark's door discussing the ranking of eocnomics blogs by Gongol.  Sic transit gloria, :-).

"The long-debunked fallacy known as Say’s Law..." -- a perplexing guide to the perplexed

"With this I buy bread?"

"You want bread? Bang a baker!"

Paul Krugman wonders why don't da bunk stay debunked? He should ask a falleontologist (rhymes with paleontologist). When I was at Cornell, many decades ago, I came across an article and then a doctoral dissertation by Daniel Ellsberg that demonstrated the difference between risk and ambiguity. More recently I encountered a lovely explanation by Jeff Gill of the invalidity of the "probabilistic modus tollens" ("Ho" signifies the null hypothesis):

The basis of the null hypothesis significance test rests on the logical argument of modus tollens (denying the consequent). The basic strategy is to make an assumption, observe some real-world event, and then check the consistency of the assumption given this observation. The syllogism works like this:  

If A then B | If Ho is true then the data will follow an expected pattern
Not B observed |The data do not follow the expected pattern
Therefore not A | Therefore Ho is false.  

The problem with the application of this logic to hypothesis testing is that the certainty statements above are replaced with probabilistic statements, causing the logic of modus tollens to fail. To see this, reword the logic above in the following way:  

If A then B is highly likely | If Ho is true then the data are highly likely to follow
an expected pattern
Not B observed |The data do not follow the expected pattern
Therefore A is highly unlikely |Therefore Ho is highly unlikely 

Initially, this logic seems plausible. However, it is a fallacy to assert that obtaining data that is atypical under a given assumption implies that the assumption is likely false: almost a contradiction of the null hypothesis does not imply that the null hypothesis is almost false (Falk and Greenbaum 1955). For example (Cohen 1994; Pollard and Richardson 1987):  

If A then B is highly likely | If a person is an American then it is highly unlikely
she is a member of Congress
Not B observed | The person is a member of Congress
Therefore A is highly unlikely | Therefore it is highly unlikely she is an American.  

From this simple little example and the resulting absurdity it is easy to see that if the P(CongresslAmerican) is low (the p-value), it does not imply that P(Americanl Congress) is also low.

The ambiguous subject matter of economic analysis is thus not once but twice removed from the logical syllogism of modus tollens. Is it any wonder that economists keep trying to shine their boots with poop? I repeat: risk is not ambiguity, lime is not coconut, probability is not logic, coconut is not hedgehog. Therefore, the hedgehog is not a lime.

What does this have to do with the lump of labor? Plenty. Dudley Dillard (1988) called Say's Law a corollary of the Wages-fund doctrine. John Wilson (1871) denounced a "trade unionists' version" of the by then discredited Wages-fund doctrine that latter came to be known as the "Theory of the Lump of Labour" (Alfred Marshall dubbed his version of the lump of labor fallacy, the fallacy of the fixed "work-fund" an obvious play on the old wages-fund notion). Raymond Bye, whose introductory economics textbooks were ubiquitous in the 1920s, 30s and 40s, denounced the lump of labor fallacy because it violated Say's Law. Jevons's Paradox... And so, on and on we go, round and round, where it stops nobody knows. Say's Law is/isn't Say's Law is/isn't the Wages-fund doctrine is/isn't the lump of labor fallacy is/isn't Say's Law.

Just remember: ambiguity is not risk, risk is not logic, ambiguity is not logic.

Penny Wise and Pound Foolish Cuts to the IRS Budget

Multinationals of the world rejoice:

The Senate, by a vote of 72–26 on Jan. 16, passed the omnibus appropriations bill (H.R. 3547) to fund the federal government through fiscal year 2014. The bill now moves to President Barack Obama's desk for his signature. The House passed the appropriations bill Jan. 15 by a vote of 359-67. The legislation allocates $11.3 billion to the Internal Revenue Service, a decrease of $526 million, or 4.4 percent compared to the previous year's enacted level.

[Source: BNA]. Reducing the IRS budget allows multinationals to abuse transfer pricing in order to source less income in the U.S. I guess multinationals might be upset that some of our trading partners are increasing their transfer pricing enforcement. But as long tax rates abroad are lower than ours – particularly in those tax havens – allocating less of their profits here means lower effective tax rates. Of course, U.S. based multinationals must defer the repatriation of their profits at least until Congress decides once again to take the bone head move of offering another tax holiday on such repatriated profits. OK – we argued back in the Bush years that the repatriated profits would lead to more investment but we know the vast bulk of repatriated profits were paid as dividends to shareholders.

Say against Say: lower wages won't clear labor markets (It's the law!)

L'offre crée sa propre demande (supply creates its own demand) does not mean the same thing as un produit terminé offre, dès cet instant, un débouché à d’autres produits pour tout le montant de sa valeur (the finished product offers, from that moment, an outlet for other products for the entire amount of its value). For starters, la loi des débouchés is an argument about heterogeneity, not simply about quantity. It is also an argument about proportion, with "the entire amount of its value" qualifying the extent to which any given finished product constitutes a demand for other products.

La loi is thus more robust than "supply creates its own demand" but also more ambiguous. Critics of Say's Law have faltered on its robustness while proponents have ignored its ambiguity. In an 1821 letter to Malthus, Say supplied ammunition to those who would champion a doctrinaire reading of the law. With the proviso, "supposing even they immediately find capitals to set them to work at a fresh business," Say sought to refute Sismondi's objections to machinery as a cause of unemployment. Say's reasoning may seem circular here but I think the error is more substantial even than a mere affirming of the consequent: a rigorous application of Say's law of markets would conclude the opposite of what Say assumes in his letter to Malthus!

How so? In assuming displaced workers "immediately" are set to work in a "fresh business," Say at once treats labor as a commodity in two incompatible ways. On one hand, Say treats labor as a differentiated "finished product" that can be displaced by a machine which substitutes for its speciality. On the other hand, though, labor (power) is assumed to be an undifferentiated general capacity that can readily be adapted to a new trade. The elixir for this fantastic transformation from leaden particularity to golden generalization is, presumably, the wage. Given a wage of zero in their former occupation and a positive wage, however low, in the fresh business, displaced workers can be counted on to make the transition. The only fly in this alchemical ointment is the stubborn aversion of workers to low wages.

Of course not every redundant blacksmith can make the leap to concert pianist, even given a low enough starting wage. But people are adaptable, so the thinking goes. For finished products, though, Say's law offers no such reprieve. There can be no general glut of overproduction, only overproduction of some products co-existing with underproduction of others. The "fresh business" idea would come in handy here. If there are too many overshoes produced, it is simply a matter of re-labeling them as flower pots, of which there happens to be a shortage!

Sarcasm aside, Say's segue from workers being displaced by machinery to workers set to work in fresh business, from the particular to the general, raises the spectre of a general glut in the labor market, which -- because all labor is treated as homogeneous -- is not amenable to "redirection" by wage signals from localized gluts to localized shortages. Furthermore, in some industries the substitution of machines for labor power would be irreversible other than, hypothetically, at a negative wage because of the sunk costs in machinery.

With regard to labor markets, the phrase "supply creates its own demand" is not only not Say's Law; it violates Say's Law!

Will The US Congress Choose To Go To War With Iran?

Unfortunately this looks like a serious possibility.  I know that the entire rest of the world, with the exception of the Israeli leadership and the leaders of the Saudi royal family, want the Congress not to pass the current bills to impose further economic sanctions on Iran, just as the Obama administration has succeeded in getting an interim nuclear agreement on nuclear weapons with them, with negotiations ongoing to achieve a final agreement, which would almost surely be ended by the Congress passing these bills.  While public opinion, including a solid majority of the US Jewish population, supports this agreement, we have a bipartisan group of Senators now approaching getting enough votes for this insane legislation to overcome a presidential veto.  This is a new low for a body that has already put on so many shows of mass stupidity in the past, although this time there are a bunch of Democrats on board rather than it being some circus put on by Tea Party dingbats.

Iran's leader, Ali Khamenei, has issued fatwas against nuclear weapons.  I have posted this point more times than I can count, but regularly when I tell people this, the reaction is, "Oh, he is just doing that to trick us."  Not likely. He is a religious leader issuing a religious proclamation, and it should be taken seriously.  Of course while Ahmadinejad was president it was easy to ignore that Khamenei was really in charge and to focus on all the crazy statements that Ahmadinejad would make on a regular basis.

Then there is the myth that if the US just presses hard enough, this will be like South Africa or the USSR and the system will collapse to be taken over by pro-US  reformers who will abjure nuclear weapons.  Well, first of all, US pressure on Iran, just like the sanctions on Cuba, simply allow hardliners in Iran to justify their repressions and general bad behaviors.  However, the part that most people really do not understand is that the vast majority of Iranians, including openly and clearly the Green Movement opposition, support Iran having a civilian nuclear program, which is what the government has always claimed is what they are pursuing.  If somehow a bunch of secular reformers were to overthrow the Islamic regime, they would continue the programs, although maybe then we would say it is OK.  After all, the Iranian nuclear program originally started back when the Shah was in power with US assistance.

While passing the sanctions would end this round of negotiations and put the hardliners back in charge over reformist President Rouhani, the Iranians probably would not move to obtain nuclear weapons immediately because of Khamenei's fatwas.  But he is old, and if it becomes clear that it is simply impossible to achieve any sort of agreement on the matter with the US, his successor as Vilayat-al-faqi might well overturn his anti-nuclear weapons fatwa, and war might well then be the result.

After all, two months after he became president, Bush ended the ongoing negotiations about nuclear weapons with North Korea, with advisers inspired by Nicholas Eberstadt's prophecies of the imminent collapse of the regime whispering in his ears.  Instead, the North Koreans moved to obtain nuclear weapons, and their noxious regime remains in place, possibly worse than ever under the rule of Kim Jong-Un.  A similar outcome in Iran would be highly likely if Congress passes this awful legislation.

Barkley Rosser

Outsourcing ObamaCare and Transfer Pricing

Robert Oak is not happy with the decision to give Accenture the responsibility for running healthcare.gov:

We pointed out earlier that the failed Obamacare website was poetic justice as CGI Federal is also an offshore outsourcer of U.S. jobs. But now the poster boy for labor arbitrage, offshore tax havens, and bloated, often failed government contracts is in charge, Accenture ... Accenture is incorporated offshore and has been the subject of many a Congressional hearing on inverted companies incorporated in Bermuda or the Caymans to avoid taxes.

Mr. Oak spends a fair amount of time on the offshoring of jobs by Accenture before going into the tax issue. Accenture’s 10-K filing for fiscal year ended August 31, 2013 indicates that its average annual pretax income for the past 3 years has been $3918.5 million and that its average annual tax bill $941 million for an effective tax rate = 24%. This is not particularly that low for a multinational domiciled in a tax haven. But looking more closely at the details, a somewhat odd picture emerges. If we look at Accenture’s reported foreign taxes as a share of foreign sourced income, this ratio over this 3-year period has been 21.4% whereas its U.S. taxes as a share of U.S. sourced income has been 33.5%. The 24% effective tax rate should be seen as a weighted average of these two ratios with U.S. sourced income being less than 21.4 percent of worldwide income (on an average annual basis, U.S. income was only $837.1 million). Accenture, however, reports that 37% of its revenue is from U.S. business. How the share of U.S. sourced income was so low when 37% of its revenue was from U.S. sourced business is not clear from a reading of its financials as reported on this 10-K. One would have thought the U.S. still owned some of the worldwide Accenture intangibles so under arm’s length pricing we would have seen more U.S. sourced income. Then again as Mr. Oak notes – Accenture does offshore the responsibility for performing on U.S. based contracts.

Are People Being Mean To Those Doing DSGE Models, Or Is It The Other Way Around?

There has been an outbreak recently of people picking on the usefulness of dynamic stochastic general equilibrium (DSGE) models in analyzing macroeconomies, particularly for policymaking and forecasting purposes.  This has been going on for a long time, and I confess to having been one of the guilty parties.  In the past those of us doing it have tended to emphasize the unreality of assumptions in these models, such as rational expectations and general equilibrium.  Although newer models have allowed for limited versions of heterogeneous agents, many of them have also assumed a homogeneous agent.  Positivist instrumentalism is used to justify making obviously unrealistic assumptions in order to achieve empirical understanding and especially forecastibility.  While the calibration of DSGE models have allowed them to be able to replicate past outcomes, their ability to forecast the future or provide even conditional policy advice, the latter what they are supposed to do best given their supposed ability to satisfy the Lucas Critique, has proven very poor, with 2008-09 the poster boy for this.  Supposedly front room central bankers are highly frustrated with what they are getting from their DSGE modelers in the back rooms (although they also use Klein-style quasi-Keynesian models and purely atheoretical VAR-type time-series models as well), with these complaints becoming public and many criticizing these models.

The most recent outbreak first showed up on the infamously anonymous Econ Job Market Rumors site only to get repeated by Noah Smith and some others who note that these models simply are not used by any private consultants or investment firms or, well, any private firm that anybody has been able to dredge up in lengthy comments, although one commenter noted that at least one firm uses an ability to DSGE model as a screening device for hiring people, given that this does take some quantitative skills, even though these people are not being hired to actually do any DSGE modeling.  This lack of any such use by the private sector is touted as the final bottom line proof of the ultimate worthlessness of these models.

On the other hand others argue that this is unfair and overblown, with Tyler Cowen weighing in that even if there are problems with DSGE models, people should merely "devalue" rather than "dismiss" them, the latter argued to be unreasonable and narrow-minded, marginalrevolution.com/marginalrevolution/2014/01/the-devalue-and-dismiss-fallacy-methodological-pluralism-and-dsge-models.html .  (This has a link to Noah's post, which I seem to be unable to  link to for whatever reason.).  The comments on Tyler's post go further in defending the DSGE approach more generally on the basis of its consistency with micro optimization that is foundational for micro, and this is all about microfoundations naturally, and "we cannot throw out all our textbooks!" blah blah blah.  One defender did claim that DSGE models, "in all but name," are used by private firms, although without mentioning any specifically, and somebody on Noah's site brought up Computable General Equilibrium (CGE) models, which are used by private firms, but only for micro rather than macro purposes.

So why has all this back and forth become so heated and nasty?  Part of it is that the defenders of DSGE have been fully arrogant and have fought back and maintained their position, even as they have been ridiculed and attacked by many.  I dislike invoking what looks like conspiracy theory, but the hard fact is that the advocates of DSGE modeling in its varied forms continue to control both the top journals as well as the top departments in economics.  One of the more serious alternatives that has been put forward to DSGE models has been Agent-Based Models (ABM).  I know that not a single ABM paper has been published in a top 4 journal.  I know that when these are submitted, they are rejected on such grounds as "this is not an equilibrium model," which is a sign that failure to fit into the DSGE paradigm is sufficient for the papers to be rejected.  The defenders of DSGE trumpet this lack of such papers getting into the top journals, actually bragging about it, although most loudly on anonymouse sites like EJMR.  Rather than evidence of suppression of competing ideas, this is seen as proof positive of the rightness of their position.  It is this, and their stranglehold on the research departments of most central banks as well, which draws forth the ridicule and opposition when their models have so clearly failed to deliver the advertised goods.

Let me recognize that DSGE modelers are trying hard to make their models more useful for studying things that have occurred.  They are introducing heterogeneous agents in the form of intervals containing continua of agents who as an interval act like the homogeneous agent of the older models, although allowing some endogeneity of the distribution across the interval, such as a wealth distribution.  They are introducing financial frictions into them, thereby supposedly Minskyizing them.  Some now even have forms of bounded rationality rather than full rationality in the form of extra elements added to the stochastic shocks that are already assumed to be driving everything in these models.  T'hey have long had price and wage stickiness in them, leading to the New Keynesian forms of these models, with such ad hoc devices as the Calvo pricing mechanism fairy, although most Post Keynesians and even some other Keynesians view wage and price stickiness as far from being key to a model being "Keynesian."  Indeed the idea that wage and price flexibility will eliminate business  cycles is a serious myth, speculative bubbles showing that excessive price flexibility can cause and aggravate them, and the general failure of the DSGE models to handle those one of their biggest weaknesses.

In any case, given the combination of arrogant self-satisfaction and defensiveness by the DSGE modelers in their various redoubts and the clear annoyance and dismissal of these models, most crucially by many who should be their main customers, policymakers, with this added rub of their complete non-use by the private sector, this fight is likely to continue.  They may provide "discipline," as their advocates note, but I also know that their appeal to micro is not accepted particularly by real micro general equilibrium theorists, who pretty much scorn DSGE models.  

Barkley Rosser

Added: DSGE models should be distinguished from Computable General Equilibrium (CGE) models.  These are open to some of the same criticisms as DSGE, but not nearly as much so. These have been around for a long time and used for policy purposes, but are strictly micro.  A well-known example is their use in predicting impacts on trade flows by sector NAFTA.  Several competing models were used that gave answers with different numbers, qualitatively similar answers in terms of which sectors would be affected how, although one can argue that this qualitative matter could be determined without them.  In any case, their strictly micro focus differentiates them from DSGE models, and while flawed, are used by private sector firms and viewed as more successful than DSGE ones.

Noah Smith And His Commenters Miss Boat On Fiscal Policy In 2013

I cannot make the link seem to work, but earlier this evening at Noahopinion, he posted on Bad Event Studies, arguing that the supposedly contractionary fiscal policy implied by the sequestration that started after March, 2013, may have provided a bad event study to test the relative strengths of monetary and fiscal policy, particularly market monetarism versus Keynesianism.  He proposed various combinations of outcomes, and in the end basically said we do not know because people may have been acting in earlier years on expectations about what was going to be done in 2013 in monetary and fiscal policies.  However, throughout, he and all the commenters accept the idea that fiscal policy was contractionary during the year.

This is wrong.

As is so often the case, what was going on at the state and local levels was completely ignored.  From June 2009 until the end of 2012, roughly 750,000 government jobs were lost.  Of those about 36,000 were at the federal level, while the rest were at the state and local level, with a good 500,000 of them at the local level.  Quite a few people in fact noticed during this period that the biggest drag on the economy was this downward pull from coming from the fiscal "policy" of the state and local governments aggregated, which of course is not somthing consciously controlled, and hence we do not think of it as "policy."

In 2013, all that changed.  In February, local governments began to hire and by midyear state governments did also.  I was only able to get numbers on this from a Washington Times report of all places in September, which drew on BLS numbers I could not find, but they reported that the combined increase in employment by the two together from February through August was 74,000.  Given that housing prices have continued to rise since then and they play a major role in this, it is near certain that this number was higher by the end of 2013.

I did find from a BLS report in December the total of federal government jobs lost for the year through November. That was 92,000 and can be blamed on the sequester.  Looks like pretty much of a wash.

So, the bottom line is that looking at fiscal policy in its entirety for 2013, it was neither stimulative nor contractionary.  The contraction coming from the federal sequester appears to have been about offset by expansion at the state and local levels.  There is simply no way to use 2013 to test any of this for this reason.

Yasraeh's Law

"In other words, the economy grows with every new worker." -- Allen Greenberg

As the above chart shows, "supply creates its own demand" only began to make its mark in the 1930s and "Say's Law" is not much older than that. Thomas Sowell, Robert Clower and Steven Kates have all tried to clear up what Clower has termed a "mare's nest" of confusion about what Say said and meant. "To this day," wrote Clower, "the source of the Keynes phrase ‘supply creates its own demand’ remains a mystery."

Whatever its original source, the phrase ‘supply creates its own demand’ is a far cry from Say’s phrase that ‘products pay for products’. 

After much pondering of Keynes’s remarks on Say and classical economics in the General Theory and earlier, I now conjecture that Keynes confused Mill’s interpretation of Say’s ‘theory of markets’ with the problematic presumption that seems to run through the writings of most pre-Keynesian economists, to the effect that there are unspecified forces (invisible fingers or hands?) operating ‘behind the scenes’ to ensure short-run viability of private-ownership economies.

So Say didn't say what Keynes said Say said, see? But note "the problematic presumption that seems to run through the writings of most pre-Keynesian economists." For clarity's sake, let call that problematic presumption Hearsay's Law. Supply creates its own demand. Technology creates more jobs than it destroys. A cheap market will always be full of customers. The economy grows with every new worker.

Marx criticized it as "the theory of compensation as regards the workpeople displaced by machinery." Jevons upheld it as a "principle recognised in many parallel instances." Regardless of whether or not the principle is or was "Say's Law", what did Say have to say about this erstwhile "theory of compensation"? In book 1, chapter 7 of his Treatise on Political Economy, "Of the labour of mankind, of nature, and of machinery respectively," Say wrote:

Whenever a new machine, or a new and more expeditious process is substituted in the place of human labour previously in activity, part of the industrious human agents, whose service is thus ingeniously dispensed with, must needs be thrown out of employ. Whence many objections have been raised against the use of machinery, which has been often obstructed by popular violence, and sometimes by the act of authority itself. 

To give any chance of wise conduct in such cases, it is necessary beforehand to acquire a clear notion of the economical effect resulting from the introduction of machinery. 

A new machine supplants a portion of human labour, but does not diminish the amount of the product; if it did, it would be absurd to adopt it. When water-carriers are relieved in the supply of a city by any kind of hydraulic engine, the inhabitants are equally well supplied with water. The revenue of the district is at least as great, but it takes a different direction. That of the water-carriers is reduced, while that of the mechanists and capitalists, who furnish the funds, is increased. But, if the superior abundance of the product and the inferior charges of its production, lower its exchangeable value, the revenue of the consumers is benefited; for to them every saving of expenditure is so much gain. 

This new direction of revenue, however advantageous to the community at large, as we shall presently see, is always attended with some painful circumstances. For the distress of a capitalist, when his funds are unprofitably engaged or in a state of inactivity, is nothing to that of an industrious population deprived of the means of subsistence. 

Inasmuch as machinery produces that evil, it is clearly objectionable. But there are circumstances that commonly accompany its introduction, and wonderfully reduce the mischiefs, while at the same time they give full play to the benefits of the innovation. For, 

1. New machines are slowly constructed, and still more slowly brought into use so as to give time for those who are interested, to take their measures, and for the public administration to provide a remedy. 
2. Machines cannot be constructed without considerable labour, which gives occupation to the hands they throw out of employ. For instance, the supply of a city with water by conduits gives increased occupation to carpenters, masons, smiths, paviours, &c. in the construction of the works, the laying down the main and branch pipes, &c. &c. 
3. The condition of consumers at large, and consequently, amongst them, of the class of labourers affected by the innovation, is improved by the reduced value of the product that class was occupied upon. 

Besides, it would be vain to attempt to avoid the transient evil, consequential upon the invention of a new machine, by prohibiting its employment. If beneficial, it is or will be introduced somewhere or other; its products will be cheaper than those of labour conducted on the old principle; and sooner or later that cheapness will run away with the consumption and demand. Had the cotton spinners on the old principle, who destroyed the spinning-jennies on their introduction into Normandy, in 1789, succeeded in their object France must have abandoned the cotton manufacture; every body would have bought the foreign article, or used some substitute; and the spinners of Normandy, who, in the end, most of them, found employment in the new establishments, would have been yet worse off for employment. 

So much for the immediate effect of the introduction of machinery. The ultimate effect is wholly in its favour. 

Indeed if by its means man makes a conquest of nature, and compels the powers of nature and the properties of natural agents to work for his use and advantage, the gain is too obvious to need illustration. There must always be an increase of product, or a diminution in the cost of production. If the sale-price of a product do not fall, the acquisition redounds to the profit of the producer; and that without any loss to the consumer. If it do fall, the consumer is benefited to the whole amount of the fall, without any loss to the producer. 

The multiplication of a product commonly reduces its price, that reduction extends its consumption; and so its production, though become more rapid, nevertheless gives employment to more hands than before. It is beyond question, that the manufacture of cotton now occupies more hands in England, France, and Germany, than it did before the introduction of the machinery that has abridged and perfected this branch of manufacture in so remarkable a degree.

Actually, that's not far off Dorning Rasbotham's 1780 Thoughts on the Use of Machines in the Cotton Manufacture. Unlike Squire Rasbotham, however, M. Say didn't indict some ephemeral, unspecified "they" as saying there is "a certain quantity of labour to be performed." Instead, in his 1821 fourth letter to Malthus, Say specifically refutes arguments made by Sismondi about the harmful effects of machinery.

Good for Say! And even better that Say specified his own assumptions for the providential reabsorption of the workers displaced by machinery: "supposing even they immediately find capitals to set them to work at a fresh business..." Got that? Assuming they immediately find new employment... it's all good. Alvin Hansen remarked on this convenient assumption in his 1931 article, "Institutional Frictions and Technological Unemployment":

If we could assume that the displaced workers had somehow found new employment and were again earning wages, then indeed there would be a net gain in total real purchasing power arising out of the additional goods which they produce. But this is to put the cart before the horse, to assume the problem solved without explaining how it happened. And this is, indeed, what Say, Mill and Ricardo did. They argued that increased product means increased purchasing power. They assumed, without explaining how it happened, that the increased production had already occurred. If idle productive factors are set to work to make goods there will be no want of a market. Goods are exchanged against goods. Such was their argument. But the mechanism of labor reabsorption they did not explain.

... 

The Say-Mill-Ricardo analysis assumed without question that idle productive resources would ere long be set to work to produce goods. The only question to which they addressed themselves was whether or not the new production would find a market.

Thus the "problematic presumption" Clower mentioned is indeed connected to Say's Law of Markets but only as an assumption that the problem of unemployment has been already been solved without explaining how it happened. That is, if we suppose that displaced workers "immediately find capitals to set them to work at a fresh business" then the Law of Markets assures us that the new production will find a market. It is not the Law of Markets, however, that immediately sets them to work!

From Hearsay to Yasraeh

I have described the lump-of-labor fallacy claim as "an inverted Say's Law on steroids." But if the mare's nest formerly known as Say's Law isn't really Say's Law of Markets, then perhaps it would be more fitting to call the lump of labor claim an inverted Hearsay's Law on steroids or Yasraeh's Law, for short.

Does The Polar Vortex Over The Eastern United States Mean Global Warming Is Over?

Not particularly.  Record temps are going on in Australia, and it has been warmer over the North Pole and in Moscow than in parts of the eastern US.  November set an all time record for world average temperature and December was well above long term averages, despite it being colder than normal in that all important eastern US.

That noted, it must be recognized, and has been by serious climate watchers, that indeed the rate of increase of average global temperature has slowed substantially in the last 10 years, if not completely halted, although the global warming deniers spout on about it being 15 years, which is not the case given that 1998 was an outlier way on the upside.  In any case, global average air temperature is not clearly rising at this time, even as the polar vortex now exiting the US does not prove this.

However, this does not mean that global warming has stopped.  Curiously enough, warming above that predicted appears to be happening in the oceans below 700 meters.  The main models used by the IPCC observers model the air, the surface water, and the deep water.  Air is now not warming as much as predicted, but the deep ocean is doing more so than predicted.  Looking at the total surface, it looks like warming is still going on, although I recognize that the models are not doing a good job of explaining why we should be seeing this particular pattern.  But one must expect that warming at the depths will at some point manifest itself in the higher levels.  Maybe we do not need to worry about warming of the air for a few years, but we may well face much worse warming of the air in the not too distant future when this comes bubbling up, as it were.

There is also the matter discussed by Martin Weitzman in Philadelphia about how climate outcomes probably exhibit fat tails due to nonlinear dynamics effects.  But we do not know how to deal with such matters in policy terms.

Finally, I am not going to take sides in the matter of what the polar vortex shows or what caused it.  There is a serious argument that it may be due to global warming, the "warm ocean, cold continent" effect theory, which others dispute.  However, there is also the fact that contrary to the claim of Rush Limbaugh that the term "polar vortex" was cooked up for this particular event, its first use appears to have been in 1974 when it was invoked as part of the then seriously considered theory that we were moving into a new ice age and was part of that.

BTW, I have noted this before, but will repeat it again, just in anticipation of somebody handing me the standard story.  Yes, by 1974 and certainly the later 70s, the ice age theory was falling out of fashion and not appearing in academic papers, basically a media scare phenomenon by then, although in fact it was not until about the mid-70s that global average temperatures began to rise again after a period of gradual decline starting in the 1940s.  However, there was a close debate over global warming versus cooling in the early 70s, with the academic papers evenly split in 1971.  It was CO2 versus aerosols.  What tilted the argument was that aerosols fall out of the atmosphere quickly, whereas CO2 does not.  But this was not factored in properly in 1971 and in fact global cooling was going on, so there was a real debate at that time, even though it was basically over by 1975.

Does Laurence Kotlikoff Understand Apple’s Business Model?

He wants to Abolish the Corporate Income Tax presumably because it would increase the real income for workers. Tax Justice Network has a must read challenging the supply-side nature of Kotlikoff’s argument. I just want to comment on this claim:

Apple’s tax return says it all: The company, according to one calculation, paid only 8.2 percent of its worldwide profits in United States corporate income taxes, thanks to piling up most of its profits and locating far too many of its operations overseas.

Tax Justice Network gives credit to Citizens for Tax Justice for this reality:

But Apple is a perfect example of a corporation that does not actually move many jobs offshore but rather is engaging in accounting gimmicks to make its U.S. profits appear to be generated in offshore tax havens.

Maybe Dr. Kotlikoff should read the latest 10-K filing for Apple. There he would learn a few things such as the fact that Apple outsources it production preferring to be in the design and distribution business. The vast majority of its R&D personal are U.S. employees. We also see this quote from their 10-K

As of September 28, 2013, the Company had approximately 80,300 full-time equivalent employees and an additional 4,100 full-time equivalent temporary employees and contractors. Approximately 42,800 of the total full-time equivalent employees worked in the Company’s Retail segment.

Since about 40% of Apple’s sales are to U.S. customers, it is reasonable to believe that over 16,000 of these Retail segment employees are also U.S. workers.