The Saltwater-Freshwater divide

December 3, 2013

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There’s been a shakeup at the Minnesota Fed, and no one quite knows why. The news that president Narayana Kocherlakota dismissed two of the institution’s research economists — Patrick Kehoe and Ellen McGrattan — has sparked a debate in the macro community.

Jeffrey Sparshott argues the dismissals could be tied to changes in Kocherlakota’s own views on macroeconomic policy. Last year, the WSJ called this change an “extreme swing from hawk to dove”. Kocherlakota, Sparshott says, “went from thinking the cause [of persistently high unemployment] was largely structural (and thus could not be fixed with monetary policy) to thinking it was largely due to weak demand (which means it could be addressed through policies aimed at boosting demand)”. The two fired (rather, not rehired) economists haven’t changed their minds similarly.

Miles Kimball and Noah Smith write that the dismissals could be indicative of a larger conflict in the econ world: the Freshwater vs. Saltwater debate. The Freshwater school of economists, which includes Kehoe and McGrattan, believes that people are rational in their economic decisions, that recessions are just part of the normal ebb and flow economy, and therefore the government shouldn’t do much to fight downturns. On the other hand, “the Saltwater macroeconomists,” Kimball and Smith write, believe that “recessions were economic failures,” and the monetary and fiscal policy should be used to fight back. (Kimball and Smith fall into the Saltwater school).

In 2008, Ryan Avent took issue with a paper co-authored by Kehoe, that argued the financial crisis never really threatened the real economy and government bailouts weren’t needed: “In the best tradition of lazy undergraduates everywhere, they plot lines on graphs and draw wild conclusions”, Avent wrote of the paper.

The paper’s conclusions turned out to be dead wrong, Paul Krugman says. Larry Summers had some similarly salty things to say about the Freshwater school in his IMF remarks a few weeks ago.

Krugman suggests the dismissed researchers were just too tied to their doctrine: “If you, as an economist, try to weigh in on events as they happen, you will get things wrong, and sometimes you may get them wrong in a big way. The crucial question is what you do next. Do you engage in self-analysis … Or do you double down on your preconceptions?”

Mark Thoma, (who has a post today about how different macroeconomic models should be used in different economic situations) thinks it might not be about freshwater-saltwater at all: “My theory about what is happening at Minneapolis is that it is mostly about poor communication and insufficient leadership”. Brad DeLong agrees.

Nick Rowe thinks the problem was both about bad communication and a policy fight: “The main job of your advisers is to stop you saying something stupid in public”, he says. In Rowe’s telling, Kocherlakota said a few stupid things in public, his advisors didn’t stop him, so they got fired. — Shane Ferro

On to today’s links:

Life may not actually exist (scientifically speaking) – Scientific American

How to worry about Obamacare in an intelligent way – Matthew O’Brien

Your Daily Outrage
Hospital prices have more than doubled in the last decade – NYT

Inflated prices and fake sales: the anatomy of a cyber Monday scam – Alexis Madrigal

Long Reads
The oil-shipping free-for-all that led to Canada’s worst rail disaster in 150 years – Globe and Mail

“‘Too good to check’ used to be a warning… Now it’s a business model” – Dave Weigel
Euphemism of the day: “Ethical viral engineering” – Nick Denton

Two reasons why fighting bubbles with higher rates is a bad idea – Mike Konczal
Inflation as insurance – Ashok Rao

A profile of the self-described “the largest investor in hedge funds in the world” – DealBook
Related: Hedge funds are still for suckers – Bloomberg Businessweek
Buy stocks, say people who sell stocks – Matt Phillips

Plausible Theories
Why did Apple buy Topsy? Dunno, but it could have to do with social TV – Matthew Lynley

New  Normal
Walmart’s top-seller on Black Friday was a 29 cent washcloth – Joe Weisenthal

On the two types of ignorance – Shane Parish

Strange Bloomberg Headlines
“Americans Due to Replace Oldest Goods Since JFK; Jewelry? FDR” – Bloomberg
The ageing of Americans’ things, charted – Ben Walsh

The CFPB will start supervising the largest student loan servicers – Shahien Nasiripour

Tracing our clothing from cotton farm to retail store – Planet Money

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