Should economists be “imagineers” of our future?
By Mark Thoma The opinions expressed are his own.
This essay is a response to Roger Martin’s “The limits of the scientific method in economics and the world” (part one and part two), recently published on Retuers.com.
Roger Martin is unhappy with the state of economics. One charge is that:
[an economist] predicts a future that is based on the past. And when it is anything but, he returns to the same tools to do it again, believing that in doing so he is being meritoriously scientific. … Extrapolating the future to be a straight-line projection of the past is neither accurate, nor is it helpful in creating better understanding and newer ideas.
As I will discuss further below, I agree that macroeconomists need to fix their models. But I don’t think that predicting the future based upon “a straight-line projection of the past” is the problem. Let me explain why, first in a relatively narrow sense, and then more broadly.
This year’s Nobel prize award to Thomas Sargent and the previous award to Robert Lucas were partly in recognition of their development of the tools and techniques that economists need to go beyond simply trying to extrapolate the future from the past, a procedure that can lead forecasters astray.
Prior to Robert Lucas, economists analyzing policy interventions by monetary or fiscal authorities did exactly as charged above, they extrapolated based upon the past and an assumed unchanging future. But the (often false) assumption that the future would be like the past is at the heart of what is known as the Lucas critique.
Political strategy in the Budget Control Act era
By Keith Hennessey The opinions expressed are his own.
I cover three topics in this post: what important players won in this deal, the core concepts and tradeoffs within the deal, and what the different strategies might be this Fall under this bill when it becomes law.
The President knows he will get debt limit increases through early 2013 no matter what House conservatives/Tea Party members do. Those Members can no longer “hold a debt limit increase hostage” before the 2012 election.
We could also describe this as eliminating liquidity risk through 2012.
Assuming someone doesn’t find a way out of the enforcement mechanisms in the bill (1 in 3 chance), there will be at least $2.1 T in deficit reduction over the next 10 years as a result. While I think that’s a big policy benefit, I’m not sure how important that is substantively to the President. (Is he for stimulus? Austerity? Who knows at this point.)
But given his recent public conversion to deficit hawk, the President will undoubtedly stress it publicly over the next 18 months and began doing so last night. At a minimum, the President will benefit politically with deficit hawk centrists, both for the policy result and the achievement of a bipartisan agreement. Prepare to watch the President seize political credit for spending cuts he fought.
The President also has an opportunity to push for tax increases as part of the Joint Committee deficit reduction process this fall. You will hear the corporate jets & Big Oil riffs ad nauseam.
G’Day All,
The several articles I’ve read indicate that raising federal income rate %s actually do more harm and raise less dollars for the US economy and treasury??!!
DocE
from MacroScope:
The IMF to turn on the rich
The latest International Monetary Fund meeting ended with emerging market powers getting a pledge from the organisation for stronger and "more even-handed" scrutiny of what is going on in large advanced economies.
As Reuters correspondents Lesley Wroughton and Emily Kaiser report here, the decision is a response to long-running frustrations among emerging economies, which reckon the Fund has not been tough enough on its biggest shareholders, led by the United States.
The move reflects a number of things. First, it shows the growing clout of emerging economies within international institutions. The G-20, for example, is arguably now more influential than the old , richer G7. Secondly, it graphically underlines the current world-turned-upside-down state of the global economy, in which profligate rich economies are struggling to keep above water while supposedly poorer and less-developed ones enjoy solid growth and relatively stable finances. This graph makes the point:
One question that has been raised, meanwhile, is whether the IMF is capable of taking rich countries -- its primary paymasters -- to task. A comment from a craigbhill on the Reuters story encapsulates the issue:
This is like the bankers to the Mafia being politely asked to "give scrutiny" to the Mafia.
A bit harsh. But valid?
from MacroScope:
Who will win this year’s Nobel Prize for Economics?
And the Nobel laureate for economics in 2010 is?
Thomson Reuters expert David Pendlebury might have an idea. At least one of the picks from his annual predictions of winners (economics, chemisty, and so on) has won a Nobel prize over the years. Here is his short-list for economics this year.
* Alberto Alesina of Harvard University in Massachusetts for research on the relationship between politics and macroeconomics, especially politico-economic cycles.
* Nobuhiro Kiyotaki of Princeton University and John Moore of Britain's University of Edinburgh and the London School of Economics for their Kiyotaki-Moore model, which describes how small shocks to an economy may lead to a cycle of lower output. It described Japan's real-estate crisis in the 1990s and could describe some of the causes of the recent U.S. recession.
* Kevin Murphy of the University of Chicago for research in social economics, including wage inequality and labor demand, unemployment, and how medical research pays off.
But what are your views? Who do you think deserves the prize for 2010 on October 11?
from Jeremy Gaunt:
The rule of three
It is beginning to look like financial markets cannot handle more than three risks. First we have, as MacroScope reported earlier, Barclays Wealth worrying about U.S. consumers, euro zone debt and Asian overheating.
Now comes Jim O'Neill and his economic team at Goldman Sachs, with three slightly different notions about risks in the second half, this time in the form of questions. To whit:
1) How deep will the U.S. economic slowdown be and what will the policy response be? (That's two questions, actually, but let's not nitpick).
2) How much decoupling is possible between the U.S. economy and others, notably China?
3) Will sovereign and systemic risks intensify again or settle?
For what it is worth, Goldman reckons none of the three should be too damaging:
"Our own forecasts envisage a period of some muddiness in the near-term that ultimately resolves towards a more positive global view. But given the fragilities in the system, we will be watching our various proprietary tooks ... and trying to stay open-minded."
from MacroScope:
What are the risks to growth?
Mike Dicks, chief economist and blogger at Barclays Wealth, has identified what he sees as the three biggest problems facing the global economy, and conveniently found that they are linked with three separate regions.
First, there is the risk that U.S., t consumers won't increase spending. Dicks notes that the increase in U.S. consumption has been "extremely moderate" and far less than after previous recessions. His firm has lowered is U.S. GDP forecast for 2011 to 2.7 percent from a bit over 3 percent.
Next comes the euro zone. While the wealth manager is not looking for any immediate collapse in EMU, Dicks reckons that without the ability to devalue, Greece and other struggling countries won't see any great improvement in competitiveness. Germany, in the meantime, has sped up plans to cut its own deficit. It leaves the Barclays Wealth's euro zone GDP forecast at just 1 percent for next year.
Finally, Asian growth is under threat from tightening policies. Dicks says this is the least problem of the three, but there are indications that powerhouse China needs a period of slower growth to get things under control.
So, there are three problems -- and a not very bright outlook. Are there any others? Or are these three all being overstated?
from MacroScope:
Spend Save Man Woman
Far from being lauded as a virtue, China's high savings rate has been blamed for the economic imbalances underlying the global financial crisis. The criticism being that the Chinese spend too little and rely too much on exporting to Western consumers.
The IMF and World Bank have long called for Beijing to ramp up social spending so its citizens will feel less need to save for a rainy day and instead consume more.
But in their intriguingly named paper, 'A Sexually Unbalanced Model of Current Account Imbalances', New York-based researchers Du Qingyuan and Wei Shang-Jin suggest China's gender imbalance could also be a significant factor in the persistence of its high savings rate.
The pair argue that intensifying competition in the Chinese marriage market is causing men -- or indeed parents with sons -- to raise their savings rates to improve their relative allure among a shrinking pool of potential brides.
A draconian one-child policy, coupled with a traditional preference for male offspring and the availability of selective-sex abortion, has left the country of 1.3 billion facing its most serious demographic crisis.
An estimated 119 boys are born per 100 girls and the Chinese Academy of Social Sciences has warned that this could leave more than 24 million Chinese men of marrying age without spouses by 2020.
This anxiety over the worsening marriage prospects for men could explain why Chinese household savings as a share of disposable income has risen from 16 percent in 1990 to 30 percent in 2007.
from MacroScope:
Political economy and the euro
The reality of 'political economy' is something that irritates many economists -- the "purists", if you like. The political element is impossible to model; it often flies in the face of textbook economics; and democratic decision-making and backroom horse trading can be notoriously difficult to predict and painfully slow. And political economy is all pervasive in 2010 -- Barack Obama's proposals to rein in the banks is rooted in public outrage; reading China's monetary and currency policies is like Kremlinology; capital curbs being introduced in Brazil and elsewhere aim to prevent market overshoot; and British budgetary policies are becoming the political football ahead of this spring's UK election. The list is long, the outcomes uncertain, the market risk high.
But nowhere is this more apparent than in well-worn arguments over the validity and future of Europe's single currency -- the new milennium's posterchild for political economy.
For many, the euro simply should never have happened -- it thumbed a nose at the belief that all things good come from free financial markets; it removed monetary safety valves for member countries out of sync with their bigger neighbours and put the cart before the horse with monetary union ahead of fiscal policy integration. But the sheer political determination to finish the European's single market project, stop beggar-thy-neighbour currency devaluations and face down erratic currency trading meant the currency was born and has thrived for 11 years.
Now the budgetary and bond market upheaval currently afflicting euro member Greece and stalking Portugal, Ireland, Spain and Italy has reawakened the whole debate. "Will the euro survive?" seems a legitimate question once again.
Apart from financial analysts, Paul Krugman seems to have made his peace with the euro's existence but he still reckons it was a bad idea. Eric Maskin thinks financial markets are right to question the future of the single currency. And much is being made once again of Milton Friedman -- high priest of 20th century monetarism -- having reportedly said in 1998 that the euro would not survive the zone's first serious economic downturn.
But having an opinion about the euro is not the same as knowing whether it is going to survive. And this is what most annoys those who have money at stake. Plugging in a new set of variables into complex econometric equations is probably not going to get any of these experts closer what happens next. Hanging around the corridors of power in Brussels, Frankfurt, Berlin or Paris is likely to prove more fruitful.
In the 1990s, many financial strategists in London, Manhattan and elsewhere often confused what they thought should happen with what was likely to happen and got the call wrong on one of the most far-reaching monetary events of the century.
from Global Investing:
What’s on your reading list?
If anyone needed a reminder that Christmas and NewYear holidays are almost here, Societe Generale has provided it. Analyst Dylan Grice has picked up the mantle of the departed James Montier to offer a seasonal reading list for those with a fixation about investment and economics.
True, some people might prefer to immerse themselves in a rollicking sea tale from Patrick O'Brian or a good old Sookie Stackhouse vampire mystery. But we know that Reuters blogs' readers are a discriminating lot with a keen understanding of and passion for finance. So here is Dylan's list of six must-reads:
1. Manias, Panics and Crashes, by Charles P. Kindleberger; 2. The Essays of Warren Buffet, edited by Richard Cunningham; 3. Reminiscences of a Stock Operator, by Edwin Lefevre; 4. Fooled by Randomness, by Nassim Taleb; 5. The Case against the Fed, by Murray Rothbard; 6. Judgement under Uncertainty: Heuristics and Biases, eds Kahneman, Slovic and Tversky.
So what is your reading list? Tell us what you would include and why.
Comfortable conservation and global warming
– John Kemp is a Reuters columnist. The views expressed are his own –
Energy efficiency will have to make the single most-important contribution if policymakers are serious about limiting greenhouse gas emissions and dampening growing demand for fossil fuels.
Energy efficiency will not remove the need to invest in large volumes of wind, solar and nuclear generation, or in technology for carbon capture and storage, but it does form the third leg of the triad.
In the United States, nowhere have efficiency initiatives been given higher prominence and become as deeply entrenched in the public policy process as in the state of California. In response to a series of power crises, the state has adopted some of the toughest standards anywhere in the world.
The 1974 Warren-Alquist Act, signed by then-governor Ronald Reagan, created the State Energy Resources Conservation and Development Commission, now renamed the California Energy Commission (CEC), with a mandate to develop minimum efficiency requirements for new construction and appliances.
Efficiency improvements have been enforced through a strict standard-setting process.
Title 24 of the state code of regulations prescribes detailed requirements for all new buildings and major redevelopments in the state. Title 20 establishes standards for appliances sold to in-state customers, including heating and cooling systems, lighting units and refrigerators. Both have been repeatedly tightened to require higher levels of efficiency.
Lets talk again about carbon taxes
Let me put it bluntly, that the idea of carbon tax swap based on swapping fixed taxes with carbon tax failed to impress the American public has as much to do with the American electorate as it is with the champions of this idea such as Thomas Friedman and Charles Krauthammer. It’s the way in which this concept was presented and being presented to the American public that has doomed the carbon tax swap from the beginning. Let me explain.
Lets put coal aside for a while and concentrate on oil which unlike coal has tremendous geopolitical externalities with much of the world’s oil concentrated in the hands of rogue regimes and Islamic Sharia states. The Middle East alone costs the US billions. The oil market is massively unstable, never mind the OPEC and it price manipulations. Cheap gasoline encourages suburban sprawl and waste of space with local taxes required to support the infrastructure then decimating US taxpayers. If you don’t believe in anthropogenic global warming, that’s fine with me, the world is cooling down. There are still more than enough reasons for the US to want to slap a massive carbon tax to bill all those expenses into the price of gas/oil. So lets talk about swift implementation of a sizable carbon tax swap. We are going to swap payroll taxes, income taxes, VAT… You name it, we can swap it for a carbon tax. Say we swap 50c immediately and then we swap 10c every next year over the course of a decade. Does it mean that the American nation is required for painful sacrifices to rid itself of its addiction to oil? No. That’s the point! It does not at all!
For a start, when you swap a tax for a tax in a revenue neutral manner, it’s not that there are no winners and no losers. There is a simple law of microeconomics that postulates that regardless if a tax is imposed on the consumer or the producer, the price usually falls somewhere in between with a loss getting split between the two. Those who believe that the demand for oil is too inelastic for the carbon tax to be subject to this law, should check what happened in Oregon where gas taxes have ended with such a dramatic fall in tax revenues that the state had to consider replacing them with a mileage tax. This is very relevant for the US which accounts for 25% of the global oil consumption. The US is twice as much a global swing consumer as Saudi Arabia is a global swing producer. This means that a gas tax of $1 does not make the price of gas go up by all $1. It will go up, say, 80c. Given that taxpayer is fully refunded through the swap, the taxpayer wins 20c on every gallon. In this case the producer takes a loss of 20c and, given that so much of the US oil is imported, it’s a loss inflicted on foreign producers. Those still confused can try to read this: http://happyarabnews.blogspot.com/2009/0 5/great-committment-of-president-obama.h tml.
Next, a carbon tax swap means that we are swapping regular taxes, say payroll taxes, with a “please don’t pay me” tax. If the taxes are swapped dollar for dollar, it’s enough that a taxpayer then finds a job close to home and he is already winning. If the taxpayer switches to a hybrid or electric car, he is sabotaging the whole system. That’s why any swap of regular taxes for carbon taxes amounts to sheer cutting taxes. A revenue neutral carbon tax swap won’t stay revenue neutral even for a year as the taxpayers will quickly start defunding the state by avoiding carbon taxes. It’s a stimulus package that requires taxpayer to do a certain work for his personal benefit and the benefit of his country to get his taxes down. It’s a tax cut in which taxpayers cut their own taxes. It’s way better than this senseless throwing of money around we’ve seen until now.
Finally, if a certain taxpayer prefers to pay carbon tax, he is not losing a penny as long as a tax swap is done dollar for dollar. But if in other corners of the economy people and business do their share of avoiding carbon taxes, they are bringing the price down for all taxpayers. You don’t want to change? No problem. Let others change and benefit from their work.
In fact, with a bit of imagination carbon tax swap can be modified to serve all kinds of additional purposes. For example, rich tend to have a larger carbon footprint than poor. The swap can be designed in such a way that it does not refund the upper 10 percent, but instead redistributes their taxes between the rest. So such a swap can be used as another method of wealth redistribution, in which case an average taxpayer is more than compensated for carbon tax right from the beginning.
The reality of carbon tax swap is that it’s one of the best deals that could have been ever offered to the US taxpayer and this tremendous opportunity was squandered because of the misguided and confused marketing campaign by Thomas Friedman and his colleagues. The correct presentation of the swap should have been this:
“We give you, taxpayers, a perfect deal, from which you almost immediately benefit, first, by the simple law of tax incidence described in every introduction to microeconomics for dummies and, second, because we are replacing your fixed taxes with a “please avoid me” tax about which you can do all kinds of things to pay less of it or stop paying it completely. In the worst and almost impossible scenario you just don’t lose. In any other case you can only win. Have some mercy on yourselves and your wallets and allow us put a few government’s dollars and a bit of the Arab Sheikhs’ money back into your pocket. One should be an idiot to refuse such an offer.”
Talking about national good, long term vision, patriotism is all nice and good, but fundamentally carbon tax swap is first of all an issue of unenlightened or semi enlightened self interest. Carbon tax swap belongs to the same category of things as tax cuts, stimulus packages and their likes. And it is this aspect of the swap that was completely missed both by TF and others.
The most surreal aspect of the situation is that the public recently got so irrational about taxes that it refuses to allow the government to cut taxes just because the public has heard the word “taxes”! No tax reform, no restructuring of taxes seems to be possible these days even when it benefits taxpayers! There is no way the public can be excused for its irrationality and plain stupidity.
However, neither the proponents of carbon taxes are clean on this because of the misguided way the carbon tax swap was presented to the public. And this is my advise to all carbon tax promoters: Stop blaming the public for your own fault. First, get your facts about carbon tax swap straight, then we will see how the public responds.
Obviously I am only scratching the surface here. I could write ten times more. There is a difference between coal and oil. We can take a massive action on oil immediately, but not on coal. Another one: tax on imported oil may be actually preferable to gas tax. Yet another one: When it comes to oil no carbon tax is needed, cutting oil consumption is pretty much the same as cutting emissions. Where emissions are out of proportion to oil consumption carbon tax may be necessary, but in all other cases regular taxes are more straightforward and easy to implement while they are just as effective. We can discuss all of this stuff and more, but first we should restart the debate on carbon tax swap and we should do it better.
I usually don’t listen to economists for financial information. I go with my outsourced cfo services for information on my industry. Every industry is effected differently in a downturn.