Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday 31 December 2012

Advice for potential academic bloggers

I wanted to mark a year of blogging by encouraging other academics (particularly outside the US) to do the same. So lets use my experience to tackle some of the worries that may be holding others back.

1) How do people find out I’m blogging? I’ll be writing to myself!

When I started, I thought my posts would mainly be a useful resource for my students. Things I did not have time to say or elaborate on in lectures. In my case that is all the publicity I gave it, beyond something on my homepage and email signature. But if other bloggers discover that you are writing interesting stuff, it will be picked up. (In my case, I probably have to thank Jonathan Portes, Chris Dillow and - of course - Mark Thoma.) That is one of the great things about this medium.

Now there will almost certainly be a point where you become fixated by audience numbers.[1] But of course it is as much who reads your posts as how many read them. Here I have discovered something that is not that surprising when you think about it, but which should be a great incentive for many academic economists. Economists in policy making institutions read blogs. They do not have time to read many academic papers, but they want something a little deeper than even the FT can provide, and blogs can be ideal from that point of view. So if you have a message you want to get across to those who advise on policy, blogging is the way to do it.

2) I can imagine a few things I could write about, but I’ll quickly run out of things to say.  

Yes, I thought that too.[2] Now I admit macro is a bit special at the moment: events just keep providing material. But even so, you may surprise yourself. You certainly do not have to write as many posts as I do, and they can be shorter. (Who just said they couldn’t agree more!). No one is going to ‘unsubscribe’ you just because you have not posted for a month. How many times have you read a post, or a newspaper article, which you have disagreed with in part because you have better expertise or knowledge? Why keep that to yourself?

3) But I do not fancy getting into online debating contests

This was one issue I had to deal with early on. After writing this, I found myself being drawn into that kind of situation. (I was being provocative, so I’m not complaining.) So I pulled back, as I described here. How much you want to participate in this kind of thing is up to you.

One issue I would be careful about is tone. I once had a colleague who was always politeness personified in face to face conversation, but then could occasionally unleash the most hostile and aggressive emails or memos. I now understand better where this comes from. As I described here, when writing about contentious issues like austerity it is perhaps too easy to be rude.

4) But who am I writing for: other academics, or the public?

That is up to you. I try and make what I write accessible to non-economists, but I know that I often fail, in part because jargon comes so naturally. There are a large number of non-economists out there who are genuinely curious about economic issues, and know that the stuff they get from the conventional media is either simplistic or just wrong. If you do try to write for that audience, but also want to write something more technical, you can flag that at the beginning of the post, as Paul Krugman and others do.

5) But I should be doing research, or reading papers, rather than writing blogs.

The main activity that blogging has displaced for me is watching TV. I write the initial drafts of most of my blogs between 9pm and midnight. Now I try and avoid posting them immediately, because my mental faculties are not great at that time, but instead post them 24 hours later. By that time my unconscious mind has probably spotted most errors. You can also integrate scholarship with writing posts, as I suggest below.

6) But if I stray too far from my area of expertise, I may make mistakes.

Or, in my case, even if you are writing within your area of expertise. But as long as it does not happen too often, I think admitting and correcting mistakes does you no harm.

7) Do I have to put all those links into my blogs?

It would be easy to say at this point its up to you, but I think its good practice to link to others where you can. Bruegel said ‘Europeans can’t blog’, not because there are not European blogs, but because they tend not to link to each other. You will find your readership increases if other blogs link to you, so you should reciprocate.

This requires a little organisation and extra time. I try to keep a note of what I read, which I probably would not do if I was not writing a blog. No system is perfect, of course, and many a time I have come across a note of a post I really should have referenced. But it is worth trying.  

8) But what if my academic colleagues find out I’m blogging?

I may have to explain this for any US readers. In the UK, and perhaps elsewhere, there is a view that for academics to attempt to write for non-academics is a bit vulgar. I like to think this view is old-fashioned, but I’m not sure. However I think this will change. US academics do read blogs, and are not afraid to say so. And in the UK, there is - in ESRC and REF speak - impact!

9) Still, its not going to actually help my academic work, is it?

I’m not so sure about this. Blogging has undoubtedly improved my teaching. I do not mean students just reading my posts. In many areas, writing posts has helped me clarify my ideas, and my lectures are better as a result. I few weeks ago I wrote a refereed article that I would not have been able to write if I had not been blogging, just because writing posts forced me to think about issues more carefully. I have also occasionally found that an article that I have just read contains material that may be of more general interest, and so I have written a post on that (here is an example). As a result, I am more likely to remember what the paper said, and I hope that paper may have got one or two more readers.

10) Any other advantages?

Well, at the end of the year, you can write: thanks for reading the posts, and happy new year!

[1] Blogger says I get around 3,000 pageviews a day, and feedburner says I have around 1,750 subscribers. Is this a lot or a little? Google reader does in principle allow you to compare subscriber numbers across blogs, but it has been saying I have exactly 842 subscribers for about six months, so something tells me this may not be reliable. So,  using myself as an example again, this tells you that you do not have to know much about the technicalities of blogs to be a blogger.

[2] I should have known better. My grandfather on my mother’s side loved spending hours arguing about all kinds of things, my father wrote newspaper articles and books about a wide range of topics, my mother was a sort of journalist for a short while, and my brother is head of a media studies department, so I guess it comes naturally. On the other hand my father-in-law also liked pontificating on political issues at great length, so maybe this just says something about what many men of a certain age like to do.

Saturday 29 December 2012

Is academic macroeconomics flourishing?

How do you judge the health of an academic discipline? Is macroeconomics rotten or flourishing? Stephen Williamson is right that in one sense it is flourishing: many interesting avenues are being explored, and lots of interesting papers are getting written. Furthermore there is a common language. Of course there are pronounced local dialects, but there is mobility to, so having a freshwater dialect does not stop you giving a seminar that will be appreciated in a saltwater department, or indeed working in a saltwater department. So as an intellectual pursuit, one could claim that times have never been better for academic macro.

Society does fund some academics to engage in purely intellectual pursuits, but macroeconomics is not one of these. Yet much of the flourishing of ideas and research that is currently taking place has been inspired by recent events, and is directly or indirectly policy relevant. However having lots of ideas that are relevant to policy is not sufficient to make an academic discipline useful. It also needs to respond to the evidence in sorting out what ideas are helpful and what are not, so that it can be a progressive endeavour. In this respect, academic macroeconomics appears all over the place, with strong disputes between alternative schools.

Is this because the evidence in macroeconomics is so unclear that it becomes very difficult to judge different theories? I think the inexact nature of economics is a necessary condition for the lack of an academic consensus in macro, but it is not sufficient. (Mark Thoma has a recent post on this.) Consider monetary policy. I would argue that we have made great progress in both the analysis and practice of monetary policy over the last forty years. One important reason for that progress is the existence of a group that is often neglected - macroeconomists working in central banks.

Unlike their academic counterparts, the primary goal of these economists is not to innovate, but to examine the evidence and see what ideas work. The framework that most of these economists find most helpful is the New NeoClassical Synthesis, or equivalently New Keynesian theory. As a result, it has become the dominant paradigm in analysing monetary policy.

That does not mean that every macroeconomist looking at monetary policy has to be a New Keynesian, or that central banks ignore other approaches. It is important that this policy consensus should be continually questioned, and part of a healthy academic discipline is that the received wisdom is challenged. However, it has to be acknowledged that policymakers who look at the evidence day in and day out believe that New Keynesian theory is the most useful framework currently around. I have no problem with academics saying ‘I know this is the consensus, but I think it is wrong’. However to say ‘the jury is still out' on whether prices are sticky is wrong. The relevant jury came to a verdict long ago.

It is obvious that when it comes to using fiscal policy in short term macroeconomic stabilisation there can be no equivalent claim to progress or consensus. The policy debates we have today do not seem to have advanced much since when Keynes was alive. From one perspective this contrast is deeply puzzling. The science of fiscal policy is not inherently more complicated. What I have called a pure countercyclical increase in government spending (higher government spending now, financed by debt which is paid off by lower government spending once we are no longer at the Zero Lower Bound) can hardly fail to be expansionary in a New Keynesian framework if that debt can be sold.

What has been missing with fiscal policy has been the equivalent of central bank economists whose job depends on taking an objective view of the evidence and doing the best they can with the ideas that academic macroeconomics provides. This group does not exist because the need to use fiscal policy for short term macroeconomic stabilisation is occasional either in terms of time (when the Zero Lower Bound applies) or space (countries within the Eurozone). As a result, when fiscal policy was required to perform a stabilisation role, policymakers had to rely on the academic community for advice, and here macroeconomics clearly failed. Pretty well any outside observer would describe its performance as rotten.

The contrast between monetary and fiscal policy tells us that this failure is not an inevitable result of the paucity of evidence in macroeconomics. I think it has a lot more to do with the influence of ideology, and the importance of what I have called the anti-Keynesian school that is a legacy of the New Classical revolution. The reasons why these influences are particularly strong when it comes to fiscal policy are fairly straightforward.

Two issues remain unclear for me. The first is how extensive this ideological bias is. Is the over dominance of the microfoundations approach related to the fact that different takes on the evidence have an unfortunate Keynesian bias? Second, is the degree of ideological bias in macro generic, or is it in part contingent on the particular historical circumstances of the New Classical revolution? These questions are important in thinking how this bias can be overcome.

Tuesday 18 December 2012

The New Classical Revolution: Technical or Ideological?

Paul Krugman: “The state of macro is, in fact, rotten, and will remain so until the cult that has taken over half the field is somehow dislodged”

The cult here is freshwater macro, which descends from the New Classical revolution. In response

Steve Williamson: “At the time, this revolution was widely-misperceived as a fundamentally conservative movement. It was actually a nerd revolution.” “What these people had on their side were mathematics, econometrics, and most of all the power of economic theory. There was nothing weird about what these nerds were doing - they were simply applying received theory to problems in macroeconomics. Why could that be thought of as offensive?”

The New Classical revolution was clearly anti-Keynesian, in the sense of Keynesian theory of the 1960s/70s, but was that simply because Keynesian theory was the dominant paradigm? As Williamson says, these guys were outsiders, and they wanted to revolutionise the discipline, which meant attacking the dominant theoretical framework of the time, which was Keynesian IS/LM.[1]

I have no particular expertise here: when this was all happening I viewed it from afar and with a lag, although perhaps that is also an advantage. But for what it is worth, I think there is some truth in what Stephen Williamson (SW) says. I certainly think that New Classical economists revolutionised macroeconomic theory, and that the theory is much better for it. Paul Krugman (PK) and I have disagreed on this point before. It was New Classical economists who recognised the importance of Muth’s rational expectations idea, and it is hard to imagine making sense of what the Fed has done this year without it.

But this is not where the real disagreement between PK and SW lies. The New Classical revolution became the New Neoclassical Synthesis, with New Keynesian theory essentially taking the ideas of the revolutionaries and adapting Keynesian theory to incorporate them. Once again, I believe this was a progressive change. While there is plenty wrong with New Keynesian theory, and the microfoundations project on which it is based, I would much rather start from there than with the theory I was taught in the 1970s. As SW says “Most of us now speak the same language, and communication is good.” What New Keynesian theory does is allow central banks to apply New Classical ideas in a way that is relevant to the task they have to perform, which is inflation control through demand management.

I think the difficulty that PK and I share is with those who in effect rejected or ignored the New Neoclassical Synthesis. I can think of no reason why the New Classical economist as ‘revolutionary nerd’ should do this, which suggests that SW’s characterisation is only half true. Everyone can have their opinion about particular ideas or developments, but it is not normal to largely ignore what one half of the profession is doing. Yet that seems to be what has happened in significant parts of academia.

SW likes to dismiss PK as being out of touch with current macro research. Lets look at the evidence. PK was very much at the forefront of analysing the Zero Lower Bound problem, before that problem hit most of the world. While many point to Mike Woodford’s Jackson Hole paper as being the intellectual inspiration behind recent changes at the Fed, the technical analysis can be found in Eggertsson and Woodford, 2003. That paper’s introduction first mentions Keynes, and then Krugman’s 1998 paper on Japan. Subsequently we have Eggertsson and Krugman (2010), which is part of a flourishing research programme that adds ‘financial frictions’ into the New Keynesian model. You would not think of suggesting that PK is out of touch unless you are in effect dismissing or marginalising this whole line of research.[2]

I would not describe the state of macro as rotten, because that appears to dismiss what most mainstream macroeconomists are doing. I would however describe it as suffering from two unhelpful biases. The first is methodological: too much of an obsession with microfoundation purity, and too little interest in evidence. The second is ideological: a legacy of the New Classical revolution that refuses to acknowledge the centrality of Keynesian insights to macroeconomics. These biases are a serious problem, partly because they can distort research effort, but also because they encourage policy makers to make major mistakes.[3]


[1] The clash between Monetarism and Keynesianism was mostly a clash about policy: Friedman used the Keynesian theoretical framework, and indeed contributed greatly to it.

[2] It may be legitimate to suggest someone is out of touch with macro theory if they make statements that are just inconsistent with mainstream theory, without acknowledging this to be the case. The example that most obviously comes to mind is statements like these, about the impact of fiscal policy.

[3] In the case of the UK, a charitable explanation for the Conservative opposition to countercyclical fiscal policy and their embrace of austerity was that they believed conventional monetary policy could always stabilise the economy. If they had taken on board PK’s analysis of Japan, or Eggertsson and Woodford, they would not have made that mistake.

Sunday 16 December 2012

Mistaking models for reality

In a recent post, Paul Krugman used a well known Tobin quote: it takes a lot of Harberger triangles to fill an Okun gap. For non-economists, this means that the social welfare costs of resource misallocations because prices are ‘wrong’ (because of monopoly, taxation etc) are small compared to the costs of recessions. Stephen Williamson takes issue with this idea. His argument can be roughly summarised as follows:

1) Keynesian recessions arise because prices are sticky, and therefore 'wrong', so their costs are not fundamentally different from resource misallocation costs.

2) Models of price stickiness exaggerate these costs, because their microfoundations are dubious.

3) If the welfare costs of price stickiness were significant, why are they not arbitraged away?

I’ve heard these arguments, or variations on them, many times before.[1] So lets see why they are mistaken, taking the points in roughly reverse order.

Keynesian recessions arise because of deficient demand. If you want to think of this as being because some price is wrong, in my view that price is the real interest rate. Now flexible wages and prices might get you the right real interest rate, either because they encourage monetary policy to do the right thing (by changing inflation), or because a particular monetary policy combines with inflation expectations to generate the appropriate real interest rate. However when nominal interest rates hit zero and there are inflation targets, flexible prices may not be enough (as argued here), so there may be no flexible price solution that gets rid of the costs of recession. At the very least, that suggests that recessions are a bit different from, say, the costs of monopoly or distortionary taxation. It also tells you why they cannot be arbitraged away by the actions of individuals.(See also Nick Rowe on this.)

What we have in a recession is a coordination problem. If everyone were to spend more, the additional output would generate incomes that matched the spending. If monetary policy cannot induce that coordination, then individuals could try and persuade someone with a great deal of spending power who could borrow freely and very cheaply to embark on additional spending. The obvious someone is the government, and the real puzzle is why governments have been so reluctant to arbitrage away recessions in this way.  

The second point is horribly wrong, and it explains the title of this post. The problem with modelling price rigidity is that there are too many plausible reasons for this rigidity - too many microfoundations. (Alan Blinder’s work is a classic reference here.) Microfounded models typically choose one for tractability. It is generally possible to pick holes in any particular tractable story behind price rigidity (like Calvo contracts). But it does not follow that these models of Keynesian business cycles exaggerate the size of recessions. It seems much more plausible to argue completely the opposite: because microfounded models typically only look at one source of nominal rigidity, they underestimate its extent and costs.

I could make the same point in a slightly different way. Lets suppose that we do not fully understand what causes recessions. What we do understand, in the simple models we use, accounts for small recessions, but not large ones. Therefore, large recessions cannot exist. The logic is obviously faulty, but too many economists argue this way. There appears to be a danger in only ‘modelling what we understand’ that modellers can go on to confuse models with reality.

Lets move from wage and price stickiness to the major cost of recessions: unemployment. The way that this is modelled in most New Keynesian set-ups based on representative agents is that workers cannot supply as many hours as they want. In that case, workers suffer the cost of lower incomes, but at least they get the benefit of more leisure. Here is a triangle maybe (see Nick Rowe again.) Now this grossly underestimates the cost of recessions. One reason is  heterogeneity: many workers carry on working the same number of hours in a recession, but some become unemployed. Standard consumer theory tells us this generates larger aggregate costs, and with more complicated models this can be quantified. However the more important reason, which follows from heterogeneity, is that the long term unemployed typically do not think that at least they have more leisure time, so they are not so badly off. Instead they feel rejected, inadequate, despairing, and it scars them for life. Now that may not be in the microfounded models, but that does not make these feelings disappear, and certainly does not mean they should be ignored.

It is for this reason that I have always had mixed feelings about representative agent models that measure the costs of recessions and inflation in terms of the agent’s utility.[2] In terms of modelling it has allowed business cycle costs to be measured using the same metric as the costs of distortionary taxation and under/over provision of public goods, which has been great for examining issues involving fiscal policy, for example. Much of my own research over the last decade has used this device. But it does ignore the more important reasons why we should care about recessions. Which is perhaps OK, as long as we remember this. The moment we actually think we are capturing the costs of recessions using our models in this way, we once again confuse models with reality.

[1] A classic example comes from Robert Lucas. This includes the rather unfortunate statement that the “central problem of depression prevention has been solved”, but I don’t think that should be used as evidence against the more substantive claim of the paper, which is that the gains from stabilising the business cycle are relatively small. This assertion has been criticised even if we stick with New Keynesian representative agent models (see this paper by Canzoneri, Cumby and Diba), but the problems I outline below are more fundamental.

[2] For non-economists: twenty years ago most Keynesian analysis measured the success of policy (social welfare) by how well it stabilised inflation and the output gap, and the relative importance of inflation compared to output was a ‘choice for policy makers’. Since work by Michael Woodford, a similar measure of social welfare can be derived from the utility of individual agents, often using pages of maths, but the importance of output compared to inflation is then a function of this utility and the model’s structure and parameters.    

Saturday 15 December 2012

Delegation and accountability

Ian Mulheirn of the UK's Social Market Foundation uses lots of evocative phrases in a recent post on the OBR’s role in the Autumn statement: he talks about the wizard of OZ, economic high priests handing down prognostications on tablets of stone, Robert Chote (director of the OBR) as a kind of Pope, and more. But behind all this is a crucial point about the delegation of key economic judgements to experts. Ian expresses a feeling that is shared by many, but which I think is mistaken.

First a brief recap. As I explained here, given the Chancellors fiscal mandate, the extent of UK austerity depends crucially on the judgement of the UK’s independent fiscal council about what the output gap is. Now, its the Chancellor’s choice to pursue this path, and as I argue here, it is not a good path in the current circumstances. But having set these parameters, the OBR’s judgement is critical in determining the medium term  fiscal stance. Unfortunately, given the recent behaviour of UK productivity, no one has much of a clue what the current output gap is. Until the Autumn statement the OBR had been following a consistent approach, based on survey evidence, but this time it found that approach produced results it found unbelievable. So it is now, like everyone else, making it up as it goes along.

Ian does not disagree with this move, and as he notes others have gone further than the OBR in discounting the survey evidence. But nevertheless he says of this change: “ The loss of consistency and the sudden wholesale re-evaluation of its approach makes the OBR’s processes opaque and unpredictable for outsiders.” This is true, but would he rather the OBR stuck to an approach to measuring the output gap that it, and most others, no longer believe - just for the sake of consistency?

I think his real complaint is about accountability. To quote again: “Back in 2010, the case for the OBR was that independent economic experts would yield better judgments about crucial things such as the structural deficit than politicians. What that argument overlooked was that politicians are at least accountable for their judgments at the ballot box.” Now I think many feel the same way, so lets explore just what is meant by accountability here.

A political party is accountable at the ballot box for everything it does, all at once. And I can safely say that you will find it very hard to discover a voter who will say in 2015: I’m not voting for the Conservatives because the Chancellor got his calculations about the output gap wrong. By contrast, Robert Chote's reputation will depend in large part on the judgements he makes on this issue. Partly for that reason, I know who I’d prefer making these judgements, even though I cannot vote for or against him.

There is also a certain naivety in the way even some macroeconomists talk about evaluating these judgements. If we are talking about a forecast, they suggest the judgement is simply based on whether the forecast is right or wrong. Yet anyone who knows anything about macro forecasts knows this is silly. To test the ability of a macro forecaster by results, you need a large number of forecasts to separate luck from judgement, by which time the forecaster is safely drawing their pension. The only short term criteria we really have to make a judgement is the quality of their analysis, as judged by other experts.

This is why it is very important that an institution like the OBR or a central bank is accountable in a clear public manner to those with expertise in the area. If that institution starts taking judgements that clearly deviate from what outside experts regard as reasonable, there should be mechanisms by which the leadership of that institution can be changed. The way the Treasury Select Committee works in the UK, while far from perfect, provides accountability along these lines. The absence of similar mechanisms in the Eurozone is a real concern. Where such accountability exists, I think it is superior to any appeal to the ‘judgement of the ballot box’.

As I have argued before, there are structural flaws in getting politicians to make judgements that involve technical expertise, which the ballot box does not resolve. Delegation to independent institutions can avoid these flaws. However these institutions will invariably have to tread a careful path, because their advice has political implications. Here I do have a little sympathy for Ian’s point of view. There is no doubt that the current government has taken every opportunity it can to use the OBR as cover. In his Autumn Statement speech the Chancellor again used analysis the OBR has done about its forecast errors to suggest that the UK’s second recession had nothing to do with austerity. This is a simple case of economic deceit.[1] If my judgement had been misused in this way, I would want to make that misuse as clear as possible in a very public manner, because I had a reputation to protect. Whether the OBR has done that in this case I leave as an exercise for the reader.

[1] Austerity in itself will depress the economy, but a forecast that included it could still be optimistic because of other factors. If these other factors do not materialise, the forecast will be wrong for that reason, but austerity has still depressed the economy. Now whether some of the OBR’s forecast error is due to underestimating the impact of austerity is another matter, so I will not comment on it here, as others have already done so.