Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 13 May 2014

Humility and Chameleons

Macroeconomics tells you to (temporarily) raise, not cut, government spending when we have a recession caused by deficient demand and interest rates are at their lower bound. That is the claim that some of us make. Others say we are being far too sure of ourselves and our subject, in part because there exist models where this is not true. As a result, we should not loudly complain when politicians do not follow this advice. A bit more humility please.

If you think we should have more humility, imagine the following. The UK or US government tomorrow abolishes their independent central bank, and immediately raises rates to 5%, saying it was about time savers had a better deal. Well macroeconomists generally think that independent central banks are a good idea, and we nearly all believe that raising interest rates when inflation is below target and unemployment is high is crazy. But wait a minute. There are models that suggest keeping interest rates low is causing low inflation, and that raising rates could stimulate the economy - I discuss one here. So perhaps we should not be critical of a government that did this. We should be humble, and leave the politicians to do as they please while we get on with our research. Let us make sure we are absolutely sure before shouting too loud.

Why is that wrong? Two reasons. First, the existence of a model that says higher interest rates could stimulate the economy is not in itself evidence that it might. In an interesting paper, Paul Pfleiderer talks about Chameleon models. He defines a chameleon model as “built on assumptions with dubious connections to the real world but nevertheless has conclusions that are uncritically (or not critically enough) applied to understanding our economy.” The model that I discussed where higher rates could stimulate the economy assumes (among other things) agents believe the inflation target is negative, and that raising rates will show them they are wrong. Possible, but highly improbable.

Second, economic policy always takes place in an uncertain environment. Raising interest rates might have reduced inflation in the past, but maybe this time is different? If we wait until we are all absolutely sure about the impact of a policy change, we will wait forever. However, if we are more than 90% certain that raising interest rates, or cutting government spending, will make the recession worse, we should say so. If politicians ignore this advice, we should make sure everyone knows. This is no intellectual game - people’s welfare is at stake.


34 comments:

  1. Is it not the case that the reasons for not raising interest rates are simple, and clearly observable (it will reduce spending, hurt people on flexible rate mortgages, hurt banks/liquidity and so cut lending)? In other words, even though a lot of conventional macro implies we shouldn't raise rates, we don't need economic models (especially complex ones) to tell us it's a bad policy idea; we already knew. Theory is only needed to advance understanding beyond the (relatively) obvious.

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  3. If most of the evidence and macroeconomic theory says that a policy is bad, that should be enough for economists to criticize it publicly. In other words, even 70% certainty should be enough to oppose a policy. Why, you ask? Because the politicans that are implementing it have even less understanding of what effect it will have. If an economic policy is used even though data and theory goes against it, the policymakers are being either populist or incompetent and that is sufficient reason for criticism (even though they may get lucky and it may actually succeed).

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  4. Simon, let me clarify a few things:

    1) I did not say we should not complain too loudly when politicians do not follow our advice. I said we should not promote our policy recommendations as gospel truth. Go ahead and promote what you think is best. But I think it's important for us to be honest with what we do and do not know.

    2) How do you know we had "deficient" demand? I have written down models where a plausible "bad news" shock can generate low demand that might be identified as "deficient" by an econometrician, but in fact, is not "deficient." The prescription depends on what we believe to be the exact nature of the shock. I have written extensively how these models provide plausible interpretations for what we see around us. Of course, they have shortcomings. But then, so does any model. Your tactic of portraying my analysis as resting on "chameleon" models is not appreciated, but I appreciate how it is an effective technique in persuasion.

    3) I never said anywhere that higher interest rates could stimulate the economy. What I said was that zero nominal rates is not, in itself, evidence of what some economists call "deficient" demand.

    4) Your concluding sentence, that peoples' welfare is at stake, that this is not just an intellectual game...just what are you accusing me of here exactly? Do you really want to go there? I hope not.

    I enjoy your blog very much but, honestly, I do not count this as one of your best efforts.

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    1. David

      You seem to have taken my post in a way I did not intend.

      But before getting to that, when have I or Paul Krugman ever promoted policy recommendations as gospel truth? When have I not been honest about what we know? What I have argued is that the general view (which could be wrong, but which I agree with for many reasons) is that we have a recession because of deficient demand. That is why interest rates are at the ZLB, and we have QE. I have also argued that in these circumstances textbook models (which may be wrong, but which I think in this case are not) suggest fiscal stimulus rather than fiscal contraction.

      What you seemed to be saying in your post was that because there were models out there that told a different story (call them contrary models) I should not make these claims – I should show more humility. You seemed to be making a general point: that the existence of contrary models in general was sufficient grounds for humility. That is what my post took issue with, and I was careful to say that the argument I was attacking was that because “there exist models” we should be humble. My post was about that general argument – it was not about your particular models or views. Nor did I say anywhere, or imply, that you thought higher interest rates could stimulate the economy. I would be surprised if you did.

      I used the Schmitt-Grohe and Uribe paper to show clearly why the existence of contrary models was not grounds for humility – a counter example if you like. I thought that particular model could fit Pfleiderer’s description of chameleon, and I gave my reasons why. (Chameleon models can still be thought provoking, which is why I wrote the post about it.) I did not claim that all contrary models would fit this description, and it would be very surprising if they did.

      My final remark was trying to say that the humility argument gives license to politicians to do what they like, and that this was dangerous because people’s welfare is at stake. I do believe that people would on average be better off if politicians followed textbook economics rather than their own prejudices, and macro policy since 2010 seems a clear case in point. That is why I tend to come down quite hard on arguments which, however unintentionally, appear to give them cover for doing so. But to repeat, I was attacking what I thought was a proposition involving policy and contrary models in general, and not your own views or models.

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    2. Simon, I appreciate your thoughtful reply. On reflection, I think I was being overly sensitive and reading too much into what you were saying (and also confounding your more carefully stated views with the other fellow, who tends to be more assertive and provocative).

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    3. Nice dig at the "0ther fellow". Frankly, not " your best effort" buddy.

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    4. In David's defense, when I first read this post after David's, I was perplexed as well. I was confused about why Simon brought up expansionary interest rate increases after linking to David's post.

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    5. I do not think David needs defending - the post should have been clearer.

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    6. "How do you know we had "deficient" demand?"

      In the real world house prices dropped massively (constitutes a negative demand shock in any model which features wealth in the consumption function) and unemployment rose. So accept the mainstream view or (implicitly, this is after all the main trick of your humility nonsense, to hedge your bets and not clearly state what you actually thing) promote your anti-Keynesian right-wing "food stamps caused the Great Depression" nonsense

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  5. Magnus Carlsen13 May 2014 at 14:56

    @DA, Can I ask whether there are any circumstances at all under which you would recognise that demand might be deficient? Indeed was this not why monetary policymakers lowered rates to zero? I would have thought that the observation of zero rates would be a strong clue.

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    1. Magnus, in short, yes.

      First, I would need strong evidence to suggest that allocations are government by anonymous Marshallian spot markets subject to sticky wages/prices. Personally, I believe that most resource allocation occurs through long-term relationships, so that the dynamic behavior of spot wages and prices do not matter so much (see here: http://andolfatto.blogspot.ca/2010/07/sticky-price-hypothesis-critique.html ).

      Next, I would have to be convinced that depressed expectations are either not individually or socially rational. I'd have to be convinced that there were not natural economic forces at work depressing real (and nominal) interest rates, like a growth slowdown, for example. Other "fundamental" forces that could depress demand include people being afraid or uncertain of the future evolution of fiscal policy (taxes that punish the accumulation of physical and human capital).

      And so on. The list can be made longer. There are, in my view, plenty of competing interpretations of what is going on. Depending on what we really think is going on, the appropriate policy response may be completely different from "standard" prescriptions based on "standard" diagnoses.

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    2. Magnus Carlsen14 May 2014 at 01:46

      You mean in short yes, but actually when you start to think about it no.

      Demonstrably you have had your head in the sand. If the UK, 2010 (i.e. when austerity was initially implemented) wasn't a clear case of deficient demand then I'm a socially rational Walrasian auctioneer. Growth didn't just "slow down", real output was below what it was in 2008, 2007 and 2006 even. It would have to be a very exotic supply side explanation.

      What I don't get is how highly intelligent employees of central banks seem to recognize deficient demand when it comes to monetary policy - i.e. cutting rates and QE, but simultaneously deny deficient demand when it comes to fiscal policy.

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    3. @DA: Other "fundamental" forces that could depress demand include people being afraid or uncertain of the future evolution of fiscal policy (taxes that punish the accumulation of physical and human capital). "

      Wow--what a remarkable sentence. Is there any evidence that such a fear f punitive taxation could be significant? Seems like highly dubious right wing S&M fantasy to me.

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    4. Magnus, I actually thought you were being sincere in starting a conversation. I see that you have already judged me, so I will leave you with your secure knowledge of how the world works.

      Eric, certainly when I go to speak of members of the board of directors of our local branches (of the St Louis Fed) and other business people of my community, the uncertainty surrounding the burden of the U.S. health care legislation, Dodd-Frank and other impending legislation, certainly does take a prominent position in the conversation. Of course, I did not mean to say, as you seem so intent on suggesting I did, that this is the only possible factor holding back what would otherwise be a more robust recovery. But I'm sure you derived great pleasure, recording here on Simon's page, in your brave anonymous manner, the fact that I am subject to an S&M fantasy.

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    5. So the US health care legislation seems like punitive taxation to your businessman friends? I did not suggest that you thought this was all that was holding back a robust recovery. Nor did I derive any pleasure from any of this. I was simply struck that you would use the word "punish," and I remain skeptical that there is much significant empirical evidence that the potential for slightly higher taxes (like what Obamacare entails) will make much of a difference in a recovery. I still think you and your businesspeople friends are not seeing things clearly, and my little joke about S&M fantasy was in response to your word, "punish," which struck me as absurd. Lastly, I intended to be neither brave nor anonymous. For what it's worth, my name's Eric Colburn. I live in Cambridge, Massachusetts.

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  6. Such an important point. Thank you for making it. As I always say, a model is only as good as its interpretation. Many models are good for understanding how a certain factor, or factors, work, not for taking as a literal interpretation of the entire reality. So, to say that those models say something else, and so it's therefore substantially uncertain, is a misinterpretation.

    Another example is when Ed Prescott said, "It is an established scientific fact that monetary policy has had virtually no effect on output and employment in the U.S. since the formation of the Fed."

    See:http://orderstatistic.wordpress.com/2014/01/30/the-wisdom-of-laureates/

    Sure you could find models where this is true, but it requires interpreting these extremely unrealistic models literally to claim they are evidence for monetary policy having no effect, or virtually no effect, and therefore we should have "humility" in thinking monetary policy can have a strong effect.

    The models interpreted intelligently, not literally, and the mountain of empirical evidence make it extremely likely that one side is right, the one that says monetary policy can have a big effect.

    False humility is not a virtue either.

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    1. Richard, no one would ever accuse you of false humility.

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    2. I meant to end that with a ;)

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    3. Andolfatto,

      Haven't you adopted Mr. Pope's view that "what is, is right"? Wouldn't a local equilibrium, no matter how dismal, convince you according to the criteria you have offered, that no intervention is needed?

      On the main issue of your initial response, there has been a pretty constant theme among Krugman's non-howling adversaries that he ought to be nicer. In most cases, the "being nicer" that's requested would mean making his case less powerfully and. Often, it also amounts to a demand that he be a passive hypocrite, allowing bad analysis or outright untruth to go unchallenged. Making a "be nice" demand of Wren-Lewis cannot avoid looking like giving him the same disingenuous treatment.

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    4. I'm not sure who Mr. Pope is. Do you mean Voltaire's Dr. Pangloss, by any chance? And no, equilibria generically do not correspond to optima. I have advocated interventions in the past, many consistent with Krugman's proposals. The issue I wished to address was that of our high priests adopting language that suggests a lot more certainty in what we know than actually exists.

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    5. Alexander. Justification of "An Essay on Man" which aimed to "vindicate the ways of God to man" in which her wrote "Whatever IS, is RIGHT" (caps and all).

      Pangloss was created to make fun of Pope's view.

      The high priests you accuse have made the point, repeatedly, about proof and pudding. At some point, being more right than your adversaries does earn you the right to claim precedence for your ideas. If you are fighting against listening to the guys who have been right more often than you, you ought to admit that is the case.

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  7. «Well macroeconomists generally think that independent central banks are a good idea, and we nearly all believe that raising interest rates when inflation is below target and unemployment is high is crazy.»

    The above may be the conclusion given extremely narrow assumptions and doses of "ceteris paribus" that would kill an elephant. And not just the usual astutely crafted Arrow-Debreu-Lucas assumptions, perhaps augmented by New Keynesian ones about oversaving caused by nominal stickyness, but also using an artfully designed definition of "inflation" for example.

    But of course the very big political aspect of the summary above is the cleverly unspoken one: that there is no role for fiscal policy. How wonderful it is to have found a set of assumptions that "prove" that central bank donating low cost debt to their friends (according to Bagehot's anti-principles: to insolvent borrowers, against toxic collateral, at very low rates) is all that's needed to correct the nominal frictions that stop the Real Business Cycle from generating the optimal distribution of income. Nothing to see here, move along :-).

    People more focused on policy in "realistic" conditions and who are not stuck on the Central Truthiness of Economics (that unregulated markets guarantee that income is distributed solely according to productivity) like institutionalists and the StumblingAndMumbling blogger think that considering institutions, power relationships, and mechanisms are a better guide to the likely consequences of policy. Some of these people even remember the importance of the second best theorem.

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  8. «people being afraid or uncertain of the future evolution of fiscal policy (taxes that punish the accumulation of physical and human capital).»

    I love the line of argument that taxes are not the cost of membership in a group purchase scheme, but a nasty way to punish property owners at high cost to everybody else, as this gives me the opportunity to mention my *progressive taxation* scheme.

    The starting points of the scheme are that government spending and taxes are purely a reward or a punishment for some people, and that progress comes only from the desire of property owners to accumulate more property ("accumulation of physical and human capital") while non-owners are ballast on progress.

    Therefore a progressive tax scheme would be like:

    * 50% "undeserved income" tax rate for the economic exploiters who lazily contribute less than £20,000/y to the national income and who destroy physical and human capital with their parasitical activities.

    * 35% "unearned income" tax rate for the slow, not-trying hard enough members who only contribute less than £40,000/y to the national income and who don't contribute to the accumulation of physical and human capital.

    * 25% "earned income" tax rate for the barely productive people who contribute less than £100,000/y to the national income and start to contribute to the accumulation of physical and human capital.

    * 10% "ordinary income" tax rate for those productive enough to contribute up to £400,000 and who probably are contributing something more significant to the accumulation of physical and human capital (for example public/prep schools for their children).

    * 0% "deserved income" no-tax rate for the meritorious hardworking people contributing up to £1,000,000/y to the national income, and who are starting to contribute significantly to the accumulation of physical and human capital (for example by buying flats in London).

    * 10% "Productivity Tax Credit" given to those heroes of the economy whose massive productivity contributes more than £1,000,000/y to the national income and who are the only ones who contribute significantly to the accumulation of physical and human capital.

    The goal of the scheme above is to TAX POVERTY INTO HISTORY, by incenting people to stop being poor and becoming rich, by ensuring that taxes punish being a lazy, wastefully living poor, and reward becoming a hard working, wealth accumulating rich.

    :-)

    PS This is what progressive governments already do like in Texas:

    http://www.motherjones.com/kevin-drum/2014/03/texas-turns-out-be-not-so-miraculous-after-all

    Where local taxes are around 12.6% of income for people in the bottom 20% ("takers") by income, fall to 7.4% for the top 20% by income, and to 3.2% for the 1% ("makers") by income.

    This gives people in the bottom 20% a strong incentive to get into the top 1% and accumulating physical and human capital instead of living in idle luxury driving around in their government-provided Cadillacs after eating their government-supplied t-bone steaks while getting gold-plated affirmative actions government-funded studentships for their 3rd-gen-never-worked children.

    :-)

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  9. It's not just macroeconomics which says a huge increase in interest rates will have bad consequences. There is plenty of real-world experience which shows it. Warren Buffet, no macroeconomist: "You see who's swimming naked when the tide goes out." But even though a path of rates from 0% to 5% has bad consequences, the path 5% to 0% to 5% may not be superior to keeping the rates constant at 5% the whole time. I'm not sure at all that it is. (For instance, Third World central bankers complained last year about the Fed increasing interest rates, and the Americans took the stance, "There is no satisfying these people," because the same central bankers complained when the Americans lowered rates three years before. But the Third World central bankers were right; path dependence is important.)

    In terms of humility I would like to see some acknowledgment that lowering interest rates do not just have good consequences. Lowering rates mechanically increases the value of assets and so increases inequality. The Greenspan put has enormously benefited the investor class. It's not quite a zero-sum game, but mechanically the non-investor class suffered. No pareto optimum there. Taxation could, in theory, claw back some of the gains; but those taxes need to be in place before the rates are lowered, rather than hoping and praying something might be done twenty years down the road.

    And eventually Keynesians make it too easy on themselves. Borrowing (if you can) and spending money is known by politicians the world over as being the easy way to juice the economy and keeping constituents happy. The standard shouldn't be whether there is some temporary bump, but whether, over the course of (say) ten years Keynesian economics has a superior outcome. Now here I hope you throw up your hands and say, "Who knows, ten years?" *That's* a good place for humility to come in.

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  10. «If the UK, 2010 (i.e. when austerity was initially implemented) wasn't a clear case of deficient demand then I'm a socially rational Walrasian auctioneer. Growth didn't just "slow down", real output was below what it was in 2008, 2007 and 2006 even. It would have to be a very exotic supply side explanation.»

    Exotic? What about a large terms-of-trade shock?

    http://mazamascience.com/OilExport/output_en/Exports_BP_2013_oil_bbl_GB_MZM_NONE_auto_M.png

    Also for a little while the giant leverage machine slowed down a bit, another extractive industry gone bad.

    Both extractive, asset stripping, activities had started to deliver manna from heaven (a variant of the Dutch disease) 40 years ago as Tony Blair described cogently in 1987:

    http://www.lrb.co.uk/v09/n19/tony-blair/diary
    «Mrs Thatcher has enjoyed two advantages over any other post-war premier. First, her arrival in Downing Street coincided with North Sea oil. The importance of this windfall to the Government’s political survival is incalculable. It has brought almost 70 billion pounds into the Treasury coffers since 1979, which is roughly equivalent to sevenpence on the standard rate of income tax for every year of Tory government. Without oil and asset sales, which themselves have totalled over £30 billion, Britain under the Tories could not have enjoyed tax cuts, nor could the Government have funded its commitments on public spending.
    More critical has been the balance-of-payments effect of oil. The economy has been growing under the impetus of a consumer boom that would have made Lord Barber blush. Bank lending has been growing at an annual rate of around 20 per cent (excluding borrowing to fund house purchases); credit-card debt has been increasing at a phenomenal rate; and these have combined to bring a retail-sales boom – which shows up dramatically in an increase in imported consumer goods. Previously such a boom and growth in imports would have produced a balance-of-payments deficit, a plunging currency and an immediate reining-back on spending, with lower rates of growth.
    Instead, oil has earned foreign exchange and also produces remittance payments from overseas investments bought with oil money.
    The situation is neither stable nor healthy in the long term: but in the short term it allows the living standards of the majority to rise rapidly, even though the industrial base, the ultimate foundation of a successful economy, is still only achieving the levels of output of 1979.

    The fact that we have failed to use oil to build a productive and modern industry for the future is something historians will deplore.»

    What if in 2007-2008 the "in the short" that Blair mentions above finally ended?

    BTW finding myself supporting an argument by an "aligned" economist is strange, but sometimes they do make good points.

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  11. @Simon: Aren't models by definition always to some extent “built on assumptions with dubious connections to the real world"?
    If economic reality were calculable, we wouldn't be tempted to simplify (model) it, would we?

    @David: Seeking to know whether there are "natural economic forces at work" seems an odd choice of words to me: isn't an economy 100% man-made, so 0% 'natural'?
    Economic reality seems essentially teleological (governed by drives, motives and man-made laws) rather than causal (governed by forces and natural laws) to me.
    Wherever anything resembling external forces and laws impedes human needs, wants and wishes people can be counted upon to (seek to and -sooner or later- manage to) circumvent them.

    @Simon: How meaningful is a statement whether a recession is "caused by deficient demand" if causation itself has a dubious relation to economic reality?
    (As has 'demand'; can 'demand' ever be measured independently from the 'consumption' that it is supposed to explain?)

    Indeed (@David), "resource allocation occurs through [...] relationships" and relationships are far more complex than assumed in any economic model.
    Rather than 'demand being deficient' or not, real actors (in institutionalised or ad hoc relations with each other) rather than abstract 'agents' that do not behave as before create recessions.
    If you ask them why, yes, "depressed expectations" (of the behaviour of others) is a more meaningful explanation than "deficient demand", because it can be further analysed as resulting from (changing) information and interpretation of other people's drives and motives and (changing) patterns of communication between actors.

    Economic progress (depression) = (deficient) political will + mutual trust
    Economic policy = leadership + management of self-fulfilling prophesies

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  12. Magnus Carlsen14 May 2014 at 05:38

    The oil sector in the UK has been diminishing in size gradually for over two decades now. This can't explain the discontinuity in real GDP around 2009-10.

    Real output fell, to varying degrees, in many countries around this time. Not all of them had meaningful extractive or financial sectors. Moreover they can't all simultaneously have had negative terms of trade shocks.

    In fact your ramblings actually imply that economic policy failed a fortiori. For the reasons you give sterling depreciated. Standard textbook theory (as well as copious evidence) find this to be expansionary. The failure of the UK economy to expand suggests negative influences elsewhere.

    Enter George Osborne, stage right.

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    1. Magnus Carlsen14 May 2014 at 05:41

      (This was meant as a a reply to Blissex 04:52)

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  13. There is a structural problem to it: the decision is made by politicians who often, some would even say more often than not, use it for political games.
    Not really a good answer is found for that. Probably your independent agency is the best, but still far from perfect. Imho mainly the issue is still how to build in that system checks and balances. Such an agency is too likley to be dominated by either bankers or left from centre economist like yourself. Both undesirable imho.

    In this particular crisis the huge problem is that there are a lot of structural issues. Structural overspending to start with (on top of issues like aging that need a lot of spending and hits revenue at the same time).
    But as important a very sick financial sector that is simply not cleaned up properly. Better in the UK and the US, but Japan is still partly in its 1990 mess (almost 25 years ago!!). In Europe you probably have at least 2-3 tn of bad loans not properly accounted for. That rubbish has to get out of the system before things can run more or less normal again.
    In Spain more than half of the company loans are to cies that cannot pay even the interest from their CF while just over 10% of loans are considered as bad. Just look at Japan what that does to your growth (and Japan has always been and is still considerably more competitive than Southern Europe anyway).
    Another structural problem that has piled up is the fact the the cheap money in this and earlier crisis measures has created a situation not only in the banking sector but also in the rest of the economy where badly run large cies are kept alive (as they benefit from the lower interest) and compete with start ups that donot benefit from low interest.
    Just look at average age of quoted cies and similar data. While on top of that these large cies are the top-outsourcers on top of it.

    Aging is not taken properly into account by most, while it is hitting in in most countries now. GDP growth per worker looks a better measure than simply GDP growth to calculate the gap.

    Yes anti-cycle works most likely but it will not solve all the current issues. A climate has to be created in which people feel confident that the shit is properly cleaned up (and all over the place not only the home country) and there simply isnot at the moment.
    Now stimulus looks often used to avoid structural measures, like properly cleaning up the bankingsector. Just look at the South of Europe as the most clear example. Effectively the mess is roughly equal to when the crisis started but as interest is low everybody pretends that all is well. Basically just waiting for the next crisis.

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  14. «The oil sector in the UK has been diminishing in size gradually for over two decades now.»

    Hahahahahahahahahaha! I had provided this link:

    http://mazamascience.com/OilExport/output_en/Exports_BP_2013_oil_bbl_GB_MZM_NONE_auto_M.png

    «Real output fell, to varying degrees, in many countries around this time. Not all of them had meaningful extractive or financial sectors.»

    Michael Pettis "The volatility machine"...

    Besides the countries with the biggest issues (UK, Ireland, Iceland, baltics, Greece, ...) all had rather significant debt-collateral spirals designed to enable extractive actors in finance to do their most.

    «sterling depreciated. Standard textbook theory (as well as copious evidence) find this to be expansionary. The failure of the UK economy to expand»

    Tony Blair put it rather well: «The fact that we have failed to use oil to build a productive and modern industry for the future is something historians will deplore.»

    Besides there are other two factors:

    * The UK's loss of the oil windfall coincided largely with the the end of a global debt-collateral spiral; it is difficult to export more not just as a nation suffering from the consequences of "Dutch disease", but then most trade partners are in a recession too.
    * Sterling is still too high, as the UK switched from exporting oil to exporting London house deed and other money laundering services.

    «suggests negative influences elsewhere. Enter George Osborne, stage right.»

    While I think he is a particularly knavish character, one of his great merits may have been his skill at driving UK living standards downward permanently by a significant amount after the loss of the oil windfall, without causing much fuss.

    He has done this by putting most of the fall on "parasitical" workers while rewarding "productive" rentiers, but overall the downward adjustment was well executed; he was also lucky that he could mask it with the bust of the other extractive industry, the global finance system.

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  15. SW-L: "the humility argument gives license to politicians to do what they like, and that this was dangerous because people’s welfare is at stake."
    In the first place, I'm not sure there is a politician who feels s/he needs a justification for acting against the recommendations of economists. In the second place, anywhere that politicians' doing what they like is dangerous to the people's welfare, there is a serious governance problem.
    Actually, the humility argument leads me to the opposite conclusion: In a recession or a slow recovery, government ought first to be taking measures to relieve human suffering, providing jobs as employer-of-last-resort, income assistance, retraining/relocation if indicated, etc. It is the arguments that have been advanced for austerity (e.g. 'runaway debt'), or for withholding relief (e.g. 'moral hazard') that depend on dubious assumptions and unproven mechanisms. No model is needed to see that unemployment assistance, income support, etc. improve the lot of those most harmed by economic downturns. Shouldn't these be the immediate responses of a representative democracy?

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    1. "No model is needed to see that unemployment assistance, income support, etc. improve the lot of those most harmed by economic downturns."

      Economics is a science and, as such, one must confront unequivocal and clear predictions with reality. As such, you need a model -- and, moreover, a model which is justified and supplemented by empirical observations.

      Though economic theory is sometimes elegant and beautiful, it is certainly not an exercise of poetry where nothing is silly or wrong.

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