Reflections on a Past Self

This is from one of my early blog posts, back in January 2007:

I've been picking on Mankiw lately. Nothing should be read into that. He's undoubtedly at least 56% smarter than me, and he is one of the greatest economists of our time in my opinion. I consider myself a New Keynesian so I rever him in many ways. Besides, he's got the best econ blog on the web - so I have to post about him all the time - even though we often disagree. Besides, I love his text book(s).

It's amazing how much I have changed over the last 3 or 4 years. I don't think Mankiw is one of the 'greatest economists of our time.' I definitely don't consider myself New Keynesian anymore (I blame my schooling for indoctrinating that into me). And I certainly don't think Mankiw has one of best blogs on the web either - especially since he stopped allowing comments. And, above all, his textbooks are the most generic, least explanitive, most indoctrinating books on the market - yuck, yuck, yuck. Not to be overly critical, but I mean really... I know his texts are popular, but they are just not very good - pretty and popular, but not good.

Great Post Quoting Karl Marx on the Unique Importance of Money

Kudos to Brad DeLong for bringing this to the forefront.

Cyclicality of Labor Productivity

Most economists teach productivity is, obviously a key factor in long-run growth. But also, many teach that (as much data shows across time and across regions) that productivity has tended to be pro-cyclical - that it rises during boom times and falls during bad times. This obviously is not the case this time around.

Many less 'classical'-leaning economists claim that cyclicality of labor productity is not that simple - that it depends on what kind of economic cycle we are talking about. Supply shocks could potentially induce pro-cyclical productivity (one theory is that of 'labor hoarding'), but demand shocks like the one we are currently experiencing should, by their very nature of layoffs and cut hours, cause counter-cyclical behavior as those left with jobs are forced to do twice as much work in a given day (as the article notes).

So, I'm left with wondering again, what's the purpose of aggregation in macroeconomics if it leaves you with misleading results during times when analysis could really could use a little bit of realism.

Chartalism - Causality and Necessity is Problematic

From-http://bilbo.economicoutlook.net/blog/?p=4870

(S – I) = (G – T) + (X – M)

So total private savings (S) is equal to private investment (I) plus the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)), where net exports represent the net savings of non-residents. That has to hold as a matter of accounting. It is not my opinion.

Thus, when an external deficit (X – M < 0) and public surplus (G - T < 0) coincide, there must be a private deficit. While private spending can persist for a time under these conditions using the net savings of the external sector, the private sector becomes increasingly indebted in the process.

I've continued my skepticism on Chartalism's basic arguments. First, I don't think, as many of them claim, that mainstream economists are ignoring an accounting identity. I am not particularly mainstream, but I think Chartalists are over-selling their argument. I agree with the above accounting equation. What concerns I have are two fold:

1. That the causality does not necessarily have to be government deficits CAUSING a net savings. An accounting identity is just that - it is not a model of causality. THe identity leaves open numerous and simultaneous causation runs. Net savings could fund deficits, a capital account surplus could fund net investment....

2. I disagree with the above statement, "...private spending can persist for a time under these conditions using the net savings of the external sector, (but) the private sector becomes increasingly indebted in this process."
How is this supposed indebtedness a given? If we are running a current account deficit, and by definition a capital account surplus, foreigners are providing us part of their savings to fund our negative net savings and government debt. What is it about this that is unsustainable for as long as our currency and economy is strong?

I agree with the typical post-Keynesian argument that debts financed from abroad can lead to bubbles in some cases, but not necessarily this Chartalist subgroup. I don't see how this means the solution is for government debt (deficit spending) to replace foreign funding to pay for investment spending. Further, I don't see how encouraging further private savings (less consumption) would be somehow less attractive than running large government deficits.

I get that the government is the monopolist of money and therefore has no offsetting liabilities for money assets in aggregate. I don't get how it necessarily follows, given the above, that the government should just spend and spend and spend, and print and print and print.

I'm still open to dialogue on this, but I have to say, the inability of chartalists to present a cohesive argument is not appealing. (And I've read up a LOT on this subject).

Confused by Obama's Re-Package of health care bill

First, Obama promised to bridge the gap of coopertation b/w Republicans and Democrats, but instead of compromise, and instead of coming up with his own plan (which I've said before he should have done from the beginning - it's called leadership) he decided to tweak the existing Senate bill and, in a completely stupefying move, INCREASED the cost of the bill by $200 billion - with the overall price tag in excess of $1 trillion.

Given that the public and most Republicans' beef with the House and Senate bills were largely their price tag and bloat, one would have thought that Obama might have been willing to compromise on the cost.

He has consistently said that any healthcare reform must be built around lowering costs, improving quality and coverage, and protecting consumer choices. He could have done all three simply by creating a government regulated private exchange and allowing trade of plans across State-lines, promoting HSA's, and focusing on reducing the driver's of costs (like by pigou taxing fatty foods etc.) as opposed to easing the symptoms (via large entitlements and subsidies). Would that have covered everyone or reduced costs by as much as possible? Perhaps not. But it would have satisfied all his conditions at minimal cost to the government (taxpayers).

This was Obama's (second) opportunity to show leadership on health care, and he failed, again.

Australia is Getting it's (Yellow) tail kicked by the recession

The story is simple.
The boom days of the 2000's world economy were a boon for the wine industry, and no country relished in the success more than Australia, who took the concept of mass production and applied it to an industry that had historically ignored the average consumer in favor of vino savants.

But then the recession hit, and just like everything else, the wine industry came crashing down. And, according to a report by the Winemakers' Federation of Australia, and highlighted in the recent edition of "Wine Spectator" Magazine, due to reduced demand from the recession, there is now a huge excess of wines worldwide, and in Australia this excess is extravagant: the quantity supply of Australian wines now exceed quantity demand by 20%. There is a surplus of wine inventories equivalent to Australia's entire sales to the UK (100 million cases). The surplus is pushing wine prices lower - lower than even the Australians think is sustainable in terms of brand value.

Unless the Australians are willing to let prices plunge even further (which it doesn't seem like they do), the solution, from an economics viewpoint is to either put the grape-resources toward more efficient production (ie. cut the supply of wine), or they need to stimulate untapped demand. I personally don't see the demand solution as being workable - Australian wines are already heavily marketed. The supply solution is workable but would be a painful and messy transition. I think the Australians need to accept the factual irony that the value of their brand IS that it is low-value. They should embrace price reductions even further and allow the market to work itself out. They cannot sustain these unprofitable relative high price-points.

A Teaching Dilemma

I will be teaching the intro macro chapter on monetary policy and the role of the Fed in a few weeks. For the 4 years or so I've been teaching I've always had concerns about the best way to teach 'the money' chapter because, frankly, most all of the 'money' chapters I've seen in many intro texts (Mankiw, Case, Hall, etc) really could be torn from the book's binding and probably the students would be better off.

I hate how the 'money' chapter discusses the role and makeup of the Fed while ignoring its history (why we have it, etc.) and comparing to how other economies in the past and present model their financial systems.

I hate how the 'money' chapter just nonchalantly shrugs off any discussion of endogeneity of money by saying explicitly, "it doesn't matter because either way the Fed is who influences interest rates." Of course the laughable absurdity of that statement hits me on so many levels since that statement implies something as true that is not at all always true in dynamic time-space, it implies aggregation of interest rates into 'the interest rate' is just a simplifying assumption, it implies that money demand is lesser or just not important - and it implies that the forms that money demand takes (as a positive force for growth or as a negative force that creates boom/bust cycles and instability) are unnecessary to know. Finally it implies 'money' as defined by circulated currency and demand deposits is the only thing that matters - any notion of credit demand or money created through credit demand is ignored. In sum, these chapters absurdly perpetuate the fallacy of composition and the idea that aggregation and simplification are wholly beneficial to learning and understanding our financial system.

Basically, the 'money' chapter can be said to teach a misleading (and now outdated) view of the role of the Fed, combined with the completely ridiculous and fallacious ideas of what is important about our financial system. The only thing students seem to take away from this chapter is that what's important is the ability for the Fed to create money via our fractional reserves system.

So now my dilemma. Over the last few years I've tried to teach from the text, and supplement with some basic concepts of uncertainty and its effect on money demand and our financial institutions. I've supplemented some basic Austrian ideas of how the Fed may be dynamically perpetuating mal-investments.

But I'm sick of saying one thing and having my text book say and focus on something completely different. Should I just ignore the chapter completely and risk my students missing a question or so on the Departmental final, should I present my concerns to Sr. professors, or should I just keep doing what I'm doing? It's getting to the point where I not only feel its a detriment to the students, but I literally feel ashamed when I teach the 'money' chapter. Does it have to be this way?

Thoughts?