The Right-Wing Anti-Krugman

We're going to imagine there exists a right-wing version of Paul Krugman, and we'll call him/her APK. APK has a good gig with the Wall Street Journal, or some other such right-wing rag, and is also pissed with the Obama administration. APK thinks that Obamacare is an abomination, and wants a smaller government. For some reason, dating perhaps to his time in graduate school at the University of Chicago, APK just cannot abide nerdy types, particularly the ones armed with functional equations, and would like to hoist those characters on their own petards, as it were. APK went to Chicago in 1976 expecting some kind of low-tech economics on the order of what Stigler and Friedman did, but got that idiot Lucas instead. Good God!

APK reasons that there is an army of people he/she can recruit for the cause - those who have seen only a smattering of undergraduate economics. If they have studied only principles of economics from books like Mankiw or Krugman and Wells, all the better. The game here is that he/she wants to tell an accessible story that should be convincing to this type of person - no more and no less.

The model APK is going to use is a straightforward AD/AS model with a liquidity trap. It's like Krugman's (second figure), except APK reasons that the effect of the debt overhang on the demand for goods is really large, so the AD curve should have a slope smaller than the slope of the AS curve. APK has been reading my blog too, for some reason that I can't figure out, and has come across this post and this one, and that's giving him/her some ideas.

The APK model is in the figure.

In the IS/LM part of the diagram, we have the liquidity trap case, with a flat LM curve. In the AD/AS portion of the diagram, the AD curve is positively-sloped and flatter than the AS curve because of a large negative effect of private debt (denominated in nominal terms) on the demand for goods. Point A is the initial short-run equilibrium. If there is no government intervention, the economy will ultimately settle in the long run at point B, after the nominal wage falls and the price level rises, restoring market-clearing in the labor market. Along the path to the long run equilibrium, APK reasons, the price level rises at a rate that is higher the larger is the output gap, which gives the Phillips curve in the bottom of the figure. Note that it slopes the opposite way from how we're used to thinking about, undergrads. No need to worry though. This situation is unprecedented. We're in a liquidity trap and weird shit is happening.

So, APK says, we're in a bad situation. In line with other Inflationistas - APK just had Ron Paul over for dinner - APK is worried about high inflation, as his/her model predicts that it should be well above PI*, which is the 2% anticipated rate of inflation that appears to be well-anchored by the Fed. But we don't have to suffer this high inflation for such a long time - possibly until we are all dead - as there is something we can do now now now. APK resons that we can reduce government spending, which will shift the aggregate demand curve left from AD1 to AD2, reduce the inflation rate (though of course the price level is actually higher at F than at B - but APK thinks that people are going to forget about the price level rise quickly), and get all those whiny unemployed people off our backs at point F. How does this happen? Lower government spending unleashes a torrent of private spending because of the rise in the price level that deflates private debts - there is a negative multiplier that can be very large in absolute value.

Hopefully you get the point now. I've used all the elements of Krugman's narrative, I think, and put these things into the model that he likes to argue is all we need to think about the serious macroeconomic problems of the day. And most everything goes the wrong way, in ways that some knee-jerk right-wing cretin would find very appealing. Conclusion? Though AD/AS analysis seems parked forever in undergraduate textbooks, researchers and policy analysts abandoned it long ago for good reasons. Once modern macroeconomists figured out how to incorporate all the standard tools of economic analysis - game theory, general equilibrium theory, contract theory, mechanism design, etc. - in what they were doing, the game was up. Doing it properly keeps everyone honest - we present models so that they can be taken apart and analyzed to see if they square with the preceding research in convincing ways. I don't see how we would want it any other way.

Knowledge/Power

Figure 1: Paul Krugman And Bill O'Reilly Talk To Tim Russert

"My problem was ... to pose the question, 'How is it that at certain moments and in certain orders of knowledge, there are these sudden take-offs, these hastenings of evolution, these transformations which fail to correspond to the calm, continuist image that is normally accredited?' But the important thing here is not that such changes can be rapid and extensive or, rather, it is that this extent and rapidity are only the sign of something else - a modification in the rules of formation of statements which are accepted as scientifically true. Thus, it is not a change of content (refutation of old errors, recovery of old truths), nor is it a change of theoretical form (renewal of a paradigm, modification of systematic ensembles). It is a question of what governs statements, and the way in which they govern each other so as to constitute a set of propositions that are scientifically acceptable and, hence, capable of being verified or falsified by scientific procedures. In short, there is a problem of the regime, the politics of the scientific statement. At this level, it's not so much a matter of knowing what external power imposes itself on science as of what effects of power circulate among scientific statements, what constitutes, as it were, their internal regime of power, and how and why at certain moments that regime undergoes a global modification.

It was these different regimes that I tried to identify in The Order of Things, all the while making it clear that I wasn't trying for the moment to explain them, and that it would be necessary to try to do this in a subsequent work. But what was lacking here was the problem of the 'discursive regime', of the effects of power peculiar to the play of statements. I confused this too much with systematicity, theoretical form, or something like a paradigm. This same central problem of power, which at that time I had not yet properly isolated, emerges in two very different aspects at the point of junction of Madness and Civilization and The Order of Things." -- Michel Foucault, "Truth and Power", reprinted in The Chomsky-Foucault Debate: On Human Nature, The New Press (2006), pp. 144-145.

I do not know that I understand Michel Foucault, and I have not read much that he wrote towards the end of his life. I had thought Foucault's discursive formations were to be grouped with Thomas Kuhn's paradigms and Imre Lakatos's scientific research program. To me, economics is like medicine, psychiatry, and penology. It fits in well with the disciplines that Foucault analyses. Superficially, the epistemic status of these disciplines is more questionable than a hard science. And they have been used to help nation states categorize, partition, and rule their subjects since, say, the eighteenth century. But I want to drop talk of science for now. I look at a concrete example to help me understand what Foucault might mean when he talks about government, power, the political economy of the sign, a discursive regime, and politics. Doubtless, I will miss many, many nuances here.

You can see many commentators and supposed experts in the media, although, for many, I am none too clear in what area they are expert. (I have in mind such people as Rush Limbaugh, Bill O'Reilly, and even Wolf Blitzer and Thomas Friedman.) Many write best-selling books. A book store will classify them, when they come out, in a section labeled "current events". I suppose libraries will put them somewhere in social sciences. People with the sort of media presence I have in mind can be said to benefit from a sort of power for their statements. From an analytical point of view, you might know a drunk at the end of your local bar who is more worth listening to. Yet these commentators react to one another, take each other seriously, and end up having effects on laws that are passed. At least one kind of power circulates among their statements, a power that is not easily available to those taking their own way at your local.

Foucault also writes about power being productive, not solely a matter of prohibitions. How does the above clip illustrate this theme? Those who have power circulating their statements can sometimes dismiss others as living in a "fantasy world". But I think the power we see in right wing commentators in America extends to individuals in communities across the country. You can find many who think they keep informed by watching TV news. And they will have conversations with one another, maybe conversations that you could not participate in without being seen as rude, dismissive, and condescending. Some of these people might even participate in governing your community by participating in, say, the school board, the city council, or state government. Within such groups, you might find an intellectual who has read, for example, Hayek's Road to Serfdom on Glenn Beck's recommendation. So this power I am vaguely pointing at helps form local communities, as well as national discourse.

I consider Krugman to be at a different level of seriousness than the other two people in the above clip. Still these questions arise for him. What power gets his statements listened to and to circulate widely? It would be a mistake to classify his statements solely as part of the academic discipline of economics. For example, his newspaper columns about the Iraq war do not have much to do with economics. And a regime in which he occupies the acceptable left wing of the public face of economics seems quite limiting to me. When Krugman debates Keen through their blogs, it seems clear who is doing the other more of a favor to acknowledge the existence of the other's work, whatever you make think of the outcome of that debate.

I trust that one can see that in merely acknowledging the existence of political power that allows Krugman's statements to circulate, I am not thereby criticizing their content or what Krugman does with this non-personal power. In fact, I think Krugman has quite often acknowledged the power of his platforms and talked about how that influences his topics. As far as I know, he does not read Foucault. (Has not Brad DeLong written a bit on Foucault?) I am not sure what Krugman has said about his willingness to participate in the sort of hurlyburly babble seen in the above clip, other than that he sometimes has a book to promote. I suppose the bit where he leans back and rolls his eyes at the ceiling is comment enough on his particular antagonist there. I think Krugman would even be receptive to claims about the lack of agency of the author. He is rarely as forthright as in the above clip about calling a lie, "a lie". And he knows that his conventions do not allow him to comment on nonsense spouted by his fellow columnists, except very elliptically.

By the way, the video clip above is not directly from a major network. Apparently, it was put on YouTube with annotations added by Jim Gilliam. And, of course, I do not claim the power of those you might see babbling on your television.

Saturday Entertainment: What's Krugman Doing with his AD/AS Model Now?

When someone is using the wrong tool, we at least hope that they're using the tool properly. For example, suppose Paul Bunyan wants to cut down a very large tree with a very small hatchet. It will certainly work better if he holds the hatchet by the handle and strikes the tree with the head, and not the other way around. Case in point: this "wonkish" post by another Paul.

Krugman obviously didn't read this post of mine, where I try to figure out what he is up to. You'll see in Krugman's post that his current preferred AD/AS configuration is Figure 3 in my post. AD is steeper than AS, and upward sloping. Here's what Krugman says about his second Figure "AS-AD with ZLB," which is my Figure 3:

Now, the reality is that prices and especially wages are sticky — which is why we don’t see runaway deflation. But that stickiness isn’t what’s keeping unemployment high, it’s just something we have to let into our models to make sense of what we see out there.

The AD/AS model Krugman has constructed is indeed a sticky wage model. If he's thinking about the quantity of output that gets determined as being less than "full employment," then the stickiness is that the nominal wage wants to rise but it can't. You would get full employment with an increase in the nominal wage, which shifts the AS curve left, and increases the price level and output. Output goes up because the increase in the price level deflates the value of private debt, and shifts the IS curve right. So what's going on in the labor market in the background of Krugman's second figure? There is an excess demand for labor. Firms really want to hire workers, but they can't find enough people to work at the market wage. That's a very funny kind of unemployment. Maybe Krugman can explain it to us.**

The other problem is that the Krugman narrative seems to be that we would be in a deflation, but for the wage stickiness that is holding up wages and prices. But what's going on in Krugman's second figure and my Figure 3 is that the increase in prices and wages that would give us full employment is being suppressed. I'm really confused.

I've been trying very hard to understand what Krugman thinks a liquidity trap is. As far as I can tell, price stickiness seems necessary to get it. But the liqudity traps I'm familiar with are summarized nicely in this paper by Cole and Kocherlakota and in a more recent paper by Ricardo Lagos. Those papers are about Friedman rules - monetary policies that will give you zero nominal interest rates forever. The basic idea is that the restrictions on the policies that will give you this are weak. That's a liqudity trap - at the zero lower bound we can alter policy in various ways and it doesn't matter. An interesting result I can get in this paper and this one is that you can get a liquidity trap away from the Friedman rule. That's due to an asset scarcity which makes the real interest rate low. If assets are extremely scarce you can have very high inflation rates at the zero lower bound. In all of those models prices are flexible. Conclusion: Liquidity traps need have nothing to do with sticky prices and wages.

**Addendum: Can't believe I woke up in the morning thinking about this. In the short run in Krugman's figure, the real wage is indeed too high, and there is an excess supply of labor, which is part of Krugman's narrative. The key problem in the narrative for this case is that the flexible price equilibrium has a higher nominal wage and higher price level, so the problem can't be a failure of wages to fall. Further, now I'm wondering how Krugman excludes Figure 4 in my previous post. That's the one where the slope of the AD curve is smaller than the slope of the AS curve and you have excessive aggregate demand. Does he know something about how strong that negative wealth effect is?

Obamacare versus the Faculty

I don't know how widespread this phenomenon is, but I thought I would share an email I received this morning:

I have been teaching multiple sections of economics for four years now at several Colleges and Universities in the State of Indiana. I have also been a frequent user of your texts in the classes that I teach.

With the implementation of the ACA (Affordable Care Act) these institutions are giving notification to their part-time faulty that their individual teaching schedules will now be limited to three sections. At the college this will likely result in the cancellation of 20-25% of the class sections in economics, and I would assume other areas will have a similar result. The students are not fully aware of the situation and many will be surprised that their desire to get a college education is now being impacted by the need to avoid the full implementation of the ACA.

Regardless if you are a Republican or a Democrat I would hope full-time faculty would voice their concern regarding the impact the implementation of the ACA could have on the attainment of higher education for the current student population and upon the lives of the dedicated part-time faculty that have been devoted to serving this student population.

My hope is that if faculty across the nation brought this to the public attention that we as a nation could have a more open and complete dialogue regarding the course we wish to set as a nation.

Update: Another example.

Ec 10 Bleg

As part of our "marketing" effort to get freshmen into ec 10, Harvard's introductory economics course, the ec 10 staff and I are trying to construct a list of famous alums of the course. Here is the list we have put together so far:

Steve Ballmer
Ben Bernanke
Lloyd Blankfein
Ryan Fitzpatrick
Jeremy Lin
Sheryl Sandberg
Eduardo Saverin
Chuck Schumer
Cameron Winklevoss
Tyler Winklevoss
Mark Zuckerberg

If you attended Harvard and have a famous classmate who you are sure took ec 10 (or its predecessor ec 1), please email me the information.

Hawks, Doves, and Hyenas

People seem fond of categorizing central bankers as "hawks" and "doves." I think what people have in mind when they talk about the hawk/dove divide is the Phillips curve as a policy menu, much as in Samuelson and Solow. Then, hawks and doves are people who agree that what they are doing is choosing a point on the Phillips curve, but disagree about what point to pick. Hawks are more willing to substitute unemployment for inflation than are doves. You can see why someone who perceives himself or herself as a dove in this context would like the nomenclature. A hawk is someone who is trying to screw the unemployed -- worse than a vulture, who just eats what dies of natural causes. The hawk kills, and then eats.

Currently, that's not a helpful way of thinking about, for example, the members of the FOMC, and why they might disagree with each other. Fundamentally, these people don't agree on the theories they are using to guide their decisions. Some people might argue that preferences determine the choice of theories (that seems to be the crux of what Krugman has to say), but I don't think so. Here's a better guide to how people think:

New Keynesians: These are people who have absorbed modern macroeconomics, and have bought into the framework developed by Mike Woodford and others. That framework was an outgrowth of the neoclassical growth model (Cass-Koopmans), Brock and Mirman, and Kydland-Prescott, incorporating monetary factors, and with a role for monetary policy. This is the theory that is dominant on the committee. It's what's principally driving the forward guidance aspect of current monetary policy, i.e. promises about future policy that are supposed to have beneficial effects today. The hard-core New Keynesians are Williams (San Francisco), Evans (Chicago), and Kocherlakota (Minneapolis). Bullard (St. Louis) has some New Keynesian sympathies, as does Plosser (Philadelphia), I think.

Old Keynesians: This is some version of IS-LM, AD-AS, Phillips curve, much like what you would find in some undergraduate textbooks (not in my favorite one, as Mankiw would say). This is pretty loosey-goosey, and can incorporate almost anything. Fortunately for the Old Keynesians, the New Keynesians (for just this reason) have taken pains to describe what they do in the language of Old Keynesians - you can often find words like "IS curve" and "Phillips curve" in there. The rationale for quantitative easing (QE) - a cornerstone of current policy - is pretty much Old Keynesian. To the extent anyone justifies it, it's done using pre-1970 theory. The "transmission" mechanism that Fed officials describe for QE - purchase assets, interest rate falls, investment goes up - sounds like something straight out of a principles of economics textbook. The most prominent Old Keynesian on the FOMC is Janet Yellen.

Old Monetarists: This is literally a dying breed. Hard-core monetarism is represented best by the views of Milton Friedman: (i) monetary factors are very important, but attempts by the central bank to intervene to influence real activity in a good way are likely to go haywire; (ii) there exists a stable money demand function; (iii) central banks should be targeting money growth so as to control inflation. Views (ii) and (iii) died in most, if not all, central banks in the 1980s. But Plosser has some old monetarist views.

There are some outliers in there. George (Kansas City), Fisher (Dallas), and Lockhart (Atlanta) are hard to place. Rosengren is a Keynesian with some background in banking, and Lacker doesn't fit into a neat macro pigeonhole. The others I don't know much about.

Increasingly important, and I think surprisingly overlooked in light of the financial crisis, are the backgrounds of monetary policymakers in general economics. What do they know about banking theory, incentives, and information problems? What do they know about banking and monetary history and how the financial systems in different countries work? In the next financial crisis, we want a person running our central bank who understands what too-big-to-fail is about, the nature of long-run moral hazard, and how moral hazard can work against the central bank even during a crisis.

As well, in the context of run-of-the-mill macro monetary policy, different views about the mechanism by which monetary policy works can be irrelevant. Everyone appears to accept that there is some short-run nonneutrality of money at work. Everyone accepts that it is important that the central bank control inflation. The key differences are in views about the persistence of monetary nonneutrality, and how to spot inefficiencies that the central bank is capable of correcting. Some people look at the state of the world now and think that the difference between real GDP today and what it would have been if it had continued to grow at 3% per year since the end of World War II is all inefficiency. You can find other people who think that where real GDP is today is about the best we can do. There are a lot of other people who aren't sure one way or the other.

So, how would either Larry Summers, or Janet Yellen, fit in as leader of this group? Brad DeLong tells us that other people think that Summers is a "right-wing hyena," but he thinks Summers is a good guy. DeLong fits nicely in the Old Keynesian camp, so maybe Summers is an Old Keynesian. But clearly Paul Krugman does not like Summers. He seems to like Yellen better. Krugman is certainly an Old Keynesian too, and maybe DeLong is just sticking up for his friend and coauthor Summers, so maybe Summers is not so Old Keynesian after all.

Janet Yellen is firmly Old Keynesian. Her training happened before the revolution in macroeconomics took place, and it's quite clear that she thinks about the world in a conventional IS-LM, Phillips curve, demand-management style.

If we were to choose a Fed chair based on academic records, then this would be no contest. Summers, in spite of being occupied as a policy wonk for a considerable period of time, still has a REPEC ranking of 25. That's a #25 ranking in the world among economists, based on publications in academic journals, quality of publications, citations to those publications, etc. Yellen's ranking is 805. Summers was tenured at Harvard at age 28, while Yellen never made it past the assistant professor rank there. Of course we know that central banking requires some different skills from what it takes to publish papers. Some of our colleagues should definitely not be let out in public.

A good Fed Chair should be collegial. That means making FOMC members feel comfortable in expressing their views, so that diverse information can be forged into some kind of coherent synthesis, as part of the policy process. Bernanke has been very good at exploiting the strengths of the unusually-decentralized Federal Reserve System. The regional Presidents have their own staffs, their own views, and Bernanke by all reports is willing to listen, and has used ideas from the regional Feds as part of the monetary policy program. As well, the regional Presidents seem free to speak their minds in public, and they often do. I think all of that is healthy.

Some clues to how Summers thinks are in the transcript and video for this forum on "new economics." The worst it gets is when Summers says this:

When I was in the government, I got a lot of papers in the mail. To the first approximation, I attempted to read all the ones that used the words ‘leverage,’ ‘liquidity,’ ‘deflation’ or ‘depression.’ And I attempted to read none of the ones that used the words ‘neoclassical,’ ‘choice theoretic,’ ‘real business cycle,’ or ‘optimizing model of.’ (laughter) There were more in the second category than there were in the first. But there were a reasonable number in the first, and they told you a lot.

There is a lot in Badgett [sic] that is about the crisis we just went through. There’s more in Minksy and perhaps more still in Kindleberger.2 There are enormous amounts that are essentially distracting, confusing, and problem denying in the stuff that is the substance of the first year courses in most PhD programs.

So I think economics knows a fair amount. I think economics has forgotten a fair amount that’s relevant. And it has been distracted by an enormous amount.

You can find other things in that forum, and in what Summers has said in other contexts, that put him in a more favorable light, but I think that quote is telling. It's interesting to read Bagehot, or Minsky, or Kindleberger, but we're going to find a lot more serious ammunition to bring to bear on thinking about financial problems in work on money, banking, information economics, mechanism design, contracts, and incentive problems, that people have been working on in the last 30 years or so. Summers has revealed himself here to be shockingly closed-minded - he wants to ignore a large segment of research that the mainstream of the economics profession takes very seriously. A leader of central bankers needs to dig into all the alternatives and understand them, even if he or she doesn't agree with everything. Summers seems to impress people as always wanting to demonstrate that he is the smartest person in the room. He is quick to come to a conclusion, and can be an intellectual bully. Not exactly Mr. Collegial.

If you have never seen Janet Yellen in action, here's a speech she gave at the Haas Business School at Berkeley. She's clear, articulate, and thoughtful, I think. Yellen has a reputation in the Fed system as being a good listener - she's certainly collegial. There is no reason to expect that she would not follow Bernanke's example in encouraging independent thinking in the hinterland - places like St. Louis. Yellen may be overly inclined to see everything going on in the U.S. economy as a demand management problem, but maybe that's not the worst flaw we could have in a central banker.

Summers has the additional problem of being too closely allied with various power structures. He is part of the Cambrige, MA clique. He has worked for hedge funds and too-big-to-fail banks. Not good for central bank independence.

I think I'm with Krugman on this one. Though there are potentially better choices around, Janet Yellen would be fine, and I think Larry Summers is just too risky a bet, though he might surprise us.

Vote!

If you are a member of the American Economic Association, you probably received an email this morning about the election of AEA officers. Please vote. It is your patriotic duty, or something like that.

Information about the candidates is available here.