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Neoliberals Passing the Baton

Brad DeLong got a huge amount of attention by saying it was time for neoliberals such as Brad DeLong to pass the baton to those to their left. Alarmingly, he seems to have written this first on twitter.

Zach Beuchamp rescued it from tawdry twitter to now very respectable blogosphere with an interview.

One interesting aspect is that Brad has very little criticism of 90s era Brad’s policy proposals. Basically, the argument is that Democrats must stick together, because Republicans are purely partisan and no compromise with them is possible. I absolutely agree with Brad on this.

But I also want to look at criticisms of Clinton/Obama center left policy as policy.

Brad tries to come up with 2 examples

I could be confident in 2005 that [recession] stabilization should be the responsibility of the Federal Reserve. That you look at something like laser-eye surgery or rapid technological progress in hearing aids, you can kind of think that keeping a market in the most innovative parts of health care would be a good thing. So something like an insurance-plus-exchange system would be a good thing to have in America as a whole.

It’s much harder to believe in those things now. That’s one part of it. The world appears to be more like what lefties thought it was than what I thought it was for the last 10 or 15 years.

Now monetary vs fiscal policy is only considered right vs left because of the prominence and fanaticism of Milton Friedman. Is see no connection between laser eye surgery, hearing aids, and private health insurance. Medicare for all is not a National Health Service (note I am not conceding that a national health service would be bad for medical innovation). Brad did not advocate insurance/plus/exchange system in 1993. He (and Bentson, Summers and Rubin) advocated a payroll tax financed system not the Clinton-Clinton and Magaziner mess. I think he is stretching to get a second example.

I think the first isn’t really left vs right and the second is and always was a bad political calculation. IIRC Obama certainly said that he thought single payer was better policy but politically impossible. That was the general line on the center left wonkosphere. I think the case for insurance-plus-exchange was at most a bad political argument disguised as a bad policy argument.

In another twitter thread (no not the one where he says twitter is a horrible medium for serious discussion) Paul Krugman comments

I want to focus on two of his tweets

Last point: wages. Here’s where research has convinced me and others that wages are much less determined by supply and demand, much more determined by market power, than we used to believe. This implies a much bigger role for “predistribution” policies like minimum wage hikes 10/

Pro-union policies, and more than we used to think. “Let the market do its thing, but spend more on education/training and a bigger EITC” no longer sounds like wisdom 11/

I listed this as the one economist’s mea culpa based on empirical evidence which came to my mind. A lot of center left economists used to oppose minimum wage increases and were convinced by empirical evidence (mostly by Card and Krueger) that this is actually good policy. But I don’t see any problem with the EITC. Rather, economics 101 based arguments against the minimum wage and unions have been undermined by evidence*.

I think Krugman’s problem with “a bigger EITC” is political. It appears on the Federal budget so deficit hawks won’t allow a really huge increase. In contrast, people can think firms pay the minimum wage, so increasing it sounds like a cheap way to help the working poor.

More generally, I don’t see any reason to abandone redistribution (like the EITC). In fact, I think that is both excellent policy and political dynamite. I note that Bill Clinton and Barack Obama campaigned promising to raise taxes on the rich and cut taxes on everyone else. Also they won. Other Democrats didn’t promise that and they lost. A more progressive income tax is a relatively market respecting policy long supported by left of center economists. Oh and also Alexandria Ocasio Cortez. I don’t think there is any evidence against the Clinton 1993 tax increase combined with EITC increase.

The fact that it is totally obvious that it is good politics (rejected absolutely by the Republican party and supported by most self identified Republicans) doesn’t mean that it is too obvious to stress. It means debating redistribution vs predistribution is a distraction (which one here is not like the others)?

I personally have criticisms of Bill Clinton type neoliberalism after the jump

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MMT II

Don’t blame me. Blame Noah Smith who asked me to write more about MMT. I don’t know much about MMT, but I am going to write about it anyway.

First, there seems to be an extremely important disagreement between MMTers. There are definitely some that argue that MMT implies the US Federal Government can (and should) spend more without taxing more.

In contast Stephanie Kelton who seems to be a rather prominent MMTer clearly asserts that a major increase in Federal Government spending should be accompanied by increased taxes here
“MMT would set public spending always to the level required to achieve full employment, and then accept whatever deficit may result.”

Now she might consider 4% to be higher than the current US non accelerating inflation rate of unemployment, but I don’t think she thinks it is much higher. Basically, her position is that the current amount of spending is about right. Low unemployment and stable inflation. As far as I know, MMTer’s accept that as a sign of good macro policy. So they should consider a big increase in spending inconsistent with MMT.

I think I understand what is happening here. There was a decade of high unemployment. People advocated policy based (at least in part) on the need for stimulus. Now the US has low unemployment. Serious policy analysts change their proposals given changing conditions. Many other people stick to a proposal when it makes no sense. I don’t want to be rude but consider the W Bush tax cuts which were proposed because the economy was booming, there was a surplus, and then justified as an anti-recession measure. They claimed that the same policy was perfect to solve different problems. He started with a decision to cut taxes on the upper tail (his words) and then looked for justification. Spend till we reach full employment, no spend a lot more on say a green new deal now that we have reached full employment may be “leftist,” but it has nothing to do with any economic theory (because the two statements are contradictory).

I think it is very very slightly unfortunate that MMT has been equated with “deficits are never a problem”. MMTers might say this from time to time, but they definitely also say that deficits can be a problem (when inflation is accelerating).

Given what I wrote above, the implication of MMT I have noted so far is that one should not impose austerity during a recession. Sadly, policymakers disagree. But conventional new Keynesians and conventional Paleo Keynesians agree. There is no daylight between MMTers and conventional Keynesians on what fiscal policy should have been in the recent past and should be now (although there is a huge range of views among MMTers — I mean differering by hundreds of billions a year).

OK what else. MMTers seem to argue that monetary policy is ineffective even when the safe nominal interest rate is positive. I think this is nuts. I think the evidence that it matters is overwhelming. US data from January 1 1980 throught December 31 1982 are enough to prove them wrong.

One of them wrote that monetary policy works by making people borrow. Notice that it is just assumed that macro policy is stimulus. The possibility that an economy might overheat and the policy aim to reduce demand has not come to the mind of the person whom I am quoting (whose name doesn’t come to my mind). Assuming that macro policy must or should always aim to stimulate demand is an embarrassing mental slip.

MMTers note that deficits can be monetized. They note that this implies that countries which borrow in their own currency are not anywhere close to risking default. I agree (the anywhere close is because I think a US debt of $ 1 quintillion in the form of 1 day notes would cause default — I am very reluctant to use the word “impossible”). Here again the position is completely conventional. Not only Keynesians but also Austerians think this. It is just that to Austerians fiscal dominance of monetary policy is a nightmare. I don’t think any macroeconomist thinks it is impossible.

So far we have conventional views and claims about monetary policy which might be accepted by fresh water fanatics but which are inconsistent with the historical evidence.

What’s left.

I think there is a lot of insisting on using words and phrases with unusual definitions. To most macroeconomics “deficit spending” means bond financed deficit spending. Monetized deficits are described as bond financed deficit spending combined with open market operations. In MMT deficit spending means monetized deficit spending and bond financed deficit spending is described as monetized deficit spending combined with bond auctions.

This is a distinction without a difference. It is purely semantic dispute about the definition of deficit spending. The disagreement does not imply different forecasts about observables. I think the fact that MMTers consider this a vitally important distinction implies that they won’t be able to make a useful contribution to the discussion.

Also I read things about the purpose of a bond auction and the natural gravitational effect of deficit spending. I think these are not meaningful statements in social science. I think there is no way to test if they are true. I think there is no way to get testable hypotheses using this kind of reasoning (I use the term “reasoning” in the broad sense of something that someone seems to think has something to do with useful thought).

I guess there is also a discussion of what comes first the bond sales or the government spending. Here I think I recall the word “first” but I know it isn’t about which happened at an earlier time (bond sales happen every week, government spending every minute). It isn’t a statement about causation either. I don’t think it is a meaninful statement.

So I see conventional views, confusing jargon, and meaningless distinctions. Also extreme rudeness. I don’t think that this is (or should be) typical academic debate

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MMT

Paul Krugman has some tweets harshly criticizing this article by Stephanie Kelton.

His claim appears to be that, as a Modern Monetary Theorists, she asserts that there are two schools of macroeconomics MMT and “the mainstream” which includes Paul Krugman. I am kicking myself for deciding to read the article to find if it is as horrible as he asserts. I think it is.

She wrote “There is a doctrine among mainstream economists holding that: (1) government deficits push interest rates higher and (2) rising interest rates crowd out private investment. The government can take more of the economy’s financial resources, but only at the expense of lost private investment. This means that running budget deficits has at least some downside.”

This proves that, by her definition Krugman isn’t a mainstream economist. He wrote this. For 20 years he has asserted that sometimes fiscal stimulus does Not cause higher interest rates and that, in those cases, it has no downside.

More generally, even when criticizing vulgar Keynesians (before the acronym MMT was coined) he stressed that the monetary authority can, and often will, cancel the effects of fiscal stimulus. Nothing about what must be true as in “at least some”. I don’s see how anyone who has read anything written by Krugman could type the quoted passage. I am extremely confident that Kelton has read almost exactly nothing Krugman has ever written on macroeconomics.

I don’t know what she means by federal funds, but I guess that would be loans on which the federal funds rate is paid. Since those are interbank loans, banks total demand for funds on which the federal funds rate is paid is always exactly zero. This is an accounting identity. I think she means banks borrowing at the discount window. I don’t think she knows that this was almost exactly zero until 2008 — it just isn’t important. Untill 2008 they borrowed from each other at the slightly lower federal funds rate.

Here I crop so you can see the numbers. An amount of money which it would be nice to have, but trivial compared to GDP, Bank assets, Fed liabilities or M1.

I have to pick up the pace and now flag every howler (after the jump)

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It is anti semitic to assert that lobbyists influence politics ?

“she was condemned by bipartisan leadership for suggesting pro-Israel lobbying groups … influence American politics.”

Front page of WWW.washingtonpost.com, Deanna Paul does not seem to notice that the events she describe are insane.

It is, in fact, true that it is not allowed to note that AIPAC is a lobby or that it influences politics. This shows that it is a lobby with huge influence on politics.

This is bipartisan insanity.

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I actually disagree with Paul Krugman for once

This is an exiting day. I disagree with something Paul Krugman wrote.

In 2017, private insurance paid about a third of America’s medical bills — $1.2 trillion, or 6 percent of GDP. Having the government pay those bills directly, without a revenue offset, would therefore be a spending increase — a fiscal stimulus — of 6 percent of GDP.

Suppose — as MMTers tend to assume — that interest rates nonetheless didn’t rise. Then this stimulus would have a multiplier effect, probably raising GDP, other things equal, by 9 percent.

I have 2 objections. First the replacement of private insurance with debt financed single payer is effectively a tax cut not a spending increase (as indicated by the phrase “those bills”) as such, the direct effect on demand is less than 6% of GDP. Krugman likes to do two kinds of analysis IS-LM and New Keynesian.

In a standard new Keynesian model, the shift would have no effect on demand — ultra rational consumers would assume that they would have to pay the public debt eventually, so they would save the money that isn’t being paid as insurance premiums (which would presumably be paid as salaries instead).

In an IS-LM model, the incrase would be 6% times the marginal propensity to consumer. Going full Hicks (the orignal IS-LM model) that is 1-1/(the multiplier) = 1/3. To consistently apply the original IS-lm model, Krugman should calculate (multiplier -1)(the tax cut) = 3% of GDP.

Second Krugman writes “a multiplier effect” when he means “a multiplier greater than one”. I hate that. It does not follow from the definition of “to multiply” If I have to multiply a by something to get b, that doesn’t mean b is greater than a. Mutiplying by 0.9 is multiplying.

I insist on this, because anti Keynesians often play the 1=0 trick. When fiscal stimulus is proposed, they claim to prove that the multiplier is zero. When data is analyzed they claim to have been proven right, because there isn’t proof that the multiplier is greater than 1.

But the important point is that the correct calculation implies a 3% increase in GDP. Okun’s law (click the link) implies a 1.5% reduction in unemployment to 2.5% which would probably scare the Fed into raising interest rates, but which is a lot more possible than -0.5% as calculated by Krugman.

Now I don’t think that the marginal propensity to consume is 1/3, but that means that Krugman and I have to explain why estimate multipliers are only 1.5 and not much higher. I suspect this explanation would imply that MMTers predict a negative unemployment rate, so I suspect thaat, in the end, I would agree with Krugman’s conclusion.

But I find his calculation suspect.

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The Ethics of Clinical Trials

In a clinical trial the therapy is decided by a pseudo random number generator. How can this be ethical ? People are treated differently for no reason related to different interests different values and priorities or even different merit (assuming merit can differ).

There is a utilitarian rational for clinical trials. Through such trials doctors learn, and that knowledge is useful to future patients. But this rationale is utterly rejected as ethically unacceptable, because it was used to justify depraved experiments.

I think the current discussion of the ethics of clinical trials is based on a mixture which is partly consequentialist and partly deontological, and that it is incoherent, because people feel the need to claim it is totally both, while the two are inevitably in conflict.

So it is asserted that physicians must act in the interest of the patient – each and every patient. It is also argued that clinical trials are morally acceptable. This does not make sense.

It is only possible if the expected welfare of the patients is identical under the two treatments over which one randomizes. Any difference, no matter how tiny, in expected welfare would compel the use of only the current standard therapy, or of only the new experimental therapy.

I think the failed effort to avoid this is to reject the concept of expected welfare. It is argued that it is OK to do one or the other because one does not know which is better for the patient.

It would be OK if one were to say all probabilities must be rounded to 0, 1 or 0.5 so we don’t know means each is exactly equally likely. However, this approach would make life strange and brief. In particular it would rule out general anesthesia for any procedure not necessary to save a life. The chance of death is very low but demonstrably not zero. Don’t operate unless you would operate with a 50% chance of killing the patient would rule out almost all surgery. We must make choices under uncertainty and can’t pretend that all uncertainty is the same and survive for long.

Consider 2 examples:

1. There are 2 treatments, and, with best estimates, with treatment A the probability that the patient lives is 50% and with treatment B the probability is 30%.

2. There are 2 treatments, and, with best estimates, with treatment C the probability that the patient lives is 50% and with treatment D the probability is 30%.

According to current medical ethics, one must provide treatment A not treatment B but one may chose treatment D or treatment C. This always is based on the assertion that the interests of the patient is all that matters. Yet I have assumed that, for the patient, the two pairs of choices are identical. This can’t make sense.

In the first case there is an unobservable difference between patients of type 1 or type 2 where if they are type 2, then treatment A kills them on the spot. 10% of people are of type 2 (as learned from decades of painful experience). If someone is of type 1, their chance of surviving with treatment A is 5/9. In contrast with treatment B all have a 30% chance of living. With decades of painful experience it is known with essentially complete certainty that the probabilities are 50% and 30%.

In the second case, there aren’t two types, but the evidence on treatment C is preliminary based on a small (phase II) trial. The fraction who survived in the trial was 50% but the 95% confidence interval is 20% to 80%. The null that the true chance is 30% is not rejected at standard confidence intervals. By standard reasoning it is time for a phase III trial with randomization.

In each case, we know that giving A not B might cause a patient to die who would otherwise live and our best estimate of the probabilities of survival are higher with A than with B and higher with C than with D.

I think the difference is that one learns something by randomizing and giving half of the patients D and that this outweighs the expected deaths due to the randomization.

I think it is possible to believe people have a right to care, and also conduct randomized trials, if one says there must be a standard of care, and all people have right to that. That one may deviate if the weight of evidence suggests that an experimental therapy is better, but that such deviation is a matter of utilitarian total expected welfare maximization not individual rights which trump average interests.

But it is not easy or comfortable to believe this, so I think that doctors have decided to rely on statistics but reject the very concept of probability. The logical inconsistency might cause some discomfort. It would cause more if the concept of probability weren’t so utterly alien to normal human thought. But in any case the tension between believing in rights and believing those rights don’t always trump utilitarian calculations clearly causes more discomfort.

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A Facebook Experiment

Solid social science on the opinion pages (needless to say news reporters consider interest in randomized controlled experiments to be opinion.

Christian Caryl explains how it is possible to determine the effect of the Russian influence campaign on the 2016 presidential election.

Sinan Aral, a professor at the Massachusetts Institute of Technology [skip] says he and his colleagues want to study the Russian influence campaign in precisely this geographical context. The MIT scholars have developed a robust methodology for assessing how social media campaigns influence the behavior of their targets — and now they want to bring it to bear on the Russian meddling in 2016 [skip]

“For example, Facebook and Twitter constantly test new variations on their feed ranking algorithms, which cause people to be exposed to varying levels of different types of content,” they write. “One underpublicized A/B test run by Facebook during the 2012 U.S. presidential election caused users to be exposed to more ‘hard news’ from established sources, with effects on political knowledge, preferences, and voter turnout.” Given access to adequate data, the researchers claim they can estimate the impact of the Russian influence campaign in Michigan, Wisconsin, Pennsylvania and Florida “with 95% to 99% confidence.”

Facebook performed the necessary experiment, because they perform experiments all the time aiming to maximize user engagement. These are genuine randomized controlled experiments (because Facebook’s profits are on the line). The names of people exposed to more or less hard news can be compared with the lists of people who actually voted (which are public) only if facebook is forced to cease to protect their privacy (which really means to protect Facebook from proof that they let the Russians trick Americans into electing Trump).

I don’t think the researchers will ever get access to “adequate data” but I do think it is worth fighting for such access.

update: this might not have been clear in the original post. The idea is to use which of the 2 algorithms was used as an instrument for exposure to Russian propaganda. So it is engagement with known russian propaganda regressed on the algorithm used to check the association of (engagement with known Russian propaganda)(demographic characteristics typical of Democrats) and turnout (in particular of African .

To be crude (and explicit) the idea is that African Americans with the hard news algorithm interacted less with Russian propaganda and were more likely to vote. Or not (good experiments are ones where one doesn’t know the result before analysing the data).

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How did they get so rich ?

I hope and trust that this will be an amusing display of my ignorance. I don’t hope to reach David Graeber’s level

David Graeber: Apple Computers is a famous example: it was founded by (mostly Republican) computer engineers who broke from IBM in Silicon Valley in the 1980s, forming little democratic circles of twenty to forty people with their laptops in each other’s garages…

1. How did Jeff Bezos get so rich ? His wasn’t a subtle idea.
The first point is that Amazon went for years without turning a profit. I think his strategy was partly based on new entrant predatory pricing. I would guess that are many B league Bezoses whose firms went bankrupt. In the field of innovative low margin retail, survivor bias is a bitch.

But also, books were a good place to start. There are lots of different books. They are durable. They aren’t so heavy (even pre-kindle).

Then there is big box one stop shopping.

2. Yeah what about the Waltons ? At first (in the 80s I think) I was very puzzled to read the name Sam Walton on a list of the super rich, because I had never seen a Walmart. In fact, that was when I first read “Walmart”. Retail is a very competitive low margin sector. How could anyone become super rich in discount retail ??? My guess is that he was the first to realize how much big cars had changed the game. The long cars of pre-1973 had big trunks, but I guess they just aren’t in the same league as pickups, SUVs and minivans. It is notable that Walmart started in the huge vehicle belt (which I think has a lot to do with belt size if you get my drift).

3. Brin, Page and Google. OK look the original product is actually excellent. Also giving stuff away (including 1 gigabyte e-mail boxes) was smart.

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The Buffett Buffer

This is an almost semi serious proposal suggesting payday lenders could get good publicity.

There are many entities with plenty of spare cash. The US Treasury isn’t one of them. I think that the good publicity gained by offering zero interest loans to unpaid federal employees is worth the cost. They are good credit risks because they will get paid (without interest) eventually.

I’d say some entity with spare liquidity could help the country and win praise. I call my proposal the Buffett buffer. I think the challenge is largely one of automatic underwriting. It would be necessary to extend the offer only to people who are employed by affected departments. I don’t think this is hard — the web pages are still up, so it is possible to search them. The skeleton staff of non furloughed workers could make employment information public at the request of employees (including their un-paid selves).

Actually since the payoff is in popularity, I think this might be the Bloomberg boom not the Buffett Buffer.

Why not ?

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Romer & Romer on Taxes

Given the debate about returning to 60s level top marginal tax rate of 70% amazingly re-opened by Alexandria Ocasio-Cortez, I decided to actually read the Romer and Romer paper (pdf warning) which includes evidence suggesting an even higher rate is optimal. It is a masterpiece, which I won’t try to summarize. Read it.

I do however, want to grind a very old ax related to “Schlock Economics”. I am thinking of the time that Robert Lucas totally humiliated himself while accuding Christine Romer of Schlock Economics. He demonstrated that he had managed to forget the IS-LM model (honestly he might actually have failed my undergraduate intro-macro course which is a major major accomplishment few have achieved).

Old ax grinding after the jump

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