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Is the Permanent income glass half full II

Would you believe one fourth full ? No how about one tenth full ? How about not as dry as the Sahara desert ?

Recently I asked the question. Keynes dismissed the PIH (well before it re-emerged) as follows when discussing consumption in Chapter 8 of The General Theory …

(6) Changes in expectations of the relation between the present and the future level of income. — We must catalogue this factor for the sake of formal completeness. But, whilst it may affect considerably a particular individual’s propensity to consume, it is likely to average out for the community as a whole. Moreover, it is a matter about which there is, as a rule, too much uncertainty for it to exert much influence.

It seems to me that the very very first step in evaluating Keynes’s null is to look at the association between the ratio of consumption to current income and the ratio of future income to current income. If there is anything to the PIH it seems that it must be that a high ratio of consumption to disposable personal income must be correlated with a high ratio of future disposable personal income to current disposable personal income.

Here is a scatter of those ratios


“consinc” is the ratio of US consumption expenditures (PCECA) to US disposable personal income (A067RC1A027NBEA) both from Fred. finc4inc is the ratio of the average of US real disposable personal income (A067RX1A020NBEA) over the next four years (t+1, t+2,t+3 andt+4) to current year real disposable personal income (A067RX1A020NBEA).

The two variables should be possitively correlated if there is anything to the PIH. Now achieved future average real disposable income should be the forecast plus an error term, so the correlation should be well below one. But there is almost nothing there. the main feature of the data is that consumption was low compared to income when consumption was explicitly rationed.

To avoid this, I also looked at data of consumption from 1946 on here


There is no pattern to explain (the correlation is actually slightly negative).

How is it possible that the profession has debated for decades how to improve on the primitive model of consumption as a function of current disposable income to consider the average agents’ consideration of future income when there is no evidence that at all ?

Why Much of the Population Thinks Economists are Charlatans

by Mike Kimel

Why Much of the Population Thinks Economists are Charlatans

Noah Smith asks why people think economists are charlatans. He concludes it has something to do with trade.

I submit the answer is much, much simpler, and I think it deals with the part of economics which has most visibility with the public: macroeconomics. Read this post from a few years ago about an economist who is reasonably prominent outside academia. But it wouldn’t be difficult to make a list of other economists, whether with a bit of prominence outside academia or inside it or both, for whom one could write essentially
the same post. Heck, if we wrote down a list of chairs of the President’s Council of Economic Advisors, budget directors, and Treasury Secretaries, how many of them couldn’t be the subject of that sort of post? And let’s be realistic, there is no cost to doing so. Consider the folks who retroactively predicted double digit growth rates in 2002. None of them suffered consequences, regardless of the damage they caused.

What happens if you do the same thing in another field? What happens if to a guy who peddles Lysenkoism in Biology? Think they’ll make him Dean of a prominent Medical School? A physicist who makes her life
work debunking the Michelson Morley experiment ain’t gonna go far either. Obvious charlatans in biology or physics or chemistry get treated like charlatans by people who call themselves biologists, physicists and chemists, even those who work in different parts of the field. People who call themselves economists (whether macroeconomists or otherwise) sit on panels and attend conferences with the obvious charlatans. They shake hands with the obvious charlatans, they don’t spit on the floor and turn their back on the obvious charlatans, and most damning of all, they don’t refer to them as obvious charlatans. And meanwhile, the obvious charlatans do very well. Fudging and shading the data can pay very well, especially if one is well spoken and looks presentable.

The problem is, a career where it is easy and lucrative to be a charlatan, where being an obvious charlatan has no consequences or costs but plenty of benefits will attract more and more obvious charlatans. In fact, there are a couple old principles in economics, from back in the day when the field wasn’t as infested that can tell  you what happens next. We’re long past the point where the public has figured it out. The only thing that will save the profession is if economists figured it out too.

Notes Toward Economics at (or, more accurately, approaching) the Eschaton

No, not Dr. Black’s blog.  The real eschaton: the end of everything.  Or, in this case, its economics equivalent: the point at which almost all human work is no longer necessary but human beings still exist.

The scenario is a simple one.  There are x humans on Earth (x>>1).  Self-repairing, recycling machines can provide all the needs and wants of those x people and then some.*  There is only one job humans need to do: every day, one person needs to press one button once–during a specific time period—to start the self-rebuilding and repairing of the machines.

Applying basic micro and macro economic theories, and assuming a money-using society, we can come to several stylized facts:

  1. This is the true case where Chamley (1995, 1996) applies.  The only capital created is exactly that that replaces current capital.  With no new capital, the effective tax rate on capital should be 0%.**
  2. The requirement that someone presses the button has two aspects:
    1. It is not required to be skilled labor
    2. It is, however, essential labor
  3. In standard economic theory, the laborer is paid hisser Marginal Product
    1. The pressing of the button provides all of the goods to everyone for that day; since there is no MPK in this scenario, the MPL should equal the net profits from that day.
    2. Pressing the button requires the laborer to choose to do the job instead of something more pleasant; therefore, they must be compensated to provide at least as much Utility as not pushing the button would provide them
    3. For a sufficiently large population x, there may well be people who will not press the button in their lifetimes.  For even relatively large x, there will be people who will press the button less frequently than they will need to buy goods.
      1. In either of those scenarios—unless we consider Malthusian constraints necessary in a time of abundant plenty—any equilibrium condition will require that each person and any of hisser dependents be supported s.t. AD does not decline.

The natural scenario for button-pushing selection is by lottery, which would also minimize the substitution effect. Some constraints would be required: may not repeat for at least z days, cannot sell/buyout of doing the job (though some intraweek switching possible), backup available in case of illness,*** etc.

What is interesting is the tax rate t required.  It is fairly easy to show that for even moderate populations, t must approach 100% if the laborer is indeed receiving the day’s MPL.****  This is in part because, since no new capital is being created, tax revenues from capital must approach 0%.

The problem then becomes one of Game Theory.  We know what the Final State must be if all activity leading up to it is rational.  The next question is how we get there.  But that will have to be deferred to my next post.

Enjoy the Holiday.


*Excess capacity needs to be assumed if you assume humans are still breeding; that is, an additional y babies (y<

**It is caddish of me to note that Chamley’s brilliant realization that has been the underpinning of several decades of freshwater economic theory is, of course, completely reflected in the U.S. tax code, where investment is offset directly by depreciation.

***Anyone who designs a non-redundant system with a Single Point of Failure should be shot. The applicability of this to economic models, and most especially microeconomic models, is left as an exercise to the reader.

****It is also intuitive that a large consumption tax would not be a reasonable substitute for such an income tax; even a “luxury tax” presents significant timing issues for even a small population.

Which (macro)-economists are worth listening to?

One could add a few names, and people did in comments.  One could also add a couple more thoughts  to Jonathon’s criterion, two of which could be admitting to mistakes and fixing parts of the model one is using if missed called, and a caveat around whether an economist could explain his/her model well and clearly after the biggest financial event in the world and history occurred (maybe not paying public attention?).

Jonathon Portes (micro) at  Not the Treasury View asks:

Which (macro)-economists are worth listening to?
This post relates to the ongoing blog debate on “the state of macroeconomics”, which I contributed to here, and which has drawn in a whole host of economics bloggers who know far more about modern macroeconomic theory than I do.  However, here I want to address a related, more mundane question, but one which is perhaps more relevant to most non-economists’ concerns.   That is,  when economists argue about the correct stance of policy, who should we (policymakers, commentators, and the general public) listen to?

This question was prompted by a recent exchange I had with Ed Vaizey and Simon Hughes on the BBC’s Daily Politics: I pointed out that not only was the government’s decision in 2010 to cut the deficit too quickly doing considerable economic damage, but that this was both predictable and predicted by economists such as Paul Krugman and Martin Wolf. Their response was essentially “how were we to know which economists to listen to? Others were saying the opposite”.

This is a fair question.  My answer to it is that policymakers and the public should listen to economists who fulfill two critera: first, they have made empirically testable predictions (conditional or unconditional – see Krugman here) that have proved, by and large, to be broadly consistent with the data; and second, they base those predictions on an analytic framework (not necessarily a formal model) that is persuasive.  In other words, getting it right alone is not enough; it should be possible to show your workings – to explain why you got it right. Otherwise, your predictions may be interesting, but they tell you little about how to formulate policy.  (bolding mine…Rdan)
My shortlist (apologies in advance to those I’ve omitted) of economists commenting on macroeconomic policy who I think qualify is something like the following:

  • KrugmanDelong and Wren-Lewis on fiscal policy when interest rates are at the zero lower bound;
  • Adam Posen on monetary policy when interest rates are at the zero lower bound;
  • Martin Wolf on private sector savings and public sector deficits (the financial balance approach);
  • Richard Koo on the implications of a “balance sheet recession”

Jamie Galbraith on inequality and macroeconomics

Via Naked Capitalism comes this youtube video from Jamie Galbraith on inequality and macroeconomics, a speech delivered at the INET talks in Berlin:

Galbraith has marshaled a great deal of cross country data over time, and shows how changes in equality happened in a very large number of economies in parallel. He explains, persuasively, that the most plausible culprit is changes in the financial regime.

Krugman and Waldmann

Paul Krugman notes Angry Bear Robert Waldmann in the micro/macro conversation in the New York Times:

There has been an ongoing discussion in the econoblogosphere about the usefulness or lack thereof of “microfoundations” in macroeconomics, which in practice means trying to write down models in which aggregate behavior is justified in terms of the actions of utility-maximizing individuals with rational expectations.

But bear in mind what we’ve actually seen in academic economics: the development of an ethos in which only microfounded models are considered “real” theory, in which it’s basically impossible to publish a paper unless it’s intertemporal optimization all the way. That’s the kind of dominance a theory is only entitled to if it produces dramatically better predictions than the theory it has crowded out

Wren-Lewis says he disagrees, but as Robert Waldmann says, his examples offer very thin gruel. The failure of the commodity price shock to filter into wider inflation? Lots of people predicted this without any appeal to microfoundations, just the observation that wage contracts were no longer indexed and oil as a share of GDP was lower than in the 70s. 

The basic picture is that we’ve seen a more or less complete takeover of macro by an approach that hasn’t remotely earned the right to that kind of dominance.

Noah Smith at Noahpinion has an impressive listing on Thursday’s Roundup of the many involved in the conversation:

This week in econ: A bunch of people are talking about philosophy-of-macroeconomics, which I like…things like microfoundations, rational expectations, bounded rationality, learning, and untested hypotheses. This is just my kind of nerdery! Elsewhere, people are arguing about monetary policy even more than usual. It’s another day in the ER…er…econosphere..

The 2012 Version of a Very Old Joke

With apologies to Stan Collender’s Beautiful and Talented Wife (not to mention mine):

James had gathered a mix of friends, acquaintances, and random strangers at his Rent Party, but no one was talking to anyone else. So he decided to get people to talk to each other, using the easiest non-visible variable available:

“Don, what’s your IQ?”
“Sharon, what’s your IQ”
“Maybe you should take with Don”

James watched as Sharon and Don began a discussion of elementary particle theory, astrophysics, and Ken Rogoff’s chess games.

Encouraged, James continued his efforts.

“Lynn, what’s your IQ?” “151”
“Jorge, what’s your IQ?”
“You should talk with Lynn.”

And they were soon discussing the biophysics of bacteriorhodopsin and Hilbert Space.

Thrilled this was working so well, James tried again.

“Steve, what’s your IQ?”
“Lucy, what’s your IQ?” “49.”
“You two should probably talk,” James said.

Lucy turned to Steve, “So where do you teach Real Business Cycle Theory?” (h/t Mark Thoma)

Macro right, micro wrong?

Derek Thompson at The Atlantic had some thoughts on labor cost and economics taken from Henry Blodgett’s observation on declining wages for most wage earners. The second paragraph caught my eye as interesting for economists.

My response was that Blodget was macro-right — income inequality is a serious and growing problem — but micro-wrong, because this graph is measuring wages rather than full compensation. Total compensation — that’s wages plus benefits and taxes — hasn’t changed very much as a share of the economy since 1960, according to data from the National Institute of Pensions Administrators. What’s changed is that benefits and taxes have gone up, and wages have gone down.

(Wikepedia provides a short refresher of each term.)

Stylized Facts

  1. Net Exports goes negative in 1973 and never recovers. One word: oil. Even the USD depreciation after the Plaza Accord (the one Martin Feldstein likes to pretend was inevitably going to happen then) can’t quite get it back to being positive. And once outsourcing industry to China hits full stride…
  2. Private Investment peaks in 2006. Dating the start of the current recession from December of 2007 still strikes me as being six months late.
  3. Consumption goes up fairly steadily from 1981, encompassing 8% more of total GDP—around a 12% increase over less than thirty years. Coincidentally, the Reagan Revolution moves taxes more heavily onto consumers at the same time. (Note that only about half of the appreciation in consumption is reflected in the change in Net Exports.)
  4. Government spending declines starting around 1991, when the Real George (H.W.) Bush breaks his “no nude Texans” pledge. The era of Big Government remains over until George “Dad’s Rolodex Got Me Another Job I Can Screw Up” (W.) Bush desperately needed people to be employed:

Those are my top-of-the-head ones. What are yours?