Interesting thoughts from Arnold Kling on the Euro Crisis (which he believes is a misnomer). A snippet:
My view of the bailouts is that they are primarily to save French and German banks. All the talk about "saving the Euro" is a smokescreen.
I find it ironic to have an EU official warning about the collapse of democracy. The eurocracy is a very undemocratic organization, chronically in conflict with popular opinion. The bailouts are unpopular, and quite properly so. Any official who claims that that the bailouts should be undertaken in the name of democracy is a poseur.
Showing posts with label Arnold Kling. Show all posts
Showing posts with label Arnold Kling. Show all posts
We Need More Competition in Government
Arnold Kling and Scott Sumner both advocate a return to decentralization and federalism-based policies. I particularily like this paragraph from Kling:
I would like to see more experiments and more variety. Instead of having a big national contest over what health care system, why not try single-payer in one part of the country and radical deregulation in another? Switzerland, which is about the size of Maryland, has different health care systems in each of its 20-odd cantons, which are about the size of Maryland counties. Surely it must be possible to try different health care approaches in Texas and Massachusetts.
I do not see what is unreasonable about this. One may say that this would lead to potentially devastating situations in states that took a more decentralized approach, but even if this were true, those peoples could move to a state that offered a more centralized approach if they felt that would benefit them.
Also, Sumner implies that comparing the United States to smaller, far less diverse and complex countries like Denmark and Switzerland is a mistake. I think it is safe to say that it gets exponentially more difficult to centrally plan for a country as it gets larger. Thus, the argument that the US should centrally plan health care because smaller countries do it effectively is a backwards statement. We shouldn't centrally plan precisely because these smaller, less complex nations are competent at it.
UPDATE: Here is Reason's Peter Suderman's take on Kling's post:
I'm obviously wary of socializing medical payment, even at the state or local level. But given the opportunity to see single payer compete against a genuinely deregulated market, I'm pretty sure I'd bite. And I suspect a lot of single payer supporters would too. But that sort of political competition isn't in the cards. Instead we're stuck with a broken, compromised system in which neither side gets what they want: On one hand, the government controls nearly half of all medical spending, but failures get blamed on the free market. On the other hand, those who want to sweep away the current system and socialize medical insurance get stuck with messy legislative compromises larded with handouts for special interests. You could make the Beltway centrist's case that this is a good thing—that political systems shouldn't cater to extremes. But in this instance, we've got a system that's catering to almost no one [emphasis mine -ed.] And in the meantime, we're stifling innovation and experimentation on both ends of the political spectrum.
I would like to see more experiments and more variety. Instead of having a big national contest over what health care system, why not try single-payer in one part of the country and radical deregulation in another? Switzerland, which is about the size of Maryland, has different health care systems in each of its 20-odd cantons, which are about the size of Maryland counties. Surely it must be possible to try different health care approaches in Texas and Massachusetts.
I do not see what is unreasonable about this. One may say that this would lead to potentially devastating situations in states that took a more decentralized approach, but even if this were true, those peoples could move to a state that offered a more centralized approach if they felt that would benefit them.
Also, Sumner implies that comparing the United States to smaller, far less diverse and complex countries like Denmark and Switzerland is a mistake. I think it is safe to say that it gets exponentially more difficult to centrally plan for a country as it gets larger. Thus, the argument that the US should centrally plan health care because smaller countries do it effectively is a backwards statement. We shouldn't centrally plan precisely because these smaller, less complex nations are competent at it.
UPDATE: Here is Reason's Peter Suderman's take on Kling's post:
I'm obviously wary of socializing medical payment, even at the state or local level. But given the opportunity to see single payer compete against a genuinely deregulated market, I'm pretty sure I'd bite. And I suspect a lot of single payer supporters would too. But that sort of political competition isn't in the cards. Instead we're stuck with a broken, compromised system in which neither side gets what they want: On one hand, the government controls nearly half of all medical spending, but failures get blamed on the free market. On the other hand, those who want to sweep away the current system and socialize medical insurance get stuck with messy legislative compromises larded with handouts for special interests. You could make the Beltway centrist's case that this is a good thing—that political systems shouldn't cater to extremes. But in this instance, we've got a system that's catering to almost no one [emphasis mine -ed.] And in the meantime, we're stifling innovation and experimentation on both ends of the political spectrum.
Competing Macro Views
Some would say the current state of macro is in disarray as it is having a great deal of trouble explaining the current economic situation. But I don't think disarray is so much occuring as is intense competition. Right now there are a ton of competing views trying to explain the siuation. Krugman, Kling, and Sumner seem to me to be the big three right now. Here's Kling on the current state of macro and the competing views:
I am prepared to offer pushback against the Sumner-Hetzel viewpoint. However, it really deserves the status of the "null hypothesis." In a more reasonable world, everyone would be starting from the presumption that Sumner and Hetzel are correct. Those of us arguing folk-Minskyism and telling the Recalculation Story should be the ones fighting an uphill battle to bring our ideas into the policy debates. That this is not the case, and that SC is now on the fringe, is one of the most remarkable stories of this whole macroeconomic episode.
I am prepared to offer pushback against the Sumner-Hetzel viewpoint. However, it really deserves the status of the "null hypothesis." In a more reasonable world, everyone would be starting from the presumption that Sumner and Hetzel are correct. Those of us arguing folk-Minskyism and telling the Recalculation Story should be the ones fighting an uphill battle to bring our ideas into the policy debates. That this is not the case, and that SC is now on the fringe, is one of the most remarkable stories of this whole macroeconomic episode.
Kling on Organizational Capital/Fiscal Policy; Shiller on the Herd
Kling on how fiscal policy should be updated to fit our modern economy which is based on the production of organizational capital versus the production of widgets. He expounds on this idea (originally Garett Jones' I believe).
He also provides an interesting quote by Robert Shiller on the herd mentality:
Consider this possibility: after all these months, people start to think it's time for the recession to end. The very thought begins to renew confidence, and some people start spending again -- in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned as an explanation for mass behavior late in a recession, but economic theorists have long been fascinated by such a possibility.
He also provides an interesting quote by Robert Shiller on the herd mentality:
Consider this possibility: after all these months, people start to think it's time for the recession to end. The very thought begins to renew confidence, and some people start spending again -- in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned as an explanation for mass behavior late in a recession, but economic theorists have long been fascinated by such a possibility.
Kling on TARP
Kling on TARP:
On History : The claim that the economy would be much worse off now without TARP has been repeated so many times that I must infer that it has as much ideological significance as the claim that the New Deal ended the Great Depression. And yet, the claim is rarely backed by evidence...
On Today vs 1930's: Ben Bernanke studied the Great Depression, and he found that the loss of banking institutions mattered, because borrower-lender relationship capital was destroyed. But even if we stipulate that his view was correct for the 1930's, it was not necessarily correct for today's economy. What we had last year was not a crisis in ordinary banking, but a crisis in securitization. In my opinion, we can do without securitization. Instead, in my view we can, and probably should, return to ordinary banking...
On Securitization: My view of history is that what TARP accomplished is that it saved the firms that were involved in securitization. If you think that the institutional capital embedded in that industry is really, really valuable, then TARP had benefits that might offset its costs. My own view, having seen first hand how securitization worked when I was at Freddie Mac, is that it relies too much on government guarantees, and old-fashioned banking is a viable alternative. So I would not have been willing to put much effort into saving securitization...
On History : The claim that the economy would be much worse off now without TARP has been repeated so many times that I must infer that it has as much ideological significance as the claim that the New Deal ended the Great Depression. And yet, the claim is rarely backed by evidence...
On Today vs 1930's: Ben Bernanke studied the Great Depression, and he found that the loss of banking institutions mattered, because borrower-lender relationship capital was destroyed. But even if we stipulate that his view was correct for the 1930's, it was not necessarily correct for today's economy. What we had last year was not a crisis in ordinary banking, but a crisis in securitization. In my opinion, we can do without securitization. Instead, in my view we can, and probably should, return to ordinary banking...
On Securitization: My view of history is that what TARP accomplished is that it saved the firms that were involved in securitization. If you think that the institutional capital embedded in that industry is really, really valuable, then TARP had benefits that might offset its costs. My own view, having seen first hand how securitization worked when I was at Freddie Mac, is that it relies too much on government guarantees, and old-fashioned banking is a viable alternative. So I would not have been willing to put much effort into saving securitization...
Kling's New Book
Arnold Kling has a new book out entitled From Poverty to Prosperity. His brief, basic description:
Overall, compared with what you learn in introductory economics, the book puts much more emphasis on entrepreneurs and innovation. It also puts much more emphasis on both institutions and culture.
Worth a look.
Overall, compared with what you learn in introductory economics, the book puts much more emphasis on entrepreneurs and innovation. It also puts much more emphasis on both institutions and culture.
Worth a look.
Kling on Traditional Keynesianism in 2009 (and some other stuff)
Arnold Kling on Keynesian policies and the 21st century American economy. His concluding paragraphs:
The way I see it, the complexity of today's economy means that old-fashioned Keynesian policies will not restore full employment. Pump-priming and stimulus policies are a good fit for a manufacturing economy with homogeneous labor affected by temporary layoffs. They are not such a good fit for a post-industrial economy with an educated labor force facing permanent structural changes.
The way I see it, the complexity of today's economy means that old-fashioned Keynesian policies will not restore full employment. Pump-priming and stimulus policies are a good fit for a manufacturing economy with homogeneous labor affected by temporary layoffs. They are not such a good fit for a post-industrial economy with an educated labor force facing permanent structural changes.
Over the next ten years, some sectors of the economy on long-term downward trends will continue to shrink. Sectors that became bloated in recent years, notably mortgage finance, will eventually settle back to lower, sustainable levels. Much of the new strength in the economy will come from underlying long-term forces. New workers will be absorbed by businesses that have not yet been launched in industries that we have not even imagined. For this restructuring, what I like to call The Great Recalculation, Keynesian stimulus will be irrelevant.
This is definitely an oversimplification, but I think what Kling is more or less saying is this: If you owned a house today built in the 1930's that had continually been renovated so it was currently modernized, and suddenly it was devastated by a storm, why would you use 1930's technology, design and materials to repair it?
Also, here is an excellent overview by Kling on the history of monetary and fiscal policy since the 1930's and the effects different economic theories had on those policies.
Kling on the Stimulus Package and Macro
Arnold Kling, my go-to-guy anything macro-related, offers some thoughts on the stimulus package:
It would appear that the great claim to fame of the stimulus is that it kept state and local governments from having to reduce spending. If you combine that with wage stickiness at the state and local level (that is, if you believe that they would cut jobs rather than cut pay for government workers), then the stimulus saved jobs. From a Recalculation perspective, one might ask whether those are the jobs that you would want to save.
Here's an essay by Kling on why he lost faith in traditional macro. Some key snippets:
There are no controlled experiments in macroeconomics. We would like to observe what would happen to employment and output in the United States in 2010 under different stimulus proposals. Ideally, we could construct alternative universes with the exact same initial conditions and try different policies. In practice, this is not possible.
When researchers attempt macroeconometrics, they are attempting to turn different time periods into controlled experiments. In effect, we take the situation in 1980 and 2005 and identify the factors that cause them to be different. We are interested in the effects of particular factors, notably fiscal and monetary policy. This method is valid only if we have properly controlled for other factors. The way I see it, controlling for other factors is impossible, because structural change is too important, too multi-faceted, and too pervasive for any statistical methodology to overcome.
***
Because of the need to impose strong priors, the structural approach is nothing but a roundabout way of communicating the way you believe the economy works. The estimated equations are not being used to discover relationships. Instead, the equations are being used by the econometrician to communicate to others the econometrician's beliefs about how the economy ought to work. To a first approximation, using structural estimates is no different from creating a simulation model out of thin air by making up the parameters.
His concluding paragraph:
We badly want macroeconometrics to work. If it did, we could resolve bitter theoretical disputes with evidence. We could achieve better forecasting and control of the economy. Unfortunately, the world is not set up to enable macroeconometrics to work. Instead, all macroeconometric models are basically simulation models that use data for calibration purposes. People judge these models based on their priors for how the economy works. Imposing priors related to rational expectations does not change the fact that macroeconometrics provides no empirical information to anyone except those who happen to share all of the priors of the model-builder.
It would appear that the great claim to fame of the stimulus is that it kept state and local governments from having to reduce spending. If you combine that with wage stickiness at the state and local level (that is, if you believe that they would cut jobs rather than cut pay for government workers), then the stimulus saved jobs. From a Recalculation perspective, one might ask whether those are the jobs that you would want to save.
Here's an essay by Kling on why he lost faith in traditional macro. Some key snippets:
There are no controlled experiments in macroeconomics. We would like to observe what would happen to employment and output in the United States in 2010 under different stimulus proposals. Ideally, we could construct alternative universes with the exact same initial conditions and try different policies. In practice, this is not possible.
When researchers attempt macroeconometrics, they are attempting to turn different time periods into controlled experiments. In effect, we take the situation in 1980 and 2005 and identify the factors that cause them to be different. We are interested in the effects of particular factors, notably fiscal and monetary policy. This method is valid only if we have properly controlled for other factors. The way I see it, controlling for other factors is impossible, because structural change is too important, too multi-faceted, and too pervasive for any statistical methodology to overcome.
***
Because of the need to impose strong priors, the structural approach is nothing but a roundabout way of communicating the way you believe the economy works. The estimated equations are not being used to discover relationships. Instead, the equations are being used by the econometrician to communicate to others the econometrician's beliefs about how the economy ought to work. To a first approximation, using structural estimates is no different from creating a simulation model out of thin air by making up the parameters.
His concluding paragraph:
We badly want macroeconometrics to work. If it did, we could resolve bitter theoretical disputes with evidence. We could achieve better forecasting and control of the economy. Unfortunately, the world is not set up to enable macroeconometrics to work. Instead, all macroeconometric models are basically simulation models that use data for calibration purposes. People judge these models based on their priors for how the economy works. Imposing priors related to rational expectations does not change the fact that macroeconometrics provides no empirical information to anyone except those who happen to share all of the priors of the model-builder.
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