Tuesday, January 10, 2017

Why John Taylor shouldn't be Fed president

Bonddad - why John Taylor shouldn't be Fed president. Quote:

1.) He is the leading proponent of having the Fed use mechanical rules to determine policy.  Taylor authored the "Taylor Rule," an equation that he believes should completely govern the Fed's interest rate policy. The rule is very useful as a basis for policy discussion.  Despite that benefit, Taylor's argument assumes his equation is infallible -- that it will always be correct in any circumstance.  That assumption is incorrect; nothing, especially in economics, is that simple.  There is always "another hand" that should offer policy guidance.  And binding the Fed's hands would have prevented them from engaging in the extraordinary measures during and after the Great Recession.

2.) Taylor continually compared the Obama recovery to the Reagan recovery, an economic apples to oranges comparison.  The Federal Reserve caused the recession preceding Reagan: They increased interest rates to wring inflation out of the economy -- a policy that worked brilliantly.  Once rates started to move lower, the economy faced little to no structural headwind to naturally slow economic growth.  Perhaps just as important, Reagan's tenure began just as the baby-boomers were beginning their peak earnings time in life.  This started a long period when the labor force participation rate increased, adding additional stimulus to the economy.

Obama's recovery was preceded by an entirely different precursor: a debt-deflation recession and recovery.  This is an entirely different economic scenario then that faced by Reagan and one that leads to a far slower recovery.  In a post-debt deflation economy, consumers are burdened by debt values that, ins some cases, are higher than asset values, leading to slower spending as consumers allocate additional resources to paying down debt rather than other goods.  The de-leveraging process can take years, acting as a slight to large drag on economic growth.  And unlike Reagan, Obama faced a declining LFPR as the baby boomers started to retire, which also lowered GDP growth.

Taylor has yet to acknowledge either fact in his analysis.  There are two possible reasons for his oversight.  1.) He is unaware of the difference between the recoveries.  Given Taylor's stature, this is highly doubtful.  But it this is the reason is is automatically disqualifying because it belies a profound ignorance of economic history.  2.) He is aware of the differences, but for political reasons refused to acknowledge them.  This is the more likely reason.  Taylor is a University of Chicago economist; he is inherently biased against government action and activist policy.  However, if this is the reason, it is also disqualifying because it indicates he is more interested in political outcomes than positive economic outcomes.

And therein, I guess, is the big problem with economics: you can pretend to do it while actually promoting ideology.

Tim Taylor: narrative economics and the Laffer Curve

Tim Taylor - narrative economics and the Laffer Curve. Big long reprint of a talk by Shiller about the apocryphal story of Laffer having dinner with Cheney and Rumsfeld, and as if that's not bad enough, drawing the Laffer curve on a fine linen napkin.

But this is the neat bit:

The point of Shiller's talk is that while a homo sapiens discussion of the empirical evidence behind the Laffer curve can be interesting in its own way, understanding the political and cultural impulse behind tax-cutting from the late 1970s up to the present requires genuine intellectual opennees to a homo narrativus explanation--that is, an understanding of what narratives have force at certain times, how such narratives come into being, why the narratives are powerful, and how the narratives affect various forms of economic behavior.

My own sense is that homo sapiens can be a slippery character in drawing conclusions. Homo sapiens likes to protest that all conclusions come from a dispassionate consideration of the evidence. But again and again, you will observe that when a certain homo sapiens agrees with the main thrust of a certain narrative, the supposedly dispassionate consideration of evidence involves compiling every factoid and theory in support, as well as denigrating those who believe otherwise as liars and fools; conversely, when a different homo sapiens disagrees with the main thrust of certain narrative, the supposedly dispassionate consideration of the evidence involves compiling every factoid and theory in opposition, and again denigrating those who believe otherwise as liars and fools. Homo sapiens often brandishes facts and theories as a nearly transparent cover for the homo narrativus within.

Though I'd say there's something special about economics that makes it easier to baffle with narrative, as opposed to a field like physics.

Monday, January 2, 2017

Interesting infant industry experiment from Noah Smith

Noah Smith - infant industry and Napoleon. Wait, you're doing what now?:

The first known proponent of this idea was Alexander Hamilton. He suggested subsidies -- which he called “bounties” -- as the best tool for helping young manufacturing industries, as opposed to tariffs. Casual observation would suggest that Hamilton’s strategy worked well, or at least didn’t hurt too much, as the U.S. became an industrial powerhouse. However, in the middle of the 20th century, the doctrine came under attack from economists. Studies of industrial policies in places like Turkey showed disappointing results. Productivity in the shielded industries didn’t even go up. Infant-industry protection was broadly rejected along with other economic heresies.

This dismissal was premature. Arguments from theory can break down in any number of ways. And examples like Turkey’s aren’t true random experiments -- for example, countries might try to use protectionism to shore up industries that were uncompetitive to begin with, and which had little hope of ever flourishing. Policy decisions don’t just drive economic conditions, they’re also driven by them. To really know whether infant-industry protection is effective, we’d need some kind of random event that affected the competitive environment.

Economist Reka Juhasz, of Princeton and Columbia, combed through the historical record to find such a random event. And she found one: the Napoleonic Wars. It seems doubtful that Napoleon’s conquest of Europe was an elaborate scheme to protect failing French manufacturing industries, so it’s probably safe to consider its effects as akin to an act of God.

During his wars with Britain, Napoleon tried (unsuccessfully) to bring his island nemesis to its knees by cutting it off from European markets. The move protected industries within the sprawling Napoleonic domains that competed heavily with Britain. The prime example was mechanized cotton spinning, a very high-tech industry for its time, and a locus of intense competition between early industrial nations like Britain and France. With detailed historical records, Juhasz was able to identify how much different regions saw their trade costs with Britain go up as the result of Napoleon’s embargo, and to see whether cotton spinners in those areas flourished.

They did. Juhasz found that in the short term, profits of protected cotton spinners rose, and their size and productivity increased more in the long run. Decades later, these regions were exporting more, relative to less-protected regions, showing that companies in the shielded areas were eventually able to compete in global markets -- just as the infant-industry argument would predict.