The thoroughly modern macroeconomics of Stephen D. Williamson (SDW), Part I

First in a series. I’m reading his intermediate macro textbook (fourth edition). Cost me ten bucks (including shipping). It is somewhat of a novelty among intermediate texts because he adheres to a “Real Business Cycle” (RBC) perspective. SDW blogs here. What is RBC? That’s the subject of this series. The eminent MIT professor Robert Solow describes it archly:

The preferred model has a single representative consumer optimizing over infinite time with perfect foresight or rational expectations, in an environment that realizes the resulting plans more or less flawlessly through perfectly competitive forward-looking markets for goods and labor, and perfectly flexible prices and wages.


To be fair, adherents to RBC would answer, our models get much more complicated than that; and they will, in time, provide more accurate predictions of the economy. Being able to predict is what ultimately matters anyhow.

The RBC folks can be a little sharp themselves. Here, for instance, the eminent Robert Barro contrasts his own “regular economics” with irregular Keynesian economics.

Here is RBC guru Edward Prescott, pulling rank:

I don’t know why Obama said all economists agree on [the need for a stimulus bill]. They don’t. If you go down to the third-tier schools, yes, but they’re not the people advancing the science…

And Prescott again:

It is an established scientific fact that monetary policy has had virtually no effect on output and employment in the U.S. since the formation of the Fed . . . 

I find the above a little breathtaking, purely in terms of arrogance. We’ll try  to get to the substance in this series. Full disclosure: I did well in my macro comprehensives in grad school, but that was in 1984. I’m trying to get up to date. After following DeLong and Krugman’s ongoing jihad against modern macroeconomcs’ “dark ages,” I thought it would be worthwhile to get the Full Monty “Real Business Cycle” (RBC) side of the story. As the quotes above should indicate, RBC is the mortal enemy of traditional Keynesian economics, and vice versa.

A few fun bits to get warmed up.

In the “Key Terms” section at the end of Chapter One, SDW defines the term “Keynesian” as “Describes macroeconomists who are followers of J.M. Keynes . . . ” By contrast, RBC theory is defined as “Initiated by Finn Kydland and Edward Prescott . . . ” So Keynesians are like children following a dead Pied Piper, RBC’s founders don’t have “followers.” They do the serious work.

On financial bubbles, or by SDW, “bubbles,” we get:

Some economists argue that the rapid increase in the price of housing up to 2006 was an asset price “bubble.”

By contrast:

Alternatively, according to the fundamental view, market prices of assets can always be explained (maybe through some hard thinking and research) by factors affecting supply and demand . . .

Get the difference, bubbleheads?

I’ll end by noting SDW’s principal exception to GDP as an indicator of well-being is its omission of household production, which is fine as far as it goes, though the failure to mention non-market environmental amenities up front is curious. As I said, we’re still in the throat-clearing phase of the book, so some suspension of judgment is called for.

Lastly, on unemployment, SDW lists four factors affecting it: aggregate economic activity, the structure of the population, government intervention, and sectoral shifts. The first one looks circular (As in “When more and more people are thrown out of work, unemployment results.” — Calvin Coolidge), but as noted above this is an introductory chapter so we will withhold judgment. The RBC view of unemployment is kind of notorious. We will unpack it at our leisure.

Noah, treading water

The often interesting Noah Smith offers a dubious contrast of intellectual vibrancy of left vs. right. On the right we have the Yuval Levin/National Affairs crowd, who as others have observed enjoy little support from the raging id that is the Republican base. The “Reformicons” have been roundly bashed so there is no need in this post to dwell on their dubious ideas. On the left he offers Richard Florida, advocates of schemes to boost savings (like Richard Thaler, Univ of Chicago economist), and Cass Sunstein.

I’ll leave classifications of Florida (the man, not the nutcase of a state) to others. My friend Peter Dorman characterizes him as an advocate of European-style cities. Dorman notes that this does not jibe with Smith’s notion that his leftists have transcended the old ways of social-democracy.

I’m a little tickled that someone attuned to New Keynesian models is taken with savings schemes, since in that context no such scheme enlarges the saver’s lifetime budget set, though it might increase their well-being. I debated the asset builders some time back and basically made that point. You don’t increase incomes of the poor by persuading them to spend it later rather than sooner. As for Sunstein, he’s a deregulator. There could be something to say for all these worthies, but they are a poor sample of the American left.

Instead I would suggest those interested in what’s left to look into events such as this, and journals such as this. Or my blogroll. Noah, you need to get out more.

Samantha Power was a human rights activist. You won’t believe what happened next!

(Warning, rant ahead.) Today’s datapoint in a continuing series:

Human Rights Watch gets a letter from Nobel Peace Prize winners.

Clausewitz said “War is the continuation of Politik by other means.” MaxSpeak says human rights politics are the prelude to war. Human rights activists who go to work for the U.S. government become apologists for the war of the month, or of next month.

Nations, the U.S. no less than others, invariably cloak their military aggression in moral terms. I suggest moral motives are never the central factors in so-called humanitarian interventions. After all, there are human rights calamities all over the globe, happening all the time. What determines the focus of U.S. concerns? Why Syria and the Ukraine and not Rwanda or the Congo? Of course you can never fix everything. Usually you can’t fix anything. But still, to where are the government’s energies directed? Why do U.S. officials complain about Venezuela’s democratic election results but indulge brutal, absolute monarchies elsewhere? Who are they kidding?

Poor George W. Bush got too much blame for Iraq. We forget the years of economic sanctions, courtesy of the Clinton Administration. These sanctions greased the political skids for the ensuing Bushist invasion. Does anybody remember the reasons for them? Was it because Saddam Hussein did some beastly things before and after, but mostly after he was no longer our friend? To these measures have been attributed the deaths of hundreds of thousands of Iraqi children, in response to which Clinton’s Secretary of State Madeleine Albright said, “[W]e think the price is worth it.” Then she gets to dine out on the foreign policy blunders of George Bush. Isn’t that Dick Cheney awful?

The best human rights policy is to confine interventions to instances where the U.S. has zero material national interest. (“But then they would never happen.” Well, there you go.) The latter always perverts the motivation and execution of policy. Go ahead and rescue the kidnapped girls in Nigeria. Go ahead and take out Joseph Kony. Material interests always entail entanglements, and you know what the founders said about that.

More datapoints . . .

A problem from Samantha Power

Anne-Marie Slaughter was a human rights campaigner. You won’t believe what happened next.

P.S. Chase Madar was on the case.

P.P.S. So was Bob Dreyfuss.



Growth and its discontents

I’m a bit unsatisfied with the final graphs of my Inequality-who-cares post from yesterday. Herewith a few attempts at clarification and extension, probably not for the last time.

There should be no question that for many, many people, faster economic growth is a matter of life and death, especially in the developing world. My GDP post speaks to where the U.S. is on that score. Faster growth doesn’t solve everything, and it can create other problems, but you can’t diminish its importance. As I mentioned previously, low or zero growth with increasing poverty provokes political interest in inequality, which is why Thomas Piketty is now rich. If you care about inequality for its own sake, however, growth is not enough. The burden of TP’s blockbuster book is that growth under capitalism has generated inequality and may continue to do so.

What are really in question are productivity, properly adjusted for environmental costs, and distribution. With higher productivity, we can work less, play more, and still have more stuff. We can decide how much of our increased productive capacity to deploy to leisure time. In that context, there is still the issue of distribution, or inequality. You can have more or less inequality with less or more growth. In circumstances of economic growth, is inequality still salient? I would say yes. It may not be as important to the poor as a higher floor on living standards, but it’s still a legitimate concern.

The growth agenda stripped naked of weak promises of greater social welfare is an invitation to a lottery, also known as greater mobility. People prefer limited, unfair chances at reward to no chance at all. So they buy Powerball tickets and they buy into Horatio Alger tales. For the sake of growth, we are encouraged to look askance at labor organizing and social insurance (‘don’t kill the Golden Goose’), the key components of an equality agenda.

People forget that mobility is a double-edged sword. Your lottery ticket’s prize can be hugely negative. It’s wonderful when by a combination of effort, talent, and good luck somebody rises from the bottom to the top. But with unchanging inequality, someone has also fallen from the top to the bottom, not necessarily because of any personal deficiencies.

There is also the politics of growth-meritocracy-mobility versus inequality. (Data point: an article alleging the Administration’s flagging interest in inequality, courtesy of Tom Philpott. By my previous post, this interest can be questioned.) I want to argue that the politics of anti-poverty are weak, beyond a minority, core constituency of some well-off liberals and some poor, mostly people-of-color people. There has been no integrated working class constituency for anti-poverty action for some time, even under conditions where poverty has recently increased. By contrast, an equality-anchored agenda under such conditions may carry promise, not least because growing inequality squeezes the lower sixty percent of the income distribution closer together. We become more like the old 19th century populist dichotomy of “tramps and millionaires.” We evolve to an appreciation of class.

In my previous post I contrasted my own view with what I described as the ‘liberal’ position. My liberal friend Bob Lucore pointed out that my view is coincident with that of the Americans for Democratic Action (on whose national board I once sat, so to speak, and would happily sit again). This is certainly true. Liberals are an ideologically diverse group. I wish the ADA had enough adherents to conquer the world. It would be a much better place. Alas, the common use of liberal is more closely associated with the president than with the ADA.

Some time soon we’ll unpack “neo-liberal.” That will be fun.