Strongly disagree. photon137 is just copy-pasting the conventional wisdom into a comments thread and calling it a grand insight. Yet the deference afforded these "experts" is vastly disproportionate to the rate at which economics produces testable hypotheses. There is no such thing as a "right-wing" and a "left-wing" Nobelist in physics, but there is in economics. You quote Krugman, we quote Hayek, you quote Stiglitz, we quote Friedman, and so it goes.
If Bernanke and Obama actually knew what they were doing, there would be a close correspondence between theory and reality. There isn't. It's very rare that these folks actually make concrete predictions that are tested in the future. So let's make some predictions. You and photon137 can make some, and then we will make some.
Fantastic. All I care about is the content. In any case, your comment was no simple personal testimonial, but an attempt to tell carsongross that the "crowd was against him". This is just the conventional wisdom attack again.
That is not the case anymore. The crowd is not against him.
It's too bad that pg has hidden upvote totals, as the bien pensants who support the bailout policies of Bush, Bernanke[1], and Obama would realize that millions of informed people now oppose them. To be an informed person, it is no longer sufficient to parrot what is read in the New York Times or the Wall Street Journal.
My comment wasn't an attempt to tell carsongross the crowd was against him. It was an attempt to tell carsongross that the way he's phrasing his arguments will make people think he's a crank.
I'm telling him what he can do to convince people like me of his arguments, assuming that's his goal. If not, well, mea culpa.
You're falling into the same trap. "bien pensants?" Really, help me understand or sod off. Compare this response to photo317's polite, civil, and reasoned reply.
First of all, the plot you mention is the projection after the Treasury stimulus - this has absolutely nothing to do with the Fed at all. I have never mentioned the government stimulus at all.
I am only describing the factual and operational mechanisms by which the Fed operates - none of which is "conventional wisdom". Nowhere have I tried to justify the existence of the Fed.
Now since you have brought up the subject of macroeconomics, let me impart some "conventional wisdom" to you:
It is a "testable hypothesis" which has been verified every single time a recession has happened, that the direct cause of a recession is a fall in aggregate demand - and all economists worth their salt ranging from Keynes to Friedman, from Marshall and Samuelson to Karl Marx would agree with that statement.
The reasons for fall in aggregate demand could be numerous: war, famine, change in demographics, inflation shocks, credit reduction.
A recession caused by a bursting of the credit bubble and the result negative credit shock is known as a "balance-sheet" recession where the average consumer has massive liabilities and little equity or high-quality assets left to finance those liabilities. Deleveraging is the natural process by which an economy comes out of such a recession. Lack of credit causes a decrease in puchasing power leading to a decrease in aggregate demand.
Now let's examine the Fed's function in all of this:
(a) During the credit shock: the Fed acts as the lender-of-last-resort injecting massive liquidity into the system to avoid a systemic catastrophe (to which we came very close in 2008). In 2008, banks stopped lending to each other - corporates had their credit lines closed, commercial-paper issuance went bust. Tell me, if you were a corporate in a capital-intensive business (such as GM, Ford) at that time, even an AAA-rated one, how would you find the money to finance your working capital? That's why avoiding systemic failure of the financial system was important - otherwise few corporates would have survived, let alone banks - leading to colossal unemployment.
(b) Post credit shock: So now corporate credit and interbank credit have been restored. But the end-consumer is still highly leveraged - paying interest on loans amidst an increasingly uncertain wage and unemployment backdrop. It is dangerous to provide credit to consumer when the cost of financing that credit is too high. So, the Fed tries to lower the cost of financing by lowering interest rates (to near zero) and by making a market for assets which were pulled out of the financing chain due to the market panic - namely, mortgages. However, do note that there is no net capital creation, the Fed's balance sheet has assets (mortgages, treasuries) and liabilites (cash) in equal amounts.
(c) Now the situation becomes murky. The Fed has an accommodative policy but the transmission mechanism is not working. Banks are not lending to consumers. Why? Because the recssion has started and consumer expectations for future purchases have gone down - leading to (i) a decrease in demand for credit and (ii) overall lower sales of goods and services - recession and deleveraging are now in full flow - people are starting to have to learn to live within their means.
(d) The Fed, weirdly enough, has a mandate to keep the unemployment-rate "low". Here's where I disagree with the fact that the Fed can be effective in achieving this target. Even the Fed thinks that monetary policy alone is too blunt a tool to address unemployment as a whole. Balance sheet recessions cause severe structural dislocations in the labour market limiting worker mobility. These are things that the Fed can't and shouldn't address. Even Milton Friedman concurs [1] (interestingly, Friedman was a great supporter of having a pragmatic monetary policy authority - be it the Fed, a Mickey-Mouse bank, whatever - to attenuate the variability of the natural business cycle. People invoking Friedman seem to forget that).
(e) At this stage, let's look at the chain again: Aggregate Demand <- Consumer Purchasing Power <- Consumer Credit <- Financial Credit. The right side is being taken care of by the monetary policy - but the chain breaks down in the middle. So who steps in from the left side to boost aggregate demand? Voila! - the government (and its stimulus package).
Now, the situation becomes political. The government can (i) do a massive stimulus itself targeting specific sectors it thinks that have structural issues or, (ii) cut taxes giving more purchasing power to the consumer and letting them make the consumption decision. That's all the hoopla is about - nothing more, nothing less. (In general, fiscal stimulus targeting has been done badly by the Obama government [2] )
The Fed, as far as the markets are concerned, is an apolitical observer (Bernanke is a Republican but he's the biggest dove on the FOMC!) - it has to be to maintain market stability (to see an example, a single word out of place uttered by a Central Banker can cause massive market rallies or drops - see Mario Draghi's latest ECB press conference).
Now, if you have anything useful to contribute which is substantiated by facts and logic, please do so - otherwise do not be vitriolic just because you can be so - that's extremely easy.
It is a "testable hypothesis" which has been verified every
single time a recession has happened, that the direct cause
of a recession is a fall in aggregate demand and all
economists worth their salt ranging from Keynes to
Friedman, from Marshall and Samuelson to Karl Marx would
agree with that statement.
Appreciate the polite discussion. In that vein, there are several issues with your basic premise.
1. Hayek won a Nobel, so by many definitions is an economist "worth his salt". As you may know (because he is absent from your list), Hayek does not agree with that statement.
What measurements could Keynes base his theory on in a time before computers? Did he really have access to Visa's databases of transactions to compute a measure of "consumer spending"? Did he have access to every VC and PE fund balance sheets to compute the amount of investment? Did he have a command line interface to JP Morgan's chart of accounts?
Only today, when we can reliably measure the activities of millions of people, can we even begin to quantify these kinds of things, let alone reliably attribute direct causes. Cause must precede effect, effects must not occur without causes, cause/effect pairs must occur together many times, and (most importantly) effects must be predictably produced by causes. With real economies, we can't blow them up just to test hypotheses. With virtual economies, we have a chance of testing some of these things.
More generally, the macroeconomy is not some fantastic thing invented out of whole cloth, it can and must be based on direct measurement of individual actors in the economy.
For example: bpp.mit.edu is real economics. It computes macroeconomic quantities (like the rate of inflation) from direct microeconomic measurements on historical prices from the web. If you disagree with their analysis, you can replicate it from their dataset.
I think this is our fundamental disagreement. I do not believe macroeconomics has a firm empirical foundation in the same way that physics does. Economics is best conceptualized as a many-body problem in biology, with highly non-fungible humans (100 Steve Jobs will greatly affect any reasonable simulation). We're just not there or even close in macro, and so the confidence of some of these people (especially Krugman) is just wholly unwarranted relative to the claims of a solid-state physicist.
Indeed, many of them will deny that macro parameters can or should be derived from direct measurement of individual actors in the economy. By contrast, in physics, thermodynamics is firmly based on the microscale discipline of statistical mechanics.
"By contrast, in physics, thermodynamics is firmly based on the microscale discipline of statistical mechanics."
Thermodynamics is absolutely the most aggregate branch of physics. delta(E_int) = delta(Q) - Work always works for a system regardless of your microscopic model - statistical mechanics is just one model to explain aggregate quantities that arise ie temperature, pressure etc. - micro-level structure is hardly measurable in thermodynamics.
Thanks for giving me this great example to help disprove you :)
Hmmm. Didn't Boltzmann put S = k \log \Omega on his grave? I think we are taking different lessons from stat mech. To me, the triumph of stat mech is that macroscopic phenomena (like entropy S) can be explained in terms of microscopic quantities (like Omega).
At least with S, even before stat mech there was a precise process to measure S from a P/T phase diagram. And there was a procedure to reproduce a phase diagram for an arbitrary compound.
Yet have you ever seen someone calculate the values of C, I, G, and Y from raw data? Like, a reproducible research document which calculates these from a public database of individual transactions, perhaps from a virtual economy? Everyone starts from government statistics to justify the government's activities.
You can directly measure the macroscopic quantity of inflation on a microscopic basis by simply tracking prices over time. But the other quantities that a lot of macro reasoning seems to be based on do not have simple measurements. That is the fundamental reason for deep skepticism about macro. Where's the raw data and the source?
Because we are making decisions about trillions of dollars by verbal argument rather than open public datasets and source code. Given a database with an anonymized, representative sample of tax returns, credit card transactions, bank account deposites, new company incorporations and the like (many of which would be a matter of public record) you could probably go pretty far with some basic scatterplots. Yet this is not the culture in economics.
No, we aren't taking differeent lessons from stat. mech. - your understanding of thermodyanmics is flawed (there are no two views here - this is physics).
S = k ln W is an entropy model for an ideal gas with uncorrelated particle motions and inelastic collisions. It doesn't explain the "entropy" of a real system.
There is no precise way to measure S for any real fluid whatsoever. S, at a microscopic level, isn't even well defined (disorder? - but that's just an interpretation for S, not a definiton). Phase diagrams only allow you to measure changes in S - and that's only because (assuming reversibility), delta(S) can be explained with change in pressure and temperatures (both are aggregate variables). And when a process is irreversible (which most real-world processes are),the only thing you can say is that the change in S would be greater than what you can compute using T, P, heat transferred and work done.
Raw data to calculate C, I, G and Y are freely available for public use at : http://www.nber.org/data/ . The accounting framework on which the above measurements are based is described here: http://unstats.un.org/unsd/nationalaccount/docs/SNA2008.pdf
(individual nations implement their accounting frameworks, as the NBER does for the US, according to the guidelines above).
I agree with you that economics has nowhere near as much predictive power as physics (trained in physics, stuck in the financial-sector as a boring quant - I can testify to both). Nor it has infallible foundations (rational behaviour? game-theory based "utility" maximization? VNM utilities?)
I also agree with you that aggregate demand as a macroeconomic quantity is hard to measure as are many macroeconomic variables. But nowhere does Hayek disprove the existence of aggregate demand (whether business cycles are caused by monetary policy or fiscal policy or some other factor is debatable - their end effect is always on aggregate demand).
But statistical observations of the aggregate often lead to great discoveries and the foundation of a subject. Max Planck's enormous set of highly aggregate experimental data (without him knowing the mechanism by which light operates) led him to formulate the "quantum" hypothesis (ie light is quantized as photons) - which was the founding stone for quantum mechanics and all the great stuff that followed.
We have such numbers in engineering - the Reynold's number, the Nusselt number etc. We don't know how they arise from chaotic microscopic behaviour but we do know these quantities exist. They have a profound effect on the onset of turbulence in fluid flow, onset of convection in heat-transfer and a whole lot more. The effects themselves can be measured and be tallied with a "Reynold's number" of say 3000 (which is again based on conduit dimensions, pressure gradient, viscosity - all measurable quantities but we don't how they tie up together to give rise to turbulence). Never stopped us from making pumps and engines and life better for the world.
As an aside, Hayek's theory and the whole Austrian school of thought is the least empirical of all such branches. So you contradict yourself.
Even Milton Friedman declared himself "an enormous admirer of Hayek, but not for his economics. I think Prices and Production is a very flawed book. I think his [Pure Theory of Capital] is unreadable. On the other hand, The Road to Serfdom is one of the great books of our time." (copied verbatim from Wikipedia).
There is a difference between normative economics (which the political leaders and Paul Krugman propound - ie the "That's how it should be" class) and positive economics (which, as a subject, deals with discovering mechanisms of the economy and searching for empirically verifiable variables that can validate those mechanisms). I think you're confusing the two.
There is a difference between normative economics (which
the political leaders and Paul Krugman propound - ie the
"That's how it should be" class) and positive economics
Well, sure, but there can be no obligation to do that which cannot be done. Let's say you believe that the Federal Reserve's QE and money printing activities are like monkeying around with the number of shares in the cap table, that this nothing to do with the process of wealth creation, and that they downplay the effects of ruinous inflation on economies (viz. Weimar 1924, Argentina 2001). Then the positive and normative are tightly linked. You should not do X (normative) because X will lead to disaster (positive).
Which is why this plot is so important:
http://www.intellectualtakeout.org/sites/www.intellectualtak...
If Bernanke and Obama actually knew what they were doing, there would be a close correspondence between theory and reality. There isn't. It's very rare that these folks actually make concrete predictions that are tested in the future. So let's make some predictions. You and photon137 can make some, and then we will make some.