Richard Posner has a critique of public intellectuals who work in the public sphere (with special reference to Christina Romer), either in government service, or in journalistic fora. Mark Thoma and Brad Delong have already made clear the (many) points at which Mr. Posner has gone astray. Parenthetically, I’ll add that I wonder about the analytical abilities of anybody who lumps Philip Glass (!) and Elliott Carter together into the highbrow music category (see page 18 in his tome Public Intellectuals: A Study of Decline (1991)). More substantively, I have a few of additional observations, some of which are amplifications of Brad Delong’s points.
First, I agree with Mark Thoma that Mr. Posner apparently has little understanding of macroeconomics, either of old-style Keynesian type, or the new(er) real business cycle type, or certainly New Keynesian approaches. His charge that her current pronouncements are at sharp variance with her earlier academic work really makes me wonder if he’s read any of Dr. Romer’s previous work. I suspect that he’s taken at face value the conservative mis-apprehension that her tax cut paper contradicts the view that government expenditures can have an impact on growth. As I’ve explained in my responses to reader comments here, Romer and Romer (2008) provided estimates of tax cut multipliers, but no spending multipliers. Hence, a comparison of instrument efficacy is not feasible (comparing multipliers across methodologies can be done, but would be inappropriate).
Second, I would not pass a student out of intermediate macro who wrote in an exam:
The impact of the public-works program on investment is more complicated. But suppose, plausibly in a serious economic downturn such as the one that we’re in at present (and that was even more serious back when the stimulus bill was enacted), that a great deal of investment is in the form of passive savings, such as demand deposits and Treasury securities, because people and companies are anxious about their economic prospects, and they want safe savings, rather than savings that would be at risk because invested in entrepreneurial projects.
As Mark Thoma points out, this is confusing a financial investment with physical investment in a NIPA sense.
This confusion tells me that anybody writing far outside their area of expertise should think twice, consult a textbook or two, before committing virtual pen to virtual paper. (I’m not saying one shouldn’t write outside of one’s area of research expertise on a weblog — just one has to be careful).
Third, before he pontificates on what economists who work in the government should or should not be doing, I think Mr. Posner should read Martin Feldstein’s discussion of how the CEA works (“The Council of Economic Advisers and Economic Advising in the United States,”
The Economic Journal, Vol. 102, No. 414 (Sep., 1992), pp. 1223-1234 [JSTORE pdf]; excerpt here). Here’s a quote:
Although the CEA is physically as well as operationally part of the White House complex (CEA offices are in the Old Executive Office Building adjacent to the White House and within the same security cordon), the economic staff functions in a completely professional and nonpartisan way. My very able and distinguished staff included Larry Summers, who was prominent as chief economic adviser to presidential candidate Michael Dukakis.
The tradition of professionalist is so strong that even in a presidential election year the CEA chairman appoints members of the staff for the coming academic year with the clear understanding that they will continue to serve even if the party in power loses the presidential election. …
My limited observations, having been a staff economist in the situation mentioned in the last paragraph, is that CEA members (nominated by the President and confirmed by the Senate) do not “leave behind their academic scruples” when they move from academia to government service. That doesn’t mean that I think they’re correct in their analyses — just that what they believed when they came in is pretty close to what they say in public. (After all, silence is also an option.)
Fourth, I think any blog post (let alone paper) should be internally consistent. Consider Mr. Posner’s (approving) statement:
Most economists, however, believe that it is unrealistic to suppose that people have enough information about the future to adjust their current behavior to expectations of higher taxes, inflation, devaluation, or other possible consequences of an increase in the national debt. There is too much uncertainty.
Then, he says two paragraphs later:
But Romer actually gives some credence to the unrealistic picture of the far-sighted consumer or businessman by arguing that recipients of tax credits authorized by the stimulus bill will spend rather than save the tax-credit money because they will assume that the credits are permanent.
But if in fact consumers do not look forward (as Mr. Posner argues, not as Dr. Romer argues), they will only respond to current changes in disposable income, and in fact the multiplier will look pretty big.
(Actually, I find the biggest problem with Mr. Posner’s argument here is that the failure of consumers to respond in a fashion consistent with unencumbered intertemporal optimization w/perfect certainty is not due only to uncertainty, but also liquidity constraints, as well as possibly more exotic utility functions.)
Fifth, Mr. Posner should read a bit more widely. He states:
Romer argues in her talk that by the end of the second quarter of this year, $100 billion of stimulus money had been spent. That is a suspiciously round number, and it is unclear how it was arrived at; but let us assume it is accurate. She then argues that this small expenditure–about two-thirds of one percent of the Gross Domestic Product–is responsible for the fact that the decline in GDP fell (on an annualized basis) from 6.2 percent in the first quarter of the year to 1 percent in the second quarter (though the latter figure is likely to be readjusted upwards).
This assertion is groundless. No one has the faintest idea what effect the stimulus has had.
As someone who had to “fact-check” numbers going into White House policy documents and speeches on occasion, I can say that the numbers are verifiable regardless of Administration (whether they are interpreted in an appropriate fashion is a fair question).
But the more substantive question is whether the math is so nonsensical. As I showed quite clearly in this post, the number Dr. Romer obtained was easily calculated and plausible.
Sixth, my impression is that former CEA staffers and members that have become bloggers are pretty careful with the numbers and analytics — certainly more so than Mr. Posner. These include Jeff Frankel, Paul Krugman (notwithstanding Mr. Posner’s barbs), Andy Samwick, Diane Lim Rogers, and Nouriel Roubini. (see this post for former gov’t/Fed economists who became bloggers.)
Update 8/20 12:40pm Pacific: In a rejoinder to Brad Delong’s post, Mr. Posner shows that he still can’t multiply, divide, and adjust quarter on quarter changes to annualized rates of change.. To recap my original calculations using a 0.5 multiplier on a total $60 billion expenditure:
Here’s a way to think about what the impact of ARRA has been on 2009Q2 growth. About $60 billion of stimulus funds had been expended by end-June, of which a large portion is in the form of tax rebates. The price deflator is about 10% higher in 2009Q2 than in 2005, so $60 billion translates to about 54.5 billion 2005$. This is a cumulative figure, while 2009Q2 SAAR GDP was 12892 billion, or 3223 billion Ch.2005$ at quarterly rate. If the multiplier is 0.5 (keeping in mind a large chunk of these funds are tax rebates), then growth was about 3 percentage points higher (q/q SAAR) than would have otherwise occurred; I think this is how Josh Bivens arrived at the conclusion that GDP growth would have been 3% lower in the absence of the ARRA.
Now, let’s use the numbers Mr. Posner is using. He uses $89 billion through end-Q2. Assume 40% is going to transfers to the states which are spent on health services, education, and general spending support (this is G, not Transfers in NIPA lexicon), to obtain $35.6 billion. Divide by the GDP deflator to obtain approximately 32.4 billion Ch.2005$. This is approximately 1% of 2009Q2 GDP of 3223 billion Ch.2005$ (not at SAAR). Taking 1.01 to the 4th power yields 1.04, i.e., the increase in output in 2009Q2 coming from the stimulus, assuming absolutely none of the tax cuts are spent is 4%.
Technorati Tags: stimulus, Christine Romer,
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Re on your second point on the confusion between financial vs NIPA investment – if a judge such as Posner can reason in this manner what about the average Joe? Perhaps the problem is not in his reasoning but in educating the public on measurement concepts. How popular would such a lesson be?
There is a foolish meme in our society when things become difficult, We have to do something! We would be wise to understand what is taught to all medical students, First, do no harm. The meme that we have to do something is not a logical response but a political response to justify policies that run counter to common sense and the will of the people. This meme was SOP for the New Deal. When it was pointed out to those in the FDR administration that destroying food while people were starving was insane the response was We have to do something. So Posner demonstrates poor economic logic in his third paragraph.
Then Posner continues his failed logic in his fourth paragraph when he preaches the typical demand side mantra that consumption creates goods and services. Consumption the very name itself tells us that it destroys production, whether as waste or as benefit. Consumption does not produce. So Posners analysis is firmly rooted in the errors of the demand model.
Then Posner exposes that he has the same hubris as all central planners when he writes, The point is not that people are irrational, but that they just don’t have the information that would enable them to decide what adjustment in savings and consumption they should make today to optimize their economic situation if and when the national debt has to be paid down through higher taxes, inflation, or other measuires.(sic) Posner, in typical Central Planner style, assumes that he knows more than normal people and so he should make decisions for them.
He is also wrong when he makes the assertion, no one has the faintest idea what effect the stimulus has had. The electorate massively opposed the Bush/Paulson stimulus plan virtually bringing down the congressional phone systems in opposition. In their initial response the House turned it down and the people gave a deep sigh of relief. But then the when the dark forces, through legal manipulations, violated the spirit of the constitution by first passing the revenue bill in the Senate then returning it to the House, the economy crashed. The political class proved they were not responsive to the electorate. The massive government largess would drive the economy even deeper into the prohibitive range of the Laffer curve. It was the Bush stimulus – what Posner supports – that precipitated the crash as the electorate began saving to protect themselves.
Finally, Posner is wrong when he says that economists are on holiday from their standards when they accept public or political position. These economists are in the positions they are in because of their prior positions as academics so there is no need to change their positions. Now admittedly most academic economists constantly search for positions that will get them chosen for lucrative government positions, but in doing this they discard their standards long before entering the government position.
In summary Posners critique is much ado about nothing.
I was disappointed that Menzie choose to analyze Richard Posner when the serious economic work was Christina Romer’s paper. So here is a very quick analysis of Romer’s publication.
Romer wrote:
…I sent in as the title of my talk, So, Is It Working? …I thought that given the provocative title, I should probably get straight to the answer: Absolutely. The Recovery Act, together with the actions taken by the Treasury and the Federal Reserve to stabilize financial markets and the housing sector, is helping to slow the decline and change the trajectory of the economy.
Now if we assume the definition of “working,” as Romer does, that a slowing of the decline is our goal then at least her facts are correct, but if we define “working” as an actual recovery the she is totally wrong. We are not in a recovery and she does not even try to make the case that we are.
I find it curious that economists feel the need to defend their profession.
But, in truth, I think many people were shocked. They assumed the economics profession–and notably in government institutions like the Fed–were on duty. In fact, they appear to have been asleep at the switch.
A casual glance at the Case-Shiller index in, say, 2006, would have told you there was a problem. But did anyone analyze what a mean reversion process might imply for the financial system?
Or take oil prices. In late 2007, Greenspan was saying there was a 1-in-3 chance of recession when oil prices were already dragging down the US economy with every prospect of taking it into recession.
So I think it’s fair to say that there was a problem with the profession. However, the problem was not primarily one of integrity. Rather, it was:
– risk appetite: economists tend to be low risk people. That why the Econbrowser recession index is at 99.7% when there’s nary a rental car available in Houston, flights are packed and your own posts suggests the trough was Q2. Low risk people are reluctant to challenge the established system.
– principal-agent problems. Anyone who’s worked in an institutional setting know’s what this is about.
– mindset: Roubini many times claimed the sky was falling and many times he was ignored. That doesn’t make him wrong, but it does mean the ‘consensus’ was not prepared to seriously contemplate his thesis.
So often these discussions degenerate into pointless moralizing. Someone was ‘bad’ and should be held responsible.
Maybe structural issues deserves greater emphasis. Perhaps your graduate students should have to spend six months on a trading desk to get a feel for and become acclimated to real risk taking.
Perhaps you should have a course called “Making Your Voice Heard: Principles and Practice in Managing Institutional Politics Using Principal-Agent Theory”.
So, the problem with blame is that it internalizes the problem to the individual, and the implied course of action therefore is to dismiss and replace the individual. There are cases when this is necessary, but it ignores what–in my experience–are more significant structural factors and prevents a problem-solving approach to preventing recurrence.
I really don’t see why Menzie put this much work into this post. This is almost as bad as the post responding to Rush Limbaugh.
Menzie, if you want to respond to someone critical of mainstream macro, Arnold Kling is your man.
Ah, economics according to DickF. Nothing like them for humor.
First, a clarification. Linguistic analysis is not economic analysis. Pointing out that consuming something means it isn’t there anymore is not all that usefull went dealing with economics, because in many cases, it isn’t true in economics. Non-rival goods and services continue to exist during and after consumption. The argument in economics is not “consumption is production” but that there is a dynamic between the two. Consumption induces production. The “errors of the demand model” leaves out an important qualification. Which demand model is meant? I realize that supply siders have long favored a view of the world in which we ignore half the market – we chatter away about supply and ignore demand – but ignorance of how demand works doesn’t make for better economic analysis. Ignorance of the varieties of demand-side models leads to expressions like “errors of th edemand model” but not to better analysis.
The analysis of the Bush/Paulson response is pure dogma. That effort to help will lead to harm is how Dick opened his comment and what he asserts when dealing with Bush/Paulson, but it is pure assertion. No evidence is offered. The nomenclature is also a bit odd. The original post is about a stimulus package. Dick wanders into discussing a rescue package for the financial sector – not what most people mean by stimulus. If the Bush/Paulson effort did any good, then stimulus efforts should be more effective – a functioning financial sector makes getting the real economy moving a heckofalot easier – but rescue and stimulus are conceptually different, and different in practical terms, as well.
DickF: I did analyze, albeit briefly, the Romer paper — see this post. Using your medical analogy, if you gave penicillin to a sick patient, and the temperature kept on rising before it started falling, would you still say it would have been better not to give the penicillin to begin with?
I like your statement:
Which displays your sheer ignorance regarding relative pay scales in a research university vs. Federal government. I was chuckling for a long time after reading that statement.
Buzzcut: Thanks for your advice on what I should be writing about. Actually, it wasn’t so much work, since the mistakes were so blatant, rejoinders were easy. Certainly much easier than downloading data and running a (properly specified) regression. In my experience, Dr. Kling does not mis-represent other people’s assertions, and impugn other economists motives. But Mr. Posner did. Isn’t setting the record straight a worthy goal?
Steve Kopits: You write as if principal-agent problems are a strange beast to economists. While in my opinion this issue is insufficiently appreciated amongst the more neoclassical of macroeconomists, I don’t know if it’s right to say we as a profession are unaware of this.
Regarding risk-taking, I know several academic economists who were formerly on forex trading desks. I don’t detect any difference in behavior vis a vis other academic economists.
kharris: Well put!
Menzie wrote:
Using your medical analogy, if you gave penicillin to a sick patient, and the temperature kept on rising before it started falling, would you still say it would have been better not to give the penicillin to begin with?
In most instances, yes. You see if a doctor is not careful the cure can be worse than the disease. That is why doctors are taught “First, do no harm.” If you had given my father penicillin and then ignored his rising temperature he would have died.
I imagine most of the people here know of patients who were given medicine that only made them worse and if the prescription was not changed the patient would have gotten worse and perhaps even died.
But I understand your point and I would make a similar point with the statistics that Romer uses to justify the Obama team continuing the Bush errors. On Tuesday October 29, 1929 the DOW crashed to 230.07. By year end the market had recovered to 248.48 with absolutely no stimulus at all. The real crash came when Hoover signed Smoot-Hawley in mid-1930. Today with stimulus the DOW is still down around 20%. Based on the Great Depression experience if we had done nothing we would have seen a huge market recovery. So when Romer claims stimulus caused a slower decline that could be simply because most of the decline happened quickly within a few months.
But the most humorous statistic that Romer uses is the GDP. She spends much of the paper praising how much stimulus was given to the state and local governments. Then when talking of how GDP is declining less that in earlier months she writes: The role of the Recovery Act is clearest in state and local spending. Sharp falls in revenues and balanced budget requirements have been forcing state and local governments to tighten their belts significantly. But state and local government spending actually rose at a healthy 2.4% annual rate in the second quarter of 2009.”
Note the highlighted comments. Romer is pointing out that it is stimulus that is adding the government component of GDP. This is like a company borrowing money then rushing out to buy their producets so they can claim record profits! Based on this thinking we could have 10% growth in GDP every month. All we have to do is spread around enough government money. Obviously the stimulus crowd could never run a successful business. Apparently this will come as a surprise to Romer but you don’t make money buying your own products. This is hilarious!
Menzie,
The most glaring lapse of ethics is something more precise than just lower analytical standards per se. It is the habitual practice of some blogging academics like Thoma and Delong of (1) presenting propagandistic spin and distortions in support of policies they prefer, under the guise of sound, objective analysis, and (2) censorship of comments and commenters (deletion of comments; banning) not due to inappropriate tone or other supposedly inappropriate behavior that they do not tolerate from regular commenters on their ideological “side” (although that basis for censorship is sometimes their false claim) but rather simply to rid their (largely) ideological echo chambers of legitimate challenges to their “side’s” partisan talking points/arguments and particularly to posts by the blogger (I suppose it’s a combination of hyperpartisanship and ego-protection).
Mark Thoma even had the chutzpah to ban me (after first deleting some of my comments and posting in their place blatant, gross misrepresentations of what I had said), and then to email me out of the blue some time later offering to let me return to participation as long as I (in effect) always let others get in the last word (and then some) no matter what they said (e.g., no matter how much they misrepresented my arguments, deliberately or inadvertently, or spewed non sequiturs, errors of fact, etc.), and as long as I not tell other commenters/readers that I am under any such restrictions! I posted the email exchange here http://swordscrossed.org/node/2285#comment-90623
Why is this breach of (educational) ethics so awful? Because as a person seeks to establish his preferences among public policy options, he (hopefully) takes a rational approach of (1) determining what sets of trade-offs are associated with alternative policy options (this is a product of research & analysis), and (2) once the trade-offs have been determined in Step 1, applying his personal values and priorities in choosing among these alternative sets of trade-offs, and thus choosing among policy options. For #1 we rely heavily on experts, quite often academics. But rather than making a good-faith effort to help us with #1 — identifying, explaining and quantifying the alternative sets of trade-offs — and then advocating for their preferred policies on the basis of #2 (values and priorities) and letting readers apply their own respective values and priorities, folks like Thoma and Delong arrogantly and disingenuously take the liberty of presenting a distorted picture of #1 (what the trade-offs are) in order to generate support for policies that they prefer, based largely on their #2 — their own personal values and priorites. They apparently are so sure that they have the “right”/”superior” values and priorities that it is moral and ethical for them to deliberately mislead people about what the trade-offs are.
And as for the censorship, again their underlying, arrogant assumption is that advancing the cause of their preferred policies trumps open, honest discussion and debate. And again, there is most likely also an element of mere ego-protection.
“I am tempted to invoke the ancient economists’ chant, “noh-bah-de-noz,” but real-life policymakers don’t have that luxury. So we delve in the details and try to sort out what seems like the best approach.”
http://macroblog.typepad.com/macroblog/2009/08/how-fast-can-the-economy-grow.html
I think that this is a useful distinction. So, when you say this:
“My limited observations, having been a staff economist in the situation mentioned in the last paragraph, is that CEA members (nominated by the President and confirmed by the Senate) do not “leave behind their academic scruples” when they move from academia to government service. That doesn’t mean that I think they’re correct in their analyses — just that what they believed when they came in is pretty close to what they say in public. (After all, silence is also an option.)”
I’m not saying that this is wrong, but I can imagine somebody known for saying that we don’t know in private life being forced to advocate a policy in govt life. They might even be good at it.
Isn’t setting the record straight a worthy goal?
As a matter of fact… no. Seriously. Going back to your most preposterous post, the one where you responded to RUSH LIMBAUGH (of all people), really, what’s the point?
Truthfully, sincerely, your strengths as a blogger lie elsewhere.
In response to whether setting the record straight is a worthy goal, Buzzcut wrote:
As a matter of fact… no. Seriously. Going back to your most preposterous post, the one where you responded to RUSH LIMBAUGH (of all people), really, what’s the point?
In this case, responding to Judge Richard Posner to set the record straight is a particularly worthy goal. Due to J. Posner’s authority and general credibility, distortions from him can gain traction quickly. A fast, in-depth, and well reasoned response from a variety of sources serves to prevent such distortions from spreading, or even worse, becoming an unquestioned truth.
Generally speaking, keeping a long, updated record of Rush Limbaugh’s lies, distortions, etc., is also a worthy goal. Rush Limbaugh has the luxury of repetition. Every time he lies and the lie is not rebutted, that serves as reinforcement of the lie. Now, there can be a discussion as to whether Menzie Chinn should be doing the rebutting, but there’s no question that it is a worthwhile endeavor. If Chinn’s knowledge and expertise are particularly relevant to the particular distortion, and the response can be done quickly and efficiently, then I see no reason why Chinn should not respond.
“Dr. Kling does not mis-represent other people’s assertions, and impugn other economists motives. But Mr. Posner did. Isn’t setting the record straight a worthy goal?”
It always is. (Dr. Krugman must truly annoy you, one presumes.)
Jim Glass: No. Please provide specific cases where Dr. Krugman has (1) made mathematical errors, (2) and misquoted.
Menzie: I do not always agree with you but this time I must say that your remark no Philip Glass and Eliot Carter is priceless.
Here’s a great Krugman twist on reality:
From this column a long, long time ago…
http://www.nytimes.com/2003/03/18/opinion/18KRUG.html
How about we start here?
About George W. Bush: “Remember: this administration told Europe to take a hike on global warming”
Krugman seems to forget that the U.S. repudiated the Kyoto Protocol on Bill Clinton’s watch, not W’s, in 1997 when the Senate voted it down ninety-five to zip.
“In this case, responding to Judge Richard Posner to set the record straight is a particularly worthy goal. Due to J. Posner’s authority and general credibility, distortions from him can gain traction quickly. A fast, in-depth, and well reasoned response from a variety of sources serves to prevent such distortions from spreading, or even worse, becoming an unquestioned truth.”
Just replace Posner with Krugman; same thing…
Babinich: Er, well, as the CEA senior economist for environmental issues was sitting in the office next door to mine in 2001, I can say that the Bush Administration closed the door on continued negotiations on Kyoto, which up until that point had remained open. This was after a couple months of discussions about building lots of nuclear reactors in order to comply. So, sorry, in my book, your case is not made.
The fact that the CEA senior economist for environmental issues was sitting in the office next to you has no relevance to this conversation.
The fact is that Krugman is guilty of ‘leading’ his readers into believing that W’s was the only administration to tell Europe to take a hike on Kyoto.
Only when one does due diligence on Kyoto will that person find out that during the Clinton administration the vote against Kyoto was ninety-five to nothing.
“So, sorry, in my book, your case is not made.”
Your book is a closed book. The fact that you condemn Posner and defend Krugman, in this case, illustrates that you have little regard for the truth when it opposes your ideology.
Babinich: Last I heard, the “administration” was a separate branch from the legislative, in the US constitution. But I expect nothing more coherent from somebody who wrote (5/31/08): “Especially since anthropogenic warning continues to be debated.”
Due diligence is that too much to ask of you?
In 1997, the U.S. Senate adopted the Byrd-Hagel Resolution by 95-0, urging the Clinton Administration not to sign any climate-change protocol that “would result in serious harm to the economy.” In 1998 Al Gore signed the Kyoto Protocol. Yet President Clinton never submitted it to the Senate.
As for anthropogenic warming, prove it. Where is the definitive proof that man, and man alone, is the cause?
Babinich:
Where is your definitive proof that you’ve stopped beating your wife? or that you are not Satan himself?
Clearly you have no concept of how science works. Right now there is one and only one falsifiable claim that explains the currently observed GW and that is anthropogenic GHGs. Occam’s Razor, QED.
I know exactly how science works. A change in the rate of energy input or output can cause climate change. Cloud cover changes the amount of sunlight hitting the surface of the Earth. Air current patterns circulation may result in small precipitation, altering how much water vapor remains in the atmosphere.
The unpredictability of nature natural can cause warming or cooling.
What one does not do is implement a protocol (Kyoto) without weighing all the evidence and thinking through the consequences.
Do I believe we should continue to pump hydrocarbons in the atmosphere when cleaner alternatives (nat gas, nuclear) are available? No, I do not.
Back to Krugman…
Here is some more evidence that Krugman tends to sensationalize…
http://justoneminute.typepad.com/main/2005/05/okrent_v_krugma.html
Menzie said “But I expect nothing more coherent from somebody who wrote (5/31/08): “Especially since anthropogenic warning continues to be debated.”
Go ahead and put me in the incoherent camp as well, which I’m sure you already have.