Will Taylor

Greenpeace enters the economic policy debate…sort of….

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I was interested to see this article on stuff about Greenpeace arguing for  a “green” economy. I even considered taking a peak at the report they have put forward by the  “German Aerospace Centre’s Institute of Technical Thermodynamics” until I got to this bit at the end of the article

Where the report stumbles is on the financial side, giving no detail on the level of investment required or the economic tradeoffs, making it impossible to judge if the transformation would be worthwhile or simply a pyrrhic environmental victory.

Argent said this was a deliberate choice, with the aim of the report to spark a discussion rather than getting too bogged down in the numbers.

Which basically means this report tells us nothing….

As a side note, as an economist I would replace “financial side” with “opportunity cost”  as it it’s not just “money” trade offs that need to be considered…social, environmental, and any other metric that will be part of the cost need to be considered. You can’t just look at non-monetary gains on the benefit side and ignore them on the cost side.

jamesz

A technocrat and an economist

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Many economists are becoming increasingly technocratic in their desire to shape the economy to fit their favourite theory. However, behind their desire to improve the lot of their compatriots looms the shadow of public choice theory, scorning their efforts to shape public debate. Indeed, many libertarians are so persuaded by public choice ideas that they advocate limited government largely because they have no faith in elected officials. So can one both appreciate the consistency of treating public servants as our theory would treat anyone else, and at the same time believe in engineering a better state?

Dani Rodrik says ‘yes’:

There are three ways in which ideas shape interests. First, ideas determine how political elites define themselves and the objectives they pursue – money, honor, status, longevity in power, or simply a place in history. These questions of identity are central to how they choose to act.

Second, ideas determine political actors’ views about how the world works. Powerful business interests will lobby for different policies when they believe that fiscal stimulus yields only inflation than when they believe that it generates higher aggregate demand. Revenue hungry governments will impose a lower tax when they think that it can be evaded than when they think that it cannot.

Most important from the perspective of policy analysis, ideas determine the strategies that political actors believe they can pursue. … Expand the range of feasible strategies (which is what good policy design and leadership do), and you radically change behavior and outcomes.

jamesz

Models in everything

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The surprising complexity of orange juice production:

Revenue Analytics consultant Bob Cross, architect of Coke’s juice model, also built the model Delta Air Lines uses to maximize its revenue per mile flown. Orange juice, says Cross, “is definitely one of the most complex applications of business analytics. It requires analyzing up to 1 quintillion decision variables to consistently deliver the optimal blend, despite the whims of Mother Nature.”

HT: Centives

jamesz

Changing figures of speech in economics

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We’ve been slightly obsessed with Deirdre McCloskey on TVHE for quite a while now but only just got around to reading her book, ‘The Rhetoric of Economics’, recently. The central premise of the book is that economists write to persuade, so we can use the theory of rhetoric to analyse economists’ writings and arguments. She describes many of the techniques that economists use to persuade others and what struck me is how different the dominant methods of persuasion are between academics and practitioners.

Academic economists tend to persuade largely through appeals to authority (references) and aesthetics (theory). They look down on computational work as insufficiently rigorous and too dependent on parameter selection. The lack of generality in computational results does not appeal to their tastes and they find it unpersuasive. I acknowledge that you can point to the entire field of econometrics as evidence to the contrary; however, there is a reason economists quip so often about the disregard they have for empirics that contradict the theory.

In contrast, economists outside academia tend to make far fewer appeals to theory or authority because those techniques are not persuasive to a lay audience. Unless one spend years marinating in economic theory its pronouncements carry little weight. Most people want to hear facts backed up with anecdotes that appeal to their personal experience. That leads professional economists to rely heavily on estimation and simulation to persuade their audiences. Those techniques generate firm predictions with a veneer of scienciness that lends them authority. Anecdotes then provide a comprehensible story that allows people to interpret the predictions. Obviously these descriptions are extreme generalisations but I think they represent at least the relative tendencies of each group.

Practitioners and academics tend to have a mutual disdain for each other. They accuse the other of being either irrelevant to policy decisions, or insufficiently sophisticated in their arguments. Could it be that a large part of the divide between them is due more to their implied audience than the type or subject matter of their investigation?

Matt Nolan

NZ NDGP graphs – add your own comments!

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As a starting point – thank you Statistics New Zealand for all your tasty data.

First a graph of the deviation of per capita NGDP from its 1994-2011 trend (took out the 1991-1993 period due to the structural changes taking place) – comparing the last ANZSIC 1996 data (Dec 2011) to the September ANZSIC 2006 data:

datarevision

Then a graph of deviations in NGDP from trend and the UR (unemployment rate):

NGDPUR

The same things will case NGDP to shift and the UR to shift, in opposite directions.  In that way this is unsuprising.  Make of it what you will in the NZ context, given your implicit model of the economy – in fact, feel free to mention it in the comments.  I will be sitting out of this one at present.

jamesz

Carney on NGDPLT

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Mark Carney appeared at the Treasury Select Committee today for interrogation before being confirmed as the next Governor of the Bank of England. The big question everybody wanted answered is whether he favoured a move from inflation targeting to NGDP level targeting. The answer is ‘no’, but the reasons are interesting.

Carney is a known proponent of central bank commitment and the use of forward guidance. In recent speeches he has also spoken favourably of NGDPLT and that has prompted a storm of commentary in the UK; little of it was favourable towards the idea. Consequently, all eyes were on Carney’s evidence today. Reading the comments on Twitter suggests that he dismissed NGDPLT and retreated from his previous statements. I don’t think that is true at all.

In both his oral and written evidence he called flexible inflation targeting  “the most effective monetary policy framework implemented thus far.” However, he was at pains to point out that there are problems with it at the ZLB and there are other potential regimes, such as NGDPLT, that might help in those circumstances. In his oral evidence he spoke at length about the benefits of commitment and history dependence when encountering the ZLB. Despite that, he was not in favour of an immediate move away from inflation targeting, as you might expect given the outcome of the Bank of Canada’s review. Some of the reasons he gave are well-known: the problem of revisions and data quality, for instance. Notably, he did not think that NGDPLT would unhook inflation expectations and commented on the additional credibility a central bank could gain by implementing an inflexible rule.

The most interesting argument he made against level targeting was the one he dwelt on in his oral evidence: it relies upon people having rule-consistent expectations. That is to say, the success of a central bank relies on people expecting that it will implement its stated plans, and behaving as if they will come to fruition. Of course, he did not make the naive argument that people’s expectations are irrational. Rather, he pointed out that expectations among the populace have inertia and take time to change. If a large portion of the population have persistently incorrect expectations following a change in target then it would be costly in terms of welfare. He alluded to agent-based modelling done by the Bank of Canada to claim that these transitional costs as expectations gradually adjust could outweigh the gains to the switch.

In summary, he thinks NGDPLT is a great idea but hard to put into practice (data issues) and costly to implement (transitional costs of changing expectations.) Relative to the commentary in the UK press that is a ringing endorsement: one of the top central bankers in world says that the only real barrier is the details of implementation.