Alesina on austerity: round 2

Alberto Alesina has returned to the fray with a new paper that shows how tax rises are far more damaging than tax cuts. With a new dataset covering the recessionary years, this is the most up-to-date evidence on fiscal consolidation available. Importantly, they are unable to discern evidence that the ZLB caused the effects of fiscal policy to be greater. Of course, this isn’t the final word and it’s only one piece of evidence, but I’ll be reading it closely over the next few days.

Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large. Our results, however, are mute on the question whether the countries we have studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13.

The Economist’s misguided lecture to macroeconomists

In a bizarre leader article The Economist praises microeconomists for their use of data to better predict people’s behaviour and recommend macroeconomists do the same:

Macroeconomists are puritans, creating theoretical models before testing them against data. The new breed [of microeconomists] ignore the whiteboard, chucking numbers together and letting computers spot the patterns. And macroeconomists should get out more. The success of micro is its magpie approach, stealing ideas from psychology to artificial intelligence. If macroeconomists mimic some of this they might get some cool back. They might even make better predictions.

I’m tempted to label this as obvious baiting but the misunderstanding is deeper than that. Read more

QOTD: “”I have a dream. It involves a Star Trek chair and a bank of monitors.”

Bank of England Chief Economist Andy Haldane:

“I have a dream. It involves a Star Trek chair and a bank of monitors. It would involve tracking the global flow of funds in close to real time, in much the same way as happens with global weather systems.”

Is the binding constraint on better macroprudential policy a lack of timely information? If they had that information, could a world regulator really have averted the crisis in 2007?

Full speech here.

New Zealand politicians want everyone elses wages cut

Our Prime minister, John Key, has decided to say the following:

Prime Minister John Key has indicated he thought the New Zealand dollar’s fair falue was around 65 USc and that it would be logical for the Reserve Bank to intervene to push the New Zealand dollar lower, given it was currently well above where it was fundamentally fairly valued.

Key restated his view that currency intervention was not effective in the long term to try to shift the underlying value of the currency, but agreed it was “fairly logical” for the Reserve Bank to intervene when the currency was so far away from its fundamental value.

Lots of people may think this, most of them without any thought or interest about asking “why” the dollar is where it is, but lots of people do think it.  But a sudden drop in the New Zealand dollar is akin to a cut in wages – all those imports suddenly become more expensive.

Given their standing and thereby ability to seemingly signal intervention in markets, the prime minister and finance minister really need to keep quiet about policy where there is an independent body involved – as it both creates volatility and indicates that such things are a more political issue.  I was pissed off when Cullen did this, pissed off when Key has done it in the past, and I’m pissed off hearing it now.  I don’t care if someone asked the frikken question, part of central bank independence is having fiscal authorities show a bit of discipline with their comments.

Read more

There is no One Model to Rule Them All

I like the influence that physicists are having on economics. Moving towards agent-based modelling in some areas of the discipline is a great idea. But, in addition to lending their novel insights, some seem to enjoy piling on economics generally. Generally you have to take the good with the bad but Mark Buchanan’s latest article is so shockingly bad that I can’t help picking on it. Read more