Arnold Kling on the economics profession

Arnold Kling from Econlog has an excellent post on the debates between economists. One of the best quote for me was:

There are economists making the case against the stimulus in ways that I find unpersuasive (Eugene Fama, for example). But the economists making the case for the stimulus are not doing a very good job, either.

There is no definitive answer. Those that are selling stimulus as the ONLY possibility are merely using a different set of value judgments than those selling the market as perfectly self-correcting. Ultimately, as Arnold says:

My advice to Will Wilkinson would be to distrust one-handed economists when it comes to macro

Economic models are incredibly useful for framing a situation like the one we are in now. However, don’t let the ideology of certain economists be more persuasive just because it is from economists.

I would add that by far the most balanced economic discussion on the crisis has come from Econlog and Marginal Revolution. And the reason that there description has seemed so balance is because they are TRANSPARENT with their value judgments – massively different to many of the other US economists on the blogsphere.

Institutions fail: What about it?

Over at Anti-Dismal, Paul Walker has replied to a comment I posted with a couple of posts. Now I thought I should repay the favour by writing something up :)

Update: Paul replies here.  I agree with absolutely everything he says, but ultimately I think our views on what constitutes “optimal” action still differ as a result of different value judgments.

You should definitely go read the posts, they are very good posts which cover the idea of government failure, and the limits to market failure through asymmetric information. I completely agree with all the objective parts of his posts. However, I still believe my response to “Now there may be something wrong with the price system, but there is a lot more wrong with the government system”:

That’s really your key value judgment isn’t it. I’m not sure I agree. I am not a fan of “multipliers” – but in the face of a large, sustained, market failure I find it hard to conclude that there is no role for government.

Here’s why:

Read more

Currency manipulation: What they don’t tell you

It appears that one of President Obama’s first concerns is “currency manipulation” by China – very interesting. The administrations view seems to be:

The US has long felt that China has artificially depressed the value of its currency to boost exports – to the detriment of US business – but the Bush administration always stopped short of formally declaring China a currency manipulator.

However, I would also note who in the US it benefits: The US consumer. When China devalues their own dollar, they are making exports more cheaply for the rest of the world – including the US.

I’m all for market pricing the in the face of good information – but lets not forget that US consumers have benefited from this action.

Chinese growth slows rapidly

Given the increasing importance of China as a trading partner to New Zealand (they are our 4th largest trading partner, account for 4.5% of our exports in the year to November *) and as a major support for our main trading partner, Australia, the rapid slowdown in growth in China should be concerning.

Both Calculated Risk and Econbrowser mention that Chinese economic growth has slid to 6.8%pa in December – down from 9.0%pa in September.  According to Nouriel Roubini this indicates that Chinese economic activity was virtually unchanged between the September and December quarters (seasonally adjusted) – indicating a massive loss of momentum in the worlds fastest growing economy.

This slowdown is a lot more rapid than expected – as is illustrated by this graph from Econbrowser:

Infrastructure as stimulus?

Greg Mankiw has made an implicit call that there are long lags to infrastructural policy – and therefore such policy seems difficult to justify as a short-term stimulus (Anti-Dismal and Kiwiblog also link to this approvingly).

Now this is a very fair point, however I was initially going to criticise it on the simple ground that the government promising to invest in infrastructure increases expected future income which DOES lead to stimulus now (given that we believe that expectations and confidence are key).  Hell the government could pay people now to build things in the future.

However, that didn’t take very long.  So instead I’m going to discuss this post on a defense of infrastructural spending.

Read more