Sunday, June 29, 2014

What Happened to the Phillips Curve ?

Here we go again. There is a blog discussion among Keynesian to New Keynesian economists on the cause of the new Classical & Rational expectations revolutions. I have been typing my usual comments. I will now try a post. The question is: how important was stagflation in causing the abandonement of old Keynesian models ? I basically agree with Simon Wren-Lewis this time.

The discussion I have read Simon Wren-Lewis, Mark Thoma, Paul Krugman, and Noah Smith

A glossary: I'm not sure the participants are using terms exactly the same way. I will explain how I use them.

1. New Classical to me refers both to models based on the Lucas supply function and to real business cycle models. I think Mark Thoma used the phrase to refer only to the Lucas Supply function which explains why he says new classical models have been abandoned.

2. Stagflation: I think this generally refers to high inflation and high unemployment at the same time. Importantly, I don't think the word implies inflation which will remain high forever and ever so long as unemployment remains normal or low (at or below the NAIRU).

3. Stable Phillips curve: To correspond to the meaning of curve, this should mean the claim that inflation is best modelled as a function of unemployment plus a disturbance term (that is with no effect working through expected inflation)

4. The natural rate hypothesis is a claim that the long run Phillips curve is vertical at a natural rate of unemployment (which depends on labor market institutions)

Simon Wren-Lewis argues that stagflation could easily be reconciled with the old Keynesian approach (and notes that it was) so the change must have been caused by something else. He believes the cause was economists' attraction to rational constrained maximization.

There is a much simpler reading. Just as the original Keynesian revolution was caused by massive empirical failure (the Great Depression), the New Classical revolution was caused by the Keynesian failure of the 1970s: stagflation. [skip] I just do not think that is right. Stagflation is very easily explained: you just need an ‘accelerationist’ Phillips curve (i.e. where the coefficient on expected inflation is one), plus a period in which monetary policymakers systematically underestimate the natural rate of unemployment. You do not need rational expectations, or any of the other innovations introduced by New Classical economists. No doubt the inflation of the 1970s made the macroeconomic status quo unattractive. But I do not think the basic appeal of New Classical ideas lay in their better predictive ability. The attraction of rational expectations was not that it explained actual expectations data better than some form of adaptive scheme. Instead it just seemed more consistent with the general idea of rationality that economists used all the time. Ricardian Equivalence was not successful because the data revealed that tax cuts had no impact on consumption - in fact study after study have shown that tax cuts do have a significant impact on consumption. Stagflation did not kill IS-LM. In fact, because empirical validity was so central to the methodology of macroeconomics at the time, it adapted to stagflation very quickly.
I agree (except for the word "need" see below).

Mark Thoma agrees with Simon Wren-Lewis.

Paul Krugman wrote

I remember the 70s quite well, and stagflation did indeed play a role in the rise of new classical macro, albeit in a subtler way than the caricature that it proved Keynes wrong, or something like that. What mattered instead was the fact that stagflation had in effect been predicted by Friedman and Phelps; and the way they made that prediction was by taking a step in the direction of microfoundations. [skip] What this did was to give immense prestige to the notion that you could use the assumption of rationality to make better predictions than you could using historical experience alone.
I agree with this too except for the part about "What mattered"

Noah Smith agrees with Krugman.

My thoughts.

I am sure that Krugman recalls the 70s correctly (I arrived later but have similar recollections). However, I do not think that the perceptions in the late 70s about what Paleo Keynesians said in the 60s were accurate. Roughly I have seen no evidence that any prominent economist wrote anything which was proven false by the occurance of stagflation. Here, as often, I am retailing the research on recent history of thought by James Forder

I do not believe that any prominent Keynesian ever presented a model which was inconsistent with stagflation. It is widely believed that at some point Keynesians believed in a stable Phillips curve. This belief is not based on any primary sources.

I think that the immense prestige is based on an extraordinarily successful strategy of setting up and knocking down a straw man.

I think it is useful to see how the Old Keynesians responded to Lucas's supply function paper. I strongly recommend reading as a statement of the old Keynesian orthodoxy ( the twits ad Cowles have redone their indexation of old discussion papers (and failed to make old links link to new papges) so the above link is dead. The current link is . I can make no promises that it won't rot too.

This is prominent old Keynesian James Tobin summarizing a conference which happens to have included roughly the first presentation of the Lucas supply function outside of Chicago (except, as noted by Tobin in 1971, for the clear description in "The General Theory of Employment Interest and Money"). I note that Tobin agreed that Friedman was definitely right that eventually expected inflation would rise one for one with a permanent increase in inflation.

Second I think that a non accelerationist expectations augmented Phillips curve in which a permanent increase in lnflation of 1% causes an increase in expected inflation of 0.5% is consistent with stagflation (as I defined it above). An accelerationist Phillips curve is sufficient but not necessary. Let's say crazy monetary policy causes 30% inflation one year and 15% expected inflation the next year. According to the non accelerationist expectations augmented Phillips curve, enormous unemployment would be required to get actual inflation down to 10%. One might argue that actual data through the 70s refuted the 0.5 times lagged inflation model, but it just isn't true that any combination of high inflation and high unemployment refutes it. I know of no hint of any evidence that anyone ever believed that such a model is the truth and, in particular, was not convinced by the argument that a permanent increase in inflation must eventually cause a one for one increase in expected inflation. Simple models like the 0.5 model were estimated and used to forecast, because people thought they were false but useful -- reasonable approximations given the range of policies actually being considered -- that is because people used Friedman's methodology of positive economics.

Importantly the 0.5 model implies a downward sloping long run Phillips curve. It is also the sort of model which old Keynesians used in the 1960s.

Finally, it is consistent with the data through the 1970s. My estimate of that parameter using data through 1980q1 is

. reg ldwinf infcpi linfcpi unem if qtr<1980 ldwinf | Coef. Std. Err. t

infcpi | .4888773 .0642374 7.61

linfcpi | .0698199 .0748645 0.93

unem | -.1724548 .1291306 -1.34

_cons | .0518619 .0063418 8.18

This is roughly similar to estimates reported by 1971 (though not with my few variables from FRED). Ldwinf is the growth rate "Business Sector: Compensation Per Hour" over the following year, infcpi is CPI inflation over the preceding year, linfcpi is CPI inflation the year before that and unem is the standard unemployment rate. I used quarterly data so overlapping year long periods.

The controversy between Friedman and the Paleo Keynesians was whether the sum of coefficients on lagged inflation is one or less. Data from the 1970s do not answer this question.

The standard definition of "stagflation" is a combination of high inflation and high unemployment. This can occur in a 1960s era Keynesian model. Only after the fact did people (notably including Friedman who knew otherwise) come up with the idea that Paleo Keynesians didn't model expected inflation or assume that the Phillips curve shifts up at all with expected inflation.

Also 1960s era Keynesians agreed that Friedman was right about the long run -- that eventually an permanent increase in inflation would not cause inflation higher than expected inflation.

In 1971 Tobin agreed that this must be true. However, the US data from the 70s which allegedly proved Friedman right and someone else wrong doesn't prove that it is true.

Friday, June 27, 2014

Friedman says the world if flat but time zones still matter

Historically distance travelled North South doesn't hurts a teams world cup chances much less than distance East West does -- time zones jet lag you know. Nate Silver himself went for some globalization speculation guessng time zones would matter less now that players play all over the world. Yet eight of ten American teams advanced to the round of 16. The 16 are evenly divided between the Western and Eastern hemispheres. I doubt that has happened often.

Vox On Clown Posse

When you say Dylan, he thinks you mean Dylan Thomas. Man he aint got no culture A think which really exists in the world were you live is a long detailed scholarly, balanced article by Dylan Matthews on the suit in which the Insane Clown Posse, four Juggalos, and the ACLU sued the DOJ and the FBI. No doubt there are stranger artifacts on the web than But I dont't dare imagine them. It is also odd that I came there clicking Brad DeLong's link. I was surprised that it lead me to the real authentic Insane Clown Posse and not to a conservative critic of Paul Krugman.

Monday, June 23, 2014

Rolling Stones in Rome

Tonight I listened to the Rolling Stones perform in the Circus Maximus in Rome. Of course I didn't buy a ticket (180 Euros and sold out I'm sure). I just loitered in via Terme di Caracalla. I could see the maxi screens with St Peter's in the distance. They are old but they've still got it. They did play too many new songs (new meaning post 1978). I high point was Mick Jagger introducing Ron Wood then saying "Ron non mangia abbastanza pasta". I am pleased to report that his accent is even stronger than mine. But the really wonderful aspect was the crowd of un paying listeners. About half were kids of going to rock concert age and a good third were old enough to have been going to rock concerts when the Stones were new. The very best part was 8 pairs of people. In each pair one was middle aged and the other a teen ager and they had the same face. This was clearly a mother daughter (or father son or father daughter)bonding thing were the not so young Stones fan was showing his or her child what it was (and still is) all about. These were just people standing or milling around. There were also mom dad and the kids families which were almost as good. The stars were three women daughter mother and grandmother. I am old enough to remember when the Stones were a source of tension between parents and children, so I found all this absolutely totally incredibly wonderful.

Sunday, June 22, 2014

Jella internazionale

Yesterday I checked what was happening in the World Cup. I was surprised to find that Iran had held Argentina to a 0-0 tie after 90 minutes (so in tempo di recupero which I think is called stoppage time in English). I was a bit surprised to find that I was pleased. OK so they occupied our embassy and held diplomats hostage 33 years ago, but I find I don't bear a grudge and must must must root for the underdog. So I clicked for more details and saw huh wah now it says Argentina 1 Iran 0. Yes that was minute 91. My 5 seconds (10 second max) of rooting for Iran caused them to lose the match. This reminds me of the strange case of Barack Obama. He isn't just a half Arican US president whose parents divorced when he was 2 and whose middle name is Hussein. He is also the only candidate who has ever won in spite of receiving a campaign donation from me. Speak no ill to me of your worst enemy. If I am for him, he will lose.

Saturday, June 21, 2014

Waldman on Cheneys

I was frustrated to learn that I am not the Waldman[n] who has enough influence to be quoted on Fox News by Megyn Kelly. Paul Waldman manages to win a Hirohito award with "Maybe listening to Dick Cheney on Iraq isn’t a good idea" as a result of which the debate situation has worked out not necessarily to the Cheneys' advantage while underlining history's greatest example (so far) of self unaware inadvertant self reference (which is not thee first line in their op-ed).
The op-ed contains nothing even approaching a specific suggestion for what , other than to say that defeating terrorists “will require a strategy — not a fantasy. It will require sustained difficult military, intelligence and diplomatic efforts — not empty misleading rhetoric."
@robertwaldmann was attempting absurdly self referential tweets when I found Greg Sargent @ThePlumLineGS noting the influence of his co-blogger. I should have known that I couldn't compete with the Cheneys

Wednesday, June 18, 2014

Ahmed abu Khattala was just captured in Spite of the declarations of Ayotte, McCaina and Graham.

Via Jed Lewison at the Daily Kos Last month Kelley Ayotte, John McCcain, and Lindsey Graham wrote "Since we know where Ahmed abu Khattala is, why hasn’t he been detained?" Ahmed abu Khattala was recently detained in spite of the publication of the fact that the US authorities knew where he was. I'm pretty sure that Ayotte, McCain and Graham have the speach and debate clause to thank for the fact that they aren't criminally liable under the Espionage Act. update: In fact abu Khattala was living openly in his mom's house. He knew that everyone knew where he was, so the fact that the US government knew wasn't a secret at all.

Sunday, June 15, 2014

Use Your Head

As I type and if I recall correctly, the past four world cup goals have been headers. Wilfried Bonny (Ivory Coast) Gervinho (Ivory Coast) Enner Valencia (Ecuador) (bouncing the ball off the goal line too) Admir Mehmedi (Switzerland) That seems like a rare rund to me. It turns out to be surprisingly hard to find any calculation of what fraction of goals are scored with the head. I finally learned that 21% of league 2 goals are scored with heads (I would have guessed closer to one in ten and no I don't know what league 2 is) So that means that the chance that a series of 4 goals are all headers is about 1/625 which isn't very low (the game has been played for a while).

Monday, June 09, 2014

27 % again

It's that number 27%. The well known crazification factor. The fraction of Hispanic Americans who voted for Romney. How do you say "crazification factor" in Spanish ?

Friday, June 06, 2014

I told Kevin Drum So

Kevin Drum Just revised and updated his prediction of how many people gained insurance coverage due to the ACA
Latest Gallup Numbers Confirm 10-12 Million Newly Insured Under Obamacare [skip] you're probably up to 12-13 million who are newly insured under Obamacare.
I comment. April 2 you forecast 10 million newly insured by December 31 2013 well below the CBO's original forecast. I said hooey. I think you were, in part, relying on Gallup estimates for the first quarter (the 15.6 in your graph) and very conservatively extrapolating.

I guessed the original CBO guess would be about right (bewared of Doug). Now you agree. Your calculations from then say 12 million adults (your guess was 2 million under 26ers were already covered due the ACA in 2013). Clearly the number of children newly covered when their parents get medicaid or private is well over a million. Your 10 million by Dec 31 guess is no longer operative. I told you so

Also this isn't what we get from the ACA in 2014. Medicaid signups continue. The Medicaid rolls increased by about 1 million in April. Almost all of this must be due to the ACA (one would expect less than 100,000 due to population growth etc).

I admit I was wrong (link above). I thought the CBO guess (13 million in 2014) would turn out to be about right. Clearly it was an underestimate. Counting under 26ers and children the number is clearly well over 13 million now. Also it is growing quickly (by almost a million last month).

Worth the price ? Hmm Surtax -- fine by me. Cut back the Medicair advantage boondoggle very fine by me, tax Cadillac insurance very fine by me, Medicair advisory panel uh not just advisory excellent. The costs seem to be excellent reforms all by themselves.

Of course the real cost was keeping the Senate busy during the few months of a filibuster proof majority. Also the 2010 elections. I'd say well worth the political cost, but that's not obvious.

update: Just here. Drum is anchored. He said 10 million and he is reluctant to admit he was wrong. So a Gallup estimate of 10 million adults since 2013 (in addition to the 2 million by 2013) becomes 10-12 million in his headline. That doesn't work. His old calculations (no new relevant data) say 12 million adults plus millions of children. After reviewing the Gallup numbers, he gets to "you're probably up to 12-13 million who are newly insured under Obamacare." The "10-" in the title is absulultey not justified by the text of the post.

Monday, June 02, 2014

Drum Kinsley Greenwald Holder and The Espionage Act

Boy did I ever let this comment run away with me. Kevin Drum asked what the hell Michael Kinsley was thinking when he wrote the following


b>that decision must ultimately be made by the government. No doubt the government will usually be overprotective of its secrets, and so the process of decision-making — whatever it turns out to be — should openly tilt in favor of publication with minimal delay. But ultimately you can’t square this circle. Someone gets to decide, and that someone cannot be Glenn Greenwald.
I was unusually prolix in a comment.

I believe the bolded passage is an example of a fallacy which is more common than any other fallacy or any valid method of reasoning -- the false dichotomy. Kinsley asks if elected officials should have authority to keep things secret backed by the threat of prison. The alternatives he offers are prosecute Greenwald for espionage or eliminate all restrictions on revealing government secrets.

Thus Kinsley tries to sneak in the assumption that there is no middle way -- that it is, for example, impossible to threaten to prosecute people with security clearance for revealing secrets learned using that clearance without also threatening to prosecute journalists who report those secrets. I have just described the Obama administration's current policy (although the espionage act is so vague that the non prosecution of Greenwald and well most Washington reporters is an act of prosecutorial discretion - Obama administration policy which the next administration is free to change).

So our Democratically elected officials decide to keep secrets with a system of classification and security clearances. Currently Snowden would be prosecuted if in the USA while prosecution of Greenwald is not even under consideration (unless Eric Holder lied).

Kinsley could go further. The Guardian online has a wide circulation, but the Snowden effect is vastly amplified by all the other journals (including say mother jones at this blog) which repeated Greenwald's assertions. If Greenwald is guilty for reporting facts which were already out of the control of the US government, why so are you. Kinsley's logic is that there is no difference between Snowden, Greenwald, Drum, or, I'm sure, Kinsley.

Or heads up. I'm pretty sure that Greenwald, Drum,Kinsley and a good half of the US public could be prosecuted under the Espionage Act. It might be time to amend it a bit no ?

I think this is a fair excerpt with elisions

"whoever, for the purpose of obtaining information respecting the national defence with intent or reason to believe that the information to be obtained is to be used ... to the advantage of any foreign nation ... obtains, ... any sdocument, writing or note of anything connected with the national defence


"(d) whoever, lawfully or unlawfully having possession of ...any document ...relating to the national defence, wilfully communicates or transmits or attempts to communicate or transmit the same and fails to deliver it on demand to the officer or employee of the United States entitled to receive it;


shall be punished by a fine of not more than $10,000, or by imprisonment for not more than two years, or both."

The elided text consists of clauses or phrases separated from the quoted text by conjunctions such as "or". If you obtain any document respecting the national defence with an aim to help humanity (including foreigners) you are criminally liable.

Note there is no requirement that the documents related to the national defence be classified. If, say, you tell foreign policy makers the US military budget as published in the Federal Register for the sole purpose of helping them forecast US aggregate demand and optimizing their macroeconomic policy, then "shall be punished by a fine of not more than $10,000, or by imprisonment for not more than two years, or both."

I'm not a lawyer. I note that the text is perfectly clear. I trust that it has been interpreted to be the law Congress should have written. I think this is done through the absolutely essential judicial principle of lying about plain English if reading what was clearly written has bad enough consequences. But I have no doubt that, under current US law, you, Kinsley and I are felons.