tag:blogger.com,1999:blog-582368152716771238.post5749954250736924707..comments2024-03-29T07:18:14.271-05:00Comments on The Grumpy Economist: Levine on the Keynesian IllusionJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger29125tag:blogger.com,1999:blog-582368152716771238.post-11702012064372871342015-03-23T17:10:21.106-05:002015-03-23T17:10:21.106-05:00Levine certainly has a mastered the verbosity of K...Levine certainly has a mastered the verbosity of Keynes. <br />Shorter version:<br />In a closed economy in which everyone is a producer and consumer of one good, all transactions stop.<br /><br />Keynes - There is a demand problem<br />Friedman - There is a supply problem<br />Mulligan - Everyone went on vacation, what's the problem?<br />Kylenoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37139266833794432112015-03-22T12:14:53.425-05:002015-03-22T12:14:53.425-05:00"Cynically, maybe the lesson is that lack of ...<i>"Cynically, maybe the lesson is that lack of equations -- or even an equations appendix or citation -- keeps debate going and your name in the papers."</i><br /><br />Regardless of whether I agree with this post (or Levine), I have to admit that this statment got me thinking for quite a bit. I think you are definitely onto something here.<br />Johnhttp://principles-of-economics-and-business.blogspot.comnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-5651345785311655122015-03-22T09:24:34.836-05:002015-03-22T09:24:34.836-05:00...Sure Ralph! And perhaps we could add some crowd......Sure Ralph! And perhaps we could add some crowding in too there. How about, for each X additional employees in the public sector, the private sector responds by hiring some workers too? We could end up with an employment over population ratio of 150% in no time...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-83581635766956269442015-03-21T23:13:49.865-05:002015-03-21T23:13:49.865-05:00http://mainlymacro.blogspot.com/2015/03/is-walrasi...http://mainlymacro.blogspot.com/2015/03/is-walrasian-auctioneer-microfounded.html<br /><br />Well, according to Simon Wren-Lewis, New Keynesians are doing much better than RBC people in 80's because RBC price taking isn't microfounded.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-84582388294692701732015-03-21T19:17:00.737-05:002015-03-21T19:17:00.737-05:00Stephen Williamson had a response to all of this f...Stephen Williamson had a response to all of this for anyone who is interested. And I think this quote from the comments section kind of sums up why these arguments never seem to go anywhere:<br /><br />"What "Keynesians have in mind" are many things. And for every person with a "Keynesian" idea, there is another who claims the idea is "not Keynesian."<br />http://newmonetarism.blogspot.com/2015/03/no-one-expects-spanish-inquisition-more.html<br /><br />Kind of reminds me of all of the back and forth bickering after your Alan Blinder post from a couple months ago about Keynesians, New Keynesians, etc.Zacknoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37692848706708976042015-03-21T17:03:15.332-05:002015-03-21T17:03:15.332-05:00An interesting article that attempts to evaluate K...An interesting article that attempts to evaluate Keynesian views from the ground up. It presents an invitation to think more deeply about the fundamental of Keynesianism, but most of the commenters appear interested only in denying Levine's conclusion. I need to read and reread it a few times to take it all in (including also the contra views).Rich Bhttps://www.blogger.com/profile/00941404638652186901noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-24658953168988420672015-03-21T14:10:36.276-05:002015-03-21T14:10:36.276-05:00Levine: "Now suppose that the phone guy sudde...Levine: "Now suppose that the phone guy suddenly decides he doesn't like tattoos enough to be bothered building a phone."<br /><br />It's called the demand shock. Government buys the tattoos for a while whereas a tattoo artist is getting a new profession.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-19628899437324967502015-03-20T19:53:25.784-05:002015-03-20T19:53:25.784-05:00I'm pretty sure that Levine meant phones to be...I'm pretty sure that Levine meant phones to be money in his model.robhttps://www.blogger.com/profile/04682517711551179057noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-64014193851616929952015-03-20T15:46:30.255-05:002015-03-20T15:46:30.255-05:00I went back to read Levine's addendum. That cl...I went back to read Levine's addendum. That clears up my problem, but also makes the point that money isn't the issue creating the problems.Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-60983012232169784752015-03-20T15:18:16.466-05:002015-03-20T15:18:16.466-05:00Nick, the phones are money, but money is not the p...Nick, the phones are money, but money is not the problem in the story. The problem is that each person has only one unique buyer and seller. Consider a case where any of them decide they don't want to buy anything. You'll get the same depression.<br /><br />Check out the addendum from Levine. Same link as original.Garynoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-52256307640345726482015-03-20T13:31:32.534-05:002015-03-20T13:31:32.534-05:00Prof J: think about a $20 bill. Each person accept...Prof J: think about a $20 bill. Each person accepts it in payment, and passes it on to the next person, who also accepts it in payment, and passes it on, and so on forever. Nobody wants to hold it without planning to pass it on to someone else. What percentage of the population would accept a $20 bill in payment, if they did not plan to pass it on to someone else? Only people who collect rare currency. That's a lot less than 1% of the population.<br /><br />It's exactly the same with the phone in David's example. Most people accept the phone in payment, but only because they plan to pass it on to someone else.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-46359401836867130032015-03-20T13:18:04.988-05:002015-03-20T13:18:04.988-05:00Let me try to see if I get this.
Round 1 (Levine)...Let me try to see if I get this.<br /><br />Round 1 (Levine): Everyone produces because they want to consume. If someone decides they no longer want to produce, it all falls apart. Same thing happens if someone decides they no longer want to consume, because the person who produces whatever they consumed now has no market, and stops producing, and it all falls apart.<br /><br />Round 2 (Um... Smith?): In reality it doesn't "all fall apart" because for each thing there's more than one producer, and more than one consumer, and people can substitute on both ends. So it's more of a gradual failure. Now, instead of "it all falls apart" we have more of an equilibrium, that re-adjusts for disruptions like "someone decides not to produce/consume".<br /><br />Round 3 (deLong): None of this is relevant to the recent downturn, because the economy also includes money and financial assets, which are claims against future output. What happened here was that people's financial assets evaporated simultaneously, and they wanted to restore their assets, so they all stopped consuming at once, and the system couldn't adjust to a disruption that large - so it all fell apart, but there's a simple fix. Put money into the system, restoring people's financial assets to their former value, and they resume consuming and producing.<br /><br />Round 4 (Friedman?): Financial assets are claims on future output. They fall in value because people are afraid that the output will not actually be there. But money is just another claim on output. When you add money, you dilute the value of the financial assets-plus-money by adding MORE claims on future output. When people realize that, they realize the value of their financial assets-plus-money has declined again. They then redouble their efforts to save, further reducing consumption.<br /><br />Round 5 (Modern Keynesians?): Round 4 is called inflation, and it's too simplistic. If you add a measured quantity of money, and do it in the right way by giving the money to the right people (with a "high propensity to consume"), their consumption increases production, which increases future output faster than you're adding money to the system, and all will be well - no inflation.<br /><br />Round 6 (Modern Austrians?): Round 5 sounds great, but the people with high propensity to consume will not be the ones generating the extra production - in fact, they will produce less. The extra production will come from either holders of financial assets or from producers, through wealth and income taxes being cycled back to the consume-but-not-produce-or-invest-ers. So the returns to investment and the returns to production will be lower, causing those people to cut back, slowing the rate of economic growth - and economic growth is what fixes all problems, and its lack is what ultimately causes all problems.<br /><br />Round 7 (Progressives?): Round 6 isn't so bad. Sure, the investors will cut back, and producers will cut back, but when they do, what will they do with their money instead? They'll consume! That will help to restore the returns to investing and producing. Maybe the growth rate will end up lower, but there will be more social justice, and that's worth something.<br /><br />Round 8 (Austrians again, I think): Round 7 is wrong! The investors and producers won't spend their money instead - they'll just have less money! The marginal value of producing will be lower, so they'll adjust by producing less and making less effort. They won't consume more, and they'll produce less, which will be spread more thinly, and everyone will collectively be worse off.<br /><br />Round 9 (Progressives, again): Okay, maybe - just maybe - everyone will collectively be worse off. But, the poorest will be less poor, and the richest will be less rich, and social justice is worth something.<br /><br />Round 10 (Cochrane): We're going to need some equations, here.<br /><br />Do I have that about right?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-82395126201900600802015-03-20T13:08:45.309-05:002015-03-20T13:08:45.309-05:00Prof J,
As I read Levine's piece, it seems th...Prof J,<br /><br />As I read Levine's piece, it seems that everyone accepts the phone as payment:<br /><br />"What happens is clear enough: the phone guy produces a phone, trades it to the tattoo artist in exchange for a tattoo, who trades the phone to the hairdresser in exchange for a haircut, who trades it to burger flipper in exchange for a burger. All are employed, all get what they want - everyone is happy."Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-146606495755108682015-03-20T10:43:09.633-05:002015-03-20T10:43:09.633-05:00Nick Rowe,
I saw your comment before, and I'm...Nick Rowe,<br /><br />I saw your comment before, and I'm perplexed. How can phones be money in this example, since only the tattoo artist is willing to accept a phone as payment? To be money, wouldn't the item need to be more universal? Not necessarily acceptable to all, but to at least more than 25% of the population? If not, then aren't there four types of money here?Prof Jhttps://www.blogger.com/profile/16539902592080231165noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-78380376064301717632015-03-19T19:32:13.666-05:002015-03-19T19:32:13.666-05:00John: Let me put it this way: I think that David m...John: Let me put it this way: I think that David missed seeing another interpretation of his parable: that "phones" are money, and that the "phone guy" who produces phones is the central bank that produces money.<br /><br />(I would also say, and have said several times, that many Keynesians, and New Keynesians in particular, miss "seeing" the money that is implicitly in their models. David is not alone.)Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86398892333616720152015-03-19T18:43:57.973-05:002015-03-19T18:43:57.973-05:00I'm not sure I understand this: "A workin...I'm not sure I understand this: "A working macroeconomist reading Krugman and DeLong feels as a doctor would if the Surgeon General got up and said that the way to cure cancer was to draw blood using leeches."<br /><br />Presumably, results from New Keynesian models are not analogous to drawing blood using leeches. Krugman, DeLong, and some others use ISLM sometimes to tell a story, but in the background (and sometimes explicitly too) they use modern New Keynesian models. Why is this so horrible? In graduate school, we first study the simplest RBC models because, even though they are missing a lot, they provide some intuition to keep in mind in more complex models. The same is true in finance, labor, and other fields. Why is the line between acceptable and unacceptable drawn at contains optimizing agents vs. does not contain optimizing agents? Lots of models are useful for telling stories and a smaller class are useful for calibrating and making concrete policy decisions. Is it necessarily the case that Krugman and DeLong don't understand this?Joshua Weisshttps://www.blogger.com/profile/10313541087554190148noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-31468204871864400692015-03-19T16:40:31.601-05:002015-03-19T16:40:31.601-05:00John,
As pointed out above, the New Keynesian mod...John,<br /><br />As pointed out above, the New Keynesian model has ratex, budget constraints *and* aggregate demand. Maybe price setting isn't perfectly well microfounded, but then as Simon Wren-Lewis has pointed out, neither is the Walrassian auctioneer. <br /><br />Bottom line: if prices are sticky *at all* (whatever the mechanism), then liquidity preference effects dictate that the monetary authority controls the real rate by setting the nominal rate. And inflation *cannot* be determined by the Fisher equation alone. If the CB sets the real rate, you can't avoid AD. <br /><br />Neoclassicals need an intertemporally consistent model of the real rate that respects the fact that the CB sets real rate in the short run. <br /><br />KAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-4737098908951559232015-03-19T14:34:11.396-05:002015-03-19T14:34:11.396-05:00Levine claims to understand modern Keynesianism, b...Levine claims to understand modern Keynesianism, but then makes the bizarre claim that "Keynes is so popular with those that do not do math" and tries to refute Keynesianism with a simplistic example that doesn't appear to be relevant to Keynesianism.<br /><br />Really, are people supposed to believe that Greg Mankiw is disproved by that essay? That's absolutely ridiculous.<br /><br />So I agree that more clarification is in order if we're supposed to take this seriously, and not assume that it's just a few grumpy conservatives desperately looking for excuses to rag on liberals.Will Mayhttp://willonrails.com/noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-19747684895017599562015-03-19T14:28:07.805-05:002015-03-19T14:28:07.805-05:00Levine claims that there is no model representing ...Levine claims that there is no model representing Keynesian theory, but this is false. At a minimum, there is the Old Keynesian model, and there is the New Keynesian models. He probably doesn't like the former, but the latter has budget constraints, rational expectations, and so on.<br /><br />Instead of addressing these models, he builds his own model of "Keynesian economics" in order to critique it. But what he produces is quite unlike the models that Keynesian actually work with, and so it's not clear that he's critiquing Keynesian economics at all, rather than just a strawman.<br /><br />This isn't even getting at the Rowe/Delong criticism of his model (i.e. that the phones are serving as a medium exchange, and hence are money, and that he neglects the possibility of a monetary economy).Jonathannoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-80135535146043952412015-03-19T14:24:02.624-05:002015-03-19T14:24:02.624-05:00"Standard Keynesian economics violates budget..."Standard Keynesian economics violates budget constraints."<br /><br />I'm intrigued by this comment. Can you elaborate.<br /><br />My overall impression of Levine's post was that it was quite interesting but didn't really relate to the sort of problems Keynesian polices are intended to address. It was like reading an elegant explanation of why a hammer is no good at cutting wood. Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-29399426905962554062015-03-19T14:22:02.479-05:002015-03-19T14:22:02.479-05:00John, the "x does not understand y" bit ...John, the "x does not understand y" bit was added by anonymous. As I'm sure you're aware Nick Rowe is very polite and I think his argument is worth addressing.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-88725277068652656452015-03-19T13:59:18.588-05:002015-03-19T13:59:18.588-05:00Any article blog post or tweet that starts with &q...<em>Any article blog post or tweet that starts with "x does not understand y", "x does not know y" etc is unworthy of even being read.</em><br /><br />Actually, Nick Rowe's post begins:<br /><br /><em>I confess this is a bit of a "Gotcha!". But it's a bit more than that as well. It illustrates the difficulty that people (even economists) have in "seeing" money.</em><br /><br />That's hardly offensive.<br />Kevin Donoghuehttps://www.blogger.com/profile/07534540865029864916noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87931652836625412172015-03-19T13:45:28.103-05:002015-03-19T13:45:28.103-05:00I agree. Ad-hominem attacks, insults, allegations ...I agree. Ad-hominem attacks, insults, allegations of corruption, and writing about what people do and do not know are completely unprofessional and unethical. And the best response is silence. If people want their arguments considered and responded to, they need to learn to talk about ideas. If you respond, you incentivize such behavior. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-18898930627937061052015-03-19T13:36:20.809-05:002015-03-19T13:36:20.809-05:00Ok, John do what you prefer but this is not very p...Ok, John do what you prefer but this is not very professional. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-26670803960770574702015-03-19T13:29:19.558-05:002015-03-19T13:29:19.558-05:00Any article blog post or tweet that starts with &q...Any article blog post or tweet that starts with "x does not understand y", "x does not know y" etc is unworthy of even being read. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.com