tag:blogger.com,1999:blog-582368152716771238.post7636825885912758352..comments2024-03-29T07:18:14.271-05:00Comments on The Grumpy Economist: Historical FictionJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger25125tag:blogger.com,1999:blog-582368152716771238.post-18775417701195458882018-01-29T03:29:30.359-06:002018-01-29T03:29:30.359-06:00prof premraj pushpakaran writes -- 2018 marks the ...prof premraj pushpakaran writes -- 2018 marks the 100th birth year of James Tobin!!!prof prem raj pushpakaranhttps://www.blogger.com/profile/14561237920972677898noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39755157131152164082015-09-23T02:36:34.236-05:002015-09-23T02:36:34.236-05:00I looked at Britain's inflation/unemployment r...I looked at Britain's inflation/unemployment rate. Britain also managed to get inflation down pretty fast, but unemployment took much more time to get down, with the trough reached only around 1990. Perhaps the model fits better there?Anandhttps://www.blogger.com/profile/16214341101980294503noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37726490964556677262015-09-06T00:01:07.910-05:002015-09-06T00:01:07.910-05:00John, what are your thoughts about Nick's comm...John, what are your thoughts about Nick's comment?Tom Brownhttp://www.google.comnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86121465035465199042015-09-05T21:34:16.552-05:002015-09-05T21:34:16.552-05:00Krugman's rhetorical style is often extreme. W...Krugman's rhetorical style is often extreme. When important people refuse to retreat from what he thinks are demonstrably flawed arguments, his criticism and scorn can be withering, to the anger of many. <br /><br />I see ideology but not extremism in his economics, however, and a sense of social justice that I admire greatly.JZhttps://www.blogger.com/profile/12994372644670111315noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-68657656688660552592015-09-05T17:55:35.554-05:002015-09-05T17:55:35.554-05:00"He is, however, opposed to ideological extre..."He is, however, opposed to ideological extremism..?" Well, thanks for the laugh. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-77352818667101982662015-09-05T14:27:51.923-05:002015-09-05T14:27:51.923-05:00Cochrane: "[Krugman asserts that] late 1970s ...Cochrane: "[Krugman asserts that] late 1970s Keynesian macroeconomics with adaptive expectations was vindicated in describing the Reagan-Volker era disinflation."<br /><br />I don't read Krugman that way. Instead, he often defends a middle ground between vindication and refutation. Such statements as "Keynesian economics is looking pretty good" have moderators and qualifiers built into them.<br /><br />Krugman is certainly open to the idea of rational agents who look both backward and forward. He is, however, opposed to ideological extremism, which seems to be in the nature of some academic purists.<br /><br /><br />JZhttps://www.blogger.com/profile/12994372644670111315noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-17818219571669166392015-09-05T11:20:02.499-05:002015-09-05T11:20:02.499-05:00Ganesh, what about other countries? Look, we can a...Ganesh, what about other countries? Look, we can all agree that an oil shock is an adverse supply shock that should affect output and employment. But it is not at all clear why it should be strongly correlated with inflation, UNLESS the Fed tries to accommodate the shock. You show me a model that can explain how inflation depends on oil prices in conjunction with use in power generation that can match both US AND international data (did countries more reliant on oil experience high inflation in the 2000s?) and I will think about it. But to arbitrary proclaim that oil prices mattered pre-1985 and not after because that would be convenient to your story, well, you are assuming your conclusions. And that's bad science.Constantine Alexandrakishttps://www.blogger.com/profile/03148709241309623293noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-71776907605924448382015-09-05T10:03:20.468-05:002015-09-05T10:03:20.468-05:00Constantine Alexandrakis:
The relative importance...Constantine Alexandrakis:<br /><br />The relative importance of oil prices can be gauged from a) the extent to which oil was used for power generation, and b) fuel efficiency. Until the mid-1980s, the US used quite a bit of fuel oil (a crude oil derivative) to generate power. That changed as the US moved more and more to natural gas. Improving fuel efficiency meant that our consumption of oil did not grow nearly as fast in the 2000s. As you can see, both of these are supply-side factors i.e. a shifting out of the AS curve.<br /><br />GaneshAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-60422659662121305442015-09-04T20:53:46.939-05:002015-09-04T20:53:46.939-05:00So if you make the series less noisy using core in...So if you make the series less noisy using core inflation, it looks like Tobin's stylized nautilus played out in ten years instead of twenty. That speed seems to be the main point of this post. <br /><br />A couple of tweaks to Tobin's assumptions (NAIRU, etc.) seem like they could easily explain the speed with which these economic effects played out. Steve Rothhttps://www.blogger.com/profile/11895481216028771016noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-82216713856351609242015-09-04T16:14:04.988-05:002015-09-04T16:14:04.988-05:00Everything is black and white with you guys. I'...Everything is black and white with you guys. I'm not saying the oil price is the only factor. The oil price began dropping from a high of $40 in 1979. It reached a low of around $12 about five years later. A persistent and significant decline. It then averaged around $20 for the next 15 years. The roll over of oil prices would have contributed to changing inflationary expectations.<br /><br />Henry.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-56962994866298845982015-09-04T12:55:54.735-05:002015-09-04T12:55:54.735-05:00Except that oil prices, in real terns, rose betwee...Except that oil prices, in real terns, rose between 2002 and 2011 just as much as they rose in the 1970s. Where is the inflation? Well, check if Mercury was aligned with Venus. Maybe that will improve the prediction of the model.Constantine Alexandrakishttps://www.blogger.com/profile/03148709241309623293noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-70086643310979407442015-09-04T12:48:40.647-05:002015-09-04T12:48:40.647-05:00pithom, you are just as liberal with the facts as ...pithom, you are just as liberal with the facts as Krugman. Tobin has inflation to 4% between 1986 and 1987. In reality it took half the time (1983). Tobin has a 3% - 4% inflation with 10% unemployment (1987). In reality 3% - 4% inflation is accompanied by a 7% unemployment in 1992 and 1993. Constantine Alexandrakishttps://www.blogger.com/profile/03148709241309623293noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-19160517875926646312015-09-04T12:45:22.079-05:002015-09-04T12:45:22.079-05:00"For me, this raises the question: What is ev..."For me, this raises the question: What is even moderate inflation today regarded as an uncontrollable boogyman? There is hysterical prissiness afoot regarding even microscopic rates of inflation, usually under the banner that any rate of inflation threatens to "accelerate," "gallop" or turn into hyperinflation."<br /><br />This is an interesting interpretation of those events. The inflation boogyman that was beaten down easily meant above average UE rates from 1975-1988. Even just starting in 1981 (Volcker took office in August 1979 so we are subtracting a year plus to get the best possible result) you still have 7-8 years of above average UE- and these were "boom" years according to many. Trying to avoid a decade averaging 7-8% UE is somehow "hysterical prissiness". Baconbaconhttps://www.blogger.com/profile/13511082564082971086noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-73315520399880228912015-09-04T12:26:38.264-05:002015-09-04T12:26:38.264-05:00Uninformative. Tobin's model has UE dropping ...Uninformative. Tobin's model has UE dropping only when inflation is approaching zero, in reality UE started dropping when inflation rates stabilized at 4. The price of oil drops until 86/87 while UE and inflation start handling themselves 2-3 years prior.Baconbaconhttps://www.blogger.com/profile/13511082564082971086noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39583938582446638002015-09-04T12:18:17.695-05:002015-09-04T12:18:17.695-05:00"Inflation wasn't as quashed as it was in..."Inflation wasn't as quashed as it was in Tobin's scenario"<br /><br />Inflation was quashed far faster than in Tobin's scenario, the fact that it stopped short due to Volcker is pretty much irrelevant for two reasons. One is that Tobin's graph predicts significant and long lived deflation- 6 years below zero with a trough at -3%. Two is that virtually all the employment gains occur during this period. Peak UE is in 1988 and trough UE is in 1995 with 100% of the deflation years in this band and only a single year of positive inflation. <br /><br />The relationships between UE and inflation in this graph simply didn't exist, and cannot be recused by invoking fed actions. Baconbaconhttps://www.blogger.com/profile/13511082564082971086noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-28220689728748491022015-09-04T02:21:22.396-05:002015-09-04T02:21:22.396-05:00Whatever is the right theory, the facts on the gro...Whatever is the right theory, the facts on the ground were that even rising double-digit inflation subsided, evaporated, or retreated, or was beaten down by Volcker, rather quickly (even as Reagan was running primary deficits btw. Reagan moved to primary surplus only in year 7 or 8 of his Presidency). <br /><br />For me, this raises the question: What is even moderate inflation today regarded as an uncontrollable boogyman? There is hysterical prissiness afoot regarding even microscopic rates of inflation, usually under the banner that any rate of inflation threatens to "accelerate," "gallop" or turn into hyperinflation.<br /><br />The historical record shows good solid US growth with moderate inflation (3+% real growth, 3-% inflation 1982-2007), and that even escalating (there's a good scare word also) rates of inflation (late 1970s to early 1980s) are reversed quickly through tighter monetary policy.<br /><br />Gee, this is recent historical record, not theory. <br /><br />Gadzooks! The discussion today should be about "stimulus" and "expansion" and "job growth" and "real growth" and "we want boom times."<br /><br />Seems to me the Fed needs to gun the presses long and hard (QE at $50-$100 billion a month) until we see Japan-style rates of unemployment. We might, or might not see inflation---they are not in Japan.<br /><br />If we do see some inflation, so what? 3% is very livable, as recent history proves. If we see no higher inflation, all okay too.<br /><br />If we see higher inflation, say above 5%, it appears a moderation in monetary policy would retard inflation. Meanwhile, a lot business es would have made money, a lot of people would have gotten jobs, taxes could be cut thanks to higher revenues, trading partners would do better---are there any downsides to robust economic growth?<br /><br />Yes---central bankers do not like it. <br /><br /><br />Benjamin Colehttps://www.blogger.com/profile/14001038338873263877noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-53438473971478119382015-09-03T23:16:11.724-05:002015-09-03T23:16:11.724-05:00What also happened, that the RE mob seem to want t...What also happened, that the RE mob seem to want to ignore, is that the oil price fell significantly from the early 1980s onwards. Boxed in thinking yields hollow sounding results.<br /><br />HenryAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-65089336812587216272015-09-03T22:17:25.350-05:002015-09-03T22:17:25.350-05:00"The two lines look pretty different to me. T..."The two lines look pretty different to me. Tobin's simulation looks like it had the unemployment rate north of 9% for seven consecutive years. In reality, it ended up being above that level for just one year, even though it peaked slightly higher than he projected."<br />-That's because the Fed had a looser monetary policy than Tobin predicted, allowing inflation to hover around 4% instead of going into 2% deflation.pithomhttps://www.blogger.com/profile/13997094225496018110noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-28067345520052226712015-09-03T20:49:11.602-05:002015-09-03T20:49:11.602-05:00On thinking it over, I think your second diagram i...On thinking it over, I think your second diagram is not quite fair to James Tobin. Because Tobin was making a *conditional* forecast, about what would happen to inflation and unemployment *conditional* on what would happen to MV (or NGDP). And it looks like the Fed increased MV in 1884, while Tobin's conditional forecast assumed MV would continue to fall.<br /><br />I think the right way to do it would be to take the numbers for *actual* historical MV, plug them into Tobin's Phillips Curve, and compare Tobin's new "predictions" for inflation and unemployment with what actually happened. <br /><br />Eyeballing the graph, it seems that Tobin's predictions would look a lot better using actual MV, though still would show prices being less flexible than they actually were from 1884 onwards.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-67084961928569868932015-09-03T20:43:24.363-05:002015-09-03T20:43:24.363-05:00So the operative question for you Zack (and all th...So the operative question for you Zack (and all those Ratex proponents) is this. Did the Ratex guys have a simulation in early-1981 of what the US inflation-unemployment graph might look like? If so, share it. The point is which model did a better job of predicting the trajectory of the inflation-unemployment tradeoff.<br /><br />GaneshAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-78416999919184969752015-09-03T20:28:50.343-05:002015-09-03T20:28:50.343-05:00Also notice that Tobin's graph is plotting ann...Also notice that Tobin's graph is plotting annual rates. The graph Krugman created for comparison is using quarterly data points. At first glance this makes it look like the high unemployment in the 80's lasted longer than it did.Zacknoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-67733039866029096762015-09-03T20:22:06.580-05:002015-09-03T20:22:06.580-05:00"Historical Fiction" is the title of Ste..."Historical Fiction" is the title of Stephen Williamson's original post that Cochrane is referencing. Click the link to Williamson's post- the whole point is that it's a response to the very same Krugman column you are linking to. <br /><br />As to whether the "basic shape" was in line with the Keynesian prediction as Krugman claims, I suppose it's a matter of interpretation. The two lines look pretty different to me. Tobin's simulation looks like it had the unemployment rate north of 9% for seven consecutive years. In reality, it ended up being above that level for just one year, even though it peaked slightly higher than he projected.Zacknoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-70073719624319746762015-09-03T19:46:52.667-05:002015-09-03T19:46:52.667-05:00I think we need to keep the ISLM model separate fr...I think we need to keep the ISLM model separate from the Phillips Curve. The ISLM model is a theory of the AD curve. It says nothing about how quickly or slowly wages, prices, and expectations adjust.Nick Rowehttps://www.blogger.com/profile/04982579343160429422noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-16499160199104524262015-09-03T18:52:11.564-05:002015-09-03T18:52:11.564-05:00Mr. Cochrane:
I think we all know that you and Mr...Mr. Cochrane:<br /><br />I think we all know that you and Mr. Krugman dislike each other ....a lot. However, to say that Mr. Krugman has been pushing a lot of "fiction" without acknowledging realities is just plain wrong. For starters, here is a link to a post by Mr. Krugman which has the same graph that Mr. Tobin came up with in his paper: http://krugman.blogs.nytimes.com/2015/09/01/the-triumph-of-backward-looking-economics/?module=BlogPost-Title&version=Blog%20Main&contentCollection=Opinion&action=Click&pgtype=Blogs&region=Body<br /><br />If your dislike for Mr. Krugman is so great that you don't want to even read what he has said, let me copy and paste something he did say in the above post:<br /><br />"Unemployment shot up faster than in Tobin’s simulation, then came down faster, because the Fed didn’t follow the simple rule he assumed. But the basic shape — a clockwise spiral, with inflation coming down thanks to a period of very high unemployment — was very much in line with what standard Keynesian macro said would happen. On the other hand, there was no sign whatsoever of the kind of painless disinflation rational-expectations models suggested would happen if the Fed credibly announced its disinflation plans."<br /><br />So, it turns out that Mr. Krugman does acknowledge that unemployment came down faster than Mr. Tobin's simulation.<br /><br />I'd say for starters: read other people's blog first - even if you dislike them a lot. I do... I read your blog and Mr. Krugman's.<br /><br />Ganesh<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-81226842169599830302015-09-03T18:29:08.085-05:002015-09-03T18:29:08.085-05:00"The Keynesian IS-LM model, whatever its othe..."The Keynesian IS-LM model, whatever its other virtues or faults, failed to predict how quickly inflation would take off in the 1970, as the expectations-adjusted Phillips curve shifted up. It then failed to predict just how quickly inflation would be beaten in the 1980s."<br /><br />-Failure to predict positive and negative supply shocks (which is mostly what these events were) is hardly an intellectual sin.<br /><br /><br />"And you can see the crucial Keynesian prediction error: After the monetary tightening is over in 1986, no, we do not need years and years of grinding 10% unemployment. "<br /><br />-The chart shows unemployment declining from its peak at 10%+ to 5.3% in five-six years. Reality was closer to five years. Worse predictions have been made. Also, notice that inflation was higher in real life, which explains the difference between Tobin's predictions of elevated unemployment through the mid-1980s and reality. Volcker stopped disinflation quite a few percentage points short of Tobin's 1980 scenario.<br />"Adaptive-expectations ISLM models and their interpreters were predicting years and years of unemployment to quash inflation, and it didn't happen."<br />-Inflation wasn't as quashed as it was in Tobin's scenario, and unemployment took a much shorter time to rise (though not much less time than in Tobin's scenario to decline!). The 1980s really did have quite a few years of significantly elevated unemployment, leading to most of the Regan deficits.pithomhttps://www.blogger.com/profile/13997094225496018110noreply@blogger.com