Saturday, September 20, 2014

A St. Louis based economist to disregard: Stephen Williamson No. 000077

Macro economics is politics masked as science through which runs a deep political divide. As Michael Pettis well explained recently:
There is as you know a political divide between economists. One group focuses primarily on managing demand to prevent the under-utilization of labor and capital (often called Keynesians). The other insist that it is only by increasing savings, which usually means increasing wealth inequality and allowing the benefits of growth to “trickle down”, that we can generate the increases in investment that drive long-term economic growth (often called supply-siders, or Austrians, although for some reason true Austrians seem to loathe supply-siders).
The point to remember is that rising inequality or, especially in countries like China, a declining household share of GDP, tends to force up the savings rate and to reduce consumption, which sometimes even lowers the investment rate, as we saw in Germany during this century. But because globally savings and investment must always balance (another accounting identity often forgotten in the debate), the tendency to force up the savings rate in any country must automatically be balanced by an increase in investment, an increase in consumption elsewhere, or an increase in unemployment. This is just a matter of logic.
To fortify their political arguments the Supply Siders/Austrians offer "benign view of economic fluctuations in output and employment." Olivier Blanchard, Where Danger Lurks.

According to this view, called either the rational expectations or efficient market hypothesis of the 1970s, “people and firms did the best they could in assessing the future.”

Thus, by 1980 Supplysider/Austrian Robert J. Barro would attack Keynes because Keynes rejected "well functioning private markets."
One reason that Keynes may not have been troubled by this "deficiency" is that he viewed the private economy as inherently unstable. It did not take large (and presumably objectively observable) shocks to triger a recesion, because even a smal shock-when -interacting with the multiplier (and, in some models, also the investment acelerator)-could generate a significant and sustained drop in output and employment.

Keynes had to be rejected for political reasons for, “The [Keynesian] model stressed the failure of private enterprise economies to ensure full employment and production, and the consequent role for active macro policies as instruments to improve outcomes.” Id.


A second facet of rational expectations is its assumption of linearity, of regularity:
These techniques however made sense only under a vision in which economic fluctuations were regular enough so that, by looking at the past, people and firms (and the econometricians who apply statistics to economics) could understand their nature and form expectations of the future, and simple enough so that small shocks had small effects and a shock twice as big as another had twice the effect on economic activity. The reason for this assumption, called linearity, was technical: models with nonlinearities—those in which a small shock, such as a decrease in housing prices, can sometimes have large effects, or in which the effect of a shock depends on the rest of the economic environment—were difficult, if not impossible, to solve under rational expectations.
Thinking about macroeconomics was largely shaped by those assumptions. We in the field did think of the economy as roughly linear, constantly subject to different shocks, constantly fluctuating, but naturally returning to its steady state over time. Instead of talking about fluctuations, we increasingly used the term “business cycle.” Even when we later developed techniques to deal with nonlinearities, this generally benign view of fluctuations remained dominant.
In such a political, non-scientific environment, an assured way to gain attention is to attack, at any opportunity, the leading voices of the opposition and for the the Keynesians that would be Paul Krugman.

So Saint Louisan Stephen Williamson does attacks with regularity, which most disregard. Today we have a new attack on Krugman. Stephen Williamson: New Monetarist Economics: What Have We Learned Since 2009?

And here is the Williamson's argument, "If the phenomenon can be described, and we can find some regularity in it, then it can also be described as the outcome of rational behavior."

But it is Econ 101 that there is no regularity due to: (1) mistakes (Soros); (2) asymmetry of information (Yi-Cheng Zhang, 2005); or (3) reflexivity (“expectations about the economic future tend to actually shift that future” (Syll, 2014). Further, “The interaction between animal spirits, trust, confidence, institutions etc., cannot be deduced or reduced to a question answerable on the individual level.” (Syll, 2014).