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I think Robert has it correct. And I would like Brad to demonstrate that in fact there are plenty of investment opportunities whose risk adjusted present value is sufficient to offset general uncertainty left lying around. If so where are the IPOs?
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Second Best "A solution to this dilemma is require the bad guys to paint the ends of their guns with bright orange color to designate them as real guns held by bad guys trying to pretend they are good guys with toy guns. This would relieve the burden of the good guys having to point them out individually since they already know who they are." Of course in Australia, the guy in question had no right to have a gun in the first place. Which sort of makes me wonder where he got it.
Toggle Commented 2 days ago on Links for 12-16-14 at Economist's View
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" DC politicians, including Krugman, have supported the aggregation of banks in and around the New York federal reserve bank for most of their careers. " ??? Krugman is a New York native, who studied in greater Boston and was long a professor in New Jersey. He is also no politician. What the hell does he have to do with DC?
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P.S. To the above point - if people evaluate gains and losses differently (as is consistently shown experimentally) then the optimization problem is changed even more by considering the uncertainty properly.
Toggle Commented 3 days ago on Real Business Cycle Theory at Economist's View
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One quote from Keynes that seems to be always forgotten is this: "But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task, if in tempestuous seasons they can only tell us, that when the storm is long past, the ocean is flat again. " The emphasis today is still (despite models being supposedly dynamic and stochastic) with optimizing static efficiency. If uncertainty and instability are costly, the whole optimization problem is potentially changed (it is like building houses in a hurricane zone - making them as cheaply as possible is not necessarily the best solution if they will be periodically destroyed). If the model doesn't even include the possibility of a hurricane, with an extended optimization problem - properly including the cost of uncertainty and the cost of adjustment, then the outcome and recommendations from the model may be completely misleading.
Toggle Commented 3 days ago on Real Business Cycle Theory at Economist's View
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I must say I find Farmer disappointing. I think he could be the way forward, but he is too hung up on Keynes. It is like someone post Einstein, trying to promote Newtonian physics. Personally, I don't believe in structural parameters at all (at least not for the economy as a whole, if then just on a (sub)cohort basis). I think the only way forward is to disaggegate, and use simulation techniques (as they use in weather forecasting). To me the story that makes most sense is Minsky (changing risk perception), which is also an anti-structural parameter approach. If any progress will be made with aggregate models, then risk and uncertainty are the key concepts, and general equilibrium is the poison to be avoided.
Toggle Commented 3 days ago on Real Business Cycle Theory at Economist's View
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David which parties exactly are you talking about? The racist ones?
Toggle Commented 6 days ago on Paul Krugman: Mad as Hellas at Economist's View
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ZJohn When reading a summary of a summary you should be careful of reading too much into single words taken out of context. To find out who "such backgrounds" are you have to read the original paper.
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Second Best Quoting Farmer "There is no natural rate of unemployment in the sense that Friedman used that term." I find this an odd thing to say. What does he mean by that? Friedman thinks that the natural rate of unemployment is in fact that level of unemployment where the labour market is roughly in balance (supply in aggregate = demand in aggregate) so that unemployment reflects the sum of transitory and structural unemployment with no cyclical unemployment. They like to call it the NAIRU these days. How can he not believe in such a thing? It is like saying he doesn't believe there is such as thing as full employment, it is just that he and Friedman might argue about what full employment is.
Toggle Commented 6 days ago on Links for 12-12-14 at Economist's View
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djb "If by animal spirits he means "The propensity to Invest" there might be some truth to it" Yes that is what he means.
Toggle Commented 6 days ago on Links for 12-12-14 at Economist's View
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Roger Farmers model is not my model. He concentrates on "animal spirits". I think risk perception (or risk appetite) is the key change, not just from businesses, but also from households and banks. Of course you could simply allow them to be interpreted as the same thing. But the key issue is the liquidity trap - an increase in risk perception means that real interest rates are too high for investment (including household investment) to be considered worthwhile, and cannot be lowered to a level where that is not the case. I don't really see what the difference is between his model and PKs except that he ignores interest rates. But I also differ from him (and from Keynes or Krugman for that matter) in that I don't consider the concept of equilibrium useful. The economy is always in flux and change always takes time and occurs at different rates in different sectors. Because it happens at different rates in different sectors, the direction of change after feed back and adjustment costs may be away from full employment, not towards it. The position of the economy is the sum of the changes that have already happened and sometimes there are positive feedback effects that mean that short term change effects long term comparative advantage (if I dig up my banana plantation and plant macadamias, because of current prices, then I will be a macadamia producer in future, and will also become a macadamia expert, even if banana prices then rise).
Toggle Commented 6 days ago on Links for 12-12-14 at Economist's View
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Believe it or not Matt this is not a particularly partisan piece, even if what you say is actually true, it is not what PK was implying (since deficit scolds are in both parties).
Toggle Commented 6 days ago on Paul Krugman: Mad as Hellas at Economist's View
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Noni, very good comment by the way. But as I see it the key point with inequality is the rule of law, in particular property rights. The rich become much richer because their wealth earns them more wealth, and the their wealth is protected by the whole society even though it only belongs to an individual or group of individuals. To a certain extent this makes sense (positive sum game), but there must be a point where the value of this service exceeds the price (tax) that we are asking for it. Increasing inequality is a sign that we have exceeded that optimum point.
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P.S. There are other words that I am beginning to think should be outlawed as well (to be replaced by multiple words with narrowly defined meanings) - savings and efficiency come to mind.
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I think somebody really needs to tell me what they think "equilibrium" means. Because, I don't think I have a clue anymore what people mean when they say "equilibrium". Maybe we should stop using the word in economics, it just causes confusion.
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It is like the famous line from Sir Walter Scott "oh what a tangled web we weave, when first we practice to deceive". If you first take the wrong approach, things just get messier and messier. What are we trying to do? We are trying to establish a floor below which people in our society shouldn't be allowed to fall (for a number of reasons). Then give people that amount unconditionally as a basic right and you avoid all the complicated rules and provisions we have built up to try to achieve the same thing conditionally.
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So why don't we just give the most vulnerable more money, so they won't be so vulnerable? To quote Steven Gordon of Worthwhile Canadian Initiative "the best anti-poverty policy is to give money to poor people". People really do make things too complicated.
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I had a programmable HP calculator. If you learn reverse Polish programming, you can handle anything.
Toggle Commented 7 days ago on 'The Chinese Century' at Economist's View
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cm By the way the time period of my experience was the 1970s and my dad used a slide rule (later a HP calculator).
Toggle Commented Dec 10, 2014 on 'The Chinese Century' at Economist's View
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Peter K, in fact one thing I picked out from John Cochrane's approach is that his idea of what "dynamic" means is very odd. He has a very specific view of dynamic, which is not at all dynamic as far as I am concerned. He just holds different things constant, than people would in other models. This seems to me to be a symptom of people who confuse their models with the real world.
Toggle Commented Dec 10, 2014 on Links for 12-09-14 at Economist's View
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Peter K, obviously John Cochrane is complaining that he doesn't use ad hominem attacks, whereas Krugman is complaining that John Cochrane attributes a ridiculous strawman of Keynesian views to his opponents (which to Krugman implies he thinks they are stupid).
Toggle Commented Dec 10, 2014 on Links for 12-09-14 at Economist's View
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P.P.S. It is perfectly reasonable to argue about what the central bank should be targeting as it can really only have one target. And I'm just about convinced that a somewhat flexible NGDP target is the most sensible target.
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P.S. Actually the ABCT doesn't indict Fed manipulation of the money supply. It suggests that if the Fed manipulates the money supply to offset the business cycle, it MIGHT make mistakes which make the cycle worse. Of course it doesn't actually provide any evidence that this is what in fact happens. And of course the alternative to the Fed manipulating the money supply, is being left to the whims of the supply and demand for gold (or silver or whatever). Maybe somebody should have a look at the recent history of the gold price before they think that that is the answer to life, the universe and everything. It might really make planning for business people easier if there is an authority out there trying to ensure that some particular macro-economic value is kept on target. The idea that the interest rate (and there is no THE interest rate, there are umpteen different interest rates according to term and risk) tells businessmen exactly what demand will be when their on spec production is ready for customers is absolutely ludicrous - that is where blinkered but incomplete deduction from imperfect axioms can take you.
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Small correction ... if you lack at ... ... if you LOOK at ... P.S. Note that whether inequality is good or bad for growth is rather irrelevant to the previous comment (because it is about stability not long term growth), but inquality not being good for growth certainly makes the point stronger by ruling out any offsets.
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djb It seems we have spent a lot of effort worrying about what the NAIRU (non-accelerating inflation rate of unemployment), but it seems that we have ended up inadvertedly stuck with a diru (decelerating inflation rate of unemployment) instead. Surely deceleration is a (negative) form of acceleration. One problem is that the central bank treats its target rate of inflation as an upper bound, but not as a lower band. But perhaps the real problem is the general mix of policy, I remain unconvinced that encouraging higher leverage (via small deficits combined with low interest rates) is a path to macro-economic stability, and I sort of wonder how anybody who really thinks about it, can believe that either. I really believe that when we had larger government deficits and credit rationing we were better off. Part of the problem seems to be that if you lack at what economists think is being optimized, economic security is nowhere to be seen. And yet if you actually ask people what they want, it is one of their highest priorities. You can efficient and brittle (the throw away society), but is that really what we as a biological species with a long and vulnerable childhood and a long and vulnerable old age really needs? The liquidity trap has forced the Feds hand, but there are still plenty who treat ANY money printing as the devil's work. Now I agree, uncontrolled money printing is a bad idea. You may need taxes and or bond sales to combat inflation at some stage. But maybe some money printing, that then is allowed to trickle UP to the best providers for the common good (rather than down based on the whims of the very rich) would produce a better society.
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