John Taylor writes:
"I completely agree with John Cochrane when he writes in his review of my book First Principles that
the “preference for rules is one of the most important lessons of
modern macroeconomics” and that it is still the major point of
disagreement among those writing about economic policy today. As John
nicely puts it, the disagreement is about “rules vs. discretion,
commitment vs. shooting from the hip, and more deeply about whether our
economy and our society should be governed by rules, laws and
institutions vs. trusting in the wisdom of men and women, given great
power to run affairs as they see fit.”"
So who, exactly, is on the side that thinks "trusting in the wisdom of men and women, given great power to run affairs as they see fit"? Clearly not me (not that I'd expect Taylor to have me in mind anyway). Not Paul Krugman - his biggest concern has been such men and women in authority with lots of discretion but no wisdom. Not Brad DeLong. Not Mark Thoma.
This reminds me of the post-ACA claims that the pro-health-reform-constitutionality side did not believe in a Constitution that limited the power of the state.
It's what several years ago I called the "assumption of ideological orthogonality". The assumption that because I believe X, and I don't agree with those guys, then those guys believe not-X. It's a really bad way to view the marketplace of ideas and it can lead you into saying really dumb things.
Saturday, July 14, 2012
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Krugman is a rules over discretion sort of guy? I've always read his arguments as advocating for men and women who have discretion to use it more wisely. But I don't think I've ever heard him argue for a more rules-based approach to fiscal policy for instance.
ReplyDeleteThe rules vs. discretion point is hairy - a lot of the defenses of it are based on some strange assumptions about RE on the part of the public but oddly not always on the part of the central bank. Still, Krugman has definitely been pushing adherence to the modified Taylor rule in his critique of Bernanke, for example. To Taylor and Cochrane's eyes the claims about fiscal policy may look like discretion but I don't know why. He's pretty clearly said resort to fiscal policy in a liquidity trap and set its magnitude based on the output gap. Where is the discretion there PrometheeFeu?
DeleteBut anyway - categorizing rules vs. discretion can be hairy because of course Taylor says the monetary stance doesn't need to be more expansionary and guys like Krugman and DeLong think Bernanke's shooting from the hip and that's the whole problem.
The clearest falsehood from Taylor is the part that I quoted: that the other side trusts in the wisdom of men and women with considerable discretion. If you could sum up the Krugman position in a single sentence, it would be "I don't trust the wisdom of these people". Taylor is making himself sound really uninformed by assuming that because he doesn't trust the wisdom of people with lots of discretion, that means the other side does trust them. It's poor reasoning on his part.
It is discretion in the sense that he does not advocate constraining fiscal policy. He is accepting the status quo of discretionary fiscal policy and then advocating that the discretion be used in a particular way which he finds wise.
DeleteIt's the difference between saying: "We must loosen monetary policy because there is an NGDP shortfall" and saying "The Federal Reserve should publicly adopt an NGDP level target and hold itself to it". The first is like what Krugman says while the second is not.
"[T]hat the pro-health-reform-constitutionality side did not believe in a Constitution that limited the power of the state."
ReplyDeleteSomeone said that? Or that the other side, as represented by its leading lights, did not believe that any congressional regulation could ever be ultra vires?
The second statement is basically true, though some would allow Lopez and Morrison to linger on the books.
John Taylor is really such a pig.
ReplyDeleteSoros made the case, very well at CATO, that because of irrationality a rules based approach does not work.
Additionally, Taylor and Cochrane impeach themselves. If gov't were good enough to predicate what rules we needed, then gov't would not be bad.
IOW, his argument that gov't is bad carries with it the implicit concession that gov't must have, in the words of Soros, arbitrary power to do what is needed when new events require action.
@Daniel: Well, there's that guy here who seems to think discretion is better than rules.
DeleteDaniel, not only do I think such, I know that it is true.
ReplyDeleteYou seem to constantly want to write abut things about which you do not know or understand. A second serious fault that you have is an inability to draw necessary distinctions.
Any good second week law student knows the difference between rules that, for example, prohibit conduct and rules that regulate conduct. We, for example, prohibit murder. We regulate, by a standard of care, driving a car. We can also take a blended approach. We also prohibit driving faster than the posted speed limit. Good law students also learn to judge the situations in which one can prohibit from the one's in which one has to settle for regulate.
For example, Austrian's favor a rule that it would be a crime for a bank to make a bad loan. Under such a rule there would be very few loans. However, if we regulate lending, holding bankers to some standard of care, we get more loans.
Under Bush and Greenspan, we quit regulating all kinds of loans and financial transactions, such that our financial markets became nothing but casinos. When oil prices doubled---also due to the utter idiocy of Bush and his three lost wars---well the house of Cards came falling down and the Fed had to pretty much make it up as it went along to stop the whole ship from sinking.
No "rules" would have prevented the entire affair, for as explained by Soros, Truman, many other real world geniuses, the World is irrational---you have imperfect people, acting on imperfect information, at all times.
Macro, as a discipline or science, has as a result, totally lost its way. Any rule one devises for the Fed, such as targeted NGDP is doomed to failure, as people and events will cause the "rule" to become meaningless.
What matters are the people. The story of the last 4 years within the Obama administration and the Fed has been the people, not "rules." In the summer of 2008, when Obama looked to be the winner but the storm flags were out, I was writing to the NYT and FT being as shrill as possible against letting Larry Summers back into gov't because he man is useless at governing, which was as plain as day from 1000 miles from the Coast. The distance gives one altitude and perspective. I was plain spoken that Obama would rue the day that man went back in gov't. Rhomer and TG had the same very obvious flaws.
Now, four summers later we have an economy and nation, broken by a lack of confidence. If Larry Summers was a member of your family, you wouldn't have confidence in his driving to a near by convenience store and buying a gallon of milk.
I don't understand how you can believe what you do about Bush, Summers etc and still support discretionary governmental action. The wrong people keep being put in charge and your response is: Well, if we just put the right people in charge, everything will be better. Maybe it's time to realize that it is extremely rare for the right people to be in charge and that the way to get the government to work better is to adopt a framework of rules that much more severely constrains the people who happen to be elected. If Bozo the Clown is in charge, it's rather ridiculous to act as if the love child of Mother Theresa and Einstein was in charge.
DeletePrometheeFeu
DeleteI don't support it, I accept it as a reality.
You really have to be dull, very dull to arrive at any other conclusion. You and Daniel badly confuse the familiar with the necessary.
I explained my thoughts in the Federalist papers, long ago. It really has to do with Foreign Affairs, where there are no rules. Accordingly, there can be and are no "rules," anywhere else.
For example, how does the Taylor Rule or targeted NGDP work in early 2014 when we are at war with Iran and Iran can destroyed the oil fields of Saudia Arabia, in retaliation. In that event, the Fed might have to break every rule in Dodd Frank, especially if we also had a major earth quake in CA.
Or, what if the situation in Europe threatens to collapse into civil wars in Spain and Italy. Should the Fed be allowed to buy Spanish bonds to prevent civil war and collapse of a nation? You will appear to be a real idiot if you say the President can send troops to Iraq but we cannot buy Spanish bonds for similar purposes.
Or, let me take a different tack. All the central American countries unite into one country and then threaten to cut us off from the Panama Canel, if we did not do a trade agreement that sent most Americans in the Southern half of the US to Mexico for health care. Could the gov't make it mandatory that you travel from Texas to Mexico to get non-emergency health care (as opposed to going to war to regain access to the canal?)
We live in a world that is irrational. Grow up
You are making a multitude of wrong/unrealistic assumptions.
DeleteThe first significant mistake you make is to believe that a Taylor rule or an NGDP targeting rule would not be able to handle such a scenario. As long as the rule is based on targeting a forecast, I can see no reason why it couldn't operate quite well during war in Iran or an earthquake in CA. I would find an NGDP target to be the optimal policy under those scenarios. In fact, the predictability of the monetary response would be a very useful thing to have during such times.
Assuming that following the rule is not the optimal policy, you are making the mistake of assuming that anyone could in real time come up with a better policy than simply following the rule. Rules can be developed over the long term. We can do careful analysis, run experiments, debate, refine over and over again. I have no doubt that the economics profession over the course of 50 years can come up with a policy rule that will outperform a mythical dream team having a 24 hrs brainstorming session in the situation room. The genius President and his genius advisers saving the world through sheer force of will make good TV, but it doesn't work like that. When you work under stress, with insufficient information and not enough time to think, you screw up. Special cases aren't special enough to break the rules.
As for your last example, no, I don't think this special case is special enough. (Not to mention it being completely unrealistic) The US should not force its citizens to buy their healthcare from Mexico. The US should instead explain to South-America that if they blow up US ships that try to cross the Panama canal, the US will retaliate and that given that the US spends more on its defense budget than the next 25 countries put together (none of which are in South America as I recall) they would win quite rapidly. We're not talking about nation building here. Sure, it's hard to make Iraq democratic, but it would be easy as pie to make South-America not a military problem.
Alexander Hamilton wrote:
ReplyDeleteFor example, Austrian's favor a rule that it would be a crime for a bank to make a bad loan.
I hope you are referring to some politicians in Vienna. This is not at all what Austrian Economists think.
I wasn't aware of any compelling evidence that Austrian Economists think, let alone effectively, but clearly Austrian's believe that bank lending should be a crime. All that silly fiat currency stuff. Fractional reserve lending, the worst of our sins (but not a peep about synthetic CDOs).
DeleteClearly, one would not call people who believe that in the natural order of things money is a golden colored commodity, dug from the ground, "thinkers."
When the supply of money is said to be tied directly to the success of mining operations someone isn't thinking clearly.
The reader may also consider a few recent comments from Brad DeLong.
Noah Smith Needs Backup: Hoisted from the Archives: Sources of Austrian Confusion
http://delong.typepad.com/sdj/2012/07/noah-smith-needs-backup-hoisted-from-the-archives-sources-of-austrian-confusion.html
The "money" quote:
We accept money because if we don't have any money we have to buy commodities with other commodities, and when we do so we are unlikely to receive the cost of production for what we sell. Have you ever tried to buy a latte at Peets with a copy of Ludwig von Mises's Money and Credit? It does not go well.
Austrians as a whole do not believe that FRB is theft. Rothbardians who are at the fringe of the Austrian movement do run around screaming that FRB is theft, but that is to be fair the least absurd of their claims.
DeleteThere's so much modesty in this thread. We have "Alexander Hamilton" here, where is "Lord Keynes" I wonder?
ReplyDeleteCurrent, meeting invincible ignorance requires a plan statement of wherein and how people are wrong.
ReplyDeleteThese rules, are they binding means chosen or goals set? I want a central bank to have a clear set of goal(s). I don't want to bind them about the means chosen.
ReplyDeleteLorenzo
DeleteHaving goals, beyond survival, is contradictory.
For example, how would you express as a goal the need for the Fed to be an instrument of foreign policy in, say, stepping in to buy Greek or Spanish bonds in order to prevent a civil war in either country?
You want what life doesn't offer. Simple solutions to complex problems.
Grow up
"Having goals, beyond survival, is contradictory."
DeleteYour life sucks Hamilton.
I think the thing about Taylor's statement is not so much that it is wrong--it is not wrong; rule by experts is the defining characteristic of the modern political order--, but that it applies equally to Taylor as well.
ReplyDeleteAfter all, who comes up with these rules if not another bunch of experts? And, if it is another bunch of experts, who are they? Well, they sure include John Taylor, creator of the famous Taylor rule.