Wednesday, December 19, 2012

Williamson responds

I learned macro from the guy's book, so when he takes notice of my blog it's worth linking to. He writes:

"Weird? Krugman said macroeconomics was rotten and half the field should be displaced. I don't know how you read that as a dispute with Fama, who is not a macroeconomist, or Casey Mulligan, who may be a macroeconomist but is not taken seriously by anyone I know. What's true, which I think you understand, is that Krugman has wrapped himself up in contradictions. Back in the day, he did normal economics as a trade theorist, but he doesn't think macroeconomists should be allowed to do normal economics. We should be put back in the IS/LM box."

1. Whenever Krugman gets specific about what bothers him about "freshwater", he talks about strong Ricardian equivalence, the Treasury View, and demand denialism. I've said a couple times now that I agree Krugman overstates the extent to this, but it is out there and the thing is casual statements to this effect are even more common. And casual allusions to these sorts of things are what mislead the public and policymakers, which is why Krugman is so concerned about it I think.

2. I don't know what contradictions Williamson is thinking of here, and I have no idea what he means by "he doesn't think macroeconomists should be allowed to do normal economics". Huh? You are not helping to convince me your reaction isn't weird, Prof. Williamson.

3. On IS-LM: I think Krugman has a point here, that it's not as defunct as people suggest. I don't think he's arguing for a resurgence in formal economics, but the point is the old workhorse is clearly not as useless as a lot of people thought. Think about what we've replaced it with: an AD relation, plus a Phillips Curve, plus a monetary policy reaction function. All that is built up from various microfoundations in a way the original wasn't. So we've put an endogenous money spin on the LM curve and sometimes we don't even call the IS curve an IS curve, but the story is basically still there, which is precisely why you can get the same results in new consensus models that you got out of the IS-LM model. So it's not really the relic or the embarrassment that a lot of people treat it as - it was a first cut at the same things we still talk about today. I think Krugman talks about the IS-LM model because every one of his readers who ever had a macro course has seen it at some point, and also because it just goes to show that we do not need to reinvent the wheel to understand a lot of what's going on.

Of course none of this is really what I thought was weird about Williamson's post!

So while I have his attention, let me try to get back to that. The post began going on about how Krugman isn't up on modern macro. In a detailed sense this is almost certainly true, but Williamson overstates his case: Krugman has a good grasp of the broad architecture of the new consensus in macro and probably a better sense of the details of it than most other economics bloggers out there. He probably doesn't have the same sense of it that people who just went through it (like Noah Smith) do or people who are active in the work (like Stephen Williamson) do, but lets not go overboard.

So after making these accusations about Krugman, Williamson starts to talk about this modern macroeconomics that Krugman allegedly doesn't get. And what does he serve up to us?

Forty year old macro that is well integrated into all the work that Krugman does and all his monetary and fiscal policy views.

Come on, Prof. Williamson. That's kind of a weird reaction, you have to admit!

My original point is that I know you're on top of modern macro, and that's exactly why this reaction of yours is so disappointing. I know Krugman probably isn't up on all the details of modern macro work. So why don't you share some of those details with us that might give us pause about some of Krugman's claims! Don't give us forty year old theory and tell us it's over Krugman's head.


  1. OK Daniel since I believe you, that you really don't get what is going on rhetorically here, let me switch the roles. If I put the issues into the following analogy, maybe it will click.

    MAJOR FREEDOM: Man, 95% of the economics profession--everyone but the Austrians--are a statist cult. The Austrians are great: they understand the importance of investment to growth, they understand the importance of subjectivism in price theory and they understand that monetary policy can cause the boom-bust cycle.

    DANIEL KUEHN: MF this is even more deranged than your usual comments. The standard Solow model understands saving and investment lead to increases in output, everybody since at least Pareto uses subjective price theory, and everyone except the RBC guys think central banks affect or even cause the business cycle. What the heck are you talking about?! I guess you don't know anything about economics.

    BOB MURPHY: Whoa! This is an odd post by Daniel. I agree with him that MF overstepped in calling 95% of the profession a cult, but Daniel's implication that MF doesn't know about investment or subjectivism is just plain goofy. Doesn't Daniel realize MF has read Menger, Mises, and Rothbard? Where does Daniel get off implying MF doesn't know this stuff?

    ^^ Do you see how goofy my response is here, Daniel?

    1. That's what you were suggesting in your post too, but where does he say that? Can you show me some crucial sentence I'm missing that suggests he's saying "what you say is special to you is actually something we all agree on?". I get the claim you're making, I can't see how you could possibly read it that way.

      He isn't trying to convince Krugman everyone agrees with him. He is misdiagnosing what bothers Krugman. Why else would he write things like: "There was nothing weird about what these nerds were doing - they were simply applying received theory to problems in macroeconomics. Why could that be thought of as offensive?"

      He thinks Krugman is complaining about forty year old economics that's all over the place in Krugman's own work.

      I get your argument - I understand what you are claiming. What I need is a reason to believe that that's what Williamson is saying. Is there anything indicating he thinks Krugman is arguing something that he agrees with. He seems pretty intent on the idea that Krugman is missing or doesn't agree with what he thinks.

  2. Well, put me down as somebody who thinks that Stephen Williamson really does not get macroeconomics--modern or not modern.

    For example, consider Williamson's:

    >If the central bank targets the nominal interest rate at a low enough rate forever, you have to get deflation. By arguing against this you're making yourself look silly…

    In my view, if a central bank sets and holds the nominal interest rate at a low level for a "long enough" period of time, two things can happen:

    1. if the central bank's action is a response to expected deflation and sets the real interest rate at the natural rate at which price-change outcomes are consistent with expectations, you get the expected deflation;

    2. if the central bank's action is a shift in policy from a state in which there is not expected deflation, you get accelerating inflation and then hyperinflation.

    There is no "have to get deflation" in what I at least regard as "standard monetary theory".

    In my view, Stephen Williamson does not understand how to use the techniques of macroeconomic modeling when he simply wipes the accelerating-inflation-leading-to-hyperinflation outcome from his scenario. The economy can be in a perfect-foresight equilibrium. It does not have to be in a perfect-foresight equilibrium.

    Or look at his truly bizarre recent rants against Narayana Kocherlakota. There's an awful lot of what I regard as the basics that Williamson simply does not get at any level...


    Brad DeLong

  3. According to Williamson the Eurozone must be run by evil gnomes.

    It may make sense to talk of "tranquil times" and "soundness" when the main point of debate is how the FED should signal policies for best effect on expectations, it makes much less sense when the president of your Central Bank is spouting nonsense about "confidence" magically fixing everything while the very currency area he's set to keep working is failing because of problems that were foreseen decades ago by everyone and his grandmother, problems that all the high officials still refuse to acknowledge, let alone fix.

    In fact, 100% of the "serious guys" in public economic debate here in Italy are on the same position of Giavazzi, while all the other positions are represented in public debate as "fringe"/"conspiracy theorists"/"marxist" (make your pick).


All anonymous comments will be deleted. Consistent pseudonyms are fine.