PRINCETON, N.J. — Christopher Sims and Thomas Sargent have no simple solutions to the global economic crisis. But the work that won them the Nobel Prize in economics Monday is guiding central bankers and policymakers in their search for answers. http://www.washingtontimes.com/news/2011/oct/10/2-americans-win-nobel-economics-prize/ Here is the wikipedia page on Sargent http://en.wikipedia.org/wiki/Thomas_J._Sargent He seems to have a very diverse background and I don't think it can be argued that he is an overly "political" economist, but here is what he had to say about the Obama administrations implications that all economists agreed back in 2009 that the economy needed stimulus. https://files.nyu.edu/ts43/public/personal/sargent_Mpls_interview.pdf "In early 2009, I recall President Obama as having said that while there was ample disagreement among economists about the appropriate monetary policy and regulatory responses to the financial crisis, there was widespread agreement in favor of a big fiscal stimulus among the vast majority of informed economists. His advisers surely knew that was not an accurate description of the full range of professional opinion. President Obama should have been told that there are respectable reasons for doubting that fiscal stimulus packages promote prosperity, and that there are serious economic researchers who remain unconvinced" His take on the current unemployment situation also seems very different from what the administration will tell you is "universally accepted" that extending unemployment has a net positive effect. "The prospect that concerns me might sound like I’m hardhearted, but that’s just the opposite of my feelings. What you’ve seen in the recent recession— and it’s quite natural because it’s been so severe—is a tendency of Congress to expand unemployment benefits, over and over again.What Lars and my theory tells us is that if, in the United States, we create a system where unemployment and disability benefits are permanently extended in their generosity and their duration, we will inadvertently put ourselves into the situation that much of Europe has suffered for three decades. I don’t know enough about politics to predict whether that’s likely to happen. The unfortunate thing is you can see a multiple equilibrium trap here. Low unemployment rates enabled the United States politically to sustain a modest unemployment compensation system. But the politics of the current situation can imply that so long as unemployment is high, we’re going to extend the duration and generosity of benefits. And that extension, done out of the best of motives, is exactly what can lead to the trap of persistently high unemployment. An intriguing thing is that some European countries like Sweden and Denmark are now moving exactly in the opposite direction." While you may agree or disagree with this guy, he certainly does throw a monkeywrench in the administrations implication that "everybody agrees" that we need stimulus and people are only opposing it for "political" reasons, not economic reasons.
Interesting if true. One of my hobbyhorses around P&CE is that economists are awful on the economy, that historians are better. Just thought I'd point that out.
Neil Buchanan, who is both an economist and a law professor (not sure how he would fit into your calculus) comments on Sims and Sargent.... http://www.dorfonlaw.org/2011/10/another-way-to-know-that-keynesians-are.html Definitely worth the read, as are most of Buchanan's blog posts.
And these guys support Obama's actions therefore Obama is right therefore I do a victory dance. Told ya it was interesting if true. An interesting bit from yoss' article. The RE theorists are...how can I put this?...batshit insane. Anyone who has ever participated in any human endeavor, from coaching U-littles soccer to the PTA to Thanksgiving dinner with the family realizes this assumption is as stupid as stupid can be and completely contrary to the human experience. On a more serious note, embedded in that article is my basic problem with economists. They have a theory about human behavior and then build from there. It's stupid. They should observe human behavior and THEN come up with their theory of human behavior and build from there.
From what I have read about Sargent I think he would not approve of anything entitled, "Another Way to Know That the Keynesians Are Right" because it is not about whi is "right" and who is "wrong" for him, it is about understanding the real world results of policy.
Professor Sims doesn’t want to be pigeonholed. “I’m not ‘non-Keynesian,’ ” he said, adding that he has been an active “promoter of new Keynesian macroeconomic models,” because they “are the place in our profession where theory and data and policy decision-making are coming together.” “It doesn’t really make much sense to stand on the sidelines and take potshots at them,” he said. “If you don’t like the way they’re working, you should try to do better.” He and Professor Sargent have been “trying to do empirical macroeconomics using formal tools of statistics,” he said. “Those tools aren’t in themselves ideological.” Professor Sims spoke favorably of the Obama administration’s fiscal stimulus programs, which are Keynesian in their countercyclical spending. “An expansionary fiscal policy is probably what we need right now,” he said. http://www.nytimes.com/2011/10/16/y...s-uneasy-with-labels.html?_r=2&pagewanted=all Gasp. The Wall Street Journal stretches the truth once again.
This is a GIANT red herring. No one has suggested that unemployment benefits be extended permanently. It's the same as suggesting that Keynsean economists favor the general growth of government because they favor stimulus spending. That's ludicrous. Sargent is an economist, and if he agreed with the conclusions in the paper it wouldn't matter what it's titled. If, according to Sargent's views, a Keynsean response to a problem is the correct one, it's correct regardless of who said it or what they called it.
The following line is also somewhat disingenuous. Sweden and Denmark may be moving in the opposite direction, but their unemployment benefits are still way more generous than those in the US. And the study by the SF (?) Fed indicated that extending the duration of benefits had likely increased the unemployment rate by 0.5%. So we'd still probably have unemployment stuck of almost 9% even without those extensions.
Isn't reducing the unemployment rate in this instance just a gimmick of changing U1 without changing U6?
I've always loved that argument against temporary unemployment benefits. If we force people to live in the streets, they'll be more incentivized to get jobs!
And how long have those "temporary" benifits been extended now? If we believe some of these incredible multipliers that some people claim unemployment benifits create then why is are we having such a hard time pulling out of this employment slump? Do you really believe people don't take into consideration how long they will be getting unemployment with their willingness to take a job that they may see as a downgrade from their previous job? Do you believe unemployment checks and the streets are really the only choice for a significant number of people. Especially in this day of two wage earner families you don't think some people make a concsious decision that the unemployment check is better than going back to work? For instance let's say my wife was layed off, but my company is offering over time. Maybe it makes much more sense for her just to stay home with the kids and collect unemployment and for me to pick up some overtime to make up some of the lost wages. In addition her being home allows her to saves on some expenses like reducing the amount she spends on clothing and dining out. So overall her unemployment isn't a huge hit on the family budget, but it does reduce the amount of spending we do as a family. In that case is she going to run out and take a job that might pay her 2/3's of what she was making before she got layed off? Maybe she has even decided that she probably won't go back to work at all until, the kids get older, but she will certainly keep collecting the unemployment checks as long as they are available. I personally have a friend who is a union electrician, and he turned down several offers to work until he got to the point where he was getting close to running out of unemployment. Then he took something, even though it was not the job he preferred.
Right, the articl basically says it is foolish when people try to claim that economists support their position when the economists really are not taking a position, but I am going to take a few quotes out of context to claim that these particular economists are on my "side". Before you claim that I was using a select quote to prove they were on my "side" I will say that the point of this post was not to claim any such thing. It was simply to point out that people who try to claim that there is some type of universal agreement among "respected" economists that we need the type of stimulus that Obama claims we need are certainly overstating their case, and that there are valid economic reasons to believe that the stimulus will not work as advertised.
The goal is to maximize economic wellbeing, not to set incentives perfectly. Yes, there are going to be some perverse results when the government gives you money to do nothing. I'm OK with that. As for the multiplier nonsense - give me a break. Unemployment benefits are a tiny part of the economy; even if they work twice as well as the most enthusiastic Keynesian thinks, they're not going to be more than a blip overall. Finally, the fact that we've had unemployment benefits extended for a while in no way indicates they will be permanent. It's a terrible red herring.
First, please explain in specific detail how Professor Buchanan was taking a few quotes out of context. Second, not surprisingly, you missed the real point of Professor Buchanan's post. Here, I'll quote where he summarizes it....
Private employment is actually bouncing back at a respectable pace. It's gvt. employment that's dropping like a stone. Interesting, that. Conservative doctrine is that the public sector is a drag on the economy so decreasing public employment should be teh awesome. It's almost like reality has a liberal bias.
OK, Buchanan writes: "Sargent rightly says that this assumption is built into all modern economic models. That assumption, however, is not the rational expectations assumption at all. Rather, it is the assumption that expectations matter in some way. And, as I said, Keynesian models -- which support expansionary fiscal and monetary policies -- can easily incorporate assumptions about how expectations are formed. So long as the expectations are not "rational" in the extremely stylized sense that the anti-Keynesians hypothesized, you get a Keynesian model." So he is making it sound like Sargent is rather "wishy washy" about expectations. But if you read the entire article he is more forcefull than the quotes provided: http://www.econlib.org/library/Enc1/RationalExpectations.html "proponents of the rational expectations theory are more thorough in their analysis of—and assign a more important role to—expectations. The influences between expectations and outcomes flow both ways. In forming their expectations, people try to forecast what will actually occur. They have strong incentives to use forecasting rules that work well because higher "profits" accrue to someone who acts on the basis of better forecasts, whether that someone be a trader in the stock market or someone considering the purchase of a new car. And when people have to forecast a particular price over and over again, they tend to adjust their forecasting rules to eliminate avoidable errors. Thus, there is continual feedback from past outcomes to current expectations. Translation: in recurrent situations the way the future unfolds from the past tends to be stable, and people adjust their forecasts to conform to this stable pattern. The concept of rational expectations asserts that outcomes do not differ systematically (i.e., regularly or predictably) from what people expected them to be." When Buchanan claims that " And, as I said, Keynesian models -- which support expansionary fiscal and monetary policies -- can easily incorporate assumptions about how expectations are formed." Is like claimimg I can put a dick on a girl and it doesn't make a difference . A model is just a way of analyzing a bunch of data based on certain conditions. What makes it a Kesyan model is the assumptions that go into that analysis. So to claim that a Kensyan model can include the assumptions that Sargent makes is just proof that the Kensyan models are right, ignores the fact that if you change the assumptions the way Sargent suggests you quite possibly could end up with results that are very non-Kensyan. Of course the proof of the pudding would be in the tasting. If Buchanan could site a model that actually did include the assumptions as defined by Sargent and he still came up with the same kensyan results he would have something, but as far as this article goes, he is just blowing smoke. as for this part of the quote: He provides no quote to support this "basic approach" statement. That is his spin on a couple of quotes from Sims. I am sure somone who was more favorable to republicans could question Sims draw some quote out of him that would be critical of the democrats and supportive of the republicans. I don't think either of these guys are political, and I think they would be very uncomfortable to be seen as a supporter of one of the parties over the other. and for this part Once again this is his spin. I don't think his defense is minimal at all, and his own assertion that you could just change the assumptions of the Kensyan models and the implication that the results would still be Kensyan, without any data to support it, are meaningless.
OK, so then it just becomes an opinion about how if those "peverse" results are worse than the econmic wellbeing you seem to believe the benifits provide. That is a fair argument so why do you bring up the toxic rhetoric about people being thrown in the streets? I think Sargent is doing food work trying to gleen from the history how negative the "perverse effects" might be. Unfortunately if he tries to do that some people will accuse him of being heartless and not caring about the unemplyed, or of being "batcshit crazy" as one of our posters here have suggested. I think part of the argument is that it is more than just impact of the benifits themselves, it is the expectations that they are helping to drive and the impact of those expectations. It is your opinion that it is a red herring, but Sargent has studied the european economy and their unemployment benifits a lot and he is concerned that we are moving in that direction. I really don't know who will have the political will to try to bring unemployment benifits back down to the historical levels we have seen in this country, when both parties seem to have bought into the Kensyan theory that uneployment benifits are a net "good" for the economy.
Well no, it's not that simple. But the "toxic" rhetoric isn't to disparage Sargent, it's to demonstrate that taking this idea to an extreme is silly. No one here has suggested any of that. Sargent's work itself is good economics. It's when people argue that due to his conclusion we should stop paying unemployment benefits that I get annoyed. Now, mind you, Sargent himself didn't say that - he merely concluded that it lowers employment. Which you'd expect it to, really. Yes, I'm well aware of that - expectations are very important to economic forecasting. But again, no one is reasonably expecting the unending extension of these benefits. 1. The last sentence is completely wrong. It is not Keynsean theory that unemployment benefits are a universal good. Keynesean economics advocate significant increase in spending during liquidity traps. Unemployment benefits are almost entirely spending (people who aren't working are likely to spend that money to live on), they're good for the economy at the moment. There is absolutely no Keynesian theory that states unemployment benefits are good in all circumstances. 2. We keep having to extend unemployment benefits, which we have only done in the face of the worst economic period in the last 70 years. That's not an indication that we're heading for a European-style dysfunctional employment market (whether those markets are, in fact, dysfunctional is another discussion). There is no political will needed to stop extending unemployment benefits once unemployment falls. It'll happen automatically. 3. Dude, at least use a spell check. I'm not a fan of spelling smack, but when using Firefox your entire post appears red.
Taking what idea to the extreme? The only one being extreme was you. "The RE theorists are...how can I put this?...batshit insane." sorry I stand corrected Superdave said insane, not crazy. I don't know of anyone who has suggested we should stop paying all unemployment benefits, the question is at what point do they become self defeating. Ok, and just like politicians will not undestand the complete ramifications of what Sargent is saying, they also will not understand the complete ramifications of the Kensyan models either. This is a matter of degree. It seems like the Republicans have lost the will to fight the extensions right now, and if it appears to the public that the extensions actually helped the economy, then it will be even harder to justify cutting them. There are going to be all kinds of disagreement about what is the optimal level of unemployment benefits among economists during different times but I think Kensyans will always think the optimal level is higher than Sargent believes, as they have argued that if the generous benefits were really the problem then how come there were times in the past when the European unemployment rates were on par with the american rates in spite of their more generous benefits. I think my concern along with Sargent is that politicians will misuse these opinions to erode the political will to reduce unemployment benefits. After all if generous benefits were good when there were a lot of people unemployed, they should be good when unemployment comes down because they won't cost us nearly as much in real dollars anyway. Well that is strictly your opinion. I definitely feel that the Democrats will take any opportunity available to them to bash republicans when they suggest bringing the benefits back to historical levels in the U.S. They may not remain at the current levels, but I share Sargent's concern that they will remain at sup-optimal levels. LOL. Sorry about that. I have been trying to respond to this thread while I have also been pretty busy at work, and the faster I go, the more likely my posts will be filled with misspelling and typos.