What Is a Model?

by Gene Callahan

I’ve been pondering this point a bit lately, and this seems like a good place to share my musings and get some feedback. The main questions I’ve been pondering are things like, ‘How is a model “accurate”?’ ‘What makes something a model of one thing and not another?’ ‘How do we know how to “use” the model in some activity?’

Let’s consider a blueprint for a house. It consists of some blue lines on white paper. You give it to me, ignorant of building practice, and tell me ‘Build this right here’, and indicate a piece of ground. I see there is a scale conversion on the blueprint, say, 1 inch = 3 feet. I figure out the requisite enlargement of the figure — then I go and paint a white rectangle on the ground of that size, and proceed to paint blue lines on it.

An ally on the left? And bleg results

by Sandy Ikeda

This passage is from a piece in, of all places, Scientific American, from, of all people, Jeffrey Sachs:

During the decade from 1995 to 2005, then-Federal Reserve chairman Alan Greenspan over-reacted to several shocks to the economy. When financial turbulence hit in 1997 and 1998—the Asian crisis, the Russian ruble collapse and the failure of Long-Term Capital Management—the Fed increased liquidity and accidentally helped to set off the dot-com bubble. The Fed eased further in 1999 in anticipation of the Y2K computer threat, which of course proved to be a false alarm. When the Fed subsequently tightened credit in 2000 and the dot-com bubble burst, the Fed quickly turned around and lowered interest rates again. The liquidity expansion was greatly amplified following 9/11, when the Fed put interest rates down to 1 percent and thereby helped to set off the housing bubble, which has now collapsed.

Keynes: Stimulus Follows Stability and Not Vice Versa

by Mario Rizzo

 

I have been arguing for some time, both here and elsewhere, that the ideas of John Maynard Keynes after the mid-1930s and into the 1940s are more sophisticated that the prime-the-pump notions of many modern day economists who call themselves Keynesians. Keynes, himself, evolved away from those simple ideas he advocated in earlier years.

Coffeehouse Culture: an uncommon economic indicator — maybe

by Sandy Ikeda

I’ve noticed in the past 6 months or so that it’s been getting harder even on weekdays to find a seat at my preferred local coffeehouse (aka “the office”), and much too frequently lately I’ve had to bail to my second choice, which very often is also full. It’s not the cold weather because the crowding these days is a lot worse than in winters past. My wife suggests it’s the recession, with the growing reserve army of the unemployed – who in my nabe would mostly have worked on Wall Street – choosing to spend its time sipping joe in public than at home. Sounds plausible, but I’m too timid to ask anyone straight out if they’re there because they lost their job.

Anyway, just another, admittedly trivial, reason to hope this recession ends quickly. (But it won’t – not for another two years, I think, when inflation will be double-digit.)

Bleg: Which Austrians called the Panic of 2008?

by Sandy Ikeda

A comment from Laeeth Isharc on an earlier post raises a fair but, at least for me, uncomfortable point:

…Austrians/Hayekians might perhaps be within a minority of economists able to foresee the disastrous consequences of the inevitable bust…. But I don’t recall seeing a single piece by Austrian economists in the academic or policy world warning about the dangers of such a policy in the contemporary context.

So help me out: Who, if anyone, firmly within the Austrian camp — let’s say associated with NYU, GMU, WVU or current members of the SDAE — called this latest boom and bust? I certainly didn’t.

I’ll be generous in interpretting “call” (i.e., exact timing and magnitudes not essential — so pattern predictions are OK), but please respond with references to published writings, including articles and, I guess, blog posts.

Economic Planning versus Democracy: Illustrations from the Commentators

 

by Mario Rizzo

 

Some time ago I posted  “Planning and Democracy” and the related “How Hayek Explains Bush on the Auto Bailout.” Since then I have been struck by how almost every day we see the tension between central direction of economic resources and democracy manifested in the attitudes and analysis of commentators. Here is a small sampling, followed by my analysis. Forgive the length of the quotations but they are highly instructive.  

 

 

1. Carl Bernstein, the noted journalist, on the Morning Joe TV show on MSNBC:  

“Everything we have been hearing this morning on this broadcast indicates that the reason Barack Obama is showing such masterful- and I think we can use that word- leadership so far is that he’s in the process of solving the problem of the U.S. Congress, the fact that it is a largely dysfunctional institution. That he’s got to work around it to get this economic program moving and through.”

Taylor Rule and Fed Witches’ Brew

By Chidem Kurdas

Bubble, bubble, toil and trouble—that’s an apt metaphor for the Federal Reserve policies meticulously dissected by Stanford professor John Taylor, in the Wall Street Journal and other places.  He shows that the Fed set the financial crisis in motion and then made it worse.

Relative to the pattern that held since 1987 – a standard that has come to be known as the Taylor Rule – the Fed kept interest rates exceptionally low in 2002-2006.  Easy credit got real estate prices bubbling, which convinced folks that property prices go only one way and concealed the risk of price declines. Hence homeowners, developers and banks over-extended themselves.

Once the credit bubble collapsed in 2007, the excessive debt became rancid. Taylor argues that the Fed mis-diagnosed the problem as a lack of liquidity. Once again opening the spigot and cutting US rates, it brought down the US dollar. The price of oil, being denominated in dollars, consequently went through the roof. That wrecked household budgets and people responded by curtailing consumption. Thus economic conditions worsened.

Infrastructure: How the seen crowds out the unseen

by Sandy Ikeda

So far I’ve come across no discussion of the consequences that the massive infrastructure spending touted in Stimulus Package I (there will of course be others) will have on what Nathan Glazer called “the fine structure of society” in the local communities it will impact.

A new freeway, for example, might make it possible to get from point A to point B faster, but it can also reduce the local economies of A and B, as well as those in between, to barren border vacuums. Note that this is apart from whether they will be built in a timely manner or if the measured economic benefits they generate somehow cover their construction costs.

Because nearly all of the debate has taken place within a macroeconomic framework, most public intellectuals seem to have neglected how such a massive and rapid increase in physical-infrastructure might undermine this fine structure. Some have mentioned the “bridge to nowhere” syndrome or questioned whether the stimulus spending will actually stimulate quickly enough. And a few, like my colleague Mario Rizzo, have brought up the important resource-allocation effects. But I’m talking about something different here.

Why Obama’s Stimulus Won’t Work and What Might

by Mario Rizzo

 

The fiscal stimulus package has passed. But the argument is not over. I gave a talk at the Club for Growth-Heritage Foundation conference, “Economic Recovery: Free Markets vs. Big Government” this past Tuesday just as the bill passed the Senate. I have linked the text of my remarks here. My four key points are:

 

1. The central cause of the current economic state of affairs is bad monetary policy from 2002 through early 2006.

 

2. Stimulus should not stimulate or reinforce the misallocation of resources.

 

3. Stimulus should create economic value and not destroy it.

 

4. The best stimulus consists of incentive-relevant tax reductions.

Orthogonal mindsets

by Sandy Ikeda

At the Colloquium lunch on Monday, one of my esteemed colleagues wondered aloud whether Paul Krugman’s insistence that the humongous stimulus package needs to be much bigger wasn’t evidence of madness. Then, something came up during the actual colloquium – with Larry White, with whom we were discussing a chapter, dealing with Hayek versus Keynes in the 1930s, from his forthcoming book on the “clash of economic ideas” in the 20th century – that helped a non-macro-guy like me better understand, from a sociological perspective, why economists on different sides of the bailout/stimulus debate often just don’t seem to get each other.