It’s not the debt we need to fix, stupid! It’s our thinking.

23 Jul, 2021 at 15:22 | Posted in Economics | Leave a comment

The ad nauseam repeated claim that our public debt is excessive and that we have to balance the public budget is nothing but absolute nonsense. The harder politicians — usually on the advice of mainstream establishment economists — try to achieve balanced budgets for the public sector, the less likely they are to succeed in their endeavour.darling-let-s-get-deeply-into-debt And the more the citizens have to pay for the concomitant austerity policies these wrong-headed politicians and economists recommend as ‘the sole solution.’

Public debt is normally nothing to fear, especially if it is financed within the country itself (but even foreign loans can be beneficent for the economy if invested in the right way). Some members of society hold bonds and earn interest on them, while others pay taxes that ultimately pay the interest on the debt. The debt is not a net burden for society as a whole since the debt ‘cancels’ itself out between the two groups. If the state issues bonds at a low-interest rate, unemployment can be reduced without necessarily resulting in strong inflationary pressure. And the inter-generational burden is also not a real burden since — if used in a suitable way — the debt, through its effects on investments and employment, actually makes future generations net winners. There can, of course, be unwanted negative distributional side effects for the future generation, but that is mostly a minor problem since when our children and grandchildren ‘repay’ the public debt these payments will be made to our children and grandchildren.

To both Keynes and Lerner — as to today’s MMTers — it was evident that the state has the ability to promote full employment and a stable price level — and that it should use its powers to do so. If that means that it has to take on debt and underbalance its budget — so let it be! Public debt is neither good nor bad. It is a means to achieve two over-arching macroeconomic goals — full employment and price stability. What is sacred is not to have a balanced budget or running down public debt per se, regardless of the effects on the macroeconomic goals. If ‘sound finance,’ austerity and balanced budgets means increased unemployment and destabilizing prices, they have to be abandoned.

wvickreyWe are not going to get out of the economic doldrums as long as we continue to be obsessed with the unreasoned ideological goal of reducing the so-called deficit. The ‘deficit’ is not an economic sin but an economic necessity …

We have the resources in terms of idle manpower and idle plants to do so much, while the preachers of austerity, most of whom are in little danger of themselves suffering any serious consequences, keep telling us to tighten our belts and refrain from using the resources that lay idle all around us.

Alexander Hamilton once wrote “A national debt, if it be not excessive, would be for us a national treasure.” William Jennings Bryan used to declaim, “You shall not crucify mankind upon a cross of gold.” Today’s cross is not made of gold, but is concocted of a web of obfuscatory financial rectitude from which human values have been expunged.

William Vickrey

The real crises we are facing

22 Jul, 2021 at 17:07 | Posted in Economics | Leave a comment

The fact that 21 percent of all children in the United States live in poverty—that’s a crisis. The fact that our infrastructure is graded at a D+ is a crisis. The fact that inequality today stands at levels last seen during America’s Gilded Age is a crisis. The fact that the typical American worker has seen virtually no real wage growth since the 1970s is a crisis. The fact that forty-four million Americans are saddled with $1.7 trillion in student loan debt is a crisis. And the fact that we ultimately won’t be able to “afford” anything at all if we end up exacerbating climate change and destroying the life on this planet is perhaps the biggest crisis of them all.

These are real crises. The national deficit is not a crisis.

Can a government go bankrupt?
No. You cannot be indebted to yourself.

Can a central bank go bankrupt?
No. A central bank in a monetary sovereign country can always ‘print’ more money.

Do taxpayers have to repay government debts?
No, at least not as long the debt is incurred in a country’s own currency.

Do increased public debts burden future generations?
No, not necessarily. It depends on what the debt is used for.

Does maintaining full employment mean the government has to increase its debt?
No.

It is true that MMT rejects the traditional Phillips curve inflation-unemployment trade-off and has a less positive evaluation of traditional policy measures to reach full employment. Instead of a general increase in aggregate demand, it usually prefers more ‘structural’ and directed demand measures with less risk of producing increased inflation. At full employment deficit spendings will often be inflationary, but that is not what should decide the fiscal position of the government. The size of public debt and deficits is not — as already Abba Lerner argued with his ‘functional finance’ theory in the 1940s — a policy objective. The size of public debt and deficits are what they are when we try to fulfill our basic economic objectives — full employment and price stability.

Governments can spend whatever amount of money they want. That does not mean that MMT says they ought to — that’s something our politicians have to decide. No MMTer denies that too much government spendings can be inflationary. What is questioned is that government deficits necessarily is inflationary.

July 22, 2011 — a date which will live in infamy

22 Jul, 2021 at 10:55 | Posted in Politics & Society | Leave a comment

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Instrumental variables — in search for identification

21 Jul, 2021 at 17:52 | Posted in Statistics & Econometrics | Leave a comment

Nick HK (@nickchk) | TwitterWe need relevance and validity. How realistic is validity, anyway? We ideally want our instrument to behave just like randomization in an experiment. But in the real world, how likely is that to actually happen? Or, if it’s an IV that requires control variables to be valid, how confident can we be that the controls really do everything we need them to?

In the long-ago times, researchers were happy to use instruments without thinking too hard about validity. If you go back to the 1970s or 1980s you can find people using things like parental education as an instrument for your own (surely your parents’ education can’t possibly affect your outcomes except through your own education!). It was the wild west out there…

But these days, go to any seminar where an instrumental variables paper is presented and you’ll hear no end of worries and arguments about whether the instrument is valid. And as time goes on, it seems like people have gotten more and more difficult to convince when it comes to validity. This focus on validity is good, but sometimes comes at the expense of thinking about other IV considerations, like monotonicity (we’ll get there) or even basic stuff like how good the data is.

There’s good reason to be concerned! Not only is it hard to justify that there exists a variable strongly related to treatment that somehow isn’t at all related to all the sources of hard-to-control-for back doors that the treatment had in the first place, we also have plenty of history of instruments that we thought sounded pretty good that turned out not to work so well.

Nick Huntington-Klein’s book is superbly accessible.

Highly recommended reading for anyone interested in causal inference in economics and social science!

Causal discovery and the faithfulness assumption (student stuff)

21 Jul, 2021 at 12:35 | Posted in Statistics & Econometrics | Leave a comment

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For more on the (questionable) faithfulness assumption, cf. chapter six of Nancy Cartwright’s Hunting causes and using them.

Conditional probabilities (student stuff)

21 Jul, 2021 at 12:21 | Posted in Statistics & Econometrics | Leave a comment

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While the global super-rich are taking joyrides in space

21 Jul, 2021 at 11:32 | Posted in Politics & Society | 2 Comments

The World's Billionaires 2021 Timeline: Musk VS Bezos

Instead of putting billions of dollars into space tourism for the chosen few, think of what that money could have done in saving our climate and helping the poor and suffering in the world. One can have nothing but contempt for these super-rich ego-boosting ethical morons. And as if this wasn’t enough, we have a totally uncritical media reporting on the events. What a disgrace!

Alan Kirman debunking mainstream economics

19 Jul, 2021 at 15:36 | Posted in Economics | 1 Comment

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An economic theory that does not go beyond proving theorems and conditional ‘if-then’ statements — and do not make assertions and put forward hypotheses about real-world individuals and institutions — is of little consequence for anyone wanting to use theories to better understand, explain or predict real-world phenomena.

Building theories and models on patently ridiculous assumptions we know people never conform to, does not deliver real science. Real and reasonable people have no reason to believe in ‘as-if’ models of ‘rational’ robot-imitations acting and deciding in a Walt Disney-world characterised by ‘common knowledge,’ ‘full information,’ ‘rational expectations,’ zero transaction costs, given stochastic probability distributions, risk-reduced genuine uncertainty, and other laughable nonsense assumptions of the same ilk. Science fiction is not science.

For decades now, economics students have been complaining about the way economics is taught. Their complaints are justified. Force-feeding young and open-minded people with unverified and useless autistic mainstream theories and models cannot be the right way to develop a relevant and realist economic science.

Much work done in mainstream theoretical economics is devoid of any explanatory interest. And not only that. Seen from a strictly scientific point of view, it has no value at all. It is a waste of time. And as so many have been experiencing in modern times of austerity policies and market fundamentalism — a very harmful waste of time.

Alan Kirman presents a forceful critique of mainstream economics in general, and more specifically, of the kind of assumptions that  mainstream macroeconomic DSGE modelling (New Classical, ‘New Keynesian’, RBC, etc.) is built on. For most heterodox critics of mainstream economics the themes are probably well-known. That said, let me just give some brief comments on what Kirman at the end of the interview presents as an alternative to mainstream orthodoxy — agent-based modelling.

Agent-based models are formal models usually constructed using mathematical programming and performing simulations and ‘artificial experiments’ with the intention of being able to (more explicitly than in conventional mainstream game theory) describe aggregate effects and dynamics of interacting individuals and socio-economic structures without standardly having to assume equilibria, non-emergence, Walrasian auctioneers, representative agents, rational expectations, etc., etc..

Agent-based models come in different degrees of realism and are usually conceptualised as different kinds of self-organising complex systems. But one thing they all have in common is reliance on mathematical formalism. In essence the agent-based modelling endeavour in macroeconomics is an attempt at providing new alternative mathematical models where many of the bizarre and ridiculous known-to-be ‘unrealistic’ assumptions in standard DSGE models are replaced with other less ‘unrealistic’ assumptions. But the idea that mathematical modelling as such is always appropriate to apply is never seriously questioned. And that’s where I find it hard to follow. One set of mathematical tractability assumptions are substituted for another. But what if the mathematical modelling in itself is the problem? What if the use of mathematical-formalistic modelling in itself biases your research efforts in specific directions? If it is the mathematical-formalistic approach in itself that is the problem, we only end up with different models based on the same unquestioned mathematical modelling strategy. From my own critical realist perspective I can’t see that mathematical modelling is the self-evidently appropriate way to perform analyses of societies and economies. The kind of ‘closures’ demanded of the target systems for warranting the analyses, I would argue, simply often aren’t there.

As a critique of mainstream economics, yours truly fully appreciates the work done by people like Alan Kirman. But although their alternative agent-based models in many ways are superior to the more traditional mainstream ‘Walt Disney’ kind of models, I am not convinced that their unquestioned attachment to mathematical-formalist modelling is the right way to move forward in making economics a more realist and relevant science.

Which causal inference books to read

19 Jul, 2021 at 11:57 | Posted in Statistics & Econometrics | Leave a comment

Causal Inference Books Flowchart

Source

All suggestions are highly readable, but for the general reader, yours truly would also like to recommend The book of why by Pearl & Mackenzie.

Why economics has failed so miserably

18 Jul, 2021 at 16:01 | Posted in Economics | 1 Comment

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The economy is — as emphasised by both Keynes and Soros — pervaded by genuine uncertainty and reflexivity. The uncertainty makes the future difficult to anticipate and reflexivity often makes our expectations about the future something that actually changes the future. They both severely undermine the explanations and predictions that are made  within the standard economic models.

Gendern oder nicht gendern?

18 Jul, 2021 at 13:46 | Posted in Varia | Leave a comment

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Ascenseur pour l’Echafaud

17 Jul, 2021 at 23:24 | Posted in Varia | 1 Comment

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The problem with intersectionality

17 Jul, 2021 at 12:06 | Posted in Politics & Society | Leave a comment

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RCT — a questionable claim of establishing causality

16 Jul, 2021 at 11:33 | Posted in Statistics & Econometrics | 2 Comments

Amazon.com: Randomized Control Trials in the Field of Development: A  Critical Perspective eBook: Bédécarrats, Florent, Guérin, Isabelle,  Roubaud, François: Kindle StoreThe ideal RCT is the special case in which the trial’s treatment status is also assigned randomly (in addition to drawing random samples from the two populations, one treated and one not) and the only error is due to sampling variability … In this special case, as the number of trials increases, the mean of the trial estimates tends to get closer to the true mean impact. This is the sense in which an ideal RCT is said to be unbiased, namely that the sampling error is driven to zero in expectation …

Prominent randomistas have sometimes left out the “in expectation” qualifier, or ignored its implications for the existence of experimental errors. These advocates of RCTs attribute any difference in mean outcomes between the treatment and control samples to the intervention … Many people in the development community now think that any measured difference between the treatment and control groups in an RCT is attributable to the treatment. It is not; even the ideal RCT has some unknown error.

A rare but instructive case is when there is no treatment. Absent any other effects of assignment (such as from monitoring), the impact is zero. Yet the random error in one trial can still yield a non-zero mean impact from an RCT. An example is an RCT in Denmark in which 860 elderly people were randomly and unknowingly divided into treatment and control groups prior to an 18-month period without any actual intervention (Vass, 2010). A statistically significant (prob. = 0.003) difference in mortality rates emerged at the end of the period.

Martin Ravaillon

Don’t buy into the inflation scare

15 Jul, 2021 at 23:18 | Posted in Economics | 5 Comments

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