Another cup of coffee

12 August, 2018 at 11:52 | Posted in Varia | 1 Comment

At last (on Via Garibaldi, Genova) we found a cup big enough for the morning coffee needs of my better half …

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Being an economist, I, of course, came to think of a famous experiment involving coffee …

Pros. Kahneman, Knetsch & Thaler conducted a study to see how the endowment effect influences our decision making.

The scientists randomly divided participants into buyers and sellers and gave the sellers coffee mugs as a gift. They then asked the sellers for how much they would sell the mug and asked the buyers for how much they would buy it.

EndowmentEffectResults showed that the sellers (who owned the mugs) placed a significantly higher value on the mugs than the buyers did. They were willing to sell a mug for $7.12 while buyers were willing to pay $2.87 (median reservation prices).

People appreciate things that they already own more than those which they might own. The fear of losing the mug (loss aversion) becomes the cause of the contradiction in the evaluation of the cost of the coffee mug.

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Mein Herr und mein Gott

11 August, 2018 at 22:46 | Posted in Varia | Leave a comment

 

Modern macro — a total waste​ of time

11 August, 2018 at 11:33 | Posted in Economics | 2 Comments

While one can understand that some of the elements in DSGE models seem to appeal to Keynesians at first sight, after closer examination, these models are in fundamental contradiction to Post-Keynesian and even traditional Keynesian thinking. The DSGE model is a model in which output is determined in the labour market as in New Classical models and in which aggregate demand plays only a very secondary role, even in the short run.

In addition, given the fundamental philosophical problems presented for the use of DSGE models for policy simulation, namely the fact that a number of parameters used have completely implausible magnitudes and that the degree of freedom for different parameters is so large that DSGE models with fundamentally different parametrization (and therefore different policy conclusions) equally well produce time series which fit the real-world data, it is also very hard to understand why DSGE models have reached such a prominence in economic science in general.

Sebastian Dullien

Neither New Classical nor ‘New Keynesian’ microfounded DSGE macro models have helped us foresee, understand or craft solutions to the problems of today’s economies. But still most young academic macroeconomists want to work with DSGE models. UnknownAfter reading Dullien’s article, that certainly should be a very worrying confirmation of economics — at least from the point of view of realism and relevance — becoming more and more a waste of time. Why do these young bright guys waste their time and efforts? I think maybe Frank Hahn gave the truest answer when interviewed on the occasion of his 80th birthday, he confessed that some economic assumptions didn’t really say anything about ‘what happens in the world,’ but still had to be considered very good ‘because it allows us to get on this job.’

The Gray Ghost

10 August, 2018 at 16:57 | Posted in Varia | Leave a comment

 

For Tora and David, with whom, when they were just little kids, I spent hours and hours watching this​ series back at​ the beginning of the 90’s.
They were my heroes then.
They still are.

Another dime in the jukebox

10 August, 2018 at 16:21 | Posted in Varia | Leave a comment

 

Gently​ weeping​

10 August, 2018 at 16:00 | Posted in Varia | Leave a comment

 

Abba Lerner and the nonsense called ‘Ricardian equivalence’

9 August, 2018 at 10:43 | Posted in Economics | 9 Comments

According to Abba Lerner, the purpose of public debt is “to achieve a rate of interest which results in the most desirable level of investment.” He also maintained that an application of Functional Finance will have a tendency to balance the budget in the long run:

There is no reason for assuming that, as a result of the continued application of Functional Finance to maintain full employment, the government must always be borrowing more money and increasing the national debt …

dec3bb27f72875e4fb4d4b62daebb2fd161b36392c1a0626f00cfd2ece207d84Full employment can be maintained by printing the money needed for it, and this does not increase the debt at all. It is probably advisable, however, to allow debt and money to increase together in a certain balance, as long as one or the other has to increase …

Since one of the greatest deterrents to private investment is the fear that the depression will come before the investment has paid for itself, the guarantee of permanent full employment will make private investment much more attractive, once investors have gotten over their suspicion of the new procedure. The greater private investment will diminish the need for deficit spending …

As the national debt increases it acts as a self-equilibrating force, gradually diminishing the further need for its growth and finally reaching an equilibrium level where its tendency to grow comes completely to an end. The greater the national debt the greater is the quantity of private wealth.

Abba Lerner

According to the Ricardian equivalence hypothesis, the public sector basically finances its expenditures through taxes or by issuing bonds, and bonds must sooner or later be repaid by raising taxes in the future.

If the public sector runs extra spending through deficits, taxpayers will according to the hypothesis anticipate that they will have to pay higher taxes in future — and therefore increase their savings and reduce their current consumption to be able to do so, the consequence being that aggregate demand would not be different to what would happen if taxes were raised today.

Describing the Ricardian Equivalence in 1989, Robert Barro writes (emphasis added):

The substitution of a budget deficit for current taxes (or any other rearrangement of the timing of taxes) has no impact on the aggregate demand for goods. In this sense, budget deficits and taxation have equivalent effects on the economy — hence the term, “Ricardian equivalence theorem.” To put the equivalence result another way, a decrease in the government’s saving (that is, a current budget deficit) leads to an offsetting increase in desired private saving, and hence to no change in desired national saving.

Ricardian equivalence basically means that financing government expenditures through taxes or debts is equivalent since debt financing must be repaid with interest, and agents — equipped with rational expectations — would only increase savings in order to be able to pay the higher taxes in the future, thus leaving total expenditures unchanged.

There is, of course, no reason for us to believe in that fairy-tale. Ricardo himself (!) didn’t believe in Ricardian equivalence. In ‘Essay on the Funding System’ (1820) he wrote:

We are too apt to think that the war is burdensome only in proportion to what we are at the moment called to pay for it in taxes, without reflecting on the probable duration of such taxes. It would be difficult to convince a man possessed of £20,000, or any other sum, that a perpetual payment of £50 per annum was equally burdensome with a single tax of £1000.

That the theory does not fit the facts we already knew. Studies that have empirically tried to test the theory have over and over again confirmed how out of line with reality Ricardian equivalence is. This only underlines that there is, of course, no reason for us to believe in that fairy-tale. Or, as Nobel laureate Joseph Stiglitz has it:

Ricardian equivalence is taught in every graduate school in the country. It is also sheer nonsense.

My first album

8 August, 2018 at 23:10 | Posted in Varia | Leave a comment

 

Collider bias (wonkish)

8 August, 2018 at 11:51 | Posted in Statistics & Econometrics | Leave a comment

 

Birger Schlaug skärskådar Annie Lööfs ordblajande i DN

7 August, 2018 at 11:24 | Posted in Politics & Society | Leave a comment

Annie LööfBirger Schlaug gjorde igår en uppfriskande och njutningsfull närläsning av den Margaret Thatcher och Ayn Rand älskande Annie Lööfs DN-Debatt-artikel. Inte mycket blir kvar av politikerbroilern Lööfs tyckmyckentrutade mumbo jumbo. Tag och läs! [h/t Jan Milch]

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