I'm Shovel Ready

Lots of carping on the ‘net about the likely slow pace of stimulus spending. Nevermind the pace, I want to know what’s in it. You actually have to dig quite a bit to get the details of the package (especially with the CBO web site down today). Fortunately, I always keep my shovel handy. Here’s what I see:

9702bc96-e756-11dd-adce-000255111976 Blog_this_caption(Click through to the live version to see the labels)

A few observations:

  • There’s $90 billion in unstated spending.
  • Infrastructure grabs the headlines, but education and health actually get the lion’s share.
  • The “green” portion of the stimulus looks rather small in context. It also seems out of balance – more $ for energy supply than energy efficiency. I’m not convinced that energy supply subsidies are very green.
  • The distribution of half the tax credits is unstated. How do you know the magnitude without knowing the components? Could it be that business tax credits constitute the majority? If so, that would be highly regressive.

Where’s the consulting sector in all this?

Some Links I Won't Have Time to Blog About

Paul Krugman’s letter to Obama

Reasoning-from-conclusions-to-assumptions? (a perspective on modeling)

Sell-off drops EUAs to $11.60/TonCO2

Via Nature, a google search doesn’t really produce 7 grams of carbon, and you can’t build carbon infrastructure to get to a low-carbon future.

Four new CCSP reports from the last days of the Bush administration:
Final Report of Synthesis and Assessment Product 4.1 (Coastal Sensitivity to Sea-Level Rise: A Focus on the Mid-Atlantic Region)
Final Report of Synthesis and Assessment Product 4.2 (Thresholds of Climate Change in Ecosystems)
Final Report of Synthesis and Assessment Product 2.3 (Aerosol properties and their impacts on climate)
Final Report of Synthesis and Assessment Product 1.2 (Past Climate Variability and Change in the Arctic and at High Latitudes)
Plus last month’s USGS report on abrupt climate change, buried over the holidays.

Are We Slaves to Open Loop Theories?

The ongoing bailout/stimulus debate is decidedly Keynesian. Yet Keynes was a halfhearted Keynesian:

US Keynesianism, however, came to mean something different. It was applied to a fiscal revolution, licensing deficit finance to pull the economy out of depression. From the US budget of 1938, this challenged the idea of always balancing the budget, by stressing the need to boost effective demand by stimulating consumption.

None of this was close to what Keynes had said in his General Theory. His emphasis was on investment as the motor of the economy; but influential US Keynesians airily dismissed this as a peculiarity of Keynes. Likewise, his efforts to separate capital projects from ordinary budgets, balanced if possible, found few echoes in Washington, despite frequent mention of his name.

Should this surprise us? It does not appear to have disconcerted Keynes. ‘Practical men were often the slaves of some defunct economist,’ he wrote. By the end of the second world war, Lord Keynes of Tilton was no mere academic scribbler but a policymaker, in a debate dominated by second-hand versions of ideas he had put into circulation in a previous life. He was enough of a pragmatist, and opportunist, not to quibble. After dining with a group of Keynesian economists in Washington, in 1944, Keynes commented: ‘I was the only non-Keynesian there.’

FT.com, In the long run we are all dependent on Keynes

This got me wondering about the theoretical underpinnings of the stimulus prescription. Economists are talking in the language of the IS/LM model, marginal propensity to consume, multipliers for taxes vs. spending, and so forth. But these are all equilibrium shorthand for dynamic concepts. Surely the talk is founded on dynamic models that close loops between money, expectations and the real economy, and contain an operational representation of money creation and lending?

The trouble is, after a bit of sniffing around, I’m not seeing those models. On the jacket of Dynamic Macroeconomics, James Tobin wrote in 1997:

“Macrodynamics is a venerable and important tradition, which fifty or sixty years ago engaged the best minds of the economics profession: among them Frisch, Tinbergan, Harrod, Hicks, Samuelson, Goodwin. Recently it has been in danger of being swallowed up by rational expectations, moving equilibrium, and dynamic optimization. We can be grateful to the authors of this book for keeping alive the older tradition, while modernizing it in the light of recent developments in techniques of dynamic modeling.”
’”James Tobin, Sterling Professor of Economics Emeritus, Yale University

Is dynamic macroeconomics still moribund, supplanted by CGE models (irrelevant to the problem at hand) and black box econometric methods? Someone please point me to the stochastic behavioral disequilibrium nonlinear dynamic macroeconomics literature I’ve missed, so I can sleep tonight knowing that policy is informed by something more than comparative statics.

In the meantime, the most relevant models I’m aware of are in system dynamics, not economics. An interesting option (which you can read and run) is Nathan Forrester’s thesis, A Dynamic Synthesis of Basic Macroeconomic Theory (1982).

Forrester’s model combines Samuelson’s multiplier accelerator, Metzler’s inventory-adjustment model, Hicks’ IS/LM, and the aggregate-supply/aggregate-demand model into a 10th order continuous dynamic model. The model generates an endogenous business cycle (4-year period) as well as a longer (24-year) cycle. The business cycle arises from inventory and employment adjustment, while the long cycle involves multiplier-accelerator and capital stock adjustment mechanisms, involving final demand. Forrester used the model to test a variety of countercyclic economic policies, commonly recommended as antidotes for business cycle swings:

Results of the policy tests explain the apparent discrepancy between policy conclusions based on static and dynamic models. The static results are confirmed by the fact that countercyclic demand-management policies do stabilize the demand-driven [long] cycle. The dynamic results are confirmed by the fact that the same countercyclic policies destabilize the business cycle. (pg. 9)

It’s not clear to me what exactly this kind of counterintuitive behavior might imply for our current situation, but it seems like a bad time to inadvertently destabilize the business cycle through misapplication of simpler models.

It’s unclear to what extent the model applies to our current situation, because it doesn’t include budget constraints for agents, and thus doesn’t include explicit money and debt stocks. While there are reasonable justifications for omitting those features for “normal” conditions, I suspect that since the origin of our current troubles is a debt binge, those justifications don’t apply where we are now in the economy’s state space. If so, then the equilibrium conclusions of the IS/LM model and other simple constructs are even more likely to be wrong.

I presume that the feedback structure needed to get your arms around the problem properly is in Jay Forrester’s System Dynamics National Model, but unfortunately it’s not available for experimentation.

John Sterman’s model of The Energy Transition and the Economy (1981) does have money stocks and debt for households and other sectors. It doesn’t have an operational representation of bank reserves, and it monetizes the deficit, but if one were to repurpose the model a bit (by eliminating the depletion issue, among other things) it might provide an interesting compromise between the two Forrester models above.

I still have a hard time believing that macroeconomics hasn’t trodden some of this fertile ground since the 80s, so I hope someone can comment with a more informed perspective. However, until someone disabuses me of the notion, I have the gnawing suspicion that the models are broken and we’re flying blind. Sure hope there aren’t any mountains in this fog.

What We Need

In Four Legs and a Tail I pondered what we need to get some action on climate. Over the holidays I heard Seamus Heaney on NPR. A story from his Nobel lecture came up, which I think rather poignantly illustrates the nature of the needed paradigm shift, in a different context:

One of the most harrowing moments in the whole history of the harrowing of the heart in Northern Ireland came when a minibus full of workers being driven home one January evening in 1976 was held up by armed and masked men and the occupants of the van ordered at gunpoint to line up at the side of the road. Then one of the masked executioners said to them, “Any Catholics among you, step out here”. As it happened, this particular group, with one exception, were all Protestants, so the presumption must have been that the masked men were Protestant paramilitaries about to carry out a tit-for-tat sectarian killing of the Catholic as the odd man out, the one who would have been presumed to be in sympathy with the IRA and all its actions. It was a terrible moment for him, caught between dread and witness, but he did make a motion to step forward. Then, the story goes, in that split second of decision, and in the relative cover of the winter evening darkness, he felt the hand of the Protestant worker next to him take his hand and squeeze it in a signal that said no, don’t move, we’ll not betray you, nobody need know what faith or party you belong to. All in vain, however, for the man stepped out of the line; but instead of finding a gun at his temple, he was thrown backward and away as the gunmen opened fire on those remaining in the line, for these were not Protestant terrorists, but members, presumably, of the Provisional IRA.

It is difficult at times to repress the thought that history is about as instructive as an abattoir; that Tacitus was right and that peace is merely the desolation left behind after the decisive operations of merciless power. I remember, for example, shocking myself with a thought I had about that friend who was imprisoned in the seventies upon suspicion of having been involved with a political murder: I shocked myself by thinking that even if he were guilty, he might still perhaps be helping the future to be born, breaking the repressive forms and liberating new potential in the only way that worked, that is to say the violent way – which therefore became, by extension, the right way. It was like a moment of exposure to interstellar cold, a reminder of the scary element, both inner and outer, in which human beings must envisage and conduct their lives. But it was only a moment. The birth of the future we desire is surely in the contraction which that terrified Catholic felt on the roadside when another hand gripped his hand, not in the gunfire that followed, so absolute and so desolate, if also so much a part of the music of what happens.

(Emphasis added)

We're All Going to Die

Well, at least me and a few fellow Montanans. There’s an earthquake swarm in Yellowstone right now. The supervolcano is sure to blow us all to Kingdom Come. This elk my wife met seems unconcerned though:

Elk pthpt

A guy at Wolfram made a nice visualization example out of the data, though it’s not exactly a gripping movie.