Noah Smith: Noahpinion: The swamps of DSGE despair: "A DSGE model starts with the assumption of optimization by various economic agents such as households and firms, which spits out a system of nonlinear equations representing people's optimal choices. These nonlinear equations are then 'log-linearized' around a 'steady state', and the linearized forms of the equations, which are very easy to work with mathematically and computationally, are used to compute the 'impulse responses' that tell you what the model says the effect of government policy will be. The linearization is equivalent to the assumption that the economy undergoes only small disturbances. That's probably not a good assumption… but it does make the models a LOT easier to work with. It also generally makes the equilibriim unique…. Braun et al. decide to venture into no-man's-land, and work with a non-linearized version of a New Keynesian model with a Zero Lower Bound. So what do we learn from these sorts of exercises? In my opinion, we learn relatively little about the real economy, but that's OK, since we do learn some important things about DSGE models. Namely: (1) Almost every DSGE result you see is the result of linearization, If you drop linearization, very funky stuff happens. In particular, equilibria become non-unique, and DSGE models don't give you a good idea of what will happen to the economy, even in the fictional world where the DSGE model's assumptions are largely correct!… So even putting aside the question of whether DSGE models accurately represent reality, we see that most of the DSGE models you see don't even accurately represent themselves."
Ryan Avent: Innovation: Uncle Sam, venture capitalist: "Economics points to the need for a strong government role in setting clear property rights and supporting the functioning of markets. And an englightened government should also price externalities (like those generated by greenhouse gas emissions). And it should subsidise basic research—a public good that markets simply won't do enough of without state encouragement. What the government should not do, economists seem to agree, is play venture capitalist…. I think it would be a grand thing if America's government, and governments in general, began listening to what economists have to say on these issues, taxed carbon, and focused on providing substantial funding for basic research. But we—meaning economists, elected officials, and those of us trying to translate economics into advice for elected officials—should keep in mind two very important things. The first is that the stuff that economists can agree on might not, actually almost certainly does not, capture the full range of Sensible Things to Do. There is no question that sensible support for education and basic research and a healthy market economy have been important for America's rise to global technological leadership. But America also happens to have benefitted from innovations that directly resulted from a government wildly overstepping its bounds. To give just one example: during the formative years of the computing era, government was an enormous source of demand for all the intermediates to production of computing power and computing power itself. America's military machine brought brilliant people together, demanded they do work requiring extraordinary computational power, and plied them with the funds to develop and build early computers. That work created expertise, component supply, and even private demand that fueled subsequent private investments. And government remained a significant source of final demand for the output of those later private investments. It is quite probable that computers would have been developed somewhere without all of that effort, and it's almost impossible to know whether the money spent on these efforts might have been used better elsewhere. But I don't think it's absurd to look back and feel that the government's role in supporting the development of computing (or the web, for that matter) was a Very Good Thing. Government support for innovation obviously turns up its share of duds, representing waste of real resources that could have gone toward some other end. But even America's higgledy-piggledly defence-biased innovation support network seems to generate a lot of hits… communication advances, industrial chemistry, nuclear technology, computing, and much of the technology that goes into the iPhone in your pocket and the Google driverless car soon to be ferrying you to work…. The second important thing to keep in mind is that government isn't going to adopt first-best solutions even when we're confident we know what they are. And as far as second-best solutions go, I'm not sure that throwing a lot of government money and effort at innovation programmes that generate lots of misses but the occasional big hit (and plenty of ancillary knowledge along the way) is a bad thing."
Ezra Klein: Scalia’s gay adoption claim: Even wronger than I thought | Enochian | Richard Owen (1860): Review of the Origin of Species by Means of Natural Selection | Mark Thoma sends us to Paul Krugman: Economist's View: 'The Price Is Wrong' | Fungi Discovered In The Amazon Will Eat Your Plastic | | The good, the bad and... the austeritist! | Is That Sarah Palin’s Hand In Your Pocket Or Is She Just Happy To See You?: SarahPAC spent more than twice as much on consultants in the 2012 election cycle as it did on candidates. (Candidates received less than $300k of the $5 mill SarahPAC grifted from the doubtless aged and infirm.) You guys, that buys SO MUCH NORDSTROM. |