two handed economists

From the Great Depression to the Great Recession

cpeadmin — Thu, 05 Mar 2009 08:48:25 +0000

David Leonhardt thinks that the Great Recession will end up reducing income inequality rather than increasing it, for the same reasons as the Great Depression did:

1. The stock market crash will hurt the wealthy and upper middle-class households more than others, because they own the bulk of stock.

2. The Obama administration is planning to raise taxes on the rich and cut taxes for everyone else, as the FDR administration did, kinda.

3. The Great Depression resulted in a surge in school enrollment, as teenagers who would have been working in the factories stayed in high school. We may be seeing a similar surge now, e.g. in applications community colleges – if those schools have the capacity to take in and train more students.

Restoring irrationality to man

cpeadmin — Thu, 05 Mar 2009 08:47:30 +0000

Pieces from the last couple of months on why BE matters – David Ignatius interviews Nouriel Roubini in the Washington Post and cites Roubini’s explanation that “the rational man theory of economics” blinded (other) economists to indicators that a financial crisis was coming, a point of view shared by Daniel Kahneman; and David Leonhardt gets practical advice from behavioural economists on how and when to spend and save in a recession.

David Brooks for the New York Times: An Economy of Faith and Trust

cpeadmin — Wed, 21 Jan 2009 08:46:42 +0000

David Brooks of the New York Times writes about “An Economy of Faith and Trust”. Classical economics, which assumes that individuals are rational and markets are efficient, cannot explain the current financial crisis. “The crisis has delivered a blow to classical economics and taken a body of psychological work that was at the edge of public policy thought and brought it front and center.” The effectiveness of monetary policy is curtailed in this crisis. Brooks questions if the fiscal stimulus package being proposed will have any effect because it rests on a “mechanical, dehumanized view of the economy” when the economy is more like a “society of faith and trust”.

An important issue may be whether people who benefit from the fiscal stimulus will spend or save the increased income from the stimulus due to a lack of confidence in the future.

http://www.nytimes.com/2009/01/16/opinion/16brooks.html?_r=1

Co-author of Nudge to head US Office of Information and Regulatory Affairs

cpeadmin — Fri, 09 Jan 2009 08:39:39 +0000

Cass Sunstein, co-author of the book Nudge: Improving Decisions on Health, Wealth and Happiness, is expected to be named by US President-elect Barack Obama to head the Office of Information and Regulatory Affairs. Sunstein had written prolifically about regulation in the past. Interesting to see how he would incorporate behavioural economics concepts to regulation, and the effectiveness of BE in public policy.

http://nudges.wordpress.com/2009/01/09/cass-sunstein-goes-to-washington/

We shall experiment, but how shall we learn?

cpeadmin — Fri, 09 Jan 2009 08:37:37 +0000

Paper by Harvard economist Dani Rodrik on different methods of evaluating policies and key elements of growth diagnostics (and why it’s not so different from microeconomics and policy analysis).

Interesting to me for the discussion on methodologies – regressions, qualitative surveys, randomized field experiments – and their strengths and weaknesses. His basic point, which all policy makers know (or should know), is that nothing is conclusive. Even if internal validity can be established to everyone’s satisfaction, there is always the question, how generalizable is this study or experiment or result to my particular context? The question Rodrik thinks we really want to ask is, does the research change your priors on the question of interest?

Rodrik offers a stylized account of the traditional policy framework:
- presumptive rather than diagnostic
- operationalised through a long list of reforms (the laundry list approach)
- emphasizes complementarity among reforms rather than their sequencing and prioritization
- biased towards universal recipes, best practices and rules of thumb.

In contrast, growth diagnostics:
- starts with relative agnosticism on what works and what doesn’t, is explicitly diagnostic in terms of bottlenecks and constraints
- emphasizes experimentation, monitoring, evaluation – to find out what works
- looks for selective, relatively narrowly targeted reforms
- suspicious of best practices and universal recipes, looks for policy innovations instead.

Which sounds like how we do policy, or, more accurately?, how we would like to do it.