Ed Prescott is a Nobel-prize winning economist. But according to Stephen Williamson, an economist who attended a presentation given by Prescott on Wednesday in Montreal, Prescott believes the recession is President Obama’s fault. (Italics mine)
Ed Prescott did pathbreaking work in the economics profession, and his Nobel prize is well-deserved. His work with Finn Kydland made macroeonomists more quantitatively disciplined, and serves as a benchmark for most of the work done in macro in the last 30 years, including New Keynesian economics, models with financial frictions, and incomplete markets models. However, I doubt that there were any people in the room yesterday who took Ed seriously. Ed’s key points were: 1. Monetary policy does not matter. 2. Financial factors are the symptoms, not the causes, of the recent downturn. 3. The recession was due to an Obama shock, i.e. labor supply fell because US workers anticipate higher future taxes.
Perhaps Prescott delivered a more nuanced explanation of this thesis than Williamson’s summary does justice to. But on the face of it, there’s really no other way to describe it than complete lunacy.
Just for starters: The National Bureau of Economic Research dates the recession as beginning in December 2007, a month before Obama won his first caucus vote. We’re not only talking about some amazingly prescient workers here, but also some very confused people, since a majority of them went on to vote for Obama, even as labor markets imploded. And what to make of the fact that the employment picture has improved throughout Obama’s term of office, despite the fact that, if anything, higher taxes are more assured now than they were before his election?
Wingnuts come in all shapes, sizes, and levels of education.
ciotog
I’m totally going to take some furlough days from my job this year, to make up for the tax increases put in place by Obama. Thanks, state of Illinois!
Hunter Gathers
Even when it was the banksters, I knew it was the blacks.
Pancake
Talk about a delusional fool, wingnut or not.
lawguy
so, it is true. If they were doctors they would recommend bleeding the patient.
El Cid
The markets and businesses pre-emptively panicked and rightly so because there was a Kenyonesian Muslim Negro as a leading candidate. How could the economy not pre-collapse?
jeff
Off topic, I know, but I just saw Pat Buchanan call Obama an unpatriotic America-hater. Hence, there will be an apology from NBC along with an announcement that he has been fired, probably within a few minutes. Just wanted to note the end of an era, as Pat has been on the TV my entire life, though he’s a fucking literal Nazi.
Mark S.
Huh? People quit working because they didn’t want to pay higher taxes?
Hunter Gathers
@Mark S.:
That’s why I quit. Had nothing to do with my asshole, backstabbing, lying, white trash piece of shit boss. I just got tired of paying my damn taxes.
Bill Murray
who amongst us wouldn’t have voted for getting a paid vacation — other than those with that protestant northern European work ethic thing
El Cid
@Mark S.:
This has been a bunch of bullshit forever, highly prominent during the Reagan years.
‘Yeah, I ain’t gonna go from making $1 million to $10 million because my marginal tax rate will go up, so I’ll give up those extra millions and millions of dollars ’cause I can’t get all of it, so I’m goin’ Galt.’
jl
in the link to Willianson’s blog post:
“Bob Hall suggested that this [Prescott’s theory being true] would require a Frisch labor supply elasticity of about 27, which seems ridiculous. However, Ed stuck to his guns and thus seemed – well, ridiculous.”
Here, the ’27’ means that a one percent increase in expected tax rate would reduce labor supply by 27 percent.
This kind of extreme result for labor supply has always been a very weak link in the Prescott style Real Business Cycle theory. The idea is to explain business cycles and welfare optimizing equilibrium reactions to exogenous shocks that throw the economy away from its long term growth path. The models have long required that labor supply respond in extreme ways to relatively minor shocks.
As far as I know, the ‘solution’ has been to assume that labor market equilibrium is unlike perfectly competitive equilibria in other markets. For labor, according to these new and supposedly improved RBC models, people either work full time or not at all, people enter the labor market and offer labor either at fulltime or nothing, and lottery is held to determine who gets employed. I’ve never understood how that is a solution to the problem.
I don’t think Prescott is a wingnut, he is a True Believer in his RBC model.
JAHILL10
@jeff: Seriously, when is that evil old man going to quit/die?
To paraphrase Lewis Black: The good die young, but pricks live forevah!
cat48
Well Krugman & Mark Thoma both think he’s nuts; Nobel or not. This is spreading like wildfire though as Mort Zuckerman was on MSNBC today spouting something similar about how none of his policies were right & they have made the economy worse and it didnt have to be this way. (Especially Israel, but he didnt talk about that for once) He said every person who voted for Obama at Aspen felt the same way as in betrayed & he doesnt know anything…..etc. I had to put TV on mute since I can’t afford to hit it & break it. Also,too Arianna is just crushingly disappointed and EVEN Barbara Striesand……..oh NOES!
Kryptik
It’s always amazed me how people are so willing to blame taxes for the fact that businesses are greedy fucks willing to ‘downsize’ at the merest rise in costs or taxes, but still willing to give severance packages to failed CEOs in the tens of millions.
And now Obama retroactively caused the recession, because of taxes. Brilliant. Really. Saddest thing is that this will become the conventional wisdom in about 2 months, I’m sure.
tomjones
That’s easy. Just as 9/11 and the 2001 recession were Clinton’s fault, the recovery must be credited to the innovative policies of the Republican president elected in 20__.
Mark S.
@El Cid:
It is fortunate that this recession has only hit millionaires.
Allison W.
This is why I did not jump on the Michael Steele was right bandwagon. There was nothing virtuous about his statement, these guys are on a campaign to erase bush’s 8 years in office and pin every thing on Obama.
anonymous
@jl:
Another reason why the University of Chicago needs to be razed and salted.
tomjones
@Mark S.: Also, all the good capitalists fired workers to make it very easy for their them to go Gault.
Warren Terra
@lawguy:
If only they were even that sensible. If they were doctors, they’d recommend bleeding the patient’s kids and pets. And they’d probably drink the blood.
(Edited to clarify: lawguy’s hypothetical would-be doctors at least recognize it’s the patient needing treatment, even if their answer is to inflict harm, while I’d argue that these numbskulls and monsters would instead go after the helpless and needy people closest to the patient. Though I shouldn’t have ignored the likelihood they’d also target the patient for harm as well.)
Mark S.
@jl:
What does that even mean? A one percent tax increase and a quarter of the workforce goes Galt?
jwb
@jeff: Cool. I didn’t know NBC could fire Obama. Awesome power we have endowed our media with.
Hunter Gathers
@Mark S.:
Why the hell does that number keep popping up? Does the crazification factor apply to everything now?
Ed Marshall
@anonymous:
I’m embarrassed for University of Chicago over Ed Preston, but even they know that RBCT is horseshit. I had forgotten he existed but he isn’t what even that school is supposed to produce as an economist.
burnspbesq
@jl:
“I don’t think Prescott is a wingnut, he is a True Believer in his RBC model.”
And nothing bad can ever come from placing too much faith in models, right?
Bill E Pilgrim
The Joe the Plumber school of economics.
You’re going to raise my taxes
-Why, do you make more than 250, 000 a year?
Yes, with a plumbing business.
– The profit is over 250K? Not the gross? So your income is actually over 250K?
Well no. But I’m going to buy the business soon, and…
– Wait, it’s not even your business yet?
Well it will be.
– At which point, even if you bought it, you still wouldn’t make 250K?
Well right, but..
– So your taxes won’t possibly go up, in any conceivable actual universe.
Well… uhm…. you’re going to raise my taxes!
– Sigh.
jwb
@cat48: You could despair at our elites being this stupid and self-centered. Or you could see the increasingly flimsiness of the ideas they are putting forward as a sign of how desperate things are getting for them: it’s becoming increasingly difficult for them to keep their worldview coherent when simple facts keep disproving their accounts of how the world works.
ETA: did this comment break the thread?
Oh, dear, we need clean up in comment 27. I think it was you, Bill.
Bubba Dave
Which is why when Bill Clinton raised taxes 4%, America suddenly reached 108% unemployment?
Roger Moore
@Mark S.:
Yes. It’s called “Going Galt”; you should look it up some time in Ayn Rand’s glorious masterpiece Atlas Shrugged.</wingnut>
jl
I will try to explain how such ideas come to be. Why I try such a thing, I am not sure. Maybe because work is over and I feel like doing crazy things.
Here is the source of the problem, IMHO:
If you want to use rigorous theory about how the economy works by individual people and business make individual decisions about how to to maximize their welfare and their decisions are all consistent, or in economic equilibrium with each other (which is what economists DO, dammit!)
then
All positive and normative statements in macroeconomics depend on the economy being in a general equilibrium on all markets. If some exogenous factor (because of a unexpected technological invention, for example) changes, then the economy must move from one equilibrium to another very quickly.
Otherwise an economist has nothing to say based on rigorous theory.
However, except in very special cases, there is no objective test, using any amount of data that we can ever expect to have, for an economy being in or out of general equilibrium.
So what do economists do?
One school, let’s call them ‘classical’, represented here by Prescott, tries to rationalize anything we observe at any time as an equilibrium state of the economy. Prescott sees his research program as trying to show that business cycles are equilibrium responses to unexpected changes in the supply curve of the economy, and this works better than any other approach.
Keynesian economists (Krugman, DeLong, etc.) are willing to venture guesses about whether the economy is close to or at equilibrium or not, and also guess about whether the economy is being sluggish or fast in moving to the next equilibrium.
Most economists realize we see puzzling and counterintuitive things in economic data. The classicals attempt to solve the problem by assuming the economy is always in equilibrium, and assuming that all economic agents, including poor slobs like us, are always solving complicated, forward looking problems to maximize our lifetime consumption and wealth from now until we die. These complicated models are so loosely connected to observable variables, you can make a model that will explain almost anything that happens, and make government intervention either increase or decrease welfare.
The Prescott RBC school is the extreme of the classicals. It assumes that ALL business cycles are welfare maximizing equilibrium responses to unexpected supply side shocks that are exogenous to the economic system.
The classicals think that people like Krugman and DeLong are crude and prmitive because they base much of their analysis on empirical rules of thumb based on historical parallels that cannot be written down as an equilibrium consistent with individuals solving intertemporal optimization problems that maximize their lifetime consumption and wealth.
Keynesians often doubt that the classicals’ complicated optimization models correspond to anything happening in reality. The problem with the Keyensians is that the historical and behavioral rules of thumb and the approximations they rely on have had a bad habit of changing too often and too fast to make predictions as reliable as in the more exact sciences.
The ‘New Keynesians’ insist on building models that are based on individuals and businesses solving complicated lifetime consumption and wealth maximizing problems into the distant future, and that results in the economy always being in some sort of equilibrium. But they add things like wage and price rigidity, or informational or computational limitations on the agents, to get Keynesian style conclusions. Like the classicals, there are so many choices you can make that are loosely tied to real world data, that you can reach any conclusion you want.
But if the macroeconomics community cannot reach a consensus on what is an equilibrium and what is not, and all the commonly accepted theory depends on the economy being in equilibrium, or moving instantaneously from one equilibrium to another, then there is not much basis for reaching a consensus on anything. Prior beliefs about how people and economy behave play a major role in how you do your modelling and what results you get.
Prescott is extreme, but his style of reasoning is common among economists who are willing to bend their theories to be more in accord with common sense. Mankiw is a New Keynesian, and he cooks up models that come up with Krugman and DeLong style conclusions in terms of what you will see in aggregate data, but where government policy to decrease unemployment in a recession almost always reduces peoples’ welfare.
The confusion and mess is far deeper in macroeconomics than indicated by the kind of statements Prescott makes. At least Prescott is more forthright than many other economists about what he really believes, which is a good thing. That similar reasoning pops up in popular pundits in disguised form is a bad thing.
Sly
In other words, standard-fare Ed Prescott.
Supply and demand always move together! Technology shocks that don’t appear in the data rule all! Widespead involuntary unemployment doesn’t exist! Real Business Cycle Fhtagn!
RBC theorists are almost as big a group of crackpots as the modern Austrian Schoolers.
burnspbesq
@Bubba Dave:
No, ya big silly. Everybody knows the curve is asymptotic to 100 percent.
Anonymous37
— trying to close strikethrough.
jwb
@cat48: You could despair at our elites being this stupid and self-centered. Or you could see the increasingly flimsiness of the ideas they are putting forward as a sign of how desperate things are getting for them: it’s becoming increasingly difficult for them to keep their worldview coherent when simple facts keep disproving their accounts of how the world works.
jwb
@Anonymous37: I think it got fixed. My comment 27 was a causality.
burnspbesq
OT:
T minus 16 minutes: does anyone still care, even a little bit, about where LeBron chooses to play for the next several years?
Corner Stone
@Allison W.:
WTF?
What stupid nonsense are you talking about now?
There were a bunch of people saying MS was right about his comments?
mr. whipple
@burnspbesq:
Everyone in N. Ohio.
Corner Stone
@Hunter Gathers:
I am going to have this tattooed somewhere.
This is so freakin good.
Cat Lady
I’m sticking pins in my ears and eyes now and singing along to the Internationale in the original French.
Teh stoopid, it burns!111!
jl
A final note, I do not know of any practical real world macroeconomic forecasting companies or research institutes that rely on Prescott style Real Business Cycle models. The problem is that the research is conducted in way that precludes predicting much of anything other than steady per capita growth rates in GDP, income, etc, over the long term.
The Real Business Cycle people do not often try to estimate their models with real data, and rarely use commonly accepted statistical tests to compare the performance of their models with other approaches. In a famous anecdote, statistical estimation and testing using real data was deemed to reject too many ‘good models’.
Conceptually what the Real Business Cycle, and many classicals do, is to do simulations, and see if their simulated economies produce summary statistics similar to those of the real data.
1. put the real world data through a filter to separate out the long run trend and cyclical components of the time series of interest,
2. build model to explain the cyclical departures from the long run trends.
3. pick parameters to stick into the model from published research. These are usually summary statistics of some sort or other.
4. run some sort of simulation to generate a distribution of outcomes
5. calculate the variances and covariances of the parameters of interest in the model. For example, the variances and covariances of GDP growth and the unemployment rate
6. compare the simulated model statistics with real world statistics for the corresponding variables.
There have been some attempts recently to estimate these kinds of models using real world data (usually by ‘New Keynesians’, but in the studies I have seen the results have depended strongly on arbitrary assumptions about, for example, whether per capita GDP is moving along a linear or quadratic trend over the long run (Who knows?).
The set up of these kinds of models makes prediction difficult. The only systematic prediction they have is that, over the long run, everything moves along some kind of deterministic trend determined by deep economic fundamentals (technology, peoples’ taste for leisure, etc.). All business cycles come from unexpected shocks. What is there to predict of interest to us common folk who will have a difficult time if we have no wage money for a year or few?
I don’t think prediction can be the gold standard for judging a nonexperimental science, because you cannot control the environment over the prediction interval. But I think anything that calls itself an emprical science needs to try to predict something. Real Business Cycle theory is very weak on prediction and forecasting.
OK, I will quit now. My fit of madness is over. You kids quit making fun of economists, right this minute, you hear, dammit?
karmakin
@jwb: There’s that number again.
Can we just ban the number 27 from this site? Really?
Anonymous37
Holy shit.
Barack Obama has invented time travel.
Mark S.
@jl:
It would seem to me that if your model says that a 1% increase in taxes causes a 27% drop in the labor supply, that would be a relatively easy proposition to test. There’s literally dozens of industrial countries with decades of economic data to sift through. I don’t understand why this shit can’t be tested.
Nylund
A while back Ed Prescott and a grad student got into an email conversation that got, shall we say, a little nutso. Full of talk of Obama being a socialist, a mention of the “Russyians” and how the people are against Obama and only Wall Street CEO’s support him. Pretty Wingnutty stuff.
I’m an economist. I’ve never met Ed Prescott but I surely learned his work in Grad School. Its seminal stuff in macro and nearly every macro paper uses some aspect of his work (and some would argue that is a very bad thing). Many of my friends not only know him but had him as a Ph.D. adviser. The short answer is that he’s too well respected for anyone to say anything outright disrespectful, but from the private stories I’ve been told…well, I shouldn’t repeat private conversations. Let’s just say that whenever you meet one of his students and ask, “So how is Ed in person?” You’ll find yourself dealing with a very awkward silence as they struggle for the proper and polite way to change the subject. His fame helped many of my friend’s careers, so they won’t stab him in the back, but they sure as heck don’t want to talk about his personality and viewpoints. One gets the impression that there is no way to talk about such things without it sounding very bad.
jwb
@Nylund: Crazy genius syndrome, eh?
jwb
@jl: Thanks for these mini-lectures. Very helpful.
jl
@Mark S.:
Sorry if I hijacked the thread. A madness to explain why economists say the strange things they do swept over me, like a swamp fever.
RBC researchers believe that they have solved the problem of their high labor supply elasticities by the fix I described in my first comments. Every person works either 40 hour week or not at all, and a lottery chooses who offering labor gets a job. it turns out that this kind of fix can be derived using welfare and profit maximizing equilibrium labor markets using models of labor search and process of matching skills and job openings
So, the RBC people are happy with it. Others think that the fix is ridiculous.
About one third of the cyclical variation in hours worked is do to variations in hours at a job, not on how many are employed full time or not at all, so that fix does seem to leave a lot out.
nonRBC classical and Keynesian and New Keynesian economists tend to agree with you: a labor supply elasticity of 27 can be compared to real world economic data, and they think that the data show the estimate of 27 is ridiculous.
Brian J
@anonymous:
He was at the University of Minnesota for years, but now teaches at Arizona State. I believe they have similar views at Minnesota compared to what the professors have at Chicago, but towards being accurate, Prescott wasn’t really affiliated with that school.
Nick
@Kryptik:
you have to understand, for conservatives, this is ok.
Brian J
@Nylund:
That’s really interesting, and totally believable. Intelligent, skill, and competence in one’s field isn’t particularly related to one’s political views, or so I’ve thought. What you said sounds like even firmer proof of that.
El Cid
The entire Atlantic slave trade was caused by taxes. If tax rates had been lower, something or other.
jl
@Nylund:
Thanks for that link. It is enlightening.
Looks like Cole nailed the essence of it again.
Drats!
terry chay
The reason macroeconomists don’t harsh on Prescott is because the whole field is pseudoscientific gobbledygook and 3rd grade math sometimes obscured by some college level applied mathematics (often not). If you call him into question, you invite an honest examination of his work, and people start realizing that not only is the whole model horseshit, the alternatives aren’t much better, and many peoples life work is wasted also.
If only they’d go crazy and commit suicide like statistical physicists and game theorists. But alas, people deny the crazy, since it is not scientifically testable there is niching to debunk, and they have a long life on the lecture circuit.
sacman701
jl and Nylund have it right. Prescott’s theory decribes how the economy might work if people were always well-informed, rational, and forward-looking, there were no large-scale market failures or coordination failures, and technology shocks were big enough to explain all variation in output. It’s a useful theoretical baseline in some ways, but it does a very poor job of explaining how the world actually works.
Mark S.
So everyone seems to agree that this RBC model doesn’t do a good job of predicting things. Why the hell does anyone pay attention to it then? This is what drives me crazy about economists. They deal with real world problems in their field but they seem to waste an inordinate amount of time with bullshit like this. Any ideas on how to get out of this recession? How to lift the Third World out of poverty? Is single payer more efficient? No, we must be more abstract than the Theology Department.
/rant
Wile E. Quixote
@Pancake:
You know, if we killed all the pathetic little wingnut trolls like you America’s jobless rate would decrease dramatically. As a bonus your parents be incredibly grateful for getting their spare bedroom back so that the children that they’re proud of can come visit them.
Wile E. Quixote
@Anonymous37:
Of course he invented time travel. How else could he have faked his birth notice in the Honolulu newspapers?
Anonymous37
@ Wile E. Quixote:
Fucking asshole. You’d think he’d do something selfless with the invention, like assassinate Hitler.
bob h
Perhaps these clowns are auditioning for a possible Romney/Palin/Huckabee administration job, and want to get on the scoreboard early with eye-catching lunacies?
El Cid
Robert Reich is a communist shrill.
sparky
@jl: well you could both be correct: to me he reads like a purist, and over time it seems that purists cling to their models as having better explanatory power, even if those models need a bit of *cough* tweaking. and yes it’s ironic that a person who is the embodiment of ivory tower thinking would complain about statists.
as a person who has in the past been seduced by theory, i can grasp the attraction of preferring to believe it’s just a question of refining a few points to the sad realization that you’ve been looking at the world through the wrong end of the microscope.
in politics the analogy might be the Bush failed conservativism idea.
edit/ps: thanks for your explanations in this thread, especially the assumptions about stability–clarified much for me.
Sheila
By dint of this reasoning, the Iranian hostage crisis was Ronald Reagan’s fault. Can we do that election over, please?
El Cid
@Sheila: It might be the case that treasonous Reaganite contacts with the Iranian regime prolonged it, as Nixon was recorded by LBJ as treasonously negotiating with the South Vietnamese government in order to postpone peace negotiations so as to favor his campaign. But, you know, look forward, not backward et al.
slag
@jl: Well, not to be selfish or anything, but I hope you never get cured of the madness that compels your explanations. More madness, please.
But this:
is really the crux of the issue for me.
If you’re not explaining how or why things existing outside of your mathematical models happen, are you explaining anything at all? Or are you just living in a world of your own creation? And at what point does your life’s work constitute anything more than a really intricate tautology?
Seriously. I don’t get it.