Tuesday, July 24, 2012

Simon Wren-Lewis issues a put-up-or-shut-up challenge to heterodoxy

For heterodox economists
Read it at mainly macro
Can heterodox economists constructively engage the mainstream?
by Simon Wren-Lewis


Ralph Musgrave said...

I’m baffled. Will someone please explain what Wren-Lewis is asking, and what the big significance of his question is?

His central question (to quote) seems to be: “what do consumers do if they are told that taxes are rising temporarily?”

My answer (and I suppose I’m a “heterodox” economist) is that consumers will do a fair amount of consumption smoothing because they’ve been told the tax increase is TEMPORARY.

Now what? Do I get a Nobel prize for that answer? Or does the sky fall in or something?

Matt Franko said...

How can we use the SFB (which are ex post) to cross check 'a forecast'?

That's like weather forecasters trying to forecast next weeks weather by 'checking' to see if it rained last year...

As far a het economists, I dont see the MMT folks using the SFB this way, ie "to forecast". Rather within this identity they identify tradeoffs.

I'd rather see it framed like Warren does when he looks at current levels of UE and output:

'Our taxes are too high for our given size of govenment' (and current savings desires).

Which I assume Warren has the SFB in mind at some level when he makes that assessment..

And as far as Lewis' question, what if govt raises taxes in order to "pay for" a new San Francisco Bay Bridge that is made in China?

And the whole question is out of paradigm as Lewis' hypo has the govt raising taxes to "pay for" new spending.

If a policymaker came to an MMTer with that idea I'd assume an MMTer would immediately correct them that they need NOT raise taxes to "pay for" anything, because "money" is NOT exogenous, etc...

This is a "do you still beat your wife?" type of question. I reject Lewis' whole premise.


paul meli said...

"This is a "do you still beat your wife?" type of question."

I see you've learned something from M_F :-)

paul meli said...

I suppose i should post something substantive and on-topic…

This is a common framing re conventional discourse.

The framing defines the problem incorrectly, then challenges us to find a solution.

An engineers success in his career would be very limited if he took this path.

As framed there is no "right" answer…the problem must be recast by the heterodox participants before it can even be addressed…

…to which the response is likely to be "you didn't address my question".

So yeah, Matt, what you said.

Matt Franko said...

Right Paul, Lewis' question comes from a context of 'exogenous money' and he is lost right there. (govt raises taxes to "pay for"...)

I keep trying to identify economists past or present who do NOT think in terms of exogenous "money" and am coming up blank (outside of the MMT school).

I believe this is what Warren means by "gold standard thinking".

I'm reading some books by A. del Mar this summer from the 19th century and it looks like he knew "money" need not be exogenous, and there is the example of Lincoln issuing 'greenbacks' so it should be obvious Lincoln and his people knew "money" need not be exogenous (but I can find no write-ups on this, so all we seem to have is the prima facie from Lincoln).

People have a hard time understanding the difference between exogenous and endogenous "money" imo. This is a core problem in this. I think this issue also goes back to a lack of mathematical cognition in the population.

I wonder if the good Major here is even capable of understanding what is meant by exogenous and endogenous "money"???

Ramanan said...

Wren-Lewis I guess thinks that it is just a matter of tinkering with the same old models and thinks that heteredox economics is just a matter of stressing a few things - else there isn't much difference!


He also is trying to present a picture that he has been saying fiscal policy is effective in his models and so on.

Now that is a terrible portrayal of the mainstream profession.

It is quite clear if one were to read Mankiw how chimerical their worldview is.

Tom Hickey said...

Ralph:"I’m baffled. Will someone please explain what Wren-Lewis is asking, and what the big significance of his question is?"

Sounds to me like he is asking about Ricardian equivalence.

He asks a general question that presumes taxes don't fund govt spending, whereas that is not the case under the currency monetary system. So if taxes change by the same amount as govt spending, this amounts to redistribution from the top to the bottom when there is progressive taxation. The result is that spending and saving decrease toward the top, and the ratio is uncertain, while more of the govt expenditure directed toward the bottom gets spent. So it is a question of multipliers as how this would affect an economy. We would also have know more about the sectoral balances to figure affects on production, employment and price levels.