People who believe in magic really do believe....

Connecting the Dots: Illusory Pattern Perception Predicts Belief in Conspiracies and the Supernatural
Jan-Willem van Prooijen, Karen Douglas & Clara De Inocencio , European Journal of Social Psychology, forthcoming

Abstract: A common assumption is that belief in conspiracy theories and supernatural phenomena are grounded in illusory pattern perception. In the present research we systematically tested this assumption. Study 1 revealed that such irrational beliefs are related to perceiving patterns in randomly generated coin toss outcomes. In Study 2, pattern search instructions exerted an indirect effect on irrational beliefs through pattern perception. Study 3 revealed that perceiving patterns in chaotic but not in structured paintings predicted irrational beliefs. In Study 4, we found that agreement with texts supporting paranormal phenomena or conspiracy theories predicted pattern perception. In Study 5, we manipulated belief in a specific conspiracy theory. This manipulation influenced the extent to which people perceive patterns in world events, which in turn predicted unrelated irrational beliefs. We conclude that illusory pattern perception is a central cognitive mechanism accounting for conspiracy theories and supernatural beliefs.

Macro-Consensus

No End to the Consensus in Macroeconomic Theory? A Methodological Inquiry 
 (Published version)
 John McCombie & Maureen Pike 
American Journal of Economics and Sociology, April 2013, Pages 497–528 

Abstract: After the acrimonious debates between the New Classical and New Keynesian economists in the 1980s and 1990s, a consensus developed, namely, the New Neoclassical Synthesis. However, the 2007 credit crunch exposed the severe limitations of this approach. This article presents a methodological analysis of the New Neoclassical Synthesis and how the paradigmatic heuristic of the representative agent, namely, market clearing subject to sticky prices, excluded the Keynesian notion of involuntary unemployment arising from lack of effective demand. It shows these models may be modified to produce Keynesian results, but are ruled out of consideration by proponents of the New Neoclassical approach by weak incommensurability. It concludes that because of this the New Neoclassical Synthesis, in spite of its failure to explain the sub-prime crisis, is likely to resist successfully the resurgence in Keynesian economics. 

Nod to Kevin Lewis

Whither the Euro?

Dani Rodrik nails the issues and the answer:

"Ireland and the southern European countries must reduce their debt burden and sharply enhance their economies’ competitiveness. It is hard to see how they can achieve both aims while remaining in the eurozone.

The Greek and Irish bailouts are only temporary palliatives: they do nothing to curtail indebtedness, and they have not stopped contagion. Moreover, the fiscal austerity they prescribe delays economic recovery. The idea that structural and labor-market reforms can deliver quick growth is nothing but a mirage. So the need for debt restructuring is an unavoidable reality.

Even if the Germans and other creditors acquiesce in a restructuring – not from 2013 on, as German Chancellor Angel Merkel has asked for, but now – there is the further problem of restoring competitiveness. This problem is shared by all deficit countries, but is acute in Southern Europe. Membership in the same monetary zone as Germany will condemn these countries to years of deflation, high unemployment, and domestic political turmoil. An exit from the eurozone may be at this point the only realistic option for recovery."

The whole article is well worth reading.

**************UPDATE***************

In today's WSJ, the German finance minister says "not so fast"!

Of course, Rodrik's point is that defending the Euro is no longer worth it for the PIIGS, not whether it's worth it for Germany or France.

Good news for people who love bad news

Yes, the economy lost more jobs last month, and yes the unemployment rate is still 9.7%, but in some sense this is what qualifies as "good news" these days. Job losses were predicted to be higher and the unemployment rate was predicted to rise, so this qualifies as a "better than expected" jobs report.

I continue to think that the economy is turning the corner and that we are more likely to get a faster than predicted recovery than we are to get a double dip recession.

I also think that the biggest threat to a robust recovery is not a lack of further government action, but rather the threat of further government action in the form of higher taxes on corporations and entrepreneurs. 

 

 

KPC: Your Hip Hop Headquarters!

The video. I humbly present the video: Fear the Boom & Bust.....



LAGNIAPPE: Here is an actual picture (really) of Russ Roberts with Ke$ha.

Back From NYC, and Rapping It Down

So, I'm back from NYC, and have finished my (truly trivial, probably will die on cutting room floor) role in the rap video. It was SO great to watch the film crew in action, though. Very, very cool. Also colder than heck in NYC, post-blizzard.

For more info on the video, and the rap song, and the people who actually matter, check this video....

Wrestling Greased Capitalist Pigs

Interesting article. Very interesting, in fact.

I began to ask myself: how will I be able to defend capitalism from those who seek to destroy it when actual capitalists are behaving so indefensibly? This is a question that free-market conservatives are now forced to grapple with on a much larger scale in the wake of the collapse of the financial markets.

... a raft of government policies, some dating back decades, helped create the current economic crisis. The Community Reinvestment Act, which was originated during the Carter administration and updated by President Clinton, encouraged more lending to those with patchy credit histories. Fannie Mae and Freddie Mac were able to use their government backing to borrow money cheaply, allowing them to absorb trillions of dollars in mortgages. And under the leadership of Chairman Alan Greenspan, the Federal Reserve Board pursued one of the most aggressive rate-cutting campaigns in history, which helped drive mortgage rates down to the lowest levels since the Eisenhower administration—yet the Fed resisted jacking up interest rates despite mounting evidence that housing prices were inflating to unsustainable levels.

While all of this is true, the causes of the current financial collapse, as with any economic calamity of this magnitude, are complex. The government may have helped create an environment that made us susceptible to a housing bubble, but at the end of the day private banks took advantage of that environment. They threw prudent risk management out the window, they pushed mortgages on un-creditworthy borrowers, they financed those mortgages with complicated financial instruments that few—if any—understood, and they escaped with millions as their companies begged for taxpayer dollars.

At a time when the nation is rushing toward socialism, there's an obvious temptation among conservatives to rally around the market and lay all of the blame for the financial crisis on big government. But any full accounting of the current mess requires us to reconcile our belief in capitalism with the fact that this is a case in which actual capitalists behaved recklessly. Their behavior, and the public outrage that it generates, presents more of a threat to capitalism than an army of Paul Krugmans.

(Emphasis mine)

ATSRTWT

Be careful what you wish for

You know what I really miss and would like to have back? Two things: (1) a big-ass trade deficit and (2) hordes of illegal immigrants arriving. That would be great, wouldn't it?

New Keynesian Macro in graphs!

In honor our our current posterboy (Larry Meyer), I am happy to blog about a new NBER working paper by Pierpaolo Benigno titled "New Keynesian Economics: An AS-AD View".

Sadly I can't find an ungated version, so I will quote at length from the introduction:

This work presents a simple New-Keynesian model illustrated by Aggregate Demand (AD) and Aggregate Supply (AS) graphical analysis. In its simplicity, the framework features most of the main characteristics emphasized in the recent literature. The AD and AS equations are derived from an intertemporal model of optimizing behavior by households and firms respectively.

The AD equation is derived from households’ decisions on intertemporal consumption allocation. A standard Euler equation links consumption growth to the real interest rate, implying a negative correlation between prices and consumption. A rise in the current price level increases the real interest rate and induces consumers to postpone consumption. Current consumption falls.

The AS equation derives from the pricing decisions of optimizing firms. In the
long run, prices are totally flexible and output depends only on real structural factors. The equation is vertical. In the short run, however, a fraction of firms keep prices fixed at a predetermined level, implying a positive relationship between other firms’ prices, which are not constrained, and marginal costs, proxied by the output gap. The AS equation is a positively sloped price-output function.

As in Keynesian theory, the model posits some degree of short-run nominal rigidity. Nominal rigidity can be explained by the fact that price setters have some monopoly power, so that they incur only second-order costs when they do not change their prices. In the long run, the model maintains the classical dichotomy between the determination of nominal and real variables, with a vertical AS equation.

The analysis is consistent with the modern central banking practice of targeting
short-term nominal interest rates, not money supply aggregates. The mechanism of transmission of interest rate movements to consumption and output stems from the intertemporal behavior of the consumers. By moving the nominal interest rate, monetary policy affects the real interest rate, hence consumption-saving decisions.

This simple framework allows us to analyze the impact of productivity or mark-up disturbances on economic activity and to study alternative monetary and fiscal policies. In particular, we can analyze how monetary policy should respond to various shocks. That is, a microfounded model yields a natural objective function that monetary policy could follow in its stabilization role, namely the utility of consumers. This objective is well approximated by a quadratic loss function in which policymakers are penalized, with certain weights, by deviating from a price-stability target and at the same time by the fluctuations of output around the efficient level. In the AS-AD graphical plot, optimal policy simplifies to just an additional curve (labelled IT for “Inflation Targeting”)

seems pretty cool. Here is an interesting tidbit given our current policy debates:

The impact of the fiscal multipliers on output and the output gap can be quantified showing that a short-run increase in public spending has a multiplier less than one on output and a much smaller multiplier on the output gap.

Uh-oh!

A Sticky Information manifesto

Ricardo Reis' new NBER working paper (ungated version here) is exactly that.

The SIGE (sticky information general equilibrium) model does away with the various real rigidities generally included in DSGE (dynamic stochastic general equilibrium) models like habit formation in consumption, and various ad-hoc-ish adjustment costs with the single assumption that many people only update their information sets sporadically.

The paper outlines a full GE model, and then estimates it using Bayesian computational methods for the US and the Euro-zone.

According to Reis: "The end result is a laboratory that is
rich enough to account for the dynamics of at least …five macroeconomic series (inflation,
output, hours, interest rates, and wages), and which can be used to inform applied
monetary policy."

Michael Smerconish, in Philly

Radio host and columnist Michael Smerconish, on the Porkulus.

Excerpt:

About 200 prominent economists, including a dozen Nobel laureates, signed a petition pledging support for the stimulus package. Paul Krugman, himself a Nobel economics winner, has called for an even bigger government footprint than the one the president signed. Treasury Secretary Tim Geithner might have to run TurboTax on his computer, but he also ran the New York Fed. He's no dope.
So it should be easy to believe that Obama and his economic brain trust are poised to steer the country out of recession, right? Not necessarily.
ON THE OTHER side sits the conservative Cato Institute, which recently placed full-page ads in the country's major newspapers to express disagreement with the president's plan.
Among the 200-plus who signed that petition was Michael Munger, chairman of the political-science department at Duke.
Munger, who holds a doctorate in economics, told me the president had mischaracterized the nature of the objections. The issue isn't that the Cato petition signers are simply "philosophically" opposed to government intervention. It's that government intervention doesn't work.
"All we're doing is funding things that were already set up, that would have been done anyway by the state. So the point is not that I think the government has no business. The point is that what they're doing is going to do more harm than good. I find it outrageous that he would misrepresent the position of 400 professional Ph.D. economists," he said.

Like Summers, Krugman, Geithner and the hundreds of economists supporting the stimulus plan, Munger and his allies are impressive. And these competing views leave many Americans stuck in the middle of two opposing "expert" opinions.
When I raised that with Munger, he said stimulus supporters know that the statistical realities don't bear out their case.
"But they're desperate," he said. "They're hoping that by giving some sort of sense of confidence - the idea that someone is in charge - that they can reverse this by giving people a sense of confidence."
Which is starting to remind me of global warming. Loads of experts and a similar number of opinions. On one hand, the Intergovernmental Panel on Climate Change deemed it "unequivocal" and "very likely" that global warming, if it truly exists, is spurred by human activity.
Meanwhile, Weather Channel founder John Coleman has called it "the greatest scam in history." Once again, the rest of us are stuck somewhere in the middle, unsure of whom to believe.

My own view: There is a LOT more evidence that there is global warming than there is that Porkulus will work. Porkulus is just faith-based economics married to political entrepreneurship.

Welcome Rush Limbaugh Listeners!

Dear Friends:

Those of you coming to this site because of the discussion on Rush Limbaugh today....welcome!

The web site for the interview Mr. Limbaugh quoted from can be found here...

And feel free to browse around. My blogging partner, Dr. Kevin Grier, and I, have written quite a bit about the bailout, and we welcome your thoughts.

For those who missed the Limbaugh show, here is the transcript, in section #2....

Mike Munger, email me
Political Science Department
Economics Department
Duke University

Small Government Means NOT Big Government

Steven Taylor has some observations on current affairs, and the views of one Richard Viguerie, with whom I shared the stage as twin Keynote Speakers at the Libertarian National Convention in Denver last year.

Some of what Prof. Taylor says makes good sense to me, some of it less so. But one portion is worth quoting:

One of the areas that Viguerie and his camp ignore in terms of “small government” is the increasing ability of the central state to intrude on our private lives, and well as the increase in power of the executive in way that damages our democracy. This is a more pernicious problem than most “small government” conservatives admit, and indeed, many who forcefully criticize fiscal policy aspects of “big government” are frequently boosters of an ever-growing security state that will “keep us safe” replete with an executive that ignores Congress when it feels like it. To me this is far more antithetical to the notion of “small government” than any amount of welfare spending could ever be.

The Repubs focused on lowering taxes, without decreasing spending. In fact, they increased spending, and regulation, more than any administration in history. All that does is borrow against the future. Maybe it doesn't do "harm," but it certainly does no good, unless you embrace the Keynesian principles the Repubs claim to hate.

And, the increases in regulation, education nannyism in the name of accountability, and the sheer hubris of the Patriot Act, the Gitmo imprisonment of due process, and outright lying about the war and etraordinary rendition.....Well, let me just say I think Prof. Taylor is on solid ground with this critique. The Repubs were hijacked and hoodwinked by a radical, statist minority who cloak their true intentions in "small government" rhetorical fabric.

(Nod to GW on the Taylor piece, which I had missed)

Neanderbill's Performance Art: Lucas was wrong....

So, you should understand about Neanderbill.

He is 6'8" tall (really, he is), and 180 pounds if he had a big breakfast. Ichabod Crane, except taller.

One windy day, I pull into the parking garage (we carpool, Neanderbill and I), and when I open the door about 6 or 8 one dollar bills on the floor (change from a carwash) blow out Neanderbill's door, and go flying toward the wall.

Neanderbill, wearing a trench coat that flies out behind him like a cape, goes running after the bills, flapping his enormous long arms.

And bellowing, in his basso profundo voice, "Lucas was WRONG! Lucas was WRONG!"

He stomped on the bills, one by one, and returned them. But I basically didn't recover the whole day.

In the Future, Everyone Will Be Bankrupt for 15 Minutes

Interesting article, from 1999, from the Philadelphia Fed.

Excerpt:

Historically, financial markets have displayed a tendency to overreact to a deterioration in business conditions. During a downturn, it’s normal practice for financial intermediaries to raise their credit standards and for risk-averse investors to shift out of stocks and bonds into cash and government securities. These actions reduce the amount of credit extended to the private nonfinancial sector and raise interest rates charged on loans. Usually, the cutback in credit does not lead to widespread financial distress, although some firms (and households) go bankrupt. But if the cutback is severe, many firms may fail. Widespread business failures, in turn, may cause the failure of financial intermediaries and lead to further cutbacks in credit and more bankruptcies.

This self-propelled cycle of credit cutbacks and bankruptcies leads to a financial crisis that results in low output, high unemployment, and very low investment.
Why a business downturn becomes a fullblown financial crisis is not fully understood,
but investor pessimism plays an important role. If enough people think that a usiness contraction is about to degenerate into a financial crisis and act accordingly, the crisis will, in fact, materialize: investors, fearing a financial crisis, may withdraw so much cash from banks and other depository institutions that they may force even sound financial institutions to run out of cash and fail.

Furthermore, an economy that suffers one financial crisis becomes prone to suffering
more crises because investors begin to view every downturn with alarm, and their pessimism and fear cause downturns to degenerate into crises more often.

And, the article gives a pretty good review of TFP, which Angus invoked, and Tyler lauded, earlier.

Say What?

This morning Tyler links to an RBC article by Martin Uribe and Stephanie Schmitt-Grohe. Let me just say in advance that I know and like Martin and Stephanie and they do awesome work. However, I found the following sentence in their paper quite bewildering:

We find that anticipated shocks are the most important source of uncertainty.

To which I can only reply: ???????? Folks, only a highly trained macroeconomist could hope to parse that humdinger of a sentence.

The paper is indeed a move back toward pure RBC in that there are no nominal ridigities in the model. However, it does simply assume a host of real rigidities, including the dreaded "investment adjustment costs" on the grounds that there is "a large existing literature
showing that these frictions improve the model’s empirical fit."

Oh.

For those of you who prefer a nominal rigidity approach but like the idea of exploring the distinction between expected and unexpected shocks, there is a related paper by Northwestern grad student Joshua Davis (paper can be downloaded here) that gets different results about what shocks are important than do Uribe & Schmitt.