There’s an interesting post on the Atlantic by Jim Manzi, Stimulus predictions: put up or shut up, that calls on economists who are making predictions about what Obama’s stimulus package will or won’t do to present their models on which these predictions are based.
In part, he says:
So here’s what we would need to falsify a prediction. Anyone who claims to know the impact should escrow a copy of the source code of the econometric model that is used to make the prediction, along with a stated confidence interval, operational scripts, and assumptions for all required non-stimulus inputs that populate the model with a named third-party. Upon reaching the date for which the prediction is made, the third-party should run the model with the actual data for all non-stimulus assumptions and compare the model result to actual. Any difference would be due to model error. We actually still would not be able to partition the sources of error between “error in predicting causal impact of stimulus” and “other”, but at least we would have a real measurement of model accuracy for this instance.
Of course, I sincerely doubt this will happen. I wonder why not?
As readers of this blog will understand, I don’t make empirical predictions from my models, but I do make qualitative ones; and my models aren’t the econometric giants that conventional economists build, but smaller models that, in contrast to the econometric lot, are truly dynamic (for those who don’t realise that standard economic models aren’t genuinely dynamic, please read this blog post “Why Did I See it Coming and “They” Didn’t?” ).
So I’ve taken up Jim’s challenge, and wrote the following comment on his blog:
Dear Jim,
I’m willing to take your challenge, but from an unusual perspective.
While I am an academic economist, I don’t build nor believe in the type of econometric models that dominate economics these days–generally so-called “New Keynesian” or “Dynamic Stochastic General Equilibrium” models.
Instead I build nonlinear dynamic models based on Minsky’s “Financial Instability Hypothesis”, and I have started constructing a strictly monetary model of a pure credit economy.
My predictions based on these models are qualitative rather than quantitative, but on the grounds of Minsky’s extremely prescient hypothesis the sheer scale of private debt that has been accumulated, and the abundant historical data on debt with which we can review past economic performance in the light of Minsky’s hypothesis, I have been arguing that this crisis is beyond bailouts.
Therefore while I think the bailouts are better than doing nothing, ultimately I see them as futile. All they will do is replace some private debt with even more public debt as has happened in Japan (if the spending is debt-financed), or pump fiat money into the economy only to see it disappear into debt repayment and not reflate the economy if (as Bernanke is now doing with M0) the helicopter approach is used.
To check my reasoning and qualitative predictions on this front, I proffer two models that are elucidated on posts on my blog http://www.debtdeflation.com/blogs:
http://www.debtdeflation.com/blogs/2008/11/26/parliamentary-library-vital-issues-seminar/
and
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
The former includes a model of Minsky’s Hypothesis built in the systems engineering program Vissim, which is downloadable from the blog; the latter details a model of a pure credit economy that undergoes a credit crunch, using the mathematics program Mathcad.
The former can be downloaded and run; the latter I only explain in the post, though there is a draft of a forthcoming paper that details the mathematics of the model:
http://www.debtdeflation.com/blogs/wp-content/uploads/papers/NotKeenOnBailoutsFinal.pdf
Both models, which I’m now working on integrating and extending, imply that there is no way out of this crisis while we still in effect honour the debt that was run up during this speculative bubble. We either have to inflate it out of existence, or selectively abolish it.
Since, as you’ll see from the second post above, I also doubt the possibility of causing inflation simply by driving up M0, the second option is the only one that I expect will work: at some point, to end this crisis, much of the debt is going to have to be repudiated.
I’ll keep an eye on that blog entry to see what eventuates, and whether any neoclassical economists submit their models for scrutiny.
firefly, jumping in for Steve (sorry), a lot is going to have to be abolished.
Either through controlled mechanisms (ie Govt) or uncontrolled by bankruptcy. The amounts are so great in many areas that they can NEVER be paid off.
So smart Govts can:
(1) let organisations go under, then nationalising the remains and recapitalising those who are critically important, which is a possible mechanism for some banks (10 banks go under, save only 1, thats all you need to provide services).
(2) Cancel debt by law. The classic example would be CDOs. It is doubtful many are legal anyway. This does require international cooperation.
Govts around the World announcement “At 12:00 Zulu time, all CDO contracts are now declared null and void and have no legal standing”. Poof 65 trillion goes away. The will bankrupt some organisations on the creditor side, but then you use method (1) for those who need to be saved, the others you let go.
On the debtor side, put in an emergency once off tax for a reasonable % of that money, to put something back into the general efforts to save the economy.
(3) Shut down every hedge fund. These are destabilising organisations. With an estimated, at one time, 600+ trillion dollars in positions, they also act as positive feedback mechanisms increasing instability (think currencies, etc).
They are getting in the way of stabilisation efforts. They are just the same as people who light bushfires right here in Victoria .. and should be shown exactly the same mercy.
Internationally coordinated again, at (say) 12:00 Zulu time the police break into every hedge fund operation in the World and shut them down, taking away computers, papers, etc.
All those trades, and the associated debt and destabilisation .. gone. Use method (1) to save those on the losing side who have to be saved, the rest, e.g wealthy individuals … go under.
Basic Triage. Save the essentials to keep society going, let go the unsaveable, invest in the ones who are actually ok. Keep people in their homes and make sure they have food.
I shoukld add the reason you wait for bankruptcy before nationalising is that the debts are now gone. So the cost is just some capital.
Later on Govts can sell off those organisations and help pay off the taxpayer debts
Basically an extended form of the ‘Swedish model’ when they nearly went under in the 90′s (look it up). It worked for them, though now this solution has to be extended far further.
Can’t argue with any of that at the first principles level OldSkeptic! The basic truth behind this is that we wouldn’t think twice about doing this to a Bernie Madoff, and yet in essence he’s just a more “honest” version of what the entire financial sector became.
Re the original subject of this blog entry, has anyone else noticed that Steve’s response to Jim Manzi’s challenge seems to have vanished (been deleted??) from the “Stimulus predictions: put up or shut up” article at http://business.theatlantic.com/2009/02/stimulus_predictions_put_up_or_shut_up.php ?
Rather odd, and a bit disturbing…
I could have told you this without any modeling other than the stuff we were taught in 5th grade arithmetic.
Take a peek at this document, retrieved from the fed’s comptroller office:
http://www.occ.gov/ftp/release/2007-137a.pdf
and take a look at the very *last* chart. Remember that’s millions they’re talking so just add 6 zeros to those numbers.
So… 1 trillion? 10 trillion? Not enough. Not nearly enough, even if it was real money and not the fantasyland cotton candy it is.
What’s going on in DC right now is like asking whether to give coffee or coffee AND aspirin to to the terminal cancer patient. It’s all about votes – a show for our benefit. A new American Idol for the voters with congress playing the part of Simon.
Given these numbers, the terminal outcome for the world economy as it now exists is certain.
Cheers!
Ian, we can all argue about who was right in the past. Bit like saying I told you so about the impact of (e.g.) fuel build ups or high temps on bush fires.
But now we are in this mess, so how do we get out of it in the quickest way with the minimum possible damage?
There is going to be damage, it is in our power to make that devestating or just merely bad. The US has decided to make it devestating for them, by trying to protect the old order.
Anyone who has worked through Steve’s work knows that the old order cannot, in fact should not, be saved.
So what is the new order? More local production? Less trade? Where is the capital coming from? What about skill levels? What sort of society do we want?
I am always reminded about Australia before the 2nd World Waar. Broke (Australia like Germany and the US suffered terribly during the Depression), we could not even make a gun.
By the end of WW2 we were making, here in Australia, guns, ships, radar, computers, Mustangs and Mosquitos (the F-22 and F-35 of their day). In just 6 short years.
So it ain’t over until it is over. And in the end, the big boys, US, EU, China, Japan, will make their own good/bad decisions. But what are our decisions? What is right for us? What can we do to get through this? And emerge with a strong economy and a good standard of living?
{Though saying ‘I told you’ so to some people is so irresistible that you would have to be inhuman to avoid that pleasure. Plus some of these people deserve Guantanamo, they have made Bin Ladin look like an amateur in terms of damage to our society.}
Hi Steve,
At some time would you please post a blog fleshing out what debt repudiation will look like.
How do you select the beneficiaries and how do you prevent the debt teleporting elsewhere?
How do you do it without rewarding the imprudent at the expense of the prudent? If those rescued by debt repudiation are to be somehow stripped of material reward, then wouldn’t plain old bankruptcy do the same job?
Thanks,
Muzz (Joe Blow non-economist)