Tuesday, September 04, 2012

Economists Love The Spread

The spread is a debating tactic where you present a set of supporting arguments so wide and particular your opponents are unable to rebut them all because 1) they have day jobs and 2) they have limited space or time to address them in any particular forum.  A champion spreader is Noam Chomsky, who selectively recites facts of world history from Indonesia, Russia, to El Salvadore and 200 places in between, which no one but a professional in Comparative Economic Systems would be familiar with (indeed, comparative economic systems was a flourishing economic subdiscipline precisely because it couldn't be easily refuted because those communist countries didn't have a free press and made up their production data, but after 1989 it was obvious this field was simple wishful thinking dominated by deluded Marxists-note:of the ones I knew!).

So, a paper by Michael Woodford calling for NGDP targeting is a case study of a good type of argument for this kind of thing. As it is doubtful that less than 1% of his readership understands all the strengths and limitations of the model he presents, it makes for a great spread argument by Paul Krugman, because he can be sure that most readers won't have the time, inclination, or ability to assess the credibility of this paper. As with most spread arguments, they can be used by those with the opposite conclusion (eg, John Cochrane here), because a small tweak makes it support an opposite view, and who's to say what is minor when references are really recondite.

The model used by Woodford is from an older paper by Eggertsson and Woodford (2003). Kids Prefer Cheese notes this following set of quotes from that paper:
For simplicity we shall assume complete financial markets and no limits on borrowing against future income. 
Our model abstracts from endogenous variations in the capital stock, and assumes perfectly flexible wages (or some other mechanism for efficient labor contracting), but assumes monopolistic competition in goods markets, and sticky prices that are adjusted at random intervals in the way assumed by Calvo (1983), so that deflation has real effects.  
We assume a model in which the representative household seeks to maximize a utility function Real balances are included in the utility function, following Sidrauski (1967) and Brock (1974, 1975), as a proxy for the services that money balances provide in facilitating transactions.
In other words, the basic workhorse of this model was created decades ago and has been available to thousand smart economists trying to forecast the macroeconomy. If some metric of monopolistic competition, sticky prices, inflation, and real balances, predicted future investment and consumption, we would know it because there's a model that targets these variables directly, and whether a parameter is 7 or -0.3 is simple enough to change after the fact: if some parameterization worked, the model could rationalize it. There isn't such a model, as evidenced by the fact that all recessions have surprised macro economists in real time.

 Now, these are smart people, so they are very good at explaining the past, but that's really unimpressive, and reflects the degrees of freedom available relative to the target variables of quarterly GDP aggregates. It's like finding a trading rule for last year's daily S&P moves.

Don't be fooled by The Spread in economics.  All macro models are no more precise than the infamous Laffer curve, which while true at extremes and useful for some intuition, says very little about your average policy change and intermediate forecasts. Outsiders can't critique such models directly, but they can say, "what did this model say in 2007?  In early 2009?"  That is, not what does the model now say about 2008 given 2007 data, but what did it actually say in 2007?  


Anonymous said...

Excellent post.

Anonymous said...

I guess, this particular post itself is a very good example of "spread argument" - with selective examples frrm left leaning authors. .

Eric Falkenstein said...

I put in Cochrane and Krugman...so, that's right and left.

Mercury said...

Hmmm. Sounds like both professionals and laymen alike can safely treat "spread arguments" as a sub-species of “Baffle Them With Bullshit”.

Only Krugman would worry that an irresponsible Fed might not continue to act irresponsibly after they’ve magically, centrally planned us out of a persistent economic slump prolonged by their irresponsible actions.

Here he is advocating for perpetual ZIRP which will ultimately and certainly screw us all (I’m sure even he doesn’t actually believe that his condition of real-GDP explosion is a real possibility) I’d say he’s about three columns away from openly begging for hyper-inflation.

Barry W. Ickes said...

I ignore most of the post, but have to respond to your comment about Comparative Economic Systems. It is a complete insult to say most people in the field were Marxists. Most were anti-Marxist. Much of the field was dominated by refugees from Communist countries. Much funding came from the government that wanted to understand how much burden military spending placed on the Soviet Union. The field died because once the Soviet Union collapsed the funding collapsed.
You should really apologize for such an insult.

Eric Falkenstein said...

Barry: all the comparative economic systems enthusiasts I knew circa 1989 were of the hard left, though that's clearly a biased sample. I'm sure, however, that some of them were smart, good faith researchers, as true in any large group, but as you even admit, once the Soviets fell there was no more interest. Thus, it wasn't a real science, whether created by the right or left.

Aaron Brown said...

Spread arguments are a recognized tactic in formal debate. I recall a master of the spread I came up against in high school. We had the affirmative of: "Resolved: the government should guarantee a minimum income to all families."

Standard judging technique was to keep a flow chart. Each speaker had a column and each point he or she raised was written there. An arrow was drawn to any response by a subsequent speaker. While strength of argument and overall persuasiveness counted, you could get an advantage just by racking up uncontested points.

After my partner's opening case, a guy named Mike King had 157 objections in a 7 minute speech. One I recall in particular was that a truck shortage (for which he had a strong reference) would prevent delivering goods to people so even with a minimum income there would still be people unsupplied with necessities. Of course, we had no equally strong reference that said there was no truck shortage.

It's possible to counter the tactic, of course, but it often overwhelms the other team. They get tied up with silly minor points, and only manage to address 20 of your 157 points, and those without supporting evidence.

Eric Falkenstein said...

My legal case was basically a spread strategy on both sides. I didn't like it, but if one didn't play the game they would lose quickly. They key is, the judge knows very little about how to weigh arguments and has idiosyncratic reasoning, so raising many arguments was the dominant strategy (of course, given the plaintiff's purpose is merely to inflict harm).