
The MIT Gang - drallison
http://www.nytimes.com/2015/07/24/opinion/paul-krugman-the-mit-gang.html?action=click&contentCollection=Art%20%26%20Design&module=MostEmailed&version=Full&region=Marginalia&src=me&pgtype=article
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overpaidgoogler
The distinction is usually referred to as saltwater vs freshwater economists
(referring to the geographical location of the university's). Apart from MIT
there is also Princeton and Stanford in the saltwater camp.

And Krugman is right that the saltwater economists were vindicated by the
recovery from the GFC.

However Krugman is not a good spokesperson for saltwater economists. Most econ
professors I know from saltwater university's say they cannot even understand
his points (note that Krugman did not win his Nobel prize for macro, but for
trade).

In particular he is wrong to bundle together views on debt crises, recessions,
and general attitudes to the free market. By the time you are in a debt
crisis, it's a bit late to stimulate the economy with even more government
debt. At some point you actually have to figure out a way to pay money back.

~~~
washedup
We really need a way to simulate how the economy will react under certain
policies. The current model is based on one hypothesis about how the economy
works, when such policies may have been only tested once or twice before, AND
when the test conditions were different in a lot of ways. Because of the
complex nature of economic systems, prediction is extremely difficult.

We have yet to see if the monetary policies being used today will be a success
or not. Many people point to signs of weakness and cracks in the economic
foundation. Until interest rates are brought back to 2007 levels, we cannot
say that the economy is stable. What happens to high levels of debt when
interest rates begin to go up? People begin to default, credit is restricted,
and spending drops. It will certainly bring higher volatility across the
entire global economy, and the FED is nervous about how much.

While MIT might be today's most influential powerhouse of economic thinkers,
we still don't know how successful they were at applying theory to practice.
The debate about Keynes is still up in the air.

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overpaidgoogler
I don't see any fundamental difference between what your call simulation and
what economists call models. The only difference is that your believe in the
possibility of models so accurate that one could easily verify that they give
correct predictions, as opposed to existing models which are subject to
continual debate.

The reason it is so hard to stimulate the economy is that it represents the
sum total of a large part of all human activity. So for example to test the
impact of a particular kind of fiscal stimulus, you would have to accurately
model the response of individuals to their new circumstances, as well as the
response of markets (which involve individuals with conscious knowledge of the
new policy, and thus their own beliefs about its effects). It is this last
factor that makes the economy so hard to stimulate. You are not only
simulating actions, but beliefs, and beliefs about beliefs, etc. It's ironic
that economics is criticised for following physics to closely, when it is
precisely this last factor that makes economics fundamentally unlike physics.
The closest thing to modern macro if mean field theory.

~~~
pekk
Mathematical descriptions of large-scale static properties like equilibria are
patently not the same as, say, dynamic discrete-time simulations with evolving
state.

I don't think we have anything satisfyingly like the latter for economics, but
to claim that there is no fundamental difference is just inaccurate.

~~~
overpaidgoogler
DSGE models are precisely "dynamic discrete-time simulations with evolving
state" and they are the workhorse of modern macro.

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pmorici
It's hard to take anything Krugman writes seriously. All his writing is so
intertwined with his politics It's impossible to sort the factually sound
parts from the rest and he has a track record of saying some truly wrong
things with great conviction.

~~~
pekk
Are you sure you aren't just discarding everything he says because he has
different politics?

~~~
tigerthink
Krugman used to think like a typical economist, but abandoned this approach
and subsequently became a celebrated columnist. Ironically this was years
after he wrote an essay complaining how the economists who became popular were
rarely the ones who had a good understanding of economic theory:

[http://econlog.econlib.org/archives/2015/03/ways_of_thinkin....](http://econlog.econlib.org/archives/2015/03/ways_of_thinkin.html)

[http://econlog.econlib.org/archives/2015/03/krugmans_danger....](http://econlog.econlib.org/archives/2015/03/krugmans_danger.html)

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stevedekorte
Inflation did not remain low, it just went into the capital markets and luxury
goods first because all the new money (~$3T so far) was effectively handed to
big finance to buy their junk bonds above market prices. The wealthy can only
consume so much in basic consumer goods (steaks, coffee, paper towels, soap,
etc) so we wouldn't expect consumer prices to increase immediately, but we can
expect them to increase inevitably. Had the newly printed money been sent to
each citizen instead, consumer prices would have risen almost immediately.

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dmritard96
Its interesting how his attitude as stated at the bottom of the piece is that
they (the economists) were 'right'. Its so interesting because you would think
that brilliant people would realize that their claims aren't falsifiable.
There was no AB test for the recession and there are a ton of reasons that
their decision could have had relatively little to do with anything.

~~~
closetnerd
Exactly this. I'm amazed he has the audacity to make such a claim. No sooner
does he the make claim does he start attacking right wing politicians for not
realizing it instead of making a reasonable effort to justify it.

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dluan
My beef with Krugman is his absolutism, which comes as way more smug when he's
post-rationalizing.

~~~
jeffbax
Yeah, his problem is he's so lost in his own ego these days he's just a
blatant ideologue at this point. He's uncharitable to his opponents, unwilling
to acknowledge his own biases, and is more and more like the Bill O'Reilly of
the left just better educated. His smugness and amazing ability to totally
ignore any evidence to the contrary just makes me roll my eyes.

His ability to spin is uncanny, these being but two small examples of many
[http://econlog.econlib.org/archives/2015/07/krugman_on_cana_...](http://econlog.econlib.org/archives/2015/07/krugman_on_cana_1.html)
[http://econlog.econlib.org/archives/2015/04/krugmans_insigh....](http://econlog.econlib.org/archives/2015/04/krugmans_insigh.html)

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guelo
I don't understand how conservative economists who have been constantly
predicting runaway inflation since 2008 have any credibility remaining.

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georgeglue1
For context, MIT has had the consensus best overall economics program for the
last ~30 years.

Harvard, Stanford, etc. compete closely with MIT in many fields, but MIT is
still the most desirable destination for graduate students and assistant
professors.

It's no surprise that MIT students achieve a lot, and it's not surprising they
can't succeed when put in intractable positions.

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refurb
_The truth, although nobody will believe it, is that the economic analysis
some of us learned at M.I.T. way back when has worked very, very well for the
past seven years._

That makes me laugh. I wouldn't measure economic success over a period of 7
years. Yes, the economic policies seemed to have brought the US economy out of
its slump. However, let's see how we do over the next 7 years.

The danger of "printing money" is not so much the printing, it's the pulling
back once the economy recovers. Since the Fed will get a ton of crap for
moving too fast and slowing down the recovery, it tends to err on the side of
moving too slow.

The problem with that is a rapid increase in inflation, followed by a spike in
interest rates.

Any idea what might happen to housing prices when interest rates jump from 4%
to 10% (historically they floated around 6%)? Every increase in interest rates
reduces the buying power of those looking for homes.

And what happens if they move way too late? Rampant inflation and an erosion
of savings.

We're still not anywhere close to being out of the woods yet.

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AndrewUnmuted
People replying to this article may do well to remember that Krugman also
attended MIT to receive his PhD in economics.

It's quite unfortunate that the man chooses to intentionally disregard all he
learned and espoused while attending such a massively well-respected
institution.

