Taylor on what the Taylor rule implies for the present situation

Interesting... from John B. Taylor's blog:

"The Taylor rule says that the federal funds rate should equal 1.5 times the inflation rate plus .5 times the GDP gap plus 1. Currently the inflation rate is about 1.5 percent and the GDP gap is about -5 percent (using the average of the seven estimates of the gap provided in the recent update by Justin Weidner and John Williams).

So a little algebra gives a funds rate of 1.5X1.5 + .5X(-5) + 1 = .75 percent.

This number is nowhere near -6 percent, which is what you sometimes hear people say the Taylor rule implies."

I think I've hear the numbers near -6 percent from Krugman, and possibly Delong... the issue, I guess, is that they are not adopting the specific slope and intercept from Taylor's 1993 paper, but are employing some procedure based on economic data for estimating an appropriate slope and intercept---based on "a period during which the Fed has set interest rates too low for too long".

Update: Actually, the Krugman post I was probably thinking of doesn't use Taylor's 1993 rule (which is indeed the one cited in Taylor's post,  which is also (modulo trivial algebra) equation (1) of his 1993 paper:

f = 1 + 1.5 p + 0.5 y,

where p is the inflation rate over the past four quarters, and y is the deviation of GDP from target ("output gap").  It uses Mankiw's "Taylor rule" (this having become a generic term for prescriptions for setting the federal funds rate as an affine (i.e. straight-line, with slope and intercept) function of inflation and the output gap), i.e.:

f =  c p  + c y  + d

where c and d are coefficients to be chosen on some basis, p and y as before.

Mankiw's uses equal coefficients on inflation and the output gap, whereas Taylor's inflation coefficient is thrice its output coefficient.  Krugman fits c and d  to data for 1998--2008.  Thus he does do what Taylor gives as the explanation for the people who get -6%: "they change the Taylor rule, replacing variables or estimating coefficients with data during which the Fed has set interest rates too low for too long."  Presumably Taylor thinks interests rates were set too low during part of the 2000's at least....I wonder, though, what result one would get by letting output and price coefficients be fitted independently...probably something not too different from Mankiw's rule.

At issue seems to be how the Taylor rule should be determined.  Taylor's 1993 paper shows that his rule fits the behavior of the fed funds rate from 1987--1992 fairly well.  One might reasonably ask that included as part of such a rule be a publicly disclosed formula for updating it, perhaps based on a window of economic data, or some time-profile of weighting of data, so that recent experience influences the rule more than that of decades ago.  Krugman, at least, is quite clear about what he's doing along these lines; Taylor does not derive his rule from an explicit fit, merely showing graphically that it fits the preceding fivish years of data reasonably well.

University of Minnesota University Relations office said to have canceled premiere of environmental documentary on agricultural pollution of the Mississippi

The premiere of a documentary produced by U of Minnesota's Bell Museum of Natural History, on pollution of the Mississippi by agricultural practices, appears to have been canceled by the "University Relations Department." See also this from a U Minn bio professor.  He writes that the Vice President of University Relations is married to the president of a PR firm that represents the Minnesota Agri-Growth council.   I know,  I know, correlation is not causation...  Still, I expect outrage from the local Tea Warm Milk and Kahlua party...

NBER financials --- not easy to find details, but SourceWatch information looks VERY incomplete.

Thanks to Dave Bacon, the link (available via a few clicks starting at the About menu item on NBER's homepage) to the 2010 financials summary page of their annual report (if you follow the link, go to the bottom of the page and click).  Trying to find the full report online has proven bootless...so far this is what I've turned up.

However as I pointed out in comments on my earlier post, responding to the summary fiscal 2010 financials Dave provided, the vast majority of their money---32.4 million out of revenue of 39 million---is coming from current grants.  Given this, the $10 million from four right-wing foundations over 16 years, detailed by SourceWatch, is extremely unlikely to represent a signficant fraction of their funding during that period although without access to financial statements, who knows.

Since I've gone this far, I suppose I should probably just ask NBER for the info!

Estimating the happiness equation: Freakonomics blogger Justin Wolfers on the Black/White happiness gap

Unfortunately (or perhaps fortunately) for the humorist in all of us, Justin Wolfers posts to the New York Times' Freakonomics blog, but is not actually an author of the recent Freakonomics sequel, Superfreakonomics.  (If you picked up on my reluctance to appear implicitly favorable toward the Freakonomists in my previous post, it's largely because of what I've read about Chapter 5 of that sequel, on geoengineering and global climate change---see, for example, this.)  Nevertheless, the paper by Wolfers and his Wharton colleague Betsey Stevenson, titled Subjective and objective indicators of racial progress, looks interesting.  A rough summary would be that in the US, black or African-American people's self-reported level of happiness has increased substantially since the mid-1980s.  Although it is still lower, even controlling for other circumstances like average income, than for white Americans, the gap has narrowed.  The overall gap (not controlling for income) has also narrowed, but the narrowing appears not to be due to increases in income, but appears due to other factors;  Wolfers and Stevenson suspect, but have no direct data to indicate this, that it is due to the decrease in racism black people encounter in day to day life.

There's some bad news for some of us in the conclusion to their Section II:

Comparing these various estimates, we find that controlling for measurable differences in the lives of blacks and whites explains about one-third of the black-white happiness gap in the 1970s and much of this is due to the differences in income between blacks and whites. Turning to the trends over time we see that little of the change over time is explained by the controls. In all specifications the black-white happiness gap—measured relative to the standard deviation of happiness—is closing at a rate of about 0.5 per century. However, this relative change is composed of both a decrease in the happiness of whites and an increase in the happiness of blacks; the decrease in the happiness of whites is larger once controls for objective indicators have been taken into account. Finally, while the racial happiness gap remains large, around two-thirds of this can be explained by differences in observable characteristics.

White folks, it seems, have been getting less happy---an effect that is only made more pronounced by controlling for other measurable factors.  Actually, Stevenson and Wolfers (2009) claim that this is mostly due to a decrease in happiness among white women.

Reading the paper is recommended as a look at a simple piece of modern social science research, how it tries to control for potentially confounding effects, and how tricky it is to deduce correlation from causation. (An example of the latter: "one reason that married people report substantially greater happiness in a cross-section is that happy people are more likely than unhappy people to marry (Stevenson and Wolfers 2007)".)

Where does the National Bureau of Economic Research get its money?

Annoyed by the fact that the Cambridge, MA based National Bureau of Economic Research (NBER) charges $5 a pop (or requires an institutional subscription) to download its working papers (with some exceptions, such as for journalists, I decided to look into where they (and the people who publish there) get their funding, since I object to publicly funded research being published in venues that are expensive for the public to get access to.   Probably this is well-known to professsional economists (so if any read this thing, feel free to comment)---but the overall situation with NBER working papers seems to be that they are (primarily? entirely?) results of research done as part of NBER programs.  Perhaps that means, the research is NBER-funded as well?  NBER has a contract with the Commerce Department to officially determine when recessions and "stagnations" have begun, and ended.  I found it relatively difficult to figure out where NBER gets its money, since googling "NBER funding", "NBER budget" and the like tends to turn up NBER research on national budgets and general economics, not surprisingly.  I found this link to a page by an organization called SourceWatch interesting, though I don't have a lot of familiarity with the group.  Much of the discussion seems to concern pre-2001 funding, and the introductory paragraphs are confusing.  They consist mostly of quoted material, and it is unclear what is being quoted:  a New York Times article about the NBER or, as seems more likely, an article from an unnamed source, critical of the NYT piece and of the NBER's then-director Martin Feldstein?  In any case, the quoted material seems highly polemical even to someone as leftish on many things as I am.   And sure, Feldstein is too conservative for my taste, but he gets a lot of respect from me for recognizing, at least sometimes, that Keynesian theory can be relevant, and calling for substantial fiscal stimulus on Keynesian grounds early in this recession.  Nevertheless, this claim from SourceWatch is interesting:

"Between 1985 and 2001, the organization received $9,963,301 in 73 grants from only four foundations:

All four of these are characterized (by SourceWatch, at least, in their own descriptions linked in the above quote) as very conservative, small-government/low-regulation foundations.  Actually they say the  Scaife foundation is no longer pushing this ideology since Sarah Mellon Scaife took over, but (I think) during the 1985-2001 period they were.  I wouldn't necessarily trust SourceWatch on this (e.g. they say the Olin Foundation gave $20.5 million to "right-wing think tanks" in 2001, then give a list that includes the Brookings Institution.   I'm fairly confident this is not a mistake, rather a combination of deadpan humor and a genuinely left-wing viewpoint that does see Brookings as part of the right-wing liberal establishment.  But Olin is well known as a conservative foundation, so the characterization of Olin, if not of Brookings, seems reasonable.

I'm still at a loss about the pay-for-working papers policy.  Perhaps this --- especially library subscriptions to it --- is a significant source of income to the NBER?   NBER's working papers are definitely a respected and prestigious series that I see cited a lot (and not just by conservatives--Paul Krugman's blog links them on occasion, as does Brad DeLong's). So they can likely get a significant amount of income that way.  It does seem that the goal of spreading knowledge of the results of NBER (oops, I mean covert promotion of right-wing economic ideology ;-) ) might be better served by making them free to the public.

Here's Freakonomics on the NBER and the shift in directorship from Feldstein to Jim Poterba.  (No opinion implied on the quality of Freakonomics books, blogs, or Steven Levitt, though.)  Still, it gives you an idea of the attitude of much of the economics profession toward the NBER.

2008 Perrin Reserve Blanc, 2006 Dry Creek North Coast Cabernet

Just a couple of quick notes on some good wines I've had recently.  Perrin's 2008 Reserve Blanc, a white Cotes-du-Rhone made from 50% Grenache Blanc, 20% Bourboulenc, and 10% each Marsanne, Roussanne, and Viognier, is what a white Cotes-du-Rhone should be, and one of the best ways you could spend ten bucks on a white wine (I paid US$9.98 at Ta Lin in Albuquerque).  I've posted before on Perrin's excellent reds; this shares some characteristics with them, notably a certain almost glyceriny smoothness, but without stickiness... and a characteristic that I'd call "watery" except that sounds bad, and this is good---it's probably associated with being relatively low in alcohol, and not extremely high (nor excessively low) in acid or tannin.  Mainly, it's got intense, but refreshing rather than tiring, flavors, flavors akin to those of a good chardonnay-based wine from the Maconnais, but maybe slightly fruitier and slightly more floral.  And much cleaner, more balanced, and more intense than most of the Macon-Villages and such I come across (in North America, anyway) in this price range.  Some resemblance to nice Spanish whites, like Muga's white Rioja.

A favorite wine at a party I recently attended was the 2006 Clos du Bois North Coast Cabernet.  Nothing super-complex, just a very drinkable, fairly rich, but balanced, Cab.  It Googles up at $12-14, which I'd say is reasonable although not a steal.  (A 2007 Acacia Pinot Noir, tasted afterwards, seemed excessively jammy and just not enjoyable to drink, which surprised me as their Pinots have seemed decent value even in the $20 range, in the past.  Perhaps not fair to judge based just on one bottle.)

Consensus on Deolalikar's P vs. NP proof-attempt (via Scott Aaronson)

Haven't been blogging much recently, but I certainly need to post this link on Deolalikar's claimed proof of P ? NP:  Scott Aaronson saying (nearly a month ago) that a consensus has developed that it's fatally flawed.  Scott's post is worth reading in part as a preliminary guide to what you'd need to learn about to really tackle this problem---and what to do to increase your --- and others' --- confidence you'd actually solved it.

I think I already linked Richard Lipton's less conclusive "Fatal Flaws...?" post.   Lipton wrote another good post a few days later (a week after the proof was posted).  These lack a definitive statement that "it's dead" (one section is labeled "it ain't over till it's over".  Scott seems to have concluded on the basis of most of the same evidence that it was almost certainly over.  The fact that googling "Deolalikar proof" turns up nothing later than Aug. 12 on the first page (I see a broken link from Aug. 18 on the second page) also suggests it's dead.

A weak link from Greg Mankiw on whether to extend the Bush tax cuts

Harvard economist Greg Mankiw says it "might be worth remembering" that 70% of economists who expressed an opinion in a Wall Street Journal poll last month thought that all the Bush tax cuts should be extended, 24% thought they should for households making under $250,000/year, 6% said they should all be allowed to expire.  Of rightish-leaning economists, Mankiw is one whose thoughts are often worth reading, but I'd much rather hear what he thinks on the issue (I suspect he's with the 70%) and why, than what 48 of 53 economists chosen by the right-leaning WSJ have to say.  I have three main points: (1) the Journal quotes four respondents by name---they are from Northern Trust, Standard & Poors, Perna Associates, and Pierpont Securities.  In other words, this is not a poll of academic economists, but of economists working for financial firms.  Maybe they're good at forecasting, maybe not.  I care more what people like Mankiw himself, Paul Krugman, Joe Stiglitz, Robert Barro, Barry Eichengreen, Thomas Sargent, Christina Romer, Laura Tyson, etc... think on these issues.  (2) It's not clear what the basis for the judgment is supposed to be---it thus likely mixes their values regarding inequality, taxes, etc... with issues of the economic effects of tax policy. (3) Much discussion currently centers around whether or not the cuts should be made permanent.  "Extended" is a very different thing; many would support extensions while we are still in a slump, but not necessarily permanent ones.  For example, I'd support (along with Obama and virtually everyone else) an extension for people making under $250,000 a year as providing fiscal stimulus (though government spending, especially direct aid to states and municipalities, would be more effective), but not necessarily a permanent extension for everyone in this group,

Link on paper on profiling/importance sampling in context of screening for terrorists

Mainly storing a link to this interesting paper that raises some questions:

William Press, "Strong profiling is not mathematically optimal for discovering rare malfeasors".  Weak profiling apparently is---under the assumptions of his model, which seem to me a rather imperfect fit, but not wholly irrelevant, to most real-world terrorist-screening scenarios.   No implied view from me on the correctness or relevance of these results, pending more careful reading and thought.

Aha, just realized it's that Bill Press--former (pre-2004) deputy director for Science and Technology at LANL (curently at UT Austin, on leave from LANL).

Oh yeah, link is from The Yorkshire Ranter, who got it from Bruce Schneier.