Tag Archives: stephen williamson

Picking on Piketty!

So like many other fellow bloggers, amateur economists, savant economists, and Nobel laureate Paul Krugman, I have my copy of Capital. This time the author is Thomas Piketty and not Mr. Marx though. I am yet to read the book- not sure if I will ever get to it amidst semester ending, grading and fulfilling research requirements. So I wanted to get a quick take on what macroeconomists have to say about the book. Not surprisingly, Steve Williamson had a post- but he was yet to read the book. So I guess we will have to wait for his critical comments or not as he is more into figuring out what Fed should be doing! Meanwhile this following comment by Tony on Steve’s post┬áprovides a good critical view:

Piketty’s book does not contain explicit references (to the best of my knowledge) to the two-decade-old body of work on macroeconomics and inequality beginning with Huggett and Aiyagari. Neither does the book’s online appendix, but if you follow the links provided in this appendix to other papers that Piketty and co-authors have written you will find references to some of this work. (That does not count as a citation in my book but it shows at least that Piketty is evidently aware of some of this work.) But for reasons that are unclear to me Piketty does not seem persuaded by papers like Castaneda, Diaz-Gimenez, and Rios-Rull (JPE, 2003) which match most of the facts about U.S. income and wealth inequality with parameters calibrated more-or-less reasonably. Instead in his book (which I have still not yet finished) and in a very recent paper (April 2014) with Zucman he seems to favor fairly mechanical models with multiplicative shocks to individual wealth accumulation. These models generate power laws for the upper tails with coefficients that evidently depend on the now-infamous “r-g” (i.e., the difference between the interest rate and the growth rate). But he does not make much of an attempt to calibrate them as do Benhabib et al (Econometrica et al, 2011). My overall impression so far is that Piketty does not really engage the existing literature on income and wealth inequality. Maybe this is because he focuses almost exclusively on the upper upper right tail of the wealth distribution (not just the top 1% but the top 0.1%). Krusell and Smith and Castaneda et al and others do a pretty good job of matching the top 1% but perhaps (and I am not sure about this) less well on the top 0.1%. But then in his book he makes bizarre statements like “the profession [has an] undue enthusiasm for simplistic mathematical models based on so-called representative agents”. He knows this is not true! (He was even a discussant for Quadrini and Rios-Rull’s forthcoming chapter on “Inequality in Macroeconomics” in the Handbook of Income Distribution.) Inexcusable.

There is also this article from 2012 on VOX that might interest you. And as the famous econblogger Noah Smith once tweeted: stop spelling Piketty as Picketty ­čśë

Leave a comment

Filed under book review, current economic issues, Uncategorized

Steve Williamson’s Macroeconomics

I have to admit that this indeed is a fabulous undergraduate macro text. As claimed it does reflect the current practice of macroeconomics or at least the most influential one. However, the following is worthwhile to note:

  1. The most common example given by almost all advocates of RBC theory of business cycles of a shock to total productivity, the oil price shock of 1970, is also present in this book. While it is true that with an exception of one, all the recessions in US have been preceded by a sharp rise in energy prices, this should work as a change in relative price of an input and hence a movement along the production function and not as a shift in it. However, even if we accept that the increase in energy prices does work as a productivity shock we cannot ignore the fact that most of the empirical studies place the contribution of energy prices to business cycles between 8 t 18 %, which is not a very significant, let alone a major one! ( Stadler 1994). This is not withstanding the fact that for technology shocks themselves to contribute to cycles, they should contribute at laest 78% to the shocks according to Aiyagari (1994).
  2. I still have difficult time understanding why various authors motivate the study of endogenous growth by mentioning the failure of Solow model’s prediction about convergence of growth rates across countries, but failing to mention that Robert Solow himself never intended his model to be used in that way, Easterly (2001, pp.55). Solow wrote his model on the backdrop of what is called as capital fundamentalism, a belief which postulates economic growth as a function of availability of machines per worker. He intended to show that this belief is wrong and hence capital accumulation does not cause growth in Solow model but some exogenous factor called technology does. The insight comes from the simple yet powerful logic of diminishing returns to a factor. When applied to cross country comparison of growth rates, economists extended the logic of the Solow model by assuming that, at least in principle, all countries have access to the same technology. Then, the only reason that countries, for example the tropics, did not catch up with the developed countries was lack of capital. But again the problem with this conclusion is that capital is not a very sizable factor in production. Therefore, if one wants to explain the differences in growth rates on the basis of availability of capital, then the conclusions are obviously absurd. As per the calculations of Lucas mentioned in Easterly (2001), each US worker for e.g. will have to have 900 times more machines than each Indian worker in order to explain the differences in their standard of living and thats clearly not the case.

All said and done, this book does a good job in presenting macro in a much clean and consistent way and avoids giving the feeling to the reader which, I got as an undergrad, that macro is a series of disconnected models with no relation to the micro behavior.

References:

Aiyagari R S (1994), On the Contribution of Technology Shocks to Business Cycles, Federal Reserve Bank of Minneapolis Quarterly Review, Vol. 18, No.1, pp.22-34.

Easterly William (2001), The Elusive Quest for Growth, The MIT Press.

Stadler George W (1994), Real Business Cycles, Journal of Economic Literature, Vol. XXXII, pp. 1750-1783.

Williamson Stephen D (2007), Macroeconomics, Third Edition, Pearson.

Leave a comment

Filed under book review