A wonderful Nobel for Josh Angrist, David Card & Guido Imbens. In Ec10 we learn about 3 principles of economics: optimization, equilibrium & empiricism. This prize is all about #3. It is about science as a process of discovery not fixed and final answers.
nobelprize.org/prizes/economi…
In many ways economics is harder than the natural sciences because human beings are more complex and the relationships we study are less precise and less stable than what natural scientists study.
Two years ago the Nobel Prize was awarded to Abhijit Banerjee, Esther Duflo, & Michael Kremer for their work on randomized control trials in the area of development--these were deliberately designed experiments to learn in way that has long been standard in the natural sciences.
In many cases it is impossible to design an experiment (think minimum wage, immigration or college education). In this case you need to use a "natural experiment," which is to find a group that was treated, another group that was not, and use it to determine the causal impact.
Natural experiments raise a lot of devilishly complicated statistical questions many of which center around the questions are the treatment and control groups really the same in all respects except the treatment and what exactly can one infer from the difference between them.
The Nobel committee has a nice non-technical explainer about how natural experiments work and what can be learned from them. nobelprize.org/prizes/economi…
We don't have definitive answers on the topics that these scholars have studied like minimum wage, immigration or education, but we do have process that is helping to continue and expand our understanding of all of them and much, much more.

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More from @jasonfurman

11 Oct
I don't like it when people say "science says". Science is a process not a fixed set of answers.

Take the minimum wage. One theory predicts increases reduce employment. Another predicts smaller increases don't reduce employment but larger ones do. Others have different predns.
Thirty years ago the dominant theory was employment reductions and the empirical evidence was a mess. The New York Times editorial page would routinely caution that raising the minimum wage would reduce employment. nytimes.com/1988/02/23/opi…
David Card (winner of the Nobel Prize) together with Alan Kruger studied a natural experiment about NJ vs. PA which upended this conventional wisdom and ushered in a new era of more credible attempts to casually identify the effects of the minimum wage.
Read 10 tweets
7 Oct
The infrastructure/reconciliation bills will almost certainly have a negligible medium-to-long-term impact on inflation. It could be a very small positive or a very small negative. This chart is the most important reason why.
The fiscal support was huge in 2020 and even larger in 2021. But the infrastructure and reconciliation bills (or at least President Biden's versions, we don't have budget numbers for Congress' version) are *much* smaller in gross terms and essentially zero in net terms.
The ~$500b from the American Rescue Plan passed in March that is set to spend out next year will continue to put some upward pressure on inflation relative to pre-pandemic rates. But the new legislation is negligible (look at the diamonds).
Read 4 tweets
7 Oct
The reconciliation bill is a small change in the overall level of taxation but a large change in the composition of taxation. A brief🧵putting this in context.

(Note for this thread "reconciliation bill" = House Ways & Means version, will likely change somewhat.)
The reconciliation bill would raise revenue by about 1/2 percent of GDP annually. That is expected to bring revenue to ~18% of GDP. That is well within the historical range and well below previous peaks during periods of low unemployment rates like the one CBO is forecasting.
The bill has large gross changes ($2.1T in raisers & $1.2T in costers) for a much smaller net increase:

High-income & misc increases: $1.1T
Corporate increases: $1.0T
Infrastructure & community development: -$0.1T
Green energy: -$0.2T
Children/safety net: -$0.8T

NET: $0.9T
Read 9 tweets
24 Sep
Jeremy Rudd has a paper on inflation expectations that is well worth reading if you're interested in this topic. Takeaways: (1) don't be reassured by anchored expectations & (2) be worried if people start noticing actual inflation.

Some thoughts:

federalreserve.gov/econres/feds/f…
1. I agree with Jeremy that inflation expectations risk being a residual term that make models work perfectly, that much casual economic conversation has that feature, but they also can be effectively operationalized so wouldn't ditch them entirely.
2. His argument goes against relying on measures like the Index of Common Inflation Expectations (CIE) to argue that Flexible Average Inflation Targeting (FAIT) is working. It takes away the dovish argument, "sure inflation is up but don't worry, expectations are anchored."
Read 8 tweets
22 Sep
FISCAL DOMINANCE is massively overstated as a motivation or risk for the Fed.

FINANCIAL DOMINANCE is greatly overstated as a motivation or risk for the Fed.

Understanding the actual Fed the issue is really about EMPLOYMENT DOMINANCE, and that is more good than bad. A 🧵:
1. Fiscal dominance says the Central Bank deliberately keeps interest rates lower than it would otherwise in order to prevent the government's debt from growing too fast. With debt much higher than in the past they have the motive, so the argument goes, to keep rates low.
Most serious people think we don't have fiscal dominance now but some worry that we'll have it in the future if there is a less responsible Fed Chair or President. I think this misunderstands both the White House's interests and the Fed's actual behavior.
Read 17 tweets
22 Sep
The FOMC median inflation projections are likely, once again, underestimating future inflation. But less obviously true than their previous projections.

They expect PCE / core PCE inflation to be 4.2% / 3.7% this year. To hit that would require a large inflation slowdown.
In the first 8 months of the year (including a reasonable forecast for Aug based on the CPI & PPI), inflation rose at around a 5% annual rate. To hit their numbers for the full year will require it to slow to about a 1.5% annual rate. In other words, 0.12% monthly prints.
That could happen if either a lot of transitory level increases reverse themselves (e.g., used car prices will likely fall more) or if there are transitory falls due to spreading virus (e.g., further falls in travel/tourism prices).
Read 9 tweets

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