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"EconWeekly" - 5 new articles

  1. Robots for everything: Teaching assistants
  2. "I still hold out some hope": James Bullard on the U.S. becoming Japan
  3. Q1 GDP nowcasts
  4. Brief comments on the elections in Spain
  5. The hawkish shift of monetary policy recommendations
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Robots for everything: Teaching assistants

From the Washington Post:


(Thanks to @JustinWolfers for his tweet.)

My thoughts after reading this article:

1. Robots can be more valuable when there is more technology in the environment.  In this example, a chatbot was superior to humans in the context of a massive online open course (MOOC),
"where students often drop out and generally don’t receive the chance to engage with a human instructor. With more human-like interaction, Goel expects online learning could become more appealing to students and lead to better educational outcomes." 
This brings up the possibility of increasing returns to capital, at least up to a point. Here, the internet made MOOC's possible, which in turn made robots more valuable.

2. If it's important to make the interaction with the bot human-like, make your robots more human: program them to respond with a delay, to make mistakes, etc. In this example:
"I had the same doubt last week [whether the TA was a chatbot] because we were getting such speedy responses from TAs."
3. Context may be important for how well customers accept artificial intelligence. In this example, the users were taking an AI-related class, so it's natural the chatbot would be welcome:
" 'A really fun thing in this class has been once students knew about Jill they were so motivated, so engaged. I’ve never seen this kind of motivation and engagement,' Goel said. 'What a beautiful way of teaching artificial intelligence.' "
      

"I still hold out some hope": James Bullard on the U.S. becoming Japan

Refreshingly outspoken James Bullard, from the St. Louis Fed, gives an interview to the New York Times. Some great quotes (emphasis mine):

"The general rule of thumb within the Fed is that labor market data trumps G.D.P. data.
"Once major central banks hit the zero lower bound, the key issue was whether central banks would be able to keep inflation expectations consistent with inflation targets.
"I think the Brexit vote, there are a couple of aspects of this that make it much less of an international macroeconomic event. It’s a scheduled event; you can track which way the vote is going to go by looking at polling; and it’s a long-term strategic vote on the part of the U.K. The day after Brexit — even if they vote to leave — nothing would actually change in terms of the trade arrangements. Those would continue for at least two years." 
"The norm in central banking, away from the zero bound, is to say, “We have set the policy rate exactly where we think it should be for today, given everything that’s going on in the economy, and in the future we’ll look at the data.” You didn’t do this kind of dot-plot thing. [...] I’ve wondered if we should get back to something that’s more akin to that. We don’t want to give unintentional commitments." 
"I’ve actually argued that unconventional policy works reasonably well. But it’s far less clear how it works, or how effective it is." 
"I’ve always been worried that the long run here is the Japanese outcome. I still hold out hope that that’s not the case, but I am worried about it, and it’s been going on for a very long time. If you talk to people in Tokyo, they say, 'Well, we’ve been through this and tried all these things, and you guys are just following us.' I hope that’s not exactly true. [...] I still hold out some hope.
"I’m not as big an advocate of fiscal policy as some other people. It’s very hard to do very much on a business cycle time scale, given the fact that you’ve got to work with Congress.
"At some point something will happen and we’ll be back in recession, and by almost any reckoning we will not have much that we can do in the way of lowering our policy rate."
      

Q1 GDP nowcasts

Atlanta Fed's nowcast of Q1 GDP (0.6%) was really close to preliminary estimate announced today by BEA (0.5%). Atlanta's was much closer than the New York Fed's nowcast (0.8%). The question is which of the two nowcasts will be closer to the final estimate, after revisions (available in late June).




Gavyn Davies and Juan Antolín-Díaz explain why these two nowcasts can differ so much from each other, and from their own nowcast at Fulcrum Asset Management. The Atlanta Fed's approach consists of "bean counting," i.e. they mimick the way the BEA calculates GDP by aggregating monthly data as they are released. The New York Fed's and Fulcrum's methodologies are both dynamic factor models, which extract a "common factor" from multiple time series (not only those used by BEA to estimate GDP). This underlying growth can then be scaled to match certain properties of the GDP time series (as the New York Fed does), or not be scaled (which is the approach they prefer at Fulcrum).
      

Brief comments on the elections in Spain

A little closer to Italy. The fragmentation of the vote was the expected and actual result of yesterday's general election. Incumbent Partido Popular (PP - moderate right) won the most votes, but came far short of the majority it had obtained in 2011.

The main other party, Partido Socialista (PSOE - moderate left) might be able to form a government coalition with the new Podemos (far left), but they will still need the support of a motley crew of smaller parties in order to reach the 176-seat majority. Another possibility is a core coalition of PSOE with Ciudadanos (C's - center), plus somebody else. But that seems even less likely, as Ciudadanos promised during the campaign that they wouldn't join forces with either Podemos or nationalist parties. A grand coalition of PP and PSOE, à la Germany, would be unpalatable for PSOE - and its demise as the leading party on the left.

Source: El País.

After the first vote to form a government, which the incumbent prime minister will presumably lose, the parties have two months to form a government coalition before they must call fresh elections.

Any coalition will be uneasy and precarious. Partido Popular has made bitter enemies during its four years in government. It's been an acrimonious election campaign. The programs differ wildly across parties. Whatever government they form, I think significant advances on important legislation are unlikely over the next four years (labor market, changes to the Constitution, education, Catalonia's independence referendum).

Another important (and surprising to me) result was the decline of nationalist parties in Catalunya and Euskadi, and the rise, in those same regions, of the new left-wing party, Podemos. As a pro-referendum force, Podemos could actually do more for the independence cause than either the Catalan or Basque nationalists on their own. Yesterday's elections gave Podemos 69 seats, more than all the nationalist parties combined ever got in any general election. It's still doubtful, however, whether Podemos will be part of the new government. Moreover, those 69 seats won't belong to a single parliamentary group, as Podemos is itself an umbrella brand that includes a cluster of regional, left-wing parties with their own agendas.

Messy. Bumpy. And thoroughly entertaining.


Election results, town by town
Can you spot which two regions are different?
Source: El País.

      

The hawkish shift of monetary policy recommendations

A recent poll by Chicago Booth (thanks, Tyler!) asked a panel of economists in early December to agree or disagree with the following statement
The Fed should raise its target interest rate when it meets in mid-December.
The respondents (all of whom are "senior faculty at the most elite research universities in the United States") were largely in favor of a hike. Forty-eight percent either agreed or strongly agreed; and 19% disagreed. Nobody disagreed strongly.

Digging through previous questions to the same panel, I found a puzzling result from early April. The question then was:
The Fed should wait until its preferred measure of inflation (Core PCE) is clearly rising — and not just forecast to rise — before it begins hiking interest rates.
Here's how the results of the two polls compare:

April




December


The hawkish swing is dramatic. In April 40% of respondents thought the Fed should wait for core inflation to rise. In December, even though core inflation had not risen at all, only 19% didn't think the Fed should raise immediately. What's going on? (Remember, both statements were about what respondents thought the Fed should do, not predictions of what the Fed would do.)

1) Unemployment went down. But I find this hard to believe, because the unemployment rate fell just 0.5% between March and November, and the consensus forecast in March was already that unemployment would go down.

2) Despite the wording of the April question, respondents did have in mind forecast inflation, not just actual inflation. But forecasts of core inflation barely changed between April and December. If anything, medium-term forecasts went down slightly.

3) There is a third (fourth, fifth?) variable in the respondents' mental Taylor rule. However, this additional variable would have to produce a hawkish leaning by December. Output didn't grow particularly fast, in the U.S. or globally. Perhaps a heightened awareness that low interest rates are destabilizing the global financial system? I'm not convinced because, if anything, the consensus is probably that the system is more fragile now than in April. An interest rate hike, at the wrong time, could trigger the crisis.

4) Respondents are concerned about the Fed's credibility. The Fed had been beating the hiking drum from October through December. Doing nothing in December would have undermined the effectiveness of future Fed communications.

5) The respondents, by December, believed that the December hike was largely testimonial, a mere assertion that the Fed is still "in charge," and the hike is to be followed by a gentle tightening cycle. This was not the consensus in April yet.

6) The poll statements are poorly written, because they fail to account for a behavioral bias that makes respondents more likely to agree than disagree with whatever statement they face.

7) Respondents are unconsciously conflating the normative statement with predictions of what the Fed will do. (The consensus prediction shifted dramatically between April and December, mostly because the Fed itself gave strong guidance of an interest rate hike in October and November.)

8) Tyler is right, and economists don't know what they're talking about. Moreover, their ignorant self-confidence produces time-varying biases.

I think a combination of #3, #4, and #5 is most likely, but (as a respondent to opinion polls myself) I can't completely dismiss behavioral biases of the respondents.
      

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