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Text of the page (random words):
e evaluating the effect of federal debt and holding the federal debt constant while evaluating the effect of private debt and then using or comparing the effects there is nothing wrong with this method but jerry did say that the total effect we calculate may or may not be close to accurate depending on whether debt actually has a linear effect on economic growth this is probably a much stronger objection than the one i made i think jerry is right his explanation is overwhelmingly good still in jerry s example and i presume also in the real effects of debt pdf you can calculate how economic growth would have changed if federal debt was constant while private debt was growing and you can calculate how it would have changed if private debt was constant while the federal debt was growing but i suspect you cannot know if either of these alternate realities are correct because as jerry says regression is only a mostly valid way to examine a nonlinear system and that s only if you re studying small movements in the system as the movements get larger the regression gets less valid and if there is one thing we know about debt it is that its effect is not linear now let me throw something else into the mix you can have a straight line or a line that isn t straight linear or non linear but the line that isn t straight may be almost straight or it may be extremely curvy maybe jerry s mostly valid case holds true more for curves that are almost linear than for those that are extremely non linear i want to suggest that it is not only whether you re studying small movements that affects the validity of your results but also the degree of non linearity of your source data jerry would probably say that for extremely small movements the line is very close to linear no matter what okay but he also says that determining whether a movement is large or small is a little subtle in other words the accuracy of the regression is a difficult thing to determine with confidence i suspect that a small mostly valid movement can be much larger for a curve that is almost linear than for an extremely non linear curve or in other words a small movement of any given size will be less accurate for data with a high degree of non linearity than for data with a low degree of non linearity just throwing that into the mix i also want to suggest that debt might have had linear effects the very first time somebody borrowed money when the first payment was made against that debt however the effects immediately became much more complicated since the very first time a loan was repaid over a period of time the effects of debt would have been non linear and the greater the financialization of the economy the greater the degree of non linearity in the effect of debt put that in your pipe and smoke it i want to go back to my concern with seeing the results change when debt changes i don t want to focus on calculating differences that may not even be valid i want to see the differences in actual economic growth that are due to differences in debt growth that i think would be useful suppose we take debt other than federal debt and look at it relative to the federal debt graph 1 the non federal debt relative to the federal debt here we have a picture of the relation between debt other than federal and the federal debt we do not attempt to calculate how it would look if federal debt was constant while private debt was growing we do not attempt to calculate how it would look if private debt was constant while the federal debt was growing we simply look at the actual relation between the private non federal and the federal debt note that the accuracy of this picture does not depend on anything being linear or non linear nor does it depend on the degree of non linearity of the source data it is simply a picture of the historical record i want to compare this ratio to economic growth and look for the effect of changing debt on growth so i add to the graph a series showing the growth rate of real gdp graph 2 non federal to federal debt blue and rgdp growth red next to see the relation between the two i convert the graph to a scatter plot graph 3 the non federal to federal debt ratio horizontal and rgdp growth vertical and then bring the data into excel and put a trend line on it graph 4 showing a linear trend line we get a downsloping trend economic growth is in the neighborhood of 4 annual when the non federal debt is roughly equal to the federal debt economic growth is half as much when non federal debt is around five times greater than federal the trend remains generally downsloping when we make the trend line non linear graph 5 showing a non linear trend line again trend growth runs in the neighborhood of 4 when the debt ratio is low near 1 0 and in the neighborhood of 2 when the debt ratio is high near 5 0 these graphs do not answer the question how much debt should we have but they do offer a perspective on how debt is best distributed between federal and non federal entities the graphs suggest that the federal and non federal debts should be roughly equal thus if we are concerned that the federal debt is too big when the non federal debt is three to five times bigger we would do well to concentrate on reducing the non federal debt first and put off our concern with federal debt until later at july 08 2018 3 comments email this blogthis share to x share to facebook share to pinterest friday july 6 2018 the control variables where i want to start trying to understand regression pondering the real effects of debt by cecchetti et al i ve never done regression so maybe i don t know what i m talking about it wouldn t be the first time that happened if i have something wrong please do point it out i googled controlling for variables in regression got a bunch of quotables here are the first three what does it mean when you control for a variable importantly regression automatically controls for every variable that you include in the model what does it mean to control for the variables in the model it means that when you look at the effect of one variable in the model you are holding constant all of the other predictors in the model a tribute to regression analysis minitab blog blog minitab com blog adventures in statistics 2 a tribute to regression analysis control variables are variables that you are holding constant why do you control for variables the number of dependent variables in an experiment varies but there can be more than one experiments also have controlled variables controlled variables are quantities that a scientist wants to remain constant and she must observe them as carefully as the dependent variables variables in your science fair project science buddies https www sciencebuddies org science fair projects science fair variables control variables are variables you want to remain constant why do we need to control variables the control variable strongly influences experimental results and it is held constant during the experiment in order to test the relative relationship of the dependent and independent variables the control variable itself is not of primary interest to the experimenter control variable wikipedia https en wikipedia org wiki control_variable control variables are variables that are held constant that s interesting because normally a value is is either a constant or a variable the same google search turned up this bit what are control variables in regression a control variable enters a regression in the same way as an independent variable the method is the same but the interpretation is different control variables are usually variables that you are not particularly interested in but that are related to the dependent variable what are control variables and how do i use them in regression https www quora com what are control variables and how do i use them in regressio this okay i like it this makes some sense to me the dependent variable is say economic growth we want to know what it depends on or actually we think we know it depends on some independent variables and we think we know what they are so we use them in our regression to see if we are correct for example we think economic growth depends on debt on government debt and household debt and corporate debt so we have three independent variables all changing and having or not having an impact on economic growth so then we decide to look at these independent variables one at a time so we pick one and call it the independent variable and we make the other two control variables we hold them constant so that we can see the effect that the independent variable has on economic growth the crude version of this might be simply to ignore the control variables and pretend that the independent variable is the only thing that influences economic growth in the more sophisticated version you run the test repeatedly giving each control variable a chance to be the independent variable maybe i m misinterpreting what it means to hold something constant but it seems pretty strange to me this idea that if you make something a control variable it suddenly has no effect on the outcome i mean suppose we take federal debt as our independent variable and we make household debt and corporate debt our control variables holding them constant so then we can see how the federal debt affects economic growth but this is some kind of nonsense because economic growth is influenced by household debt and by corporate debt as well as by the federal debt if we hold household and corporate constant what the regression tells us is that all the effects of debt on economic growth are due to the federal debt and the federal debt alone suppose for example that increases in household and corporate debt always boost economic growth well in the real world those increases really happened therefore economic growth was boosted up by those increases but our regression tells us that all of that boost was due to the federal debt pretty ridiculous no suppose instead that increases in household and corporate debt always harm economic growth again in the real world those increases actually happened therefore in the real world economic growth was held down by those increases but our regression says the federal debt is responsible for that poor growth this is pretty ridiculous too yet until 2008 or so that s how economics was done some economists still do it that way asserting that all our economic troubles are due to the federal debt and none to any other debt to my mind that s obviously wrong i don t know anything about regression so i probably shouldn t talk but it seems to me the idea that you can just control some variables to find out how your one independent variable affects economic growth is more grotesquely absurd than anything that was done before 2008 the outcome we got is the outcome we got you can see it on a graph of gdp growth even if it is true that growth is affected by all the components of debt we re not going to see the gdp growth of the last 70 years change when we hold most of those components constant let s say that the federal debt is always bad for economic growth and that household and corporate debt is always good for economic growth until 2008 this is more or less what economists thought well if we control for household and corporate debt we should see only the bad effects of the federal debt economic growth should be less the growth numbers should go down but that doesn t happen the growth numbers don t change if we suddenly switch variables then controlling for household and federal debt we should see only the good effects from corporate debt economic growth should be higher but obviously it isn t the growth numbers don t change the outcome doesn t change retroactively when you control for different variables i was a math major in school but i ve never done regression so maybe i don t know what the hell i m talking about if i have something wrong or if i seem to have something wrong please do point it out at july 06 2018 8 comments email this blogthis share to x share to facebook share to pinterest monday july 2 2018 causation correlation canary the canary dies is the coal mine dangerous because the canary dies no and yet we know the coal mine is dangerous because the canary dies at july 02 2018 no comments email this blogthis share to x share to facebook share to pinterest sunday july 1 2018 le mot un juste subtract the rate of inflation from gdp growth and you get what economists call the rate of real gdp growth subtract the rate of inflation from the rate of interest and you get what they call the real interest rate subtract the inflation rate from a nominal rate and you get a real rate that s the arithmetic of it you may have questions about gdp and interest rates and the economy and even about this calculation but you cannot challenge the arithmetic it works our topic is the interest rate the arithmetic allows economists to say things like this since the global financial crisis short term nominal interest rates in many developed economies have hovered around zero similarly inflation rates have been quite low by historical standards although they have remained positive and roughly stable on average in most countries as a consequence real interest rates defined as nominal rates minus expected inflation have also been very low even falling negative for some countries now i have a problem i don t have a problem with the first two sentences which provide facts my problem is in the third sentence but the problem is not about how to calculate real interest rates which is comparable to what i started with above nor is the problem with their observation that real interest rates have been very low this is simply the result you get from the calculation my problem is with the first three words of the third sentence in particular the third word consequence it is simply the wrong word it implies that real rates are low because interest rates and inflation are low nay not implies it says as much consequence is defined as a result or effect of an action or condition to say that interest rates and inflation are low and as a consequence real rates are low is to say that real rates are a result of interest rates and inflation the result that is of the subtraction this is absurd the whole discussion that economists have been having about the real rate of interest is an important discussion if the economists are right if the real rate is low and stays low our economy will not be the same economic growth will be slower for one thing what s that you say growth has been slow for a decade you say yes indeed and this is intimately related if those economists are right to the fall of the real interest rate to a low level i keep interrupting myself to say if those economists are right not because i m challenging them but to make it clear that i am presenting their view not my view i don t have a view on this i don t yet know what my...
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