Sunday, January 18, 2015

Kotlifoff, is infinitely incompetent

He makes this statement:

PBS: A country’s fiscal gap is the present value of all its projected future expenditure commitments net of all its projected future tax receipts. Whether the expenditure commitments are called one thing or another doesn’t matter to the fiscal gap. All commitments are put on the books.
Economists have been slow to realize that the official debt and its annual change – the deficit — measures fiscal language, not fiscal policy. But the profession is now clear on the point. Over 1,200 economists, including 17 Nobel laureates in economics, have endorsed www.theinformact.org, a U.S. federal law mandating infinite-horizon fiscal gap accounting by government agencies.

Now what happens to the economic agent as the X axis goes to infinity?

Each Italian, over time, infinitely duplicates himself in an infinity of universes, and in each universe the Italian is perfectly hedged against all outcome.  This would be Krugman's trading networks, (which he did not invent) becoming infinitely dense with each gain from trade becoming infinitely fractional.

We actually have 1,200 economists who got through Econ 101 who thinks this is possible!  This is the horror of the economics profession. The mathematical problem is the nature of the second differential as the X axis becomes infinitely dense.  There is no smooth transition that keep the second differential from going out of bounds, and the system disintegrates. There is no transition from finite graphs to infinitely dense graphs. That is why Weiner process have the condition on the second differential such that no movement can exceed  half that value, that limit ensures no transition to infinity. That condition makes sure that Italians do not becomes enter a time warp and become dismembered.

Here is exactly what I mean, from the article:

Italy has a dynamic new prime minister, Matteo Renzi, whose last name should be Frenzy. In less than a year he’s made big changes to governance, dramatically liberalized labor laws, slashed short-term taxes on new hires, promised to halve the size of Parliament, and rekindled hope for his economically beleaguered country.
But Renzi needs help. He knows that Italy must invest, particularly in education, broadband technology and clean energy. Yet with unemployment at 13 percent, he dare not raise taxes. As for borrowing to invest, even when the investment will pay for itself, that’s a no no thanks to German Chancellor Angela Merkel’s enforcement of the European Union’s Stability and Growth Pact.

This is mostly good news, this is the second differential in action.  But Italians are integers, and the best they can do is hold two jobs during the transition, after that the second differential becomes second differences, and reaches a limit.  Debt and debt change, multiplied determines the second differential.  The boundary condition on that second differential is in the 'But Renzi needs help' statement from the article.  One thing Kotlikoff does is lay out the conditions fairly well, but the argument that this process can be approximated by an infinite horizon is simply a bogus lie.

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