Mankiw on Taxes

There's been an interesting exchange in the blogosphere on taxes originating with this post from Greg Mankiw. Mankiw makes the reasonable version of Arthur Laffer's point when he writes:

"High tax rates tend to depress GDP. Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can"

A fair point. But that's when things start to get weird. He follows up with:

"For some purposes, a better statistic may be taxes per person, which we can compute using this piece of advanced mathematics: Taxes/GDP x GDP/Person = Taxes/Person"

Basically, more productive, more advanced, wealthier countries will count as having more burdensome taxes than other countries, holding all else equal. This is inherent in his metric - a logical necessity of the metric that he thinks may be "better" under some circumstances. I really hope we learn that someone hacked into Mankiw's blog and posted this before Greg noticed. This is pretty weird, and unfortunate coming from someone like him. This was first brought to my attention when I saw the inflammatory title of Matt Yglesias's post on it in my blogroll. I very often disagree with Yglesias on economics, so I thought Yglesias must have read something wrong. I often agree with Brad DeLong, so when I saw it next from him on my blogroll, I got more curious. Then I scrolled down to read the original Mankiw post, and sure enough: weird, crazy, and makes you wonder about the Harvard Economics department.

*I actually don't wonder about the Harvard Economics Department. I have a great deal of respect for Mankiw, I often agree with him, and I'm sure this was just one of those posts that slipped out before he got the chance to think about it.

The Long Shadow of History

Gunnar Myrdal called it the "American Dilemma". The American idea of race is, like all understandings of "race", unique and historically contingent; and for America, the load-bearing pillar of "race" is the divide between Black and White. At various points the Irish, Poles, Jews, or Hispanics have had important roles to play as well. But these concerns have been more transitory and less fundamental than the "Black/White idea".

One of the most important reasons why the Black/White idea has been so immutable is that it has been irrevocably tied up with so much of the rest of our identity. The American idea of liberty can never rid itself of its relationship with chattel slavery. Not only did some of the greatest proponents of human liberty actually own slaves, but these proponents made clear in no uncertain terms their failing or at least their inconsistency on the question.

The Black/White idea was driven even deeper into American identity as George Washington's worries about sectional animosities between East and West were, within a generation, replaced with far greater sectional differences between North and South. While the East-West division that flared up in armed rebellion soon after independence was purely a struggle between white Americans, the later North-South division couldn't avoid entanglement with the White/Black idea. Whatever the causes of the Civil War (and I am one that thinks it's entirely appropriate to discount the extent to which many people claim it was simply a "war over slavery"), one thing remains absolutely clear: the power, entitlement, legislative dominance, and identity of the antebellum South was crucially dependent on the enslavement of black Americans.

This struggle, and repeated episodes afterwards from Appomattox to the Civil Rights Act, began to fuse racism and the Black/White idea to the concept of "states' rights". Never mind the fact that the famous abolitionist William Lloyd Garrison was also a secessionist (albeit for the North). The Confederacy beat him to it, and since then assertive states have been associated with racism. If history had gone slightly differently and Garrison had gotten his way, assertive state governments could have been associated with abolitionism. Calls for secession of the North also appeared when Texas - a slave state - enthusiastically joined the Union in 1845.

But history casts a long shadow, particularly the history of the Black/White idea as it relates to states' rights. As a result, Arkansas has remained on the sidelines of the legal fight over the health insurance mandate that is being waged by several state attorney generals. The sordid history of states' rights is especially sensitive for Arkansas, which defied the Supreme Court's Brown v. Board of Education ruling, when Governor Faubus refused to integrate Little Rock Central High School in 1957. Faubus called up the Arkansas National Guard to prevent integration. After attempting to talk him down, President Eisenhower responded by sending the 101st Airborne into Little Rock, and federalizing the Arkansas National Guard (yes, that second one is unequivocally constitutional, Tea Partiers).

Many states have defied federal authority in the past, but Arkansas was one of the few states in recent history who has had the "burnished rows of steel" at the disposal of the federal government arrayed against their assertion of states' rights. Understandably, the state is not jumping at the chance to defy the federal government again (the fact that its current governor is a Democrat probably influences this as well, although he also cites this history).

I think all this baggage carried by "states' rights" is understandable and it should be acknowledged, but it's also very unfortunate. It hamstrings legitimate assertions of states' rights and valuable progress at the state level. The fact is, there is no inherent reason to believe that everything is best done by the federal government. The federal government doesn't make that sort of blanket claim, of course, but what is a state to do in the instances when the federal government does make that claim for itself? Often, fear or precedent ensure that the default solution is a federal solution. I think this is extremely unhealthy for our democracy. What's even more unhealthy is that the gut reaction of many people seems to be either to (1.) fully acknowledge the darker history of states' rights and insist that all modern assertions of states' rights are racist, or (2.) pretend that the darker history of states' rights doesn't even exist and assume that all assertion of state authority over federal authority is innocent, legitimate, and ideal. Neither of these positions are intelligent or helpful. Unfortunately, you usually hear one or the other.

Last year, I wrote about a specific case in Maryland, in the 1960s, where knee-jerk reactions to the idea of "states' rights" scuttled potentially valuable reform that is near and dear to my heart. You may want to take a look at that as well.

Note: Rockwell's iconic painting depicts an incident in

New Orleans, not the incident in Little Rock

Good Historical Precedent for the Mandate

I've had a couple of posts up recently on misuses of American history to justify political or ideological positions today. The other day I wrote specifically about a liberal abuse of history that attempted to justify the health insurance mandate (which readers know I have major reservations about, despite my strong support for other elements of health reform). This morning, I noticed that Brad DeLong links to Paul O'Rourke's much, much better example of historical precedent for an insurance mandate (DeLong was also the source of the less convincing example I critiqued earlier). The legislation in question comes from the early Republic - the Act for the Relief of Sick and Disabled Seamen, of July 1798 (the Adams administration). The act laid a tax on all privately employed sailors, collected by their employers, of 20 cents a month (a lump sum payroll tax, essentially) to provide hospital care for the sailors. O'Rourke provides the full text of the law. Of course there are some differences - there is still no "mandate" per se (then again, there was nothing to mandate, as there was no health insurance at the time) - but the more fundamental point is the tax imposed on all sailors, whether they want the hospital care or not. This is the same mechanism that is being used to implement the mandate today.

I don't think this answers all the Constitutional questions. After all, I actually went in to the text of the Constitution to debunk the last attempt to justify the mandate, which I don't do here. I would think this one would be justified with the Article 1, Section 8 power to lay taxes and appropriate funds for the general welfare. One argument I could make is that this is really more of an example of a public option than it is a mandate (after all, no one is forced to purchase anything, they are simply taxed and provided a social service - just like Medicare). I think that's a valid argument to make about how far we should take this historical precedent. Nevertheless, I still think it is important to acknowledge, because this example is a lot sturdier constitutionally and as an analog to the current situation than the last one shared by DeLong about the militias.

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Some people talk as if the Constitution were just the Articles of Confederation with lower voting thresholds. All significant additional powers granted to the federal government are downplayed. We spin this story that the commerce clause and "necessary and proper" and the General Welfare clause are inventions of FDR in the 1930s, or at the very earliest perhaps Progressives and trustbusters a few decades earlier. This simply wasn't the case. The Constitution is not another Articles of Confederation and we need to take that seriously.

Daniel's Top Ten Books

Several prominent bloggers have been publishing a list of the top ten books that influenced them most. Recently, Greg Ransom at "Taking Hayek Seriously" has produced a similar interesting list of F.A. Hayek's biggest influences (many of which are available for free online). I thought this whole exercise was kind of dumb when people started doing it, but ever since whenever I've thought of a book I've liked I've had a nagging desire to publish a list, so I put most of this together this weekend. I'm still pretty young, and I hope my ideas are still being formed - so I hope this list changes over time. But for now, here it is, in no paritcular order:

1. The End of Laissez Faire, by John Maynard Keynes: I like to tell people that The End of Laissez Faire is a geneaology of Liberalism. Over the years I've been familiarized with tidbits of a lot of political philosophy, but this book pulled them all together for me and showed me the big picture: how the various strains of liberalism are connected, and how many intellectual movements in the late 19th century bastardized liberalism (primarily Marxism and laissez faire fundamentalism).

2. Micromotives and Macrobehavior, by Thomas Schelling: This showed up on a couple bloggers' lists, and I agree. I didn't really get the importance of macroeconomics before this book (which is pretty impressive, since it's not even about macroeconomics proper). Schelling opened my eyes to the pervasiveness of the "fallacy of composition"/"ecological fallacy" in economics. You simply cannot generalize from individual to group behavior.

3. Durable Inequality, by Charles Tilly: Strongly influenced the way I think about inequality and discrimination. I'm eternally grateful to Deirdre Royster (formerly of William & Mary) for introducing me to this book.

4. The Elusive Republic, by Drew McCoy: Shaped my understanding of the founding fathers. Convinced me that (1.) they viewed the world in a completely different way than we do today, (2.) they were not of one mind - there is no position of "the founders" on anything, and often individual founders changed their positions over time, and (3.) the Hamilton-Jefferson dichotomy we always think of today is caricatured almost to the point of uselessness.

5. Inventing America: Jefferson's Declaration of Independence, by Garry Wills: Shaped my understanding of Jefferson and human liberty. It goes line by line through the Declaration of Independence, and discusses the intellectual origins and background of each position taken in the document. It ends up being a history of the revolutionary period, an account of Jefferson's own thought, and an intellectual history of the Scottish Enlightenment all in one volume.

6. The General Theory of Employment, Interest, and Money, by John Maynard Keynes: Doesn't get everything right, but provides the basic framework for how I think about the economy. Keynes made many technical innovations on the classical model, but he also emphasizes the importance of caution and empiricism, as well as common sense in economic policymaking. Easily the greatest economist since Adam Smith. Possibly greater than Adam Smith (if for no other reason than Keynes innovates where Smith synthesizes... although Keynes synthesizes some too).

7. The Origins of Virtue, by Matt Ridley: I learned Dawkins through Ridley. This has powerfully shaped my understanding of evolution and the human condition, particularly as it applies to human social organization. I know evolutionary psychology isn't accepted in all quarters, and I don't take Ridley's arguments hook, line, and sinker. But I do think they are generally good arguments.

8. Marxism: For and Against, by Robert Heilbroner: A big influence on how I think about intellectual movements that I disagree with. Heilbroner demonstrates the right way to dispute a position without villifying the proponent of that position, and how to acknowledge good arguments while maintaining a more foundational disagreement. On top of all that, it simply helped me to understand Marxism better.

9. A Leap in the Dark, by John Ferling, and Washington's Secret War and The Perils of Peace, both by Thomas Fleming: These are all histories of the revolutionary period and aren't notable in and of themselves, but Ferling and Fleming both write about history in a way that has strongly influenced the way I think about history: specifically, they take seriously the fact that historical actors don't know what is going to happen in the future, and that this has an enormous impact on their decision making. It seems simple, but when it gets pointed out to you in specific instances, you realize how often we analyze things with 20/20 hindsight. More historians need to think like this. Ferling highlights this phenomenon more explicitly than Fleming (you can practically derive that thesis from his title - A Leap in the Dark).

10. Underwriting Democracy, by George Soros: Soros, for all the combustibility of his political and financial activities, taught me a lot about how humans think and how that shapes society - specifically, what he calls "reflexivity". It's not a concept original to him, but I think he explains it especially well (I believe Robert Merton has written a lot on it, and Soros specifically cites Kurt Godel and Karl Popper as his influences - he studied under Popper at the London School of Economics). The idea is essentially that markets and society in general tend towards disequilibrium and reorganization because prediction and action can lead to changes in market or social fundamentals that alter what is being predicted or acted upon. You can think of it as Heisenberg's Uncertainty Principle applied to society. Others have remarked on it, I learned it first and best from Soros. Soros himself wrote about reflexivity more exlcusively in his 1987 classic, The Alchemy of Finance, which I haven't read. But he does devote a good third of Underwriting Democracy to the theory. Much of the rest of the book is about how he's supported civil society in Eastern Europe.

Misuses of American History and the Mandate

I've been frustrated recently with abuses of American history in pursuit of ideological ends, a topic I've opined on even more extensively in other fora. It frustrates me for two primary reasons: first, it's often just very bad history. As someone that spends a lot of my free time reading history, that's bothersome. But perhaps more importantly, it's very conceited to speak as if you own America's history and everyone else has abandoned it. America's tradition of liberty and self-government is a very broad tradition. It's perfectly legitimate for all sorts of people to find inspiration from that tradition: tea partiers, libertarians, liberals, conservatives, etc. What I think is illegitimate is for a select group to claim that they are the sole inheritors of the legacy of the founders and that the others are illegitimate.

Needless to say, the Tea Party movement has given me a lot of ammunition lately. Their abuse of history has been by far the most conspicuous, and they use it to buttress one of the most radical political positions on the market today. So when I stumbled across a liberal abuse of history in defense of a narrow legal position, I felt an obligation to share it, simply because I've been pointing to the Tea Partiers so insistently.

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Ian Millhiser at Think Progress argues that there is precedent for the individual health insurance mandate. Virginia Attorney General Cuccinelli, and others, have argued that the Constitution gives the Congress no authority to force people to buy a good or service. In his rebuttal, Millhiser points to the Second Militia Act of 1792 (HT - Brad DeLong), passed during the Washington administration. This act required able bodied men to purchase all manner of equipment so they could defend the country if called upon. Washington requires people to buy guns; Obama requires people to buy health insurance - what's the problem?

The problem comes in when you dig a little deeper into what gave Washington the authority to demand those purchases. The first place to look - the first place you should always look - is Article 1, Section 8 of the Constitution, which lists the powers of Congress. Other powers of the government come up in other places, but this is the mother lode. Several relevant military powers are included, but for brevity I'll note the most important for this case:

"To provide for organizing, arming, and disciplining the Militia, and for governing such part of them as may be employed in the service of the United States"

There are also various powers for making rules governing land and naval forces, which can also be mentioned. The point is, our most important question today is "what gives the federal government the right to force us to buy health insurance". A historic example of a legitimate past forced purchase may indeed be enlightening, but only if the legitimacy of that past legislation is derived from a power that can also be applied to health insurance (i.e. - a general power to mandate purchase of goods or services). That's not the case here. Nobody has pointed to such power, they've simply pointed to the Second Militia Act. And I would contend that the Second Militia Act is derived from the authority of Congress to govern and regulate the militia. Governance of the militia means telling members of the militia (able bodied males) what is incumbent upon them as militiamen, such as staying well equipped. This power is perfectly legitimate, but I don't see how it carries over to health insurance at all. It's a misuse of history.

I personally think of myself as a Constitutional originalist. I do think it's a meaningful document that needs to constrain government today. I don't think we can just invent new rights a la FDR. Nevertheless, I take issue with a lot of other people who also call themselves "originalist", because I think that these "originalists" discount the extent to which the Constitution gives discretion to future generations and future Congresses for their own self-government. For example, Congress has the explicit authority to appropriate money to provide for the General Welfare. That power is vague. It is "elastic". It is entirely constitutional. Many "originalists" get frustrated with the application of this power, but I don't understand why. If the Congress had intended "General Welfare" to mean anything other than "General Welfare" they wouldn't have written it that way. We need to be judicious and deliberative about exactly what a wise appropriation for the General Welfare might be - but that is a question for public and Congressional debate, not a question for constitutional lawyers. The power is very clear. So I'm an originalist, but I'm an originalist that reads a great deal of deliberate inclusion of discretion into the text of the Constitution. I simply don't see any other way of reading the document.

No reading of the Constitution, in my mind, provides a general authority to mandate the purchase of goods and services. Certain powers - such as the militia powers - give some scope for such mandates. But I find no power that could justify the health insurance mandate.

Liberty or Death

The misuse of American history for ideological ends has bothered me a lot recently. Thankfully, I haven't seen anything so far abusing the auspicious event that happened in Richmond, Virginia, 235 years ago today. On March 23rd, 1775, Patrick Henry delivered his "Give me Liberty, or Give me Death" speech before the House of Burgesses, awakening Virginia to the fact that Boston's hardships were cause for concern in the Old Dominion as well. It was an outcry in a deliberative, representative body (the first in the New World), to take collective action in the defense of liberty against a leader that asserted power over the Americans, rather than receiving assent to govern from those Americans. Henry did not emphasize taxes or the size of the state in his speech. He focused on the impending threat of war and the revocation of the right to self-governance.

There's a bit of a historical mystery that I don't have time to look into, but am curious if readers can help me with. Richmond was only designated as the capitol of Virginia in 1780. Before then, Williamsburg remained the capitol as far as I can tell. And yet in 1775, Henry delivered his address to the House of Burgesses in Richmond. Does anyone know why? Williamsburg was under no direct military occupation or threat as early as 1775 (and if they were, it's not like Richmond would be considerably safer). So why were they in Richmond? If anyone knows, please let me know in the comments - I'm curious.

Dresden: February, 1945

The Dresden Historians' Commission just released a report suggesting that 25,000 Germans died as a result of the Allied bombing of Dresden over February 13-15, 1945. Der Spiegel reviewed the issue here two years ago, and especially highlights the question of whether the bombing was militarily justified. This estimate is lower than earlier estimates, which approached death tolls in the hundreds of thousands, but it is quite consistent with more recent estimates. As a matter of context, 90,000-166,000 died in the bombing of Hiroshima, and 60,000-80,000 died in the bombing of Nagasaki, both in August of 1945, six months after the bombing of Dresden and three months after the German surrender.

This news reminded me of an interesting debate between A.C. Grayling and Christopher Hitchens about the Allied bombing, with Grayling expressing reservations about the practice. The first of eleven videos covering the debate is here. You should be able to click through to find the rest.

Thinking critically about events like Dresden, as well as Hiroshima and Nagasaki, is very important in an open society. Even if we conclude that such actions were justified, it is vital to entertain the possibility that they weren't. Emotions cloud judgement in war, and nostalgia and idealism cloud judgement in the task of writing history. We can't make the right decisions now or in the future if our judgement is clouded, or if we've granted ourselves the advantage of an imagined justification in historical precedent.

Brown vs. the Board of Governors?

Talk about hyperbole.

I've been struggling a lot lately with some really, really challenging economic policy questions, and I've shared some of my thoughts on this blog. One issue I've been grappling with is the efficacy of nominal wage cuts. A little further back I struggled with the unconventional monetary policies that have been suggested recently, specifically whether they would be efficacious in a "liquidity trap" (however you want to define that - and there are lots of definitions floating around... don't just blindly trust someone that tries to tell you "so-and-so misunderstands the idea of a liquidity trap" - because there simply is no consensus on what the term even means). I honestly am still agnostic on both of these questions - still groping my way around. The issues are very complicated, and we simply don't have a lot of empirical experience to draw on to understand how either works in an environment where we would need to know most: namely, abnormal depressionary conditions.

Scott Sumner isn't nearly so timid. Today, he wrote of Janet Yellen:

"her failure to understand that monetary stimulus was still possible at
zero rates should be an automatic dis-qualifier for the Board of Governors,
roughly equivalent to a Supreme Court nominee who opposed Brown vs. Board of
Education"

Wow. I don't have much to add to this, except to say that I always appreciate Sumner for his extremely intelligent and unorthodox perspective on these issues. I don't usually expect hyperbole from him (I go elsewhere for that)! There are unconventional monetary policies that might work. Others argue that they won't work and that we now need to turn to fiscal policy. Granted, there's a lot we don't know about fiscal policy - but we know a hell of a lot more about fiscal policy than we do about the unconventional monetary policies Sumner is refering to. Even if you buy into quantitative easing in theory, that lack of experience alone is a justifiable reason to be skeptical. Is it really fair to compare caution and skepticism to embracing segregation?

And they say Krugman is shrill!

Sumner also notes that Yellen is a "dove", and he sorta says this is a good thing at a time like this. That's a little disconcerting for me to hear too. Yes, I agree that now we need a very dovish Federal Reserve Board. But what about several years down the road? It may come back to bite us. I'd personally prefer more people like Bernanke - people with a strong price stabilization bias, but who are intelligent enough to act like doves when the situation calls for it, and who are enough in touch with everyday people to recognize that they have a responsibility to rein in unemployment as well as inflation. The balance that Bernanke strikes will probably serve us better in the long haul than a Board full of doves. That having been said, I am very supportive of Obama's selection of Janet Yellen and wish her the best of luck.

There's Something about Rudy (but I'm still not quite sure what it is)

Rudy Giuliani was recently interviewed by the Washington Post for their "On Leadership" series. As expected, most of the interview dealt with 9/11. The obligatory Churchill reference was thrown in the mix. What I'm trying to understand - what I've been confused about for a while actually - is why Giuliani emerged as some sort of "hero of 9/11". As far as I can tell, his leadership consisted of his TV appearances where he comforted Americans, and of course calling the shots of the rescue effort. I don't want to belittle that, but it seems like an odd thing to highlight, to continue to talk about a decade later, or to call him the "man of the year" for.

What, exactly, did Rudy Giuliani do that Jay Fisette, the Chair of Arlington's County Board in 2001, didn't do in response to the Pentagon attack? As far as I can tell the difference is that Jay didn't talk on TV as much, and Jay didn't have the national name recognition. That's meaningful, but does it justify the singular identification of Giuliani with 9/11? What's even more off-putting about the Giuliani cult is how often it is framed as "Giuliani comforted the nation when Bush was nowhere to be found". It reeks of being a deliberately constructed cheap-shot at Bush. I was not a big fan of the Bush administration, but this strikes me as unjustified. If Jay Fisette of Arlington could have been said to have matched any substantive accomplishment of Rudy Giuliani, George Bush certainly surpassed both of them in his response to 9/11. Was he where he should have been in the hours after the attack? Maybe, maybe not. But his response was measured and deliberate (remember the criticism of the administration for actually waiting too long to go into Afghanistan?). He responded with lethal (and well justified, non-impulsive) force against al Qaeda and the Taliban. He created a new Department of Homeland Security which, despite its inevitable implementation problems, represented a meaningful shift in the way that government thinks about national security. At least for the fall of 2001, Bush did far more than appearing on TV and offering comfort. He addressed the problem.

It all eventually went downhill, of course. My first real hesitation about the Bush administration occured when they refused to finish al Qaeda off when they had the chance at Tora Bora. It was the first real sign that the faith we had put in this president to defend the nation was probably misplaced. That suspicion was repeatedly confirmed throughout his tenure. An intelligent reorientation of national security policy quickly degenerated into unconstitutional public surveillance, secret prisons, and torture. And then of course there was Iraq - the most objectionable distraction from fighting our real enemies of all. In the middle of a war on Islamic terrorists, the administration decided that it was time to divert our attention elsewhere and spread democracy out of the barrel of a gun. What's more, there are indications that they always wanted to do this and only used 9/11 as an opportunity to get it done. So I want to be clear: my kind words for Bush in the previous paragraph aren't an embrace of the administration. But in 2001, Bush was genuine, Bush was courageous, and Bush seemed to do far more to justify the title of "hero of 9/11" than Giuliani ever did.

The other problem with lifting up Giuliani for something like this is that it minimizes the far more substantial efforts of ordinary citizens. Giuliani has been criticized by rescue workers for saying that he had been at ground zero "as often, if not more, than most workers" (a claim that was easily demonstrated to be ridiculously inaccurate). The average soldier in Afghanistan did more to make sure such an attack never happened again than Giuliani did, and the average citizen riding on a plane could do more to stop a future attack than Giuliani ever could. Obviously we can't highlight every single one of these people (that's sort of the point), but why do we feel the need to highlight anyone? Who was the "hero of Pearl Harbor"? Nobody. We just remember it as a day of infamy. Nobody pulled December 7th out at every stump speech. Insofar as Roosevelt did reference it, it would be a reference to real accomplishments and decisions in response. Giuliani is essentially being recognized by the media for being recognized by the media in the hours after the attack.

There is no "hero of 9/11", it was simply a horrible, horrible day. Everyone thinks that "there's something about Rudy", but I just don't get it - and now that I've gotten the chance to actually write this out on paper it turns my stomach even more than it did before. Many leaders did at least as much as Rudy did. Some, like George Bush, did much more good in the months after the attack. And in addition to these leaders, countless anonymous citizens did even more than that to respond and recover. What's so special about Rudy? And why does he seem to be using this so opportunistically?

I don't often get to say this, so I'll take the opportunity: Al Sharpton said it best. Here's what he had to say about the issue -

"You didn't bring us together, our pain brought us together and our decency brought us together. We would have come together if Bozo was the mayor"

Talking Past Each Other: A Prediction for the Near Future

Quick - don't scroll down and read anything in this post. Answer this question in your head: did government spending make up a large or small share of GDP growth in the impressive 5.9% annualized growth rate for the fourth quarter of 2009?

Did you say it made up a large share? Sure - that seems to make sense. We have a liberal in office now. Keynes is cool again (yes he is - I don't care what you say about my extracurricular interests!). We have hundreds of billions in that stimulus package and over a trillion dollars in deficits. Any growth we see is because the government is running the printing presses 24/7 and kicking the can down the road for dealing with our real problems, right?

Wrong. Government spending growth in the fourth quarter was basically zero - actually slightly negative. What's going on here? What's happened is that Americans have systematically forgotten that they live in a federal republic, where a great deal of the work of government is done at the state and local government. While the federal government has been hanging lose, state governments have been tightening up. Keynes may be popular again, but Keynesian policy is for all intents and purposes non-existent. Any attempt at Keynesian fiscal policy is being neutralized by the state governments. That doesn't mean the federal stimulus is bad. We'd be in much, much worse shape without the stimulus. But taken as a whole, the American polity isn't doing any public stimulus right now.

Does that sound weird to you? That's exactly what I'm worried about. When people start arguing over whether fiscal stimulus works or not, and about how macroeconomic policy should be done in the future they're going to point to the easiest number - the federal deficit - and declare that it is largely impotent, not even considering that the federal government is not the only game in town. And in the rare instances that state budgets are discussed, the catchy phrase "fifty Herbert Hoovers" will inevitably be brought up, and inevitably the argument will get redirected toward "well Hoover was actually a closet Keynesian - Amity Shlaes told me so", etc. etc. - and it will turn into a revisionist history debate about Hoover and not the issue at hand: namely, that there is effectively no fiscal policy going on in the United States right now.

Stephen Gordon (HT: Mark Thoma) provides this comparison of the breakdown of Canadian GDP growth and American GDP growth for the fourth quarter of 2009:

As you can see in the second blue bar from the right, most of our GDP growth in the fourth quarter came from restocking inventories. In other words, in early 2009 when businesses were scared of the future, they just sold off their inventories instead of actually producing new goods. That's why output dropped then and so many people were thrown out of work (you don't need that many employees just to sell off inventory). Pretty soon, the inventories are spend down and need to be replenished - that's what happened in the fourth quarter. This is still very good - it still puts people to work - but as Gordon notes, it's a very unbalanced way to grow. What happens in mid 2010 when the inventories are restocked but demand is still tepid? A double-dip recession, that's what. There has been a lot of talk recently about a double-dip recession and this is why (this and the fact that the fiscal stimulus that does exist is going to begin to peter out then).

A stronger stimulus could balance this growth and generate a virtuous cycle of self-sustaining growth. If we had some infrastructure or public works projects, money would go into the hands of workers (consumption) and business (investment) for actual purchases that they have preferences for and place value on. Right now that's not what we're spending on - the people doing the spending right now are store owners who are replenishing their shelves, not business making new machines or households buying new goods. Just store owners stocking empty shelves. That's fine, but nobody seems to be buying anything off those shelves, so what happens next?

At the heart of all of this is the states - specifically the states' ridiculous proclivity for balanced budgets and aversion to borrowing. This is literally a nineteenth century budgeting outlook transposed onto fifty sovereign governments that make up the early 21st century's sole superpower. It's absolutely shameful. What's even more shameful is that I think we're largely oblivious to this. We're going to be judging how macroeconomic policy fared without even giving the states a second thought, and all these budget troubles at the state level are only going to convince state governments to be more tight-fisted in the future. What they should be doing is recognizing that there is no point in having a AAA bond rating if you impose borrowing limits on yourself. The market will impose that limit on you. If the market is starting to get nervous about the soundness of your finances, your bond rating will slip, the interest you'll have to pay will increase, or both. Far from taking a responsible, market oriented approach, state governments are willfully ignoring market signals, specifically credit market signals.

This is my prediction for the near future: that we are going to be talking past each other very, very soon. Soon the inventory cycle will run its course and growth will stall again. Unemployment might even increase again, and people are going to be blaming the Obama administration for their big-spending ways. State governors are going to make stump speeches in the fall for Republican candidates declaring how they tightened their belts through all this while Washington acted irresponsibly, so the Democrats must go. They're not even going to realize that macroeconomic fiscal stimulus was virtually non-existent this year, precisely because those state governments tightened their belts. Keynesian fiscal policy will not have been proven a failure - although many people will claim that it was. Yet again, Keynesian fiscal policy will not have been proven a failure because it will never have been tried.

History of Economic Thought - New Books!

A recent post on the history of economic thought has generated a lot of comments, so I feel that our readership won't begrudge my excited sharing of a new book acquisition along the same lines, a brief plug for the store, and a few more links.

Yesterday I picked up a first edition of A.C. Pigou's "Industrial Fluctuations" (1926) - his massive tome on the business cycle. It sells on Amazon for $180, I got it in very good shape for $40. Not too shabby! Pigou was a contemporary of Keynes at Cambridge, and unfortunately was treated very ignobly by Keynes in the General Theory, although they were close personal friends. Pigou is sort of a New Keynesian in a lot of ways - his views on recessions are hardly "Classical" or non-chalant, but he places a great deal more emphasis on frictions and cyclical factors. I think this is perfectly consistent with the Keynesian system, and the appropriate emphasis really depends on the economic environment. Keynes presented a new way at looking at savings and investment decisions that introduced the possibility of a stable state of underemployment. The Keynesian system didn't have to tend towards underemployment, but it certainly could. As far as an over-arching framework goes, the Keynesian system was and is far superior to an assumption that markets always and everywhere clear. However - markets still have tendancies to clear, even in a Keynesian system - and there's no reason why frictions and cyclical factors can't contribute to downturns in such an environment. I'm with Keynes on the prospect of underemployment, but still think Pigou (and others - his modern incarnation, Greg Mankiw, for example) have a lot of important things to say about what produces any given recession.

I also purchased a second edition of Sir John Hicks's "Value and Capital" (1939) for only $9. Hicks is famous for providing a formal model for the Keynesian system. Others have modified and adjusted it over the years, but he set the ball rolling. Hicks also worked a lot with the idea of a liquidity trap - something that Keynes briefly alluded to in the General Theory, but never spent that much time on. I don't expect to read Pigou's book all the way through any time soon - but I think I might try and read "Value and Capital" in the very near future.

I got both of these books at Second Story Books in Dupont Circle in Washington, D.C.. It's a really great used bookstore, and I recommend that anyone in the area drop by. Usually I just go there for history books - they have a great European and American history section. Good history of science, and a good military section. Their section on economics is very sparse, and they do the Barnes and Noble thing, where personal finance and business books get mixed in with economics books. Recently, however, that section has doubled in size and I found these two great books. I don't know if they just acquired someone's collection or if they're responding to a strong demand for economics books - but the economics section might be getting more respectable. Anyway - make sure you drop by.

Finally, I don't know why he's had this recent interest, but Brad DeLong has been churning out posts on the history of economic thought recently. Here are some recent ones:

- J.S. Mill on inflation targeting, anticipating Michael Mussa's position.

- J.S. Mill on why bad ideas won't die (take, for example, a recent commenter's embrace of Jean-Baptiste Say). This is a great line from Mill: "a perpetual principle of resucitation in slain absurdity".

- Mill on Say's Law

- Hayek anticipating Eugene Fama (featuring an appearance by Kahn and Robinson)

- Tracing Fama back through Hazlitt, Friedman, Say, Bastiat, and Hawtrey

- And Marx opposing monetary stimulus. One of the many things that Marxists and other deduction based mega-projects like Austrian economics and libertarianism have in common (and yes, they have quite a bit not in common as well, but that's less interesting to highlight and think about).

Technological Singularities and Measuring Value

This week I came across this fascinating presentation by Robin Hanson, of the George Mason University Economics Department, on technological singularities and the possibility of experiencing another one by mid-century. He specifically considers the role of nanotech and AI in this singularity.

Hanson highlights four previous technological singularities: (1.) the evolution of brains, (2.) hunting, (3.) farming, and (4.) the industrial revolution. He charts out how estimated global production per capita grew tremendously at each stage, and then plateaued as the technological innovation fully defused and the prospect of exponential growth moderated. Hanson argues that it's possible we might go through another technological singularity - a prospect that seems all the more reasonable when past singularities are charted out on a log-time scale. As readers of this blog know, I'm quite optimistic about our development as a species and the break-throughs we'll have in the far (and not so far) future. Nevertheless, I do have one major reservation about Hanson's presentation, and it primarily has to do with his data.

The obvious criticism is that we only really have good data on global production after the last singularity - the industrial revolution - and for quite a bit of that period, the data is shady at best. It's not until the last half of the twentieth century that you have good data even on the developed world. Now, we have convincing proxies for earlier periods, and the task is made easier by the fact that they simply didn't produce as much back then (agricultural production accounts for the bulk of it, and knowing something about cultivation methods makes that relatively easy to estimate). But the criticism still stands.

But that's not my primary criticism. My primary criticism isn't methodological, it's conceptual. The biggest blind spot in Hanson's data work is that the way we conceive of value production now is not the way it has always been conceived. If we only count commodities that we consider commodities now, we're going to necessarily make earlier periods look more impoverished than they actually were. Value is subjective. We can conclusively demonstrate that the market economy made humanity more materially better off. And that is a very good thing. What's much harder to demonstrate is that it created more value. My guess is it did create more value, but probably less than Hanson's presentation might suggest. I'll let a selection from Keynes's General Theory explain what I mean:

"Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York. Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the "financial" burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment. We have to accept them as an inevitable result of applying to the conduct of the State the maxims which are best calculated to "enrich" an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time" (p. 131).

We see the period between the advent of farming and the advent of the industrial revolution as being an impoverished period. But what we really mean is that they were materially impoverished. In many ways, past ages may have been wealthier than us, in the sense that they produced more value, utility, or welfare per capita because of the way that their values were structured. We live in a world of diminishing returns. Some of these diminishing returns are technological and inescapable in any age: you will have to put in increased effort to produce more and more crops on a given plot of land, holding all else constant, no matter what age you live in. But some of these diminishing returns are psychological and self-imposed.

My wife is leaving for Brussels today for a conference. While she's there she's going to be visiting a few palaces and cathedrals. Tourist attractions like these bring in millions every year. How often are such attractions built today? When we build buildings today how often do we think of them as monuments for the ages? How often do we weigh the benefits that they will produce centuries into the future against the costs of building them now? Rarely. Occasionally, but rarely. That strikes me as a necessarily impoverishing attitude. Granted, not everyone in ancient Egypt and Rome made their investment decisions based on the benefits that would accrue to future epochs. Material poverty was so desperate that such decision making was reserved for an elite few: an elite that often relied on slave labor and confiscatory taxation to build their monuments. I'm not yearning for some idyllic past that never existed. But what I am doing is pointing out that the time horizon that we use to think about what is valuable and the sheer imagination that we bring to the question of what is valuable has been, in many ways, severely curtailed, both as a result of what Marx called the "fetishization of commodities", and because of our secularization, which removed one of the primary motivations for building monuments to the ages (the prospect of eternal life). It doesn't mean that the modern market society is bad. I'm a big fan.

What it means is that it will probably have to change if we want to maintain lasting value. At some point, as a species, we need to build for the ages again. And that doesn't mean some wealthy philanthropist looking a century into the future. That means a visionary looking a thousand years into the future, and dreaming about what human society will look like then, and investing in that.

I've gone far afield from Robin Hanson. I think his talk is very good. It lays out the technical interpretation of technological change from an economist's perspective, which I enjoyed. And I appreciate his optimism about the future. I think he has a very characteristically modern understanding of value creation (at least in this presentation) which could probably be augmented. But all in all, it's an excellent piece.

Some History of Economic Thought Links

I came across two interesting links discussing the history of economic thought this morning that I thought might be worth sharing.

The first, from Mark Thoma, covers Adam Smith's version of laissez-faire. Everyone knows Smith was an ardent foe of mercantilism and a proponent of free trade, but for some reason that gets leveraged into the claim that Smith was some sort of proto-libertarian (as if libertarians are the only people that support free trade). That's not really true. Smith advocates things that I defend against modern libertarians, and he was active in the 18th century! Usually I give leeway to earlier writers. In a traditional agricultural economy I would probably be more libertarian too. I understand that when circumstances change so does the proper role of government. But even back then, Smith had a very modern view of the role of government, the importance of externalities and public goods, etc. It is a very classically liberal view of government - there is no fetishization of the state. But it's not a libertarian view. Mark Thoma channels Gavin Kennedy on these issues here.

The second link is from Brad DeLong, who extensively catalogue's Thomas Robert Malthus's views on "general gluts", or depressions. Malthus is most famous for his theory of population dynamics, which heavily influenced Charles Darwin. But he wrote more traditional works of political economy as well, including a protracted debate over the possibility of a "general glut". Most economists in Malthus's time believed that the economy naturally operated at a full employment level. Any economic downturns could be attributed to frictions or temporary miscalculations. Malthus (along with Sismondi and a few others) argued that economies could stay depressed for a very long time, operating in a sub-optimal equilibrium rather than simply struggling through a temporary friction. Of course, for this reason, Malthus is considered the premier proto-Keynesian. And during his lifetime, Keynes made it quite clear that Malthus was one of his inspirations. I would also recommend Lawrence Klein's discussion of all the "proto-Keynesians" in his book The Keynesian Revolution, which I am almost done reading. He does a good job not just explaining what the early theorists of general gluts thought, but how they fit into the Keynesian schema (i.e. - what parts of the Keynesian system they were missing that prevented them from producing a full model of underemployment).

And this seems as good a time as any to highlight the New School for Social Research's history of economic thought site, which is quite simply the most comprehensive and most in depth resource on the history of economic thought available on the internet today. It's like Wikipedia on steroids specifically geared towards the history of economic thought: not something I would ever cite, but it provides tremendous detail and background and it provides excellent links and source material for further study.

The Rev. Thomas Robert Malthus

Collection of Posts on Socialism

I've seen several posts and sources - both new and old - on socialism recently which I thought were worth sharing collectively. What I like about these pieces is that they move beyond the Marxist-Leninist-Soviet socialism that a lot of Americans instinctively think of when they hear the word.

First is Bryan Caplan at Econlog on the Baader-Meinhoff gang, a decidedly Marxist-Leninist group operating in West Germany in the last quarter of the 20th century.

I also enjoyed Matthew Yglesias's discussion of George Orwell's socialism - an anti-totalitarian, anti-Leninist brand of socialism associated with the New Left in the post-war period. Yglesias's most salient point is the deep misunderstanding of Orwell's socialism by American conservatives.

And of course, no consideration of Orwell is complete without Christopher Hitchens, who discusses 1984 here and here. Listen to the very end - at the end he has an interesting discussion about which dystopian future is more likely: that of 1984 or Brave New World.

One of my favorite discussions of socialism is that provided in Keynes's The End of Laissez-Faire, available in it's entirety here. I like to think of this short book as a genealogy of liberalism. It does a very good job outlining how classical liberalism split into an individualistic and a communitarian branch. He goes into great detail on pre-Marxian socialism, and the sense in which modern (at the time of the writing, in 1926) laissez-faire and modern Marxist socialism in many ways bastardized the liberal tradition from which they both emerged.

Brad DeLong has a quick, interesting discussion of what about Marx is still important for modern, neoclassical economists to acknoweldge and respect.

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Finally, I recommend this discussion between Bryan Magee and Herbert Marcuse, about The Frankfurt School and Marcuse's socialism (Part 1, Part 2, Part 3, Part 4, and Part 5). Marcuse is one of the foremost socialist critics of Marxism. If "anti-Marxist socialism" sounds like an oxymoron to you, I suggest you listen to this series.

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For probably obvious reasons, I have a great deal more respect for the New Left and the anti-Marxist socialists than I do for Marxists, but I still have to offer this to you as well.