Sunday, June 20, 2010

Assault of Thoughts - 6/20/2010

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" -JMK

- Arnold Kling essentially says advocates of fiscal stimulus are arguing in bad faith and all they really want is big government. I understand that Kling is going to disagree with us, but what bothers me is that he repeatedly insists on thinking the worst of us. How can there really be a debate when this is the case? And I want to emphasize it's not because of Keynesian hurt feelings that this is a problem - it's because obviously he's not listening very carefully or critically if he thinks the case for stimulus is all just a ruse. It's like the recent thing with Krugman over Hayek wanting unemployment. To a limited extent Krugman is right - Hayek suggested the readjustment would be (in his words) a "slow" process. Most Austrians will say recessions will be painful but they oughta be quick. Hayek is honest insofar as he doesn't cling to this convenient, unjustified claim. It may be a slow process according to Hayek. But that needs to be understood as a cost-benefit tradeoff. Hayek prefers slow, grinding recession to avoid slower, more grinding recession later. Krugman shouldn't twist that as liking the unemployment - at best it's prefering it to something worse. Kling shouldn't commit that mistake either. Kling also makes an issue of crowding out except under a liquidity trap. I would point out two things in this regard: (1.) the (Hicksian) liquidity trap isn't an on-off switch (although the old Keynesian one is) - the prospect of crowding out decreases steadily, and (2.) we need to keep public goods in mind. There is lots the government can invest in without worrying about crowding out.

- Mark Thoma on the spilt between trends in capacity utilization and unemployment in the last decade. I haven't thought about this too hard, but I have two points: (1.) computer technology and human capital have become considerably more important - our definition of "capacity utilization" may just be not as useful as it was in the past, and (2.) if this is a real change in an underlying economic relationship, it's actually a fairly important one. The relationship between capital utilization and employment is going to change how money markets relate to labor markets - and therefore the impact of fiscal policy as it passes from the IS curve to the N(Y) curve to the labor market. What this suggests is that the transition from IS to N(Y) may be changing. Again, given the substantial changes in the labor market, the importance of automation and human capital it's not surprising that these underlying relationships might change. This is something to think about and keep an eye on.

- Jonathan Catalan critiques Krugman's take on the economic policies of Heinrich Brüning, the longest serving chancellor of the Weimar Republic [update - Brüning was not the last chancellor]. Confusing monetary policy with fiscal policy, Catalan writes:

"But, the Reichsbank made good their ability to finance government reparation of
debt and provide liquidity to private investors, and so I am not particularly
convinced by any argument that the German government, at the time, was being
fiscally austere."
Let's be clear about how they made their debt payments. Adam Tooze, author of The Wages of Destruction: The Making and Breaking of the Nazi Economy, tells us that Brüning unflinchingly raised taxes, erected tariffs, and cut government spending at precisely the point that unemployment in Germany was starting to climb. That is the definition of fiscal austerity. Paying your debts is the definition of austerity. Catalan is right - ultimately we don't know what would have happened if Brüning made another choice. But fiscally austere he certainly was.

- More Brad DeLong on gluts... this time on the difference between microeconomic and macroeconomic gluts. I haven't gotten the chance to read this one carefully, but his last one is good.

- When Jonathan Catalan and Matthew Yglesias agree on something something very, very obvious is being said. In this case - a tax on soda decreases the consumption of soda. Two points from me: (1.) it was in a public health journal, and maybe the idea is more novel to them... seems doubtful, but maybe, and (2.) I would note that it's still important to know things like price elasticities and regularly reestimate. We know supply and demand - but what do the supply and demand curves look like? It reminds me of George Borjas's classic paper on the labor market effects of immigration, which was simply titled "The Labor Demand Curve Is Downward Sloping". Again, thouh, the question there was "how" downward sloping. For low-educated native minorities wages were responsive to additional immigrants. For just about everyone else, wages weren't very responsive.

- Jonathan Catalan on Keynes and the bancor, a long-standing interest of his. Essentially, Keynes would have had floating exchange rates with a world currency. I think that's a pretty reasonable structure - it seems to overcome the major objections to the gold standard on one hand, and Bretton Woods on the other. I don't know too many details about it, but you can bet this will come up with force in the next decade as the recovery subsides and more people question U.S. leadership on a variety of fronts. I'm not sure about Catalan's claim that this is a way to control trade or equalize trade balances. Certainly its goal is to avoid unsustainable imbalances between the reserve currency issuer and everyone else (the "Triffin Paradox"), but I'm not sure you can say much more than that.


  1. Actually, the last Chancellor under Weimer was either Franz von Papen or Hitler depending on one's POV (after all, the Enabling Act was not passed until 1933).

    Anyway, Daniel is right about his austerity policies (he was animated by the desire to pay off the war reparations debt) ... what Daniel doesn't mention was that Brüning's major problem was that he was an advocate of authoritarianism (at least under certain circumstances). His policies would not have been implemented but for his emergency decrees - this laid much of the groundwork for later decrees by Hitler.

  2. "In this case - a tax on soda decreases the consumption of soda."

    Only if the tax doesn't encourage black markets in soda. I've often argued that the level of smoking in the U.S. is underestimated as a result of black market cigarettes.

    Of course this doesn't even get to the nanny state issues associated with such a tax.

  3. Compare the sort of power exercised by Brüning and that by FDR; FDR's dumbest policies (almost all them were dumb, but some more than others) were blocked by the courts and the other normal aspects of a liberal society. For whatever reason Wiemar did not allow for this sort of check on policy except by a change in supreme leader.


All anonymous comments will be deleted. Consistent pseudonyms are fine.