Friday, February 26, 2010

Big Numbers, Whaling, and Atmospheric Carbon

Whales in the atmosphere?!?!?

We have a hard time conceptualizing big numbers. Often, we simply have no frame of reference. A recent example has been a mind-boggling multi-trillion dollar federal deficit. I can't even really get my head around that, even though I hear these trillions and hundreds of billions quoted at work all the time. You'd think we were headed towards disaster, but actually it's not the current trillion dollar deficits that worry budget experts at all. Recently, a new $15 billion stimulus bill was passed. Did you have sticker-shock when you read about that? Well don't - the bill was less than 2% of last year's stimulus. That's a rounding error in Washington. These gigantic numbers can be an obstacle to an informed public precisely because we find it so hard to process what they mean.
A good example from BBC News this morning is a report that over the last century, whaling may have released 100 million tons of carbon (from their rotting bodies and burned blubber) into the atmosphere. Scandalous isn't it? Not only can we have moral outrage at the inhumanity of killing whales - we can now be mad about the role of whalers in climate change! Well I had no idea how much 100 million tons of carbon was, so I did a little sleuthing.

First, let's annualize this. 100 million tons over a century of whaling is a million tons of carbon released a year. Apparently, in 2006, humans released 8.4 gigatons of carbon into the atmosphere. Apparently, the Earth can successfully recycle three of those gigatons, leaving 5.4 gigatons released by humans into the atmosphere every year (or at least that much from 2006 on) that stays in the atmosphere. So:
Whaling contributes: 1,000,000 tons a year
All human activity contributes an additional: 5,400,000,000 tons a year

So whaling increases net additional human carbon emissions by 0.0185%. And that's probably a very high estimate for what is emitted by whaling today. I imagine most of the million tons of carbon from whaling in the last century was released much earlier, when we relied more heavily on whale oil and whaling methods were more crude.

I'm not a climate change skeptic - I think it's a very big problem. I just think it's interesting what makes the front page of the newspaper sometimes, and how easily we gloss over big numbers without really trying to understand how big they are. In fact, far from being callous about climate change by minimizing this whaling statistic, I'm actually trying to make a point that while this is an interesting study to report, BBC would probably better serve the public by detailing the source of the other 99.9815% of carbon that humans add to the atmosphere each year.
*Note - I googled all these numbers very quickly. If there's anything inaccurate in what I've written I'd be really interested in hearing about it!

Wednesday, February 24, 2010

Stockman and the Austrians

And since the Austrian School has come up a couple times recently, I thought I'd mention something intriguing that I stumbled across:

David Stockman, Reagan OMB director, supply-side high priest, and all around budget badass recently came out of the closet...

...the Austrian school closet, that is. He's praising what he calls "the Austrian masters" and getting on board with the Austrian views about money and fiat currency. Thankfully, Austrian school economists haven't played a major role in public administration since Joseph Schumpeter ran the central bank of Austria in the 1920s (and Schumpeter isn't nearly as off the wall as the rest of them, anyway). I suppose the other close-call was the well known Ayn-Randian, Alan Greenspan. But he was effectively excommunicated from that odd little cult long go.

Anyway, I just thought that was interesting. My pile of books I want to read is already massive, and now I think I need to add Stockman's The Triumph of Politics to it. I should also read this. It's a famous expose of Stockman from a 1981 issue of The Atlantic. Stockman was, in his words, "taken to the woodshed" for the his loose lips with the author of the article. Interesting stuff. Depressions do strange things when it comes to ideological realignment and soul searching.

Trying to Get in Touch with My Inner Keynes

It's no secret that I'm a Keynesian. I feel like I have eclectic interests, an open mind, and great respect for many non-Keynesian thinkers, but I am decidedly in that camp and have only found myself more firmly under the sway of the old Cambridge don since the beginning of the Great Recession. Moreover, I personally feel like I was ahead of the curve. I first read his magnum opus, The General Theory of Employment, Interest, and Money (1936) in 2006 - way before it was cool. It was this reading that confirmed my earlier suspicions about my own affiliation.

But lately I've been doing quite a bit of introspection on the nature of my inner Keynes, namely: am I a Post-Keynesian or a New-Keynesian? Specifically, do I think that nominal wage cuts are effective at fighting depressionary conditions? It's the sort of school of thought sub-sub-classification internecine struggle that seems somewhat appropriate to this blog (particularly now that I know we have at least a couple economics-inclined readers). However, like most who engage in these internecine struggles, I'm personally convinced of the importance of the question. Millions of livelihoods and perhaps trillions of dollars are on the line, after all! Why haven't I decided!

Well, because it's a very tough question. Standard theory says that wage cuts should raise the employment level, and some very smart people have highlighted rigid or sub-optimally high wages as the source of involuntary unemployment. That's the New Keynesian position, and if pressed that's what I'd call myself. It's a safe and respectable default. The problem with that is, standard theory often breaks down in unstandard times - and we're living through very unstandard times in the economy right now. Markets are gumming up and failing to function normally all over the place. It's important to recognize that it's not just a hard period - things are not really working how they're supposed to work. The government borrows around a tenth of GDP and interest rates on short-term government debt are bumping around at 0%?!?!? The money supply shoots through the roof and we're seeing exceptionally low inflation?!?!? For an economist, this is the equivalent of a Salvador Dali painting. But we've been here before, and one of the most prescient thinkers on these problems the last time we were here was John Maynard Keynes. And Keynes (1936) said that nominal wage cuts in depressions would worsen depression.

So what motivated this blog post? What do I have to share with you besides my own soul-searching? Well, there has been quite a bit of chatter on other blogs over this very question that I wanted to share. Because some of the recent posts reference back to it, we can start with a year-old op-ed by Paul Krugman, arguing the classic Keynes position on the issue. Krugman is interesting - he's always been in the New-Keynesian camp, but he's been sounding a lot like a Post-Keynesian lately. Bryan Caplan responded at that time. A recent heated exchange between Brad DeLong (New Keynesian) and Steve Horwitz (Austrian School) over a somewhat different (but related) question turned up this comment by DeLong on David Henderson's (ummm... I guess Austrian School) blog. This is when the real nominal wage discussion begins.

Henderson responds to DeLong's comment. Menzie Chinn (I suppose also a New Keynesian) responds to Henderson's head scratcher of an attempt at ad hoc empiricism. Caplan responds to Henderson and DeLong. And as usual, Scott Sumner makes me wonder if I have everything wrong and should just become an unrepentant Monetarist. Then again, Scott Sumner is sort of out in left field... by which I mean the parking lot. I don't mean that as an insult at all - he just has a very different perspective on things from most people.

So there's a bunch of links to wade through - and my guess is there will be more today. The other reason why I mention this is because the back-and-forth mentions the last time nominal wage cuts did decidedly lead us out of a recession: the 1920-21 Depression, to be exact. I'm currently about half to two thirds of the way through a paper critiquing the Austrian School interpretation of the 1920-21 Depression, so that caught my eye in a big way. Throughout the last year, several Austrians and libertarians have argued that the quick exit from the 1920-21 Depression vindicates the Austrian school and proves that active fiscal and monetary policy only makes depressions worse. I point out that the 1920-21 Depression was very unusual. It was a manufactured depression - the Federal Reserve created it. Moreover, they justified their quite deliberate actions with arguments that Keynes himself put forward in 1923. Depressionary conditions that necessitate a Keynesian response (liquidity trap, low interest rates, high savings, depressed aggregate demand) were not in force through 1920-21, so a Keynesian response was entirely unmerited. And the coverage the 1920-21 in the recent blog debate only drives home that point (which is nice... makes me more confident in my thesis) - if Keynesian depression conditions don't hold, then we shouldn't be surprised that wage cuts got us out of depression in that case. If Keynesian depression conditions did hold, then successful wage cuts would lead you to question Keynesian prescriptions. So anyway, as a result of this work I'm officially obsesssed with the 1920s now. It was a fascinating time. Perhaps look for more on that in the future.

By the way - I found a piece by F.A. Hayek on the 1920-21 depression and its aftermath that he wrote in 1925. If anyone knows of anything that Ludwig von Mises wrote about the post-war downturn, I would be very, very interested in hearing about it. I don't know von Mises very well.

Monday, February 15, 2010

Edmund Phelps Interview

Edmund Phelps, who is probably one of my favorite living economists, was recently interviewed on EconTalk by George Mason economist Russ Roberts. I admire Phelps because he really saved Keynes from the Keynesians when he provided an expectations-based explanation for the stagflation of the 1970s. Phelps's work on expectations and wage determination grew out of Keynes's very strong emphasis on uncertainty and expectations - an emphasis which was downplayed by many American Keynesians in the '50s and '60s. In this interview, Phelps mentions other economists - including Friedrich Hayek and Frank Knight - who also influenced his views on uncertainty and expectations. That's one of the most rewarding parts of this interview in particular: that it reveals the considerable common ground shared between the Austrian School and Keynes on these questions. It's unfortunate that the interviewer (Roberts) tries to highlight this as a Hayekian side of Phelps, but Phelps himself squarely acknowledges the influence of Keynes as well. Another important critique that Phelps makes of American Keynesians is that Keynesian economics doesn't not require a bloated public sector.

Many other interesting topics are covered in this interview. Two I would note are (1.) Phelps's anticipation of New Keynesian economics with his model of efficiency wages, and (2.) at the end of the interview he discusses recent work he has been doing on "the good life".

It was interesting to listen to this, having recently finished Keynes's Tract on Monetary Reform (1923) myself. As I was reading the Tract, I couldn't help but think "if Keynesians in the '50s and '60s had spent as much time reading this as they did reading Keynes's General Theory, Phelps probably wouldn't have had to make the innovations that he did in the '60s and '70s. And then, lo and behold, a week after finishing the book EconTalk interviews Phelps himself.

One other thing I'd like to point out about Phelps is that he is a strong proponent of job subsidies, something I have also taken great interest in recently. The Senate recently produced a new (smaller) stimulus bill that includes a small job subsidy that is roughly along the lines that Phelps suggests.

I should also note, for those of you that aren't aware, that Phelps was the recipient of 2006 Nobel Prize in Economics. His Nobel lecture can be found here.

Monday, February 1, 2010

Evolution and Economics

I wanted to share a series of three posts on evolution and economics, pointed out to me by a former professor.

It introduces evolutionary and behavioral economics, and discusses the resistance to these approaches. It also discusses the early behavioral foundations of Keynesian economics, and the continuation of this behavioral Keynesianism through guys like George Akerlof. It also discusses the reformalization of economics thanks to the New Classical school, and Milton Friedman's work on methodology.