Hayek on Social Security

Okay, I've read Hayek on Social Security in The Constitution of Liberty and I simply have no idea what Greg Ransom is talking about. I see nothing fallacious about what Levine and Zernike have written, and in the context of The Constitution of Liberty I find this story about Hayek, Social Security, and Charles Koch all the more fascinating and relevant.

My read on Hayek is that he sees a role for a bare minimum level of social insurance, but that he is wholly opposed to Social Security, Medicare, and the national health systems of Europe. The entire chapter is dedicated to contrasting these programs with the bare minimum insurance to provide for what he calls "extreme need", which he would accept. I have no idea what Greg could possibly have in mind when he says the terrible things about Levine and Zernike that he did, and he really does owe both of them an apology. I can't find a single thing they wrote that Hayek didn't express in The Constitution of Liberty.

"Though a redistribution of incomes was never the avowed initial purpose of the apparatus of social security, it has now become the actual and admitted aim everywhere. No system of monopolistic compulsory insurance has resisted this transformation into something quite different, an instrument for the compulsory redistribution of income. The ethics of such a system, in which it is not a majority of givers who determine what should be given to the unfortunate few, but a majority of takers who decide what they will take from a wealthier minority, will occupy us in the next chapter. At the moment we are concerned only with the process by which an apparatus originally meant to relieve poverty is generally being turned into a tool of egalitarian redistribution. It is as a means of socializing income, of creating a sort of household state which allocates benefits in money or in kind to those who are thought to be most deserving, that the welfare state has for many become the substitute for old-fashioned socialism. Seen as an alternative to the now discredited method of directly steering production, the technique of the welfare state, which attempts to bring about a "just distribution" by handing out income in such proportions and forms as it sees fit, is indeed merely a new method of pursuing the old aims of socialism."

And on the way Social Security benefits are paid, Hayek writes,

"This is all part of the endeavor to persuade the public through concealment, to accept a new method of income distribution, which the managers of the new machine seem from the beginning to have regarded merely as a transitional half-measure which must be developed into an apparatus expressly aimed at redistribution. This development can be prevented only if, from the outset, the distinction is clearly made between benefits for which the recipient has fully paid, to which he has therefore a moral as well as a legal right, and those based on need and therefore dependent on proof of need."

Levine and Zernike refer to this passage (accurately):

"In this connection we must note still another peculiarity of the unitary state machine of social security: its power to use funds raised by compulsory means to make propaganda for an extension of this compulsory system. The fundamental absurdity of a majority taxing itself in order to maintain a propaganda organization aimed at persuading the same majority to go further than it is yet willing should be obvious."

He concludes this thought with:

"Such subsidized propaganda , which is conducted by a single tax-maintained organization, can in no way be compared with competitive advertising. It confers on the organization a power over minds that is in the same class with the powers of a totalitarian state which has the monopoly of the means of supplying information".

He also writes:

"Though in a formal sense the existing social security systems have been created by democratic decisions, one may well doubt whether the majority of the beneficiaries would really approve of them if they were fully aware of what they involved."

He also calls it "a tool of politics, a play ball for vote-catching demagogues"

And as for that Austrian public health care he was getting: "There are so many serious problems raised by the nationalization of medicine that we cannot mention even all the more important ones". He's mostly referring to single payer type stuff here, and I have issues with single payer too. But the point is it's precisely such a system that he had to be cajoled away from by Charles Koch. That's what's so ironic about it. I don't think single payer is wise, but if I had reason to believe I couldn't get a certain degree of medical care outside of a European country that provides that benefit, I might resist leaving too! And perhaps that would be hypocritical of me. But my case wouldn't be remarkable because I'm not giant of the libertarian movement that's written extensive criticisms of this stuff!

This is particularly good too:

"There can be no principle of justice in a free society that confers a right to "non-deterrent" or "non-discretionary" support irrespective of proved need. If such claims have been introduced under the disguise of "social insurance" and through an admitted deception of the public - a deception which is a source of pride to its authors - they have certainly nothing to do with the principle of equality under the law".

And this is a nice conclusion:

"It has been well said that, while we used to suffer from social evils we now suffer from the remedies for them."

Hayek clearly and unequivocally supports a minimal level of social insurance, but I could fine nothing but scorn for the currently operating social security and public health insurance systems. He likened their public relations arms to totalitarian propaganda. He said they were fulfilling the agenda of socialism. He went through what would be necessary to end them. He challenged the idea that they represented any notion of equality under the law. He called it the tool of demagogues. Nothing in the chapter on Social Security in The Constitution of Liberty suggests that anything Levine and Zernike said was wrong. The man claimed quite clearly that he did not like Social Security and he did not like public health insurance programs. Period.

This is not the first time people have questioned Ransom's grasp of Hayek either (see here and here, and lots of the convos on Coordination Problem). I advise my readers to take what he says with a grain of salt from now on. Read that chapter in The Constitution of Liberty. Levine and Zernike don't deserve the terrible treatment that Ransom gave them, and they seem to understand Hayek a lot better than he does on this point.

Who Cares if al-Awlaki was a Citizen???

He was a person.

And in my government class, we were taught that the use of the word "person" in the Constitution was deliberate. The fifth amendment refers to "persons". Other portions refer to "citizens". I don't understand the contrast between the killing of al-Awlaki and the killing of bin Laden and it's disconcerting to me that people think rights like due process only matter for citizens. That should be disconcerting for you too.

Due process is of course dependent on circumstance. Due process on the battlefield is different from due process regarding prisoners of war. Due process for a criminal pointing a gun at a cop is different from due process for a criminal in hand-cuffs. Who the hell cares about "citizenship". Due process is a right that attaches to persons.

I don't personally know the ins and outs of combatants vs. soldiers, etc. But I do know one thing - I don't see this killing of al-Awlaki as any different from the killing of bin Laden. But I'm bothered by the fact that (1.) some people seem to think that non-citizens somehow ought to be treated differently when it comes to the rights of persons, and that seems dangerous, (2.) people are talking about totalitarianism with regards to this, which to me trivializes totalitarianism, and (3.) that people still talk as if radical Islamic terrorism is a criminal issue is really baffling to me.

The offending passage

After accusing me of making things up because I quoted him verbatim and accurately portrayed the content of his post, Greg Ransom's real concern came to light: I was not aware of the real intent of his post, which he never bothered to tell anyone about. Now, I never attributed any particular intent to him in anything I wrote - but since I now know his intent now, we can move forward.

The real offending passage for Greg is this one:

"Hayek, a founder of that school of thought, is primarily known for two major works. The first, The Road to Serfdom (1944), grudgingly accepts the possibility that some “free” countries might find it necessary to set up a bare-minimum catastrophic social insurance program limited to the very neediest, so long as the benefits do not incentivize productive members of society to abandon free-market retirement savings or medical insurance.

Hayek’s comparatively liberal attitude toward social insurance hardened considerably by the time he published his 1960 opus, The Constitution of Liberty. Despite privately spending the intervening years paying into Social Security, Hayek devoted an entire chapter—titled “Social Security”—to denouncing the modern welfare state as a gateway to tyranny and moral decay. Ironically, one of Hayek’s main objections to government programs like Social Security was the “fundamental absurdity” of using tax dollars to promote their benefits. In other words, Hayek publicly objected to the kind of brochure that Charles Koch sent him. In their private correspondence, however, we could find no objection to this “fundamental absurdity.”

By the mid-1970s, Hayek had fully distanced himself from the modest benefits he’d originally conceded to in The Road to Serfdom. In his preface to the 1976 edition, he explained his “error”: “I had not wholly freed myself from all the current interventionist superstitions, and in consequence still made various concessions which I now think unwarranted.”"

Nobody reading Greg's blog who didn't realize this should feel that bad. He never told you he had a problem with this particular passage and he refused to quote or link to any particular passage. You should not feel bad that you can't read his mind.

But this does clarify the issue at hand. Greg has no reason to believe that the Koch letter to Hayek is in any way a fabrication. So when he calls Zernike "incompetent", "intentionally deceptive", and the two authors "reeking sewer rats from the bowels of Russia", I want to make it clear that he does not think that they are "reeking sewer rats from the bowels of Russia" because they brought to light this interesting information about Koch, Hayek, and the human resources policies of the IHS. Rather, Greg Ransom thinks that these journalists are "reeking sewer rats from the bowels of Russia" because they misrepresent Hayek's views in the Constitution of Liberty.

Greg Ransom thinks Hayek was pro-Social Security, in other words. And he's mad at these people for suggesting otherwise.

I haven't read The Constitution of Liberty, but I'm checking it out today to take a look. Needless to say, I'm not taking Greg's word for any of this. If anyone else is familiar with it, or wants to read on it too I encourage them to and to report back here. Is Greg right that these two journalists are "reeking sewer rats from the bowels of Russia" for this? And even if they do misrepresent Hayek's views, that seems to a large extent secondary. This seems like an important statement about Koch and the IHS too.

Anyway - it would have been much clearer from the outset if Greg had just written a post that said "I want to congratulate Levine and Zernike on the work they did to uncover this evidence of Hayek's genuine support for a social safety net" The whole "reeking sewer rats from the bowels of Russia" thing was a little vague, but now we are clear.

Let me know what you all think of Constitution of Liberty, if you get a chance to look at it.

Horwitz on Hoover

Steve Horwitz has a new briefing paper on Hoover. I'm a little curious about phrases like this: "Hoover's big-spending, interventionist policies prolonged the Great Depression, and similar policies today could do similar damage." That seems a little strong. Big spending? I'd have added a "-ger" to the end of Horwitz's chosen adjective. And "interventionist" is pretty vague too (it's such a strange word - "interventionist" - as if tariffs and tax increases are interchangeable with public investments or targeted tax cuts... it seems to me that talking about "interventionism" in general doesn't get you very far).

This is the fate of Hoover, though. It is bound to happen when anyone talks about him. Hoover was not the Ron Paul of 1931. But he wasn't the FDR of 1931 either. Is he the "father of the New Deal" as Horwitz asserts, or is he a "moderately proactive Andrew Mellon"? That's really in the eyes of the beholder, is it not?

Is he a "big spender" or was he just a "bigger spender" but not a "big spender"? Again - interpreting the facts is trickier than it first appears. One thing is for sure - and Horwitz does a service by pointing this out - he was not a smaller spender.

I'm being generous when I tell you Greg Ransom is cranky

In a post on "the lies and misrepresentation spread yesterday by left wing journalists Yasha Levine of Nation and Kate Zernike of the hyper-partisan New York Times", Greg writes that "she’s [Kate Zernike] a demonstrable ignoramus — and a highly bigoted one at that" and "She’s incompetent, yet intentionally deceptive and dishonest to boot." It didn't get truly classy until the comments "Levine & his co-author are trash writers for a hard left yellow journalism Internet rag with roots in most pathological anti-social elements in Russia." And what was that gem in response to? A commenter simply asked for an example of when they had lied! Then more of this: "intellectually incompetent ravings of these reeking sewer rats from the bowels of Russia and the Internet".

And anyone that knows Greg knows this is not a fluke. I really have to steeply discount people that get flustered by DeLong's occasional "shrillness" but can somehow react politely to this.

The biggest problem (for Greg, not me), is that his post offers no reason whatsoever to question the claim that Charles Koch got Hayek to come work for IHS by trying to convince him that America's safety net was strong enough that Hayek didn't have to worry about leaving Austria, which he liked precisely because of the social safety net that they had that was serving him so well in his time of need. Digging in like this only makes the claim look more credible to me. Could they have fabricated it? Perhaps. But the fact that Greg Ransom - a veritable Hayek encyclopedia - simply sputters nasty non-sequitors at it suggests to me he's got nothing.

I like Hayek. I'm pretty much uninterested in the Koch brothers. I like a social safety net. This isn't an argument that Hayek is a bad person. It's a notation that Hayek and Koch both recognize the value of these sorts of things when they let down their guard and think no one is listening.


[A reminder - I do lightly moderate comments for trolls. If Greg or anyone else comes on here and starts bad mouthing my regulars, I don't care what kind of substance is in the comments too - you will be deleted]

This is fabulous

And I am not usually one to use that word.

The importance of history

Krugman and The Onion agree: history is important.

A Research Idea

So in my math econ class we're doing a lot of set and relation stuff, and so we're talking a lot about preferences for applications. It made me think of an interesting research agenda: looking at the evolution of economic rationality.

Certainly rationality didn't spring fully formed from human beings. But is it inherent in all animals? It doesn't seem like it would be hard to test a few basic things - transitivity of preferences, diminishing marginal utility, etc. - on a wide variety of animals with food, toys, etc.. My understanding is our knowledge of the genetics of existing animals helps us to map evolutionary trees and identify where certain traits evolved. It seems to me we could just as easily use data on animal preference relations to map the evolution of economic rationality too. The real leap with humans has been the propensity to truck, barter, and exchange. But presumably other elements of our economic behavior (which is really just allocative behavior - all animals do that) would go much deeper.

Has anyone tried this? I'm sure there's been some work done on animal preferences (in fact I know of work on primate preferences), but I doubt the evolution of economic rationality has been looked at.

Assault of Thoughts - 9/29/2011

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

- A new blog on the economics of the digital age (HT Brad DeLong). One of the bloggers there has written about skills biased technological change in the past - I've cited him for my engineering chapter.

- WSJ on technological unemployment. As a short-run phenomenon, I think this should be taken more seriously than it is. As a long run phenomenon I think it's reasonable to dismiss it as a problem.

- Since Arnold Kling probably likes that last bullet point, I have to offer one he won't like. I agree completely with Karl Smith. There is a macroeconomy, aggregates are useful, and we can think scientifically about aggregates without deriving it up from the individual.

- Keynes vs. Smith on wine. I am a Smithian in the sense that I appreciate the distinctiveness of Virginia wine, but I'm not sure that appreciation quite amounts to terroir. In that sense perhaps I edge closer to Keynes.

- Bob Murphy raises some good questions for Steve Landsburg. I agree with a lot of it in the comments. The allocation of costs in Landsburg's post seems very selective.


I got more than four hours of sleep last night and my midterm and presentations are behind me, which is a lot more than I can say for the previous three nights. So I'm feeling great! Have a good Thursday everyone.

Quick Report on the NBER Conference on the Engineering Workforce

It went well. Both my presentations went smoothly. The first one on our chapter focused a ton on the demand-side issues (lots of discussion - they wouldn't let me get to the supply piece!), which was fine because I mostly presented the supply material to the group last October. The second presentation was on the debate over whether we have had major "shortages" of engineers (I say no). It was shorter than I would have liked and a little birds-eye-view, but I was asked to put it together at the last minute so that's how it goes. The message still went over well. We have several non-economists working on the book, so I think the simple model I presented for thinking about how the way people talk about "shortages" fits with the way economists think this market operates (lagged adjustments, etc.) really clarified things. The problem with this debate is that you'll hear a lot of people use "shortage" to mean many different things. Bill Gates talks about it when he's basically referring to wanting to move along the demand curve. Other people use it to talk about some sort of inadequacy of demand (this, I think, is a more legitimate although still not quite right use of the term). It's a big jumble. My view was very well received, which was good.

Another interesting tid-bit: I was told that the conference room where we were holding the meeting was the same room where Larry Summers offered his own thoughts on women in science and engineering. I am happy to report that my thoughts on the issue had a much better reception than his did.

The other important thing is that Hal Salzman (my co-author on the trends overview chapter), is adding me as an author on his current chapter on petroleum engineering. I've been doing a lot of the analysis for the paper, so that's nice. But it's also one of the more fascinating chapters in the book. He is looking at a very steep run-up in the salaries of petroleum engineers due to a variety of factors in the oil and gas markets. So it's a good clean labor market demand shock that we're using to look at the supply response. We have a lot of wage and graduation data together now (and the response in graduations for petroleum engineers is phenomenal). What we need to do is calculate some elasticities, which I think I should be able to help him out with. It's just one of those nice clean discontinuities that economists love to use. It's a very good chapter, and I'm glad I'll be able to put my stamp on it.

Demand for (Sacagawea) Money

Stan Collander has an interesting post on the unfortunate history of the Sacagawea dollar. For my international readers - several years back the U.S. decided to mint a bunch of new dollar coins with a picture of Sacagawea (the Shoshone Indian guide of Lewis and Clark in their expedition across the U.S.) on it. It was all released with a lot of fan-fare, but the strange thing is you rarely see these coins anymore. Collander explains part of the reason why.

But then the question remains - where are those coins? I actually found out where a lot of them are recently, and this post is as good an opportunity as any to share: Ecuador.

Or so I'm told by an Ecuadorian colleague of mine at American. Apparently Ecuador recently dollarized, so now while they still issue some of their own coins, dollars and American coins are legal tender in Ecuador. And apparently they love Sacagawea dollars down there and use them all the time! So if you ever wondered where all those coins went, now you know.

I'm not sure what it is with Americans and large denomination coins. We just don't like them. The Europeans have them, but we don't. I think it goes back to the good old days of inflationist revolutionaries sticking it to the king. If only Benjamin Franklin's money demand theory of the interest rate (which was based in those paper money fights) persisted as long as our resistance to large denomination coins did!

Two pieces of good news

- A shorter article on the 1920-1921 depression that I submitted to the Cambridge Journal of Economics has now been officially accepted. I think they're trying to get the special issue it's in out soon.

- I just heard from my co-authors at Urban that our article to the Journal of Economic Behavior and Organization is accepted with a few small revisions.

Neat graphic from Andrew Sullivan

It's the population of D.C. in the day and in the night. Does anyone know what that red blob in the bottom left is? I'll give you a hint: it's a single building.

LK on Hayek on Public Works

I am swamped right now and can't write much, but I did want to note that LK has an interesting post up on what Hayek thought of public works in a depression. He's curious what peoples' reactions are to it.

Rationality and Optimizing Behavior are not the Same Thing

A great post from John Quiggin. A very good critique of my grouchy intermediate macro textbook author (it is a good book, actually).

Brad DeLong on what Friedman and Viner would say today

Brad DeLong, on how he would advise Obama:

"What to do? If Milton Friedman were here to advise you, he would give the same advice he gave Japan in the 1990s: Have the Federal Reserve buy bonds for cash. Have it keep buying bonds for cash until total nominal spending in the economy is on a satisfactory trajectory. Announce that it is going to keep buying bonds for cash until total nominal spending is on a satisfactory trajectory.

Milton Friedman's teacher, the ur-monetarist Jacob Viner, had a somewhat different take. Viner worried that when--as now--interest rates are very low, people have no incentive to spend their cash. And when you take bonds out of circulation you reduce the supply and further lower interest rates further. Viner sought a way to boost the money stock without pushing interest rates down further. He recommended coordinated monetary and fiscal expansion: the Federal Reserve buys bonds for cash, and the Treasury than issues bonds and spends, in order to (a) expand the money supply, (b) directly put people to work and (c) keep falling interest rates from further depressing monetary velocity and so crowding out the beneficial effects of monetary expansion."

Assault of Thoughts - 9/24/2011

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

- Obama is allowing more states to opt-out of NCLB (HT - Scott Johnson). This is very good. Now he needs to do the same with health reform. If the federal government has a decent idea about how to provide for the general welfare, that's great. Go for it. But they should not overestimate their abilities. Allowing flexibility from the states on these initiatives and not just allowing but encouraging experimentation and learning from best practices is important.

- Krugman talks about what is essentially Keynes's version of the liquidity trap. So if you're interested in the difference between what Krugman has been calling a liquidity trap for the last several years and Keynes's version of it, this might interest you.

- Dimitri Medvedev just significantly increased his likelihood of staying out of prison, or at least living out the decade.

- xkcd on that zippy little neutrino. It does a good job framing paradigm shifts. Paradigm shifts do involve a complete rethinking of some aspect of theory. But this headline characteristic of paradigm shifts obscures another important characteristic: many paradigm shifts don't only shift - they generalize what we realize are special theories. It's wrong to say Newton was "overthrown" by Einstein. If Newton was "wrong" most of what we know about engineering wouldn't work. So when we say that we came around to the idea that Newtonian physics was "wrong" we need to be careful about what we're implying by that. The comic makes the same point about Einstein and this neutrino.

Credit where credit is due

This new article by Don Boudreaux is a big improvement. He reads and often responds to my criticism of his consumptionist accusations, so I'd like to think I'm making a dent.

I have a few differences of opinion on the way Don talks here about the ideas that Keynes talked about in Economic Possibilities for Our Grandchildren (he doesn't cite the essay, but that seems to be what he's referencing. He spins it as innovation running out of steam - I think Keynes was more saying that consumption would be satiated. Keynes was wrong on that point, I think. In our consumption/leisure tradeoff we are less likely to rest on our laurels than Keynes imagined (although clearly this varies by culture - Europe matches Keynes's guess better than the United States). So it seems to me Don has this point backwards: "Keynes didn't doubt that consumers would buy new products if such products were offered. But Keynes believed that innovation had all but run its course." Anyway - however you read Keynes on that, that element of Economic Possibilities for Our Grandchildren was wrong (other insights in the essay are far more valuable).

Since I don't have to complain about consumptionism accusations here, it's also worth reminding everyone that I think and have always thought "regime uncertainty" is a good explanation of a weak economy. That seems obvious to me. Anti-investment policies are going to discourage investment. I have two disagreements with Don on this though:

1. He identifies certain policies as being detrimental that I wouldn't always agree with him about. Health reform, for example: is it a massive tax and burden on business, or method of controlling an exploding labor cost? Is the uncertainty about the policy high because the regs have yet to be written or because of the pending court challenges (or both?). We can both agree on regime uncertainty as a problem without agreeing on whether a particular policy causes the uncertainty and concerns.

2. Even if I think that regime uncertainty is reasonable as a process impacting investment spending, I don't have to think it's a primary cause. Keynesian economics does a much better job explaining the relationship between interest rates, inflation, unemployment, and the financial sector. Regime uncertainty - it seems to me - is less good at explaining that big picture. So it seems to me Keynesianism or something like it provides the best explanation for the crisis, and then I'm more than happy to stipulate that regime uncertainty makes us worse off on the margins.

Peter Dorman on Economics as a Science

He writes this:

"Congratulations (maybe) to the Opera (Oscillation Project with Emulsion-Tracking Apparatus) team for their (possibly) revolutionary finding that a few neutrinos were able to defy Einstein and travel from Geneva to central Italy faster than the speed of light. If true, it will require a revision of basic physics that borders on science fiction.

I heard through the grapevine, however, that some senior scientists with this project did not give permission for their names to be on the article setting out the results, including one of the individuals who helped conceive and organize Opera from the start. They are passing up the opportunity to be connected to a historic breakthrough in their field. Why?

The answer is that, with such an extraordinary anomaly, there is a risk of error. Mismeasuring the distance within the apparatus by 12 meters, for instance, would reverse the results. Above all—and this is why economists should be interested—a physicist would suffer a huge, possibly irreparable blow to his or her career by being attached to a claim that is later found to be wrong. Type I error (false positives) are taken very seriously. The logic of this extreme asymmetry, so much weight on Type I, so much less on Type II, is explained in this earlier EconoSpeak post.

It’s rather different in economics, isn’t it? If someone shows you have made a false claim in a published article, you can write a gracious response thanking the critic and go on. More likely, you will double down and spin out more studies defending your original argument. Either way, if you’re wrong it’s no big deal. Lots of the top economists in the professional firmament have been wrong at one time or another (or even all the time), and it hasn’t set them back. Meanwhile, physics evolves over time toward ever-closer approximation of the real universe, while economics accumulates error along with insight."

I would say it somewhat differently. I don't think the problem here is a Type 1 error/Type 2 error emphasis problem. Everyone that thinks in terms of faux-Popperian hypothesis testing is primarily concerned with Type 1 error. The real difference is that the specification of economists' empirical work is a lot less certain than the specification of the empirical work in a lot of physics (I imagine string theory types are more comparable to economics). The fact is, economics isn't physics. Our theoretical work consists of models to demonstrate processes that go on amidst lots of other processes. You can bring those models to an empirical test, but the interpretation of the test is never quite as clear as "what is the speed of a neutrino".

A better comparison for what Dorman is talking about here is measuring something like GDP or some other economic variable. If the director of the BEA or the Census bureau came out with truly bizarre results he or she would be concerned as well and they would be criticized for mistakes.

While a lot of physicists measure values like this with exciting new equipment, that's not the work of most economists. Measuring values in economics is fairly perfunctory for most of the profession. We can always improve our measures, but we don't need something like CERN to generate a GDP statistic. Our work is different from the work of many physicists - our work is interpreting this data knowing that the economy is a very complex system.

So I'm not quite sure the analogy holds, personally.

Forget that it's a terrible waste of human capital and a major psychological burden...

...the real problem with youth unemployment is that those people are the ones that end up turning into commies:

"Permanent mass unemployment destroys the moral foundations of the social order. The young people, who, having finished their training for work, are forced to remain idle, are the ferment out of which the most radical political movements are formed. In their ranks the soldiers of the coming revolutions are recruited." - Ludwig von Mises (1922)

Is it just me, or does Jeff Tucker seem completely oblivious to the fact that this quote really doesn't make Mises look all that good?

We're number 10?

What do people think of these think tank rankings? Apparently Cato thinks we're 10th in the world in freedom.

Looking at the color-coded map they have on the cover, obviously there's nothing truly strange about their rankings. The "right" countries seem to be in the highest, middle, and lower quartile. But moves from 6th (our ranking last year) to 10th (our ranking this year) seem to me to say a lot more about the Cato Institute than they say about freedom in the United States. Think tanks take to the bully pulpit in echo-chambers all the time in Washington, but this is a 234 page document that's produced every year. That's quite an investment for a ranking that nobody but people who already agree with Cato are going to buy into all that much.

Updates

- Got an R&R from a comment I submitted - hope to have that back to them soon.

- I'll be presenting at the second NBER conference on the engineering labor force this Monday and Tuesday. On Monday I'll be presenting on supply and demand trends (the subject of the chapter), and I'll be giving another presentation on Tuesday about fears of shortages of engineers. This will kick-off a discussion with several policymakers, so it will be geared more towards that. This may turn into a second chapter of mine in the book.

- School is busy, but rewarding. I'm expecting to cut back on blogging as the semester gets more intense.

- Also - I used Casey Mulligan's examples about youth employment for my review session today! Granted, unlike Mulligan we talked about how the data he presented showed a regular seasonal supply shift AND a large negative demand shift.

What am I optimistic and pessimistic about?

An interesting exercise, partaken in by Cowen, Caplan, and Murphy...

... and now Kuehn:

1. I am an optimist about constitutional democracy. Everyone knows the pit-falls of democratic governance and likes to harp on them, but constitutional democracy has performed remarkably well. Most constitutional democracy pessimists lament the absence of their preferred constitutional order, which to me seems to completely miss the point of constitutional democracy. Constitutional democracy is strong where it exists and every decade it is making inroads elsewhere.

2. I am an optimist about what Bryan Caplan calls “overall political culture”. Nationalism, tribalism, racism, and sexism are on the decline. These changes reveal frictions and spark conflicts with resistant tribalists but that’s because they are reacting to a move towards cosmopolitanism. Caplan also laments “social democracy”. I see social democracy as a necessary consequence of constitutional democracy and growth. As we get richer we want to sacrifice efficiency for the socialization of goods. If we want this, we ought to be free to obtain this democratically. I am not a European social democrat, but I recognize these choices as choices that we should have the freedom of making if we have the luxury of making. What drives my optimism on this point is that socialization today usually doesn’t come with the dew-eyed innocence that it did one hundred years ago – we are much more cognizant of the trade-offs, and we should be free to make those trade-offs.

3. I am optimistic about growth. Short-term fluctuations are important because they cause a great deal of hardship, but we have every reason to expect secular, continual growth. The only threat to economic growth is that we won’t want to consume anymore or that we won’t have anything else to invest in. We seem to be insatiable on the former, and always seem driven to expand our horizons. On the latter, the record suggests that technological innovation will make sure the door to new investments are always open. Demography, human nature, and science will ensure continued growth.

4. I am optimistic about markets. The superiority of free markets over planned economies is a given. It will increasingly be the case in the future that any allocation not performed by markets will be conducted outside of markets because free men and women chose to do things that way. This will be the case for many allocative decisions, nevertheless we are unlikely to have our demand for the efficiency that markets can provide satiated. Markets have a bright future.

5. I am optimistic about broad acknowledgement of externalities (at least on some level). The decreased tribalism I noted on point #2 will contribute to an increased recognition of the impact of our decisions more broadly, outside the particular party or narrow tribe that we may be transacting or consulting with. Markets will become more efficient by the increased recognition of these externalized costs.

6. I am pessimistic about climate change. I think we could converge on doing something, but even if tomorrow we had a sea change in public opinion and an increased precision in climate science (neither of which are likely), it’s unclear how much we could really do. My expectation is that I will die in a world that is considerably warmer (unless I’m lucky enough to die on Mars), but…

7. I am an optimist about human adaptation. This means that I think we’ll be living in a warmer world (with the dramatic changes that would entail), and inevitably we will adapt to that world. Certain populations will suffer, but hopefully we will have the wealth and will to help them, and the technology to provide a comfortable existence for ourselves.

8. I’m an optimist about global government. I hope we have one before I die, and I imagine we will.

9. I’m a guarded optimist about war. I’m guessing warfare will decline as we globalize, however as supranational institutions develop there’s always the chance of friction.

10. I’m a pessimist about inter-stellar colonization. The technology seems too far off. If we manage it, it will be a truly unpredictable breakthrough.

11. I’m an optimist about inter-planetary colonization. I expect to see a thriving, albeit small permanent human settlement on Mars before I die, probably some bases on the moon, substantial mining of the asteroid belt, and lots and lots of robots flying around everywhere.

12. I am an optimist about people. People are basically good, and most of the conflict that comes up in our lives comes through misunderstandings, uncharitable interpretations, or reactions to perceived threats. People are basically good and as we have a greater opportunity to interact with people not like us, they’ll realize this. Civility will thrive and differing points of view will synthesize.

Is looking at it from a distance supposed to make it look prettier?

Gene has a typology of business cycles up, the last of which is:

"Those that resemble microeconomic models from a distance"

Microfoundations!

The typology is supposed to be funny, but this is one type of business cycle theory that for some reason everybody goes weak in the knees over. I think I'm cynical because in class today - going over properties of binary relations - we ended up talking about a lot of assumptions of neoclassical consumer theory. It all sounds reasonable of course at first glance, but by the time the professor was done with it you wondered how this stuff survived. The reason, of course, is that abstracted consumers in neoclassical microeconomic theory provide an approximation that is useful for explaining observed behavior.

I happen to think that's a pretty good answer. I've never been one to throw out the neoclassical baby with the bathwater.

But I'm still suspicious enough of it all to really scratch my head at the obsession that many people have with "microfoundations of macroeconomics". When I told a lot of my colleagues at the Urban Institute that I was hoping to do macroeconomics, many were surprised. My supervisor said she could never get into macro because "it seemed so made up", that "micro seemed real". Another senior researcher said the same thing - that micro was "about real stuff". I really don't understand how people can think like this. Microeconomics seems like the faker to me. I know what GDP is. It's the market value of all final products. Easy. I know what the money supply is. It may be hard to count and there may be multiple definitions. But you don't have to make weird mathematical assumptions to talk about what it is. We know what it is - we just have a hard time measuring it. All the fundamental building blocks of macroeconomics are very real and you don't have to make any crazy assumptions to get a sense of them. You start making abstractions and assumptions when you begin to model their relations, of course, but you have a very firm base.

Microeconomics isn't like that. Even the building blocks of microeconomics are abstract and unrealistic, to say nothing of the theorized relations of one building block to another.

I think microfoundations will be looked back on as probably a good thing to think about some in the sixties, but something that was blown way out of proportion to its importance over the ensuing decades.

This president has not been a Keynesian of any variety for at least two years

And even in early 2009 it was probably just a "lean against the wind" mentality.

Read this passage shared by Brad DeLong. It's not clear exactly, but from context it seems like this happened in the spring of 2009 (because the stimulus seems to have passed). Obama is arguing to his staff that there is not a demand problem, that the problem is high productivity. In other words, in this April 2010 post by Arnold Kling where Kling also responds to Romer's concerns about demand President Obama would have sided with Arnold Kling against Christina Romer. For a lot of reasons, I think Obama is still the best of a lot of bad options, but he's increasingly looking no worse than - say - Mitt Romney. I don't know if Hillary Clinton would have fallen into this trap or not.

This is really depressing. And yet in the blogosphere we're dealing with this notion that Obama is some kind of uber-Keynesian.

If I were Romer I would have resigned and had a big press conference laying all this out and spelling out precisely what the country needed. The president shouldn't have advisors if he doesn't want to be advised.

Non-libertarians are not national socialists (but it sure is a good way of distracting from the main point)

Recently there was some excitement when Ron Paul told Wolf Blitzer a view that everyone who knows Ron Paul knew he had, and that every Ron Paul fan knew a lot of other people disagreed with. Specifically, Paul resisted the idea that an uninsured 30 year old who was dying ought to get any sort of public support. This view isn't exactly a news flash, of course.

Robin Hanson responded in this way:

"But a great many ill, collapsed, etc. folks in the world are largely left to die, at least if curing them costs anything like a US hospital stay. Ezra argues above for “decent” national care, not global care. And even libertarians wouldn’t leave family members to die. So everyone agrees that we heroically help some, and leave others to die. We only disagree on who falls into which category."

And Arnold Kling said much the same thing:

"What most non-libertarians favor is some form of collectivist policy at a national level. National socialism, to coin a phrase. People are naturally collectivist at the level of family and others in their immediate vicinity. And that's fine. But to libertarians, national socialism is a mistake. The way to behave ethically with distant strangers is to trade honestly with them and don't steal their stuff. There is no reason to treat distant strangers that live within one political boundary differently from distant strangers that live inside another boundary."

These both seem quite wrong and to ignore what seems to me to be the major point. The allegation is that non-libertarians are nationalists, and that they want to divide people up by national borders - that those within a border are in the "tribe" and those outside aren't. Libertarians, it is argued, are tribal creatures too (we all are) they just have a more reasonable tribe - the immediate family.

However, if you asked the average non-libertarian and Ron Paul a different question - whether public funds should be used to help fight AIDS in Africa or other relief efforts - you'll likely get the same difference in response. So despite the effort to smear non-libertarians as "national socialists", it's not clear to me this holds water in describing the difference in preferences.

Economists talk about demand for goods and services (of which medical care is an example) as "ability and willingness to pay". It's worth sorting through exactly which of these two constrains Ron Paul from suggesting we provide free health care to the world and which constrains the average non-libertarian from providing free health care to the world.

There are a lot of things on our plate. Clearly we can't provide high quality health care to several billion people without cutting into other priorities. There's also the collective action problem - that paying for other countries' health care is less sustainable of an arrangement if it's a free lunch for them. For these two reasons, a lot of public health spending does get spent at the national or sub-national level. The constraint here, though, is clearly the ability to pay. Our dollar doesn't go nearly as far, and dollars are less available, when we start providing health care globally. But there's just as clearly a willingness to pay for global public health for most people. As we've gotten richer there has been more of a sense that we ought to put public funds towards these sorts of efforts. Certainly because we all think people should take a certain amount of personal responsibility, our willingness to pay for health care globally isn't infinite, but the major constraint seems to be ability to pay. As we get wealthier and our public budget constraint expands, most non-libertarians want to pay for more health care at the local, national, and global level.

Is this true of Ron Paul? I think it's safe to say "no". Whereas ability to pay is the biggest thing standing between the average non-libertarian and providing public health care globally, willingness to pay is the biggest thing standing between Ron Paul and this goal.

This seems obvious to me. Everyone knew this, right? His position may be controversial, but the fact that he holds this position doesn't seem controversial.

In light of that fact it seems wrong for Robin Hanson and Arnold Kling to say libertarian critics see that nation-state as the relevant "tribe".

The difference is in whether libertarians are willing to pay for certain goods publicly and whether non-libertarians are willing to pay for certain goods publicly. It shouldn't be a newsflash that Ron Paul distinguishes himself by his unwillingness - not by his transcendence of nationalism. Most non-libertarians are willing to pay for some sort of public health care. How extensive the actualization of that willingness is is going to depend on a lot of institutional, budget and resource constraints (ability to pay), and the nature of those constraints is inevitably going to lead to a lot of national-level policies. Extrapolating from that "ability to pay" issue that somehow non-libertarians see the nation as a tribe seems very wrong to me.

Libertarians regularly express an unwillingness to pay for certain things through government. This is not a news flash. Only the most illiberal non-libertarians express the view that we should treat people who live in our nation-state tribally. So I'm not sure why Hanson and Kling come to the conclusion that they do, except that perhaps they find the libertarian position hard to defend. I don't know - but I do know I'm no national socialist and no non-libertarians I know are either.

The pull of Krugman

It appears I am not the only one who first got mesmerized by economics from reading Paul Krugman's pathbreaking work as an undergrad in 2004. Granted, this guy ended up being much more successful, a lot earlier with it than me. Oh well.

Also it's just simply a good post. But I found the personal history interesting.

This is part of the reason why those Krugman-haters out there sound like such idiots to a lot of us. I know you have your issues with him, but he's the guy that made economics cool, interesting, and important to a lot of people.

Assault of Thoughts - 9/18/2011

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

- Sylvia Nasar has another great article on Keynes. She's speaking at the Mercatus Center in November, the day I present at APPAM and the night before Kate and I leave on a trip... it seemed like too much to squeeze in, but now I'm thinking I might want to show up. I liked to things about this article especially: (1.) it explained Keynesianism easily without resorting to consumptionism, and (2.) I like the details on Marshall.

- Lots of times when I argue with libertarians, I criticize what I consider to be their dangerous foray into social engineering. On the American political spectrum right now, libertarians propose considerably more radical shifts in the way society is organized than any other group, and for an economist that thinks these social orders evolve that seems suspect. So I found Karl Smith's coining of the phrase "liberalization failure" interesting. His concern is a little different from mine, of course. He defines it as: "When attempts to leave a market to its own devices results in a social backlash and the adoption of policies worse than what would have prevailed had the government taken the economists’ orginal recommendation." I wouldn't define it so narrowly in terms of the "social backlash" (although this is obviously a problem in many cases). I would broaden it to situations where people think they can predict what will happen as a result of large-scale liberalization, but they really can't. Still, it's a good idea. But ultimately I'm not sure I like it for the same reason I don't like the terms "market failure" and "government failure". I think the idea of "failure" in general for these things is a bad way to think about it. An externality, for example, isn't a "failure" - it's just a description of the way the world works given a certain property regime and set of incentives. Indeed, in a situation of externality the whole problem is the market isn't complete - it seems strange to blame the market for that. "Government failure" is odd too because often it's not the apparatus of government itself so much as the decisions that are made that turn out badly. If a firm goes out of business do we call that "market failure"? No. We say that given the institutional environment that firm didn't have what it took to be successful. The same goes with most things dismissed as "government failure". Demonstrating that a given piece of regulation is bad hardly proves that the act of regulating is unwise. I think these terms - "government failure", "market failure", and probably "liberalization failure" too aren't as clear analytically as they first appear. But it is good that Karl Smith is calling attention to the failure of libertarians to consider a lot of public choice problems associated with their ideas.

- I always have a tough time accepting the idea that the media has a strong liberal bias. New research suggests my suspicions might be good. You can get almost anyone - liberal, centrist, or conservative - to admit that Fox is pretty conservative. You can get almost anyone - liberal, centrist, or conservative - to admit that MSNBC is pretty liberal. There are obviously example of ideological news sources. But all the other major channels and all the big name newspapers seem to all be thought of as "liberal" by conservatives I talk to and "conservative" by liberals I talk to. That's a major clue-in that there's probably not all that much bias in them. Or to put it another way - if these news sources were unbiased, you would expect conservatives and libertarians to think they have a liberal bias, and you would expect liberals to think they leaned right. If they were biased, you wouldn't expect to see that symmetry. [And commenters - be a little circumspect about whether your brilliant refutation simply amounts to proving my point]

Roger Farmer, in a comment on Cafe Hayek

Don Boudreaux recently tried to spin Farmer as being anti-Keynes, which I tried to shut down in the comments and to which Roger Farmer himself later responded "Daniel Kuehn gets my position exactly right." It's not the first time libertarians have thought my interpretation of modern Keynesians was wrong, only for those modern Keynesians to turn around and personally endorse what I've said.

Farmer shares some important thoughts later on in the comment thread:

"The debate is too often couched in terms of free markets versus state control. But markets cannot exist outside of the institutional supports provided by government. These include the courts, the police and the army, institutions that are typically accepted as necessary by even the most ardent supporters of free markets. But should we move beyond these minimalist institutions?

Once one recognizes that the courts are legitimate institutions, it becomes necessary to provide a mechanism to define what contracts are enforceable and what are the boundaries that legitimize property rights. Slavery for example, was a legitimate institution at the inception of the American experiment in democracy. It is now widely considered to be repugnant. The boundaries change. What is obvious to men and women in one era is by no means clear to others.

Democratic countries evolve. Not all new institutions are successful and reasonable men and women can and do disagree about the proper boundaries to state intervention in markets. Central banks, like the Fed in the US, developed over the course of two centuries in response to a series of financial crises, similar to the one we are now experiencing.

Is there an alternative to the active management of the money supply by a committee of experts? Perhaps. But a system in which the value of a nation’s currency is subject to the exigencies of gold discoveries is manifestly not the solution. The gold standard was discarded by previous generations because it failed to generate price stability and the fact that the US adhered to the gold standard in the early years of the Great Depression is one of the major reasons that unemployment in that period was so devastatingly high.

It is tempting to pose the following dichotomy. Is high unemployment a systemic problem of unregulated markets? Or is it caused by over active government intervention? This is an overly simplistic way of organizing a complicated question. Every system of trade exists within a set of legal institutions. Some institutional arrangements lead to higher welfare for most citizens than others. The right question to ask of a democracy is: Which set of minimally invasive institutions will lead to the highest standard of living for the largest possible number of citizens?"

Assault of Thoughts - 9/17/2011

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

UPDATE: Take a look at Bob's comments. I think I've stated everywhere I mention this that Bob Murphy is not a problematically strict a priorist and while I think Graeber's critique of a priorism is dead on (which is why I originally linked it), his critique of Bob isn't. He uses evidence all the time, and he seems to me to have a very well calibrated balance between theory and data. Just to make that perfectly clear. As for the Graeber book itself - I haven't read it, and haven't thought much about the origin of money. I really don't have a dog in that fight. That I think Graeber made a good point about a priorism should not be confused with me thinking he's made a good point about (1.) Bob Murphy, or (2.) the origin of money. I'm agnostic on the latter, and I disagree with Graeber on the former.

- Gene corrects me on empiricism. Gene thinks a lot about this stuff from a more philosophical perspective. I've said in the past here that I don't think there's much use for epistemology - my approach to these questions is more practical. I'm an "empiricist" because of the value that I place on evidence, not because I reject rational arguments. Indeed, a lot of the stuff I talk about on here (like multipliers) isn't amenable to a clear empirical picture, and what you're forced to do is take all the scraps of evidence and just decide what coherent argument makes the most sense given those scraps of evidence (and then you still have to be cognizant of the fact that other things might be going on too - you haven't come up with a totalizing theory). That got me thinking, though, about ideal types of rationalists and empiricists. It's hard for me to imagine an empiricist that doesn't rely on rationalism at all. It's pretty clear that you need rationalism to organize your observation (which is why I treated that as implicit). It's also hard for me to imagine a strict rationalist, but at least in terms of scientific pursuits I think you're more likely to come across a strict rationalist than a strict empiricist (obviously in daily life a strict rationalist would be non-sensical - we all utilize sense data all the time). The ones that come closest in economics happen to cluster around Auburn, Alabama and perhaps Las Vegas, Nevada. And my main point on the irresponsibility of that disposition remains (and on that, I think, Gene would agree with me). Again, I'd like to restate that the irony of this all is that Bob Murphy is pretty good at whipping out (and accepting the discipline of) data. In fact it's amazing that that tendancy of his hasn't raised more eyebrows in Auburn. I think the reason it hasn't is that everyone - even there - intuitively knows how ridiculous a priorism is.

- Will Wilkinson has a good discussion here of how hard it is to nail down definitions for words like "liberty" and how ultimately we just make up definitions that suit us. I think this is basically right, but I think it's likely he has the causality reversed. He suggests we have a sense of what institutional arrangements we prefer, and then we develop understandings of "liberty" and "equality" that match that. That seems odd to me. Concepts like liberty and equality are appreciated and latched on to much earlier than a deep sense of institutional allegiance, so I would have thought that we develop our understandings of what it means to be "free" or "equal" early on, and that these are very amorphous words that can carry a lot of different implications, and that our politics can grow out of that later. Either way - it's precisely the indeterminancy of these words that makes Jan Helfeld's whole project look so ridiculous to interviewees and people that aren't already libertarian, and so compelling to people that are libertarian.*

- What do readers think of James Buchanan more generally? When I was in college, we read stuff of his on constitutions, and it made a big impact on me - I liked him a lot. Lately Don Boudreaux has been posting a lot of Buchanan on Keynes (here and here) that strike me as being deeply ignorant. Not just in the "I'm not a Keynesian so I'm going to make a critical comment" sense that I may disagree with, but which a reasonable person can say is informed. I have to say - the last several passages Don has put up have lead me to severely discount a guy that I used to have a ton of respect for. Granted - the passages have very little substance and the actual work he did to advance economics (the public choice theory work) is still is as good as it ever was. But it has been surprising to read. Does anyone have thoughts on Buchanan's relationship with Keynes? Maybe it just says something about the times in which he was writing - I don't know. We all have a tendancy to get swept around by the political winds.


*I debated Jan for over two hours last spring - the audio has yet to go up. He just went around in circles and didn't get anywhere, and the reason was that I did what all his other interviewees didn't think to do - I told him his definitions were fair enough as a first cut but I thought they were missing a lot and I wouldn't accept derivations from those definitions. That's ultimately why other interviewees balk at him. They just don't think to challenge him early on in the interview because on the face of it what he says sound OK. He seemed very bothered that I wouldn't play his game and that I offered counter-definitions that we could work from. At the end of the interview he told me that my mind was "poisoned" by "post-Kantianism" and that he felt sorry for me. I literally laughed out loud when he said that.

Assault of Thoughts - 9/16/2011

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

- Charles Krauthammer has a good article on Social Security. He doesn't mention the role of persistent growth but does mention something else important - than mandatory nature of the program. He's also a little too worried about the sustainability of the program, but his point is right on: this Ponzi scheme works because it's not like a Ponzi scheme in all the ways that matter. So let's keep it running until the electorate decides they don't want it anymore.

- Bob Murphy has a post critiquing the idea of measuring trend GDP from peak-to-peak. I think the key insight for why we do this comes from Friedman's "plucking model". I try to explain that in the comments, but Bob seems to think I'm saying Austrians can't explain long recessions (I'm not saying that - they do have an explanation for that). The point is that the plucking model gives us a reason for why we measure GDP potential from peak-to-peak. Maybe this weekend I'll do a more detailed post on the plucking model, but it's a very interesting empirical regularity.

- And speaking of empirical regularities and Bob Murphy, Chris Bertram sharply criticizes Bob's a priorism with respect to Graeber and the origin of money. Bob may point the finger at Gene Callahan for misleading him (I don't know which of these stories holds water), but all that misses the point and here Bertram hits the point dead on: a priorism is a bad way of understanding the world. What's ironic is that of the Mises Institute bunch, Bob is one of the most likely to give you data to support his argument. He is one of the least a priorist (in practice at least) of a very a priorist bunch. So I don't want to pile on Bob here - I just want to reiterate Bertram and Graeber's general point. As Graeber says: "Economists claim to be scientists. Normally, when a scientist’s premises produce such spectacularly non-predictive results, the scientist begins working on a new set of premises. Saying “but can you prove it didn’t happen sometime long long ago where there are no records?” is a classic example of special pleading. In fact, I can’t prove it didn’t. I also can’t prove that money wasn’t introduced by little green men from Mars in a similar unknown period of history." I just hope he realizes he's stumbled into an idiosyncratic little group that is very resistent to empiricism as a deliberate methodological position, and that most economists don't think like this at all.

- Karl Smith puzzles over being considered a liberal or a leftist. I have to post this because I have the exact same reaction. I've been referred to as a liberal for years now and it's still weird to hear people say that because I don't think of myself as being particularly liberal. There are three reasons for this I think. First and foremost, it's who we're talking to (the libertarians). I know other people don't think of me as a liberal. Second, in the middle of this recession I'm finding myself frustrated that Democrats sound increasingly like Republicans so I probably come across as "to the left" of them, whatever that means. Really it's just a disconnect with all but the more liberal politicians on one very big issue. And third, with the rise of the Tea Party supporting basic safety nets, basic public investments, etc. and thinking these are just smart and reasonable things to do has become suspect. So what would have been fine for a conservative to say thirty years ago is suddenly less tenable. These days, being of the view that Social Security, public education, a safety net, and investment in science is something to be celebrated can come across as "liberal".

Some links on jobs that I haven't had the chance to read

...but looked worth reading

- The Wall Street Journal has a critical examination of job training programs. What's simultaneously useful, interesting, and a little strange is that the article provides a history of evaluations of job training programs.

- The Economist has a special report on "the future of jobs". The first article in the series is here, but on the left hand side there are links to all the others. Also in this issue, but not in the special report is an article on youth joblessness - an important problem in the rest of the world that the U.S. has avoided for a while - but is starting to experience more of now.

Karl Smith, Ryan Murphy, and Empirical Economics

Karl Smith had a good response to Russ Roberts's repeated "scientism" accusations yesterday. This part was especially good:

"After all no one has – in my jargon – taken a ruler to the sun. No one has actually trekked from the earth to the sun with a tape measure to get its distance.

Indeed no one has even been to the sun or even out of earth’s orbit. People confidently mock those who say the sun is not at the center of the solar system but has anyone been outside the solar system to look down and check? Certainly not.

All of this is based on measurement and inference. And people trust the measurements and inferences of physical scientists even when they make wild conclusions based on highly technical derivations, complex models and slight differences in obscure measurements.

Two guys screw together a few half-silvered mirrors and all of a sudden the passage of time is just a fancy illusion. Is that more convoluted than Donohue and Levitt?"

The simple argument is that making inferences is what all scientists do, and it's strange that Russ finds that so controversial. But clearly economics is different from physics (as it is different from all sciences and all sciences are different from each other). Ryan Murphy seems particularly concerned with that. He responds to Smith:

"The ratio of content to vitriol in Roberts’ original post is a bit low (though I’d be a hypocrite for being too harsh on someone for their vitriol), but it is rather obvious that Smith has no idea why anyone would believe that the problems in econometrics fundamentally differ from the problems of measurement in physics [I don't find it obvious that Smith has no idea about this - so perhaps Murphy could clarify]. Actually, let me rephrase- when straightforward distributions aren’t applicable in physics, they actually use the correct distributions instead of assuming asymptotics and doing other stupid things. Dr. Smith, if you look at the data in economics, you see fat tails. When you have fat tails, even according to mainstream figures like Peter Kennedy, you can’t do meaningful hypothesis testing. Which means coefficient estimates are bullshit. Actually, I’ll just cite him directly for simplicity’s sake.

The consequences of non-normality of the fat-tailed kind, implying infinite
variance, are quite serious, since hypothesis testing and interval estimation
cannot be undertaken meaningfully.

Found in a footnote on page 63 of Kennedy, Peter. 1998. A Guide to Econometrics. Fourth Edition. Cambridge, MA: The MIT Press."

I have Kennedy's fifth edition (this appears on page 70 there) and maybe the book changed since the fourth edition, but if it hasn't then Murphy has failed to quote the next line where Kennedy references an entire chapter on robust specifications and non-parametric approaches to use in these situations. In other words - precisely what physicists do that Murphy claims economists don't do.

The whole physics vs. economics game always seems strange to me. Economics is most obviously like biology, not physics - and for obvious reasons. We are studying the social behavior of a primate. When we study the social behavior of any other species of primate besides homo sapiens we usually call those scientists "biologists", but in the case of this one species we've chosen to call them "economists". Fair enough - there's good reason for the different nomenclature (we're not just primates, after all - we're pretty special). But for all intents and purposes we are biologists. The physics that non-physicists usually have the opportunity to interact with (admittedly only a subset of physics) is fairly stable, mechanical, deterministic, etc. It's not like the complex system of the economy or other subjects of biological research. I think Smith's point is exactly right - scientists do inference. It's legitimate to give a physics example to make that point. But otherwise physics is a poor standard to measure economics against because it's too different. Russ Roberts has this weird imbalance in the way he usually approaches these questions where he also agrees with me that economics is most like biology, but for some reason he assesses the empirical bona fides of economics by comparing it to physics. Why? I don't know (and I've asked him and while he's responded to other questions and comments of mine he's never answered that question).

Murphy also highlights the real empirical hurdle of economics: endogeneity. Exactly right. Because of endogeneity we have to tackle the problem of measurement and inference differently from physics. Endogeneity is what makes empirical economics so interesting (to me at least). Endogeneity is a reason to be skeptical of results - the disposition of a scientist is always skeptical. But Murphy shouldn't confuse the obligation of having a skeptical eye with an obligation to consider something illegitimate (which is often what Roberts mistakenly does).

Smith ends with more great thoughts, this time from Robin Hanson:

"They key difference, I think, is that more interested parties see themselves as losing if the public listens to economists, and these parties therefore dispute economists in public. Such interested parties also influence individual economists, and so weaken within-economics consensus. In contrast, few care enough about what physicists say to dispute them in public."

I do think this is the primary difference, and this bothers me about the way Russ Roberts approaches these questions. Let's take two examples - the big macroeconometric models and the impact analyses that instrument for endogeneity problems.

I personally accept the sort of parameterized macroeconometric modeling that is done by IHS Global Insights, Moody's Analytics, etc. as having limits, but completely legitimate. It's just modeling the impact of policy given what we know from similar past policies. Russ Roberts repeats Arnold Kling's argument about the illegitimacy of these approaches whenever they come out with a justification of fiscal stimulus using these models. Fair enough - not everyone is going to agree with me on the methodology. But when Heritage produces a criticism of the stimulus using the exact same methodology, and when that analysis makes a huge splash in the media and the blogosphere does Russ Roberts make a peep? Does he raise the same objections he did when the same model produced pro-stimulus results? No. Russ should be raising hell about that, but he doesn't. It's the exact same methodology. Not only is it the exact same methodology - but it's the same damn model (IHS Global Insights, in that case) with a different set of assumptions. The only explanation for the difference in Russ's response that I can see is that one supports stimulus and one doesn't.

The same goes with studies that instrument for stimulus. I like these because like most people I see endogeneity as the primary problem for multiplier estimates. They are hard, but that's part of life - and that's also what makes them interesting to work at. Russ, of course, doesn't like these studies. He's called them a "great place for faith based econometrics", and has downplayed their value in discussions with Ed Leamer on EconTalk. And, predictably, Russ has criticized Romer's estimates using this sort of IV approach which finds a reasonably sized fiscal multiplier. You would think, then, that when Robert Barro uses the same sort of approach and finds no evidence for a multiplier (and publishes this in the WSJ - his was not a low-profile study) Russ would be equally critical of Barro? If you think that, you'd think wrong. To my knowledge he never mentioned it, and when his co-blogger Don Boudreaux favorably cited Barro's estimate Russ didn't take the opportunity to make the same critique of Barro that he did of Romer.

I would like to come to a different conclusion, but I simply can't. When macroeconometric modeling comes out with a pro-stimulus result Russ criticizes it but when the exact same approach comes out with an anti-stimulus result, he doesn't. When intruments come out with a pro-stimulus result Russ criticizes it, but when the exact same approach comes out with an anti-stimulus result he doesn't. What else am I supposed to conclude here? It's exactly what Robin Hanson says: "more interested parties see themselves as losing if the public listens to economists, and these parties therefore dispute economists in public". Most of what Russ says about econometrics I now consider to be a politically motivated statement rather than a scientifically motivated statement, because I simply can't find much scientific consistency in the way he talks about.

Notice that the two studies I always praise here are Barro's and Romer's. Notice when I raised questions about the Heritage numbers, it was never because I objected to their use of the IHS Global Insights model - I've always considered that to be a good decision for Heritage. Notice that the studies I don't like are the cross-state studies, and I criticize these studies on here when they come up with pro-stimulus results or anti-stimulus results. This isn't a political game, much as some people like to treat it like one. The empirical work is hard, and we need to work to keep doing it better. But if you stake out a methodological position you need to apply it consistently. Too much criticism of empirical economics seems to me to be grounded in politics rather than science.

Assault of Thoughts - 9/15/2011

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

- NASA announces plans for a new rocket that will carry humans to Mars. I am not following it too closely, but my understanding is NASA budgets are under a lot of pressure - so I'm not sure how to interpret this with respect to the budget constraints. They are talking about putting people on Mars by 2025, which is in the middle of the range of Musk's schedule. Many people see space exploration as zero-sum, which is a view I simply don't understand. I'm excited to see at least two projects - one public and one private - moving forward over the next decade.

- I haven't jumped into this "Social Security as Ponzi Scheme" debate, but this post by David Henderson caught my eye. He seems to balk at the idea that Krugman was refering to Social Security as a Ponzi scheme as him being "cute". I don't see what's so hard to accept about that. Krugman (and Samuelson) both obviously referred to it as a Ponzi scheme. However, they both obviously consider it sustainable and a good idea. Isn't the "being cute"/"being clever" the obvious interpretation? Social Security has elements that are obviously like a Ponzi scheme, otherwise we wouldn't be talking about this. However, it has two things that a Ponzi schme doesn't have: (1.) transparency, so everyone is aware of the structure and able to debate it and reform it, and (2.) a built in growth guarantee because market economies do a good job growing over time (which is why economists are so pro-market!). Difference number 1 comes in handy when the parameters associated with difference number 2 change over time. So yes, it's "like a Ponzi scheme" and that's a good, clever attention getter. But it's unlike a Ponzi scheme in a lot of important ways too - and the ways in which it is unlike a Ponzi scheme are exactly what have made it a great social insurance program in the twentieth century. Will we continue to want to use it as a social insurance program? Maybe not - but that's for future generations to decide. When Krugman said this the "cute" observation made for interesting commentary. At the time he didn't have likely Republican nominees seriously considering the dismantling of the program!

- I debated whether I should share this Onion piece with my thoughts: "New Study Finds Women Should Only Be Making 20 Cents Less On Dollar Than Men", because of how sensitive the issue can be. I've worked a lot on disparity issues over the last several years - mostly racial disparities, but some on gender disparities too. One of the interesting things to me is how people think about raw vs. adjusted parity. When you see an employment or earnings gap, there's a very good instinct to think it's all illegitimate. I think for the most part that's true - but we have to remember that it is illegitimate in at least two ways. At least a portion of these disparities are problematic simply because of problems in equity - we treat blacks different from whites or women different from men. But in circumstances of complete equity in the variable of interest, we are likely to still see disparities in that variable of interest because of disparities in other causal variables. Education as a determinant of wages is the obvious example. Even if we achieve "equal pay for equal work", there's no reason to rest on our laurels and no reason to expect that that amounts to the elimination of racial or gender disparities that we're concerned about. Equal pay is conditional on equal work, but disadvantaged groups may not be producing "equal work" because of earlier disparities in child nutrition, home life, education, etc. A lot of people make the mistake of thinking either (1.) that all disparities are due to inequity and discrimination, or (2.) if we achieve "equal pay for equal work" that is satisfactory. Disparities need to be thought of as a pervasive social phenomenon. They don't occur in just one variable of interest so the logic of "holding everything else constant" isn't necessarily meaningful as a social goal.

A new report out from the Urban Institute

This one has actually been in the works a while. I've presented this several places, including an IZA conference. It didn't have much luck in the journals for some reasons that weren't entirely surprising to us, and I've been the one moving it along so I wanted it out in some form before I left. The abstract:

"Growing up poor strongly predicts poverty and poor adult outcomes. This study explores two primary reasons poverty may persist across generations: risk behavior in adolescence and dropping out of high school. Results suggest that risk behavior and dropping out help perpetuate poor economic outcomes for children from single-parent families but are less important for children who grow up in low-income families. The findings suggest that policies directed at reducing youth risk behavior and dropping out can improve economic outcomes when targeted to youth from single-parent households."

It's kind of got a kitchen-sink feel to the regressions, but it tries to do some interesting things with direct and indirect effects of poverty. Often these mechanisms are a black box for economists.

This is an off-shoot of a project funded by the Department of Health and Human Services. It uses the 1997 National Longitudinal Survey of Youth, which is a really great dataset.

Again, not quite Matt

Another head-scratcher from Matt Yglesias. Obama did a really dumb thing recently, and Matt didn't seem to notice.

Yglesias writes: "CBO Chief Doug Elmendorf testified today before the Supercommittee and said, sensibly, that “[t]he combination of fiscal policies that would be most effective would be policies that cut taxes or increase spending in the near-term, but over the medium and longer-term move in the opposite direction.” In other words, the sort of thing that President Obama proposed in his jobs bill. Higher deficits in the short term when interest rates are low and the output gap is large, followed by lower deficits down the road when (hopefully) the situation will be different."

Except not. Obama is proposing covering that bill with a tax increase on the wealthy. It's as if he's saying "What's that? There's very little crowding out right now? Don't worry! I'll just crowd it out for you!". The reason for reintroducing the tax increase on the wealthy is obvious: it polls well. This turns what could have been a nudge of stimulus into primarily a redistribution scheme. Don't get me wrong - there are worse redistribution schemes out there than this one. But it's still not what we need.

Karl Smith: "We Need to Stop This"

There's no point in paraphrasing or selectively quoting this one:

"I know some people who read my blog know Don Boudreaux personally and perhaps eat lunch with him regularly, so I am hoping this message gets through.

This kind of stuff is just unseemly.

This Keynesian explanation is adolescent. Lazily identifying the symptom as the
underlying problem, Keynesians then craft a "theory" that shows just how
inadequate spending can in fact cause inadequate spending. How clever of them!

It’s understandable that many people untutored in economics fall for
this nonsense. Just as many untutored in geography naturally think the Earth is
flat (looks that way, doesn’t it?), many untutored in economics, upon seeing
businesses closing up and workers being laid off, conclude that the problem is
inadequate spending (looks that way, doesn’t it?).

Really? No liquidity demand? No deep uncertainty? No sticky prices? No monopolistic competition? No dual role for money as a medium of exchange and a store of value? No efficiency wages? No flight to quality?

Just low spending begets low spending. Keynesians must really be ignoramuses.

Its one thing to disagree with a theory, its another to erect such an insulting straw man. Why do this?

I look forward to Boudreaux’s promised column on regime uncertainty. If he has an alternate theory of recessions, then I am happy to hear it. Yet, I would prefer if he did not begin by spitting on mine.

Additionally, if Don Boudreaux wants to debate these ideas personally I will be more than happy to. Not because I want to “show him up” though I know a lot of people watch debates for this. But, because by actually engaging one another’s ideas intensely and seriously I think we can come to a deeper understanding."

There really has been a flood of nonsense in the last two weeks about Keynesianism, and I'm not sure why. I don't understand how these people can actually convince themselves that Keynesians are this dumb or simplistic - and not just that, but even when they get informed about their misunderstandings they dig in and mock the people who are informing them. It's not pretty. People read these blogs and these guys do get out into the media, and for that reason alone it's worth responding to. But every post I see like this makes me think of them all more like politicos and less like economists - a change which I genuinely find unfortunate.

Anyway - I think there's a challenge in that last paragraph. Maybe Smith will come up to GMU - I'd show up for that. I might even go down to North Carolina to see it.

Assault of Thoughts - 9/13/2011

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

- Greg Mankiw puzzles over that investment graph Krugman shared the other day. I did too, at first - I wasn't sure exactly what Krugman was trying to say with it. I think the point was that volatile investment ought to have a volatile cause, and Barro's treatment of the investment primarily as a long-run policy problem ignores this. Approaching it as a long-run problem, should we keep taxes low, inflation stable, policy predictable, etc? Sure - definitely. But keeping an even keel in the long run doesn't seem like it has anything to do with the short-run fluctuations in investment that cause a lot of the damage. Indeed, if you look at a GDP series it's pretty clear that the long-run that Barro is worried about is actually the one that we do pretty well at (probably not of our own doing, of course). Krugman and Barro agree that our problem is an investment problem. I believe Krugman is noting that our investment problem is mostly a short-run problem, while Barro seems to think otherwise.

- When Tyler Cowen used the term "New Old Keynesians" I kind of liked it yesterday. I imaginet his mostly mean neoclassical synthesis Keynesianism with some modern theory mixed in. But ultimately, I wasn't sure how well it fit. Mark Thoma expresses exactly my reservations about it here.

- Krugman shares some interesting articles by Sylvia Nasar on Keynes and Schumpeter in 1919, and on Irving Fisher.