Friday, September 23, 2011

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.


  1. If I may riff off Scott Sumner, the regime uncertainty multiplier is zero when the Fed is targeting inflation.

  2. "is it a massive tax and burden on business, or method of controlling an exploding labor cost?"

    Why would the labor cost be 'exploding'?

  3. DJ - you mean nominal spending, I assume!!!

    Seth - Well, much faster than the rest of the economy at least. 2xGDP growth (that's an old proportion... I'm not sure what clip it's moving at now) is pretty substantial. But perhaps I should have been more subdued.

  4. "Why" not "what".

    Why are labor costs exploding? Why are they growing at 2xGDP?

  5. Oh, sorry. Premium growth due to health expenditure growth. Health expenditure growth due to all sorts of things, not the least of which being we're richer than we were and we want to buy more health care.

  6. Why isn't supply rising to responding to this growth in health expenditures?

  7. O/T: Is this question from Steve_Landsburg a fair one for Keynesians? Does it have an obvious answer? Check out my comment too.

  8. Seth -

    I'm not sure I understand. I'd imagine supply is rising right now in response to the growth in demand for health care. Do you think it's not? I doubt the expenditure growth is entirely on the price side. You need to remember to distinguish between a shift in the existing supply schedule (which may not be happening in any substantial sense - I don't know) and a movement along the existing supply schedule. Either way, I operate under the assumption that supply is rising in response.

  9. Silas -
    I don't feel like I can entirely do the post justice right now. First I don't exactly understand the question. What's good about people demanding more money? Why does Landsburg think that would make Keynesians "thrilled". I confess I don't quite understand the logic.

    It seems to me Landsburg is trying to infer some sort of welfare implications from Keynesian theory. It's not obvious to me that there is a particularly good way to do that. Keynesianism doesn't explain happiness. It explains the path of employment, interest rates, output, etc. How happy that makes people or how we should evaluate that is a different question entirely.

    The way I evaluate it is to say that (1.) people don't seem to like being unemployed, and (2.) the model says they are unnecessarily being unemployed, ergo (3.) I'm not happy with the current situation.

    This is a truly bizarre statement from Landsburg: "An old Keynesian — a Keynesian in the tradition of, say, Sir John Hicks — would, as far as I can tell, be stricken mute here because old-style Keynesianism provides no yardstick for measuring the desirability of different outcomes."

    Atomic physics "provides no yardstick for measuring the desirability" of detonating an atomic weapon in a densely populated area. But I can still adhere to what I perceive to be a correct understanding of atomic physics without being "stricken mute" on the question of the desirability of setting off the weapon. Landsburg seems to want an economic theory to be a normative and positive theory wrapped up in one. That seems dangerous to me, although obviously a lot of people talk about economics like that.

    He then gets into New Keynesianism which does offer at least the temptation of a potential normative theory. I would think the answer is "yes, people get utility from holding money right now, and yes people get disutility from being unemployed, so why don't we print more money and satisfy the utility of both. The normal costs associated with that (inflation, etc.) don't seem like much of a threat". So even if you want to force a normative frame on this, I don't see why Keynesians should be "thrilled". The situation still isn't Pareto optimal, right? The utility that hoarders get from hoarding money comes at the expense of the unemployed.

  10. Silas -
    I don't agree with this point in your comment: "Keynesians seem to ignore the benefit of hoarding money — there is something that motivates people to do it, and until you can remove that reason, policies designed to blindly “stop the hoarding” are just going to make people worse off."

    Far from "ignoring the benefits" of hoarding, Keynesians are often the only ones that make those benefits explicit and explain why people do it. Don't expect such clarity on the benefits of hoarding from anyone operating off of a loanable funds theory of the interest rate.

  11. I'm suspicious of 'regime uncertainty' because it was invented in late 2008 and so far has been used to trash Obama and to trash the New Deal. It smacks of Republican propaganda. And of course, 'investors' is almost always the rich, the poor and middle class don't have the buffet investing options they do.

    But my reading is limited, I'll be happy to retract that if anyone has ever seen it invoked against the interests of the 'investors'.

    And a quick look at Higgs bio shows his employers get plenty of wingnut welfare. Just sayin'.

  12. It is somewhat older than that. It is mostly an ideological bludgeon. It is highly underdeveloped. But it's actually very sensible. It's just not the most important thing to worry about.

  13. @Daniel_Kuehn: What do you mean, Keynesians are the only ones that make the benefit from hoarding explicit? Here's a typical Austrian treatment. Rather than just punting an explanation of "liquidity preference", it explains why people would want to have more liquid holdings.

    This relates back to the gnome example Bob Murphy gave: if a recession is due to factors suddenly being less value-productive[1], people will want to hoard cash then too -- because it's not clear what changes need to be made to restore a new productive equilibrium with different modes of production. Thus, the more general-purpose or liquid goods will be more valued.

    Does printing money help people identify new sustainable modes of production? No? Then it probably only stops hoarding by pushing people further down their utility curve. "out of the frying pan ..." and all that.

    [1] for example, because gnomes switched around cows and drill presses; or because people realized housing and related services weren't and endless fountain of wealth.

  14. @Daniel_Kuehn: Go try to run a business, and then tell me what scares employers.

    "A libertarian is a liberal who's tried to run a business."

  15. Anonymous,

    "Regime uncertainty" as a formal concept dates back at least to the late 1990s; as informal complaint about government policies it dates back even farther than that certainly.

  16. Gary--

    I worded that poorly. I meant that it was pulled from obscurity to bash Obama. It didn't exist in the media during Bush's term. Check out the google timeline, exactly one cite, at Cafehayek, from 1/1/2000 until Sept 2008.,tll:2000,tlh:2009&prmd=imvnsu&ei=sEt9Tp3zG_DLsQLC2cwm&ved=0CDIQyQEoCA&bav=on.2,or.r_gc.r_pw.&fp=6d20b15c114ae30e&biw=1166&bih=616

  17. Gary--

    This graphic may help:

  18. re: "Does printing money help people identify new sustainable modes of production?"

    Yes, of course it does. You can't make sound investment decisions until the distortion is dealt with.

    re: "A libertarian is a liberal who's tried to run a business"

    Oh don't hide your politics behind entrepreneurs. It's incredibly transparent, Silas. I've never owned a company but I have managed a large payroll and I've had a lot of experience competing for contracts, and none of that has given me reason to budge in my center-left sensibilities. I was a libertarian for several years - back when I was in high school and college, when I had no real responsibilities, and when my job experience was mowing lawns, shoveling snow, and scooping ice cream.

  19. Daniel - I don't believe that health care has had as much innovation-based productivity improvements as other industries that would shift the supply schedule because of the host of government interferences on the local, state and federal levels.

    In most areas of the economy, prices tend to decrease on an inflation adjusted basis as innovation leads to productivity improvements that shifts the supply schedule out.

    Two areas that don't seem to benefit from these innovations as much are education (K-12 and college) and medical care. These have two things in common - heavy gov't involvement, at all levels, and a high percentage of the final bill coming out of the pocket of a third party. Further, part of the gov't involvement is to protect certain classes of worker - be they teachers in K-12 or doctors.

    I don't think the folks who believe 'costs are rising in medical care' and 'Obamacare will solve this' think very deeply about why costs are rising. They want to treat a symptom, not a root cause.

  20. I'm no health care expert, Seth, but I find your comment intriguing. The U.S. is usually highlighted as having considerable innovation in health care because of good policies. How that innovation translates to improved outcomes is a different question. Often we get fancy cutting-edge techniques that only marginally counter-act the way we abuse our own bodies in this country. But I've never heard anyone argue that medical innovation hasn't been substantial in the U.S..

    I think part of the problem is that the way insurance works in the U.S., doctors have an incentive to pursue these more expensive, innovative techniques. I don't know what that solution to that is - if we could somehow pay for results rather than procedures we'd be better off, but I'm not sure how you do that.

    I'm not sure what Obamacare will do to costs - a lot of it is simply a more equitable approach.

    re: "Two areas that don't seem to benefit from these innovations as much are education (K-12 and college)"

    Another strange statement. K-12 I'll grant perhaps (although again I think the biggest problem here is equity in quality, not quality per se). But American college education is one of the most innovative and productive higher education systems in the world. You are taking these two giants of American innovation - biomedical and higher education - and acting like these are a drag on the U.S. economy. This seems exactly backwards, Seth.

  21. @Daniel_Kuehn: Yes, of course [printing money helps to find sustainable new modes production]. You can't make sound investment decisions until the distortion is dealt with.

    Distortion relative to what? If real individual preferences are driving the demand for liquid holdings (which they are), the only way to get rid of that kind of distortion is to make people want different things (e.g. by having a different risk profile). But if you get to assume arbitrary changes to individual preferences, you can assume away _any_ economic problem!


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