One more shitty argument I'm getting sick of hearing from people that ostensibly want me to take them seriously...

...sorry to be blunt - I'm just being honest.

Along the same lines, I often get told that my view bears the burden of crony capitalism, and that my political economy isn't robust to men who are not angels.

I'm sorry - but for one thing I take a Jeffersonian, federalist, constitutionalist view that is designed not to rely on men being angels.

But if you insist that my view be judged by any scandalous real world problems that might arise (and God knows they do arise in the real world - I'm not denying that), then you have to judge your view of the world by (1.) how libertarianism is actually going to be implemented in the real world (i.e. - likely half-heartedly and with crony interests in mind), and (2.) the negative consequences that such a course of action might lead to (perhaps crony capitalists capturing the whithered government that is left and using it and growing it to their purposes).

This is rarely how libertarians judge themselves.

I acknowledge the requirement to demonstrate robustness. My personal institutional preferences are quite similar to the post-war United States. I'd change things here and there, but I'm basically quite happy with this political economy. I don't think we're on the road to serfdom. I think we've hit on something basically good. And yes, there's some crony capitalism in the post-war United States but it seems to me that we do a fairly decent job. Perfect? No. Robust? Yes.

What's the libertarian alternative? I'm never given an example (although I'm assured it's not Somalia even before I think to think "Somalia"). And that's fine. Maybe we don't have an example yet, just like Marx never had his worker's paradise except for a few fleeting moments in the Paris Commune. But don't paint your own theoretical alternative in rose colored glasses and ignore precisely the robustness and crony capitalism questions that you expect me to justify. I'm happy to confront those questions for my worldview. I'm happy to say "yes, some things suck about the post-war United States but all in all this market democracy I like does pretty well". It seems to me libertarians aren't even aware that the rest of us worry about even worse crony capitalism under libertarianism and wish that libertarians would speak more openly about this prospect.

UPDATE: Mike Kimmel once said "I'm not a libertarian because I believe in freedom and property rights". Until libertarians understand why people think this, they're not going to get it.

Democracy in Deficit: Hayek Edition

Often you'll hear the argument that whether Keynes was right or wrong, he opened the flood-gates to politicians who destroyed fiscal sanity in his name. Buchanan makes this argument in Democracy in Deficit, and recently it's been repeated by Peter Boettke and Don Boudreaux.

It's an absurdly weak line of reasoning, and I want to illustrate why by using the same logic with Hayek - not because I think it's a legitimate case against Hayek (unlike Boettke and Boudreaux with Keynes, I personally think Hayek is an extremely high-caliber economist) but to illustrate how ridiculous the argument sounds:

So let's start by simply assuming that Hayek's great - that paying attention to Hayek will not lead a government astray and will not pile up an unmanageable debt. Hayek, on his own, is fine. But that's not really important. What's important is what Hayek and Hayekian economics gives politicians the license to do. Many politicians over the years have said that they are inspired by Hayek. Thatcher and Reagan are obvious politicians that fit this - both are symbolic of their era and of course have many allied politicians who felt the same way about him. More recently Paul Ryan has listed Hayek as a major influence, and has quoted him (here and here), including at CPAC - a major Republican Party venue. The same goes for Senator Rand Paul, and obviously his father as well. When was the last time Keynes was listed as a top intellectual influence for a President or for a Prime Minister? When was the last time Keynes was promoted at a Democratic Party function? I'm not sure if it's ever happened. You also have Hayek trumpeted by Glenn Beck and promoted on his show. My assertion - which I don't think any honest person looking at the evidence can reject - is that if you think Keynes has set a tone for any set of politicians (whether they are faithful to him or not), then Hayek has obviously set an even more substantial tone for another major set of Republican politicians (whether they are faithful to him or not). Anyone who wants to claim that Keynes gave politicians a license to do what they do has to admit that Hayek, as a major inspiration for a large swath of conservative politicians, has given at least as much license and therefore ought to be judged by the same standards that Buchanan, Boudreaux, and Boettke judge Keynes by in this regard.

So what can we lay at Hayek's feet for the license he gave politicians? Massive military buildups. Large and growing deficits during recessions as well as boom years. A complete lack of will to deal with entitlements or propose a long-term budget solution.

No one who lays these things at Keynes's feet can neglect laying them at Hayek's feet as well. If anything the case is stronger. Ron Suskind's recent book on Obama reveals to us that the president was vehemently opposed to the major Keynesian voices on his economic team. This is Obama - the guy that actually did stomach a modest stimulus two and a half years ago. If this guy has been given license by Keynes, then certainly we can put the Reagan legacy and virtually all post-Reagan Republicans at Hayek's feet.

*****

I propose something different: we stop honoring this argument as legitimate or logical. I appreciate James Buchanan a great deal. I've said here before I was thoroughly impressed when I was first assigned to read him as an undergraduate. I still am. But James Buchanan did a very poor job thinking about the legacy of Keynes, and unfortunately his arguments have been reproduced widely.

Krugman has made a similar argument about Hayek to what I make above. The difference between Krugman and myself is that he thinks it's actually a legitimate argument against Hayek and I don't. Boettke and Boudreaux seem to understand the problems with this line of argument when it comes out of Krugman's mouth. But when it comes out of Buchanan's mouth about Keynes and when they repeat it themselves, they are completely oblivious to how illogical they sound. Foolishness gets passed off as wisdom. This argument really has to stop. I'm getting to the point where I am having a hard time taking people seriously who make this argument.

If you have a problem with politicians - criticize politicians. Don't bring the bone you have to pick with Keynes into it unless there's a much clearer connection than this one.

A Halloween Poem by Lovecraft

In a Sequester’d Providence Churchyard
Where Once Poe Walk’d

Eternal brood the shadows on this ground,
Dreaming of centuries that have gone before;
Great elms rise solemnly by slab and mound,
Arch’d high above a hidden world of yore.
Round all the scene a light of memory plays,
And dead leaves whisper of departed days,
Longing for sights and sounds that are no more.

Lonely and sad, a spectre glides along
Aisles where of old his living footsteps fell;
No common glance discerns him, tho’ his song
Peals down thro’ time with a mysterious spell:
Only the few who sorcery’s secret know
Espy amidst these tombs the shade of Poe.

We're all Keynesians now

From Greg Ransom.

Apparently income - which of course equals expenditure - can shrink to a problematic level at times and the stream of income must be increased.

Keynes on the War Economy

Doing a little more reading on the war economy and post-war expectations. This was interesting - it's from a radio broadcast "Will Re-armament Cure Unemployment" (1939):


"What a difference all this makes! It is not an exaggeration to say that the end of abnormal unemployment is in sight. And it isn't only the unemployed who will feel the difference. A great number besides will be taking home better money each week. And with the demand for efficient labour outrunning the supply, how much more comfortable and secure everyone will feel in his job. There will be other reasons for plenty of anxiety. But on of the worst anxieties is anxiety about getting and keeping work. There should be less of that than for years past.


I have a special extra reason for hoping that trade unionists will do what they can to make this big transition to fuller employment work smoothly. I began by saying that the grand experiment has begun. If it works, if expenditure on armaments really does cure unemployment, I predict that we shall never go back all the way to the old state of affairs. If we can cure unemployment for the wasted purposes of armaments, we can cure it for the productive purposes of peace. Good may come out of evil. We may learn a trick or two which will come in useful when the day of peace comes, as in fullness of time it must."

Bruce Caldwell on the Importance of the History of Economic Thought

A Response to a Good Question from Russ Roberts

Yesterday Russ Roberts posed this important question:

"So my challenge to Paul Krugman and Brad DeLong and Matt Yglesias and Daniel Kuehn and others who didn’t like my claims about ideology and truth-seeking is this: what evidence could you imagine that would dissuade you from supporting massive government spending?"

Upon further consideration, the question is a little more ambiguous than I thought as to whether he's refering to a specific policy position or simply to a Keynesian orientation. I will be dissuaded from "supporting massive government spending" when there's no need for "massive government spending" (or when debt levels pose bigger problems). Sometimes Russ writes as if Keynesians think the economy needs government spending all the time (see his claims in the past and in this post about the post-WWII period). That's not my understanding of things at all, and I've never been taught anything even resembling that. So when interest rates start to increase, when inflation gets particularly substantial, when unemployment starts to decline, then I will yield on government spending as a policy position.

But based on the discussion in the rest of the post I think what Russ is really getting at is "what would dissuade you from supporting massive government spending as a potential policy response" - in other words, what would make you abandon your Keynesian disposition? I can think of a couple things:

1. No more plausible empirical studies showing multipliers substantially greater than one during periods when we expect them to be greater than one. As Russ notes, we have a range of multiplier estimates. I haven't had the pleasure of doing a detailed literature review (although we've discussed in detail many of the recent papers on this blog), but Russ says that they go from 0.5 to 2.0, and that seems right based on what I have seen. The point I've raised with Russ multiple times now is that the estimation strategies for most of these papers along this range are convincing to me. There are better studies and worse studies, but even the best ones show this sort of range. Russ interprets that as a problem and even goes as far as claiming "No anti-stimulus economist is convinced by a multiplier of 2 from a regression. No pro-stimulus economist believes the multipliers of less than one", which of course he knows is not true because I've noted many times on his blog and this blog my acceptance of low-multiplier estimates like Barro's (much to Andrew Bossie's chagrin). The question for me is "do we have an explanatory framework that provides a reason why we see low multipliers in some situations and higher multipliers in other situations?", and the answer is most emphaticaly "yes". Keynesian and New Keynesian models do a very good job explaining the range of values we see. The most important consideration for policy today, of course, is that multipliers are high when the economy is depressed and low when it is strong. Here are estimates from Auerbach and Gorodnichenko's SVAR models that illustrate the point beautifully:



It would seriously shake my acceptance of Keynesianism if we stopped seeing this pattern in the empirical literature of high multipliers during depressed periods and low multipliers during growth periods. I know Russ thinks that people's views aren't substantially shaped by these sorts of empirical findings, but in my case he's simply wrong. I don't have a head for high-level theory - try as I may. Maybe readers aren't fully aware of this, but the theory I peddle here is very basic stuff. As an undergrad, I excelled in the stats and econometric courses. In my early career at the Urban Institute my job was to figure out ways to empirically estimate program impacts. I'm an empirical guy. Will one study sway me? No. The subject of study here is too complex. But if the body of evidence shifts, that will sway me. The body of evidence on the multiplier right now strongly suggests higher multipliers in depressed periods and low multipliers outside of depressed periods. And the best theory I have at my disposal for explaining why that is a Keynesian theory of the economy. Which leads me to the second thing that would change my mind:


2. A better theory that explains what we see in the world. Ultimately what's attractive about Keynesianism is the same thing that's attractive about any scientific theory: it seems to explain observed phenomena better than any alternative. It helps me understand why inflation isn't sky-rocketing right now despite what's been happening with the money supply. It helps me understand the behavior of interest rates despite what's been happening with government deficits. It helps me understand why a lot of resources would simply go unused. It helps me understand the multiplier estimates that these studies keep producing. And ultimately it makes a lot of sense. Micro-founded versions of it and non-micro-founded versions of it are relatively consistent with each other, which is reassuring.

Other theories can do parts of that, and I feel strongly that other processes (including the mechanism underlying Austrian business cycle theory) are also operating in the economy. That's great. A grand unified theory is probably not a reasonable expectation for a complex phenomenon like the macroeconomy, so I am willing to entertain all of that. But until I am informed of a theoretical framework that can explain all of this better and can still incorporate other important insights, my own theoretical framework is going to be basically Keynesian. I'm not alone on this point. Many people who are against fiscal stimulus as a policy position (because of other reservations or perhaps political views) also consider themselves within the Keynesian paradigm.

*****

It's probably worth noting a couple things that won't change my mind.

1. Additional evidence that politicians are self-interested and that they act on those interests. I already know this. Nothing in my understanding of Keynesianism relies on this not being true. This is something I've always taken to be true, and something which I've always understood the science of economics to have accepted.

2. Failure of politicians to take Keynesian advice. If you thought that the government shouldn't do something, and they demonstrated a strong capacity to go ahead and do that thing anyway, would you consider that a reason to stop telling the government they shouldn't do it? I didn't think so. Let's please stop pretending this argument has any shread of logic or respectability to it.

3. Paul Samuelson and the post-WWII economy. I've been reading up on this in detail and am still forming my reaction to it, but I'm tiring of this argument too. People have explained to Russ Roberts and David Henderson many times why it's not surprising from a Keynesian perspective that the post-WWII economy would do relatively well. It's not a convoluted argument either - it's pretty straightforward. Russ writes that "they explained it away" as if there is something underhanded or insincere about what we've said. If he's going to react to counter-arguments that way there's not much I can do - he's clearly made up his mind on this. And it's also clear he thinks a valid test of Keynesianism is whether the economy can do well without government stimulus - which is an absurd test. Of course it can. Keynesian theory doesn't say it can't. Paul Samuelson was indeed worried about the post-war economy. You know who argued against these fears? (1.) John Maynard Keynes, (2.) Nicholas Kaldor, (3.) the CED (institute which promoted Keynesianism in business circles), (4.) The Brookings Institution (quite Keynesian at the time), (5.) Alvin Hansen (a.k.a. "The American Keynes"). Samuelson was swimming against the tide on this one. I think Abba Lerner disagreed with him too, although I'm still hunting that source down. William Beveridge is unclear on what he thinks in the book of his that I have and was reading last night, but he seems like he might disagree with Samuelson too. You know who agreed with Samuelson and who also expected a post-war depression? Friedrich Hayek. I don't blog at "Cafe Samuelson", but Russ still blogs at "Cafe Hayek" - yet for some reason we still have to deal with this Samuelson/WWII nonsense as apparently definitive of what we think every single time we have this discussion. Can we bury this please?

Russ Roberts on the Multiplier

Russ Roberts is blogging about the multiplier again, and I encourage people to go look at it and comment. There is little of the "you guys are just doing it for ideology" or "you guys are brimming with hubris and scientism" that you often get, so he seems to be in a mood to really talk about the stuff. I already have several comments, and I think readers should jump in too, particularly with points I didn't speak to - like the mechanism involved.

I know I've addressed all of these points several times before on his blog, and God knows the big-shot Keynesian bloggers have addressed all of them. But the more you discuss this stuff the more it gets understood and worked out.

UPDATE: More thoughts from Russ here. This one is a little more head-smack-invoking than his last post, but he does pose a specific question to Krugman, DeLong, Yglesias, and me, which I'm going to try to answer tomorrow morning before getting my study on.

Richard Rorty on Platonism in Science

From "Phony Science Wars", The Atlantic, 1999:

"These alternating intuitions have been in play ever since Protagoras said "Man is the measure of all things" and Plato rejoined that the measure must instead be something nonhuman, unchanging, and capitalized -- something like The Good, or The Will of God, or The Intrinsic Nature of Physical Reality. Scientists who, like Steven Weinberg, have no doubt that reality has an eternal, unchanging, intrinsic structure which natural science will eventually discover are the heirs of Plato. Philosophers like Kuhn, Latour, and Hacking think that Protagoras had a point, and that the argument is not yet over.

The most vocal and inflamed participants in the so-called science wars are treating the latest version of this fine old philosophical controversy as a big deal. In the very long run, perhaps, it will prove to be one. Maybe someday the idea of human beings answering to an independent authority called How Things Are in Themselves will be obsolete. In a thoroughly de-Platonized, fully Protagorean culture the only answerability human beings would recognize would be to one another. It would never occur to them that "the objective" could mean more than "the agreed-upon upshot of argument." In such a culture we would have as little use for the idea of the intrinsic structure of physical reality as for that of the will of God. We would view both as unfortunate and obsolete social constructions.

But there is no hurry, no urgent need to bring this perpetual seesaw to rest. Scientists who agree with Kuhn are not about to do anything very different from what their colleagues who agree with Weinberg do. Their disagreements come up only in after-hours chat, not during the daily grind in the lab. Analogously, politicians who think that human rights are somehow built into the ahistorical structure of the human soul usually propose the same policies as those who think that human rights are an admirable recent invention. In the short term, philosophical differences just do not matter that much. In neither science nor politics is philosophical correctness, any more than theological correctness, a requirement for useful work."

OWS and the labor market for scientists

Scientific American has an interesting article on scientists and science students participating in the OWS protests in Baltimore.

I wish I had more time to discuss this, because they're talking specifically about biochemists and the market for biologists is actually an interesting and unusual story. My read on most science and engineering labor markets is that concerns about shortages are way overblown - most of these markets are functioning just fine and respond well to price signals. Biology is a little different and has experienced a genuine glut in PhDs, so the concerns expressed here are in some ways unique to that field. A big part of the problem is supply-side policies in the market for scientific labor, which as Ken Boulding pointed out decades ago makes little sense compared to demand-side policies.

Anyway - if you want to learn more about the glut in the biologist labor market the person to read is Paula Stephan, and economist at Georgia State University.

Quote of the Day

"Concern for man and his fate must always form the chief interest of all technical endeavors. Never forget this in the midst of your diagrams and equations."

- Albert Einstein

Croaking our way to progress

Brad DeLong, speaking of Paul Krugman, quotes the preface to Keynes's Essays in Persuasion. Keynes called the essays the "The croakings of a Cassandra who could never influence the course of events in time." Brad revises "I would not, however, say "never"--I would say "sometimes, and we all hope more in the future than in the past"."

The point that you slowly improve the state of society is an important one, and one that I think is often ignored by people who say "if politicians will never do exactly what you're happy with, then you have to abandon the whole Keynesian project as unworkable". First, that doesn't make any sense because Keynesianism is an approach to macroeconomic science. If it's right, it's right regardless of whether politicians pay attention to its rightness. This dependence on what politicians do is a non-sequitor.

But even if we think about policy suggestions that may emerge from Keynesian macroeconomics, it still doesn't make sense to abandon the whole thing just because of resistance. As Brad suggests, we can still make progress. Although there was only a weak, early Keynesian response to this crisis it was still better than the catastrophe of the 1930s which took several years for an adequate monetary response and even longer for a substantial fiscal response. Some people talk as if it should be obvious that a policy we think would have a negative impact should be prefered to an inadequately implemented policy that we think would have a positive impact. This makes no sense at all, but you see the argument all over the place as if it's some deep wisdom.

We could turn the tables as a demonstration here. Politicians - even ones that talk sorta like true blue libertarians - have not embraced "true" libertarianism, and they aren't going to embrace it any time soon. So should libertarians just drop their views because they are unworkable in the real world? They apparently don't think so. So why is this considered such an ace-in-the-hole argument against a timid, un-followed-through-on Keynesianism?

I like Keynes at the end of that preface too (the whole book is very good):

"I have thought it convenient to choose this date of publication, because we are standing at a point of transition. It is called a National Crisis. But that is not correct - for Great Britain the main crisis is over. There is a lull in our affairs. We are, in the autumn of 1931, resting ourselves in a quiet pool between two waterfalls. The main point is that we have regained our freedom of choice. Scarcely any one in England now believes in the Treaty of Versailles or in the pre-war Gold Standard, or in the Policy of Deflation. These battles have been won - mainly by the irresistable pressure of events and only secondarily by the slow undermining of old prejudices. But most of us have, as yet, only a vague idea of what we are going to do next, of how we are going to use our regained freedom of choice."

Who said it?

"A utility function is often a very convenient way to describe preferences, but it should not be given any psychological interpretation. The only relevant feature of a utility function is its ordinal character", and

"Utility theory is purely ordinal in nature and there is no unambiguously right way to quantify utility changes."

The Economics of Craft Beer in DC

This was a really great article by Tammy Tuck on the high price of craft beer in DC. For one thing it was just a good outline of the business and the relationship between brewers, wholesalers, and retailers. But it also had a lot of good discussion of regulation, product differentiation, purchasing power in different markets, and a lot of other good points that would make it very instructive for an intro economics class.

One of the things that struck me was the attitude of a lot of the interviewees toward the market. The manager of a Dupont Circle retailer said "When I first started getting crazy beers that weren't yet on most people's radar, the temptation was strong to jack the prices up. The logic was that the people who wanted them would pay for them. The few shops around town who had them would charge a whole lot. So we figured the market could bear it, and we aligned our prices accordingly. After a while, a spirit of fairness settled in. We've come back from the dark side."

A wholesaler who is described as practically having a monopoly in DC said "Just because I'm the only one who can sell it, I'm not going to jack up the price. That's just ethically wrong."

Some of this could simply be posturing, of course. But we shouldn't discount the extent to which market activity itself has utility or disutility. A lot of people ignore the social import of market institutions when they talk about economics. Non-market allocation is considered automatically suspect, as are allegedly "non-market" motivations in markets.

Quote of the Day

From Jerry O'Driscoll:

"I am always amazed how people can misread plain and simple texts. Of course, many rely on second-hand accounts rather than reading original texts."

He's talking here specifically about Hayek and Coase. Hayek is an interesting case, because you can find him saying a lot of things over his long life. But certainly it's clear the sort of misreadings that O'Driscoll is referring to. I, of course, spend a fair amount of time marveling over misreads of other texts, and I think the point here that reliance on second-hand accounts drives a lot of it is generally right. When you're surrounded by people who say that Keynes thinks savings is bad, loves big government, thinks we should increase consumption, that's what less inquisitive people will start believing. This isn't to say that some of the misreading isn't deliberate, malicious, or ideological (we've had confirmation of the role of ideology recently) - I'm absolutely positive it is. But that can give birth to a lot of more innocent, second-hand misreadings.

Take this read on Keynes from Ron Paul that I heard on the radio over the weekend:



Yes, apparently Keynesianism is now about removing property rights in the energy industry.

New Acquisitions - Arlington Central Library Book Sale

Anyone in the D.C. area should stop by the Arlington library book sale (open through Sunday). I just picked up:

- The Economy of British America, 1607-1789, by John McCusker and Russell Menard.

- Science in the Federal Government: A History of Policies and Activities to 1940, by A. Hunter Dupree

- The Patomac Route to the West, by Corra Bacon-Foster

I had a bigger stack, but I really don't need to be buying books I don't have any time to read right now.

The Dupree book was commissioned by the National Science Foundation and the American Academy of Arts and Sciences in 1957 as a project to take stock of the history of science policy in the United States. So it's very much a volume of introspection at the inauguration of this new period in the history of American science. The Potomac book is just a collection of soure material from the Ohio Company and the Patowmack Company. You can find this stuff scattered around, but usually the material you always see is too or from Washington (and always selectively from that material). This looks like much more, and it reviews a broader period of the companies' histories.

Public choice, poorly executed

Recently I wrote this post on public choice theory were I suggested that often it is applied very inconsistently. Gene Callahan has a post on the same theme. It's too good to quote selectively:

"Libertarianism Calls for Bigger Government... or so a libertarian argument I just ran across implies!

The argument was against supporters of Keynes. I ran across it in private correspondence, so I can't point you to where to find it, but it runs as follows (Argument A):

1) Keynes's supporters say that his policies don't necessarily call for bigger government; instead, Keynes said governments should run surpluses in good times and deficits only in bad times, a recommendation which is entirely size neutral.
2) However, Keynes's advice was unrealistic; knowing public choice theory, we can see that, in fact, governments will love running deficits and hate running surpluses, and so will only pay attention to half of his advice.
3) Therefore, in fact, Keynes's prescription calls for more government.

So, let us apply this to a libertarian policy stance (Argument B):

1) Libertarians say that the market should decide both when a firm should grow large and when it should fail. No one should step in to bail out market losers, no matter how big they are nor how many people they employ.
2) However, their advice is unrealistic; knowing public choice theory, we can see that, in fact, governments will happily allow businesses to make profits and grow large (profits can be taxed and large businesses are great campaign contributors, etc.), but will be very reluctant to allow them to fail.
3) Therefore, in fact, libertarians' prescription calls for larger government.

Folks, it is the exact same argument with closely analogous specifics filled in differently in each. I don't see how anyone can buy A and not also buy B. (Well, except for the fact that they like the conclusion of argument A and don't like the conclusion of argument B!)"

I've never understood why some people seem to think that public choice theory and the economic incentives of politicians introduces such an obvious counter-argument to [fill in the blank] policy. What's worse is that when the present the argument, they treat the other side like freaking five year olds with no concept of market efficiency or the problems with planning.

What's most amazing to me about macroeconomic stabilization policies in particular is that we've had over a half century now of actually somewhat poorly executed macroeconomic policy making, and things are pretty good in the United States. We are a vibrant, innovative, constitutionally limited market democracy. We have major problems but somehow macroeconomic stabilization policy - with all the public choice warts which I've never denied exists - still seems to be doing pretty well.

Do we have a counter-factual? Do we have a successful constitutionally limited market democracy that is doing equally as well that has completely eschewed macroeconomic policymaking? Not that I'm aware of.

So please, don't treat me like a child when it comes to the economics of government intervention 101. I know the implications of public choice theory. My claim - the claim you have to choose whether to disagree with or not - is that macroeconomic stabilization works in theory in a frictionless model, it seems to work well enough in practice, and our experience with it including all the public choice problems that come with it seems to be quite good. What's the counter-argument?

Simply pointing to the reality of public choice problems and government failure is not a reason not to do it. When I point to "market failures" (I hate the term - but you know what I mean), do I present it as a reason to abandon markets? No, of course not. I'm a pro-market economist. One can recognize market failures without abandoning the market. For some reason some people have this idea in their heads that simply recognizing government failures implies the obligation to abandon government.

My contribution to all these "I am the 99%" things floating around

What scientists say - what people hear

The Discover Magazine blog shares some thoughts on the difference between the words scientists use and the way the public understands them. Most of these are relevant to economic science too.

Assault of Thoughts - 10/19/2011

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

- Ryan Murphy presents a hierarchy of evidence. I think he sets the bar far too high for "science" (only his two highest). I think this sort of high bar (he's not the only one that sets it there) comes from thinking too much about physics and probably too much about most philosophy of science too. If we cut out his #3, 4, 5, 6, and 7 we are eliminating a lot of what we colloquially think of as "science". The list is also clearly weighted towards the empirical potholes that economists hit on a regular basis (I don't think Ryan would deny this point). Also, I think the whole "black swan" thing has limited applications for many scientists, and is less relevant especially when you are not extrapolating into the future. Black swans and fat tails are far less relevant for a variety of elasticities and impacts that economists estimate, for example. That's not to say black swans couldn't show up there - it's just to say that we are consciously taking local effects and we think those are very useful to know, and that even if there are black swans in some circumstances it doesn't make the insights about the local effect any less valuable. This isn't to say he doesn't make good points. I like the way he introduces #3 a lot, for example.

- A great post from Krugman that's been making the rounds. What a great time to be entering the profession.

- Haven't listened to it yet, but this is the new EconTalk. It's on Keynes and Hayek.

Not moving in the right direction... at least at the turn of the 19th century

Adam Smith, 1776: "They ["great landed estates"] are founded upon the most absurd of all suppositions, the supposition that every successive generation of men have not an equal right to the earth, and to all that it possesses; but that the property of the present generation should be restrained and regulated according to the fancy of those who died perhaps five hundred years ago."

Thomas Jefferson, 1789: "The course of reflection in which we are immersed here, on the elementary principles of society, has presented this question to my mind; and that no such obligation can be transmitted, I think very capable of proof. I set out on this ground, which I suppose to be self evident, that the earth belongs in usufruct to the living; that the dead have neither powers nor rights over it. The portion occupied by any individual ceases to be his when himself ceases to be, and reverts to the society. If the society has formed no rules for the appropriation of its lands in severality, it will be taken by the first occupants, and these will generally be the wife and children of the decedent. If they have formed rules of appropriation, those rules may give it to the wife and children, or to some one of them, or to the legatee of the deceased. So they may give it to its creditor. But the child, the legatee or creditor, takes it, not by natural right, but by a law of the society of which he is a member, and to which he is subject."

*****

David Ricardo, 1817: "The produce of the earth - all that is derived from its surface by the united application of labor, machinery, and capital, is divided among three classes of the community, namely, the proprietor of hte land, the owner of the stock or capital necessary for its cultivation, and the laborers by whose industry it is cultivated. But in different stages of society, the proportions of the whole produce of the earth which will be allotted to each of these classes, under the names of rent, profit, and wages, will be essentiall different."

Two things that make me feel like a fuddy-duddy (and I'm only 27!!!)...

...Scott Sumner and Occupy Wall Street.

Both of which, it so happens, are very popular right now.

And both of which as a practical matter I'm 100% behind.

I don't know how Scott Sumner manages to be so confident about cause and effect, so nonchalant about inflation, or so focused on a single metric that is allegedly the key to everything. But I do know that I agree that right now the Fed ought to be more expansionary, and I do know that I long for the day that inflation is what I'm worried about. So I have a hard time not cheering on the wave of NGDP level targeting euphoria that has swept the blogosphere recently. Kudos to Scott and everyone else (it's not like he did this alone). If policy, research, or both vindicate him on this and clarify some of the more looming reservations this man is serious Nobel material down the road. A prize for making the world safe for inflation again (it didn't used to be a dirty word, after all).

Anyway - at least I'll never be quite the fuddy-duddy that this guy is (I tease him only because I like him).

I am still triangulating my views on OWS. But again, like Scott, whatever differences with them I may have on the nitty-gritty issues, I still have to say "it sounds a hell of a lot better than what we're looking at now".

I should probably start thinking more about OWS

Lately my mind has been completely preoccupied with transitive closures and Walker's Theorem, but at the one-month anniversary of Occupy Wall Street I think it's probably time to admit this is not a passing fad, it's an important development, and I should pay more attention to it.

People I respect a lot endorse the movement, and the demands strike a chord with me in a vague sense, but I worry that in practice I'm too "neoliberal" for them. A Tea Party analogy might be OWS:Daniel::Tea Party:Senate GOP Leadership.

But they appear to have staying power - occupying a single site for a month is more along the lines of the Arab Spring than the Tea Party, and we have reports today that they've got $300,000 stashed away and have storage lockers full of supplies.

- Evan has an interesting post about the "Occupy Wall Street Library", which apparently you can donate to.

- Bob Murphy shares a discussion between Tom Woods and Stefan Molyneux on the movement. This might come as somewhat of a shock, but their primary critique is that OWS is not libertarian.

-This is an interesting graphic from the Wikipedia page:

If I were an OWS organizer, I'm not sure which trajectory I would prefer - but the contrast is interesting. I'm guessing part of the difference is due to the fact that the primary instigator of the Tea Party movement (Santelli) was a media personality, so it's no wonder they had quick coverage.

- And here's an interesting solution to a problem that Joe Stiglitz faced:

Any other thoughts/interesting points on OWS?

Sims and Sargent: Not "Non-Keyesians"

When the Nobel Prize for Sims and Sargent was announced, David Henderson wrote an op-ed calling it "a Nobel for non-Keynesians", and wrote about it on his blog. I took issue with that approach to the award, and wrote this in the comments:

"I agree with your praise of Sargent and Sims, but how do you square your op-ed's lede with the fact Keynesians have readily embraced precisely these concerns about both expectations and empirical macroeconomics?

I see Sargent, Sims, Lucas, etc. as critiquing a naive way of doing formal econometric modeling. Once could use those naive methods to do formal modeling of any theoretical tradition - it just so happens that Keynesianism was ascendant at the time of this early growth in data collection and econometric work. A better lede would have been "A Non-Cowles Nobel". That Keynesianism was flourishing in the midst of all that seems more incidental to me.

That's not to say Sargent is some kind of stealth Keynesian. It's just to say (1.) they killed the old modeling method, not Keynesianism, (2.) Keynesianism has done great under their new methods, and (3.) that Keynesianism is even part of this discussion is something of a historical accident."

The "non-Cowles Nobel" is a reference to the Cowles Foundation which was sort of definitive of the simultaneous equation modeling of structural models. The Cowles foundation was established in 1932 - four years before the General Theory was published.

Now, Sims and Sargent seem to agree with me. Here's an excerpt from a New York Times article on them:

"An op-ed piece in The Wall Street Journal on Tuesday carried the headline, “A Nobel for Non-Keynesians,” placing the professors in the camp that opposes the interventionist philosophy of the influential British economist John Maynard Keynes.

It said the two had put “a sizable chink in the Keynesians’ armor.” An editorial said the pair was “ at odds with the recent Keynesian vogue, and in tune instead with the frustration with government fine-tuning that has dominated world economic policy since 2008.”

That’s a compelling narrative. But it’s not the way Professor Sims sees himself, as he told me by phone late last week. (It doesn’t seem to be Professor Sargent’s view, either, but we had only a brief e-mail exchange.)

Professor Sims doesn’t want to be pigeonholed. “I’m not ‘non-Keynesian,’ ” he said, adding that he has been an active “promoter of new Keynesian macroeconomic models,” because they “are the place in our profession where theory and data and policy decision-making are coming together.”

“It doesn’t really make much sense to stand on the sidelines and take potshots at them,” he said. “If you don’t like the way they’re working, you should try to do better.”

He and Professor Sargent have been “trying to do empirical macroeconomics using formal tools of statistics,” he said. “Those tools aren’t in themselves ideological.”

Professor Sims spoke favorably of the Obama administration’s fiscal stimulus programs, which are Keynesian in their countercyclical spending. “An expansionary fiscal policy is probably what we need right now,” he said."

Smith on Effective Demand

"The quantity of every commodity which human industry can either purchase or produce, naturally regulates itself in every country according to the effectual demand, or according to the demand of those who are willing to pay the whole rent, labour, and profits which must be paid in order to prepare and bring it to market."

Wealth of Nations, IV.i.12

Assault of Thoughts - 10/15/2011

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

- Matt Yglesias talks about modern macroeconomics in terms of Kuhn's take on the Copernican Revolution. I don't think I endorse this interpretation. For one thing I think of New Keynesianism as the version of Keynesianism we got as a result of the Lucas Critique, whereas here Yglesias is juxtaposing the two. Is there an incomensurability between the two? No, I really don't think so. He also just seems to analogize the two as "New Keynesianism is messy" and "Epicycles were messy", and I'm not sure that's the best way to draw parallels either. "Messiness" is largely dependent on the complexity of the subject of study and exactly what you're choosing to model in that subject. The question is - are we working at what Kuhn called "normal science" or not? I think there's a ton wrong with this interpretation, but it's interesting.

- A better Matt Yglesias criticizes Kocherlakota: "if at first you fail, then fail, fail again". I've criticized this mindset recently, to Bob Murphy's chagrin. People act as if the fact that we're not in utopia right now means that what we tried briefly three years ago is absolutely the wrong answer. If you want to say it never was the right answer, that's one thing. You can argue that point on its merits. But don't look around and say "we tried stimulus once, we're still in a bad position, stimulus must not work". As Gene Callahan once noted, it's like saying that because death from pneumonia occurs when people fail to respond to antibiotics, the key to not dying from pneumonia is to stop taking antibiotics (instead of... maybe... more aggressive treatment).

- Abstract thought, recipe following, and chemistry in some highly evolved (but not quite as highly evolved as us) primates. Humans are truly amazing creatures.

LK on Michael Brady

Commenter Blue Aurora has alerted me to Brady's work before, and now LK has a post up on it. He writes:

"Michael Emmett Brady argues that Hayek’s concept of uncertainty and the role of knowledge are quite distinct from that of fundamental uncertainty as defined by Frank Knight and Keynes:

“Uncertainty for Hayek means that each individual decision maker only has a small piece of the puzzle. However, as a whole, the aggregated set of all decision makers have a complete set of all relevant knowledge. There are no pieces missing, lacking or unavailable from the puzzle. Market prices organize and synthesize the aggregate amount of knowledge so that market price signals, understood only by savvy, knowledgeable entrepreneurs, [eliminate] … any uncertainty.” (p. 14)

“Keynes, Knight and Schumpeter deny Hayek’s claim that the market generates price vectors which concentrate the knowledge so that savvy, knowledgeable entrepreneurs can act on this information and solve the problem of uncertainty. Uncertainty means vital important information is missing. Pieces from the puzzle are missing and will not turn up in the future” (p. 14).

“Hayek could not accept the standard concept of uncertainty as defined by Keynes, Knight and Schumpeter because it would then be impossible for market prices to concentrate knowledge that did not exist. In conclusion, nowhere in any of Hayek’s three articles on Knowledge in Economics in 1937, 1945 and 1947 does Hayek deal with the standard view that uncertainty means knowledge that is not there.” (p. 15).

Brady charges that the “Austrian use of the term ... uncertainty actually means dispersed knowledge” (p. 16), which bears further investigation."

T.S. Eliot, War Debts, and Keynes

I was reading this review in the Atlantic of two volumes of T.S. Eliot's letters, and was intrigued to learn that in the early 1920s Eliot worked at Lloyd's Bank in London, specifically on government accounts and war debts. Unfortunately, the article suggests that his work at the bank is rarely brought up in the letters even though it took up a lot of his time.

Does anyone know more about Eliot's work at Lloyd's?

Eliot was associated with Virginia Woolf - a good friend, of course, of John Maynard Keynes. I've never thought much of it. I always figure these sorts of people at that time had wide circles of correspondence. But the work on war debts in London during this period makes me wonder - did Keynes and Eliot ever cross paths?

Apparently they did write to each other at least a few times, but the dates for the archived letters discussed in the link all come in the late twenties and afterwards. Does anyone know any more about Keynes and Eliot's relationship?

Some thoughts on public choice theory

Tyler Cowen says it's underrated. My sense is that's probably right (I don't know if it's the most underrated), but I wouldn't necessarily place all the blame on the economics profession. Some of the blame certainly goes to public choice theorists themselves. Yglesias puts it this way:

"While of course I agree with many of the specific observations made under the banner of public choice (public officials often do corrupt and self-interested things), I don’t really “get” public choice and think I never will. The basic theory (here’s a good recent example from Jerry Brito) seems to go like this:

1) Spread cynicism about public officials.
2) …
3) Libertarianism!"

I think his point #1 is too much. It's not a case of spreading cynicism - it's about imputing motives to public officials that we impute to all actors. That part of public choice is fine. Now, I think public choice theory goes to far in assumptions about motivation in some cases. It is not absurd to note that a public spirit motivates a lot of public officials, and we can say this without abandoning the idea that self-interest motivates them too. I've never worked for the government, but in my immediate circle of family my wife does, my mom and aunt work for local school systems as teachers, my grandad was in the Army and then worked in the veteran's court of appeals, and my grandma worked with military child care centers. Every single one of them was largely motivated by a public spirit. My wife does not come home from work discussing how she wants to obtain more resources for her agency. We worry a little about her pay freeze, but aside from that what she talks about (aside from mundane work drama) is how invested she is in using education as a form of public diplomacy. She works at National Defense University with a department that has mostly foreign officers as student, and she gets very passionate about how great it is to see Pakistani officers talking with Americans about what's going on over there, and especially about how Pakistani and Indian officers interact and learn to appreciate each other while in classes (my impression is that these two countries form the bulk of the foreign students). So is a public choice theory about resource appropriation and self interest essential? Of course it is. But this scoffing at the idea of a "public spirit" I think is deeply out of touch with reality. My wife's experience is reproduced for a lot of other people I know that have worked in government. Anyway - all I'm saying is that that is important in the analysis as well, but generally speaking I disagree with Yglesias that the starting assumptions are all about "spreading cynicism". Self interest is good starting assumption. It's just not complete.

I'm more in agreement with Yglesias on his #3. A lot of public choice theory seems to just be a thinly veiled way of smuggling a political disposition into economics departments.

It really doesn't have to be this way. Public Choice Theory makes a lot of good solid claims about good governance centering on federalism, constitutionalism (Buchanan's enormous contribution), decentralization, etc. There's considerable material to work with without necessitating the libertarianism that the discussion often descends into. But often that's not what ends up happening.

Peter Boettke recently wrote about public choice theory too here. I think he falls into the same trap. This is a comment I wrote on that post:

"re: "Imagine, just imagine if you will, what fiscal and monetary policy would have to look like if we took seriously the Humean dictum that in designing governmental institutions we must presume that all men are knaves."

Isn't this exactly what the constitution does take seriously? Don't we take this seriously?

When I first read Buchanan as an undergrad I fell in love with public choice theory. Since then, reading more broadly, it's been more disappointing. The literature seems like if you're not coming out guns blazing for libertarianism there's a sense that you're not doing public choice theory or you're ignoring public choice theory. No wonder others have stayed away too.

When Pennington came out with his work recently my reaction to it was "this is dead-on - this is why constitutional systems and federalized systems and decentralized systems are good governance". It was a rigorous statement of robust governance. But then in all the commentary on Pennington it got turned into sloganeering for libertarianism.

If the claim is "federalism is robust", "constitutionalism is robust", and "decentralization is robust" I am fully on board. But too often public choice theory in practice instead is just a very inappropriate cudgel to be used against Keynesianism or liberalism.

When public choice theory gets to the point where it gets past this idea that decentralized constitutionalism is incompatible with Keynesianism or modern liberalism and that decentralized constitutionalism does not imply libertarianism, perhaps I'll take a deeper interest in it. For the time being there seems to be a lot wrong not with public choice theory so much as the way that it is practiced."

One final point is that because of the political entanglements of public choice theory, a lot of good public choice theory doesn't get counted as such. There is a lot of work in political economy and public economics that doesn't get put under the banner of "public choice theory" because it doesn't come to libertarian conclusions.

"Small Government Keynesian" is not an oxymoron...

I think there is some confusion in the comment thread of this post over the point I made that your view on Keynesianism has little to do with your political ideology.

To be a "Keynesian" all you really need is to think that liquidity preference is an important determinant of the interest rate, the level of effective demand is an important determinant of output and employment, that as a result of shifts in liquidity preference and effective demand the economy can be below full employment for extended periods of time, and that when the economy is below full employment, spending of any variety (including government spending, but also investment and consumption spending) can have a multiplier effect on output that is larger than it is during boom years.

That or a substantial subset of that is what it is to be "Keynesian".

If you have moral or philosophical reservations about the government taking action - any action - to respond to economic downturns, that's fine. Notice that nothing in that prior paragraph requires you to support government action.

If you think government is likely to bungle spending so badly that the inefficiencies and misallocation of government spending will swamp any spending mulitplier, then it's perfectly reasonable to be a Keynesian that expects the fiscal multiplier is small.

I personally rarely think about the size of government, I think government should be more active in some areas and less in others, and I think constitutional restraint of government, decentralization of power, and democratic decision making are essential. I don't want a large government, and I don't view government as having any special competence. None of that really informs what I think about macroeconomics - in fact it's entirely irrelevant to what I think about macroeconomics - but that philosophy of government in addition to my assessment of macroeconomics are of course going to both inform any sort of policy claim I advocate.

New Urban Institute Working Paper

It's here (although it's just a short review of the data... I'm surprised they chose to label it a "working paper"!). There's some discussion of the Texas numbers that Rick Perry presented, and a good overview of some sectoral shift literature.

A little more on Roberts and Krugman

I'm pretty swamped right now, but I did want to share Russ's response to me, and Krugman's response to Russ. The Krugman post is really excellent. Russ's is quite good too, although (obviously) I disagree with a lot of it.

Regular readers know that I was (before starting school) a primarily empirical labor economist/policy evaluator by profession, and that one of my biggest interests in macroeconomic stabilization discussions is discussions of empirical estimates of the multiplier. That's one thing that Russ brings up here and he says the evidence is "discouraging". I don't think it's quite as discouraging, for some of the reasons I mentioned in the last post. What are your thoughts on that claim of Russ's?

Not recommended reading

But it's out there and it gets circulated, so we have to deal with it. Russ Roberts responds to Krugman's case on Keynesianism here. The most shocking thing to me was this:

"The evidence for the Keynesian worldview is very mixed. Most economists come down in favor or against it because of their prior ideological beliefs. Krugman is a Keynesian because he wants bigger government. I’m an anti-Keynesian because I want smaller government."

This is a statement about Russ that I wouldn't have even made before I read him say it himself. He holds his views on Keynesianism to conform to his ideology. That's a really disheartening thing to read, even though I've never been particularly in agreement with Russ in the past. I would have figured he at least had other objectives. Scientific conclusions based on adherence to an ideology are worthless. This is how we get the persistence of ideas like creationism and geocentrism. That isn't to say that in ruder stages of society creationism and geocentrism weren't decent explanations - they were decent at one time. But when the evidence starts to stack against them, adherence to ideology is what impedes scientific advances. That Russ actually embraces this is dumbfounding to me.

Needless to say, I see no evidence at all that that's why Krugman views Keynesianism favorably. Russ doesn't appear interested in offering any reason for thinking that's Krugman's motivation. It doesn't really make any sense. There are Keynesians who favor and oppose larger government (just as there was at one time a fairly active community of Austrian socialists). Your view on how the economy works doesn't require a certain political philosophy.

Much of the rest of the post is not recommended either, but unfortunately I don't have time to really get into the weeds of refuting it. Feel free to comment on this summary of the failures of Russ to make a convincing case:

1. He talks about stagflation as refuting Keynesianism. It obviously doesn't. He suggests that Krugman said you can never have high interest rates when you have high unemployment. He obviously didn't. That someone like Russ - an economics professor - could be reading Krugman for years now and not understand why he says under current circumstances they wouldn't be high (circumstances that didn't apply in the 1970s), and instead interprets it as "you can't have high interest rates with high unemployment" is unbelievable to me.

2. He talks about low multiplier estimates from Barro and Redlick as being evidence against Keynesianism. I've spoken to these studies numerous times not just here on F&OST, but also on previous posts of Russ's! Barro and Redlick show precisely what you would expect out of Keynesianism - outside of recessions, the multiplier is low and government spending crowds out private spending. You can't just choose to redefine Keynesianism as "the multiplier is HUGE" just because you want to. It's also worth noting that even if the multiplier were always small, it wouldn't matter. The multiplier is just a parameter. Early Keynesians thought it was a lot bigger than modern Keynesians think it is. So? It would be like discovering that the speed of light was actually slower (or faster) than original estimates suggested. Sure we'd have to recalibrate several things, but changing the parameter around wouldn't make relativity wrong. Likewise, changing our assessments of the parameters of the Keynesian model doesn't make the model itself wrong. Why Russ thinks it does is unclear to me. Again, he seems to just be saying "Keynesianism is the idea that government spending is great", rather than seeing it as a theory of how the economy functions.

3. He talks about the post-WWII boom again, despite the fact that lots of people (including people more prominent than me) have told him how he's misusing the episode. Why was there a post-WWII boom? Because demand was strong due to a very predictable microeconomic response to the lifting of price controls and demand in overseas markets. Once again, Russ is letting his ideology lead his economics (and I say this now because Russ has made the assertion himself). He wants to say Keynesianism amounts to "the economy is screwed without government spending". If that's what he wants to argue against, he can go find some theory that says that. Keynesianism doesn't.

Those were the big ones for me. Let me know your thoughts. This was a real eye-opener of a post for me. I hope Russ comes around to the idea that ideology is not the best guide for science.

Krugman's pragmatic take on Keynesianism

Rorty said that "truth" is "a compliment paid to sentences that seem to be paying their way and that fit with other sentences which are doing so".

It's essentially what Krugman praises in Keynesian theory. It seems to work. As Krugman writes, "We have a model of the way the world works, and the world does indeed seem to work that way."

Any ultimate answer needs more than that, of course. But that attitude is the heart of any scientific claim that becomes broadly accepted: the world seems to work the way it says it will work.

Giant, ancient cephalopods memorializing themselves with structures at the bottom of the ocean?

Cthulhu anyone?

Andrew Sullivan on Oakeshott

Gene should find this interesting.

Congratulations!

I just wanted to put up a congratulatory note for occasional reader, even more occasional commenter, and long-time friend "Dr. J", who got engaged to a great guy last week. She's pseudonymous on here, but a very important person to Kate and me.

We can't wait for you to seal the deal and then party this summer!

She also has a cooking blog you might be interested. I've tried the recent butternut squash recipes. Very good.

Assault of Thoughts - 10/10/2011

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

- Ryan Murphy on a few of the many reasons why microeconomics is really goofy.

- Apparently the Fed is breaking the law: it is illegally being too contractionary (was this one featured in Paul's "End the Fed"? Somehow I doubt it).

- I've seen a lot of people make claims that this is some kind of anti-Keynesian Nobel prize. That's really not the case. Sargent and Sims are famous for refuting a naive way of doing empirical macroeconomics that was fairly understandable given the immaturity of the field of econometrics. It was a rebuke that would have been leveled against anyone who was using econometrics for macro work at the time - it just so happened that Keynesianism was ascendant. But there was nothing especially "Keynesian" about the econometrics, and todays Keynesians are some of the foremost practitioners of the empirical innovations of Sargent and Sims! So don't take a poorly-informed newspaper explanation of the prize at face value. Good praise for the winners from Keynesians are here and here. As much as people want to make this science into a factitious shouting match, it's really not. The shouting is a fun sideshow in the blogosphere, but the issues that animate the blogosphere don't really animate most of economics. The shouting is also a part of the political process, but that does not mean that that goes on in the science. I certainly think the prize is richly deserved, and anyone (from either side) who wants to second guess Sargent because of the rational expectations stuff needs to read that interview I linked to in my earlier post first.

You don't find much macroeconomic theory signage at a Tea Party rally!

A nice shout-out to James Cox too.

Cowen on Sims on IS-LM

Tyler Cowen points out that Sims has much the same critique of IS-LM that the Post-Keynesians do. Sims writes:

"ISLM inhibits attention to expectations in macroeconomics, going against the spirit of Keynes’s own approach. This can lead to mistaken policy conclusions and to unnecessarily weak responses to classical critiques of Keynesian modeling. A coherent Keynesian approach, accounting for endogenous expectations, implies very strong effects of monetary and fiscal policy and leads to greater attention to the role of the government budget constraint in making the effects of monetary policy conditional on prevailing fiscal responses, and vice versa."

I don't take this criticism very seriously. Expectations enter IS-LM in the shape of the money demand curve. If you want to say "gee, it would be nice to make that more explicit instead of just saying 'the money demand curve looks like this when expectations are X, and it looks like this when expectations are Y'", I completely agree - that would be nice. But I don't think noting that leaving it implicit might not be fully satisfying is the same as saying that leaving it implicit "goes against the spirit" of an approach that put expectations at its center.

Talking about how expectations impact money demand was the relatively obvious point. Lots of people understood that. What needed more elaboration was how liquidity preference and loanable funds theory of the interest rate worked together to produce a potentially below full employment level of output. That's the point that needed elaboration, and that's the point the IS-LM was designed to make. Demonstrating that IS-LM left expectations implicit is not sufficient for demonstrating that it is antithetical to an expectations based approach. Granted, if your interest is modeling expectations explicitly it's not necessarily the workhorse for you.

An Empirical Macroeconomics Prize

To Tom Sargent and Chris Sims. What's interesting is that while Sargent has worked a lot with rational expectations, that work was not cited here. This is a good interview with Sargent about rational expectations and other things.

Congratulations!

Yglesias on Missouri Wine

Yglesias is intrigued by the fact that Missouri used to be a big wine-growing region.

Indeed it was. Does anyone know the important role that the Missouri wineries played in the history of the Virginia wine industry?

Some recent criticisms

UPDATE: [So in the original post I talked about "freezing" federal spending... the Kuehn household here has been constrained by a federal pay freeze for a while now, so the word "freeze" came to mind. It's a bad policy, but of course the pay freeze doesn't mean all spending is frozen - Bob also objected to that, and he's right. Spending hasn't frozen. What we haven't had is much fiscal stimulus to speak of. And as long as people say things like "we've done Keynesianism for three years and we're still in this rut", I'm still going to point out that they're being very misleading. If the shoe fits, wear it. If the shoe doesn't fit then the shoe doesn't fit.]

Bob Murphy wasn't happy with this post. These sorts of discussions, like arguments over Herbert Hoover, can really reveal what different universes people are from.

He presents this graph against my claim that "We haven’t seen any fiscal stimulus since 2009 (and that was underwhelming)":


It's clear what Bob is seeing here. He's seeing an increase in government spending. What I'm seeing is during the biggest macroeconomic event since the 1930s, government spending declines, rises quickly back to trend, and then continues on trend through several quarters of high unemployment (the growth after mid-2009 even looks a little slower than trend to me, but let's just call it "back to trend"). That sounds like the definition of "no fiscal stimulus since 2009" to me, and yet this is supposed to be some massive refutation. If your policy during the boom years is comparable to your policy during the bust years it seems best to just say "you aren't doing any macroeconomic policy with your fiscal decisions" - which is precisely what people like me have been complaining about.

The real expenditure figures drive the point home:

This is from the BEA's obnoxious new website. The nominal figures seem to match up with Bob's FRED figures - I imagine the FRED data is from the BEA. [UPDATE - Unfortunately I closed some other excel files I was working with, but take a look at the expenditure data back to 1995 - the slowdown relative to earlier decades is very clear].

And as a contrast, this is FRED data on both nominal and real government spending - with real spending going back to the 1930s:


See that thing that happened in the 1940s? That is fiscal stimulus. I am not telling Bob he has to be happy about what we're doing right now. I know he's not. Returning to trend isn't his thing - he wants to reverse the trend. I know that. But that doesn't magically make this a fiscal stimulus, and I'm going to continue to be frustrated with people who say "we've tried that and it doesn't work". We haven't tried it. We had a little burst in early 2009 that got us back to trend, and then we've been about on trend ever since. What we've tried is not fiscal stimulus. If you want to say "we've tried continuing on trend and that doesn't seem to help", then by all means say that (the empirical economist in me would say that's still wrong - counterfactuals and all that - but it's better than what people usually say).

*****

In a criticism of this post, Jonathan Catalan basically makes a bunch of points I agree with and talk about a lot on here. He writes:

"In the case of Obama, it is not about jobs created versus jobs saved. It is about opportunity cost. And, neither is it about whether or not Obama can create a short-run positive increase in employment. For the sake of simplicity, less us assume that private investment is zero for a period of six months. If government redistributes this capital from entrepreneurs to the public sector and then invests it in some form of public work there will likely be net job creation during that period of time. But, if we were to judge this in terms of benefit to the economy as a whole we would be mistaken to correlate job creation with economic growth.

The point I try to make in my article “Government Spending is Bad Economics” (that government cannot economize) is lost here. It is not about job creation. It is whether or not the job creation that comes from government spending, if any, is worth the loss which is represented by what could have been had that capital not be redistributed towards less preferred ends."

Of course it's about opportunity costs - to put it another way, "It is whether or not the job creation that comes from government spending, if any, is worth the loss which is represented by what could have been had that capital not be redistributed towards less preferred ends." This is the point I make repeatedly when I review empirical studies of fiscal stimulus. The only thing that Jonathan and I differ on is what we think is the likely answer to the question.

Steve Jobs and Obama on Job Creation

This is a very poorly reasoned article critiquing Steve Jobs for not creating many jobs in the United States. I think it's wrong. I imagine many of my libertarian readers would agree with me. Moreover, I think they'd agree wiht me for much the same reasons that I have for thinking this is a poorly reasoned article.

What I think is less likely is that anyone can explain what's wrong with this article criticizing Steve Jobs without in the process making a case for the value of metrics like "jobs created and saved" used by the Obama administration. Maybe "jobs created and saved" is hard to calculate. I'd agree. But that challenge is just as big for attributing jobs to Steve Jobs as it is for the stimulus.

Ultimately, if you can tell me why this article is wrong about Jobs, you're likely providing precisley the same reasoning about counter-factuals and "seen and unseen" that is used when referencing metrics like "jobs created or saved".

Assault of Thoughts - complaining about how pro-austerity people, John Taylor, and Nobel sour grapes see and talk about the world edition - 10/7/2011

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

- More wisdom from Gene Callahan. I've commented on this rhetoric of stimulus in the past. What really baffles me is that we haven't seen any fiscal stimulus since 2009 (and that was underwhelming)... at what point do Bob and others start saying things like "for the last two years we've tried a spending freeze and that hasn't worked - let's try stimulus!". I'm not holding my breath.

- In John Taylor's world, liberals are free spirits who like to make policy erratically and conservatives are the ones who like to operate on the basis of rules. In the real world, liberals propose monetary and fiscal policy rules too, John Taylor knows this, and John Taylor pretends he doesn't know this for God knows what reason. There's a large literature on the importance of rule-based policy that recognizes there are a lot of problems with the original Taylor rule. That's to be expected, right? Since when has science been right the first time? Taylor, you would think, would recognize this - perhaps register his disagreements with alternative versions of his rule - and be comfortable with the knowledge that he initiated the discussion. Instead, he's chosen this nasty route of pretending that no one else knows what they're talking about and that they don't favor rule-based policy because they don't favor his version of rule-based policy.

- The blogs I cite here dispute economics Nobel prizes a lot, and often act as if the mere existence of disputes in certain prizes (Hayek and Myrdal most prominently) somehow is a black mark on economics. It turns out prize controversies are not unique to economics. For the most part, these things bore me. 99% of the time people who complain about the prize are whining about someone that they don't like and completely neglecting the scientific contributions of the winners. Paul Krugman's richly deserved award brought out a lot of ugliness in this vein - same with Stiglitz. I was equally put off by the reaction to the Ostrom/Williamson prize as if it was some kind of refutation of the Krugman prize - as if economists who read and use Krugman's work don't read Ostrom or don't read Williamson, or as if Ostrom and Williamson somehow contradict Krugman!!! The politicization of science can be ugly, but we're not unique in that regard. Perhaps we are politicized to a different degree because of subject matter - but we're not unique.

I'm edging closer to being a solid Romney supporter...

...and perhaps owe Ron Paul a partial apology.

Jared Bernstein has the story, and of course also notes some of the remaining issues with Romney.

Commenter Warren Sees Politicians for What They Are

He writes of Ron Paul: "He's creating political theater", and "Well its the argument you'd expect any politician involved in a heated political campaign to make when given such a question, no? I think that's essentially the point- he doesn't necessarily believe what he says, but rather finds it valuable to try and frame the issue in the way that makes him look like the party's savior."

He is creating political theater. This is what politicians do.

I don't fawn over Obama on here. I generally like the guy, but I make no bones about the fact that he's a politician and he does a lot of things out of political motivations. In fact that's how I react to all politicians on here, as far as I know. It's really puzzling to me that the same people who claim to be so inoculated against politicians seem the least likely to come out and say this about Ron Paul or the Tea Party. Many do, let me be clear. Many libertarians aren't big Ron Paul supporters. But enough people carry with them this inconsistent outlook that it's a real puzzle to me. When excited Ron Paul supporters accuse me of being enthralled to a politician I go from puzzled to humored (or angered... if adjectives like "statist" get mixed in).

Warren concludes by saying: "So I'd say your quite correct about #2 above, but I think its a stretch to say Paul is being anymore deceptive than the average player in this particular campaign."

I want to clarify I agree completely. On any given point Paul may be more naive than other politicians, of course. But taken together he's exactly the same as the rest of them - at least insofar as how he responds as a politician to incentives.

What he and others do differ on, of course, is policy. I personally think his policy is worse than many other alternatives. But in terms of his incentive structure as a political animal, Ron Paul is (as Warren says) not "being any more deceptive than the average player in this particular campaign".