The government does very unique things...

What would you consider more "burdensome"? Paying off a high British national debt through the mid-twentieth century, or brushing up on your German in Nazi-occupied Britain (outside areas that are restricted because of nuclear fallout from Hitler's bomb, of course)?

Companies (well, for-profit ones at least) are profit maximizing. The test for whether debt is on net burdensome for them is relatively straightforward and tied to a return on investment.

Government is odd in that sense, and while we continue to pontificate about these issues I think the question is a lot harder to speak to in real life. Government makes a lot of investments, but the whole point is there's not always a monetary return on them and it's often hard to know what the costs or the benefits would be like in a counterfactual.

When we deal with profit maximization these questions are somewhat easier. When we deal with welfare optimization I think it's harder.

*****

Also, Don Boudreaux embraces Nick Rowe I'm very curious what Nick thinks of this. As has happened a couple times before, I think in the comment section I've actually realized Nick and I are closer than I thought (he seemed interested in a fundamentally different question than I was. He was concerned with whether it was "impossible" to burden future generations - I agreed with him it was not impossible - while I thought Krugman's point was that public finance and personal finance are two different things). Anyway, my position has always been that Boudreaux and Rowe both are saying pretty much what Krugman is saying.

A link relevant to the public debt/intergenerational transfer point

In the last post, there was some discussion of the difference between transfers to fund consumption by the elderly (Social Security, Medicare), versus borrowing to make public investments.

I've never liked calling Social Security a "Ponzi scheme" precisely because there isn't anything like the duplicitousness of a Ponzi scheme involved, and of course whether or not you're the one who holds the information in a Ponzi scheme matters a lot when you're assessing whether you like the Ponzi scheme or not! So that label obscures more than it illuminates when it comes to Social Security.

But of course insofar as Social Security is a paygo program, it does have elements that are similar to a Ponzi scheme. We need to make sure it's a sustainable Ponzi scheme based on the best projections of revenue and outlays that we have, and we need to be prepared to adjust revenues and outlays if we want to continue having this "Ponzi scheme"-esque transfer program (and Americans overwhelmingly do want to have the program).

The thing is, this "Ponzi scheme" is not the sort of thing you want to finance with debt! If you're curious why, read Nick's post (that's the sort of thing his post is more relevant to). The money goes to consumption by the elderly, not investment, so the program is ultimately constrained by income growth. At some point, if the entitlement is growing too fast, the difference has to be made up by raising taxes and somebody in the future loses.

That's why Social Security in this country is funded by current taxes, not by debt. Things are kept very clear. Each year, young people lose and old people win. Each year young people and old people alike vote for represenatives that are going to preserve or end this arrangement*. And an actuary keeps an eye on things and makes sure the transfer arrangement can keep trucking along year after year.

Until recently, that is.

One of the negative consequences of the otherwise advisable payroll tax cut has been that Social Security has been funded out of the general fund (which is partly financed by deficits), and that sets a dangerous precedent. This Washington Post article details the issue.

Nick Rowe wrote in the comment section of the last post that Social Security and the public debt question are "very much the same". I don't think that's quite right. Social Security is traditionally paid for by taxes, and the only intertemporal element to it is that an actuary and the Congress tries to maintain some continuity in the program. This is not the case with public borrowing, where there is a legally binding intertemporal element. That's a good thing that the two are different. Social Security is consumption spending. For all the reasons Nick lays out, that's a bad thing to finance with debt.


* - I can think of at least two reasons why a young person would vote to keep such a program, and both are reasons I ascribe to. First, that the elderly are deserving of this benefit. Given the way modern society is organized, poverty is a real risk in old age if retirement savings are constrained and continued wage income is not a possibility. We don't die working anymore. That's a good thing, but we love our elders, so we want to make sure they have a safety net. That's the first reason. The second reason, of course, is that it sounds nice to have a safety net in old age and I know that if I vote to maintain the safety net now my chances of enjoying a similar safety net when I'm old increase.

I don't quite understand Nick Rowe's problem with Krugman on debt...

...so Nick Rowe's whole post here (HT - Tom Dowling) seems to depend on the zero-growth economy, and the zero-investing government, and he glosses over how crucial that assumption is to his conclusion (he starts relaxing these assumptions at the end and gets.. well... he pretty much gets Krugman's point about no inherent burden but potential distributional and incentive problems).

It seems that if (1.) the economy doesn't grow, and (2.) old people borrow from young people so they can simply consume more, it is trivially true that debt can be burdensome to future generations. This is true for any kind of debt - public or private. And it tells us very little about the way that economies in human societies actually work (which is our goal here as economic scientists, after all - we're here to understand human social behavior, not play around with OLG models).

I don't know why Nick is embracing a conclusion that is entirely reliant on unrealistic assumptions. When we're discussing something like a general glut Nick is always the first to point out how wrong this sort of approach is. So why is he doing it here? I don't know.

Nick often tells us that in the real world we trade with money and excess demand for money can spill over into other goods, causing a general glut. There is no market for money - money is traded in every market. Any model that abstracts from this is not reliable for dealing with the real world.

Well when we think about debt, we need to think about it in a world where the economy is growing and people borrow either as a result of time preference (they'll pay a premium to consume sooner) or expectations of a rate of return exceeding the interest rate. Under both of those more realistic assumptions, Nick's concerns about the necessesity of a burdensome debt break down (and Nick even admits this!) so why is he so emphatically saying that debt is burdensome and only non-burdensome under certain atypical conditions (rather than non-burdensome and only burdensome under certain conditions)? I just don't know.

Krugman is presumably not talking about a bizarre zero growth, all consumption, OLG world (that would be as silly as thinking about a barter economy when you theorize recessions). I always got the impression he was talking about the real world. In the real world income grows, and government invests in education, health, roads, institutions, research, infrastructure, defense, etc.. And in the real world, increasing debt levels means that one person with a growing income will, in the future, pay some money to another person with a growing income. There is no inherent reason why that debt relationship is a burden on the future. Distributional and incentive problems may apply, and of course problems could crop up if you grow the debt faster than you grow your ability to pay it. But the point remains that the unit of analysis (the community) encompasses both the asset holder and the liability holder, so nothing about the debt relationship itself is necessarily burdensome.

*****

More interesting problems of course arise when you are in a situation that fits Nick's assumptions more closely: spending on the consumption of older members of society. If we want a simple transfer to older members of society because we think the elderly are deserving of such a transfer, then we'd want to prevent that program from being financed by deficits and we'd hire an actuary to make sure everything is above board. We've done exactly that with Social Security. If the costs of this consumption start increasing uncontrollably, then we're going to have to rethink that transfer payment as a society. We're doing exactly that (and should do more of that) with Medicare. But these are both questions of the social desirability of a certain type of transfer payment in a democracy. They have nothing at all to do with debt burdens because we don't pay for Social Security or Medicare by issuing debt. Indeed, Social Security and Medicare are two major holders of government bonds.

*****

UPDATE: Nick's comment section on this one is voluminous, and I enter briefly on page three and get into an issue that's also raised in this comment section. If you're worried about Dean Baker saying that it's "impossible", then I agree with Nick Rowe that it's not "impossible" for debt to be a burden on future generations. On the question of Dean Baker's word choice I am with Nick. But I didn't even realize that was the real question (I certainly don't think it's the important question). I thought the question was "is public debt like personal debt - if we contract public debt does that mean that the public's future is burdened in the same way that when we contract personal debt our future is burdened by repayment?". The answer seems to me to be "no - it's a very different sort of thing", and we need to push back against this sneaking in of microeconomic thinking into macroeconomics.

Who said it?

"Employee rights are said to be valid when employers pressure employees into sexual activity. Why don't they quit once the so-called harassment starts? Obviously the morals of the harasser cannot be defended, but how can the harassee escape some responsibility for the problem?"

The same guy that Bill Woolsey calls "a nice guy who is not comfortable saying or writing rude, ugly, or insulting things".

Boudreaux is so intent on being "against" Krugman that he repeats his argument

This "open letter" is embarrassingly bad. It's not even a case of Don disagreeing with Krugman, me thinking Don is dead wrong, and other people subsequently disagreeing with me. Don actually restates Krugman's point and actually seems convinced he's correcting him.

Don writes: "Suppose Uncle Sam were to supplement my annual income to the tune of $1 billion, to be funded exclusively out of present taxation. The result is that Americans as a group today pay $1 billion more in taxes and Americans as a group today (I’m an American) receive $1 billion more in the form of an income supplement. Receipts equal payments, so collectively it’s a wash.

But surely you agree that it’s mistaken to conclude that, because “we” pay this $1 billion to “ourselves,” government granting me this income supplement is no burden on current Americans. Therefore, you should also agree that it’s mistaken to conclude that, because “we” owe the public debt to “ourselves,” the responsibility for repaying that debt is no burden on future taxpayers."

In other words, Don is arguing that the debt burden falls on people who have to ay back the debt - which is exactly what Dean Baker said initially and exactly what Krugman agreed with Baker on in his responses when he said the debt problem is a problem of distribution and incentives, not a problem of "burdening future generations".

I'm not even sure Don understands that he's agreeing with Krugman because he writes his "open letter" as if it's challenging the argument that Krugman made.

My advice - as usual - is to read Krugman's post and if you don't realize he's right, keep reading Krugman's posts until you do realize it and until you realize he's actually making the same point as Don.

He's making many other very good points too, including noting that "owing foreigners" isn't as big of a problem as people make it out to be because they owe us about as much.

The point is this: in our daily lives, the unit of analysis when we think of "prosperity" is our own family. If we are in debt, we actually have less resources. We may get something for that debt (a car, a house), so we're better off taking on the debt than not taking on the debt - but we have less resources available as a result.

That's not true if we want to talk about the prosperity of a community that encompasses both the asset holder and the liability holder. Debt does not automatically imply a lack of resources as it does in our personal finances. It may introduce major distributional problems. It may introduce major incentive problems (Krugman specifically discusses the disincentives introduced by high marginal tax rates to pay off debt burdens). But there's nothing about a high debt level vs. a low debt level that reduces the resources the community has available for productive activity.

Krugman is like catnip to Don like he is to a lot of people, so that even when Don agrees with Krugman he doesn't seem to realize it and is intent on arguing with him.

Ouch!

Commenter Prateek Sanjay writes:

"While Steve Keen may say that mainstream economics is an emperor without clothes, it would seem to me that much of heterodox economics is the peasant that everyone knew was always naked."

I agree with the broad sentiment and caution about heterodox economics, but I'm reluctant to say it quite so forcefully myself. Commenter Blue Aurora was once surprised at a statement I made once that seemed to embrace some heterodox position, and then proceeded to ask my why it is I consider myself "orthodox" and "neoliberal". My response to him was that "mine is a promiscuous orthodoxy".

Look, most people that spend a lot of time thinking about this stuff are thoughtful people and they have good ideas. If you spend a lot of time thinking and talking about what other people think, and if you're not a complete jackass, you're going to find lots of things to appreciate in the insights of others. The reason why I appreciate a lot of heterodox economics is precisely the same reason why I agree with Prateek about the absurdity of a lot of heterodox swipes at orthodox economics: people that spend time thinking about this sort of stuff usually aren't as slow as you think they are.

Out the window at Chuck's this Christmas...

Too good not to repost...

...from that Economist article

Assault of Thoughts - 12/30/2011

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

- In case anyone is interested, there was a big fight about Ricardian Equivalence, which Noahpinion summarizes nicely here. I praise what the blogosphere has done for economic dialogue a lot, but I think this is an example of an exchange that doesn't have all that much value added (and yes, I've partaken in such exchanges too). As Noahpinion points out, they all basically agree on the main point, and yet these high-profile economists insist on insisting that the other doesn't understand the point. One thing that really surprised me (and the point at which I stopped reading the argument in any detail), was when Andolfatto said "The title of Krugman's post shows that it is he who does not understand the Ricardian proposition. There is no "Ricardian Equivalence argument against stimulus." Indeed---the proposition can be used to defend bond-financed stimulus. (In particular, if deficits do not matter, then why not bond finance?)", after Krugman writes five paragraphs of Lucas making an argument against fiscal stimulus and against Christina Romer based on Ricardian Equivalence!

- Brad DeLong on Hayek and gold. Try to keep my comment section clean. For some reason the really nasty comments come out whenever I link to DeLong. DeLong makes the obvious point that Hayek was not a fan of income stabilization when it mattered. Even later in his life, he seemed so concerned with inflation that I'm not sure how dedicated he ever was to income stabilization. Hayek was no Scott Sumner.

- Ryan Murphy on Constitutional Political Economy, what first attracted me to James Buchanan. Recently I've criticized Buchanan's very odd critique of Keynesianism, but the constitutions work is very good.

- I just heard that my QJAE article will be published in the winter, 2011 issue.

Assault of Thoughts - 12/28/2011

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

- Tyler Cowen asks why India's PISA rankings are so low. A better question is whether we should even be using PISA rankings. Hal Salzman and Lindsay Lowell provide a dose of skepticism about these metrics here.

- This J. Scott Armstrong paper on regressions has been making the rounds. I have not read it yet, but people seem to think it's good. The basic message seems to be a correlation is not causation point, and then some ideas about restricting the number of variables in a forecast. I can't speak to the latter, but I'm generally skeptical of economic forecasting anyway. The former point about correlation and the role of regression is something that I think econometricians are well aware of anyway. I think critics get a little too zealous on this. The point is that causal assertions (1.) are not proven by regressions, but they are framed by regressions, and (2.) clearly any causal claim has to originate from an underlying theory - not from a regression coefficient. People clearly shouldn't be confusing causation with correlation. I don't think they are, generally. But people also should not be causation agnostics. Don't be afraid to make causal statements, just know that it's not given to you by your regression. Your grounds to make a causal statement are given to you by underlying theory, and confirmed by an empirical analysis that is cognizant of problems of endogeneity and spuriousness.

- Brad DeLong points out that Rick Perry is not a fan of states' rights when the state in question is my own state of Virginia.

Some acquisitions

- From Chuck and Kate's mom (our hosts in New Mexico), I got the new history of Area 51, by Annie Jacobsen. I started reading it today - it's good so far. It's funny how people react to Area 51, and how much it's been conflated with Roswell (we're visiting Roswell tomorrow). My parents confused the two when I had dinner with them shortly before leaving, and I've seen a lot of people do this. Roswell may or may not have been any number of things. Something happened, but who knows what. The ambiguity makes it fun. But there's no ambiguity whatsoever about Area 51. It's a 100% real, top secret military base. You can speculate about what goes on there, but I find it interesting that some people treat it like a sci fi thing. Anyway - I'm psyched about Roswell tomorrow. There's some discussion in this book about the Roswell incident too.

- Kate got me tickets to the opera this February. To people that go to the opera, that might not sound exciting - and to people who don't go to the opera that might sound odd. But I've been mentioning for a while that I wish we did more cultural outings. We're kind of homebodies, and I've never been to an opera or a ballet, and I've only been to a few plays. We do go to a lot of historical sites (which I drag her to), and our wine trips are "cultural" I suppose, but it's always something I've been interested in trying out. We're going to see Cosi fan tutte, by Mozart, at the Kennedy Center. A friend of ours that is much more knowledgeable about this stuff says it's very good, and funny as well.

- I got myself this Zuni fetish yesterday in Santa Fe. I didn't go in planning to get anything (we were going around to a lot of Chuck's favorite art and carving stores), and when we went in the store owner told us that "the Zunis say that people don't chose their fetishes - the fetishes choose them". Good line - good marketing - I thought. Then I saw this one and it just jumped out at me from all the rest... after that I figured maybe I shouldn't be such a smartass about it :)

The abalone that the fish is made out of has completely different coloring on each side - it's the same piece.




By the way - the fetish carver that we spent Christmas eve with has some work displayed here.

Two good heterodox links

- First, Social Democracy for the 21st Century has a good discussion of the magnitude of the stimulus in perspective. It was a nice chunk of cash at a good time, when the financial crisis was making itself felt in the real economy. He makes really the essential point about state and local spending - that this was really just the federal government making sure things weren't as bad as they could have been. We can be glad for that at least - we can note that we're better off with Obama and that stimulus package than McCain and whatever he would have done (since a lot seems to be put in the frame of campaigns now again). But that's about it.

- Second, Unlearningecon has a good take-down of sticky wages. Some people do get really up in arms about this. I just get amazed anyone ever makes such a big deal of it. The really significant application of sticky wages in modern macroeconomics is as an explanation for why the short run aggregate supply curve is upward sloping. The frictions of the real world do a good job explaining why we don't live in the world of crude quantity theorists. But that's not how people think and talk about "sticky wages" more casually. In more casual discussion, sticky wages become a sort of naturally emerging wage floor. My response is - meh. That's possible, I guess. But it seems like a weird explanation. As I've noted many times - you can get a lot of unemployment in a clearing labor market. It just doesn't make sense, either. We seem to have much better ways of thinking about the cause of unemployment. On the margin, maybe a de facto wage floor contributes some to unemployment, but I think the real point of sticky wages is misunderstood.

Merry Christmas!

Merry Christmas everyone! We're off to a late start here. We were up late last night - after a day trip to Santa Fe, we went to the San Felipe pueblo outside Albuquerque. My mother-in-law's boyfriend is a good friend of an artist in the pueblo, and he invited us out there for the dances. We went to a mass at the church, which was followed by a lot of ceremonial dancing (which are going to continue to go on for the next four days). Afterwards we went to the artist's place for some feasting - till about 2:30 in the morning, and didn't get back to the house until 4. That's another thing they'll be doing for the next four days, apparently - lots and lots of eating. Very good stuff. I like all the chiles out here, and lots of traditional Christmas food too.

I hope everyone has a merry Christmas.

On my list to read...

...I have at least one Amazon gift card coming, I know, and this new Paula Stephans book on the economics of science looks very good. I've mostly seen her present and have read works of hers on the glut of biology PhD's. She's very much in the same camp as Hal and I on the science and engineering labor market. Hal and I have done and are doing a lot of work addressing these claims about "scientist shortages" - Stephans does a lot of research on gluts that crop up as a result of bad policies. I think there's a place for active science policy, but there are a lot of pitfalls and bad ways to go about it, and when all that is fueled by irrational fears about "shortages" it can be especially bad.

I've been reading several books this morning from my mother-in-law (purging the library) on Greek and Roman economies. Good stuff - lots of interesting discussion of evolving views on property.

Ron Paul again, butting in on my vacation

I'm going to take a break from sipping coffee and watching the sun rise on the snow-covered San Pedros looming outside my window to talk a little more about Ron Paul and actually this time highlight some good responses from libertarians, particularly Steve Horwitz and Nick Gillespie. Both do what I really think are the most important things to do here: (1.) recognize that Ron Paul has a history, particularly associated with race politics, that is deeply disturbing - even if we all agree he's likely not a "racist" himself (to repeat - I doubt he's a full blown racist very much. I think he's an opportunist and he probably has a few mid-century insensitivities that he hasn't matured out of, but he's not a racist), but that he's been the sort of enabler that justifiably appalls people, and (2.) that libertarians can consider the question of abandoning him electorally. Steve Horwitz does an incredible job recounting the political history of libertarianism and the various problems created by Rothbard, Rockwell, and others. Gillespie gives a good take on everything that's been happening recently.

I'm a little bothered (but like some parts) of this post by Jonathan Catalan too. What I'm bothered by is his anger at Brad DeLong for not "focusing on the issues" and for making too much of this racist newsletter thing. I don't know if it's because Jonathan's from Spain and doesn't have a deeper American identity or what (nothing wrong with that, of course), but my view is this is really serious stuff. The relations between black and white Americans, the brutalization of black Americans, and the relatively recent progress on these issues is one of the defining facts of American life. And it wasn't just "history" - and you know that if you live in the South or in any city with an appreciable black population. If someone maintains or even tacitly approves of that sort of thinking in the 1990s, that's a big deal. Various sideshow political discussions can be rightly brushed aside with a "we should focus on the issues" dismissal, but I don't think this is one of them. Race in America is a hard thing to discuss too. Not nearly all of the problems associated with it are caused by "racism" per se, so some sort of paean to "colorblindness" isn't going to do anything. The legacy of the Civil War is complex as well - much more complex than people who tend to agree with me politically often like to admit. It's hard. But it's not just another election sideshow that can be dismissed. This is the sort of thing that rightly makes or breaks a campaign.

What I do like about Jonathan's post about this line: "Brad DeLong has spent a lot of energy blogging about Ron Paul. I understand why: Paul’s beliefs are nearly diametrically opposed to those of DeLong. Their means of establishing a greater degree of freedom are different. I think the simplest way to describe it is to call DeLong a Rawlsian and Paul a Nozickian (roughly)."

The bolded sentence is very perceptive on Jonathan's part. Very perceptive, and something a lot of libertarians don't even seem to understand - much less are willing to say. I'm no philosopher so I won't jump into categorizing things as Rawlsian or Nozickian, but I think Jonathan's point is clear. And this is another reason why Ron Paul bothers me a lot and I could never vote for him. He's one of those libertarians that uses terms like "statist" and "authoritarian" and "socialist" to describe people who disagree with him. I don't know why this is so hard for some people to digest, but that's a really uncomfortable thing for people like me to listen to on a daily basis. To be treated as outside the liberal tradition, to be branded a statist by a large group of libertarians who are clearly devoted to this one politician, and then to have that politician say the same sorts of things is not something you can just brush off. Imagine if a political leader and his devoted followers regularly singled out libertarians and libertarian ideas as "radical anarchist threats to the freedom of the country" or something like that. Imagine if it was argued in every discussion with these people that you were a threat to freedom. Would a political leader like that make you a little uncomfortable coming to power? Of course he would. Ron Paul has been a minor player for a while now, but this is why people are pushing back hard after his recent successes. This is not pleasant stuff to hear from a bit player. It's even less pleasant stuff to hear from a man that might win Iowa.

I could never vote for Ron Paul for four major reasons. I talked about the first two in this post:

1. His associations with a lot of racist material and statements
2. The fact that he is neck-deep in a community that labels me a statist and considers me a threat, and then also
3. He has a very weak grasp of economics and supports economic policies that could be disastrous for the country - and through sheer obstructionism could put a lot of them into practice, and finally
4. I don't feel that he takes the threat of fascist Islamism to world peace seriously enough. I like his opposition to the Iraq war. I like his general opposition to war. But he seems too rigid on war and foreign policy in general. Bush erred on the other side, of course. Obama is starting to bring us back to a balanced position - Paul probably wouldn't be too bad on this point in practice - but it's still an issue for me.


The point is, libertarians could probably assuage me on a lot of these points. But the best way to do that is drop Ron Paul. That's a risk, I know - he's the one that's surging. But if you don't want to take that risk, don't blame me for being disgusted at the option you're presenting.

Boudreaux and Rizzo on History of Economic Thought

The other day, after one of those longish back-and-forths over Keynes at Coordination Problem, Mario Rizzo said something that seemed basically right to me, but made me react by thinking "yeah - but who cares?". He wrote:

"The important point for today is that so many economists have little or no knowledge of pre-Keynesian theories of the business cycle and monetary theory. So they think that the macro-paradigm is the only way to analyze problems of inflation, cyclical unemployment and so forth.
This is what I understand some philosophers would call a [Thomas]"Kuhn loss" -- knowledge lost when the paradigm shifts."

Of course what he meant was that economists that don't agree with him have little or no knowledge. But putting that aside, it wasn't immediately obvious to me from a scientific perspective why this even matters. From a historical perspective, sure. I have interest in older ways of thinking about the economy simply from a historical perspective. But paradigm shifts make older knowledge incommensurable for a reason: understandings of the world are bundled, and the new bundle of understanding overall seems to be more useful in describing the world than the old bundle, so any elements of the old bundle that can't be synthesize are better off left relatively ignored (again - for the scientist - for the historian it's different).

But then Don Boudreaux wrote something the other day that changed my mind at least slightly when it came to economics quoting Yeager (sorry - the website is down so I can only see it through my google feed but can't link to it right now):

"Cultivation of the history of thought is more necessary in economics than in the natural sciences because earlier discoveries in economics are in danger of being forgotten; maintaining a cumulative growth of knowledge is more difficult. In the natural sciences, discoveries get embodied not only into further advances in pure knowledge but also into technology, many of whose users have a profit-and-loss incentive to get things straight. The practitioners of economic technology are largely politicians and political appointees with rather different incentives. In economics, consequently, we need scholars who specialize in keeping us aware and able to recognize earlier contributions – and earlier mistakes – when they surface as supposedly new ideas. By exerting a needed discipline, specialists in the history of thought can contribute to the cumulative character of economics."

The first sentence doesn't bother me as much. It's not entirely clear growth even is "cumulative", at least in the sense that it is meant here, where we might worry about forgetting earlier discoveries. He continues to be concerned about "cumulative" knowledge throughout, but I think the bigger point is about the embodiment of economic knowledge. Good natural science is embodied in a host of new technology of course, but also scientific equipment itself. We may have a different way of thinking about sub-atomic particles when we have paradigm shifts further down the road, but we still have particle accelerators that actually produce something, so it's impossible to deny that something like a sub-atomic particle is a part of our experience. The same with telescopes or microscopes, right? We can't unlearn the knowledge that has been embodied in the observations from those instruments. We may interpret the observations differently in the future, but Yeager is right that economics doesn't really embody its knowledge in the same way.

Because the economy is so complex and multiple causes contribute to economic phenomena, economists are more prone to scrapping everything and starting over with a half-developed idea that they try to make work, ignoring even the good historical precedent for that idea that's already been worked into the discipline. Think of PSST or regime uncertainty, which both take points that all economists already agree on, and try to repackage them and promote them as a more totalizing theory than they actually are capable of being. These are usually singular, personal efforts, not the considered opinion of decades and decades of competing scientists.

In this environment, history of thought probably is good not just for the historians among us, but for the scientists among us. Don, I think, has convinced me to be less critical of the original Rizzo point.

I don't think this solves matters, of course. Our side sees these insights running back much earlier than Keynes, through Bagehot, Mill, Say, Malthus. I would go back to the mercantilists - some are less willing to do that. We see a deeper appreciation of history of economic thought as helpful in refuting old fallacies like Say's Law and austerianism. So the arguments don't end. But it is a good point.

Somebody seems to get what I'm saying!

OK, I have to apologize for my post two posts back on Don's comments about North Korea. I really botched communicating my point and only have myself to blame for that. The fact that I rarely agree with Don and Russ probably confused the point as well. But commenter Edwin was able to zero in on my point:

"Trying to smash the topic of freedom into a little box labeled "economic policy" ignores that there are preconditions for a free market economy, and there are more general preconditions for the whole condition of freedom."

Exactly. I don't agree with Don on government because I think his views on government are not conducive to a free market or a free society. And I don't buy into this notion that I am "turning up the government dial" a little more than Don is, and that that's the difference. Vernon Smith highlights that the important thing in understanding the operation of markets is understanding the rules of the game, and of course there's the issue of what rights are binding and enforced in a free market and what aren't. It's not a "more government" or "less government" thing. It's a "preconditions of freedom" government or "not preconditions of freedom government" thing.

Edwin goes on:

"Movement towards a freer market economy in a free society is possible as preconditions are met, but attempting to cure North Korea or to stave off totalitarianism with market prescriptions is not guaranteed to work (to put it mildly): North Korea is structured such that a free economy cannot work, and America is structured such that there will always be vigorous opposition to any policy that limits somebody's economic freedom (and more besides)."

Again - exactly. Edwin is starting to sound like Joe Stiglitz during the collapse of communism. Price liberalization and privatization are all essential, Stiglitz said. But they won't do a damn thing to help if you don't have the institutional environment in place for the market to work.

More Ron Paul Newsletters

A lot more. Here. Some of these are worse than others, but it doesn't paint a very pretty picture. It's getting harder and harder for me to differentiate Ron Paul from Glenn Beck and Rush Limbaugh.

Except that they're just interested in getting wealthy and famous, and Paul is interested in being president.

It wasn't just your commenters that presented a problem...

This is unbelievable. Don Boudreaux uses the suffering of North Koreans at the hands of an illiberal, tyrannical, undemocratic, communist, police state as an example of caution against proponents of liberal, free, democratic, capitalist government. It's really sad that classical liberalism has degenerated into "government is bad" for some people. There's apparently a spectrum: more government and less government. And apparently I and others are closer to North Korea than Don.

This is how these people think of you who agree with me on a lot of things. And moderate libertarians - this is how minarchists think of you. You're just inching over to North Korea. And minarchists - this is how anarcho-capitalists think of you. It's not fair to say that you're in Kim-Jong-Il's camp, but you're closer to it than the anarcho-capitalists.

I wish more people would have the guts to call B.S. on this sort of thing. Not just give reasons for why we want free governments to do certain things, but to call B.S. on the whole template - the whole way of thinking about the issue. If I thought libertarianism promote liberty best, I'd be a libertarian. If I thought Ron Paul would make the United States more free, I'd support Ron Paul. We disagree on very tough questions. We are not flirting with statism.

Don Boudreaux, I believe is a pretty garden variety libertarian. I'd like to see his reaction if an anarcho-capitalist were to throw these accusations at him. I know Boudreaux doesn't think very highly of Rothbard's mudslinging. What he does not seem to realize is that Boudreaux's logic and Rothbard's logic are very similar.

UPDATE: OK, people seem to really be thinking I'm saying more than I'm actually saying in this post. Of course I agree with Don that unalloyed capitalism would never come close the depravations of unalloyed government control... that's why I'm a market economist and in support of limited government - duh!!! What I'm saying is that Don treats government as a single spectrum where you can have more of it or less of it, and on that spectrum Krugman is between Don and Kim Jong Il. Now, Don did say that the consequences of (please note he referred to the consequences of government before you tell me he wasn't talking about a spectrum) government are non-linear. But he still thinks about government that way, which is wrong. My point is people are more free under a free government and a free market than they are under no government and a free market. Indeed - a free government seems to me to be required to maintain a free market. This sort of thinking is the sort of thinking that leads Mises to grouchily dismiss the attendees of the Mont Pelerin Society as socialists. This sort of thinking is what leads anarachists to call minarchists "statists".

A thought on a Nick Rowe post

In this post, Nick Rowe proposes that macroeconomics went wrong when we stopped thinking about the trade cycle and started focusing on newly produced output.

There are some senses in which he's right. For example, we know we have reason to worry about the production of investment goods because they are particularly volatile. But of course, the volatility of investment goods is intimately tied to existing investment goods: the capital stock. Likewise, we know that wealth levels are very important to worry about because they too are closely tied to aggregate demand by both consumers and investors. And once again, wealth is a collection of new and old goods, and a lot of wealth is tied up in the trading and retrading of securities: not new production.

So old production is obviously very important, even for we who have gone off track. However, I hesitate to agree with Nick in fully embracing the idea that we even have gone off track. New production is important because new production is very closely related to employment in a way that trade in old goods isn't. For there to be employment there typically must be a buyer, a seller, a medium of exchange, and the exchange of some new production. If we only have a buyer, a seller, a medium of exchange, and the exchange of some old production it's very likely that we'll have little employment (perhaps a broker of some sort... and even he will be producing something new, namely brokerage services).

We care about employment. Why? Because that's how most of us get money. And why is getting money important? Because that's how we get very important goods and services (old or new) in the modern economy.

If you want economics to be a science of how markets and prices and exchanges work and how prices and quantity sold move and change, then Nick is probably right.

If you want economics to be a science of human economic activity, explaining the sorts of economic facts that we care about, there is very good reason for the discipline to have shifted its focus to new output. This is not to say that we can ignore "the trade cycle" as Nick describes it - trade in all goods. We can't ignore that. But if what you care about is employment and human behavior to satisfy human wants, there is very good reason to highlight the role of new output.

Nick is not a friend of Say's Law, but he thinks about the economy in the same way - as a web of exchanges. There's something to that way of looking at the economy. There's something to asking "when is this system balanced and what causes it to become unbalanced?" That's all fine. But even when a balance is struck beetween sales and purchases, there's no guarantee at all that it will be struck at a level that we consider good or healthy.

My response to getting worked up about high skilled visas: meh

A lot of people are talking about this Alex Tabarrok post about high skilled immigration. He makes a lot of good points in it, but I have a hard time getting worked up about this issue the way people seem to on either side of it (and, being in the "we don't have a shortage of scientists and engineers" crowd myself, I know people that I respect a lot that are on the other side from Tabarrok too).

First, he makes a very important point about how imbalanced our student visa policy is. Schools have a huge incentive to accept foreign students because they are a cash cow for the school, and a lot more student visas are issued each year than work visas. That means we're training a lot of foreign students who are actually displacing potential American students* without giving them sufficient work opportunities here after they graduate.

So how much work opportunities should we offer to high skill immigrants? I'm pro-immigration, but I have to say I don't share Tabarrok's enthusiasm for weighting the immigration system towards high-skill immigrants. Perhaps that would make sense if we were Canada, Australia, or the UK, but a lot of the demand for entry into the United States comes from Central and South America, from lower-skill populations, and it seems foolish ignore that. We have a family-based immigration system for a reason - because we want to be a place where everyone can come and succeed and assimilate, not just the cream of the crop. These work visas are typically temporary visas. I have a hard time privileging a temporary person here for work when there's strong demand from our neighbors to the south to actually come here and be a permanent part of the society.

I do think a point system makes sense - much more sense than the bizarre collection of quotas we have now, and I do think skills should be a part of that point system, but I still think it makes sense to weight it towards a family based policy that encourages people who want to be citizens here to come.

A lot of the support for the sorts of policies Tabarrok proposes comes from people who think that there are persistent shortages of scientists and engineers, and that the labor market for scientists and engineers doesn't work. I don't know if Tabarrok shares that view, but decades of research have demonstrated that these fears are unfounded. A potential problem we do have that impacts this workforce is that certain research, development, and investment is underproduced because of very well understood externalities. The social demand for a lot of R&D and a lot of investments is greater than the private demand. But the solution to that isn't to throw more supply of a particular factor of production (in this case, high skill labor) at the existing private demand - it's to actually introduce the social demand into the market (in whatever way seems most appropriate), and let markets determine the supply quantity and price of these factor inputs.

An immigration system that is weighted towards high skill workers distorts the market price of high skill workers. Our basic immigration system does not discriminate on the basis of skill level - high skill immigrants can come in through it just like low skill immigrants. Tabarrok and others want to put their thumb on the scales and expand an existing visa that privileges high skill workers over low skill workers. That seems unwise to me. We ought to open our borders to people that want to be Americans in whatever orderly fashion we all agree on, and let labor markets sort out the skill composition of those new Americans.

UPDATE: Which is not to say I'm opposed to grabbing rents when they are there to be grabbed. Project Paperclip, in my view, was a very good idea. I suppose I just see a difference between grabbing a couple hundred rocket scientists that the Soviets are gunning for on the one hand, and greasing the tracks for hundreds of thousands of college grads just because they're college grads. We need flexibility and discretion. There are definitely rents to be had and I'm a realist and completely in support of grabbing those rents. What makes me queasy is the sort of market intervention that would heavily tip the scales towards a motley crew of (non-rocket scientist) college grads and not giving the same opportunity to lower skilled workers to our south. And like I alluded to - this sort of distortion implicit in "stapling a green card to their degree" makes me even more queasy, given the large group of Americans who aren't getting degrees for various reasons (but could).

* This is not a trivial issue at all, given how underrepresented domestic minority students are in STEM fields.

Just submitted my first referee report

Nothing special, but still a first for me.

I'm in a good mood today - did better on the Micro final than I expected coming out of it Monday night. All looks well in terms of school this semester.

Now a couple more days at Urban to finish some projects there (a submission to the Review of Black Political Economy in the next week or so), then starting my book review of this book for the Journal of Negro Education, and then off to New Mexico to see the in-laws for Christmas.

New Urban Institute President

I was in the office yesterday now that exams are over, and while I was there they happened to announce the new president of the Institute, who will be replace Robert Reischauer (who I worked as an RA for in my first couple years there). Sarah Wartell, from the Center for American Progress, is going to be the new president - starting next year. I've heard very good things about her. This statement from Wartell is a justification of her selection that I've been hearing a lot from people:

"The Urban Institute is a treasure trove of expertise, analytical tools, and independent research relevant to the hard choices ahead on housing, retirement, health, taxes, and other issues," Wartell said. "I am thrilled to join these talented scholars and researchers and those who enable their work. I want to help ensure that policymakers of all stripes can use these resources to improve outcomes and the public's return on investment from shrinking funds."

Center for American Progress is very good at promoting research and making it timely, and that's something that the Urban Institute could benefit from.

But WHY?

Commenter increasingmu writes on my post about Peter Boettke, Keynesianism, and public debt that: "[L]ike the 19th century, we need to be continually running surpluses when we aren't under extreme duress."

Why? You can't just say something like this, you have to have a reason. Why do people think this? If this is really something we "need" then why have so many countries been doing exactly the opposite and doing fine?

It seems to me the only thing that's obvious is that our debt burden can't grow faster than GDP on a permanent basis (if social welfare is growing even faster than GDP we actually probably could grow the debt burden faster than GDP without suffering welfare losses, but let's keep this simple). So the question is, what is required for that to happen. "Continually running surpluses when we aren't under extreme duress"? Nope. That's not required. The only thing that's required is that the growth of the debt is slower than the growth of GDP - not that it's negative (i.e. - a budget surplus).

So if your goal is a stable or even a decreasing debt burden there is exactly zero justification for the claim that this is something that "we need".

So why? Why are these claims made? I don't understand and I still don't feel like I have answers. Another commenter says that taxes may increase. It doesn't seem like they need to. Borrow money to pay the interest, and shave that amount off the top of the non-debt-burden-increasing deficit threshhold. A doctrine that we must run surpluses is just as likely to raise your tax burden as continual deficits - probably more. I like some aspects of Bowles-Simpson, but imagine if you had them running everything with the budget (that's what this demand for balanced budgets would entail). You don't think you'd get higher taxes out of that??? Come on - be serious.

Thoughts on Boettke?

Peter Boettke argues that "Keynesianism cannot work to solve our current problems because Keynesianism is responsible for our current problems", bringing Buchanan and Wagner into the discussion of Samuelson's confused op-ed yesterday.

It's true, Boettke is just pointing us to Buchanan and Wagner and while I'm very familiar with their argument I've never read the book. Perhaps I should read the book before asking questions, but I don't think I'll be particularly surprised by anything - so I don't think it's outrageous to pose a few questions to Boettke about the logic of this post first.



1. First, why is running deficits "the problem"? Boettke doesn't explain this at all and I'm not sure what his argument is. It's crucial for people who think this to actually make an argument rather than just presuming it's obvious, beause most economists don't think it's obvious (although most of the public probably thinks it is).

2. I would have said that Medicare is the only real budget problem we face in this country. The only one. Some people throw in Social Security - my understanding from people who have been on the trust fund's board is that that is a relatively small problem with an easy fix. Some people would throw in our tax policy - but that can change very quickly and easily too. It strikes me as reasonable to say that for the United States, the only problem we have associated with the public debt is Medicare. Bringing this back to Boettke, what could our Medicare problems possibly have to do with Keynesianism? I don't know because he doesn't say, and Buchanan and Wagner don't talk about Medicare at all (based on a word search of the html version of the book).

3. How exactly did Keynesianism cause our problems? Again - the argument is unclear to me. I guess it's clearer if you assume "the problem" is simply the fact that we run deficits persistently when we didn't used to. But that brings us back to #1. Why is that a problem? Everyone who thinks it's a problem seems to think it's self-evident. Everyone who doesn't think it's a problem is left scratching our heads as to what the argument is.


Alert readers may argue Keynes was not a "fiscalist", rendering Boettke's whole post moot. I'm not quite sure about this tactic. Keynes wanted to put the deficits in a capital budget, but he wasn't against "loan expenditures". I think the Keyes/Lerner split is overblown - overblown by Keynes himself no less than anyone else. Certainly Keynesians are comfortable with deficits, and that's the point.

Another Cafe Hayek post desperately in need of a comment section

Don quotes Steve Landsburg against progressive taxation: "Whenever a politician proposes to make the tax code more progressive, we hear rhetoric about how the rich have too much, the poor have too little, it’s only fair to spread the wealth more equally, and so forth. To me, the interesting thing about that rhetoric is that nobody believes it. Of this I’m certain, because in all the years I took my daughter to the playground, I never once heard another parent tell a child that if some kids have more toys than you do, that makes it okay to take some of them away…. [T]axation for the sole purpose of redistributing income is closely parallel to behavior that we admonish on the playground all the time. If we don’t accept this from our kids, I’m not sure why we should accept it from our congressmen.”

First this is obviously factually wrong. It's not true that "nobody believes it", if "it" is the logic of the progressive tax. Lots of people believe it. That's why we've had a progressive tax system that's been in place for a century.

But the example is a non-sequitor. It's true we teach our kids not to steal. But what does stealing have to do with taxes? It's the obvious question that could have been raised pointedly in a comment section, but commenters like that often get accused of being trolls or not understanding economics (some of these critics genuinely don't understand economics but that doesn't mean that they don't raise good points that are often left unanswered).

We also teach children that it's important to share their things. We also teach children that in certain human communities it's not only appropriate, but imperative to make contributions to a common fund where welfare is redistributed from those who have means to those who have needs.

I wouldn't use either of those examples to advocate the elimination of the market and the inauguration of communism because that would be inferring too much of the observation about what we teach our kids (and it's not even an outcome I'd approve of). Likewise Landsburg and Boudreaux should not be so impressed with an incomplete, overextended anecdote or try to draw any extensive conclusions from it.

What is "cronyism" and what isn't?

Ryan Murphy provides a link to these big business/U.S. government Venn diagrams.

I'm never quite sure what to make of these worries. I just try to think of what the world would be like if government officials didn't play important roles in the private sector in the fields that they deal with as policymakers. Is it possible to have a policymaker knowledgeable about the impact of his policy in the real world without inevitably having many of them rise to the upper ranks of business? Would we really rather have a situation where we deny people with this kind of experience any role in government? Cronyism to me is about a lot more than "six degrees of separation" test. I'm much more concern about whether there is actual malfeasance. That's obviously a risk - you don't need to be a public choice theorist to know that. But the risk on the other side is incompetence. When we have costs and benefits to weigh on either side, that usually means we have a trade off to make and it usually means a corner solution is not the right solution.

This is the sort of post that could use a few comments

Cafe Hayek commenters can be really bad, so part of me understands Don and Russ's recent decision.

But a post like this really deserves comment. Wow. I suppose other blogs can point out the problems with all this, but commenters are good for that too.

I'm also putting Elizabeth and Harry Johnson the list of people who seem to have nothing or value to say about Keynes and who are probably not worth reading. Between that post and this one, it seems the Johnsons are really in the dark.

The Paul Cabinet

Another thing I was thinking of yesterday when we were talking about Ron Paul was, "what would a Paul administration cabinet look like?"

Economic posts particularly. I imagine we would see some people from Auburn here. George Mason is the most convenient well of Austrian intellect, and probably the most in touch with policymaking, but I doubt he'd pull many from there. It's an interesting thought experiment indeed.

Andolfatto vs. Ron Paul

Given our discussion of him yesterday, and the increasing strength of his campaign, I think it's worth reprinting the post that David Andolfatto had up earlier this spring criticizing Ron Paul's grasp of monetary. The circumstances are worth recounting too. David Andolfatto works at the Federal Reserve as a research economist. He wrote this post criticizing the sitting chairman of the House committee that oversees the Federal Reserve, Ron Paul, and pointing out that the emperor has no clothes. I don't think I need to point out how that takes a lot of guts.

The supporters of Ron Paul, the Congressman who calls Obama authoritarian and who recently suggested that he's doing well in the polls because his opponents don't have principles, took deep offense at the fact that Andolfatto let his blood boil a little and called Ron Paul a "pinhead". Yes, the people who love the guy that throws around "authoritarian" got outraged at "pinhead". Andolfatto got so overwhelmed by the rage over the post that he took it down. Here it is:

"I can appreciate Ron Paul’s libertarian philosophy. And because this is so, it pains me all the more to say what I am about to say. The guy can be a real pinhead at times. And this is never so evident as in his persistent “attacks” against the Fed.

Now, of course, I work at the Fed, so maybe you think I’m just complaining for the sake of defending my employer. If you think that, I can understand why you do. It is because you do not know me.

There are legitimate arguments one could make against the Fed as an institution and/or about the conduct of Fed policy. And then there are the stupid arguments, for example, the one contained on pg. 25 of his book End the Fed:

"One only needs to reflect on the dramatic decline in the value of the dollar that has taken place since the Fed was established in 1913. The goods and services you could buy for $1.00 in 1913 now cost nearly $21.00. Another way to look at this is from the perspective of the purchasing power of the dollar itself. It has fallen to less than $0.05 of its 1913 value. We might say that the government and its banking cartel have together stolen $0.95 of every dollar as they have pursued a relentlessly inflationary policy."

One might indeed say that, Mr. Congressman. But if one did, one would behaving like an opportunistic politician, which I know you are not.

Now, let us examine what is wrong or misleading in the statement above.

First, with the exception of the last sentence (which he weasels around with his “one might say”), there is nothing factually incorrect. Indeed, the data source cited by Paul is (ironically enough) the Federal Reserve Bank of St. Louis. (I’m glad he trusts us enough for some things.)

So the question is not whether he has his facts straight on this matter. The question is whether these facts matter at all.

There is this old idea in monetary theory called money neutrality. Money neutrality means that larger quantities of money ultimately manifest themselves in the form of higher nominal prices (and wages), and not on real quantities. No serious economist disputes the idea of long-run money neutrality.

Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher).

So there you go, the Fed is responsible for increasing your nominal wage by a factor of 20. How do all you workers out there like them apples? Ron Paul wants to rob you of these wage increases!

Here is another example of the Congressman misleading the public (perhaps unintentionally); see his recent interview here with CNBC’s Larry Kudlow: Fed Under Fire.

At the 3:50 mark, Kudlow asks Paul: “Would oil be at $102 a barrel now if we had a sound dollar policy?” Paul’s reply is that, if Bretton Woods had not been abandoned (in 1971), oil would now be trading closer to $5 a barrel.

I ask you…how embarrassing of an answer is that? I mean, maybe oil would be trading at $5 a barrel. But what he is implicitly suggesting is that your nominal wage would not be scaled back in proportion. That is, he is suggesting that by cutting the value of paper, the Fed has somehow diminished the purchasing power of your labor over the past 100 years. Can he be serious?

The Congressman evidently suffers from money illusion. It is an affliction that can be forgiven in most people. But not one who likes to think of himself as a person learned in the finer principles of monetary theory.

And, as an aside, am I the only one who chuckles whenever he berates the Fed for creating money “out of thin air?” (I reiterate, there may be many legitimate complaints one could make against the Fed, but the “out of thin air” charge…well, let’s just say it…lacks substance).

Is it not true that the Treasury also creates its debt “out of thin air?” Do you think getting rid of the Fed (which, in conducting monetary policy, is simply swapping one form of thin air for another) will prevent Congress from issuing its own thin air? Do you really believe that a gold standard would mitigate the government’s ability to tax? (Seigniorage revenue for the U.S. is peanuts as a fraction of total taxation. Moreover, keep in mind that the inflation tax is collected off of foreigners as well.)

Let me conclude by saying that I think that America is, on the whole, well-served by having a voice like Ron Paul in Congress. I’d like to invite him to the SL Fed for lunch one day. I’d ask him to tone down his rhetoric and present his (frequently very good) arguments in a more sober manner.

But maybe this is too much to ask of a politician. Even a libertarian one."

Andolfatto had a follow up post here.

It's back!

It is with great pleasure that I welcome Jonathan Catalan and Mattheus Guttenberg back to the economics blogosphere. Economic Thought is up and running again. There are three posts up:

- There's one post on Sumner and the Great Depression.
- One on the modern Austrian school.
- And one that's a little more self-reflective.

A great line from David Henderson

At a talk he gave at Occupy Monterery:

"There's a common view that when markets are free, the rich get richer and the poor get poorer. It's not a total myth: it's half true. The rich get richer, the poor get richer, and pretty much everyone else gets richer."

A clever OWS-Monterey attendant that thinks in terms of rates of growth and convergence and divergence might have realized this dodges the inequality point somewhat. But I still like the line and it is still, of course, 100% true even if it leaves more to be discussed.

A little more on Ron Paul

In the comment section of this post, James Miller somewhat vaguely notes that "Paul has already addressed them", referring to the racist newsletters that made the rounds in the 2008 election and are making the rounds again.

This is true - he has addressed them... a couple different times, in fact. Now that he's running for president, he says he didn't write them. In 1996 when he had no aspirations to be the leader of the free world and was more concerned about a local voting base, he did not deny writing them and he even reiterated his point from the newsletter that black teenagers that rob you are hard to catch because they're fast runners.

Politicians lie because they like staying in office. Ron Paul likes being a Congressman. He likes working in Washington. He loves being on TV. He loves people talking about him and thinking about him. Fine, it's intoxicating stuff I'm sure and all of them do. As I've said before, when I was born in Sugar Land, Texas, in 1984, Ron Paul was my Congressman and he represented that district for years before I was born. The man is a career politician and he obviously likes being a politician, and he's obviously very good at it.

That's all fine. They all have this sort of power-trip personality. It just comes with the territory.

I don't personally want a president that shows a very weak understanding of the economy (remember Andolfatto's criticism of Paul, which he had to take down because he was criticized so sharply by Paul's supporters?). And even though James Miller is reassured by recent denials (what is he gonna do in 2011 but deny it?), it bothers me. I don't want a president that was writing or editing this sort of stuff in the 1990s.

I really wish people would be less haphazard with the use of the word "libertarianism" - particularly if they're defending it

I use it on here to mean some variant of a minarchist - and when I talk about anarcho-capitalism I usually refer to it by that name ("anarcho-capitalism") or a similar one.

That definition in and of itself can mean a lot of things, of course, but this definition on the Bleeding Hearts Libertarian blog is next to useless. Fernando Teson writes:

"By “libertarian institutions” I mean here institutions that allow all kinds of mutually beneficial arrangements, which include exchanges in private markets and government-induced correction of market failures, along with constitutional constraints on the power of government to avoid government failure."

OK, but this is what almost every American that talks or writes about government and the economy supports. What is this supposed to demarcate, really? Not only do I support libertarian institutions under this definition, but I am an extremely partisan libertarian (if this is what a libertarian institution is).

I get the same sense from Mark Pennington and just about everything I've ever read about "robust political economy". It's a defense of a constitutionally limited, federal government in a market society. We all support that. To be sure, Pennington et al. do a superb job putting into words the reasons why we all support that. But we all do. It's not productive to call this libertarianism.

UPDATE: And a word of advice to commenters. If your instinct is to inform me that I don't actually think something that I am under the impression that I do think - stop. Stop writing. Just save us all the trouble.

Hitchens on Politics

Andrew Sullivan has been posting a lot of good stuff from Hitchens. One particularly interesting post is this exchange between Richard Dawkins and Christopher Hitchens, in what was apparently his last interview:

"RD I've always been very suspicious of the left-right dimension in politics.

CH Yes; it's broken down with me.

RD It's astonishing how much traction the left-right continuum [has] . . . If you know what someone thinks about the death penalty or abortion, then you generally know what they think about everything else. But you clearly break that rule.

CH I have one consistency, which is [being] against the totalitarian - on the left and on the right. The totalitarian, to me, is the enemy - the one that's absolute, the one that wants control over the inside of your head, not just your actions and your taxes. And the origins of that are theocratic, obviously. The beginning of that is the idea that there is a supreme leader, or infallible pope, or a chief rabbi, or whatever, who can ventriloquise the divine and tell us what to do."

I am, predictably, 100% with Hitchens on that one.

Another good quote is provided by Mario Rizzo. This is from a talk he gave at Cato, which is interesting (I'll have to read the whole thing at some point) because I've never heard of it and you don't usually hear it mentioned as being among Hitchens's engagements, but every libertarian in the blogosphere seems to be aware of it:

"The old slogan of the anarchist left used to be that the problem is not those who have the will to command. They will always be there, and we feel we understand where the authoritarians come from. The problem is the will to obey. The problem is the people who want to be pushed around, the people who want to be taken care of, the people who want to be a part of it all, the people who want to be working for a big protective brother."

I think one of the biggest blindspots of modern libertarians is that they hear something like this and they think that what Hitchens refers to as "the will to obey" is the same thing as "the will to self-govern". It's not at all, in fact it's exactly the opposite. This servility that Hitchens criticizes (this was in reference to some nanny state elements of Bloomberg's New York) is inimical to self-governance. But you have to remember that Hitchens was a democrat. He was in Orwell's tradition. He was a humanist. That - I think - is the real heart of the classical liberal tradition, so of course there's going to be some affinity with libertarianism which is one branch that grew out of the classical liberal tree. But it's important to remember what Hitchens stood for - for humanity, against authority. The first clause is as important as the second.

Assault of Thoughts - 12/17/2011

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

- I truly do not understand the appeal of Ron Paul. I think he's wrong on a lot of policy, but of course if you're a libertarian you think he's right. I get all that. But as I've said in the past I don't get this view that he's above politics when he seems to me to be the quintessential politician. I am also really, really bothered by things like this, from 1992. I think I know much better than, for example, presumptuous New Englanders or Californians, the context in which a Southerner displays a Confederate flag. So I've been willing in the past to stick my neck out and defend such people, while agreeing that it is unintentionally offensive. I'm willing to stick my neck out and defend some old coot who was a segregationist in the 1950s and seems to have realized in the ensuing decades that he was wrong. I'm willing to stick my neck out and say "you know - the old guy probably genuinely realizes he was wrong". But something like this in the 1990s really bothers me. I don't want a man like this to be my president.

-Tyler Cowen keeps pointing to China as an example of Austrian business cycle theory. Is it just me, or does this seem really wrong? When we see bad investment decisions in China, it's because the government is making these decisions for political reasons. It's not because cheap money fosters a different capital structure than would have existed naturally. Ghost cities aren't examples of an elongated capital structure. What gives? Is it just me or does this have exactly zero to do with ABCT?

- Scott Sumner talks Wittgenstein, macro, and Ptolemy. At the end he ponders over "what future generations will think of the Keynesian/monetarist split. Which model will seem like the Ptolemaic system?" I think making a big thing of this alleged "Keynesian/monetarist split" says you're one of two kinds of people: (1.) you're a monetarist that is mistakenly under the impression that Keynesians are allergic to monetary policy, (2.) you're an old Keynesian that drank the post-war Keynesian Kool-Aid that turned "monetary policy alone isn't right - fiscal policy has a role" into "monetary policy alone isn't right - fiscal policy has a role". I think the future will see that the whole monetarism back and forth was just us coming to grips over the emphasis of the Keynesian paradigm.

- Brad DeLong defends Stiglitz, has some criticism for Nick Rowe, and cheers us Hicksians.

Christopher Hitchens

Christopher Hitchens has died after struggling with cancer for about a year and a half.

Speaking of Keynes's deep humanity...

Brad DeLong links to my discussion and highlights in particular many observations about how Keynes was not the man portrayed in the Keynes v. Hayek videos. That inspires me to post something Keynes wrote in The Economic Consequencs of the Peace that is one of the more powerful pieces of prose I've read recently:

"The following is by a writer in the Vossische Zeitung, June 5, 1919, who accompanied the Hoover Mission to the Erzgebirge:

"I visited large country districts where 90 per cent of all the children were ricketty and where children of three years are only beginning to walk.... Accompany me to a school in the Erzgebirge. You think it is a kindergarten for the little ones. No, these are children of seven and eight years. Tiny faces, with large dull eyes, overshadowed by huge puffed, ricketty foreheads, their small arms just skin and bone, and above the crooked legs with their dislocated joints the swollen, pointed stomachs of the hunger œdema.... 'You see this child here,' the physician in charge explained; 'it consumed an incredible amount of bread, and yet did not get any stronger. I found out that it hid all the bread it received underneath its straw mattress. The fear of hunger was so deeply rooted in the child that it collected stores instead of eating the food: a misguided animal instinct made the dread of hunger worse than the actual pangs.'"

Yet there are many persons apparently in whose opinion justice requires that such beings should pay tribute until they are forty or fifty years of age in relief of the British taxpayer."

It's not often that I have to put down a book and not continue reading because it just requires too much effort from me to keep reading, but a couple weeks ago, when I first read that passage, happened to be one of those times. When you read Keynes, you realize you are reading a man of profound humanity and spirit. Human life is hard and wracked with coercion on all sides. Sometimes collectively the right thing to do, and the liberal thing to do is seek out the option that minimizes those coercions. Sometimes that involves errecting an apparatus of coercion, like the state, to make sure that gets done. A coercive world puts real people in terrible situations. People who just accept that coercion passively - rejecting a countervailing coercion from the state as being always and everywhere illiberal - are fooling themselves if they think they are standing valiantly opposed to coercion. The task before a real classical liberal is immeasurably harder than that of consistently saying "no" to any democratic action. There was a time when democratic problem solving was central to the classical liberal vision. For a lot of people today it's considered antithetical. The task in front of a classical liberal is hard. The world is a very coercive place, and the task of a classical liberal is to minimize that coercion, not to pretend that anyone who breaths the word "democracy" is abandoning liberty. We used to consider people who thought like that "tories" or "royalists" or "reactionaries" - not classical liberals. I'm not willing to go that far quite yet. But I do wish democratic humanitarianism was taken more seriously than it is.

By the way - is anyone aware of Murray Rothbard's reaction to the incidents that Keynes described above? Google it. It's a fascinating read. Gene Callahan will get a kick out of it if he's not aware of it already.

An Entitlement Reform?

I used to work a lot with Bob Reischauer (former MedPAC vice chair and CBO director) on Medicare stuff, but have not followed it for several years. I'm also out of the loop on most high level tax discussion. But I've come to put a great deal of trust in the insights of the Urban Institute on both issues, so when they are responding positively towards the Medicare plan released by Ryan and Wyden today, I'm inclined to view it favorably. I'm curious if Bob will weigh in on it.

Thoughts?

In this graph that I made on the St. Louis Fed website, we have government employees divided by population in blue, with the scale on the left, and government spending divided by GDP in red, on the right. Any thoughts?

A lot of the narrative we are still fighting out today about government first got written in mid-century, when the role of government in society was changing rapidly (something that's quite clear from the figure). My view is that free people in a free society did what free people do: they evaluated how they wanted to live their lives and acted on it, and the market and democratic forces that allow for self-regulating orders to emerge from the interaction of free agents generated a new order, which has been fairly stable since around the early 1980s. In the 1980s the whole processes slowed down, universally recognized excesses resulting from the growing pains of mid-century were cleaned up as the years went on, and the system stabilized.

That's what I see here, and I think people who act like we're on some trajectory dating from mid-century are muddying the analysis. I think they would be less confused if they realized that emergent orders aren't always libertarian orders.

The red line is a little trickier, of course, because neither the numerator nor the denominator are as stable as the blue line. In addition, the numerator and denominator of the red line have a short term negative relation, while the numerator and the denominator really only have a long term positive relation. Most of the gyration in that red line after 1980 is attributable to the business cycle and fiscal policy. Once you recognize that, I think the red line tells the same story as the blue line of transition to a new order.

Going forward, we may see another transition related to health care. We may make the transition to socialized health care that Europe made earlier, and that will cause another blip up to a new equilibrium. I'm personally one that hopes that doesn't happen - I hope we can invest in health research and provide a safety net without socialization. But we'll see what happens.

Barely anyone alive today really lived in the old equilibrium. Many people alive today lived during the transition to the new equilibrium, and the new equilibrium itself. I haven't even lived in the transition - I've only lived in the new equilibrium. I rather like it, I don't think it's unreasonable, and I feel a little put off by people who tell me I don't like freedom because I won't relent and demand the sort of world they want to live in. I recognize I'm demanding the same thing of them, and I accept that I am, but they never quite seem to recognize that's what they're demanding of me.

Any thoughts?

Caplan on Wages and Labor

Bryan Caplan writes a post that I have a lot of issues with. First and foremost is this statement that he leads with: "Unemployment is just a labor surplus; since wages are the price of labor, the fundamental cause of unemployment has to be excessive wages."

This is how a lot of people think, and I often feel like I'm in the small minority on this - but I am more confident that I am right on this than I am on almost anything else I write about on here. Unemployment is not "just" a labor surplus (although obviously if there are labor surpluses, that can contribute to unemployment). The labor market could be in equilibrium and we could still have a lot of unemployment.

8.6% of the United States labor force is currently classified as "unemployed". That's 13.3 million Americans. Several million more aren't in this count but matter to us as "discouraged workers" or "underemployed" workers. To be in a labor surplus, you must (1.) have a reservation wage that is equal to or lower than the market wage, and you (2.) have to be jobless. Only the second criterion is involved in your classification as being "unemployed" - the phenomenon we allegedly care about and the data which we look at. We don't know how many people satisfy (1.) and (2.) - we don't know how many people comprise a labor surplus in this country. Nobody seems to have cared enough to even think about how to collect that data. We don't know if that number is cyclical or not. We don't even know if our unemployed uncle or unemployed friend is in that labor surplus or not. And we don't seem to care about that. The social fact we seem to care about is unemployment, not labor surplus. To be unemployed, it's perfectly possible to have a reservation wage above the market wage (and it's not even clear exactly what this means, since one person's labor can be sold in multiple labor markets). Nobody associated with the Current Population Survey will ever issue a survey to you asking you what your reservation wage is. It has nothing whatsoever to do with the phenomenon of unemployment. Unemployment is not the same as labor surplus.

Economists acting as economists care about market efficiency. Economists as human beings care about much more than that, and on the question of unemployment the economists' obsession with market efficiency has been very damaging - we often try to fit a square peg into a round hole. If you want to explain unemployment you can't just copy and paste other concepts like a labor surplus and pretend you've explained it. The best bet we have for explaining unemployment is explaining something that we have a better sense of: employment. We know the determinants of employment. Unemployment seems to increase when employment decreases (this sounds tautological but it's actually not at all). We also need to explain employment in a general equilibrium rather than a partial equilibrium framework. Finally, we need to explain why people might be jobless and unemployed vs. jobless and not unemployed (search theory helps with that). To the extent that we care about discouraged workers and those sorts of people, search theory becomes less essential for answering the questions we care about.

I know that only addresses Caplan's first paragraph - but take my argument seriously, think about it, then read the rest of Caplan's post and see what makes sense and what doesn't.

UPDATE: I also think it's worth clarifying something about "sticky wages". First, the observation of sticky wages doesn't necessarily imply a labor surplus at all (although certainly a wage floor would be great example of sticky wages!). An elastic labor supply curve to the left of equilibrium will give you sticky wages in the data. Why might a labor supply curve get elastic? People with jobs create lives with costs that they try to make predictable. Anyway - it's just important to remember that "sticky wages" just means "wages move less than employment". It doesn't have to mean "wage floor" or any sort of surplus. Second - it's important to know one of hte major reasons why economists talk about sticky wages that has little to do with any of this: sticky wages help explain why the long run aggregate supply curve is vertical but the short run aggregate supply curve is upward sloping. It's probably unfair to say that's the only reason why economists care about sticky wages, but it is a major reason why.

Happy Anniversary, Kate!

Wow - four wonderful years just flew by. This is a picture I like, from a trip we took to the Outer Banks with friends.

Happy birthday to Kate's mom too - one of the fun things about the wedding was we had a wedding cake and a birthday cake for her mom.