Wednesday, August 31, 2011

Assault of Thoughts - 8/31/2011

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

- So... apparently two twelve hour days plunging into an economics graduate program can make you dream about doing math and economics. Unfortunately I can't make any use of it, because (predictably) while I was clearly "doing math" it was all gibberish.

- George Magnus and Nouriel Roubini are both saying that we need to give more credit to Marx. I'm not so sure about that, but I'm looking forward to reading some Marx this year - something I've never really done in any great detail before.

- This is an interesting article from The Atlantic on the declining middle class. It is more careful than a lot of media treatments of this issue in avoiding cliches, but it's not perfect. I was particularly interested in the section where the author is relating a discussion he had with David Autor, and I want to draw your attention to that. I have a research brief that should be coming out of the Urban Institute pretty soon that challenges a lot of the papers that Autor has been writing lately, along the lines that Harry Holzer and others have been criticizing him. The claims that Autor makes are not wrong-headed so much as they are very sensitive to exactly how you talk about the problem. It's not as robust a finding as he suggests it is, I think. I'll post the research brief when it comes out.

- Bob Murphy and Danny Sanchez apparently think Karl Smith is kidding. Fools! On Friday, watch Karl Smith dispel the darkness from the land (I am still shell shocked from my recent pay cut and will be saving the twenty dollars for coffee to keep me awake during my 9:15-10:15 PM macroeconomics TA session).

- Gary Gunnels brought to my attention some Kuhnian insights into economics from the bank of the James River (get it?). I haven't gotten a chance to read it yet, but it looks interesting. Mark Blaug wrote a lot about this too, but to be honest I forgot what he argued - I should go back and look at it again.

An interesting and revealing comment on the Broken Window Fallacy

Bob Murphy writes this in his own comment thread:

"Believe it or not, you guys, Blackadder (and maybe Gene?) were actually backing me into a corner. Last night, I fired off something like, “So unless you think taking money from people and handing it to the unemployed is ‘good for the economy,’ you can see my analogy was sound.”

Well duh, Krugman et al. would say, “Of course we think that’s good for the economy–we call it unemployment benefits. Haven’t you been paying attention?”

But now I don’t need to concede anything, because Gene and Daniel Kuehn are assuring me that “nobody” ever held this position. No one has ever said that the extra economic activity caused by employing idle resources, could more than compensate for the initial disturbance that set it off, right?
"

What I've argued (and to my knowledge, all Gene has argued) is that no one that I'm aware of has said that destruction from disasters is a net benefit for the economy. Under certain conditions it can provide some quirky gross benefits, but nobody makes the case that it's a net benefit. Any ambiguous language used by Krugman like "some economic good" (which I think clearly means "gross benefit" becasue of the use of the word "some" - implying other "economic bads") should be easily clarified by the accompanying analysis and by the readily observable fact that Krugman is not a warmonger or a reveler in the misery of others.

This is obviously very different from what Bob attributes to us here. Here Bob says that we think that taking money from someone else and handing it out would be a net benefit for the economy.

Is this better than a hurricane destroying wealth to convince someone to spend money on repairs? Of course it is. We have no wealth destruction effect, only an income transfer (let's assume the redistribution isn't occuring out of taxes on wealth). Since the broken window itself is an important part of the broken window fallacy, getting the broken window out of the picture and just moving around money obviously improves the situation.

But still, Bob is talking about taking money from one person and giving it to another. Could it stimulate GDP and employment? Yes, I'd agree it probably could in a situation like the one we're in now if it amounts to transfering money from people with relatively high liquidity preference to relatively low liquidity preference. Of course there is an opportunity cost associated with that transfer, but in the current underemployed environment the stimulative impact is expected to exceed the opportunity cost.

But notice how Bob sneakily slipped in "taking money"*. This isn't what Keynesians propose. Some liberal Keynesians have a chip on their shoulder about the rich and oppose things like extending the Bush tax cuts, but that doesn't come from their Keynesianism - it comes from their liberalism (or perhaps even darker corners of their psyche). The boilerplate Keynesian position is to increase spending and lower taxes during a downturn. So there is no proposal of taking money from anybody. The point is to create money or other safe, liquid assets (like, say, Treasury debt) for which there is an excess demand.

Bob goes on:

"(Be careful how you answer guys. If you concede that a simple wealth transfer from a rich saver to an unemployed guy who will spend the $$, could generate net benefits to the economy–as least in Krugman’s view–then you are dead in the water. All you need is a small enough disaster that goads such transfers from rich to idle in order to generate these gains that will compensate for the disaster’s direct destruction of wealth.)"

This is technically true, but I don't see how it's relevant. What we're dealing with here is an opportunity cost the size of the transfer and a benefit the size of the transfer plus some residual due to the fact that we're below full employment. Yes, if Bob can think up some sort of destructive force that causes very small amounts of damage but for some strange reason induces a very large amount of spending during a period below full employment I could agree that there may be some net benefits associated with it. But that doesn't seem to be what we're talking about at all. The spending (for which, let me reiterate, there is an opportunity cost that already weighs down on any gross benefits) that we talk about is usually repair spending, right? We need to fix the window. We need to fix the nuclear power plant. We need to rebuild Germany and Japan. These aren't situations where we have big spending because of small destruction. We have big spending precisely because we have big destruction.

And in any case, even if Bob can come up with a situation where the destruction plus the opportunity cost is lower than the spending plus any multiplier, why not just create new money that doesn't have a lot of the downsides and in addition to the multiplier effect of a transfer, also has an effect on the interest rate?


* - of course I don't really think he was being "sneaky". It may or may not have been intentional, but regardless of his intent it's a crucial phrasing.

Tuesday, August 30, 2011

A few things from the first day of class

- First, my math econ professor running the "math camp" in the mornings waxed pragmatic (and tautological): "being able to abstract in useful ways is useful".


- They really emphasized how important the political economy courses were to the program, which I was glad about. They have two sets of advanced micro and macro - they have mainstream advanced courses for each and they have "heterodox" or "political economy" macro and micro. I'm doing the macro track so I have to take the advanced mainstream macro and the "political economy macro". People on the micro track similarly take advanced micro and PE micro. You can also be on the "political economy track" and do both PE micro and macro. I think this emphasis is great - more departments need to bring in political economy. One thing they mentioned that I hadn't thought about before is that this is apparently an advantage on the academic job market. Departments want people that can teach an economic thought or an economic history or a political economy course, and many top departments don't prepare students for that.


- Waiting for my economic thought class, I read some of Keynes's 1937 defense of the General Theory. Apparently he had trouble with people acting like they were in an epic battle with him when they actually weren't too! He wrote: "My differences, such as they are, from Mr. Robertson chiefly arise out of my conviction that both he and I differ more fundamentally from our predecessors than his piety will allow. With many of his points I agree, without, however, being conscious in several instances of having said (or anyhow meant) anything different." Geez - how often do I have that reaction. I think three quarters of the disagreements I have with people in the blogosphere are of this variety: they are taking issue with a view that I never disagreed with them on in the first place. Good to see it happens to the best of us too.


- Lot's of interesting students in my cohort - lot's of master's degrees, which was interesting to see. Very nice people that seem like they'll be easy to work with.


- Finally, I'm TAing a big macro lecture - not that much grading, but two review sessions and one office hour a week. We're using Mankiw's book, which I've never actually used before, so that should be interesting to get familiar with.

Ending Up In Bedlam: Boettke and Horwitz

Steve Horwitz and Peter Boettke offered two great examples recently of the real paradox that is the blog Coordination Problem. All the bloggers (and most of the commenters) there are very thoughtful people with great insights and a deep appreciation for economics. But sometimes, despite their thoughtfulness, they start from one very odd premise so that everything they build from it seems shoddy to me. This is unfortunate, because often they've got a lot of great ideas in the post itself.

For Peter Boettke, the odd initial premise almost always has to do with an imagined epic battle with Keynesianism and a very dismissive, condescending attitude towards Keynesianism as being out of the "mainline" of economics running from Smith. He takes it as an article of faith, although he doesn't talk about macroeconomics all that much. Lot's of people are dismissive of Keynesianism without engaging it. You can't engage everything in detail. The problem is Peter goes on to write a post like this one that engages some really important questions about why "bad ideas" persist in government, and the relationship between bad ideas, the generation of bad policy, and the staying power of bad policy. It's an important problem to think about - one of the reasons I like American University is that their department has such a strong political economy focus, so I like seeing Peter think about these questions - but the whole post is based on the idea of Keynesianism as the singular "bad idea" of Western democracies in the 20th century and the mystery of why anyone still believes anything like it - in a crude or sophisticated version. When I read something like this, it makes me wonder if the whole discussion is worth anything. It would be like a creationist discussion of political economy that asked why the "bad idea" of evolution persisted in our educational institutions which are allegedly dedicated to pursuing truth. I think the political economy question is very important, and I'm thrilled someone is asking it. But I wonder if the answer is even worth reading.

Steve Horwitz has a similarly paradoxical post (I have a comment there) - probing and thoughtful, but founded on some very bad thinking about economists who talk about market failure and the quality of the counter-arguments that are posed to them. Crediting Don Lavoie, he suggested that "much of Marx's critique of capitalism is like a photographic negative of what he imagines the socialist world will look like. In other words, the reason that exploitation and alienation are problems of capitalism is that Marx can envision a world in which neither one exists. Specifically, if the participatory but still unified planning of all economic activity (and the elimination of exchange/markets/prices/commodity production) is possible, we will eliminate alienation and exploitation." He then analogized this to modern economists: "Now let's fast-forward to the 1950s and 60s. The number of economists who believe in Marxian central planning has become small. However, for most critics of capitalism, the ground has shifted to "market failure" type arguments. But here's the kicker: the rhetorical strategy is exactly the same as Marx's! What are normally considered "market failures" are only "failures" because the economist is standing in the hypothetical perfect world of general competitive equilibrium and seeing how the real world fails to live up to the model."

No, no, no, no, no. Great questions. Great thoughts on how people think. But the empirical material he's working with is a worthless strawman. I've never had "market failures" taught to me like this, and it infuriates me that apparently this is what people are told others think at George Mason or St. Lawrence University. I will say, though, that it's confusion like this that makes me hate the term "market failure" (as regular readers know, I prefer "externality").

As it so happens, my history of economic thought professor talked about modern market failure economics last night after summarizing the history of thought from Aristotle to Keynes. He didn't present it in these terms at all. He presented how it's always been presented to me. He basically said that starting in the 1870s a lot of the market process insights of Smith were formalized by the neoclassicals. Great. We got much more powerful theory. But this was a first approximation, because the theory clearly wasn't how the world actually worked. So since about Arrow and Debreu (who further formalized the formalizers of the 1870s), a lot of economists have spend a lot of effort theorizing and thinking about how the world actually works. We have a first approximation workhorse model to work with: competitive equilibrium. But it wouldn't be very scientific to take that Platonic ideal and pretend it was anything other than a first approximation.

There was no whiff of the idea that market failures signaled a failure of markets because they didn't live up to some perfect market ideal. He said several times that "market failure" economics (I believe he did use that term) was an effort to understand the way the economy worked using neoclassical tools which was more informative and accurate than the first approximation of Walras, Arrow, and Debreu.

My professor last night wasn't alone - this wasn't the first time I've heard this. He was pleasantly explicit and insistent on this point, but this is how "market failures" were taught to me at William and Mary, and this is how "market failures" were taught to me at George Washington University too. I don't think I've hit on the three schools that buck Steve's general rule of how market failure is taught. There's nothing peculiar about the schools I've been too.

I think people predisposed against liberals or the mainstream or what have you have imputed ideas to this sort of economics that is (1.) wrong, (2.) convenient, and (3.) regularly repeated within their own communities.

Monday, August 29, 2011

Sunday, August 28, 2011

DeLong on Neoclassical Macroeconomics and Williamson and Cowen

This is a good passage:

"One thing that I think is wrong is in the passage Tyler quotes. It is the claim that what we have now "is not a Keynesian inefficiency associated with real rates of return [on savings vehicles] being too high; in fact real rates of return are too low". In the Keynesian-or perhaps it would be better to say Wicksellian--framework, when you say that real rates of return are "too high" you are saying that the market rate of interest is above the interest rate consistent with full employment, and with savings equal to investment at full employment. Wicksell called that interest rate the "natural rate of interest" and it is relative to that natural rate of interest that Wicksellian (and Keynesians) speak of interest rates being "too high" and "too low". Thus Williamson is wrong when he say that what we have now--when the natural rate of interest on relatively safe securities is negative and the market rate of interest is not--is "not a Keynesian [or Wicksellian] inefficiency". It is precisely such an inefficiency. To claim that it is not misinterprets Keynes (and Hicks, and Wicksell), and misleads readers trying to understand what they did and did not say."

It's funny how "not RBC" has been conflated with "not regular economics" or "not neoclassical economics" in recent discussions of Keynesianism. Even Krugman has admitted he does "irregular" economics, but I'm not sure why. This is fairly regular stuff, although it's true it's not late-twentieth century flavor of the month (decade?).

Martin Luther King on Property

"I am aware that there are many who wince at a distinction between property and persons--who hold both sacrosanct. My views are not so rigid. A life is sacred. Property is intended to serve life, and no matter how much we surround it with rights and respect, it has no personal being. It is part of the earth man walks on; it is not man."

- Martin Luther King, Jr., The Trumpet of Conscience, 1967

Saturday, August 27, 2011

Brief updates

I hope to be blogging more soon, but over the next couple days it's likely to be slow. I had orientation at American yesterday - met a few other doctoral candidates and got a barrage of mostly useless, but some very useful information from the school.

The big black hole of my time right now is that I'm still tying up a lot of projects from Urban even though I'm out of there - editing a very large apprenticeship report this weekend, and finishing building a dataset for another project I'll continue to be involved in through the fall. Then it'll be cleaning up the engineering chapter for the conference at the end of September - that's in very good shape.

This weekend, aside from staying inside and away from the hurricane, I'll probably be reading a lot of Aristotle and commentary on Aristotle for the history of economic thought class.

More blogging later - have a good weekend everyone.

Friday, August 26, 2011

That doesn't necessarily sound like a good thing...

I was on the American University website today and noticed them promoting a superlative they got from Princeton Review: #1 on the list of "most politically active students".

Hmmmm...

Orientation today, although I still feel swamped by the job I just left. I have a couple reports to finish up and am still going to be on intermittent status with Urban through the fall.

Thursday, August 25, 2011

Today is my last day of work at the Urban Institute

It's been a great experience - I've learned a lot and I have a ton of respect for the quality of research that's done here. I hope in the rest of my career I come across more of Urban's combination of passion for the issues that they look into with objectivity in reporting to clients and the public. I definitely wouldn't have lasted five years here if the Urban Institute was an advocacy organization posing as a research organization.

One of the things I've noticed about Urban since the crisis is that it could probably use a little macroeconomic perspective. There are a lot of deficit hawks here, which is a very good thing. I've worked directly with Bob Reischauer - the president - which impressed upon me the importance of being a smart deficit hawk and a smart entitlement hawk (rather than a slash-and-burn budget-vandal type). But this focus, combined with the expertise on very micro-level solutions to poverty problems has left a lot of the Institute without a strong macroeconoimc voice on the downturn. The people here that know the budget best look at it from a budgeting perspective, not from a demand management perspective. I think this is one area where things could be strengthened. Former Fed governor Ed Gramlich used to work here (I had a chance to work with him on a couple things) before he passed away in late 2007, and I think he would have been a strong voice on this if he were still around. I think a lot of budget people here are well aware of the demand management function of fiscal policy, they simply have dedicated their own careers to more long-term issues: entitlement reform, deficit reduction/tax policy, etc. That's all very important, but approaching it from a different angle would be beneficial too.

Working here has really shaped my career. Doug Wissoker and Burt Barnow have kept my econometric skills sharp, Hal Salzman has gotten me interested in science and engineering labor force issues that I'll probably stick with for a while, and everyone has been interesting and inspiring.

Nine stimulus studies

We've talked about several of these on here before, but Dylan Matthews reviews nine stimulus studies - six of which say it had a positive effect, one which says it had a modest effect, and two that said it didn't work.

I've got a few broad thoughts on these. I don't like inter-state studies. I doubt we can really say anything about any one recession, unfortunately - I think it's better to just look at the impact of fiscal policy in a recession in general. Papers that don't deal with endogeneity aren't really worth your time. Papers that do deal with endogeneity often have trouble focusing on impacts during recessions. And it's been six or seven years so I have to take another time series class before I express an opinion on VAR studies.

Why do we care about GDP?

In Bob Murphy's post on the broken window fallacy, Robert Fellner asks why we even care about GDP. He writes:

"So why are we so obsessed with GDP?! And I think the above definition of “economic growth” is more than just unfortunate, its entirely inaccurate.

I really don’t get this. I thought economics was about the study of people making decisions and dealing with scarcity via division of labor etc. Instead it seems like well sure that world is made poorer, but in our fictionalized “economy” increasing spending is a sign of growth. We even have a statistic called GDP that goes up when spending does, so all we need to focus on is increasing GDP because that represents “economic growth”. But that doesn’t mean anyone is actually better off! So why is this our goal?!"


He also writes a blog post about it here, where he spends a lot of time presenting what is essentially Higgs's critique of government spending in GDP.

I basically agree with his analysis in the comment (not his analysis on his own blog), but disagree with the conclusions he's drawing from it. No, of course GDP isn't a measure of "wealth" - that can be dismissed entirely. It's not a measure of the health of the economy either. I don't know what a "healthy economy" means or should mean, but if it means anything I'd imagine economic health would have to do with total welfare, and as anyone who's identified the producer and consumer surplus in a supply and demand graph knows, PQ does not equal total welfare.

So what is GDP? PQ, basically. Why do we care about it? Because we highly evolved apes spend a lot of effort producing and exchanging things, and the behavior of production and exchange seems amenable to scientific study. That's why we care about it scientifically. I think what Fellner is getting at is why we care about it socio-politically?

I don't think this is all that hard. Is it a measure of total economic health? No. But it is a measure of how much people earn or how much people spend in a given time period. If your earnings dropped 6% next year would you care? Yes. If you spent 6% more next year would you care? Yes. I think we have our answer. No, GDP is not a measure of health or wealth. Of course not. It's a measure of gross domestic product. Must we only care about ultimate ends? Can't we care about our income level? After all, while income is not health/happiness/welfare, these things are certainly a function of income.

The other important thing that's relevant now, of course, is that in a market economy we make our way in the world through wage labor. Not only is that how we support ourselves, but it's become a major facet of our identity (what jobs we hold). For good or bad, it's a big deal. Demand for goods is not demand for labor, but that doesn't mean it's irrelevant. Employment tracks output quite closely, for obvious reasons. If you care about working people you're going to care about economic output.

When economists talk about "growth" it's usually a reference to GDP growth. If we had a metric for welfare or if wealth statistics were more readily available, we'd probably have to be more explicit when we use the word "growth". But we don't, so it is what it is. GDP definitely seems like something worth studying, and it also seems like something worth caring about too.

A lot of this broken window fallacy talk has revolved around the obvious point that disasters make us less wealthy. So you might say "well shouldn't we be worrying about wealth"? Yes. Of course. If you think somebody hasn't been worrying about wealth, you're misreading the situation. This is why Krugman has not proposed going around breaking windows. It's quite possible to care about both GDP and wealth. But wealth is hard to track because your wealth is largely dependent on the market value of your stock of stuff. And of course, the market value of that stuff is largely dependent on movements of the market - i.e. - GDP. So even if we'd like to track wealth, that's hard (it's done, to be sure, but it's hard). If you want to track econoimc welfare or well-being, forget about it. When neuroeconomics really gets off the ground maybe we'll have something on that, but not right now.

Wednesday, August 24, 2011

One more quick thought

Why is Broken Window Fallacy thing such a big issue? It's not as if anyone has called for wanton destruction to stimulate the economy, after all. Even destruction that a lot of people genuinely support on its own merits - like killing Nazis - isn't something we go around looking for for macroeconomic purposes. So what's the argument over?

Crowding out.

And that is important even if these examples are mostly abstract.

Unfortunately, a lot of people would rather argue that "according to standard Keynesian theory, if all vestiges of civilization were destroyed, this would be a good thing" or "Krugman is a big fan of war" or "Krugman said Japan was going to see good economic times" or that "In Krugman’s version of Orwell’s Newspeak, destruction creates wealth, and war, though not ideal, is morally acceptable because it produces economic growth." And considerably nastier and dumber stuff than that.

How can one respond to this? First you point out the obvious - you don't think those things. But you can't entirely agree with these people on the impact of destruction either because you don't think crowding out holds right now. So to be fair and honest and forthright you've gotta make that still-important, controversial point.

And then when you do that the cycle of stupidity keeps turning. Some Austro-libertarian types do get it. But unfortunately these guys seem to be in the minority and aren't making a dent in the people that say we don't understand opportunity cost or that we actually want destruction.

The Fake Krugman on Keynesian Economics

Most of you probably know by now that the alleged Krugman reaction to the earthquake on Google + was a fake. A lot of people have also observed something I agree with: the faker actually provided a fair representation of Krugman's (and many other peoples') position on the potential for economic disasters to increase growth.

The guy explains himself here and illustrates perfectly what I mean when I say people badly apply Bastiat to Keynesians. This is his own summation of the problem as he sees it:

"For too long now, Krugman along with other Keynesian economists such as Nouriel Roubini have supported Keynesian policies which advocate for more taxation of the job creating private sector to contribute to the job destroying public sector. While he public sector has “created” jobs, one must remember and take into account the opportunity cost of taxing the private sector."

First a really dumb point - Keynesians don't advocate increasing taxes on the private sector to pay for government as a macroeconomic policy (they may say that if taxes need to be increased for long-term budget and growth purposes they should be alotted in a specific way, but there's nothing "Keynesian" about a particular position on that point). They usually argue that tax cuts are less effective than other forms of stimulus, this is true. They argue that tax cuts on the wealthy are probably the least effective of all. Fine. But a small tax multiplier means that they think increasing taxes on the private sector hurts growth. This is elementary. This is something that no one who has any experience with economics coursework should miss. So where did he get this. Sounds like a politician's talking point to me, and I doubt it's much more complicated than that.

More importantly - Krugman and Keynesians have not forgotten the opportunity cost of taxing the private sector (or issuing bonds). This is precisely why they're always talking about whether we have evidence that public spending is crowding in or crowding out right now. The whole debate revolves around the concept of opportunity costs, so how can he think they've forgotten it?


***

Now, Bob Murphy thinks Yglesias and I are being ogres about this, but this faker guy demonstrates precisely why it's so bothersome. The fact is, people think we don't realize wealth has been destroyed. They point this out to me as if I'm not aware. People think we don't understand opportunity cost. They point this out as if opportunity cost is something other than one of the most elementary concepts in economics. People think we're celebrating destruction which would normally barely justify indulging with a response, but is infuriating because they seem to be serious when they say it.

Bob Murphy provides a detailed treatment of Bastiat that I'm glad he's taken the time to highlight. I found his post interesting. It looks as if (with the aid of a time machine) Krugman, Barro, Romer, and Bastiat could all have a fascinating discussion about crowding out that I would love to be a fly on the wall for. But if Bob thinks that's the caliber of the debate that's going on, he's deluded.

LK on Keynes on the Nazis

Another great post by LK (although I suppose I oughta give Skidelsky credit for this one!!).

This was especially good:

"On 25 August 1933, he wrote to Professor Spiethoff, who was arranging the publication of a German translation of ‘National Self-Sufficiency’:

"Forgive me for my words about barbarism. But that word rightly indicates the effect of recent events in Germany on all of us here …. It is many generations in our judgement since such disgraceful events have occurred in any country pretending to call itself civilised ... If you tell me that these events have taken place, not by force, but as an expression of the general will … that in our view would make some of the persecutions and outrages of which we hear … ten times more horrible
.""

Great Quotes

1. "Keynes was a brilliant economist. He came up with an ingenious theory within the context of an economic crisis. Even if I think in the end that the theory was not right what does that prove? Most theories are not right." - Robert Barro, 1993 (HT - Zac Gochenour)
I like this because it shows a very deep appreciation for the role of theory in science. Science isn't about exegesis of past scientists. And science isn't about being "right" in a deep, universal sense. It's about useful approximation and continual refinement. Keynes has been refined, but I'd probably say his tradition is still more useful than Barro would say it is. Still, the general perspective of Barro here holds up well.

2. "Man wants liberty to become the man he wants to become. He does so precisely because he does not know what man he will want to become in time." - James Buchanan, 1978 (HT - Don Boudreaux)

3. "Funeral by funeral, theory advances" - Paul Samuelson
Upon reflection, I think this one by Samuelson may be a necessary, but not sufficient condition.

4. "Economics is a technical and difficult subject. It is even becoming a science." - John Maynard Keynes, 1930

Tuesday, August 23, 2011

Yglesias on Broken Windows: couldn't have said it better myself

He writes:

"The fact that breaking windows would make a society poorer (fewer windows) is precisely why nobody ever proposes stimulating the economy by deliberately smashing windows. But the way the dialogue works is that first a Keynesian observes that fiscal stimulus can increase growth in a depressed economy. Second, as an attempted reductio, a conservative says “if that was true, then you could increase growth by breaking a bunch of windows.” Third, the Keynesian accurately points out that you could, in fact, increase growth by breaking windows. Fourth, the conservative accuses Keynesians of wanting to break windows or believing that window-breaking increases wealth. But nobody ever said that! The point is that we have very good reasons to think smashing windows would be a bad idea—there’s more to life than full employment—and that’s why Keynesians generally want to boost employment by having people do something useful like renovate schools or repair bridges."

...or colonize and terraform Mars.

Anyway - getting back to the point. The argument can sometimes get a little more complicated than this, because some people say that the act of government spending itself is the window-breaking. Then you have to ask why? The weak arguers will talk about taxing and spending at which point the discussion just needs to end. The somewhat smarter arguers will talk about crowding out in the bond market. At that point you say that yes, crowding out may very well be a problem at some point, but it's not now, so this window you think is being broken actually isn't being broken at all.

Yglesias also makes a reference to reductio ad absurdums. I personally think that reductios are often very bad economic logic. Economists think on the margin and they usually think there are lots of diminishing marginal returns to different things. Reductios are usually started in a way that completely ignores this. In truth that means they're not even actual reductios, because the reductio is supposed to carry an argument to its logical extreme, and if you ignore things like diminishing marginal returns or if you ignore the fact that we're making an argument on a particular margin you're abandoning the underlying logic of the claim, and therefore you're not really offering a refutation of the claim.

UPDATE: Bob Murphy points out that while Keynesians and Bastiat agree on the stock vs. flow question that anti-Keynesians regularly bungle in making accusations (well - he doesn't use those words exactly), Bastiat was pretty clear about assuming complete crowding out in his essay. In that sense, we can just say "Bastiat made the right point, but he messed up on the crowding out part... or at least was declarative enough that his parable can't be applied under all circumstances". A better rendition is given by Wilhelm Ropke, who doesn't make Bastiat's broader crowding out claims when talking about the impact of disasters. Brad DeLong has made the argument in the past that Bastiat understood there could be crowding in by public expenditures during depressions. I'm not entirely sure I agree with Brad on that, but at the very least he demonstrates that Bastiat supported a sort of "demand smoothing" by the state, which is still better than a Ricardian equivalence-esque non-effect.

UPDATE 2: The point is this - nobody flings Bastiat because they are having a disagreement about crowding out, which may be a point that Krugman and Bastiat disagree on. They fling Bastiat because they think that Krugman and others are somehow ignorant of the unseen costs of these things or ignorant of the concept of opportunity cost. If that's what you think, don't expect people to be impressed.

Earthquake in Virginia

Since it appears nobody got hurt, I feel OK saying that was pretty cool. I've never been through an earthquake before, and it was 5.9 so it wasn't unsubstantial either I guess. The walls were definitely shaking, and they evacuated us from the building for a while.

The epicenter was just a couple miles away from where my sister-in-law used to live in central Virginia, which was interesting.

I liked the response that my sister shared on facebook that is pretty typical in D.C. - first thought: "was it terrorists?*", second thought: "damn construction!".

Anyway, apparently there was a decent sized earthquake in Colorado too. I think, rather than do some googling to see how common this is, the only safe thing to conclude is that this is a consequence of the galactic alignment :)

UPDATE: Wow - and the Cafe Hayek comment section on Russ's earthquake post is talking about... you guessed it!... Paul Krugman. This moving into elementary school boys punching girls that they like territory.

* - As problematic as acting irrationally on concerns about terrorism is, you definitely think about it more around here, and probably not without cause.

More on housing and job mobility

A little while back I argued that reduced job mobility is in part attributable to the bad housing market. There's been some new evidence against certain parts of this story that are worth sharing.

Adam Ozimek shares this new JEP paper, which argues that there is no relation between the housing crisis and declines in mobility. Ozimek concedes defeat... I'm not quite as willing because I have a few lingering questions about the paper. First, what's good that the paper points out is that there has been a consistent trend for a long time now of declining mobility, and in part of course anything going on now is continuing that trend. It also provides a detailed discussion of the wide differences between CPS, ACS, and IRS estimates of mobility that should give us pause. My biggest question is exactly why "underwater" houses should be driving this. The authors look at the state-level relationship between underwater houses and mobility and find a modest positive relationship. I'm not sure exactly what this is supposed to demonstrate. First, I thought if your house was underwater you had an incentive to walk away from it, so this sub-group of particularly bad-off homeowners ought to be more mobile, right? What I was initially thinking of were people like my parents, who are not underwater but who have taken a hit on both their 401k and their home value and aren't talking about moving now like they were a couple years ago.

So the article is worth looking at, but I still have questions.

The commenter Nonymous had a lot to say on my old post on this. Most of his comments weren't convincing - they amounted to cross-sectional observations that younger people were the most likely to be unemployed but the least likely to own a home. This is Casey Mulligan stuff. Bad inferences from relative differences. My comments from before still stand on all those points. But he also shared a paper that allegedly addressed this point, which I didn't get a chance to address. It presented evidence that there were declines in mobility, but that they were mostly within-county declines, which the authors argue shouldn't affect the labor market. Anyone familiar with the spatial mismatch literature in labor economics knows that this is wrong. Labor markets in urban centers and urban peripheries are different. Counties are big. Counties are not labor markets. If you have a car, the constraints of a cross-county job are less severe of course. But think about Los Angeles County. Think about Cook County. So I'm not sure why they're presuming that declines in within-county moves don't limit job mobility.

I obviously think the biggest problem for jobs is uncertainty and deficient demand, but the impact of the crisis on peoples' assets makes a difference too - particularly when we think about immobility. This JEP paper is worth reading, and I would say it makes me think that the housing market may be less important than I had originally thought - but I still have a couple of lingering questions and I wouldn't say it's not important.

Neumark et al. on future skill shortages

VoxEU has a shorter version of a longer working paper produced recently by Neumark, Johnson, and Mejia on projections of skill shortages (HT - Mark Thoma). I've been working through the working paper for my NBER chapter, particularly since it now looks like I'm giving a separate presentation on shortages. As you all might guess, I'm skeptical of this sort of forecasting. They don't have a good track record, in part because they can't project market responses. Often it's simply an extension of current supply and demand trends.

Neumark mentions a recent projection by Carnevale and his coauthors. I heard Carnevale present this at the Georgetown STEM workforce conference I went to a couple weeks back that I mentioned on here.

Monday, August 22, 2011

The General Theory as an Anti-Marxist Treatise

LK has a good post clearing up Ralph Raico's perennial confusion (unless it's deliberate?) about Keynes. This is tough work - I can tell you from experience. Addressing insane arguments like Keynes was a Nazi sympathizer or Keynes was a Communist sympathizer is tiring because you're never quite sure if they're being genuine or malicious or if it's even worth your time. If the misinformation spreads, it probably is worth your time. If it stays in the guilty party's head you know it's rare that you're going to convince them so maybe it's not worth the effort.

Anyway, it's a good post if you're interested in the question of whether Keynes sympathized with Communists (spoiler: no, he didn't), but I was particularly intrigued by the extended quotation of Keynes's famous letter to George Bernard Shaw that LK provides. Most people know the one line where Keynes says in 1935 that he expects the General Theory to revolutionize economics. This is the whole passage:

"Thank you for your letter. I will try to take your words to heart. There must be something in what you say, because there generally is. But I’ve made another shot at old K.[arl] M.[arx] last week, reading the Marx-Engels correspondence just published, without making much progress. I prefer Engels of the two. I can see that they invented a certain method of carrying on and a vile manner of writing, both of which their successors have maintained with fidelity. But if you tell me that they discovered a clue to the economic riddle, still I am beaten – I can discover nothing but out-of-date controversialising.

To understand my state of mind, however, you have to know that I believe myself to be writing a book on economic theory which will largely revolutionalise – not, I suppose, at once but in the course of the next ten years – the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can’t predict what the final upshot will be in its effect on action and affairs. But there will be a great change, and, in particular, the Ricardian foundations of Marxism will be knocked away
."

There's lots of interesting stuff in here. It accomplishes LK's task of abolishing this idea that Keynes had any respect for Communists. It also has a revealing sentence towards the end that notes Keynes is well aware of potential public choice problems in public finance, but (rightly) recognizes that this is not a good reason to fail to produce good economic science. But the sentence that I've bolded is what really intrigues me. We all know Keynes was gunning for the Ricardians and the Classics. But here he says that "in particular" the Ricardian foundations of Marxism would be finally finished off by the General Theory - in particular. There's a lot wrong with Classical economics - or roughly the economics of the last three quarters of the 19th century and the first quarter of the 20th century, and Keynes criticizes much in this tradition. What seems to have bothered him in particular is the foundation it laid for the real plague of the 20th century: Communism.


Assault of Thoughts - 8/22/2011

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

- Donna Ginther and her colleagues have done an analysis of racial disparities in NIH grant awards and finds them to be surprisingly large. The Economist summarizes the research here. The disparity seems to show up early on in the process, at a point where reviewers don't have access to information on race, but do see names and affilitations (which the authors suggest could provide tip-offs). This may be the case, but I'd be curious to see a list of names and affiliations. Unfortunately, I'd suspect it's more entrenched than the review panels themselves (wouldn't it be nice if it could just be taken care of with some panel reform?). I'm guessing there are legitimate differences between grant proposals that are associated with educational disparities earlier in the science workforce pipeline. Do black students get to work on major grant proposals with their professors? Do they get channeled into the same research fields, etc.? Audit studies are impressive because they can usually zero-in on exactly where the discrimination is, but this one seems a little harder to me since they don't have the same control over the quality of the proposals themselves. Actually, a good next step would be to submit identical proposals with "black" and "white" names and affiliations. If the disparity still shows up, it's a racial cue problem. If it doesn't, it's a problem that goes much deeper into the educational and science workforce system.

- Megan McArdle has a good article on Austan Goolsbee in this month's Atlantic. It talks a lot about the mistakes most economists make when coming to Washington.

- Aparently, Robert Zubrin has released a new edition of his book The Case for Mars.

Sunday, August 21, 2011

I like Paul Krugman because he doesn't stay useless in tempestuous seasons

"Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again." - John Maynard Keynes, 1923



Privately maintained public spaces

Steve Horwitz shares an interesting article about Central Park as an "Ostrom-type" privately managed public space. These sorts of public spaces are quite common. Two that are close to my heart are Mount Vernon and Monticello. Horwitz points out that the condition of Central Park improved tremendously since they started being managed privately. Mount Vernon presents an opposite example - it was very managed poorly under previous private owners until new private owners - the Mount Vernon Ladies Association - took it over (the federal and state legislature declined an offer to sell it in the 1850s).

I don't think it's easy to extract a simple narrative from these things. We know there are collective action problems associated with maintaining public goods in private hands. Mount Vernon seems to demonstrate this. We know there are public choice and collective action problems associated with a commons and with state administration. Central Park seems to demonstrate this. My concern with private management of these things is that not enough of it will be done. What is managed will be managed splendidly (visit Mount Vernon or Monticello if you have doubts), but a lot will be lost and left unmanaged, and you'll never hear people talk about those losses (the seen and the unseen, anyone?). My concern with public management is precisely what Steve points out - that it will be done poorly and risks not being responsive to what people actually want.

Some people seem to think there's a big bright line on these things - that the government is bad for these public spaces or that the market is bad. Taking either of these views seems to require that we ignore basic economics. I'm with Ostrom, personally - I think humans have a variety of ways to manage these sorts of resources. We have governments that sometimes work and sometimes don't. We have markets that sometimes work and sometimes don't. We have non-government, non-market institutions that sometimes work and sometimes don't. I'm personally interested in celebrating and supporting what works, not staking out one solution for pillorying.

A question for free bankers

Ryan Murphy has been helping me think through this one: is there anything that guarantees that a system of free banking is capable of achieving full employment? He's been thinking of it in terms of guaranteeing stable nominal GDP, which I suppose is comparable.

He pointed me to one of Selgin's articles in JMCB, titled "In-Concert Overexpansion and the Precautionary Demand for Bank Reserves" (sorry, no ungated link). I got the impression I was more comfortable with the article's conclusions than Ryan was. Selgin basically concluded that co-ordinated overexpansion wasn't possible because while more conservative banks would win out if any one bank tried to over-expand, a concerted over-expansion would result in increased precautionary demand for reserves in the entire system, which is contractionary.

This is related to the initial concern about free banking that I posed to Ryan, which was also related to the fact that free banks are not immune to the precautionary demand for money. I had initially posed the point to him in a simple IS-LM framework, which has proven to be a useful framework to think about in the current crisis. All free banking seems to do is change a vertical money supply curve to an upward sloping money supply curve. It doesn't seem to change anything else, so it doesn't seem to solve any of the problems that we (or at least I) worry about. Indeed, as Selgin points out banks demand reserves for precautionary reasons as well. You can see this right now with banks sitting on reserves. IOR is a big part of that story, but do we really think that's the only thing holding them back? Probably not. How can we expect a banking system as prone to precautionary savings as anyone else to guarantee full employment? How does an upward sloping money supply curve in an IS-LM model fix anything? These aren't accusations so much as genuine questions because I'm not expert on free banking and I'm trying to figure out why people think its so great.

Saturday, August 20, 2011

Who was an early builder of a national highway network? Who started federal funding of maternal and children's health?

Eisenhower Interstate Highway System on highways? Nope.
Clinton's CHIP program on maternal and children's health? Nope.

Warren Harding on both counts (and it wasn't even an election year - it wasn't even a mid-term year!).

Eisenhower was involved in the first decision to some extent. Following in the proud footsteps of Lewis and Clark, he took a presidentially sanctioned road-trip in 1919 to test out the quality of the roads. Eisenhower gave them a thumbs down. Wilson had provided some road funding in 1916, but it wasn't much and the war disrupted its progress. Harding put a lot more money into it in November, 1921, and tens of millions of dollars of construction went on until 1923.

The second decision is a reference to another law passed in November, 1921, to give money to the states to set up maternal and infant health clinics. It established over 3,000 clinics until it was finally shut down in 1929 over accusations that it was socialist.

Casey Mulligan would have loved the 1920-1921 Depression

Why? Because it was mostly a supply-side story. This is a point in retrospect I should have fleshed out more in the article, and perhaps I will if I write anything else in the future. I relied on citing a handful of economists (you know, those Keynesian and mainstream ones that Tom Woods says ignore the 1920-1921 depression?) for the point because the argument I wanted to flesh out had more to do with policy and claims about Keynesianism.

At Cafe Hayek, George Selgin writes: "Just looked at that Wikipedia article on the 20-21 episode. The statistic reported there clear show that demand shrank substantially; as must be the case whenever both output and prices are falling. I do not know how our friend Daniel Kuehn, who is quoted in the article, arrived at his conclusion that K “that Woods underemphasizes the role the monetary stimulus played in reviving the depressed economy and that, since the 1920-21 recession was not characterized by any aggregate demand deficiency, fiscal stimulus was unwarranted.” The statement is if anything backwards: monetary stimulus is itself only capable of promoting recovery by enhancing aggregate demand; indeed, were there no deficiency of aggregate demand, monetary expansion could only serve to cause inflation, while fiscal stimulus, e.g., Mellon’s reduced tax rates, might in principle “stimulate” the economy’s supply-side.

Perhaps Mr. Kuehn will explain
."

And I did, quoting extensively from Christina Romer: "I provided something of a chronology and interpretation to the real work that minds far more brilliant than mine already produced. I’ll quote one of them (Romer, 1988):

The downturn of 1921 is conventionally attributed to a decline in aggregate demand. Lewis (1949, pp. 18-20) argues that private consumers and producers contributed to the decline in 1921 by overspending on all types of goods after the war. As a result, by 1921 their demand was satiated and the stock of durables was very young, so they greatly curtailed their spending. Friedman and Schwartz (1963, pp. 231-242) argue that the Federal Reserve Board caused a further fall in aggregate demand by allowing the money supply to contract sharply between 1920 and 1921. Available evidence appears to confirm the view that aggregate demand declined substantially between 1920 and 1921. For example, estimates of the money supply show that M1 fell 10 percent between 1920 and 1921. 23 In the conventional story this fall in aggregate demand is supposed to have caused a large fall in both output and prices because prices were not fully flexible.

The behavior of the superior Kendrick GNP estimates suggests that this conventional explanation must be altered. Despite the substantial fail in aggregate demand, the Kendrick series indicates that total GNP fell very little between 1919 and 1921. As a result, it is impossible to argue that the decline in demand moved the economy down an upward sloping aggregate supply curve and thus drove down both output and prices substantially. This is especially true considering the magnitude of the actual fall in prices between 1920 and 1921. In this period the implicit price deflator for GNP given in table 5. falls 16 percent and the BLS wholesale price index falls 46 percent.

An obvious alternative explanation for the behavior of the economy in 1921 is that prices were very flexible. If the aggregate supply curve for the economy were very steep in the period around 1921, then one would expect movements in aggregate demand to fall almost entirely on prices and to have very little effect on output. The possibility that prices were very flexible in this period is made stronger by the fact that as discussed previously, the government spending associated with World War I also led to relatively little movement in real output and substantial movement in prices.

General price flexibility, however, probably cannot explain the entire behavior of the economy in 1921. In particular, the decline in prices is larger than one would have expected judging from the behavior of the economy during the war. Using the data in table 5 one can see that real GNP rose 5 percent between 1917 and 1918 and the GNP deflator rose 15 percent. In contrast, between 1920 and 1921 a fall in real GNP of only 2 percent was associated with a price decline of 16 percent. This seems to indicate that there may have been some type of aggregate supply shock either during the war or in 1921.

The most obvious candidate for such a supply shock are the price controls implemented during World War I. However, while price controls were in effect in some indastries in 1918, most researchers estimate that they had only a limited effect in restricting price increases. This is because many of the controls took the form of guaranteed minimum prices designed to encourage production rather than maximum prices. A more plausible explanation for the
differential behavior of prices in World War I and 1921 is the occurrence of beneficial shocks to prices in 1921.

According to a classic study of the 1920s by George Soule (1947, pp.
99-100), a surge in agricultural production drove down prices in 1921. This surge in production is due to the fact that American farmers continued to produce at wartime levels despite the recovery of European production. Soule argues that the price of primary commodities produced outside the United States such as wool also plummeted in 1921 because of a surge in supply. Soule attributes this surge to the fact that a variety of agricultural goods and raw materials had been accumulating in the producing countries for several years because the foreign shipping network customarily used to transport the goods was disrupted by the war. By 1920, the European and American shipping industries had been restored and these goods began to enter the market.

Several pieces of evidence suggest that these shocks occurred and that they were significant.”

She goes on from there, but I think you get the point of the argument. Broadberry had similar conclusions for the UK about this time, and Temin and Smith both come to these conclusions too (maybe not Temin… maybe just Smith and Temin was commenting on something else – I’d have to go back and look).

As someone who both respects Romer’s careful work in attending to pre-WWII data series and as someone who understands that there are beneficial deflations, I think you should be able to appreciate this argument
."


Friday, August 19, 2011

More great material from Ryan Murphy

From this post.

First, Samuel Jackson and The Boondocks channels Nassim Taleb... or John Maynard Keynes... or Donald Rumsfeld... or Frank Knight... or whoever - it doesn't matter. It's funny.



Second, Selgin talks about the 1920-1921 depression. He doesn't mention my paper, as Ryan notes. But I'm a nobody. He also doesn't mention Romer (not a nobody) or Temin (not a nobody). Funny - a lot of Austrians fail to mention these people. Paul Krugman and Brad DeLong have weighed in on the differences between 1920-1921 and the Great Depression too, but you never see people link to those posts either. Why? If you're going to criticize Keynesians and your going to use the 1920-1921 depression, don't you think it's worth looking at what Keynesians or even Keynes himself said about it? Forget me - I'm a nobody. But I'm not the only one talking about it.

Ryan Murphy on Lawnmowers and Money

Ryan Murphy has an interesting post on free banking and NGDP targeting here. I have a comment in the comment section.

Last week!

I have five more days of work left at the Urban Institute, then starting at American University!

I have several things to finish in that time. I just finished drafting a research brief on variability in job growth across metropolitan areas during the recession. It's funny, the whole "Texas miracle" that's been raging in the blogosphere comes up in it. At the time I just clarified a few points in a footnote (a lot is due to population growth - the unemployment rate is more comparable to the rest of the country, etc.), but I'm wondering if because of the prominence of this issue lately I should move it into the body of the text! I also just finished drafting an encyclopedia article for the Encyclopedia of Race and Racism. Our entry is "The Labor Market". The usual stuff is in that piece, but it is interesting because the encyclopedia has an international focus, so I talked a lot about race and the labor market in countries besides the U.S. too. Today and Monday I'll be drafting an evaluation design report for the apprenticeship project I mentioned previously. It's pretty self-explanatory - basically I'm telling the Department of Labor and the Department of Health and Human Services how they should structure a rigorous evaluation (particularly in light of the fact that random assignment does not look like it's going to be feasible).

A few other things to wrap up other projects, and then I'm off to school!

I'm taking history of economic thought, microeconomics, and mathematical economics. Mathematical economics looks like it will be the most intense, but I'm glad they're pushing that one. I'm also TAing for a big macroeconomics lecture which I think should be a valuable experience.

The other two things looming on the horizon are my NBER conference on the engineering labor market at the end of September and the APPAM conference at the beginning of November. There's been an interesting twist in the NBER conference - apparently I'm presenting twice. Once with my co-author giving an overview of labor supply trends, and then once by myself on labor market shortages. This is very good, because I have a lot more to say about shortages than I typically have time to for presentations on this project. And it needs saying. There are a lot of chicken-littles in the science and engineering workforce world. Alleged shortages have never really panned out in the data. Lo and behold - markets work. Who'da thunk it? I think there are good reasons to think that we underinvest in science and infrastructure. Fixing that underinvestment problem may increase the derived demand for science and engineering labor. But that's a quite different situation. There appears to be nothing dysfunctional about the science and engineering labor market itself. What's most exciting is that apparently this split presentation may turn into a splitting of the chapter - which means I'd be authoring two chapters in the book... which, needless to say, would be pretty fricken fantastic.

Assault of Thoughts - 8/19/2011

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

- Nick Rowe does a good job explaining S=I, and talking about the difference between accounting identities and behavioral theories in economics. I will have to keep this post in mind this fall. My TA assignment is to work with a 300 student introductory macroeconomics class. As a new PhD student I'm sure I'll get a pile of grading, but I'm pretty sure I'm going to be holding review sessions as well. My experience in the blogosphere these last couple years has taught me that keeping identities and theories (and their respective purposes) straight is a big struggle for how people think about macro.

- Livio di Matteo is also looking towards fall classes, specifically teaching a history of economic thought class (I'll be taking such a class as well). Matteo discusses three excellent reasons to take history of economic thought seriously:

"1.It is fun.
2.As part of the liberal education of an economist.
3.A better understanding of the discipline as something that is subject to change rather than set in a final form
."

Number 1 I definitely agree with, but I have to keep reminding myself that it doesn't offer as many career options. Number 2 I think is deeply underappreciated. And I like number 3 because it pushes back on this notion that history of thought isn't relevant to the practice of economic science. To a certain extent it's not relevant insofar as all the personalities themselves don't matter all that much. But it does help you understand the context of what you're doing, and just as Newton helped us get to the moon despite being eclipsed, Adam Smith and John Maynard Keynes still offer excellent theory despite being eclipsed as well.

- Karl Smith offers yet another excellent critique of Casey Mulligan. He writes:

"In a summing up post Casey states

'There is still no evidence to confirm the fundamental Keynesian proposition
that supply doesn’t matter.'
That was the fundamental proposition? I don’t think we had to go through all of this to see that this isn’t true and I am not sure who really thinks it is...

In contrast I thought the question we were trying to answer is: how is it possible that output can collapse without an apparent decrease in supply?

How is it possible that the US can have the same number of machines, the same number of workers and the same technological know-how yet nonetheless is producing less of the things that people want then it was a year before?

This is the core question
."

As Greg Mankiw once said - I'm not a supply-side economist or a demand-side economist. I'm a supply and demand economist.

- Brad DeLong has an interesting
post on Alfred and Mary Marshall.

- Robert Skidelsky
has a surprisingly good post on Keynes and Hayek. I think he does a decent job summarizing the Hayek position too - but you all can let me know if you don't think so.



Thursday, August 18, 2011

Good thoughts from Tyler Cowen

He writes:

"There is nothing in the (very useful) data cited by Mulligan, in his posts on supply and employment, which runs against the Keynesian story. Of course I am a fan of the blogosphere, but sometimes it frightens me when I see it having influence over research interpretations. We’re just a small number of apes sitting at computers, relative to the overall literature. When it comes to Keynesian economics, I don’t always see we apes as reflecting the broader literature very well, yet we are read by a relatively large number of apes. We can expect this problem to get worse, as people learn the “blogosphere versions” of different points of vew."

Nothing Mulligan has been saying runs againts Keynesianism: check.

We are just smart primates and should never forget that: check.

Blogosphere versions of economic theories really distort peoples' perception of the science: check.

The one thing that Cowen didn't get right in my view is what I didn't quote here - he apparently thinks Mulligan is accurately portraying Krugman's view of Keynesianism. This is wrong, of course, and I think Cowen is probably just throwing a bone to his GMU colleagues. I've never heard Krugman say that supply somehow doesn't matter. He's said that changes on the supply side are unlikely to help much right now. This is true. He's said that the main problem right now is demand. This is true. He's never said anything like supply doesn't matter for output and employment, and he's certainly never said that relative differences labor supply of the sort that Mulligan has been pointing to don't express themselves in labor market outcomes (i.e. - higher teen labor supply in the summer results in higher teen employment in the summer, high consumer demand around Christmas results in higher consumption around Christmas, etc.).

Assault of Thoughts - 8/18/2011

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

- Russia and the EU announce they are teaming up to put a man on Mars. I am guessing we'll hear more announcements this November when the cosmonauts are released from their 520 day Mars mission training.

- Paul Krugman and Dean Baker to a great job explaining how relative prices are related to aggregate prices and macroeconomic processes. The other day Peter Boettke asked "how can someone build a "general theory of anti-Mulliganism" without rejecting the use of microeconomics to understand macroeconomic problems?". I don't know what's so hard about this for him. The responses to Krugman and Baker have been grounded in microeconomics and the implications of microeconomics for macroeconomics. Casey Mulligan confuses relative price differentials for aggregate prices and lots of people have been saying this. Nobody is criticizing the use of microeconomics to understand macroeconomics - they're criticizing Mulligan's poor approach to that very problem.

- Megan McArdle talks about how beneficial exclusive schools are. I don't care so much about the result she reports as I do about the method. She's refering to an NBER working paper that uses one of my favorite quasi-experimental methods - regression discontinuity designs. It's very good to see that (1.) this method can be easily explained to readers by journalists, and (2.) nobody is second guessing it because it's not experimental. I'm going to be presenting a regression discontinuity evaluation of a job creation tax credit this November, which brings me to...

- Obama is announcing a new approach to jobs which apparently has a new hire tax credit. Very good news. It could be a lot more, but this is a good option for him to come back to.

Links and thoughts from a F&OST reader

A reader emailed me a discussion of and links to several people who have been working on the role of probability and decision making under uncertainty in the General Theory. I don't have a lot of thoughts on it now, although I definitely agree that decision making under uncertainty is crucial for the General Theory, so with his permission I'm just going to reproduce the message:

"Ever heard of the British mathematician Henry Wilbraham? What about the American logician Theodore Hailperin? Or Professor Emeritus David W. Miller of Columbia University's Graduate School of Business? What do these three have in common? They have all dealt with George Boole's Last Challenge Problem, found in "An Investigation of the Laws of Thought, on Which Are Founded the Mathematical Theories of Logic and Probabilities", published in 1854.

Today's "Boolean algebra" is not the original algebraic logic used by George Boole. William Stanley Jevons and Charles Sanders Pierce, adapted Boole's algebraic logic and turned it into something different. That something different eventually evolved into coding for computer programming.

In turn, our mutual intellectual influence, John Maynard Keynes, dealt with George Boole (and other mathematicians) in "A Treatise on Probability", published in 1921. In turn, the urn problem described by John Maynard Keynes was (almost) independently verified by military risk analyst (and later anti-war campaigner) Daniel Ellsberg. I don't think Ellsberg covered Boole, however.

Nevertheless, if you want a full understanding of "A Treatise on Probability", and how the "General Theory" is arguably an application of Keynes's logical-relationist theory of probability, you will need to examine the connection between George Boole and John Maynard Keynes. Unfortunately, of those who understand the Challenge Problem, they belong to a very small minority of specialists in mathematics.

That's why I'm considering delving deeper into maths. Keynes, after all, was hailed by big names in mathematics: Bertrand Russell, Emile Borel, and Alfred North Whitehead. I believe they spoke highly of Keynes's aptitude. F.P.. Ramsey famously criticised Keynes's "TP", but did Keynes really capitulate to Ramsey's conception of Subjective Expected Utility?

I came to this position thanks to a fellow by the name of Michael Emmett Brady - yes, that guy on Amazon.com. Yes, he does seem somewhat eccentric, and highly repetitive. He seems to be stating obvious things. But I think he's onto something that has been sitting underneath the noses of a lot of us. Something that we have a hazy understanding of, but have yet to properly harness and grasp. This Michael Emmett Brady character is certaintly not an idiot, and he's well-read.

Lord Keynes may have taken Thomas Robert Malthus and Silvio Gesell into consideration, but Brady's been making a good argument that one of the GT's most important pillars is in probability - which in turn, is related to decision-making, and has not been sufficiently addressed. It's even more important than the mathematical equations found in Book V of the General Theory (ofn which I can supply a few links).

Keynes's approach to probability and decision-making is non-linear and non-additive - something that the "Platonists" (as Nassim Nicholas Taleb would call the neoclassical orthodoxy) don't grasp, and are still stuck in S.E.U. Most decisions, according to Brady, are actually more like an interval.

0 ≤ w ≤ 1

"w" stands for the weight of evidence. Decisions made don't have to add up to unity. They're often made somewhere in between: the lower-bound being closer to zero and not so likely, and the upper-bound being closer to one. You can ask him more for a better explanation, as I don't fully understand it quite yet.

But the papers on Boole, Keynes, and decision-making are written by Michael Emmett Brady and his Brazilian colleague, Rogerio Arthmar.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1546726

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1632318

M.E. Brady has also written on the mathematics found in Book V of the General Theory. A couple of them are found at Duke's HoPE database, and he's also published in HETSA's publication. Brady's published one of possibly the best modellings of the General Theory I've seen in my entire relationship with economics.

http://hope.dukejournals.org/cgi/pdf_extract/26/4/697

http://hope.dukejournals.org/cgi/pdf_extract/22/1/167

http://www.hetsa.org.au/pdf-back/25-A-13.pdf

Finally, you might want to check out these works by Claudia Heller, who appears to be supporting Brady's position regarding the mathematics of the GT. Note that the second one is in a foreign language, but it contains diagrammatic information.

http://mpra.ub.uni-muenchen.de/12837/1/MPRA_paper_12837.pdf

http://mpra.ub.uni-muenchen.de/5076/1/MPRA_paper_5076.pdf"



Wednesday, August 17, 2011

Some data on Tea Party authoritarianism

Many times in the past I've insisted that the Tea Party is a populist-libertarian fusion movement and certain libertarians have gotten very bent out of shape over that observation. Not all. Some recognized this from the start. But many have been bothered when this gets pointed out.

Now Chris Mooney shares and elaborates on evidence of this produced by Putnam and Campbell.

Mooney ends with the question: "Why do we confuse libertarianism with authoritarianism so much, when they are so different?" I've provided one answer to that here.

Assault of Thoughts - 8/17/2011

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

- LK has a good post on the 1937 recession.

- Normally I think its bad form to trash feel-good op-eds by non-experts too much, but I do have some critical thoughts to share about this one by Chuck O'Neal in an Orlando paper (also discussed here). O'Neal writes: "Perhaps someday soon we will hear our president say: "A great American leader once issued a challenge to NASA regarding going to the moon. I am before you today to issue a new challenge for this agency to create as many new technologies and new innovations as is necessary to employ every able-bodied person in this country, to use NASA's collective genius to lift this nation out of its current economic trajectory and place it once again on a course to prosperity". This sort of thing is typical from NASA boosters who often act like NASA is a spin-off producing agency. The appeal of the concept of "spin-offs" is somewhat similar to that of externalities insofar as there is an alleged added payoff, but aside from this veneer of attractiveness it's completely wrong-headed. So we get velcro and memory-foam. Fine. Was there a reason why the private sector couldn't do that? Not that I'm aware of. So there's no good reason to pay an aerospace engineer and rig up a space shuttle to get these things. If they are byproducts to doing something that is worth hiring an engineer and building a space shuttle for, that's great. Enjoy the memory foam you get as a byproduct. But too many NASA people point to spin-offs as a justification for the agency, and it's a really bad one. The thing is, there are plenty of externalities and collective action problems that justify a public role in space. Developing spin-offs usually isn't on that list (and if a particular spin-off technology is worth a public investment, have the NSF fund the thing). Spin-offs should be an afterthought for NASA. If you get one, great.

- Wine blogger Lenn Thomson has a great essay on Virginia wines. I think his list of things holding the state back are all good, although I disagree with his point about Virginia producing too much Chardonnay. His attitude seems to be "if you're only producing good Chardonnay, leave it to the Californians". Certainly as the Virginia wine industry grows they're going to have to satisfy whatever demand is out there and if everybody just wants California Chardonnay the production is going to go down. But at this point that's not the market that Virginia wineries face - a lot of it is for demand for local wines.

- Casey Mulligan apparently thinks if you provide details on a version of Keynesianism that doesn't match his caricatures those are not details, they are "exceptions". If he read my 1920-1921 paper he'd probably say that my argument that fiscal policy wasn't appropriate was an "exception to Keynesianism" rather than a "prediction of Keynesianism". Peter Boettke still doesn't understand why so many people he thinks highly of are unimpressed by Mulligan.

I'd like a democratic federalist technocracy

Arnold Kling mentions a Brad DeLong post calling for technocracy that I've been meaning to post on. Brad writes (and has written similar things in the past):

"And it took me only two months--two months!--to conclude that America's best hope for sane technocratic governance required the elimination of the Republican Party from our political system as rapidly as possible.

Nothing since has led me to question or change that belief--only to strengthen it
."

Kling responds:

"DeLong's dream of technocratic governance is some people's nightmare. I think the solution is what in the widely-unread Unchecked and Unbalanced I call Virtual Federalism. That is, we allow people to choose their virtual state, regardless of where they live. My neighbor could choose sane technocratic governance. I could choose minimal government. My neighbor and I would need to have a common defense policy and a common foreign policy, just as in the original federalism. But for many policies, my neighbor and I could have different government. For example, my neighbor's government can try to make a Medicare Ponzi scheme last. My government would instead limit government support to vouchers for the very poor and the very sick."

I think they're both right. One of the things that I've been meaning to write in response to DeLong's technocrat dreams is to say that I want a technocracy without the technocrats. I want a democracy that is educated well enough and structured well enough to act like a technocracy and to elect technocrats (or at least other educated liberals who will appoint technocrats to key posts). And I'm not a pessimistic guy - I think we've managed to do that decently well. We'll probably do it better in the future, but we've had a pretty good run in this country, and a lot of it has been due to reasonable, relatively non-ideological (compared to other places around the world), evidence-based policy making. Of course this sounds strange when you focus in on our experiences too closely, but when you think about the scope of human history we've actually done an impressive job.

And of course regular readers know that Kling's call for federalism and local experimentation is one I heartily endorse. Unlike some deductionists out there, I don't think multi-term Congressmen from Texas can derive the right path on all policies from a priorism and old treatises. To a large extent we gain knowledge about how to do things by experimenting and exploring different options that seem reasonable. So federalism is absolutely essential to any technocratically oriented policymaking.

Also of interest - Neil Degrasse Tyson was on Bill Maher recently, and at 1:18 of this clip he waxes technocratic, which I found interesting:


The division of labor is limited by the extent of the market

And so it is with space. Like so much of history, advances are going to depend on increasing levels of demand which enable the division of labor and innovation. And also like much of history, people who scoff at it as something eccentric or far in the future because they've relied on projections of the past are going to be surprised.

Tuesday, August 16, 2011

Bastiat, Yglesias, and Krugman

It's been a while since I've posted on the Broken Window Fallacy, but people foaming at the mouth over Paul Krugman statements usually provides an opportunity, and his recent statement on Fareed Zakaria is no exception. Matt Yglesias has an interesting spin on addressing the fallacious interpretation of the very reasonable point made by Bastiat here.

Nothing convinces me you don't understand what Bastiat wrote more thoroughly than accusing Paul Krugman of having committed a Broken Window Fallacy.

Geez I'm having too many "why do I even bother with this?" moments this week - and right on the verge of going to grad school. If this keeps up I'm going to close down F&OST and hole up in the library. Ultimately, I suppose I bother because people out there actually think these things and pretending they don't isn't going to help anything.

Perry veers into Ron Paul Territory

Monetary policy is treasonous, according to a Republican candidate expected to do fairly well at this point. It's going to be interesting to see what bloggers I follow approve of/cheer this. It makes me wonder why I waste any time with people that think like this (which is of course not to say that all Austrians/libertarians do). You can only argue with ideologues for so long - then it's time to focus on other things. Most of the people that are attracted to this sort of thing (and talk of tyrants/statists/central planners/fascists/traitors, etc.) do it because it's anti-establishment and counter-cultural. It's worth confronting because these narratives can put people like Rick Perry, Ron Paul, or Michelle Bachmann in power (maybe not during a normal election, but during a very tough time like this) that actually believe this and would be very bad for the country.

Andrew Sullivan says talk like this disqualifies someone from being president. I agree. The scary thing is I could see everyone in the field except for Huntsman and Romney saying something like this.

Medicare Spending Decelerates

This is the most encouraging piece of economic news I've read in a while. Ezekial Emmanuel thinks it will continue and it is a result of health reform measures. If he's right that is very good.

Of course, that's an open question. This graphic is linked to in the first link from the Sullivan article:



It gives you a sense of the variability of these growth rates. It definitely looks quite low, even by recent historical standards - but it all depends on how sustainable the lower growth rate is. This is good medium to long-term news - it doesn't help us with our current problems. In fact abstaining from further stimulus because of debt worries is going to look even dumber in retrospect if this trend continues.

Sticky wages and unemployment

Yesterday, in response to Tyler Cowen's post, I reiterated that sticky wages don't strike me as the major thing we should be worrying about, and that my theory on why people get so caught up on sticky wages is that we've come to equate labor surpluses with unemployment, which is wrong. Since then a lot more people have jumped into the fray. I haven't even had time to digest them all, but I've seen:

- Arnold Klng: "I think it also makes for a good story for how state and local government employment declines in a recession. I have consistently prescribed wage cuts for state and local government workers as a way of maintaining employment there... This is the biggest problem with trying to fit the current situation into the AS-AD paradigm."

- Brad DeLong: "The old Keynesian line was that nominal wage flexibility--and the union-smashing recommended by Hayekians--was a side issue. In an economy with nominal debt contracts downward-flexible nominal wages were likely to produce deeper depressions as the economy was subjected to much stronger downward shocks from the deflation, debt, and bankruptcy cattle prod. Wage inertia was thus a blessing--albeit a poorly-understood blessing--rather than a curse.

I think that everybody open-minded and nuanced is finding themselves moving rapidly toward the old Keynesian position under the pressure of events and data right now
." [He also does a good job showing how Cowen's chief empirical example commits the Mulligan fallacy]"

- Robert Waldman

- Scott Sumner

- Jonathan Catalan

- Alex Tabbarok


*****

Two of the more interesting posts were from Karl Smith, who downplays sticky wages and notes real wage pro-cyclicality and then a response post to him by Scott Sumner which says that real wages are pro-cyclical during supply-shock recessions and counter-cyclical during demand-shock recessions.

Smith's point, I think, is very important. The research he is refering to on pro-cyclical wages is summarized by Abraham and Haltiwanger (1995). They note that real wage cyclicality looks very different when you look at microdata than it does when you look at aggregated data because with aggregated data you're not usually looking at comparable labor forces over time. Sumner points to real wage counter-cyclicality in demand-driven recessions and says "I’d add that real wages rose especially sharply in some of the most easily identifiable adverse demand shocks (1920-21, 1929-32, 1937-38.)". Maybe - but the story here is very unclear to me. 1920-1921, for one thing, has been considered a supply shock since Romer's work in the 1980s. The other thing is he has to be looking at aggregate data for these episodes, unless he knows of some microdata that I don't. I doubt it would reverse the finding given the deflationary pressures, but it makes it harder to assess.


*****

This is actually all right up the alley of what I want to do for my dissertation. In my applications I proposed looking at excess worker turnover as a wage adjustment strategy for firms facing sticky nominal wages. I'm not wed to that specific point, but I want to work on something related to worker flows and wage adjustment.