Do not make Keynes's mistake, everyone...

Please, make sure you have enough champagne tonight! In fact have more than enough - just in case!

Happy New Years! I had mine, but I have a bad cold and want to be well enough to see my niece and nephew tomorrow before they leave, so I'm going to feel very old and go to bed now.

Now this is rich

I thought the whole point of betting on predictions was to weed out BS and test theories.

Now when people actually propose that some of that actually goes on Bryan Caplan - a big advocate of economic blog betting - finds it "frankly deplorable" and calls it "cackling with glee" instead of... you know... just hoping that betting will do what you all think it will do.

 

Is Krugman right or wrong to have written this in November?

HT John Carney (Krugman writes it here) -

"Now, the thing about Schiff and all the other Austrians predicting runaway inflation is that they were right to make this prediction given their model. If you believe that a recession is caused by a failure on the production side of the economy, the result of past malinvestment or something, you should also believe that any attempt to correct this decline by expanding credit will simply result in too much money chasing too few goods, and hence a lot of inflation."

It seems to me the answer is ambiguous or at least depends on what you consider "Austrian theory" and what you consider to be some auxiliary take on the quantity theory (which is obviously a lot bigger than Austrian economics).

This.

From Krugman, on Romer/Bernstein. This is about more than the inflation bet. This is about a lot of people that try to confuse the public about the scientific status of the social sciences:

"...it’s really important to distinguish between fundamental predictions of a model and predictions that an economist happens to make that don’t really come from the model. The prediction that huge increases in the monetary base will cause large increases in the price level, and that big government deficits will cause big increases in interest rates, are more or less inescapable if your model of the economy is one in which recessions are supply-side problems, not the result of inadequate demand. Conversely, the prediction that neither of these things will happen if the economy is in a liquidity trap is a fundamental prediction of Keynesian models. On the other hand, the unfortunate Romer-Bernstein prediction of a fairly rapid bounceback from recession reflected judgements about future private spending that had nothing much to do with Keynesian fundamentals, and therefore sheds no light on whether those fundamentals are correct."

Would there have been lots of deflation without the Fed after all the initial crisis stuff was done?

So without the Fed response to the initial credit crunch I could see severe deflation.

I had always assumed that aside from some positive impact on expectations most of the rest of the Fed's work has been just pushing on a string, and that we all wanted the Fed to do something bold so that we could go from "some positive impact on expectations" to "a lot of positive impact on expectations:. I don't know how to date this - maybe from mid to late 2009 we had cleared the credit crunch and entered the doldrums? Assuming the Fed didn't actually raise rates I had assumed that in the absence of all the balance sheet expansion we'd still be bumping along - certainly at lower inflation but not severe deflation - for the last several years.

Is that sense I've had wrong?

Is this an indictment of Austrian theory?

No, by the way.

Or at least not necessarily.

Oddly enough I've seen more references to this from Bob's friends than from Brad's! Austrian economics is a broad set of ideas. Some of these ideas may have mislead Bob and others into 10 percent inflation predictions but there were a lot of other Austrians that were cautioning against forecasts like that.

Inflation predictions are more of a Rorschach test for how you think about the quantity theory than they are a test of Austrian economics.

This is a good point from Bob Murphy

The role of prediction in science is not as straightforward as I think a lot of people realize. I've criticized people on here before for assuming economists have a crystal ball and judging the veracity of their science on that basis.

Anyway, with that as context this is what Bob Murphy writes in his response to Brad DeLong:

"Finally my substantive point: I have never seen any of these guys explain why price inflation (and interest rates) are the decisive criteria for whose model and hence policy recommendations are right. Consider, for example, the infamous Christina Romer unemployment graph, showing what would happen with and without the Obama stimulus package. As far as I know, DeLong didn’t ask Romer to announce to the world that she had been wrong about everything and to spend years at the feet of Joe Salerno. No, Daniel Kuehn for example thought that anyone who wanted to use the Romer forecast as a test of the efficacy of her model was putting out “complete horsesh*t.”

So I’m not saying the following–like I said, I screwed up in a way that is relevant for economists talking to the general public. But since the following is exactly analogous to how Keynesians deal with the unfortunate Romer situation, I’m curious why they think Austrians who warned of large price inflation can’t say the following:

"Hey, it’s true, we threw out some predictions of how much prices would rise, and we were off. But our basic model wasn’t wrong, it was just the underlying forecast of the baseline. Bernanke really did create a bunch of price inflation, it’s just that in the absence of Fed action, the drop would have been bigger than we expected, so on net we didn’t see as large of an increase in absolute terms. Indeed, Krugman et al. agree with the economic model involved: they all congratulate Bernanke for having staved off massive price deflation. So what’s the argument here? We’re arguing about the counterfactual of price movements in the absence of Fed monetary inflation."

Seriously, how is the above any different from how Keynesians defended Christina Romer, to the point of saying anybody who thought her prediction should be used against her was intellectually dishonest?"

One important difference with the Romer prediction that bugged me was that it was made in late 2008 and released in early 2009 when we were still getting a sense of what the scope and scale of the problem actually was. And with Romer (as Bob alludes to here), there was also the question of which projection was wrong - the baseline or the actual trendline. [If I am losing readers please speak up in the comments - I'm assuming this is all common knowledge].

Now Bob's bet was a year after that. We knew a lot more than we knew at the end of 2008 about exactly what was going on. Now, if Bob had made the bet in 2008 and wanted to make a case that with more information his theory would have predicted years of depressed prices despite excessive money creation (either because deflation would have been severe or because he would not expect price inflation to be so closely proportional to money inflation under these at-the-time-unknown conditions), he could make a case for that. But if that is the case he wants to make for a bad made in late 2009, I'm not sure exactly what theory he's going to articulate.

Maybe something about secondary deflation?

But why wouldn't this all be laid out by late 2009?

Bob's point here is important. We have to be aware of these things when we're only dealing with counterfactuals. What frustrates me so much about the Romer thing is economists who should know better are implicitly basing their criticism on the argument that the baseline forecast was fine even thought they're too cowardly to explicitly tell you that because they know how ridiculous that is. That's what borders intellectually dishonest. If you need to say "the baseline was a great forecast" to make your criticism of stimulus but you are unwilling to come out and say "the baseline was a great forecast", something is very wrong with your argument.

For me at least, a case needs to be made. There's a good case that in late 2008 we really didn't have a complete sense of what was going on and that a baseline forecast was highly speculative. You can criticize Romer for that forecast but don't dismiss the policy effect on the basis of actual unemployment unless you are willing to embrace the baseline forecast.

Were we in the same position in late 2009? That seems more doubtful to me.

*****

 

It seems to me we have a couple options here:

 

1. Bob is right about the impact of monetary policy and the counterfactual here is much severer deflation than we actually saw. Bob's baseline - a year into the crisis - was thus too rosy, which lead to the error of his prediction.

 

2. Bob is wrong about the impact of monetary policy and his baseline assumption was fine. Without Fed intervention prices would have been subdued but not crashing - he was just wrong that with Fed intervention they would be soaring.

 

In the case of #1 his theory of how the macroeconomy works seems problematic or his theory of how the macroeconomy works was fine and in late 2009 he just didn't have the data to make the forecast accurately. The latter seems somewhat less probably to me than the former because by late 2009 we seemed to have a better sense of things.

 

In the case of #2 his theory of how monetary policy works seems problematic and we are assuming his theory of the macroeconomy is fine.

 

Is there a #3 I'm missing?

 

I just think it's worth getting a grip on what Bob and his fellow travelers think is the best way to grapple with this - because let's be clear, he was not the only one worried about inflation back in 2009.

 

Is it just a bad forecast? Is that what Bob wants to argue? And is that because we didn't know the lay of the land in 2009 or is it because the theory behind the forecast was problematic?

 

These are the questions that Brad's post the other day made me curious about.

 

Brad may not actually be curious about the answers. Bob may not feel like giving the answers. But that's what I'm curious about.

This is not a restriction on high skill immigration!

This is a restriction on low skilled (presumably mostly low paid) non-European immigrants to the UK that will also bleed into the high skill pool.

Why, why, why must economists of all people romanticize the "high skill immigrant"? Are immigration restrictions not worth talking about when they're for low-skill people? Are restrictions on high skill immigrants so heinous that when a low skill immigrant restriction begins to impact them our strategy has to be to treat it like an attack on high skill immigrants?

Not a great start to the book, but I'm hopeful

I started Knowledge and the Wealth of Nations yesterday. My Macro II class this spring is going to be almost entirely growth theory, and I do want to work with endogenous growth for one of my dissertation chapters, so it seemed like a nice time to pick this up, just to get a journalists view of the backstory of it all. A few things have made me cringe, just in the first couple pages.

First, Warsh says that Romer "initiated a far-reaching conceptual rearrangement in economics" by expanding the normal public/private goods distinction into considerations of rivalry and excludability.

Romer is great, but no - he didn't do that at all.

Then a page later Warsh backtracks a little and says that "public finance specialists had used a series of often confusing terms to explain the source of 'market failure'" before Romer (really? these are confusing terms used by obscure specialists?), but even then Warsh claims "it was by marrying nonrivalry to the concept of excludability, and applying the distinction where it had not been employed before, that Romer cast a new light on the ubiquitous role of ideas in the economics of everyday life".

It's fair to claim that Romer applied these ideas in areas where they had not been applied before... maybe... although of course he had predecessors in Allyn Young and even Paul Krugman (brace yourself: Krugman did not get the Nobel Prize for trashing Bush in the New York Times, no matter what your favorite bloggers told you). But it's still not right to say that he was the one that "married" nonrivalry and excludability into something a little different from a public good.

Next Warsh tried to explain exogeneity this way:

"These background conditions were, in modern parlance, treated as being exogenous to the economic system. They lay outside the model, treated as a 'black box' whose detailed internal workings were to be willfully ignored. Exogenous to her concerns is what the waitress means when she says, 'It's not my table'."

No, no, no! The first part is fine but that last sentence completely misses the point! Something is exogenous if it does effect affect a system but it is not determined by that system. You could say that the quality of the food that a chef produces is exogenous for the waitress. She doesn't control it - it's exogenously given to the system of her service to her table - but it impacts what occurs in that system.

None of this matters all that much and I'll probably still learn a lot reading this, but it's frustrating to see these sorts of mistakes in the first couple pages!

DeLong on Murphy

Wow - I forgot the bet was over 10 percent inflation by January 2013! Brad writes:

"The most terrifying thing of all is that being completely, comprehensively, unmistakably, fundamentally, fatally, totally wrong has not led Robert Murphy to rethink or modify any of his analytical positions or ideological beliefs by even one iota.

I mean, one would expect an announcement on his weblog like: "I have been totally wrong, about everything. I am closing down this weblog for five years to avoid misleading readers while I intellectually retool. You will find me sitting at the feet of Paul Krguman, chanting 'om mani padme hum' until I achieve enlightenment."

Not gonna happen..."

I think it's fair to say that he hasn't changed his perspective on how the economy works to date (he certainly hasn't dropped dismissing Krugman), although he has acknowledged how badly this has gone at a couple points.

Even more embarrassing for Bob is that he lost a potential bet he seemed curious/eager about with an MMT commenter on his blog about 5 percent inflation too.

One of the nice things about Brad DeLong is that he regularly lays out where he was wrong in the past and has changed his mind. I'm curious if any Austrians who were predicting things similar to Bob have thoughts along these lines as well. Bob is not alone, after all. Peter Boettke recently suggested that the crisis confirms Hayek's position. Is there any grounds for these sorts of claims? Should they be revising any viewpoints in the way that DeLong did much earlier in the crisis?

Often you'll hear Austrians say that we're at the zero lower bound because the central bank is pinning us there with easy money policy. That explanation begs a lot of questions itself, of course, but you certainly can't say that and then also explain how low inflation is consistent with your theory. The Keynesian story, of course, has an answer for both the low inflation and low interest rates.

What's interesting is that in Bob's defense of himself (a year ago!) he cites the eurozone crisis and the flight to quality. This is quite close to admitting the Keynesian position, if only he would make that leap. A flight to quality in the face of revised expectations about returns to capital investments of any sort in an uncertain future is precisely the mechanism here. That will give you what we observe today - not the realization of a discoordinated capital structure followed by expansionary monetary policy.

Brad DeLong doesn't think Bob can come to terms with all this. I'm not so sure. Bob was able to embrace Sraffa over Hayek. And if you thought the lefties liked Keynes, wait until you see what they think of Sraffa! Bob knows when to aknowledge the other side has a point without abandoning the good points that the Austrians make. So will he do it this time?

What did Keynes mean by "socialization of investment"?

In replying to this post on some positive things that Keynes had to say about entrepeneurs in Chapter 12 of the General Theory, Steve Horwitz brings in a line from twelve chapters later on the "socialization of investment" to argue that Keynes's worldview was about giving the "right people" (whoever they are) the power to make investment decisions, and that these would be public functionaries making public policy.

Keynes obviously is more positively disposed toward public policy than Steve is. My initial point was just that he was not talking about policy at all in that passage from Chapter 12, he was talking about something entrepreneurs achieve for the public good (this private motives/public benefits has been a theme for economists running from Smith through Keynes and beyond), while also noting reasons to expect some financial "fragility", to use a phrase from Minsky.

But it's also worth exploring a little more what Keynes means when he talks about "socialization of investment". I discuss that in this old post:

"I thought I'd share some from one of my favorite books of Keynes - The End of Laissez Faire (1926).

"I believe that in many cases the ideal size for the unit of control and organisation lies somewhere between the individual and the modern State. I suggest, therefore, that progress lies in the growth and the recognition of semi-autonomous bodies within the State - bodies whose criterion of action within their own field is solely the public good as they understand it, and from whose deliberations motives of private advantage are excluded, though some place it may still be necessary to leave, until the ambit of men's altruism grows wider, to the separate advantage of particular groups, classes, or faculties - bodies which in the ordinary course of affairs are mainly autonomous within their prescribed limitations, but are subject in the last resort to the sovereignty of the democracy expressed through Parliament.

I propose a return, it may be said, towards medieval conceptions of separate autonomies. But, in England at any rate, corporations are a mode of government which has never ceased to be important and is sympathetic to our institutions. It is easy to give examples, from what already exists, of separate autonomies which have attained or are approaching the mode I designate - the universities, the Bank of England, the Port of London Authority, even perhaps the railway companies. In Germany there are doubtless analogous instances.

But more interesting than these is the trend of joint stock institutions, when they have reached a certain age and size, to approximate to the status of public corporations rather than that of individualistic private enterprise. One of the most interesting and unnoticed developments of recent decades has been the tendency of big enterprise to socialise itself. A point arrives in the growth of a big institution - particularly a big railway or big public utility enterprise, but also a big bank or a big insurance company - at which the owners of the capital, i.e. its shareholders, are almost entirely dissociated from the management, with the result that the direct personal interest of the latter in the making of great profit becomes quite secondary. When this stage is reached, the general stability and reputation of the institution are the more considered by the management than the maximum of profit for the shareholders. The shareholders must be satisfied by conventionally adequate dividends; but once this is secured, the direct interest of the management often consists in avoiding criticism from the public and from the customers of the concern. This is particularly the case if their great size or semi-monopolistic position renders them conspicuous in the public eye and vulnerable to public attack. The extreme instance, perhaps, of this tendency in the case of an institution, theoretically the unrestricted property of private persons, is the Bank of England. It is almost true to say that there is no class of persons in the kingdom of whom the Governor of the Bank of England thinks less when he decides on his policy than of his shareholders. Their rights, in excess of their conventional dividend, have already sunk to the neighbourhood of zero. But the same thing is partly true of many other big institutions. They are, as time goes on, socialising themselves.

Not that this is unmixed gain. The same causes promote conservatism and a waning of enterprise. In fact, we already have in these cases many of the faults as well as the advantages of State Socialism. Nevertheless, we see here, I think, a natural line of evolution. The battle of Socialism against unlimited private profit is being won in detail hour by hour. In these particular fields - it remains acute elsewhere - this is no longer the pressing problem. There is, for instance, no so-called important political question so really unimportant, so irrelevant to the reorganisation of the economic life of Great Britain, as the nationalisation of the railways."

I love that last sentence especially, and it's one of those cases where you wish Keynes had lived longer than he did. He simply had no use for the wave of nationalizations that washed over Britain in the mid-20th century - the nationalizations that disturbed Hayek so much. I wish more of this had made its way into the General Theory. The need for the socialization is clear in both. The doubts about central planning and the state are there in both. But people still think of state socialism when they read those passages of the General Theory because we've been hard-wired to associate "socialization" with "socialism". How depressing is that? Keynes can't talk about any sort of social action without people thinking of socialism - even when he denigrates state socialism in the very same passage. Anyway - in addition to denigrating state socialism I wish he talked more about joint stock companies in the General Theory as well. It would have helped to clear a lot of things up. Keynes also regularly notes that different solutions are appropriate to different societies - I imagine he would say that lot of the public corporations he personally found appropriate for Britain in the 1930s might not be appropriate for America or even for Britain in the 2010's. The point is clear on the socialization of investment, though - he is least enthusiastic about state ownership, most enthusiastic about complete private ownership by joint-stock companies, and willing to contemplate public corporations. Needless to say, that's not socialism and I personally think it's a stretch to call it corporatism (but perhaps that could apply).

I'll end with a passage a little further down that has some externality thinking to it:

"We must aim at separating those services which are technically social from those which are technically individual. The most important Agenda of the State relate not to those activities which private individuals are already fulfilling, but to those functions which fall outside the sphere of the individual, to those decisions which are made by no one if the State does not make them. The important thing for government is not to do things which individuals are doing already, and to do them a little better or a little worse; but to do those things which at present are not done at all."

Now that's a novel theory!

Ryan Murphy thinks people don't like fracking because it proves peak oil wrong.

Seriously.

Ryan fascinates me with his conspiratorial pirouettes. On the one hand he is not like a lot of other libertarians/Austrians (is he an Austrian? It's like Gene Callahan... I'm not even sure!). He does not fall into the common dumb conspiratorial fantasies.

But then he makes up his own, completely original conspiratorial fantasies about things like fracking or peoples' reaction to behavioral economics or to food! Come to think of it, they all revolve around why Ryan thinks other people think the things that he's convinced himself they think!

Assault of Thoughts 12/27/2012

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

- The National Academies have a new conference report out on the defense industrial base that borrows a table I made for the Sloan work I'm doing. They misspell my name in sourcing it, but at least it's out there! There is a lot in this report that acknowledges responsiveness of this workforce to market forces, which is excellent to see.

 - The Washington Post reports on how many historic homes in Virginia are struggling to attract visitors. I learned a lot of Virginia history visiting these homes for a Saturday history class at William and Mary. Every Saturday morning we'd load up in a van and drive somewhere in the state to visit a site - often to these restored homes. It was one of the best classes I've ever taken.

- George Dvorsky ponders world government. As many of you probably know, I'm a proponent of that. I think people take an unrealistic view of what this would amount to, though. I would expect for a long time we'd see a loose confederation with a lot of the existing nation-state apparatuses intact. It ought to help a lot with cutting down on armed conflict and solving more international externality problems. Most importantly, we should probably push for this now while the United States is still ascendant, to ensure that the world government is a liberal, constitutionally limited government.

I wouldn't be that great of a nemesis if I agreed with Bob on this!

Tom Woods shares Bob Murphy's post on the fiscal cliff and includes this line, referring to my post the other day:

"Daniel Kuehn, Bob’s nemesis, crunches the numbers a bit differently, but still finds a vast imbalance between spending cuts and tax increases, and agrees with Bob that the panicked talk is overblown."

I don't know if I'm Bob's "nemesis", but it just sounds too good to quibble with that part. There is an imbalance between the part dedicated to spending cuts and tax increases - that's why all the news sources are characterizing this first and foremost as an automatic tax hike.

But I would take issue with that last line - that I agree with Bob that the panicked talk is overblown. This is really terrible policy. The last thing we need in a weak labor market where the Fed seems to be targeting an unemployment rate 1.3 percent above estimated NAIRU is to impose fiscal austerity through tax hikes and spending cuts. People seem aware that this is a problem, but this is primarily treated as a deficit problem to be solved, not a jobs problem to be solved. So no, discussion of the fiscal cliff is probably not overblown. I'll start thinking we have the right attitude on this when someone comes to the table with a proposal to change nothing immediately and instead of just doing a continuing resolution setting a new sunset date for these taxes and beginning the process of long-term entitlement reform (primarily Medicare). In other words, when something even modestly resembling the Romer plan is on the table I'll think they're taking this seriously enough.

Now this is ironic...

Elsewhere in the book, Steve Horwitz writes this: "The same dark forces of time and ignorance that plague market processes and, for Keynes, implied the need for discretionary economic policy, also haunt the policy-implementation process." (p. 208).

This is an unusual way of putting it! When Keynes cited the "dark forces of time and ignorance", he was actually talking about the social object of skilled investment. This was something that entrepreneurs did - the most important thing they did for the society at large - and not something that required discretionary economic policy. Keynes notes that some investors contribute more to this end than others, and that the tendency toward liquidity preference is one example of satisfying private ends to the detriment of social ends (that's the old fallacy of composition point that economists have been pressing since at least Adam Smith and Mandeville). So there are tensions in the behavior of entrerpreneurs, but this was not an area where public policy was invoked at all!

Can someone help me understand this?

In Microfoundations and Macroeconomics, Steve Horwitz writes: "Inflation... also leads to a capital structure that is not sustainable. This unsustainability appears in two ways. The first, as we have just discussed, is that the heightened instability in prices caused by inflation leads to a greater amount of (ex post) mistaken plan revision by entrepreneurs. Inflation embeds more errors into the capital structure at any one point in time precisely because entrepreneurs have more difficulty making use of monetary calculation and making wise decisions about capital and labor usage."

So earlier he discusses (and maybe this isn't the "we have just discussed" he is referring to, but I'm not sure) the fact that even if an entrepreneur knows the inflation rate, he does not necessarily know what's happening in his "corner" of the market, and so the exercise is more complicated than simply accounting for a headline inflation number (it's true, BLS produces geographic and industrial disaggregated price level figures, but the point still stands).

This is fine.

What I don't understand is why this is more likely with inflation than without inflation. If we take this "corner of the market" viewpoint, even at zero inflation you're going to have health, education, and certain other sectors growing a lot faster and heavy manufacturing, agriculture, etc. growing a lot slower. Plus different parts of the country will be performing differently. That variability is there even if inflation is consistently zero percent. I could imagine the variance of prices might increase with inflation, but at sub-hyperinflationary levels I wouldn't think that's really the case. He specifically cites the signal extraction literature elsewhere, and that usually preserves this constant variance assumption which I think is a pretty safe one at most inflation rates.

What am I missing here? Why does inflation embed "more errors into the capital structure at any one point in time". I get why price instability would do that. I don't get why price inflation would do that.

I do not think this one has anything to do with standard ABCT roundaboutness stories because that is the second point that he goes into after this point.

Christmas books

My family helped fill out the history/political economy of science shelf:

Knowledge and the Wealth of Nations, by David Warsh, is a popular account of the development of endogenous growth theory. This is something I'll cover in my spring macro course which is mostly on growth theory, and it will hopefully be the subject of one of my dissertation chapters.

Drawing Theories Apart, by David Kaiser, is a history of the diffusion of Feynman diagrams. Kaiser is an important historian of post-war physics that I've gone to in the past for insights on the labor market for physicists. His work as a historian on these issues has been as indispensable for me as the work on the same issue by the economist Richard Freeman. This particular book has intrigued me ever since I read Kuhn's Structure of Scientific Revolutions, since it's all about how a useful way of talking about the world developed and spread. I also anticipate I'll learn a little physics reading it.

Is American Science in Decline?, by Yu Xie and Alexandra A. Killewald, provides a middle of the road answer to the title question by two sociologists. I have to confess I don't know much about this book. It got on my radar because Hal Salzman pointed it out to me and suggested the first author has been somewhat hostile to his own work, including an Urban Institute working paper that I helped with that got a lot of media coverage.

*****

With this subject area covered, I was left to spend an Amazon gift certificate on one economics book I've been needing, a history book I've been looking at, and three books on the history of American economic thought:

Investment Under Uncertainty, by Dixit and Pindyk, is a book on real options pricing. Bob Lerman is encouraging me to apply real options pricing to human capital investment decisions for one of my dissertation chapters, and this will be an essential resource for that.

The Creation of the American Republic, by Gordon S. Wood, really should have been in my library a long time ago and there's not much more to say about it than that. Gene Callahan has a review of a more recent collection of essays by Wood.

And three dealing with economic thought:

The Economy of Abundance, Stuard Chase's famous 1934 Keynesianish tome.

Benjamin Franklin and the Politics of Improvement, by Alan Houston, and

Modernizing a Slave Economy: The Economic Vision of the Confederate Nation, by John Majewski

It's amazing what kind of deals you can get on this stuff if you buy used!

On goose fat

I never paid all that much attention to paleo diet types... until I had to render goose fat.

The goose was delicious, but there is a lot of fat and skin to that bird. You have some nice pieces of that with your meat, but there was still a bunch left. I've heard that it's good to cook with, and the bird wasn't particularly cheap, so I wanted to do something with the rest of the carcass.

Enter paleo dieter Greg Parham.

I just came across him by googling, but he's got a great guide to rendering fat that should apply more broadly than just for geese. I now have two jars in my fridge: one from the drippings in the roasting pan. This isn't quite as pure because my orange juice/honey/herb glaze dripped in too. But most of the honey carmelized into charred blobs so I think this stuff is fairly pure - just not perfect. The other jar is straight from the rendered fatty parts of the bird. Greg's steps worked like a charm.

I also got two baggies of "cracklins" from it - kind of like pork rinds but for the goose I guess. I probably won't finish all of them but they're tastey. The goose fat has a sweeter taste to it than others (that came out in the gravy too).

This morning I used the first jar (the one that might have some of the glaze in it) to make hashbrowns. Normally I use bacon fat (much better than some other oil), but this goose fat blew bacon fat out of the water (and that's saying something!). I'll have to think up something nice to cook with the purer fat that I rendered.

That's all - just a fun food experience I thought I'd share.

Christmas Eve

On Christmas Eve I roasted a goose, and it was well worth the departure from the typical Christmas turkey or ham. Here is the spread:

 

The bird mid-roast:

The whole meal (honey roasted carrots, my special stuffing, garlic roasted potatoes, and the goose):

 

 

 

The impact of the fiscal cliff

I haven't gotten into the minutiae really except insofar as it concerns Kate's employer, but Bob Murphy gives us a chance to take a closer look at what's going on. His takeaway is that tightening is happening considerably more on the tax side than the spending side: "In summary, if we go over the “cliff,” the government plans on sharply reducing the budget deficit compared to its 2012 level. Of this $487 billion reduction in the federal budget deficit, the savings will come through two mechanisms:

== A cut of $9 billion in government spending (1.8% of the deficit reduction), and
== An increase of $478 billion in tax receipts (98.2% of the deficit reduction)."

There are a couple things that I think are worth noting about this. Bob is looking at the baseline projections, which is fine because all of the tax break expirations and automatic spending changes are in that baseline. But I don't find it the most helpful to look at just those changes, personally. The federal government spends a lot of money, its revenue is tied to the state of the economy, and its outlays are tied to the population, all of which is supposed to be growing over time. Think about consumption spending - lots of people were talking back in 2011 about how consumption spending wasn't depressed - it's back to the level it was in 2007! The problem with that logic is that consumption spending should have been a lot higher than 2007 levels by 2011, so it actually was depressed. So I find it more useful to look at (1.) comparison to a counterfactual, and (2.) changes in the percent of government spending as a share of the economy. That also helps pinpoint why some of these changes are occurring.

If you look at Table 1-6 of the same report that Bob was looking at (this is from the August CBO report - some November documents didn't seem to change much of the fundamental story), and if you look at the "alternative scenario" (which assumes all those automatic changes don't go through) and the percentage of the economy, this is what you see (I can't get it to be crisper without being too small - feel free to click through the link above):

So the "alternative" scenario is what happens if Congress completely avoids the fiscal cliff. The "baseline" is the full cliff. We will probably get something in between, if not in January then in the coming months. When you think like an economist and compare the baseline to the counterfactual offered by the alternative, you see that actually spending cuts make up a bigger part of this package than if you look just at fluctuations in the baseline series. In FY 2013 the baseline is about 67 billion lower than the counterfactual, and in FY 2014 it's 153 billion lower. Revenues in FY 2013 are 330 higher and in FY 2014 they're 383 billion higher. So I would characterize the full cliff as being about 70 to 85 percent tax increases, which is pretty much how it's been characterized I think (as a big tax hike). Even EPI makes a point of telling us that the tax increases are the biggest component.

It's a little heavier on the spending cuts than Bob's post implies because (1.) tax revenues are set to go up anyway because of expectations about an improving economy and this has nothing to do with tax rate decisions, and (2.) if you look at spending relative to its trend the cuts are deeper.

Whenever you are looking at a growing aggregate you should always think about it relative to its counterfactual trend line.

You can also see this in the percent of revenues and outlays as a share of the economy. Obviously the alternative scenario (our counter-factual) is badly imbalanced from a deficits perspective (that's the whole point of all this!). But when you compare that to the baseline as a percent of GDP you see again that the spending cuts here represent a permanent, approximately one percentage point reduction in federal spending (from about the mid 22 percents to the mid 21 percents), or a five percent cut. Likewise, tax revenue as a percent of GDP increases by about two percentage points (from the mid 18 percents to the mid 20 percents).

Something like this will be what we need a couple years from now. This is really not what we need right now when the labor market is still so weak.

*****

So in summary, I think Bob is right to highlight what most reports have been saying already: that taxes represent the biggest chunk of this fiscal cliff. But I think by not comparing to a counterfactual or the trend line, he's seeing an imbalance that looks bigger than it actually is.

In any case, this is terrible policy in the middle of a recession although we do need to be thinking about our windows for  tightening up at some point. That's best left for a stronger economy, though (which does not mean we can't make deals now that take effect several years down the line).

Merry Christmas to all!

It's truly been a pleasure blogging with you all this year. And I do mean with you. Facts and Other Stubborn Things would not be what it is without its commenters, the circle of other blogs it regularly interacts with, and the circle of blogs that it pesters but which don't seem to take notice.

Merry Christmas, and Happy New Years!

Here's a nice Christmas song by Roy Orbison, sung here by Willie:

I feel like Brad DeLong should write a book about economic policy making in the Clinton administration

That's all

A Keynesian Christmas

At the mises.org blog, John Cochrane shares a 1934 Christmas poem about consumption that could have been improved if it just waited two years for John Maynard Keynes. Here's some of it:

“And what do you mean to be?”
The kind old Bishop said
As he took the boy on his ample knee
And patted his curly head.
“We should all of us choose a calling
To help Society’s plan;
Then what to you mean to be, my boy,
When you grow to be a man?”

“I want to be a Consumer,”
The bright-haired lad replied
As he gazed into the Bishop’s face
In innocence open-eyed.
“I’ve never had aims of a selfish sort,
For that, as I know, is wrong.
I want to be a Consumer, Sir,
And help the world along.”

“I want to be a Consumer
And work both night and day,
For that is the thing that’s needed most,
I’ve heard Economists say,
I won’t just be a Producer,
Like Bobby and James and John;
I want to be a Consumer, Sir,
And help the nation on.”

Keynes would enjoy the social mindedness of the boy, and of course point out that one doesn't just have to be a consumer. Those "producers" Bobby, James, and John have another name: investors. And the real troubles come in when nobody wants to be a consumer or an investor: when everyone wants to stay liquid and nobody wants to enjoy and invest to produce more of life's bounty.

But as I've always said, consumptionism did lay important ground-work for demand-side thinking in general. And what's great is that there's nothing diminishing about investors in this poem - the boy doesn't say he won't be a producer. In fact he says he "won't just be" a producer. He says he'll "work both night and day", so he'll be a very dedicated producer.

New Acquisition: an Arthur Szyk

I was at a thrift store with Kate and her mom yesterday and I got a framed print of an Arthur Szyk in great condition. After getting home I learned that it's called "Satan Leads the Ball":



Szyk was a Polish artist who after 1940 (this was done in 1942) lived in the United States. He did a lot of political art and illustrations, particularly caricatures of the Axis leadership. The large man at the center of this one confused me at first. He seems to be draping himself over Hitler and others. But then I saw "Herrenvolk" written on him: "master race". Goebbels has a jack-in-the-box Bolshevik, and Mussolini does not appear to be wearing any pants (can anyone explain that one?)

Szyk was also invited to do the same four freedoms that Rockwell did, and apparently did a lot of Americana in addition to his Axis leadership art (this pic is from the Arthur Szyk Society):



The frame is a little bumped up so I may try to fix that, but the print is in great shape.

The General Theory on Employment and Wages, through New Keynesian Eyes

Here.

Sachs and Kotlikoff on the Machine Apolcalypse

Here.

I haven't read it carefully yet. As you might expect from Kotlikoff, this involves some intergenerational thinking too, which I consider critical in discussions of inequality.

Sometimes Gene Callahan tries too hard

This is an example.

He says "Darwinian and neo-Darwinian" theories of evolution are "logically incapable" of explaining consciousness and self-awareness. Why? Because teleology is not allowed and there is no reason for beings to be "self-aware" when they could just evolve the mechanisms that make them fit sans self-awareness. The best Darwinians can hope for is that consciousness is a byproduct of some other process.

Self-awareness seems to just be an organism's capacity to recognize that she exists and persists in an environment in a generalized way. It seems to me there are all sorts of situations where taking in this information, processing it, and reacting accordingly would be useful for an organism.

Of course this capacity could be evolved separately, with no sort of general self-awareness. That's presumably what Gene has in mind: something like a computer that responds to specific stimuli as it needs to. But it doesn't seem that hard to conceive of why a brain with generalized self-awareness would be far more fit than this sort of piece-by-piece evolution of stimulus and response. A self-aware brain along with abstract thinking capacity is going to be even more robust to novel risks. Why is teleology needed? A sense of self-in-the-world is surely going to get an evolving brain further along than a disjointed assortment of stimulus and response, right?

Gene Callahan's option of direction of course is not this easy to understand. It begs the question: whence the director? Unless "well it just happened" is to count, we're in a bit of trouble. Every theory is going to run into a snag at some point - perhaps a soluble snag, perhaps not. But it seems to me we'd like our snags to be as fundamental and non-complex as possible. Explaining a grand architect seems like a bigger, less fundamental snag than explaining the existence of mute matter. Notice that this is not to say that it is less true/ It's just those that appeal to such a thing should not go around scolding others for "logical incapabilities".

You really (really, really) can't talk about technological or economic progress without invoking consumer surplus

And David Henderson makes the point beautifully with respect to the microwave and several other 19th and 20th century innovations.

One of the things that bugs me most about how Terrence Kealey talks about the economics of science (cited favorably by Peter Boettke here) is that he spends a lot of time on the impact of research and development on GDP. That's not how we expect science to make its impact. We expect technological development to do (at least) two things:

1. Improve the quality of our lives - consumer surplus, and
2. Improve production processes, thus reducing production costs

Neither of these are necessarily going to improve GDP statistics, and they may even lead to a reduction in GDP.

Other points made by Kealey - particularly around the marginal costs associated with adopting other firms' technology - are much stronger than this.

If we are concerned about things like income and employment (which are worthy concerns!) we need to look to macro aggregates like output.

If we are concerned about things like human welfare, GDP is not a great guide. Think in terms of consumer surplus.

I'm excited for this book

From the Urban Institute Press: "The president with a progressive reputation who proves more pragmatic than his ardent supporters had hoped. The legislators who serve the media apoplectic rhetoric. The magnates who pay no income tax and defend themselves with the perfectly true argument that doing so is 100 percent legal. And the public keenly invested in seeing everyone pay their fair share. Joseph J. Thorndike's history of the U.S. federal tax system from the 1920s until the end of World War II might feel familiar. Yet Thorndike's mining of governmental and popular media archives yields vital insights about our tax code and how we feel about it."

One of my life goals is to one day publish a book with the Urban Institute Press. As if I wasn't a big enough fan of the Urban Institute already, now they come out with economic history! I'm sold :)

Jim Caton on Drones and War

Jim Caton (an economics student at San Jose State University) takes issue with my recent response to Brian Doherty on drones. He thinks I neglect two points (let me know, Jim, if you think I'm being unfair in my summary):

1. Reducing the cost of war to soldiers makes Americans non-chalant about war which makes us more likely to go to war.
2. Drones separates soldiers from their killing, making them non-chalant about their work.

I don't understand these objections at all. This sounds like Charlie Rangel's call to bring back the draft so that Congress will be less likely to go to war. So our soldiers have to put themselves in more danger just so we at home will feel bad for that danger that they're put in and be less likely to send them. Do I have that right?

I don't know, I think it's a terrible flop.

The same with the second point. I could see how some drone operators could treat what they're doing like a video game, and not consider the gravity of it. But again, what is the argument here - that to prevent that from happening we have to make life even worse for soldiers: make them less safe (and the countries they are operating in less safe) by being there, on the ground, with far less precision or time to make life and death decisions.

These points seem unserious to me.

Should we children and make them fight with bayonets? I usually don't like abusing reductio ad absurdums, but I'm really not sure what else to make of this "we have to make soldiers lives hell and pose more of a threat to innocents abroad so WE make the right decision" argument.

The other weird thing about the post is that he acts as if I'm ignorant of blowback. Of course blowback is a problem. That's why we never should have gone into Iraq, for one thing. But there are reasons for taking out al Qaeda (which is not especially popular in most of the Middle East), and if we're going to do that and if you're worried about blowback (as I am), it seems to me you want to do it in a way that minimized innocent casualties! I don't understand why Caton is under the impression that he's the one mindful of the blowback. That's a critical reason why I think drone strikes make sense. Of course they're not immune from blowback - I've claimed no such thing. But I don't see any reason to think they inspire less of it than boots on the ground invading and occupying a country and causing significantly higher civilian casualities.

Questions of drone attacks on funerals and of rescue workers have come up too.

I really don't feel comfortable speaking to this because these claims are highly contested. It's a moot point anyway. I've argued that drones are important to use. There's nothing in the drone's programing or design that requires we use them in dumb ways. So you support the administration's use of drones and oppose its targeting of funerals, etc.

But let's keep in mind how tough to verify those accusations are - something that all the reports have taken care to point out.

I think our reaction to it ought to be contextual too. What are "rescuers/first responders"? Is this a group of al Qaeda affiliates that has another group of militants rush over after the strike? If so, that's obviously not the same as targeting civilian EMTs. And what is the funeral? Is this four or five other al Qaeda members burying a compatriot in the middle of nowhere? Again, that's very different from a funeral with family and civilians around.

I don't know any of this, and I don't think it's clear that anyone does. My view is that these sorts of circumstances should be avoided entirely, and none of that detracts from the argument for drones.

Drones are safer for soldiers, they are safer for civilians, they are more dangerous for the enemy. I don't need a soldier to suffer for me to think carefully about the policy decisions we make. Congress shouldn't need that either. And supporting the use of drones is of course not the same as supporting every use of drones (just like supporting gun rights is not the same as supporting every private use of guns or supporting the existence of a military is not the same as supporting every use of that military).

I suppose the fact that I woke up this morning means that we should probably not structure our view of the world around the superstitions of a pre-modern culture...

But what it also seems to show us is that the modern interpretations and applications of pre-modern supersititions may be even less reliable.

One explanation for alien-shaped heads found in Mexico recently is that the human populations there were emulating alien visitors and that is why they bound their children's skulls. Talk of gods coming down from the sky of course reinforces these sorts of explanations.

This is a long shot, but it's not implausible. Intelligent life evolved here on Earth and we're now investigating life on other planets. It would be odd not to flip that scenario, at least as a possibility. It bugs me that this isn't considered a reasonable idea by a lot of people.

The problem, of course, is when we spin intricate stories around these plausibilities without any reason to. Perhaps with the passing of December 21st, 2012 (and maybe with announcements about microbial life on Mars at some point in the near future?) the alien talk will be a lot less unfounded, a lot less superstitutious, and considered a lot more reasonable.

The link between uncertainty and the demand for money...

...is everywhere. Lots of people in all economic traditions have pointed it out.

J.P. Koning has a great history of the idea here. I especially enjoyed some of the older Pigou passages pointing this out. I need to go back and look for details, but I'm quite sure Mun and some of the other mercantilists raised this point too.

Gene has been reading Malthus lately. Did he?

So what is so special about Keynes and this idea, because as Koning points out it's Keynes that we always associate it with? It could be just that sometimes ideas are crystalized by one person and it gets attached to them. Adam Smith laid out credit rationing and efficiency wage theory quite clearly in Wealth of Nations, but we think of both of those as Stiglitz's ideas. That's just how it works sometimes.

But I think it's a little more than that in Keynes's case. Keynes went beyond simply describing the demand for money or even describing the prospect of a general glut resulting from the demand for money. Both had been covered before. What Keynes did was develop a theory of interest where decisions on the margin about what Koning calls "moneyness" determine the interest rate rather than time preference. This is not to say that time preference is out of the picture, of course. I guess one could say that time preference determines the volume of savings and investment given an interest rate but liqudity preference and expectations determines the term structure itself. With New Keynesian economics, that central story has sort of fallen into the black box that is the random shock in the Taylore rule closure (if it's anywhere), but we're talking about the economics of Keynes here, not Keynesian economics!

Should we subsidize guns? (please note the question mark at the end and the interrogative at the beginning of the sentence)

Stephen Williamson suggests we might want to tax guns because of the negative externalities involved. A commenter of mine agrees.

But this is all pretty presumptuous about the effect of guns on third parties. It's possible we should subsidize guns too. I'm not a gun owner, but I do know and trust my neighbors. They're pretty good guys, and they've already looked out for Kate and me on minor things. I have no idea if they are gun owners, but if I found out they were I'd feel even safer.

This is pretty straightforward stuff. Of course guns can cause harm to third parties, but they can also benefit third parties.

What wins out? Should we be subsidizing gun purchases? If we're going to invoke Pigou on this one we ought to consider this possibility too.

I honestly don't know what wins out. It's not my sense that the evidence is clear either way. My guess is that there is a fairly large gross negative externality as well as a fairly large gross positive externality, and I'm not sure where the net effect comes down.

I don't get it

Armed guards in schools is almost certainly overkill. I could see specific districts with concerns doing it (they probably already have them, though), but generally it's not my cup of tea.

Nevertheless I'm astonished so many people think it's ridiculous as an idea.

Between putting armed guards in schools and tightening gun control, it seems obvious that the armed guards in schools would make these shootings less likely. Even if you like the idea of more gun control, I don't see how you argue with this.

Is it good policy?

Eh, probably not.

But these reactions seem to be more about peoples' emotional response to the NRA than common sense.

Bingo!

Just noticed this addendum from Jonathan:

"P.S. While there are some sophisticated arguments out there, and those are by no means included in the following caricature, I can’t help but feel that some of the cases against drones resemble the liberal case for gun control."

YEP!

I hope everyone who has been laughing at Amitai Etzoni today extends the same criticisms to Bryan Caplan, Bob Murphy, and any other self-identified pacifists.

Jonathan Catalan gets it

I don't need Brian Doherty telling me that the death of children is a bad thing anymore than he needs me to tell him that totalitarian government and bombing innocent people is a bad thing.

The fact that he thinks this centers on it allegedly being "very difficult" to get me to "understand that there might be something horrific and evil about a policy that murders children with bombs from the air" demonstrates how confused Doherty is about all this.

Jonathan Catalan gets that this is a trade-off: that nobody wants to see innocents die but that it's not just a choice of "will innocents die or won't they die". If that was the choice we would all choose to have them not dying. The choice is between one uncertain number of innocents dying and another uncertain number of innocents dying, as well as a lot of very thorny questions of justice and liberty tossed in.

When it comes to the war on terrorism, Jonathan weighs that question differently than me. Doherty weighs it differently too, but unlike Jonathan he doesn't seem to realize that that's the question at hand.

This is precisely the same issue in discussions with pacifists. We don't disagree because you're the one that doesn't like war or killing. We are both on exactly the same page on that one. We disagree because you think your way will lead to less of that and I think my way will lead to less of that.

Gender norms and home repairs

The Washington Post has an interesting article on the subject. It reminds me a lot of my wife and my mother-in-law. There's also an interesting discussion of the world's "first lady plumber", who was from Arlington, back in 1954. If you click through the links on that the discussion at the time is intriguing. It's supportive of her, but still permeated with gender norms, which makes for a real split-personality in the coverage of it at the time.

Also - aside from the gender stuff - this has a lot of discussion of the substitution of home production for market production during recessions. This is something that has been discussed by labor economists since the 1960s, and then was incorporated into some business cycle models in the early 1990s.

Daniel Kuehn's commenters >> Brian Doherty's commenters

You often hear that Daily Kos and Krugman commenters are jerks or idiots. Reason.com is a big platform, so it's a nice opportunity to demonstrate the sort of crap a lot of non-libertarians deal with.

I am sorry for ever whining about isolated commenters here over trolling or ad hominems. There was one regular troll we had maybe two years ago that got this bad, but I've never had a comment section like Doherty's.

I am, apparently, a jackoff, an amoral monster, I think that "a dead brown foreign child is only 1/200 of an american child" (not true, just to clarify buddy), a douchebag (this guy also thinks I think it's worse to kill white kids), apparently some think it's the fact that the Newtown kids are Christian that I allegedly think it's worse than killing other sorts of children, again I don't care about brown children and am supplying leftists with reasons to go to war in Syria, this guy thinks it's not just because they're white that I like them better - it's because they're affluent, this guy thinks I'd react differently under a Republican president (same with this guy). That's easy to verify people. I blogged under Bush too and I have a search function on my blog. I have consistently been anti-torture, pro-drone, anti-Iraq, pro-Afghanistan, pro-not-treating-combatants-like-criminals. This guy thinks it's not just because the kids are white or affluent, it's because they're cute! I'm an idiot.

It's not about me, but there's a string about how the American media is close to Pravda, just to show you how paranoid these guys are. Krugman is apparently nuts for pointing out that biases in Fox and MSNBC are not symmetrical, but these guys are totally straight-laced for thinking our press is like a state news source (one guy says its worse than Pravda!).

Also not about me, but this guy thinks that the left wants to murder NRA members and suspend the Constitution (again - paranoid much?)

The thread does get better as you move further down.

I'm linked in Reason.com

Here.

Unfortunately Brian Doherty spends a lot of his post on an odd (although in retrospect, I guess understandable?) claim about me.

The post was this:

"It's amazing to me how many people think a crazy person targeting kindergartners is comparable to the military targeting al Qaeda affiliates

You are welcome to be angry about a policy you don't agree with and you are welcome even to call its ethics into question. You are welcome to mourn the (dramatically fewer) innocent victims of drone attacks.

But to talk about these two things as if they're equivalent is something I find horrific."

So he took "(dramatically fewer)" to mean fewer than the deaths at Sandy Hook. I suppose in retrospect I can see someone reading it that way, but I've blogged a lot on here before about how drone warfare kills fewer innocent people than conventional warfare so I assumed my readers would be thinking in those terms. On top of that, I just can't imagine anyone would actually think that drone warfare killed fewer innocents than Sandy Hook! It seems implausible on its face and it could have been easily cleared up. What I find most funny is that when I've talked about this issue in the past I've cited many of the sources that Doherty cites on civilian casualty statistics!

Anyway - the post Doherty links to is now updated so no one else is confused.

[UPDATE: Wow! Everybody seems taken in by this "dramatically fewer" thing! Let me spell this out - Doherty was perfectly sensible to read it the way he did, and that's something I unfortunately realized after he pointed it out, and not before I posted. Unfortunately, it's not at all reflective of what I think, so hopefully that's clear now. I didn't even realize people argued such a thing. Look people, drones are far more humane and efficient than conventional warfare, but it's still a bloody and imperfect business. Nobody should have any illusions about that. So we're on the same page: the really important issues come below this update!]

This was interesting:

"As far as motive for Sandy Hook, we all seem to agree there was none other than a desire, for whatever reasons, to murder a bunch of helpless strangers, including children. That is a big difference. But is it enough to inspire horror that someone who objects to murder of innocents in general might find them similar in that respect?"

Obviously it does! I was horrified by it after all and I object to "murder of innocents in general"!!! Equating wanting to kill children with not wanting to kill children is something that Doherty agrees is a "big difference" (I'll say!). As far as I can tell someone who does not recognize that big difference is bordering on sociopathic behavior. If you have no moral compass that differentiates wanting to kill someone from not wanting to kill someone I find that horrific. I can't imagine what other reaction there could be to that sort of thing.

He goes on (after noting that this is politicizing the tragedy):

"Indeed, the very reason why those opposed to U.S. drone strikes might feel it necessary to make that analogy that horrified Kuehn (and as I noted would undoubtedly horrify most Americans, if they'd heard it) is the very reason that it horrifies him: that people opposed to drone strikes find it very difficult to get their fellow Americans to understand that there might be something horrific and evil about a policy that murders children with bombs from the air, and that a moment where they are mourning and hating a crime involving someone murdering well over a dozen children with guns might be a moment they are open to understanding this; perhaps more so when they consider that unlike the one-time horror of Sandy Hook, with a dead perpetrator, this policy and practice is ongoing and may well result in more dead children."

Wow. OK, so now Doherty is doing the exact same thing. You don't have to convince me that "murdering children" is bad. That's my whole point. I'm already quite adamant on the point that murdering children is bad. I was quite adamant on that point before I even knew who Brian Doherty was. You have to convince me that we should change what it is to "murder" to fit the political point you're trying to make.

Lots of innocents get killed in war. This is why we should have much less war. It's as simple as that. This is why I've been advocating the end of the Iraq war for years (well, since 2003! but of course I haven't been blogging that long!). It's why recently I've been noting that we are probably done or close to done with the good we can do in Afghanistan (it's hard for me to be declarative on this because I don't have the facts on the ground). Indeed, this is exactly why I've said that it's good that the war on terrorism is transitioning from a conventional to a drone war. It kills less Americans and it kills less innocent non-Americans than conventional war. How could I not support that?

The problem that Doherty skirts around is we have twin evils, of course. There is collateral damage from war and that's bad (but certainly not murder), and we have the evil of terrorists and totalitarian Islamist governments. The trade-off between those two is quite difficult - much more difficult than Doherty is suggesting. A step in the right direction, in my mind, is moving forward in a way that reduces the first evil while still combating the second. I can't imagine how that could be controversial or suspect.

As far as I know I've never suggested that Brian Doherty needs to be convinced that terrorism or totalitarianism are bad, and that gender equality and liberty are good.

I wish he'd extend the same courtesy to me. Instead he thinks he needs to convince me that murdering children is a bad thing.

Nonsense, Brian. I don't need you to tell me that.

On what Coase offers and what he doesn't offer

In a conversation with a facebook friend (who is largely on the same page on this), I had this to say and thought it was worth sharing here:

"The Walrasian auctioneer picture of the economy is OK, but it's a very incomplete view of how humans interact when it comes to allocation and production decisions. I think Coase does a great job filling in the blanks left by Walras. The problem comes in, I think, when Coase is treated not as a way of filling in Walras, but instead treated as a counter-argument to Pigou."

I would add that just because Coase is right, that doesn't mean that Walras is wrong. Often when we see an incomplete explanation economists have a tendency to turn their nose up at the simple version.

That's dumb, I think.

Walras is great. Neoclassicism is great. It's just not the whole story. It's wrong to think about some kind of institutionalist story as displacing them.

You see this with information theory too. People look at work by Stigler, Stiglitz, and people like that and say "Ha! They're only dealing with risk! I plumb the depths of fundamental uncertainty, etc. etc.". If you want to talk about fundamental uncertainty that's all well and good. Good luck (you'll need it!). But let's please not act like risk is some trivial thing to look into! Those risk-based investigations were still really hard to work out and major advances in our thinking, and they are very relevant to a lot of problems we deal with!

Munger on Externalities

HT - Kevin Rollins

I used to blog on externalities a lot on here. It's a very important part of economics, and a lot of libertarians have a tendency to treat it (and Pigou) like voodoo. It's very nice to see that this is not true of Mike Munger's new video on externalities. Not only does it outline the theory well, but it also gives Pigou the credit he deserves. He's long been treated like a dummy by people, particularly in the public choice theory tradition, but he made most of the major points that they would only later come to! I think an important factor in this turn may be an article published earlier this year on Pigou by Backhouse and Medema in the Cambridge Journal of Economics.

I would raise two critiques with the video:

1. I strongly disagree with the contention at about 4:20 that economists rarely talk about the trouble governments have in setting the ideal Pigovian tax rate. That just sounds bonkers to me. I don't know how they teach externalities at Duke, but my experience is that this is bullet point number one in discussions of the pros and cons of Pigovian taxes. I really don't know what he could be thinking here.

2. It's only a five minute video, but I'd go more into the limitations of Coase. Coase is often treated as having made Pigovian taxation untenable for serious people. This is wrong, of course. Policy is always about social consensus and our values and ethics. Sure bargaining can solve some of these problems, but sometimes we simply don't think its right that person who bears a cost has to compensate the aggressor for damages done! In some circumstances we find that so distasteful we call it "extortion"! Coase is important for the relevance of transaction costs to other areas of economics, but he definitely didn't toss Pigou out the window. Pigou gets a "yes, but..." and it would have been nice to add at least a sentence or two of "yes, but..." to Coase.

The end of the world prediction that I most need a physicist to lull me to sleep regarding

Most of this is obviously silly such that anyone with common sense can be reassured.

A rogue planet? Ya, we generally can see those things coming. Galactic alignment? Maybe getting the sun and the galactic center adds minutely to the tug on the Earth, but I don't see how the galactic equator adds anything to that force, and if that doesn't add anything then this is a non-issue because we put the sun between us and the galactic center on a pretty regular basis.

The one that always gives me pause is the stuff with solar storms, the magnetosphere, and pole shifts. Magnetic north does flip periodically and there's been some research into the relation of this process to past extinctions. The concern from doomsday types is that this will interfere with our magnetosphere and let in radiation from the sun. Given worries about high points in solar cycles, that does give you pause.

Let me be clear - this has been thoroughly debunked - my blog title was meant as a joke. I am sleeping fine as December 21st actually approaches. But I've always found this one interesting because it's the one prediction that I at least couldn't rely on my own common sense to dismiss.

Actually the most plausible thing that could happen tomorrow, as far as I'm concerned, is that aliens who visited the Mayans will come back. It's a long shot to be sure, but it seems considerably more reasonable to think that intelligent alien life exists in the galaxy and has visited us and has communicated their intentions with us than that a rogue planet is hurdling towards us or moving into galactic alignment does something special. All you need to make an alien visitation plausible is evolutionary biology and a few weak assumptions about the consistency of social science across intelligent life forms.

Proving it actually has or will happen is a different issue entirely, of course.

This is what separates the Sagans of the world from the von Danikens of the world. My preference is to actually be a Sagan that enjoys listening to the von Danikens on the History Channel as a sort of escapism.

Anyway, just a thought I had. Treat this as an open thread on the impending apocalypse.

Time series question

I haven't had time series for seven years, so I'm trying to make a little sense of how to interpret a VAR.

So let's say we're looking at differenced log GDP. Since that's differenced already we're looking at percentage change already, right? So are the coefficients in a VAR interpreted as the impact on the acceleration or deceleration of real GDP? In other words, if I'm looking at a negative impact on the change in log GDP am I looking at a negative impact on GDP or a decelerating impact?

I'm not sure I trust the interpretation of the authors on this, but I don't really trust myself either.

ABCT question

Who was the first person to refer to Hayek's version of ABCT as a theory of "the unsustainable boom"?

I've seen it so many places that it makes me think someone popularized it and I want to make sure to attribute it correctly. If it's really just "in the air", I guess I won't worry about it.

It's amazing to me how many people think a crazy person targeting kindergartners is comparable to the military targeting al Qaeda affiliates

You are welcome to be angry about a policy you don't agree with and you are welcome even to call its ethics into question. You are welcome to mourn the (dramatically fewer [UPDATE: fewer than conventional warfare... there's apparently been some confusion on this. Some number crunching on how much fewer innocents are killed with drones that I've done in the past can be found here.]) innocent victims of drone attacks.

But to talk about these two things as if they're equivalent is something I find horrific.

Williamson responds

I learned macro from the guy's book, so when he takes notice of my blog it's worth linking to. He writes:

"Weird? Krugman said macroeconomics was rotten and half the field should be displaced. I don't know how you read that as a dispute with Fama, who is not a macroeconomist, or Casey Mulligan, who may be a macroeconomist but is not taken seriously by anyone I know. What's true, which I think you understand, is that Krugman has wrapped himself up in contradictions. Back in the day, he did normal economics as a trade theorist, but he doesn't think macroeconomists should be allowed to do normal economics. We should be put back in the IS/LM box."

1. Whenever Krugman gets specific about what bothers him about "freshwater", he talks about strong Ricardian equivalence, the Treasury View, and demand denialism. I've said a couple times now that I agree Krugman overstates the extent to this, but it is out there and the thing is casual statements to this effect are even more common. And casual allusions to these sorts of things are what mislead the public and policymakers, which is why Krugman is so concerned about it I think.

2. I don't know what contradictions Williamson is thinking of here, and I have no idea what he means by "he doesn't think macroeconomists should be allowed to do normal economics". Huh? You are not helping to convince me your reaction isn't weird, Prof. Williamson.

3. On IS-LM: I think Krugman has a point here, that it's not as defunct as people suggest. I don't think he's arguing for a resurgence in formal economics, but the point is the old workhorse is clearly not as useless as a lot of people thought. Think about what we've replaced it with: an AD relation, plus a Phillips Curve, plus a monetary policy reaction function. All that is built up from various microfoundations in a way the original wasn't. So we've put an endogenous money spin on the LM curve and sometimes we don't even call the IS curve an IS curve, but the story is basically still there, which is precisely why you can get the same results in new consensus models that you got out of the IS-LM model. So it's not really the relic or the embarrassment that a lot of people treat it as - it was a first cut at the same things we still talk about today. I think Krugman talks about the IS-LM model because every one of his readers who ever had a macro course has seen it at some point, and also because it just goes to show that we do not need to reinvent the wheel to understand a lot of what's going on.

Of course none of this is really what I thought was weird about Williamson's post!

So while I have his attention, let me try to get back to that. The post began going on about how Krugman isn't up on modern macro. In a detailed sense this is almost certainly true, but Williamson overstates his case: Krugman has a good grasp of the broad architecture of the new consensus in macro and probably a better sense of the details of it than most other economics bloggers out there. He probably doesn't have the same sense of it that people who just went through it (like Noah Smith) do or people who are active in the work (like Stephen Williamson) do, but lets not go overboard.

So after making these accusations about Krugman, Williamson starts to talk about this modern macroeconomics that Krugman allegedly doesn't get. And what does he serve up to us?

Forty year old macro that is well integrated into all the work that Krugman does and all his monetary and fiscal policy views.

Come on, Prof. Williamson. That's kind of a weird reaction, you have to admit!

My original point is that I know you're on top of modern macro, and that's exactly why this reaction of yours is so disappointing. I know Krugman probably isn't up on all the details of modern macro work. So why don't you share some of those details with us that might give us pause about some of Krugman's claims! Don't give us forty year old theory and tell us it's over Krugman's head.

Truck, Barter, and Exchange

Adam Smith meets Oz meets xkcd:



One could also make a few observations about principal-agent problems and negative externalities associated with private transactions.

Then again, I suppose Coase would say that the lollipop guild could have paid Dorothy not to do this... that just doesn't seem right to me, though.

The Dark Side of Saturn

HT - Cassini

A thought on frustration with media and gun control, etc.

I hate it too, guys. This idea that cracking down on guns will fix our problems is naive and the sort of collective guilt that people are heaping on gun owners is dangerous. I'm sure there are plenty of smart things around licensing and background checks that we could do and I'm sure concealed carry would help too. I'm not saying this stuff isn't worth talking about. But I agree that the apocalyptic approach some people are taking is misguided.

But when it comes to the media and politicians: they give you what you want.

Journalists and politicians both feel that they have a code of ethics to serve the public and to serve truth, and that's a useful code for them to feel that they have. It does a lot of good for them to think that's "their job". But ultimately their job is to give you what you want. Stuff doesn't make it on TV if it isn't what people want to be staring at. Stuff doesn't make it in Congress if it doesn't have a constituency.

If you're bothered by the fact that the media is being so single-minded about all this, just realize that they're that way because a lot of the country is single-minded about it. Not that that makes it a good thing, of course. But I feel like people give a lot more agency to the media than they really have.

My past week and my upcoming couple weeks

Family, writing, painting, family, writing, etc.

Posting might be slow. In a couple days we're hosting my mother-in-law and her boyfriend for about a week. My brother and his wife and kids are also in town from Chicago. So whereas we got away to New Mexico for Christmas last year there will be a lot of running around to different families this year (both Kate and I have family in the area).

Free time really needs to be spent finishing off the ABCT article, so if I'm well behaved I might not be posting as much.

Our bedroom is well on it's way to being "light copper" too. We were going to go with a much lighter yellowish shade to match the living room but at the last second at Home Depot we went much bolder. I think it's a good choice.

Assault of Thoughts - 12/19/2012

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

- Nick Rowe on how you fit bonds into general glut parables. The key ingredients are sticky prices and zero lower bounds.

- Eric Falkenstein has a great post accusing Keen of being a crank. I don't know Keen well, so I won't weigh in on the specific accusation. But what I like about this post is that it provides some commentary on the problems with Minsky which are helpful for someone who (1.) hasn't read a lot of Minsky, and (2.) does appreciate Minsky's fragility arguments. Falkenstein thinks Minsky is on to something, but suggests that he errs in making such a big deal of aggregate debt levels. This comes to the question of the complicated value of "cranks" (I wouldn't necesarily call Minsky a crank, but the post is a good opportunity to talk about this). Often "cranks" aren't exactly right but they have an intuition about a problem that everybody else misses, which makes them worth reading. This is true, for example, of Foster and Catchings in the early 20th century. They weren't as sophisticated as Hayek was but in a lot of ways they had better intuitions for what was wrong than Hayek did, and laid a lot of groundwork for the acceptance of demand-side explanations in the United States. Cranks have their place. Even if you don't like what Falkenstein says about Keen, I think you'll get something out of the discussion of Minsky.

- I haven't been linking to these, but Gene has been picking out some real gems from Malthus. That's a link to one on savings, but you can look through his feed for others. People who know Gene know that he has a knack for finding really insightful passages in whatever he's reading, and he doesn't disappoint here. I've always thought Malthus has been underappreciated, and I also think that people don't get the most out of him by reading his essay on population. I haven't read all of it, but what I have read of Principles of Political Economy is much more engaging. I have the same reaction to Marx. Again, I can't say I've read all of Capital, but Jesus who would want to? It's not a fun read. In contrast, I've always liked the Economic and Philosophic Manuscripts of 1844, Theories of Surplus Value, etc.

- Two good posts on hyperinflation: Jonathan asks whether institutions in the U.S. mean we aren't at risk of  hyperinflation anymore, and J.P. Koning tells us how Schacht ended that hyperinflation in Germany. Which reminds me, I really do need to read Lords of Finance. I meant to years ago, but other stuff kept getting in the way. If you're interested in Schacht I also cannot recomment Wages of Destruction highly enough.

- David Glasner shares my reaction to the Fed announcement the other day: it does not seem as big of a deal as people are hping it up to be. In noting this, he suggests that Robert Waldmann should calm down in criticizing Matt Yglesias about monetary policy in Japan. It's probably good advice, although I have to say Yglesias's blogging often bugs me too. I'm not as down on monetary policy as Waldmann is but I do worry it's not the silver bullet a lot of people think at the ZLB, although still a good policy option, and Yglesias seems to have this unexplained awe for what it can do. I guess I just worry about the veracity of the expectations channel in a way I don't worry about the veracity of direct government creation of demand. I don't know - maybe it's just me.