Sumnerians talk funny

I've been having a conversation on my post about Evan Soltas with "aaron". He's commented here before, but infrequently such that I didn't quite remember where he's at - what his views are, what his level of understanding of economics is, etc.

And at first in this conversation I got the impression he just didn't know what he was talking about. He was acting as if I had been arguing that low interest rates indicate a loose monetary stance, which of course they don't (if anyone doesn't understand why, please let me know). After a lot of back and forth I realized he is not dense... he's just a Sumnerian. And Sumnerians talk funny and it leads them to make these wild claims about Keynesians and Wicksellians generally that don't make much sense unless you assume that Keynesians and Wicksellians are speaking Sumner's language (which of course they aren't).

Anyway, I can't be the only one that's come across this sort of thing from Sumnerians, so I thought you might be interested in my penultimate response to him:

"You've gone around and around on this enough that it's clear you're coming from Sumner's perspective. If that's the case then you need to understand that most of this is semantics and you shouldn't be running around accusing people of not understanding that the level of interest rates is not the same thing as the tightness or looseness of policy.

Some people do genuinely make this mistake. Evan [Soltas] doesn't and I don't, but I bet you fifty bucks the Wikipedia page on "monetary policy" does. So it goes.

Now, if we set those people aside for a second there are two groups of people: most people who think in Wicksellian terms, and a small amount of people who think in Sumnerian terms.

The Wicksellians say that what determines the stance of monetary policy is the relation of the interest rate to the natural rate. You can have situations like right now where the interest rate is quite low, but it's high relative to the natural rate and so monetary policy is tight. We would like to have looser policy to close the gaping output gap.

Then there is this small cadre of Sumnerians who mash up the Wicksellian point with the NGDP point. This, I think, is a bizarre way to talk about things particularly if the degree of efficacy of monetary policy is an open question. It amounts to determining whether we've taken an action based on whether that action was successful, which is pretty stupid IMO.

If you want to make the case for talking like this, fine. But don't accuse a Wicksellian of not understanding that interest rates alone can indicate the stance of monetary policy. It makes you look like you don't understand the nature of the conversation."

A gleam of appreciation

My wife is amazing.

She's carrying a human being, btw. In her belly. This thing is getting so big you can see it using her stomach lining as a punching bag. She's got to deal with all kinds of crap that I don't - limited caffeine (I down gallons of the stuff), no alcohol (not gallons, but...), and she can't lie comfortably, sleep soundly, or walk around without aches and pains. And the tough part is coming. On top of that she's excelling at a job where she's really not getting the appreciation she deserves. She's helping to forge relationships with foreign militaries that should lead to mutual understanding and dialogue rather than belligerence. She's also helping to train our own officers to share in this mutual understanding. She also manages a set of interns that are going to be future leaders in public and private endeavors. But because she's staff and not faculty, her institution can often discount her contribution (thank God her immediate supervisors deeply appreciate her, although their plates are full too, limiting what the attention they can commit to that deserved appreciation). The institutional biases are nothing compared to a Congress full of power-hungry politicos that care more about spewing their ideology to win votes than actually investing in worthwhile public initiatives, even at historic levels (we're not even talking here about adding responsibilities). She can come home from this, bringing home about two thirds of the bacon, and still has the energy and the good humor encourage me in my struggles to tackle my PhD responsibilities. She says its an investment in our future - and that's my intent as well - but my God she's taking the short-term hardships like a champ. I cook and do the dishes and run errands as best I can as if that makes up for the grind she's going through. And she still comes home with a smile (most days... and when there isn't one it's easy for me to restore).

Gavin Kennedy on Daniel Klein and Adam Smith

Kennedy picks up a comment of mine at Coordination Problem on the Invisible Hand and then goes on to talk about Daniel Klein's allegorical discussion of the idea. He finds Klein's argument "beyond comprehension". I have to confess I have a hard time with a lot of this work from Klein too. He's made the case that the Invisible Hand is pivotal because it's at the physical center of both Wealth of Nations and Moral Sentiments. He's also done a lot with musical metaphors. I guess the latter is interesting from a lit crit kind of perspective but I have a hard time understanding how this is really getting at Smith's economic thought.

My view of the Invisible Hand, which I expressed in the comment, is that Kennedy has really done a great service of bringing attention to the fact that the passage in the Wealth of Nations is really not what it's purported to be. It's an odd little passage about decisions by manufacturers to invest domestically out of risk aversion, which Smith considered to be a good result.

However, where I differ with Kennedy is on the practical consequences of this mix-up. No, the Invisible Hand is not used as people say it was used - however, pretty much every element that people mistakenly ascribe to the Invisible Hand is stated clearly and far more prominently in the first three chapters of the book! So I have a hard time worrying too much about the casual use of the phrase so long as people aren't mistakenly interpreting the passage itself. The metaphor has outgrown Smith himself, in other words. It's OK, for me, if we're using it as a metaphor as long as we're not making a specific history of thought claim about the home bias of manufacturers (and in almost all cases, people are not making that history of thought claim).

In the first three chapters we have arguments for why, given a reasonably extensive market, people with a propensity to truck, barter, and exchange will engage in the division of labor to produce a surplus to sell - not for the public good - but for their own interests. Nevertheless this whole process results in a public good even if that wasn't the intent of the trucking butchers, bartering brewers, and exchanging bakers.

That's all put quite eloquently in the beginning as the organizing idea of the whole book. And that's what people mean by the Invisible Hand. So I can't see the problem with suggesting that Smith had the perspective that is attributed to him today.

Evan Soltas has Austrian malinvestments backwards

Brad DeLong shares this from Evan Soltas:

"A powerful point I had never seen before: Evan Soltas:

How to Think About Malinvestment: If the central bank holds interest rates artificially low, it can in fact induce malinvestment--the central bank is creating an incentive to invest in projects which have negative net present values…. That's a bad thing, and it's not "Austrian" to fear that. Nor is it the irrational response of a private sector to malinvest under those conditions…. But all else isn't equal…. [E]vidence that… NPV-related malinvestment is nothing to worry about comes from the fact that businesses founded during recessions are more likely to last and be successful… discrimination towards higher-NPV [projects] during recessions, not negative ones…"

The problem is that the Austrian position is that malinvestments occur in the boom, not the bust, so this point would actually militate in favor of the Austrians. The bust is allegedly the period where markets are corrected and malinvestments are liquidated. Austrians would expect investments in this period to be more sober-minded and longer lasting.

Now Soltas is right that you hear a lot of Austrians (not all, actually) complaining that money is too loose right now, but that's out of fear that an unsustainable boom associated with malinvestments is going to develop. You hear less of that lately out of Austrians - and more monetary disequilibrium and market monetarism from them - precisely because this case is starting to look ridiculous. Where is the incipient unsustainable boom?

My read of the empirical literature on this (and there's a surprising amount of it, albeit of varying quality - I think I looked at twenty empirical studies for my forthcoming article - details on that below) is that the length of the capital structure (the principal metric along which capital gets malinvested that Austrians care about) is indeed pro-cyclical, as Austrians predict. There are two main problems, though:

1. I have no idea how significant the fluctuations in length of the production process are and I don't know anyone that has a good answer to this. I know how to assess whether a fluctuation in unemployment or GDP is "economically significant", as people say. Austrians need to do more work on precisely how to think about the economic significance of the fluctuations in the length of the production process, because so far it's mostly hand-waving.

2. Austrians need to do a better job justifying why the relatively lengthened capital structure in booms is "too long" and not "just right" and why the relatively shorter capital structure in busts is "just right" and not "too short". In other words, I would have thought boom years are the "natural" years and bust years are the "unnatural" years. This seems like the obvious assumption. Everything is working during booms and it's not working and people are in a panic during busts. So Austrians need to better justify the logic of flipping that on its head. A Wicksellian way of putting this is why do you think we're hitting the natural rate during recessions and below it during booms?

Both of these points are elaborated on in much more detail in an article on Hayek's business cycle theory that I have coming out in Critical Review, volume 25 nos. 3-4 later this year.

UPDATE: Here's a draft of the article.

UPDATE 2: Doing some final edits last night before handing this back again to the editor, I found some funky sentences in the last section... so... proceed with caution. Or better yet don't read it and wait for the final version :)

High skill visas and offshoring

The other day, Current made an interesting comment:

"Here's what I've been wondering about immigration recently....

Big silicon valley companies are lobbying for an increase high skills quotas. What nobody seems interested in is the simple question "Why do they care?" In the old days if US companies thought their home state was getting too expensive they would start branches in different states and countries. I work for the Irish branch of a US company which also has branches in many other countries. Why doesn't Zuckerberg just get Facebook to make branches in lots of other countries and pay staff the going rate in those places, which is certain to be less than in the US.

I think that something hiding behind this whole debate is the "buzz" of silicon valley. Recently start-ups have become very centralized there. Y-combinator (for example) seem to want everyone they invest in to move there no matter where they're from. I have a feeling this fad will disappear."

Of course the answer to the point is that they do move overseas, all the time. This bothers a lot of high-skill visa skeptics, but as you might imagine it doesn't bother me as much. My co-author, too, has been pretty open about the point that offshoring is inevitable and that we've got to succeed in a world with offshoring rather than fight it. But there is an interesting relationship between offshoring and high skill visas. In his field work, Hal actually learned that a large number of H-1Bs in tech firms are broad on specifically to be the onshore contact points managing the offshore operations, so that in a lot of ways offshoring has been accelerated by the high skill visa program.

The second point that Current makes is important too - geography matters a lot, and high skill visa users are not evenly distributed across the country. This is a point we make strongly in a hopefully forthcoming analysis of the wage structure of high skill immigrants.

Is this a thing?

So I was just at IKEA and I came across two separate families there that were some sort of Scandinavian - speaking it with their kids, etc.

Is this a thing? Do local Scandinavians go to IKEA to get meatballs or something the same way that you'll tend to see co-ethnics in restaurants? I just always figured IKEA was a retailer that just happened to preserve Swedish names and a small food store.

It may just be a coincidence - the D.C. area is a pretty diverse place. But that's an awfully big coincidence for the middle of a Tuesday in a furniture store.

A neat thing that geneticists (or breeders?) did with my pumpkins

So something was funny about the first pumpkin in my garden this year... it was yellow. I thought maybe there was cross-pollination but I've heard conflicting stories on how common this is and whether it even affects this generation or whether it actually affects the next generation. And anyway, I don't know what kind of cross-pollination would cause a yellow pumpkin. I'm used to them being green and then turning yellow.

So I did some googling and it turns out they've genetically engineered a lot of pumpkins to start yellow so that if at harvest time they haven't turned completely orange, you don't get streaks of green in your pumpkin. Streaks of yellow are a lot harder to notice and people don't mind as much.

I think gourd eccentricities are fine so I wouldn't have minded green streaks, but I thought that was pretty cool. These are planted from seeds from pumpkins we had last fall - we didn't buy them as seeds - so whatever they did isn't just an innovation for gardeners. It came in pumpkins sold in grocery stores.

I've got two butternut squashes that could probably be harvested, but I'm being patient so they're not bland from picking too early.

Do we search for habitable systems?

In the last few years we've heard a lot about the discovery of "habitable planets" - usually defined by their size, solidity, and a distance from their star that could maintain liquid water.

This is all well and good, but part of what makes Earth habitable (at least to the sort of organisms we're familiar with) is the solar system that we live in. I'm specifically thinking of the role that Jupiter plays in flinging comets out of the solar system before they hit us.

So my question is - does this sort of thing factor into the search for habitable planets at all? Presumably it would be straightforward to look for because if you want a planet with a Jupiter-effect it's going to by definition be big and exerting a lot of pull on its system. If we don't, presumably factors like this will be worked in once we have a bigger catalogue of habitable planets.

The public choice problem is not what everyone that associates with public choice tells you it is

This.

Robert Lucas never fails to impress me

Part of that is because he has a bad rep so that I am pleasantly surprised, and maybe part of that bad rep is deserved. But he is a deeply insightful guy that catches things that a lot of other people miss.

That's all.

Something I did not know until last night

Stackelberg was not only a Nazi party member, but a member of the SS as well.

Heterodox graduate student conference/seminar

There's a call for papers out for a U Mass Amherst/New School grad student conference on November 8-9. I can't seem to google the damn thing but if you are interested email me and I'll send you the pdf call for papers.

Looking at past schedules it's not strictly heterodox macro Post Keynesian/Marxian stuff - there's other stuff that you'd imagine that sort of department would be interested in too (for example, here's the 2009 schedule).

I'm too swamped with various projects and that weekend is the APPAM conference anyway where I'm chairing and presenting on an immigration panel, but I thought some readers might be interested.

A few immigration things

1. A post by my EPI co-authors and me on high skill immigration is now up at Paul Solman's PBS website. It's a little more polemical than our other paper, but it's what Solman wanted. I wouldn't say I disagree with it, but it emphasizes points that I wouldn't emphasize so much. Ah well - that's what co-authoring and engaging in a public debate comes up with sometimes. The response post, by Vivek Wadhwa, is aggravating. The guy is a real jerk and has been calling us nativists and xenophobes regularly. He's also got weird input like "I'm not aware of any such NCES surveys" even though we discussed our data sources with him weeks ago in private correspondence. He's an odd, bitter guy that I'd personally rather not respond to, but it's a good platform for getting these ideas out.

2. Second, this was a disappointing publication from Alex Nowrasteh (Cato Institute) recently. He argues that if people are worried about immigrant welfare use we should just exclude immigrants from welfare rather than restrict immigration flows. So Nowrasteh is happy to welcome new Americans... as long as we treat them like second class citizens. Nobody would dream of saying that we should have more immigrants but that the police shouldn't respond to their 9-1-1 calls, or that they can come here but they can't use public roads. But you can get away with making that sort of argument about the safety net, and so he does. I think if you want to make an argument against the safety net then nut up and make an argument against the safety net. Don't advocate treating immigrants like they're not part of this community because it's the easy way to make that argument.

3. Speaking of the Cato Institute, they're having an event today called "What Economists Think About Immigration", featuring Madeline Zavodny, Ethan Lewis, and Michael Clemens, with Alex Nowrasteh moderating. It should be streamed online. I'll be there - if you are, say hi!

Econ Job Rumors is going to give me an ulcer

that's all

A question for people who have taught new lecture classes

By "new" I mean you don't already have notes and slides from previous versions of the class.

I'm wondering, when you teach a new course, how many of your lessons you have planned out before the beginning of the semester. Not necessarily completely polished but a good set of slides and notes so that in the week before the class you're just tweaking things and looking it over.

I am going to err on the side of caution anyway since this is my first time, but I'm trying to get a sense of how much should be squared away before hand and how much should be more a matter of just making sure I stay a couple weeks ahead of the students.

Good blog post on the South

Here. These are extremely hard to come by in the blogosphere so it's nice to see Mike Dwyer with a nice contribution).

My recent thoughts on the South (or at least what seems to bother non-Southerners about the South) is here. A lot of it jives with Mike's thoughts.

Cato Institute blog summarizing my forthcoming article in Regulation magazine

Here.

Something that proponents and opponents of the minimum wage can both agree on

(as long as they don't go into detail about exactly what they mean by the sentence)

New AU prof publication in the Cambrigde Journal of Economics

Meant to share this the other day - a paper by Jon Wisman in the CJE: Wage stagnation, rising inequality and the financial crisis of 2008.

What's interesting is how he moves past the normal inequality/MPC argument to talk about the implication of inequality for other influences on macroeconomic performance. First, the normal MPC weakening from inequality is argued to have driven policymakers to increasingly low interest rates to encourage growth. In a sense the claim is that the Taylor Rule isn't as effective in the lower MPC environment, driving the Fed to lower rates. The second argument is that greater household leveraging was a consequence of rising income inequality. The third argument is that with increased concentration of wealth, the wealthy had considerably greater power over shaping ideology, which lead to bad policy.

All seem plausible. All are more interesting then the plain old lower MPC story. I couldn't say how substantial in practice each of these effects is, though.

Thoughts on a Summers Fed?

I'm sort of withholding judgment. Summers has been blasted in the blogosphere lately for not getting enthusiastically on board the NGDP targeting bandwagon. However, he was an administration official which means that other things were in his bailiwick, and he's too smart for me to believe he is actually missing that point. I also think when it comes to "credible commitment" candidates, Summers has got that in spades. Still his dove credentials aren't as strong as others. Plus we'd have to hear a lot of bitching and moaning about his past controversies and I'm not sure that would be good in confirmation hearings or in the regular Congressional testimonies which are going to be important for Fed guidance.

So my first choice is Christine Romer. In addition to having a long-standing crush on her, she's got the dove credentials, the NGDP credentials, the fiscal policy credentials (like Bernanke, she'll keep pushing that to Congress), none of the baggage, and she's a break which will signal a regime change.

Yellen is all of that too except she exhibits more continuity so committing to a new policy regime will be tougher. So she's my second choice.

Larry Summers is my third choice.

Brad DeLong and Paul Krugman are tied for fourth, but I will not burden them with a higher ranking because I'm sure they have better things to do with their time.

One caveat - if Ron Paul would be around in the House, Larry Summers would probably move to first for me just because I would love to see those two together during testimony. This is not the social optimum, but it would be a private optimum for me.

What are your thoughts?

In my never-ending quest to frustrate Austrians with points of common ground that they don't like to acknowledge I am titling this section "The Beveridge-Hutt view of unemployment"

That's all.

Actually this is me being conciliatory... I think Beveridge's is somewhat better but I'm putting them on par in the section title.

Does anyone know where to get a pdf of the Beveridge Report?

There's an intro/summary that came out that's available but I can't find the whole report.

Putting parameters on libertarian utopias - or, Michael Lind channels the GMU oral tradition

I was reminded recently of one of my favorite James Buchanan (but not really Buchanan) lines, that "economics is the art of putting parameters on our utopias" when I read the beginning of the discussion between Michael Lind and Russ Roberts where he said "if you can't point to a single country out of nearly 200 sovereign states on this planet in 2013, that you approve of, then isn't your ideology fundamentally unworldly and utopian?"

The not-Buchanan quote could mean a lot of things in a lot of different applications, obviously, but one recent example has been Michael Lind's question to libertarians about why their ideas have not been tried. It was an excellent question. Lind is not an economist, but he could have been with that question because of its attention to the real world, its consideration of unintended consequences, and it's effort to put parameters on libertarian utopias.

For some reason, though, libertarians seem to have a terrible time tethering themselves to reality when it comes to evaluating their own ideas and the reaction to Lind was a great case in point. People were fuming and insulting to him, and often didn't really bother to grapple with the question.

The question is an important one. It is one thing to have a libertarian master plan in a treatise somewhere that looks great on paper, but if in practice it is (1.) not robust, or (2.) has unintended consequences then we've got to rethink the whole project. It's very difficult to get libertarians to really come to grips with this - they'll often dodge the problem altogether. Reagan, for example, identified as a "libertarian conservative", approved of Hayek, etc. etc. In practice, though, the Reagan administration was not what libertarians wanted to see. This should be a lesson in the public choice problems posed by libertarianism as it is actually practiced in the real world, but the reaction is usually to deny that libertarianism even came into the equation because they didn't like the results.

You might draw the conclusion from the Reagan experience, for example, that libertarianism is awful for the budget. And yet we never had a "Democracy in Deficit"esque critique of libertarianism from public choice theorists that I know of. In fact, public choice theorists often act as if public choice still vindicates libertarianism.

You might draw the conclusion that libertarianism opens the door to regulatory capture and crony capitalism. But if you try telling that to a libertarian they'll insist that because there was crony capitalism it clearly wasn't libertarianism in the first place!

With these kinds of arguments an evaluation of libertarianism isn't even possible. They assume their own conclusions. The question is, for example "does libertarianism result in crony capitalism", but the libertarian response is always "there is crony capitalism therefore this can't possibly be a case against libertarianism".

What the hell are we supposed to do with that?

Ideologies are complex beasts. Certainly we can contest all of this stuff and argue about it. But the more these problems are rationalized away as not being libertarian in the first place, the more libertarians bump up against the opposite problem of libertarianism being a pie-in-the-sky utopia that doesn't have any hope of being relevant in the real world.

Something's got to give here, and a good place to start is by taking that first Lind question more seriously.

I haven't gotten a chance to listen to the whole thing yet - if I do and I have more thoughts I'll share here. I'm not a huge Lind fan, but I do think he nailed it with that question and I was disappointed to see people attack him for it rather than provide a considered response.

Trailer for the new "Cosmos"

One more thought on Bob Murphy's testimony

Forget the extended arguments for much lower discount rates for a second and focus only on standard intertemporal choice logic.

Bob reports in his testimony that for cost-benefit analyses by government agencies the OMB suggests using both a 3% and a 7% discount rate (along with whatever else the analyst might think is appropriate). These choices are not random. Bob writes:

"The Office of Management and Budget writes instructions for federal agencies in regulatory analysis. These are called “OMB Circulars.” OMB Circular A-44 (relying in turn on Circular A-94) states that “a real discount rate of 7 percent should be used as a base-case for regulatory analysis,” as this is the average before-tax rate of return to private capital investment. However, Circular A-4 acknowledges that in some cases, the displacement of consumption is more relevant, in which case a real discount rate of 3 percent should be used. Thus it states: “For regulatory analysis, you should provide estimates of net benefits using both 3 percent and 7 percent.”"

I found the reasoning for the different rates interesting. I may be thinking about this wrong, but given the argument for each rate it seems more appropriate to use the 7% rather than the 3% rate (again - ignoring all those additional arguments for lower rates which would reduce it further from 7%).

The OMB is right that in the future a lot of what will be crowded out is consumption - but what is crowded out in the future doesn't really matter for discounting future values. What matters is the trade-off in the present.

Think about it this way - these regs and Pigovian taxes are put in place to adjust behavior, but an equivalent strategy would be to require carbon emitting firms to hold funds in trust for future generations that are hurt by climate change. The question is, what level of funding would be required to provide adequate compensation in the future? We would calculate that level of funding using the average before-tax rate of return to private capital investment, since after all the trust would be privately invested in the meantime.

This implies using the 7% rate rather than the 3% rate.

I don't think this is obviously and unequivocally the right answer, but there's a good case for it. An argument that could be made for using the 3% rate instead is that carbon emitting firms could pay the full cost of carbon to consumers today and then those consumers could save the money, earn a return on it, and compensate their descendants. But this requires much stronger assumptions about intergenerational altruism, dynastic families, and bequest motives than creating a trust does. So it's not obviously wrong, but it is weaker.

Of course to all this we have to add all the other debates about why super-low interest discount rates ought to be invoked - many of those are good argument too. But looking just at the standard logic and the OMB circular, we might want to be thinking on the higher end.

David Henderson raises an important point about funding

He relates the following story:

"A number of years ago, a fairly well-known economist I respect was consulting for a Fortune 500 company. Call the company "A." A wanted to merge with B and the federal government was putting roadblocks in the way. I favored, you probably won't be surprised to know, allowing A to merge with B. This economist, who knew I was on a roll at the time with the Wall Street Journal, writing 5 to 6 op/eds a year for them, asked me if I would write an op/ed for the Journal arguing that A should be allowed to merge with B. "Sure," I said. "And, in return," he said, "A is willing to pay you $2,500." For those of you who don't know, this is a multiple of the price that the Journal typically pays for op/eds, at least in my experience. "I'm guessing that you don't want me to tell the Journal that I'm being paid," I said. "That's right," he said, "there would be no point." "OK," I said, "then my answer is no.""

Moral of the story (IMO at least), if a funder doesn't want you acknowledging them, it's a good sign that maybe you shouldn't take the money. Normally this is just a courtesy thing - to your readers so they know the context and to the people that are helping you to put food on your table! When it's something that funders want to be hush hush that should send up red flags, I think.

It doesn't mean the perspective is wrong at all. Given David's outline of events I'm sure I'd agree with him on the policy question. But I'd feel uncomfortable about taking the money too.

Commenter "Current" blows my mind

He emails me about this J.K. Rowling ghost writer thing which before hand I was only marginally aware of.

He points out that J.K. Rowling was writing for a Robert Galbraith.

J.K. Rowling, Robert Galbraith.

J.K. ... Galbraith.

Wow.

While we're on him, what do you all think of Galbraith? I was planning on reading The Affluent Society this summer until the teaching thing came up and sort of reprioritized my reading. When I catch a breath is that worth spending time on or not?

Donor etiquette - entirely my own views but they seem reasonable to me (which is why they're my views)

- Funding streams vary across think tanks. Sometimes you get a grant or contract with a particular product specified: a report, a journal article, etc. That's easy. You disclose who gave you the money.

- Sometimes a philanthropic organization will fund a broad research agenda (I published a few things out of the "Low Income Working Families Project" at the Urban Institute, for example). I never once contacted the philanthropic organization - only the people running the effort at the Urban Institute. I never competed for their money. I'm not even sure they knew what I was writing until after it was published. But again that's easy - you disclose the organization that funded the agenda.

- Some organizations (the Urban Institute did not work this way but groups like EPI or Brookings do, as far as I know) fund research out of a big research budget. Again - researchers probably don't have direct contact with funding organizations and the funding organizations may not even see the product. In this case, my view is that it's fine to just note your research organization (i.e. - Brookings, EPI) and only note funders if (1.) the money for your research had a very specific funding stream, or (2.) if your research is very relevant to a particular donor, particularly a large donor (this has been frustrating for my co-authors and I recently... we've been sparring with some people at Brookings, which gets a lot of money from the Gates Foundation for post-secondary education research. Gates, of course, is one of the most prominent voices supporting H-1B visas. They really oughta mention that Brookings gets money from the Gates foundation, but they don't).

I assume the Institute for Energy Research falls under the third category, so it's a little less clear what makes the most sense. But come on - if you're talking about carbon taxes and you get any appreciable amount of money from Koch or Exxon - industries that will be directly affected by carbon taxes - it oughta be mentioned somewhere.

But as I noted in the last post, exactly how and what you disclose is debatable and largely depends on the structure of the organization.

Money, research, and politics: Murphy and Boxer

Two Prefaces

Let me preface this by reminding people that the other day I praised Bob Murphy's written testimony for his Senate hearing. I only ribbed him a little for knocking the published social cost of carbon estimates for not being sufficiently nationalistic (and I honestly am curious about why he did that and why he didn't use the opportunity to rebuke the OMB for making that recommendation in the first place - but that's small potatoes). In the best possible way it was actually extremely boring analysis: discount rates and who's costs you count matter a lot when evaluating costs and benefits. We all know this! But good solid analysis is often lacking in Washington, which is why it's so important for people like Bob to keep reminding politicians of these sorts of things.

Let me also preface this with a quick statement of my views on Koch funded people before you try twist this into me saying something I'm not. I have happily defended Koch funded researchers on numerous occasions. This is a nice post that collects several of these instances with a summary of my views with a defense of (1.) Bob, (2.) Dan Klein, (3.) Don Boudreaux, and (4.) GMU faculty generally. I've competed for Koch money myself, actually (I didn't get it, unfortunately). So I don't think the Koch brothers are some evil empire and you can't trust the people it funds. I do think they provide resources to people that are already on the same page as them, that in many cases they are promoting bad ideas, so Koch is a "bad influence" in the sense that it gives bad ideas more influence. Of course the Koch brothers promote a lot of good ideas too (I wouldn't have gone after some of their money if they didn't!).

Money, research, and politics

Something people have been talking about on facebook and in blog posts is the fact that in the hearing that Bob participated in, Sen. Barbara Boxer raised the issue of the funding sources behind IER (Bob's organization) as well as the other Republican witnesses. As with a lot of non-profits that choose to keep donors under wraps, IER's funding is a bit of a mystery. It's clear that they've gotten a lot of money from the Koch brothers, from Exxon, and from KBR (former subsidiary of Haliburton with big contracts in Iraq that has been accused of corrupt practices - if you're wondering why that made the list with Exxon and Koch). The numbers I've seen reported from these organizations still leaves a lot of the funding sources unidentified.

Boxer noted that it was fine that they got money from these sources but that she thought that information was important for people to know, particularly given the scientific consensus on climate change.

I agree (on both counts - that it's fine to take money from energy companies and military contractors and that it's important to know where you're getting money to do research) and I think it's a big mistake for people to treat this like some kind of cheap-shot from Boxer.

I really hope I'm stating the obvious here. Imagine if you wrote a report paid for by the local Chamber of Commerce arguing that local businesses were financially sound after recent negative publicity. Shouldn't you disclose that the Chamber of Commerce funded the report? It's not a question of whether you were objective as a researcher or not - there's a potential conflict of interest here and you ought to disclose it. Bob Murphy made this very point with respect to Fred Mishkin. I agreed with him on that (although I pointed out that "Icelandic Chamber of Commerce" was emblazoned on the front of the report). Now what the best form of disclosure is depends on the funding structure of the organization you're working for obviously. I think everyone knows what a "Chamber of Commerce" is. It's clear what the conflict of interest is. "Institute for Energy Research" is a pretty vague name. It could be a liberal group, a libertarian group, or it could have nothing to do with politics. I'd say disclosure would probably require more details in that case, because you don't know what the potential conflict of interest is just by saying you were paid by IER. Maybe we could argue the point, but we should all agree about how critical disclosure is for research.

Reporting potential conflicts of interests is important because this is how crony capitalism and regulatory capture happen. I don't think Bob would have any trouble recognizing this if it were Goldman Sachs bankrolling studies advocating more quantitative easing from innocuous sounding policy organizations holding conferences at luxury hotels in Washington. I don't understand why this is so controversial with energy companies doing the exact same thing.

The point isn't that any of these researchers are doing anything wrong. Like I said, Bob reported some pretty standard stuff. I'd have to review tape, but I feel fairly confident saying that I agreed with every word that came out of Bob's mouth at the conference and every word of his written testimony*, and I'm positively disposed towards carbon taxes. It was not radical stuff and that's not the problem. The problem is the potential for bad actors that are just hired guns for special interests, and particularly when this research is being presented in Washington the problem is that if this is a public debate it's important to keep the discussion open and honest.

A lot of funding sources people disclose are large, innocuous, philanthropic organizations that don't have much of an agenda - the big names you hear on PBS and that sort of thing. They still need to be disclosed on research precisely to foster this kind of open environment where conflicts of interest are identified.

This is the double-edged sword of non-academic policy research. You've gotta grub for money (academics do too, but often with a different sense of urgency) and you've gotta speak to practical policy debates. You can feel like you're doing a lot of good because you are providing objective research to an often irrational fight but you are also in a world of big stakes, and big stakes means that people who dip their toes into this world need to keep from being co-opted by special interests. One solution to that is being an open book when it comes to funding and influence.

Washington think tanks are an interesting mix of science and advocacy. I like to stay more on the science side of things, but there are a lot of smart people that value advocacy too, and they're worth working with and paying attention to. But scientists and advocates in Washington don't have symmetric interests in the think tank world. Advocates don't mind blurring the line with scientists at all. But if you care about the science it's critical (for your reputation if nothing else) to make a distinction between the two. It's fine to do advocacy, just keep the two distinct.

*- I know there was at least one word in his oral testimony I disagreed with: when he called SCC estimates "dubious"... not sure I would say that.

I almost forgot...

...to wish you all a happy "Fuck You, Congress" Day. Furlough, of course.

Here are some good out of office messages that people have left.

The best one I heard from Kate's office directed people to the Senate Armed Services Committee phone number for the day.

Still a dumbass policy. Still no sign of change in sight.

Noah Smith and George Selgin tell us what many of us already know...

Here and here.

Ideology and politics has little to do with most economists' thinking. We do what we do because we get excited about understanding how the world works.

With the exception of libertarian economists, who seem to be quite emphatic, I've also observed that when economists are political they're more moderated. Our left is really what in the nation at large would be thought of as center-left. Our right is what in the nation at large would be thought of as center-right.

In any case if a given economist is political it seems fairly ancillary to their economics.

I don't get invested in politics personally, although there are several policy areas where I'm pretty invested. And in those cases I find myself pretty unimpressed with the politicians involved. In other words, as a political matter I'm sort of a moderate center-left guy - not deeply invested - but I voted for Obama and I've voted for a mix of Republicans and Democrats at the state level. But Obama has never been deeply impressive to me on a policy level. I simply think he was the better option (all three times I voted for him - primary and two elections), and he's a decent guy. But that's all.

A strange sentence, if you think about it...

From Scott Sumner: "Long time readers know I strongly disagree with Krugman’s view, as I think the standard model uses inflation where NGDP growth is needed."

As you all know, I think Sumner's take on Krugman and Keynesians generally is wrong. He will not take "yes" for an answer - he hast to be in disagreement with them even when he's not in disagreement.

But that's not what's strange (we get that in almost every Sumner post!).

What's odd that occurred to me hear is the flip-flop that history of thought has done at the very least in Sumner's own perception of things but to a certain extent in real life too.

It used to be that Keynesians cared about NGDP (i.e., national income) while monetarists cared about inflation and the money supply. Now the people that call themselves monetarists will flip out if you even breath a whiff of these old Monetarist concerns (and God help you if you talk about interest rates), and they're the ones focusing relentlessly on the old Keynesian concern about NGDP.

I think in real life this is less pronounced than it is in Sumner's head, but this sentence sort of popped out at me in this regard.

Peak oil...

...is one of those things where I think critics really miss the point of what people are talking about.

I know supply curves slope up. I know prices signal to move on to other things. I'm also willing to grant that a lot of people who talk about peak oil don't know this (that's why it's good to teach economics!).

But this is not really what they're worried about. Even if the supply curve isn't perfectly elastic the worry is that it will get extremely inelastic and that you'll get lots of price signals about the skyrocketing marginal value of a barrel of oil and nothing will be on the horizon to replace it. All the prices will be sending information just fine, but that doesn't guarantee this will be a nice place to live.

I'm not all that much of a pessimist - natural gas seems to be a good option and environmentalists seem to be getting more reasonable on nuclear. But that's the concern.

You see this with discussions of full employment too.

Economists sometimes manage to get themselves into this position where as long as prices are flexible and markets are competitive they know there's a price vector that will work it all that and a microeconomic underpinning that'll get there... but they never seem to think much about whether that "there" is a good "there".

This is Keynes's question on full employment - is there a guarantee that general equilibrium will be a full employment equilibrium? No.

Is there a guarantee that the energy market equilibrium a couple decades from now will be an equilibrium where we all get to enjoy life the way we are enjoying life today? No.

Like I said, I'm an optimist but there's nothing in the functioning of markets that guarantees the good equilibrium result. What seems to be the best source of optimism is our tendency to innovate. That plus the market mechanism seems to offer good prospects for the future. But just citing the price mechanism doesn't really get at what people worry about when they worry about peak oil.

Thoughts on the IER Carbon Tax Conference

I went to a conference held by the Institute for Energy Research yesterday on the carbon tax, where Bob Murphy was presenting. Not surprisingly, I thought the presentations by the economists (Bob and Ross McKitrick of the University of Guleph, in Ontario) were more solid than the non-economists. Kenneth Green was fine although I disagreed with a lot of what he said. David Kreutzer (Heritage Foundation) was who I really had a problem with, which I'll get to in a bit.

Bob Murphy

Bob's talk, which based on his written testimony is about what he's going to say to the Senate tomorrow, was about the variability of the social cost of carbon estimates depending on (1.) the discount rate and (2.) whether we're looking at domestic or global costs, as well as the variability in the non-discounted estimates themselves. This will probably be familiar to most readers of the blog - if you increase the discount rate (say, to the normal discount rates used by regulatory agencies) and consider only domestic costs (another typical practice for regulatory agencies apparently), the discounted social cost of carbon is a lot lower. Still, this is important to educate the general public about and lay out in the Senate. I'm guessing the Senators are well aware of both of these points too - but if Bob testifies on the issue it will be harder for them to grandstand on larger social cost estimates.

I found a few things particularly interesting about this discussion. First, if you read Bob's testimony (I'm sure he'll post it after today) he really skirts the edge of telling Congress they should only be considering domestic social costs. He doesn't say that. He just makes it clear that the estimates that don't do that aren't following OMB guidelines and he's explaining what following those guidelines would do. But the whole thrust of the testimony is in that direction. I found that surprisingly nationalistic for an ancap! Second, the big discussion in the literature on discount rates is not whether 3 or 7 percent (OMB's ranges) are good discount rates for most regulatory applications - it's whether those rates make sense for looking at the very distant future, or whether they make sense when the precautionary principle should be invoked. I'm not trying to tell Bob how he should testify, but as written it makes it sound like people advocate lower discount rates solely for the purpose of getting a higher social cost of carbon and that they are flaunting standard practice. This of course isn't true. Finally, Bob pushed a hard subjectivist line without really getting into the nitty-gritty details of subjectivist theory, which was nice to see. He pointed out at several points that the social cost of carbon wasn't a single objective value that could be pin-pointed. The moderator asked him if that implied that the discussion of the social cost of carbon was fundamentally political and I think Bob gave the right answer: yes. I'm guessing the moderator took that to be something dismissive about climate politics - I think an economist that appreciates subjectivism would see it slightly differently and just acknowledge that any question of aggregating preferences is ultimately going to be a political question because of the problem with interpersonal comparisons that make any answer justifiable, but also contestable.

Ross McKitrick (who, ironically, kind of looks like Al Gore)

McKitrick's talk was very good. He discussed the tax interaction problem associated with carbon taxes, an issue that Bob took up previously in this featured article at EconLib. To summarize, the problem is that in an economy that has many kinds of non-lump sum taxes, most of which impose some dead-weight loss, the increased factor prices associated with a carbon tax will raise the deadweight loss of the other taxes. This is trickier than it first appears... I had to draw it out to really get it myself. The critical point is that these are ad valorem, not lump sum taxes. If we just had lump sum taxes there would be no tax interaction effect (I think, Bob or maybe Grant can correct me if I'm wrong). These are not from McKitrick's talk, but below I've got factor markets with private and social marginal cost of the factor (the social marginal cost is necessary because things with social costs, like carbon, go into the production of other factors):

[UPDATE: a facebook friend points out that I've got a specific tax here, not a lump sum tax. The logic of the ad valorem tax and the tax interaction there doesn't change, of course. If we're thinking of a lump sum tax on labor supply on the extensive margin it doesn't make much of a difference (although on the intensive margin it would be different). I thought McKitrick referenced a lump sum tax but I could be wrong, and he didn't sketch any of this out in detail. If you want just rely on my right panel.]

 

 

In both panels of course the social cost of the taxed factor (remember this is NOT a carbon market - this is the social cost that is passed through because factor costs are a function of other inputs, including carbon) is higher than the private cost. This means that there's deadweight loss associated with the externality. That's highlighted in red in the graph. I think (although I'm not 100% sure) the welfare derived in these factor markets should be included in the market for carbon - so the point in highlighting the welfare loss is not to double-count - it's just to show you where it shows up in this market. Before any factor taxes come into the picture we are at equilibrium point "1".

 

When we add factor taxes (but before we add carbon taxes) we shift to equilibrium point "2". In the left panel we have a lump sum specific tax. Tax collectors collect the same tax amount for each unit of the factor. The deadweight loss from that tax is in blue at the "2" equilibrium point. On the right panel we have an ad valorem tax - so tax collectors collect a constant share of the price, not a lump sum specific. At equilibrium point "2" I've made sure that the deadweight loss associated with the factor tax is equal to the deadweight loss of the lump sum specific tax.

 

Now let's say we have carbon taxes and factor taxes. That shifts us to equilibrium point "3" because now we are incorporating all the social costs of carbon and that trickles down to all these factor markets. The lump sum specific tax case at equilibrium "3" is straightforward - we are collecting the same tax per unit of a good so the deadweight loss is the same. Adding the carbon tax does no additional distortionary damage, and since it eliminates the deadweight loss of the externality it does some good.

 

However, on the right panel with the ad valorem tax the blue triangle has to be bigger (this isn't necessarily to scale but it does have to be bigger) because we're maintaining the tax rate, not the size of the tax. So you've dealt with the externality and that's great but you've increased the deadweight loss from the rest of the tax system, so the benefit of the carbon tax is reduced.

McKitrick cited literature in the 1990s on this, but then noted that Agnar Sandmo came up with the result in 1975. Interestingly enough, in Sandmo's history of thought textbook (which I'm assigning, on Grant's advice, for my class), Sandmo points out that Pigou made a similar point many decades earlier - that if revenue is collected through distortionary taxes then the optimal level of externality correction has to be adjusted by the marginal cost of financing government (i.e., by the distortion). The version Sandmo discusses with respect to Pigou pertains to spending, not taxes, but the tax interaction is exactly the same. So really we've had this result from the very beginning of the externality discussion, it's just a little trickier (it has a few extra steps) so it takes a little more work to communicate.

Kenneth Green and David Kreutzer

I don't have a lot to say on Green's presentation, although it was interesting. He was talking about his own history with carbon taxes and the politics of second best policy. When he was at AEI he apparently promoted the benefits of a carbon tax (without actually advocating it) because at that time everybody wanted cap-and-trade (which has always been less popular among economists, for obvious reasons). The carbon tax was not as bad as cap-and-trade so he figured it was better to advocate that if some kind of climate change legislation was going to get through. His thinking has "evolved" on that, and he's more convinced now that he gives and inch people will take a mile. I'm not so sure I agree on all points or that "give an inch, take a mile" is an excuse not to advocate good policy, but it was a nice talk.

Kreutzer, I thought, was much worse. He basically gave a litany of the costs of a carbon tax that he thought people were ignoring - jobs lost, output lost, etc. etc.

Well there's a reason why economists at least don't focus on this - if we think carbon imposes a negative externality then that production represents overproduction that imposes a deadweight loss on society. This is like saying we shouldn't quit using cocaine because we wouldn't be able to do all that extra work we're able to get done when we're using. Sure, that extra production is a benefit, but when you make the assertion that carbon imposes externalities you're not ignoring it - you're saying that the costs associated that extra production exceed the benefits.

This is bothersome because this sort of analysis has a lot of legs in Washington. It's very easy for a politician to grand-stand on a negative economic impact without considering the broader welfare issues at stake. You see this a lot in high skill immigration discussions too - lots of people talk about the costs to the tech industry without even thinking about whether there is deadweight loss associated with a visa policy only available to a select class of workers.

My asked, but unanswered question

So I actually submitted two questions, both for McKitrick, but the second one wasn't quite answered. I asked what the implications of tax interaction were for subsidies for green energy (might they even work in the opposite direction since we're dealing with a positive externality and reducing factor prices?). I couldn't figure it out myself sitting there in the audience because while we're reducing factor prices on the one hand we also have to finance the subsidy. So I was wondering if he knew the answer.

The moderator asked it but then added some discussion of the comparative efficiency of carbon taxes vs. regulation, which wasn't my question at all. Of course regulation is even less efficient than carbon taxes, which is precisely what McKitrick said in response.

So if anyone has any thoughts on my question (which I'm still scratching my head over) let me know!

A few more things on the Krugman post

1. Jonathan has a great post on "non-market" activity here. Although it's a minor point in the post he suggests I mean "non-price" rather than "non-market". This is interesting... probably an improvement but it kind of depends on what you mean by "price" and for that matter "market". Jeff Sessions in his head a price that he would take for a vote on immigration reform, for example. In this "political market" as some have referred to it there's some quid pro quo that could get Sessions to vote for it - presumably quite high. Other politicians have other prices. You may respond that it's not a monetary price, but there aren't monetary prices in cases of barter either and we usually consider those to be markets. So I'm not sure "non-market" is as inferior to non-price as Jonathan suggests, but at the very least talking about these issues helps us clarify what we're talking about in certain cases! It also helps us think about what modeling methods are amenable to what cases. Household economics, for example, often does not involve exchanges but it does involve utility maximization and payoffs. So you end up seeing a lot of game theory and optimization in that literature, but not many supply and demand curves. I'm not an expert on public choice, but I imagine more traditional supply and demand reasoning might be applicable. Another dimension we can think about here is personal vs. impersonal exchange relations.

2. Another point that came up in the comments is that Rand liked big corporations. Sure, fine. This is something I said on Facebook that I probably should have said here: I don't know Rand and if you want to knock Krugman for tying this decision to the guy's Randian sympathies than by all means ding Krugman for that. That seems to me to miss the major point of the post, which was not to be a treatise on Randianism but instead to highlight the importance of taking Coase and Williamson seriously.

This has been running in my head so much the last couple days I feel like I need to pay someone a royalty...

...so Bob Murphy, if you see me in the IER audience mouthing the words to this that's why... heading across the street to the panel now.

Gene Callahan says there were no liberals before 1820...

here ...I'm not sure what to think because I don't exactly know what 1820 is a reference to.

If it is something analogous to there being no Marxists before - oh I don't know, 1848? - or no Keynesians before 1936 then it sounds like something I would agree with.

If it is something analogous to the claim that there were no classical economists before 1863 then I don't think it makes much sense.

UPDATE: Gene helps me out. The dating is apparently grounded in one guy's (John Henry Newman in this case) litmus test.

Meh.

He also repeats the sedan chair/motor car metaphor he had in the main post. Look, we all agree that "I have legs and a T-Rex had legs so any history of Daniel Kuehn has to go back to the T-Rex" is stupid. "Keynes and Kalecki both talked about aggregate demand in similar ways, Kalecki somewhat before Keynes, so they are both 'Keynesian'." is plausible enough to talk about and indeed it has been talked about by a lot of people.

But if someone made the Daniel Kuehn/T-Rex analogy as a way of dismissing the induction of "proto-Keynesians" into the Keynesian camp they'd be rightly dismissed as silly.

A sedan car is not a motor car. It's missing... well... a motor. It belongs in a history of personal transportation of course. What Gene thinks this has to do with liberalism I'm not entirely sure.

Deep understanding of non-market economic behavior is the stuff of Nobel prizes

This morning has been one of those fascinating cases where after reading something pretty straightforward and insightful (from Krugman, see last post), I then sign on to facebook and see the initial reactions to it and come across a flood of people who read it completely different. These are nice learning experiences I think - good opportunities to explore different perspectives.

Jonathan Catalan most explicitly and several others have taken the view that Krugman was using the term "free market true believer" to mean "anyone that likes markets" (I guess). I didn't read it that way because he cited Williamson and alluded to Coase, who both like markets. Not to mention the fact that Krugman likes markets. I figured "free market true believer" was just a euphemism for Randians. Actually Krugman is using it here in the same way I see a lot of libertarians use it - as a synonym for "libertarian" (which is an awful use of the term IMO - Stiglitz does this too and it's like nails on a chalkboard to me).

All this distracts, though, from the real point of the post which is the importance of non-market activity. As economists we spend a lot of time thinking about markets and how great they are, so sometimes it takes effort to take a step back and realize how pervasive non-market activity is. It's all around us and it's embedded in markets themselves (Krugman's point about allocation within the firm).

In the second half of the twentieth century, after the scientific understanding of market activity had been thoroughly formalized, many economists turned their attention to a formal understanding of non-market economic activity (i.e. - choice and/or exchange under conditions of scarcity). This broad understanding of "the economics of non-market activity" includes some of the most crucial contributions in the science in the last several decades - and so understandably it's the stuff of many Nobel prizes.

The first wave of Nobel prizes for this kind of work I would say started with Buchanan, followed by Coase and then Becker. Of course people have been talking about this for centuries, but Coase was chronologically the first to break ground in what you might call the "modern" work on non-market activity, setting the stage for a lot of the IO contributions. Becker and Buchanan followed with work on the non-market behavior directly relevant to the individual and non-market behavior relevant to collectives, respectively. Soon after this first wave came Nash and Selten's Nobel. The work of Nash and Selten have applications to market activity, but of course game theory is one of the most common ways of formalizing non-market activity too.

Then, in the 2000's we had a flood of Nobels for people working on these problems: Smith, Aumann, Schelling, Hurwicz, Maskin, Myerson, Ostrom, Williamson, Diamond, Mortensen, Pissarides, Roth, and Shapley all in some way built on our understanding of decision making but in cases where we weren't making trade-offs directly in a market context.

Some of the work - particularly the mechanism design/game theory stuff - was relevant to market allocation too of course. But some of the most interesting applications have been non-market applications.

This is critical work and in a lot of ways it's a lot tougher to understand than market allocation. With markets we have two quantifiable things we're looking at: prices and quantities. Two unknowns, with two sides of the market (suppliers and demanders) means that we can pin down our answer. It's not so easy with non-market allocation in a lot of cases. Sometimes we find that the tools of the science of market activity (constrained optimization for example) works well for these questions too. Sometimes we have to come up with new answers to the question.

Paul Krugman says: Don't send a Randian in to do a Smithian or Coasean's job

Here:

"Bloomberg Businessweek has a great piece about how an Ayn Rand-loving hedge fund guy is driving Sears into the ground...

But back to the economics: Eddie Lampert’s big idea is that markets and competition rool, so he’s forcing the different parts of Sears to compete for resources just as if they were independent firms, with individual division profitability the only criterion for success. According to BB, it’s not going well; but they don’t get much into the broader issues.

The first issue that should pop into anyone’s head here is, if the different divisions of Sears have no common interests, if the best model is competition red in tooth and claw, why should Sears exist at all? Why not just break it up into units that have no reason not to compete?

For that matter, why should any large firm exist? Why not just have small firms, or maybe just individuals, who make deals for whatever they need?

Of course, that’s not how we do things. We may live in a market sea, but that sea is dotted with many islands that we call firms, some of them quite large, within which decisions are made not via markets but via hierarchy — even, you might say, via central planning. Clearly, there are some things you don’t want to leave up to the market — the market itself is telling us that, by creating those islands of planning and hierarchy.

Now, why exactly that’s true — why some things are better done through market mechanisms, while others are better done through at least a bit of command-and-control — is a deep issue. Oliver Williamson (pdf) got a Nobel for helping elucidate some aspects of that issue (although that may not mean much to you, considering some of the people who’ve gotten Nobels)."

He mentions the Coase/Williamson argument. Of course the other argument is the Smithian one - the division of labor is limited by the extent of the market. As an undergraduate I was pretty interested in IO, and in fact my senior thesis contrasted the Coase/Williamson transaction cost theory of the firm with the Smithian division of labor ideas. It was an awful mess of a research paper... but I guess that's just a step along the path of learning to do research.

What models predict the hockey stick? Only one that I am aware of (although I am new to the field - so please suggest others)

David Friedman puts his finger on something that has always bothered me about the "bourgeoisie virtues" argument of Deirdre McCloskey. It's a popular one and for good reason - what self-respecting economist is going to respond by minimizing the importance of attaching dignity to bourgeois values? In full disclosure I haven't read the books - this is something that's bothered me from talks she's given about it as well as discussions of it on the blogosphere.

The point is that economic growth is a hockey stick and that bourgeois values explain the rapid growth of that hockey stick. But Friedman points out that if we want to explain the hockey stick we really ought to have some sense of the equilibrium process that produces the thousands of years of (more or less) stagnant human existence that form the horizontal part of the hockey stick.

He reaches out for Malthus - an excellent choice - but then puzzles over what went wrong with Malthus. Like McCloskey he only really explains half the hockey stick.

The only growth model that I know of that explains the whole hockey stick, and the demographic transition to boot is the Galor-Weil model with endogenous fertility and a trade-off between quality and quantity of children that eventually results in a demographic transition. I'm not sure if Friedman is familiar with it, but it contains some of the features that he discusses (most notably a relationship between population density and productivity growth). It also adds human capital, which you need more of as productivity growth gets higher. This is the mechanism that causes the demographic transition to set in.

"Unified growth theory", as it's called, is one of the most exciting things I've ever studied in economics. Unfortunately I'm not sure I'm smart enough to push the frontiers of this cutting edge work, but hopefully I'll get opportunities to play around with it. And it's nice precisely because it takes insights like this from classical economics seriously. I am not sure McCloskey has the answer on growth theory - I prefer to take her thesis as an extension of her rhetoric in economics research agenda, and an important contribution to the way discourse shapes the evolution of market economies. I am not sure it's the key to understanding growth.

An experiment in educational democracy?

Here's an interesting thought... maybe I'll have them vote on whether they want me to lecture on Austrian economics or Post-Keynesian economics in that class before Thanksgiving week...

The former will help them more in popular discussion, the latter will give them deeper roots in the department, both are an important story in the history of thought, and I'd honestly enjoy teaching either.

Pretty much complete syllabus - thoughts welcome and appreciated.

Here.

I'm going to take some time to noodle over how I want to structure the Keynes lectures, but everything else is done.

Thanks for the thoughts on the last one - some specific points were very helpful. I got a couple general comments about the value of focusing on the answer, through time, to a specific question. This would be a lot of fun and in a seminar it would be great but I'm expected to do (what Gene tells me Oakeshott called) a "museum tour" of the discipline. I also think there's value in making sure they know the sweep of the history before thinking more specifically. However - the point is very well taken. I've noticed in planning the syllabus that when I try to whittle each author down to the major points that need to be covered (and that I want to cover) in the time I have, there are some recurring themes. The two big ones are price/value theory and "crisis theory" or what you could also think of as the running debate on Say's Law. There are lots of smaller issues around these two, but I'm hoping if I really highlight those issues it can at least replicate in part this suggestion for a more focused course. The last two classes are on post-war micro (Dec. 2nd) and post-war macro (Dec. 6th), so the focus on price/value theory and Say's Law throughout the course get tied up nicely in that sense.

The "Modern Smithian" lecture is going to be the only one where the whole lecture and readings will be structured around modern versions of old ideas, but that's going to be a running theme throughout the course... for almost every figure on the syllabus there's going to be a slide to talk briefly about modern versions of their ideas.

A suggestion for modeling tight money

Paul Krugman suggests that tight money advocates need to offer up better models if they want to be taken seriously (HT - Brad DeLong). I think it's a good point. He's mainly talking here about tight-money-oriented monetarists and New Keynesians.

Another group that isn't monolithic in its call for tight money, but is still a major contributor to that position is the Austrians, of course. It's an Austrian suggestion that I have to make, to any enterprising graduate students that are listening. Some Austrians - following the po-mo fork in the road that hit that school of thought a couple decades ago - rely on a more impressionistic, narrative case against monetary (and fiscal) stimulus, of course. But before all that came along Hayek offered a clear, neoclassical model that provided an argument for being concerned about the real distortions of expansionary monetary policy. The Hayekian model has had some innovations. Roger Garrison most notably has put the argument in modern language and added a production frontier to it and (in some versions) even a Keynesian cross.

The shortcoming of the Garrison version of Hayek's model is that it doesn't really catch up to the standards of modern macro in terms of formality, microfoundations, or rational expectations (even of a weak sort). A lot of Austrians like to think their ideas aren't given much credit because all those mean mainstream economists are just looking for political glory. This is stupid. And it's going to keep you in backwaters if you convince yourself of this and nobody is going to like you personally if you accuse them of this (to quote Tyler Cowen or Peter Boettke... I forget which... you are imposing a huge "lunch tax" if you talk like this).

I've had a thought on how to put together a modern Hayekian model for a while now that I thought I'd share. I think it would have a lot of credibility with mainstream economists, I just haven't personally been able to prioritize nailing it down. So feel free to give it a shot, just mention me in the acknowledgements as part of the inspiration. Let me know if you decide to work on it, though, so that if I've actually started to do something with it we don't duplicate efforts and insights.

1. Start with a Romer model of increasing product variety. The basic structure of this model is that there is a final goods sector and an intermediate goods sector with an increasing variety of products in the intermediate goods sector. Greater intermediate good product variety increases productivity in the final goods sector, which perfectly captures the Hayekian point about roundabout production... if...

2. ...if those intermediate goods have time component (which currently they do not). But adding this element should be relatively trivial - just index them for time. Now instead of a variety of products you have a time structure of production.

3. Monetary policy comes in in the profit maximization by the intermediate good producer. These are time-indexed goods now so costs need to include the interest rate (think of the intermediate good as a good-in-process that you don't get paid for until the final good is sold). An intermediate good with a higher time index is going to have higher interest costs associated with it. All this is pretty easy so far in the standard set up of the model... I imagine in solving it things will get trickier because of the added interest rates and that's where the work will come in.

4. This alone packs in an awful lot of Hayek. Of course once you've added a time dimension you can bring expectations in too if you want.

If you introduce a monetary shock into this I can't imagine it's going to have different results from the standard Hayekian model. The only difference is that this time it will be microfounded and a modification of a widely used model.

Of course, then you have to make the case that monetary policy is "too loose" right now. That's the hard part of the argument - they think money is way too loose right now while all of us think it's too tight. This is the point that I'm going to make strongly in a Critical Review article coming out later this year - that the Austrian argument is actually quite reasonable in a lot of ways, it's only that the idea that money is too loose right now isn't credible.

A book review of mine is published

Here.

Thinking about the way people talk about externalities a little bit this morning...

If I have to pay you not to dump toxic waste behind my house (but not on my property), it makes no sense at all to say that voluntary action has "solved" the externality. Maybe the difference between the external cost I would have experienced and the marginal value of dumping the waste can be said to have been "solved" - creating a market where there was none internalizes that portion of the cost.

But we don't like externalities because I'm still bearing the cost of the marginal value of the dumping the toxic waste in the first place. In a sense you could say it is internalized into an unjust/perverse/extortionary market relation which isn't really "voluntary" at all. Why? Because it just shouldn't have been dumped in the first place.

So it seems to me arguments like this (and maybe there are other arguments, but of course this is one that you commonly here) aren't solutions to the problem of externalities at all.

If I can't say the bolded sentence above. If we are instead dealing with an example where I can't legitimately claim that I have moral standing and the polluters don't (and certainly there are cases where standing is shared), that doesn't solve anything either. The person taking the action can still extort that portion of the benefit. If the land that the toxic waste is being dumped on is land that isn't owned by anyone, the polluter can dump and demand payment to stop but I can't require payment before dumping occurs.

Standing is subjective - they may feel they have the same standing that I do, perhaps. And they can make that case.

But you can't make an objective claim that the externality is solved by the market in this case if I don't share that understanding of our respective standing in the transaction.

Property rights are nice because they help these transactions to function, but property rights don't provide a self-justification. We're perfectly entitled to reject the legitimacy of a property rights arrangement and no one can objectively challenge that (again, they can of course subjectively challenge that rejection).

The last three paragraphs ought to get you thinking about how this relates to the problem of social welfare functions and interpersonal utility comparisons. To get anything meaningful out of those exercises we need to make assumptions about weighting utility. That's fine to make those assumptions, you just have to acknowledge it's a normative exercise and not a positive one. The same goes with these claims that markets (in this set up) solve externalities - you can say that but don't pretend you're making a positive claim.

Where am I wrong? This is just a set of thoughts I threw together so I may be.

On The Recent Unpleasantness

The Washington Post has a good quick review of the relationship between libertarians and the Civil War.

On the one hand, I find it incredible that there are "sides" to this thing in 2013. Still, there's some problematic treatment of the war on both sides (mostly, of course, on the neo-Confederate side). I've got a sort of running series of bullet points that structure my thinking on it.

1. There's nothing inherently good or bad about secession.

2. Secession outside of constitutional processes for breaking up the union is "illegal", but in a fairly trivial sense. The fact is, we pretty much make up morality and law. That doesn't mean it's random nor does it mean it's relativist. But in the case of secession at least it's pretty consequentialist and subjective. I classify the revolution, East Timor, and South Sudan as good secession. I classify New England in the early republic and the Confederacy as bad secession. But ultimately it's because of how I evaluate the projects that these parties were pursuing relative to the projects they were breaking up - not because "secession" has any kind of moral content.

3. The Deep South left because they wanted to preserve slavery, the Upper South left for more complicated reasons, including a naiveté about the prospect of war that lead to a real shock when war appeared on the horizon. This, as a Virginian, is a point I like to harp on.

4. Reasons for the war do not have to be symmetric. Neo-Confederates love to point out that Lincoln didn't start the war to free the slaves. I agree he didn't, but who cares? That's not proof that the Confederacy wasn't erected to preserve slavery from perceived threats. Even when slavery did loom large for Lincoln most of the North was still indifferent. Again who cares. In Jim Crow most of the North was terribly racist and segregated. Who cares. None of this absolves much less disproves the case against the South.

5. If you celebrate Confederate secession you are celebrating - bar none - the dumbest and most reprehensible collective decision making the American South has ever seen. Plenty seceded to preserve slavery, which seals this point sufficiently on its own. But for the sake of argument let's grant the neo-Confederate claim that it wasn't about slavery. Even if you think that, breaking up the union is still an awful decision and fighting a war to break up the union is that much worse. I don't care what Tom Woods says about nullification - this is not a move Washington, Jefferson, or Madison would have endorsed. And the fact that we don't have any in the pantheon south of Virginia for me to cite is telling: the Deep South has always been a liability. When they act like a liability they should not be lionized, they should be considered an embarrassment by anyone that proclaims pride in being from the South. And when other parts of the South follow suit they should be considered an embarrassment too. The unpatriotic nature of neo-Confederate perspectives isn't so much that they want to break off (they'd still be "American" if they did that). The unpatriotic nature of the movement is that it repudiates certainly the greatest accomplishment of a group of North Americans from 1607 to date, and probably the greatest accomplishments any group of Americans will ever be able to lay claim to. Why celebrate that?

6. And this is where I turn from disagreeing with the neo-Confederates to generating some friction with the other side - because while there's nothing to celebrate in Confederate secession there is plenty of substance to the idea of taking pride in the South. For better or worse, the Confederate flag has come to be a symbol of the South. What I don't think most non-Southerners understand is that most uses of the Confederate flag today genuinely aren't racist. Most aren't even neo-Confederate (although there's some of that obviously). If you haven't actually lived in the South I'm not convinced I can take your evaluation seriously on this (some that think this do have experience in the South, so I take that more seriously even though I may still disagree with them). So a lot of the neo-Confederate brouhaha is actually ginned up unnecessarily by a misinterpretation of exactly what it is that people are embracing. More often than not it's (1.) enthusiasm for Southern culture and (2.) balking at seriously obnoxious stereotyping and condescension from the rest of America.

7. And yet, I don't display the Confederate flag in any capacity and own only one item with the flag displayed on it. Why? Because even though I don't think most Southerners intend anything problematic by it, symbols mean different things to different people. I care less about non-Southern whites that get worked up by it, but I do care a lot about minorities that understandably interpret the symbol as a threat. If no one saw it as threatening there'd be no problem in having it around. But they obviously do, so what's the point of it? This is obviously context-dependent. I'm sure in some parts of the South minorities understand as well as I do that in most cases it's not meant to be threatening and therefore they don't feel threatened by it (granted, it's in those parts of the South that you're also going to find some of the people that do intend it to be threatening, so it gets complicated). In Northern Virginia that's a non-starter. Err on the side of not making your neighbors feel threatened is a good policy in my opinion!

8. In a similar vein, the Confederate flag is not the Nazi flag - it's more like the checkerboard on the Croatian flag. Leaving Hinduism aside for the moment, nobody uses the swastika today unless they have a view point on race and society consistent with Adolf Hitler. This is not the case for the Confederate flag. Lots of people use the Confederate flag today who - despite other things we might not like about them - don't even share views on race and society with Strom Thurmond much less Jefferson Davis. In this sense it's like the Croatian flag. This flag is very touchy for a lot of people in the former Yugoslavia who associate it with the fascist regime that allied with the Nazis. The flag pre-dates this regime and most Croats don't intend to be expressing a pro-Nazi stance. They just see it as a symbol of Croatia and they acknowledge that there are both dark and light parts to that history without embracing the dark parts. The trouble is - as I noted above with the Confederate flag - different people see that symbol in different ways. This is not the case with the Nazi flag. Pretty much everyone is on the same page as to what that means.

*****

So in summation, if you display the Confederate flag I'm not one to pounce on you or call you a racist. I would suggest you think carefully about how and why you're using it. If you celebrate the Confederacy I think you're an idiot and an embarrassment. If you celebrate the South you're OK in my book. If you want to get into the intricacies of the legality of secession I really don't care - of course it can be legitimate, but that doesn't change my assessment of the Confederacy at all. My beef with the Confederacy was never a legalistic opposition to secession.

Julia Child has over three index pages for "sauce"

That's all.

Looking back on it, it's easy to mock classical price theory and a heavy cost of production emphasis...

...but let's not be too hard on them.

Thank goodness for Marshall.

Constitutional shocks

Most of what's in the Constitution is either ratification of a broader liberalism (think of things like the first and second amendment - we spoke and worshipped and owned guns before that, we just codified it to keep those liberties safe), or procedural. In the United States at least, even though the institutions are new to a large extent constitutionalism doesn't impose radically new blueprints on society. They're usually ideas that have been floating around for a while.

Other elements of the Constitution are legitimate shocks - radical changes to the system.

These pictures of the Prohibition era made me think in these terms.

From what I can figure the biggest positive constitutional shock to the economy (and society generally) was the 13th amendment.

The biggest negative Constitutional shock may have been Prohibition. Do we have an estimate of the amount of value that was destroyed by Prohibition?

Are there other candidates for biggest positive or negative shock? Keep in mind I'm not thinking of constitutional provisions that are good for the economy. Protections of contract, for example, are very good for the economy but for the most part their inclusion in the constitution wasn't a shock (it may have set the economy on a different trajectory, though).

Of course we can also include Supreme Court rulings in Constitutional shocks... that's probably the next place to look for candidates.

Some of the pictures were starker, but this was the only winery one - which made me sad :(

Wow - John Stuart Mill is a real drama queen

"But let them work ever so efficiently, the increasing population could not, as we have so often shown, increase the produce proportionally: the surplus, after all were fed, would bear a less and less proportion to the whole produce, and to the population: and the increase of people going on in a constant ratio, while the increase of produce went on in a diminishing ratio, the surplus would in time be wholly absorbed; taxation for the support of the poor would engross the whole income of the country; the payers and the receivers would be melted down into one mass. The check to population either by death or prudence, could not then be staved off any longer, but must come into operation suddenly and at once; everything which places mankind above a nest of ants or a colony of beavers, having perished in the interval."

There's good stuff in here too, of course. I kid John. That last line just makes me laugh.

Quick link

Related to the last post, I wanted to bring your attention to LK's first post on Lee's Post Keynesian Price Theory, which draws a lot on Means. Means was not a Post Keynesian, he was an institutionalist, but his administrative pricing work obviously holds interest for Post Keynesians that drop optimization, use mark-up pricing, and are seeking out justifications for the trade.

As you might guess, I'd love to see a bit of both. Optimization is a powerful tool that explains human behavior quite well. It is flexible and requires relatively weak assumptions. It is, however, a little one dimensional. So I do think we need a lot more institutionalism in economics than we currently have. We need more field work and more economists that write like sociologists. But we don't need that because there's something fallacious about optimization. We need it because although optimization really gets at some essential issues thing are more complex than that.

Some thoughts on Rosenof's "Economics in the Long Run"

My beach reading was historian Theodore Rosenof's Economics in the Long Run: New Deal Theorists and their Legacies, 1933-1993. It was interesting, although I had a lot of problems with it.

The book stuck pretty closely to the title in what it covered, although a point of clarification is required. "Long run" is a reference not to the long run as economists use the term, but more to secular or historical trends rather than short-run fluctuations. To give you a better sense of the distinction, the major subjects of the book were Keynes (or at least the Keynes that wrote about diminished investment opportunities in the 20th century relative to the 19th), Gardiner Means and his work on administrative pricing in the "corporate revolution", Alvin Hansen on secular stagnation, and Schumpeter on long waves (with references to Kondratiev). I have a lot of sympathy with this view of long-term, often exogenous trends of strong or dampened investment opportunities, so the material was of great interest to me. The cherry on top was that I got a good look at Hansen and Means especially, who I did not know as well. I feel like I have a decent grasp now of what they were about.

But I'm a little tentative. The reason is that I do know Keynes, and Rosenof's treatment of Keynes was a little odd. There was nothing wrong per se but he really inflated the long-term-trends-in-investment-behavior side of Keynes beyond any reasonable proportion and completely neglected such basic elements as the multiplier, liquidity preference, etc. So that makes me wonder about how reliable the Hansen and Means stuff I read was. Hansen is presented as having two great contributions: secular stagnation and short-run neoclassical synthesis Keynesianism. From what little I knew of him before that seems fair enough, but I wonder. I have no guideposts at all for Means.

Another frustrating thing about the book is that in its coverage of the fates of these ideas for many decades after the New Deal, there is a gaping hole in the treatment of the 1970s. Stagflation is presented as trouble for neoclassical synthesis Keynesianism. That's fine. But then he goes on to talk about how a renewed interest in Means replaced neoclassical synthesis Keynesianism because Means's idea of administered prices could explain stagflation! Again, this gets back to my fundamental question of Rosenof's sense of proportion. I have no doubt Means experienced a renaissance in the 1970s for precisely the reasons the author lays out. But to talk about the hard times of neoclassical synthesis Keynesianism without one reference to the Lucas critique, without one reference to rational expectations, without one reference to the Phillips Curve is really shocking. In discussing Hansen's fate in this period Rosenof writes (p. 131):

"Had Hansen departed more fully from neoclassical price theory decades before, had he shifted more fully to Means's position in this regard earlier and taken the body of American Keynesians with him, the story of the 1970s might well have been quite different. Keynesian macroeconomics would then have been fitted with microeconomic foundations better suited to dealing with the problems of the 1970s."

This seems innocuous enough, but what he is talking about when he references "microeconomic foundations" is Means's administrative pricing concerns in the context of large corporations. He is not talking about more realistic foundations for expectations. He's talking about the institutionalists, not Ed Phelps. And don't get me started on how he complains about Keynesian's reliance on "neoclassical price theory" instead of Robinson's imperfect competition as if that isn't also neoclassical.

So this is all a little frustrating. I'll quickly add a few more problematic points:

1. He's too repetitive
2. He'll often write the same idea multiple times in a row in slightly different ways.
3. Sometimes you get the sense that you've read the same sentence over and over again (OK enough of this...)
4. He is very synthesis-happy. He likes Means, Keynes, Hansen, and Schumpeter and thinks that they all fill each other's lacunas and so he's looking everywhere for a synthesis or a potential synthesis. Syntheses are fun to think about, but IMO he takes it to excess and the combinatorics associated with potential syntheses between four principals is dizzying.
5. He regularly makes the mistake of confusing policy milieus with intellectual or scientific milieus.
6. I'm not even sure he's aware of the existence of New Keynesianism.

As a way of tying up numbers four and five, he presents the Clinton administration as being a synthesis of Keynes, Hansen, Means, and Schumpeter. This was written in 1997 - how convenient, huh? All the pieces of your dream synthesis come together right at the time you're writing. Happily ever after, etc. etc.

One more point. Not really a complaint at all - just something to keep in mind. It's abundantly clear that he was in close contact with modern institutionalists and Post Keynesians in writing this. He talks about both a lot in the section on the 1970s and even provides a sort of mini-history of Post Keynesianism. The only problem is that he does not present this as an intellectual history from a Post Keynesian perspective, so people who don't know that background aren't going to realize that the neglect of rational expectations, the big fuss he makes about Keynes not using imperfect competition, the extremely low regard in which he holds neoclassical synthesis Keynesianism, and the neglect of New Keynesianism is coming from a very narrow influence.

I know I've been grouchy for several paragraphs now, and honestly there was a lot about this book that was sloppy and deserves grouching at. However, I did enjoy reading it and I feel like I at least have a better sense of Hansen and Means now, which was the whole reason why I decided to read it in the first place. I've long wanted a more solid grounding in classic American economic thought - not the late twentieth century thought in which American economics is basically global economics, but the real roots of American ways of thinking about the economy. It was good for giving me that. I don't know if I'd enthusiastically recommend it to you all, but if you are interested in Means or Hansen, or if you're interested in long-term trend/secular stagnation type ideas you might want to take a look at it.