Good thoughts from Nick Rowe on some old fashiony stuff

Here.

I've always had a tough time understanding a couple things. First, I've never understood the outrage at the money multiplier/endogenous money stuff. At best it's a semantic difference (this is largely true of "endogenous money" I think, where it boils down to whether the FOMC is "accommodating" banks or whether you want to think about its bond market activities as more pro-active - it's a sin of omission vs. sin of commission argument). On the money multiplier I think Nick makes the right point that the multiplier is the same no matter where the injections occur. Noting that central banks sometimes inject money (the pro-active view of the FOMC) certainly doesn't rule out the idea that "loans create deposits". Whether loans create deposits or deposits create loans depends on one thing: at which step in the Macro 101 exercise you start tuning in.

This segues nicely into the equally odd treatment of the Keynesian multiplier. This one I think is even more right-there-in-front-of-you than the money stuff. Whether you're reading it in the Keynesian original (where the chapter on the multiplier doesn't even HAVE a G and everything is talked about in terms of I!), or in modern textbooks (where neither I nor G are functions of income and enter the equations in the exact same ways). When I TAed for our big intro macro lecture and I did my review lectures I made them work through both and show that they got the same answer, so that they understood why the model works the way it does: the income/expenditure equation and the consumption function, not some magical powers of the government.

Finally, I've never understood the tendency to treat Old Keynesians like troglodytes and New Keynesians as sophisticates when it comes to the main components of the model. All of the important elements of the Old Keynesian model are in the New Keynesian model. That's why it's a called "Keynesian". What the New Keynesian model adds is some dotting of the i's and crossing of the t's: more realistic price formation, expectation formation, etc. Some things drop out, too. You're better served going to Nick's post for that.

Bob Murphy on public space exploration... not a pretty sight.

There is so much wrong with this post that I can't not respond. He doesn't grapple with the real argument put forward for public space exploration, he botches the socialist calculation debate, and he uses Firefly for evil.

The beginning is mostly factual. The Planetary Society wants high public spending on space exploration. It has Europa in its sights. I vigorously agree. Bob's position is that we should "privatize the whole enterprise".

He writes:

"Bastiat’s famous admonition to look at both the seen and the unseen applies just as much to grandiose space projects as it does to, say, sports stadiums: It’s not enough to ask, “Would humans benefit from a mission to Europa, if it were a free gift?” Rather, the question is, “Would humans benefit more from a mission to Europa, versus the best possible alternative use of the resources such a mission would require?”"

This really makes me wonder precisely what trade-off Bob thinks proponents like me are thinking of. The whole argument is that it is a beneficial use of resources relative to alternative uses. Nobody that I'm aware of has claimed that such endeavors are costless. But how do they compare to many other budget items? How does it compare to a future where space exploration is solely private? That's the question people are talking about. Instead of addressing that, we get opportunity cost explained again.

The next paragraph is really disappointing:

"All of the usual problems with socialist central planning–brilliantly explained by Ludwig von Mises and elaborated by Friedrich Hayek–kick in when it comes to space exploration. Remember, it took the brilliant and brave iconoclast Richard Feynman to get to the bottom of the space shuttle Challenger disaster. And less disastrous but more ridiculous, in 1999 NASA lost a $125 million Mars orbiter because two different teams working on the project had an English units / metric system miscommunication."

So this is not the Mises/Hayek insight on central planning at all. The claim is not that technical problems are unobtainable by public planners. Quite the contrary, it's pretty standard to highlight Soviet technical prowess. The Mises/Hayek point is that a central planner can't make the trade-offs necessary for a functioning economy because it cannot aggregate private information on scarcity, cost, and value the way the price system can. Ironically, the technical issues were in the hands of private contractors for Apollo, Challenger, and every other achievement of the space program. I don't point this out to fault private companies. I, of course, am as vigorous a supporter of private space efforts as I am of public space efforts. It's simply to point out that the tragedies Bob raises have nothing at all to do with Mises and Hayek. (Unless the argument is that a private effort wouldn't hire such problematic contractors???... but something tells me that's not where he's going with this).

Much of the rest of the post makes an excellent case for private space efforts. The only problem is that by failing to engage the externality argument for public space exploration at all Bob presents a false choice. I have yet to come across a single advocate of a public space effort that wouldn't agree with this from Bob:

"There are plenty of commercial applications of modest space exploration efforts, including obvious things like placing satellites into orbit but also more exotic possibilities such as space tourism and mining asteroids. Pure profit-and-loss calculations from retail sales don’t have to be the sole driver, either; the X Prize showed the potential for spurring innovation with a relatively modest amount of donated money."

But that's not the point. Or at least it's not the point that Bob is trying to make here, which is that there's a problem with public space exploration. Let's review - first he reminds us we need to think of opportunity costs which I think everyone agrees on and is definitely not a case against public space programs. Second, he botches the socialist calculation debate which even if accurately rendered is not an argument against a public space program. Third, he makes some good points about valuable private efforts, which is not an argument against a public space program.

So what is the argument?

"In conclusion, my guess is that The Planetary Society’s suggestion that citizens of the United States should effectively spend (in their role as current and future taxpayers) $1.5 billion per year on planetary research is absurd".

His "guess".

Look, that's fair enough. This is not a case where we have hard data to make these assessments. Everyone is making judgments based on a sense they have about the human future and I'm no different. But let's not pretend that opportunity cost, the feasibility of socialism, or the benefits of private exploration have a thing to do with the argument here. We all have this foundation. The question is, is there a reason to think private investment is not optimal. If so, then we can accept the logic of Bastiat, Mises, Hayek, and the X prize and still support a public program. If not, then Bob's position holds completely independent of Bastiat, Mises, Hayek, and the X prize.

Finally, there's the Firefly thing. It lingers in the background of the post, but let's be clear about one thing. The Independents were a loose federation of self-governed planets that resisted tyranny. They were not anarcho-capitalists like Bob. They were federalist liberals like me. And Joss Whedon is no Robert Heinlein (although Heinlein is all over the map relative to the view of him that most libertarians have).

Caroline is six months old today

That is all.

Norman Borlaug always makes me appreciate the work of Thomas Malthus

It would have been Norman Borlaug's 100th birthday today. When I think about Borlaug it always makes me appreciate the work of Malthus. A lot of people find that odd, but I think it's because of the low quality of critiques of Malthus floating around.

What's frustrating about critiques of Malthus is that Malthus openly admits that the subsistence constraint is differentially binding because agriculture is differentially productive. He does have the famous base case model with arithmetic growth of food and geometric growth of population. And that's gripping for people, and the specification may be all wrong. But it served the useful purpose of being an equilibrium model (and an equilibrium model used by the rest of the classical economists, I should add). It also served the purpose of succinctly demolishing Condorcet and the utopians. Malthus insisted that you could not depend on the perfectibility of man. Man is an animal and the study of man needs to be tethered to that fact. We social scientists are studying a particularly goofy, creative, and eccentric primate that occupies a particular ecosystem, and those facts will govern the science of man. Moreover, when Malthus applies his model he talks about variations in preventative checks, positive checks, and agricultural productivity across different societies. I have not read much in his Principles of Political Economy outside of the stuff on general gluts, but I would be surprised if he denied technological progress there. So he is very clear that these parameters vary and change, but the fundamental point - and the point of having the rigidly parameterize arithmetic/geometric model - is that generally speaking man is constrained by the resources that sustain him.

Norman Borlaug matters precisely because Malthus was right on this point. If Malthus was wrong, Borlaug would not deserve his Nobel.

Accepting Malthus as one of the great political economists should really not be that hard. If you're willing to think in terms of early 18th century equivalents (i.e. - changing around what is the output and what is the input exactly), if you're willing to take logs, and if you squint a little, Malthus's model is basically the Solow model. Same sort of structure and same sort of equilibrium with the same sort of conclusion. Solow gets some abuse, sure, but nothing like the stupid sort of critiques that Malthus gets. Could you imagine someone offering "Solow is wrong because there's technological development" as a serious critique?

If you want to take the unified growth theory route and just label periods where subsistence constraints are binding as "Malthusian" and when they're not as "non-Malthusian" it makes perfect sense why you would use those sorts of labels. But don't try to pass off that labeling schema as history of economic thought.

What do we fault Solow for? Well we wish he endogenized a few things, chiefly technological growth. But even without that work, Mankiw, Romer, and Weil show that you can get a lot of mileage out of the Solow model. And of course "better" models cannibalize the Solow model for spare parts. The same could certainly be said for Malthus. It would be nice if he had more on technological growth. But don't confuse that case of "more research required" with the case that the model is useless or doesn't illustrate an important point. Anyway, my point here is that when Solow gets critiqued it makes for a quite edifying read. Not so with critiques of Malthus.

Has anyone else ever had problems "ssc install"ing stata programs with Windows 8?

I don't know if it's Windows 8, but it's weird enough in other respects that I wonder if it is. I ran and saved the .ado files and .hlp files "manually" and it all works fine, but that's kind of annoying. Anyone have any experience with this?

The Adventures of Toad and Frog, and lessons for rules and constitutions

Yesterday, my mother-in-law was reading Caroline a story from "The Adventures of Toad and Frog".

Frog baked Toad a bunch of cookies and brought them to his house. Pretty soon they found themselves eating too many cookies. Toad told Frog they needed willpower, which is what you have if you don't do something you want to do. First - to get willpower - Toad put the cookies in a box. That didn't work - they could open the box, Frog pointed out. Then he tied the box up with string. Frog pointed out that they could cut the string. Then he got a ladder and put the box of cookies, tied with a string, up on a tall shelf. Frog pointed out that they could get the ladder, bring the box down, cut the string, and open the box. Exasperated, Toad took the box of cookies outside and fed the rest of the cookies to the birds.

When we talk about rules and discretion, and policy-making vs. constitution-making in monetary policy or any other policy area there is often a one-upsmanship when someone wants to be more pro-rules-based-policy-than-thou. The proper response is usually to ignore them, for a number of reasons. Chief among these reasons is personal sanity, of course. But another good reason is illustrated by Toad and Frog. The more pro-rules-based-policy-than-thou attitude almost always plays into the hands of the nihilists and libertarians because the most credible commitment you can make is to feed all the cookies to the birds.

We all know there are potential problems with discretion in monetary policy. What's the tightest system of rules we can clamp down on them? Don't just establish policy rules. Don't just establish legislative guidelines on policy. Perhaps don't even establish constitutional guidelines on policy. Eliminate the monetary authority!

We all know there are potential problems associated with the welfare state. What's the tightest system of rules we can clamp down on the welfare state? Eliminate it! Constitutionally ban it! No one has to worry about labor supply elasticities then!

You hear this sort of thing over and over and over again from libertarians. "You don't think politicians are trustworthy - then why let government do things?"

What the argument ignores of course is that Frog and Toad don't have any cookies anymore when they feed them to the birds, and that's not a good situation to be in by any reasonable standard (unless, of course, that's what you wanted in the first place - although most people don't). I don't think a box of cookies tied up on a high shelf is as reliable as feeding all the cookies to the birds either, but that doesn't mean I prefer to feed the cookies to the birds.

It's a basic economic point about trade-offs. When we think about rules/institutions/constitutions the question should not be what the most credible commitment is (and that's usually a constitutional commitment rather than a legislative or policy commitment), it should be about how we balance constitutional restraint to avoid bad outcomes with the liberty to achieve good outcomes.

It's precisely that balancing act that we celebrate the American founding fathers for, but in a lot of discussions of rule-based policy making I think it's often missed.

A couple times I've alluded to the fact that ignoring this standard bit of economics is in libertarians' interest. The issue Frog and Toad faced was that they wanted to eat the cookies but they didn't want to eat them all at once. They wanted to eat them in a reasonable fashion. If you don't share Frog and Toad's preferences - if your actual end goal is not to have cookies (or welfare, or monetary policy), then a very good way to push that is to forget trade-offs and economic principles in discussing rules and constitutions and instead just push the discussion towards feeding all the cookies to the birds.

The U.S. Constitution (the only one I really know to any appreciable degree) is not libertarian. It's good and classically liberal, though, in that it constrains government and allows it to do a restricted set of things to provide for the general welfare. But it is also flexible and provides mechanisms for contesting and deliberating over the parameters of the Constitution.

The U.S Constitution, in other words, is like putting the cookies in a box, tied with a string, on a high shelf. It does not feed the cookies to the birds. And that's a good thing.

My upcoming activities

Most of these are closed to the public, but you may still be interested.

The first is open to the public (with registration of course) and some of you may be going. This Sunday at 8 am I'll be chairing and presenting on a panel at the Eastern Economic Association. The subject is generalized maximum entropy methods. Everyone on the panel is presenting work from a seminar last semester at AU on information theoretic econometrics. So if you are at the Easterns please come by!

Then on Thursday I'll be participating in a workshop at Georgetown University on high skill immigration and temporary visas. This one is not open, although I think they may release some documents on the Institute for the Study of International Migration's website afterwards. Also next week we are having an advisory board meeting for our Sloan Foundation project... which will (hopefully) largely be picking the brains of some smart people about how we can improve out analytic approach to that work.

Then the following week on Thursday I'll be presenting at a National Academy of Engineering workshop on the engineering technologist and technician workforce. This is the first of two workshops on the subject. Hopefully I'll be able to post the two papers I've been commissioned to write for them, although it may stay internal (my analyses are basically going to be the backbone of an NAE volume on the subject... but I gather they may rearrange some of it an add contributions from workshop attendees - so I don't know if my original report will be available for release by me or the NAE or not).

Some links

I offer these links merely as proof that I have not died under suspicious circumstances, been kidnapped, or embarked on some quest in the week and a half since my last post.

1. A new issue of the Review of Economics of the Household is out. It is a special issue on time-use. Time-use data is becoming increasingly important and popular, and this issue looks like a good guide to recent work with it. The Review of Economics of the Household is an excellent journal, and the premier venue for the economics of the household, gender economics, etc. You will often also find this literature in labor journals, but this one is dedicated to the subject.

2. Speaking of the economics of the household, I've just received word that my submission to the Journal of Family and Economic Issues is now in "revise and resubmit" status. This journal is more interdisciplinary than the Review of Economics of the Household, and less known - so please check it out and cite!

3. Don Boudreaux and Liya Palagashvili have an op-ed in the WSJ discussing the alleged decoupling of wages from productivity. This is not just Don asserting the claim - they review recent research from reputable economists, and it's worth looking at. Obviously it's hard to assess the argument from an op-ed without going to the research, but I was glad to see this because the whole productivity decoupling thing has always seemed both worthy of concern and also a little bit of a black box to me. Statistics are necessarily highly aggregated, and productivity measures aren't exactly the marginal productivity we reference in theory. Don and Liya notes the wage/compensation thing. I feel like a lot of the analysis uses compensation but I could be wrong. Anyway, the decoupling is stark in the highly aggregated/somewhat imperfect data which makes it seem like something worth checking out but still a bit of a mystery. Take a look at the op-ed - perhaps it will solve some of the mystery for you.

4. The estimable Margaret Simms comments on Obama's proposal for young men of color.

5. The Urban Institute released nine reports (1, 2, 3, 4, 5, 6, 7, 8, 9) two days ago on the implementation of the ACA across different states. There's no way on God's green Earth I'll have the time to take a look at them in the next couple weeks, but I recommend them to you on the basis of two points: (1.) The Urban Institute does excellent health care research, and (2.) as most of you probably know I consider variation across states to be crucial to both policy evaluation and to robust liberal democracy - so this sort of analysis is valuable.