Wednesday, December 16, 2009

The Boston Tea Party

Eleven score and sixteen years ago today, a rowdy bunch of Bostonians dumped 342 chests of tea into Boston Harbor, to protest the Tea Act of 1773. Their cry of "no taxation without representation" helped to catapult murmurs of colonial dissatisfaction into full-scale resistance to British rule, which of course would eventually culminate in armed resistance during the American Revolution.

One of the most unfortunate things for me about how the Boston Tea Party has been remembered is how the recent "Tea Parties" have mangled the purpose of the movement. Many today are satisfied with truncating "no taxation without representation" after the first two words, when arguably it was the last two words that were most important to the colonists.

The Tea Act of 1773 actually made tea cheaper for the colonies. While previously existing duties on tea remained intact, the Tea Act effectively eliminated the need for British middlemen that the East India Company had to trade through to bring tea to the colonies. This lowered the price of tea in the colonies considerably, allowing the East India Company to undercut tea smugglers.

The problem was that the Townshend duties remained on the (cheaper) tea - duties which had been imposed since 1767. Colonists vehemently opposed these duties for two reasons. First, they were not represented in the Parliament that levied the tax (hence, "no taxation without representation"). That tax wasn't crushing, but the colonists had no role in imposing the tax, and they had no way to redress their grievances about the tax. Second, the Townshend revenue was used specifically for the purpose of keeping the colonies dependent. Previously, colonial assemblies (where the colonists did have representation) paid the salaries of colonial officials and judges. These officials and judges were therefore dependent on the people. After 1767, however, many of these colonial officials and judges were paid from the Townshend revenues. The Townshend Act therefore forced Americans to pay taxes that they did not assent to, to pay the salaries of public servants that the colonial assemblies no longer had control over. The concern was that their freedom and right to self-governance was taken from them quite deliberately.

The tax itself was virtually irrelevant. The issue was self-government, freedom, and representation. I personally find it incredible that the Glenn Beck/Ron Paul/"Tea Party" crowd has actually convinced themselves that (1.) their recent concerns have anything to do with the legacy of the Boston Tea Party or the Founders in general, and (2.) that somehow everyone that disagrees them has abandoned the legacy of the Founders.

I find it perfectly conceivable that some of the Founders would be surprised at how large government is today, as well as surprised at the taxes we levy. However, given the social and economic changes that have transpired since the time of the Founders they may have found it perfectly appropriate. Regardless, none of them would deny that the American people have decided how the American people are to be governed.
The claim that we are somehow exposed to the risk of "tyranny" trivializes the experiences of those who actually suffered under tyranny, who didn't have an opportunity to decisively elect the man or woman of their choosing (as we have elected Barack Obama), and who didn't have the opportunity to elect their own representatives in the legislature (as we have for centuries). Honestly, when I hear someone suggest that by disagreeing with them you're trampling on the legacy of the Founders it turns my stomach. It's one thing to find solace and inspiration in the Founders to support your own views, today. That's fine. But to insult someone else by claiming that legacy for yourself - and doing it in such a mangled way - is very unfortunate.

Friday, December 11, 2009

The Limits of Monetary Policy (or, "Why DeLong, Krugman, Yglesias, and Sumner are Wrong")

For those of you not connected into the economics blogosphere, the Federal Reserve has been facing a tidal wave of criticism lately. There's the Ron Paul "end the Fed" crowd, of course, but there is also a rising tide of critics arguing that the Fed isn't doing nearly enough to solve the unemployment problem.

The criticism is logical enough: the Fed itself predicts extremely low inflation, with almost no inflationary pressure to speak of, combined with extremely high unemployment for several years to come. We're talking about a decade to get back to 5% unemployment, as I understand it. The Federal Reserve argues, however, that it's largely tapped out. It has lowered interest rates as far as it can and it doesn't have many tools left. Several commentators (from both sides of the aisle, but mostly from the left) are astounded:

To be fair, their incredulity is understandable. Bernanke himself is famous for promoting the idea of unconventional monetary policy and praising the "quantitative easing" that the Bank of Japan engaged in in the 1990s. Joe Gagnon, at the Peterson Institute for International Economics, has made waves by proposing exactly what Bernanke promoted back then - several trillion dollars worth of asset purchases to make monetary policy even more accomodating. Right now, with interest rates at 0%, there is no "traditional" way for the Fed to be more expansionary. Purchasing a ton of assets would pump more money into the economy by putting money into the hands of the current asset holders.

So I've thrown the critics several bones. I've said their criticism is "logical enough", and that their "incredulity is understandable". But ultimately, I think the relentless demand for Bernanke to engage in vigorous quantitative easing is highly misplaced. When the Fed lowers interest rates, lowers reserve requirements (requiring firms to hold less reserves allows them to expand credit more easily, which expands the money supply), or expands it's own balance sheet through normal open market operations, monetary policy keeps market distortions to a minimum. Everyone faces the same interest rate and everyone faces the same reserve requirements. Competition picks the winners, the Fed simply sets the macro-trajectory for the economy.

"Quantitative easing" is different; it involves an aggressive expansion of the Fed balance sheet by purchasing all sorts of assets (including government bonds). The problem with this is that the Fed ends up "picking winners". Specific market players get an artificial leg-up. These activities pose a serious risk of distorting market activity and market signals. As a rule of thumb, that's a very bad thing. In exceptional circumstances - such as a liquidity trap - it may be worth the risk.

But even if we determine that it is worth the risk in a liquidity trap, who should take that risk in a free society? I would argue that an elected, representative body should engage in those activities - not an appointed board of a central bank. If we're going to engaging in potentially distortionary measures, it needs to be done in the open, and people need to be accountable for these decisions. This is fundamentally what fiscal stimulus (i.e. - deficit spending from the government) does. It's an attempt to "soak up" the extra savings that are causing the economy to stall out, but it's an attempt that bears a real risk of "picking winners". What winners are Congress and the Obama administration picking? Infrastructure. Green jobs. Home-owners. Car buyers. Education. Some of these choices may be good, some may be bad. The point is "we the people" are making these choices, not a central bank.

I have a great deal of respect for the Fed, and I think they have a hugely important role to play in this crisis. I don't even begrudge Ben Bernanke the quantitative easing he's engaged in thus far as an extreme emergency measure. But to insist that this become the order of the day - that this is how we should wage an extended fight against depression - seems very dangerous to me. I do think the Fed is largely tapped out as far as what it can do - not because they can't do more, but because they shoudln't do more. It's time for Congress to step up.

Two additional thoughts:
(1.) Willem Buiter seems to agree with me. I ran across this after I formulated my thoughts (mostly in response to Yglesias's series of posts), but I'm happy to see he agrees with me, and
(2.) I have lots of lingering reservations about quantitative easing that I may comment on in the future. As a teaser, I'll just say it strikes me that quantitative easing risks prolonging a liquidity trap. The Fed is increasing the supply of loanable funds available to institutions that want to borrow, which should drive down the real interest rate - when what we want to do is drive it up (so that the interest rate floor is no longer binding). The only redeeming quality of quantitative easing, it seems to me, is that it may create inflation which would also make the nominal interest rate floor non-binding. I'm still noodling over this - but those are my initial thoughts. This seems to me to be a classic example of what Keynes meant when he said that Roosevelt's policies were like "a slim man trying to get fatter by buying a bigger belt".

Thursday, December 10, 2009

My own email from CRU (this one was not hacked)

A few days ago I sent an inquiry to East Anglia University. I had been getting information that the "destroyed" data wasn't destroyed at all - it was just housed on a central government server. Which, to put it mildly, is a complete non-issue. I had heard the research unit at East Anglia made a statement to this effect in response to requests, but I couldn't find it online. So I wrote:

"Hi - I was wondering if you had a press release or link on your website explaining that the raw data that CEI is so concerned about is actually being housed at NOAA. I'm trying to respond to questions from readers on my blog about this, and I've heard you quoted in articles suggesting that the raw data is still available - but it would be much better to see a statement to that effect on your website. Thanks"

I got this response today:

Thank you for your message and many apologies for not getting back to you more quickly. The University of East Anglia will make all the data accessible as soon as they are released from a range of non-publication agreements. Publication will be carried out in collaboration with the Met Office Hadley Centre. Please see our statement at for more information. As you may be aware, the University of East Anglia (UEA) has announced that Sir Muir Russell KCB FRSE will head an independent review into allegations that arose from a series of hacked e-mails from the Climatic Research Unit (CRU). Colleagues in CRU have confirmed their commitment to the quality and veracity of the science that relates to global warming. Their academic standing is a matter of public record and their work has been extensively peer-reviewed. The hacking is subject to a police investigation with which the University and its staff are fully cooperating. You will find all current information at These pages will be updated with news as it is available.

Just thought people might be interested in the update. My understanding was that all their station data is (and has always been) available here. Now - how much do you want to bet the guys at Cato and CEI that were pestering them for this data will never actually look at or analyze it?

In other Climategate news, Ezra Klein had a great piece yesterday on the more mundane climate research that is going on. And guess what - it all points to a warming planet. Maybe the bigshots are hyperbolic and deceptive, but you can't seriously think everyone drawing these conclusions is pulling the wool over our eyes.

My feeling on climate change is that human produced carbon is warming the Earth at a pace faster than normal processes operate. It seems to me there's very little doubt that we're heading for a warmer planet, and that we are making that happen. Does that mean Florida will be under water, crops will fail, and billions will die? I suppose "it could happen", but I don't think we have any evidence to convince us that we're facing doomsday. But we are facing significant change. Given my economics training, I recognize that we burn more carbon than we should because we don't bear the costs of burning that carbon. When you don't bear all the costs and benefits of a choice, you won't make the optimal choice - and when somebody else bears the costs of your consumption you're going to consume more of that product than is optimal. For that reason, I think cautiously embracing policies like a carbon tax or cap and trade is an eminently reasonable thing to do. However, humans also have a tendancy to innovate our way out of problems. So I don't think draconian measures now are justified, because twenty years from now (when collectively we'll be considerably smarter) we may have an even better, and a much less painful solution.

So I don't like to think of myself as an "alarmist", but I'm not apathetic either, and I try not to second guess the people who have spent their lives working on this.

Enjoy the email and the links.

Tuesday, December 1, 2009

North Korea and Inflation

The market is just a network of social relations - social relations which are orchestrated by prices which signal individual abilities, individual needs, individual hopes, and individual ambitions. Make the signals meaningless and social interaction becomes impossible. Induced inflation distorts those signals. Hyper-inflation destroys them. North Korea unleashed this weapon today in an attempt to destroy fledgling private markets.

I've spoken at times on the value of low, constant inflation in a modern economy. I've been meaning to talk about this in more detail, with reference to "inflationist" movements in early America, and in the late nineteenth century. A lot of these sorts of ideas are grounded in the work of Keynes, and consistent with more recent monetarist theories. But it's important to distinguish the argument for a low, constant level of inflation (as opposed to violent inflationary and deflationary episodes) from the argument for high spikes in inflation as a confiscatory tool. Keynes spoke to inflation as a weapon of the state in the months after World War I:

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

- John Maynard Keynes, 1919

Health Reform and Premiums

The Congressional Budget Office (CBO) recently released estimates for the Senate health bill, and what they've said about premiums has caused some argument among the experts. And by "argument", I mean they take entirely opposite views on what direction the CBO suggests premiums are moving in. Gruber, Krugman, and Yglesias all contend that premiums will actually go down. The CBO report itself seems to say in several places that premiums will go up. What's going on? Gruber, Krugman, and Yglesias's claim should sound strange to people. The Senate bill is sort of like Massachusetts health reform writ large, and we didn't see premiums decline there.

I think Megan McArdle is largely on target in her explanation of what's going on, and she is firm but fair with the dissenters. Basically, if you look at the same type of plan before and after reform the premiums are reduced - that's what Krugman and Gruber are emphasizing. That means something for sure, but there's a reason why the CBO didn't highlight that. If people were free to choose what health insurance they wanted, it would be meaningful to have the same plan have lower premiums as a result of reform.

The problem is, they aren't free to choose (to borrow a Milton Friedman line). A slew of mandates are included in reform, not the least of which being the mandate to simply have insurance. So risk pools are wider, which does provide the opportunity to furnish the same insurance for less money. But if you're not allowed to buy the same insurance, what does that matter? If everyone had the same options available to them that they did before the reform, I would say look at how the premium of different types of plans change before and after reform. But they don't have the same options - they are forced to buy more. So looking at the change in the same plan is meaningless - instead you have to look at the change in the premiums people will actually end up paying.

And that is supposed to increase. And we shouldn't be surprised - as I've said for a while now, the mandate dumps tens of millions of people into the insurance market. You can't have a demand shock like that and reasonably expect a drop in prices. It just doesn't pass the smell test. Does this mean it's a bad bill? Well it's at the top of the list of arguments you would make for why it's a bad bill. I think your ultimate position on the bill itself is going to have to be based on more than that. The bill does a lot of other things that I think are good. The mandate, in my mind, is a very bad idea. But if premiums continue to climb the mandate can always be adjusted later. The question for people (who feel the way I do on the mandate) is - are all the Medicare reforms, all the advances in tax policy, all the expansions of Medicaid, the exchange, etc. still better than the status quo even if they're burdened with an odious mandate? That's a question that people have to answer for themselves. I think on balance we need to do something, and I'd prefer we didn't jump into an expansive public option. This seems like the best way to do that. The problems associated with the mandate seem smaller to me than the problems associated with doing nothing. But reasonable minds may disagree.