Saturday, July 31, 2010


This week I had written an op-ed I was going to submit to the Washington post, emphasizing the point I made earlier that we really haven't done much of any fiscal stimulus and that the only reason why everyone thinks we have is because nobody thinks about states and localities when it comes to issues of national significance (like macroeconomic performance). I was waiting for the Friday GDP numbers to come out to make my case based on the last three quarters - when they did, though, total government spending was actually positive for the second quarter of 2010. So nevermind on that op-ed. The previous two quarters were still negative, although they had change slightly. This was the original text of my submission:


"The American economy faces a major threat to economic recovery that most of the public probably isn’t aware of: government has been slashing spending for the last nine months. This Friday it became official when the Commerce Department released its quarterly economic statistics. In the second quarter of 2010, total government spending fell by [X] percent. In the first quarter of 2010, it had been reduced by 1.9 percent while in the fourth quarter of 2009 it dropped by 1.3 percent.

Recently, economists have been debating the merits of precisely this kind of “austerity.” Some have argued that reducing public spending can spur economic growth. Others are convinced that it is a sure way to kill the recovery. This discussion has generally revolved around Europe, which is increasingly pursuing austerity measures, and whether Europe offers a model or a cautionary tale for the United States. What this debate often leaves out is that belt-tightening by the government has already come to our shores, and it has been with us for the better part of a year now.

This seems to contradict what everyone knows: that the Obama administration has been running record-breaking deficits. Politicians and cable news commentators bombard us with concerns about our profligacy over the radio during our commute to work every morning and on television every night. How can it possibly be true that government has been slashing spending for the past nine months?

What the public often forgets is that the United States is a federal system with state and local governments as well as a federal government. We don’t “forget” about federalism in the sense that we don’t realize these other levels of government exist; they are an important part of our lives. But we do forget their relevance to problems of national significance, such as the current recession. This is a serious oversight, because together state and local government budgets are about one and a half times the size of the federal budget. That means that amidst all the discussion of the role of government in the economy during a downturn, many of us are completely forgetting about a significant portion of the government spending that goes on. Unfortunately, the economy and the job market don’t have the luxury of forgetting this. The economy can’t tell the difference between a dollar appropriated by the federal government and one appropriated by a state or local government.

Government spending has been shrinking for the last nine months because the federal government has been almost entirely preoccupied with filling in the hole that state and local governments have been digging, and the states have been digging that hole faster than the federal government has been filling it since the third quarter of last year. This results in a net reduction of government spending in the United States. If you think that government spending during a recession is harmful, you may be comforted by this news. However, those inclined to celebrate this reduction in government spending should consider the fact that the economic outlook began to darken again precisely when total government spending (federal spending, plus state and local spending) started to shrink.

Austerity is pursued in state and local governments for many reasons. Municipal bond markets aren’t always as accommodating as the market for federal debt. Some of these entities are constrained by balanced budget requirements in their constitutions, or statutory limitations on running deficits. Local governments that rely on property taxes have been hit hard by the housing crash. In addition to all these real constraints, though, a lot of state and local leaders simply believe that tight-fistedness is a virtue during a recession. Many governors, mayors, and county boards don’t seem to have received the memo from much of standard economic theory that responsible governments are supposed to lean against the economic winds. They should take a step back when the economy is heating up and government spending risks crowding out private activities and jump in to buy and use idle resources when the private sector is too fearful of what the future holds.

While some states, such as California, have a legitimately difficult time convincing creditors to lend to them, others, like my home state of Virginia, have no such excuse. Virginia has an excellent credit rating, but our governor and our state legislature apparently feel an abiding need to run a budget surplus during the worst downturn since the Great Depression. This decision in Richmond has the same impact on the economy as the recent decision of many big businesses to sit on profits instead of using that income to hire and invest. The Virginia state government is essentially telling us that it makes more sense to sit on our tax dollars right now than it does to use them to put unemployed Virginians and unused equipment to productive work. Yet for this, Governor McDonnell gets celebrated by voters and the press.

The growth of the federal government in the decades since the last downturn of this magnitude in the 1930s leads many Americans to forget about the significance of our federal system of local, state, and national governments. The public debate over economic policy is distorted by the fact that we’re not even talking about the majority of government spending that occurs outside of the federal government. Those of us who acknowledge the importance of stimulus get complacent because we aren’t aware that government spending is actually being reduced right now, not increased. Those who argue against stimulus are galvanized by false claims that total government spending is soaring.

State governments have always played a fundamental role in the history of our republic, and they are just as essential today as they have been in the past. We can no longer afford to write them out of the story of the government response to the recession."


The argument itself still stands, of course. The logic is still good, and we still overestimate how much fiscal stimulus we're doing because we forget about the states. The positive numbers for quarter-to-quarter change this quarter are also probably related to several previous quarters of negative growth in government spending (i.e. we're still down from where we should be but they can't fall forever so you're going to get periods of positive growth). But it's harder to make that case convincingly when one of the three quarters you're looking at runs against your thesis.

So how do we interpret these recent GDP numbers?

1. It's good news public spending is not shrinking again. Private spending probably would have looked better if we didn't have six months of austerity at the end of 2009 and the beginning of 2010.

2. Fiscal policy has a lag, just like monetary policy. Shortly after spending initially stalled out we saw a weakening (also due to the fiscal crisis). Then public spending picked up dramatically with the stimulus package, after a quarter or two GDP did too. Then after an early spring of weak stimulus, we're seeing a continued weakening in GDP. In three to six months we may see another upward trend (hold me to it - we can check the data) as a result of this increase in fiscal stimulus, but a lot of that depends on whether it is sustained through the third quarter and what else happens.

3. This all is just going to contribute to confusion over what is exactly going on, which is unfortunate. We're still doing tepid, on again-off again stimulus which isn't good for the economy or for clear analysis. Informally eye-balling it, we're seeing a something like a delayed wave pattern (I demonstrate it here) with output lagging a quarter or two behind public spending. We shall see, though.

Friday, July 30, 2010

Insights from some outsiders - 7/30/2010

Five really great blog posts from post-Keynesian/Modern Monetary Theory blogs I follow from this past week:

1. Dean Baker on the Zandi and Blinder study. I seriously doubt the reality of his take on the impact on TARP, however, he has an excellent point about the counterfactuals that I hadn't noticed. Zandi and Blinder adjust two policies for their counter-factual: (1.) what they call "financial" policies, including TARP and the provision of liquidity by the Fed, and (2.) fiscal policy. I agree with Baker that the first policy probably should have been broken out into monetary policy on one hand and financial policy (i.e. - TARP and related policies) on the other.

2. FDL shares that Shirley Sherrod is suing propagandist Andrew Breitbart. Good luck with that, Shirley.

3. FDL has a post on Rand "Godwin's Law" Paul. The invocation of Godwin's Law can be very frustrating sometimes - if you have an interest in interwar history and in political ideology like I do, the fact is the Nazis come up and it's not inappropriate. But if you're whipping it out to criticize reasonable economic policy-making I think it fits. Paul thinks that Obama's economic policies put us at risk of Nazification. I beg to differ, and I'd advise against making those claims if you're a leader of a populist movement with a seedy underbelly that openly talks about revolution while decrying the abuse of "real" Americans by allegedly conspiring minority groups.
4. Warren Mosler flings Irving Fisher at gold-bugs. This actually wasn't surprising to me, although Mosler acts like it should be. Economists of the monetarist persuasion have always been vocal about expansionary monetary policy. I'm not sure what Mosler expected them to think Fisher would think. Nevertheless, history of economic thought is always good.

5. Bill Mitchell has a long, interesting post on counter-cyclical capital buffers and Minsky. Why to MMT bloggers write such freakishly long blog posts? I always worry I write too much, but I feel better after reading these guys.


Five really great blog posts from Austrian/libertarian blogs I follow from this past week:

1. Greg at Really, Libertarians? on liberaltarians and the importance of dialogue. I thought this post had a pretty narrow view of what exactly the "liberaltarian" phenomenon is, but it was very thoughtful and had a great reading list at the end.

2. Arnold Kling summarizes his "recalculation story". I've heard Austrians say that the recalculation story is basically Austrian Business Cycle Theory and Kling doesn't want to call it that. To a certain extent I see what they're saying, but I think this is an awfully limiting viewpoint. After all, you can find this sort of explanation in The General Theory too, and we're certainly not going to accuse the General Theory of being an ABCT book. Austrians add their own twist, and they spend more time on the time structure of production which of course gives the interest rate a more prominent role. Kling brings other things in, including the work of Minsky and Jones. You're not going to see self-described Austrians do this. Personally, I think the recalculation story is a good one and a real explanation of what's going on. I would like to see more empirical work on it though. My reaction is "I'm sure this happens - I'm not arguing against it at all in that sense - it just doesn't seem to me to be the only thing that is happening or even the primary thing", which is largely my take on classic ABCT too, for that matter.

3. Peter Boettke on evolution and economics. This is excellent. I don't think it's possible to stress enough how (1.) pervasive the principles of evolution are, and (2.) how important it is to understand human social processes as evolved social processes and not some "ideal form". Boettke of course highlights the relationship between evolutionary thinking and the Austrian school. I would actually use evolutionary logic against the Austrian school in some cases, and suggest that we should think of government as an evolved, emergent institution rather than some abstracted malignant force. But Boettke also provides instances where evolutionary thinking offers some fertile common ground - such as in institutional work of people like Williamson and Ostrom which is embraced by a variety of schools of thought, and in critiques of Rational Expectations modeling along the lines of Robert Solow, which the Austrians have been agreeing with and chiming in on lately.

4. Jonathan Finegold Catalan on Krugman and the liquidity trap. I still haven't read it yet, but I will!

5. Tyler Cowen reviewing an Objectivist (i.e. Randian) critique of neoconservatism. I, like Cowen, don't buy all the Objectivist counter-arguments, but I do share in the critical stance towards neo-conservatism and I do agree with Cowen that even when critiques like this one aren't wholly satisfying, it's good to see how other perspectives will frame a counter-argument.

Del Toro and Cameron to do Lovecraft

It has been common knowledge for a while now that Guilermo del Toro wanted to make a movie out of Lovecraft's At the Mountains of Madness. The last I heard it was a "sometime in the next decade" project. We don't have to wait that long, it turns out. Del Toro just announced they want to start filming next year. He'll be directing and James Cameron will be producing (HT Evan).

Lovecraft has never been made into a really blockbuster movie before. There have been lots of allusions to his work in other work (sorry Batman fans - Arkham Asylum was ripped off of Lovecraft decades after its first appearance), and there have certainly been many minor projects, but nothing big. What's ironic is that Lovecraft didn't think much of the prospect of his stories being made into movies anyway. We know because he was interviewed by the W.P.A. in 1933. He shared:

"Hollywood does not interest me in the slightest. My work is certainly too arcane and I hope too frightening to be consumed with sarsaparillas and popped corn. There is also the additional challenge that my work is consistently set in the present or recent past, with apocalyptic implications. It would be financially prohibitive to keep updating a film as time went by the same way I can simply change dates in my tales upon republication. There are films and there are books. One cannot make a film of a book. The forms have distinctly different dimensions. I have no expectation that any of the stories I have written will be adapted for the movies in my lifetime."
Not a very out of the box thinker, huh? Something tells me this won't hold up del Toro and Cameron. Nevertheless, Lovecraft did hold out some hope. He continued: "Perhaps one day when the world is very different in the distant future." None of this should be confused with a Victorian suspicion of movies on Lovecraft's part. My understanding is that he loved going to movies - particularly science fiction films - and that he got considerable inspiration from them.

S.T. Joshi, a Lovecraft sholar, has argued that At The Mountains of Madness represented an attempt by Lovecraft to take his earlier "Cthulu Mythos", which was largely supernatural in the tradition of more classic horror, and present it in a more science-fiction framework. The novella was written in 1931. This was a time of a change in perspective in Lovecraft in many ways. This was the period when Lovecraft began to get disillusioned with the presidency of Herbert Hoover. In this period he would declare himself as a staunch supporter of the New Deal, and an advocate of technocracy, economic planning, and even fascism.

One more Lovecraft link - I stumbled across this H.P. Lovecraft Podcast recently. Every week, Chris Lackey and Chad Fifer read selections from a Lovecraft story, discuss the plot, and discuss influences and criticism of the story. I've only listened to two so far - they're worth checking out.

I'm still working through Lovecraft's stories, as well as continuing to develop notes, outlines, and thoughts on Lovecraft's political economy that some day I may do something with. Right now I'm reading Shadow over Innsmouth, and so far my favorite story is either the Call of Cthulu or Shadow Out of Time. These are longer; Dagon is an excellent shorter story (this was actually the first Lovecraft story I ever read).
UPDATE: This was way to good not to repost. Xenophon tracked down a letter between Lovecraft and Clark Ashton Smith. In it, Smith writes: "I have caught my second cold of the season, and am still laid up with it. I can sympathize with your reaction to the New England winter — our chill nights, though they haven't gone below 35º, are about my idea of hell. Only a bunch of sadistic demons would want to pass — and enforce — a Prohibition law in a climate like that of the U.S. "

Thursday, July 29, 2010

Don Boudreaux vs. E.J. Dionne on Taxes [Hint: they're both wrong]

Dionne writes about it here.

Don responds here with:

"E.J. Dionne argues that rich Americans are “undertaxed” (“In American politics, stupidity is the name of the game,” July 29). He quotes the Congressional Budget Office to explain why: “the gaps in after-tax income between the richest 1 percent of Americans and the middle and poorest fifths of the country more than tripled between 1979 and 2007.”

Mr. Dionne’s view of “undertaxed” is odd. The IRS reports that in 2007 (the latest year for which data are available) the top 1 percent of taxpayers in the U.S. paid 40.4 percent of the total income taxes collected by Uncle Sam. This percentage is well above the 24.8 percent of the income-tax burden borne by this group in 1987, the year after the 1986 tax reform. Moreover, the top 1 percent of taxpayers now pay more federal income taxes than do the bottom 95 percent combined!*

If taxes are the price we pay for government services – rather than booty to be extracted simply because someone is unusually wealthy – then Mr. Dionne’s conclusion that rich Americans are undertaxed overtaxes credulity."

* See the Tax Foundation’s Scott Hodge. (New IRS data should be released any day now.)"

I respond to Boudreaux in the comments with:

It seems to me that both of you are looking at the wrong numbers to answer this question.

Shouldn't we be looking at the effective tax rates for each percentile, and then arguing about which makes more sense?

Dionne looks at after-tax income, which only seems relevant to me if you think of the tax code as a mechanism for egalitarianism and income redistribution. Perhaps this is one component of how we could think about taxes, but I think it takes a back seat to revenue raising. The primary purpose is revenue raising - if we want to incorporate some egalitarianism in how that gets done with a progressive tax code, that's fine. But by looking at the after tax income first, Dionne puts the cart before the horse.

Don looks at the share of revenue paid by different percentiles. But this also seems entirely meaningless to me unless you know how much each percentile earned. After all - even if we had a flat tax, you would see the share paid by the wealthiest 1% growing without any adjustment in the tax code whatsoever!!! Would the conclusion be that we should make the tax code MORE regressive in response? Obviously not.

Dionne gets the denominator right and Don gets the numerator right, but both of them on their own are wrong - and they're wrong in a way that reinforces their ideological stances.

The right questions are: (1.) what do the effective tax rates look like, (2.) what is sufficient to finance the government we want, and (3.) what is a fair way to distribute the burden.

Those three questions are acrimonious enough - we don't need to confuse issues even more by using misleading statistics the way that Dionne and Don do.

Now that I look at Dionne's actual article rather than Don's rendition of his article, I see that he does actually talk about tax rates, albeit briefly. What he still doesn't do is talk about the comparative tax rates across income percentiles. The richest of the rich pay lower tax rates than they used to. He says nothing about other percentiles, or whether middle-income tax payers have experienced a similar decline. That's the information you need for an informed opinion on this issue.

UPDATE: The data are in - you can scroll down to some comments by Bill, who provides the data, and my response which provides the analysis. I worked with the data in excel for a while and just summarized what I found. I'll write it up as a full-fledged blog post here tomorrow morning. This is the kind of productivity that can result from peer review.

UPDATE 2: Ya, scratch that - I'm not going to blog about it. You can still go see the analysis in the comment section. Here's my newly emerged concern: percentiles aren't income groups. Its easy to demonstrate that the richest 1% as a percentile increased their relative share of the burden of revenue raising over this period, with a substantial jump from the Bush tax cuts. But what does a percentile really tell you? The richest one percent could be twice as rich one year as the next. What you really need is to compare it for income levels not income percentiles. That's not in the tables I saw, so I'm not going to work at it. The fact still remains that Don Boudreaux and E.J. Dionne were both using a bad measure to make their points.

Jonathan Catalan on the Liquidity Trap

Jonathan's long awaited article on Krugman and the liquidity trap is now up at Rather than skim it furiously now, I'm going to wait to read it more carefully and then perhaps share any thoughts I have. I'm seeing lots of familiar citations in the list of references, which is good! The liquidity trap has a long and circuitous theoretical history that is only complicated by the fact that we haven't seen many of them in practice. I imagine there are more theoretical versions of the liquidity trap than there are historical instances of it, in fact! A lot of people gloss over this and provide inappropriate analysis of the problem in the process - it looks like Jonathan is avoiding that.

I like his first footnote especially: "While Paul Krugman is a Keynesian, not all Keynesians agree with Paul Krugman. As such, any Keynesian reader who takes offense at the criticism aimed at Krugman and equivocated with general Keynesian theory should recognize that this characterization is meant for the sake of simplicity."

I have to wonder - was he thinking of me? Anticipating criticism, clarifying, and qualifying is always very good practice. In other words: always make sure you cover your ass.

Libertarians and Ideological Cross-breeding

Xenophon shares a great link from the blog Really, Libertarians?, about whether libertarians should form alliances with liberals or not. The blogger starts by affirming the libertarians shouldn't attempt to place themselves on the political spectrum. But he goes on to emphasize that that doesn't mean there shouldn't be substantial interchange between the left and libertarians (presumably there has already been such interchange between the right and libertarians).

The discussion is very interesting. I have a few thoughts:

1. First, I find it interesting that he thinks about the "liberaltarian" phenomenon as liberals turning more libertarian and not libertarians turning more liberal. Empirically, I have no clue what direction of conversion dominates. Anecdotally, I can say that I personally moved from libertarian to what I guess you'd call "liberal".

2. And the reason why I made that conversion is important. Libertarian insights in a lot of ways are basic, Econ 101 insights about the efficiency of free contracting writ large and converted into norms or political values. In other words, I think one of the most essential libertarian fallacies is building a politico-ethical system around positive social science findings (and, I want to stress, basic and introductory social science findings at that). It's kind of an odd way of going about formulating a politico-ethical system. We don't adopt Nietzschean super-man ethics because of evolutionary biology, and we shouldn't simply adopt libertarianism because of these insights. I want to be clear - my point is not that you have to mix up normative and positive findings to come to libertarianism. My point is only that it's possible to get everything there is to get out of libertarianism simply by improving people's knowledge of social science. This is only to say that it's not entirely clear to me what should be important here: teaching people more social science, or sharing libertarianism.

3. But even that isn't entirely satisfying - after all, the reason why I abandoned libertarianism was because I kept learning social science. Yes, the market is efficient and the price mechanism leverages decentralized knowledge. But if institutions don't or can't internalize costs and benefits social scientific insights start to militate against the efficiency of markets. Uncertainty and imperfections ensure that market forces, as fantastic as they are, are going to remain sub-optimal. I haven't abandoned any of the introductory insights in adopting these views - the complement the introductory insights that I still use. I still have a relatively contractarian view of human relations. I still take a fairly atomized, individualist view of things. I still come down on Hayek and Mises's side of the socialist calculation debate. But I can't call myself a libertarian. So, if what we really want is to get people to take the implications of social science more seriously, then its not clear that that would move people towards libertarianism either.

4. This all reminds me of something that's been bugging me lately about the way libertarians talk. I recently got Marginal Revolution on my blogroll. I know, I know - that sure took a while. Anyway, the blog uses this language "market-oriented economists" a lot. At first it confused me - Cowen wrote something about how no "market-oriented economists" think the minimum wage raises employment. My response was "haven't you ever heard of Card and Krueger?!?!? It's a little much to say that no market-oriented economists think this". Later it dawned on me - what he meant was "libertarian economists". I think this gets to the point of my feelings on this particular blog post. A lot of libertarians have a pretty twisted view of what non-libertarians think, and the idea that if you're not a libertarian you're not "market-oriented" or "pro-market" is high on the list. I think this sort of thing is completely unproductive. If I were more cynical, I might just as easily turn the epithet on libertarians. I've said before that the market is a lot like a tool in the sense that it works for certain jobs and not for others. You use the right tool for the right job. If you saw someone banging on a screw with a hammer, your reaction wouldn't be "wow - that guy has a deep respect for hammers". Quite the opposite. That's how I see libertarians and markets. I could go around referring to people that see things my way as "market oriented economists", but that would confuse things, just like Cowen and other libertarians that use this phrase as a synonym for "libertarians" confuses things. The fact is there are fundamental differences of opinion - let's leave it at that and stick to the clear terminology when we talk. [ does this all the time with "pro-liberty" too. It can be very confusing if you don't know what the code-words mean].

This is starting to get a little farther afield, but I think the point I want to make is simply that (1.) the link that Xenophon shares is a very good one and the impulse is very good, but (2.) the guy clearly has blinders on and that limits the usefulness of his more fundamental insight. This is fine. We all have blinders on. I'm providing a few counter-arguments here to help take those blinders off, and people should take them how they will.

Personally I, like the blogger, don't see a lot of use for these ideological spectrums. Mostly I just feel like a non-descript moderate, often I feel like a liberal, sometimes I feel conservative, on occasion I feel downright leftist, and fairly regularly I do feel like a libertarian. The center of gravity for me is probably what you'd call "center-left" but the point is spectrums are often a dumb way to think about this stuff, and even distinct ideologies like "libertarianism" is a dumb way to think about this stuff. It is convenient, though - and convenience matters.

Khan and Caplan on Savings

Razib Khan, at the Discover blog, has an interesting post up on a Jonah Lehrer post about early childhood investments, reviewing a recent Heckman paper on preschool. Khan brings in an older paper that looked at the cognitive and non-cognitive impact of early childhood education. The cognitive impact apparently wore off over time, but the non-cognitive impact persisted. Khan relates the non-cognitive effect to the adoption of "bourgeois values", including what he mentions as a lower time preference. He goes through an interesting discussion of the results: is the impact a result of actually changing the brain at a critical point (much like how young children can acquire languages easier than older children), or does it have to do with peer groups? He also links to an interesting former post of his discussing genes and saving behavior as well as culture and saving behavior (both are important).

It's not all that strange to think that time preference is culturally informed. That's the Weber thesis. It's also not all that strange to think of it as genetically determined - low time preference is a fantastic trait to evolve if you want to set up your ancestors for success (granted, first you have to evolve an ability to think abstractly about time in the first place).

All of this meshes very well with Keynes's assertion that savings behavior is as much about psychology as it is a response to economic incentives.

I would also highlight that although Khan only mentions time preference as it relates to savings - it will also relate to investment and the sorts of investments we make. A lot of very important public investments: space colonization, basic research, addressing climate change, etc. are hampered by a high discount rate and short time horizons.


Bryan Caplan also has a post on savings, specifically addressing the critique that expansionary monetary policy and tax cuts won't work because "people will save it". He accepts the liquidity preference justification for the increased savings, and then essentially says "well what's so wrong about satisfying that preference"? I have three thoughts:

1. He does raise a good point that eventually consumer demand could be augmented by satisfying consumer's liquidity preference, but

2. The real glitch isn't consumption - it's investment demand. Now, maybe once corporate liquidity preference is satisfied, they'll start investing because they feel safer. But they're not going to start investing in response to lower interest rates - that's the essential point of the liquidity trap. When cash and bonds become interchangeable because interest rates are so low, further expansion is not going to stimulate activity through lowering the interest rate. Could it stimulate activity through satiation of liquidity preference? Perhaps. But,

3. Wouldn't it be a whole lot quicker, and wouldn't it avoid the risk of substantial inflation after the recovery, if we just augmented demand with fiscal policy? This might not be as attractive if we didn't have a bunch of potential public investments, but... ummm... we do have a bunch of public investments.

I've been fairly agnostic about the monetary policy route - I don't think it holds a ton of promise right now, but I haven't put a lot of effort into shooting it down either. Caplan presents a plausible case for how it could work, but it just seems like it would take so damned long.

Blinder and Zandi on the Stimulus

While I was getting increasingly bearish on the stimulus yesterday, everybody else was talking about a new paper by Alan Blinder and Mark Zandi claiming that we avoided a second Great Depression. Their point and my point don't have to contradict. After all, as I had said a few times in the comments, it clearly could have been much worse. The federal government did nothing other than balance out dumb state policy - but they could have added to bad state policy, the way they did during the Depression (I am not claiming Hoover didn't increase spending - I'm claiming he didn't do what Obama did). We also had better leaders at the Fed than we did in 1929, and we had a more immediate response to the banking crisis. So sure, we hopefully did avoid a second Great Depression (so far).

Blinder and Zandi put out interesting numbers on specific programs, but the analysis is a lot the same as what we've seen from them in the past, from the CBO, and from the White House. There's a good reason for that, which I've also explained here before. We don't have counterfactuals at our finger tips. If John Adams ever bothered to say anything about counterfactuals he probably would have said "counterfactuals are elusive things". So where do Blinder and Zandi get their baseline? Well, they back it out of the actual performance of the economy with a reasonable multiplier estimate. It's about all they can do. I don't personally have a problem with that, but it obviously has its limitations, and it boils down to arguments about theory and previous econometric work. I still don't know to what extent the broader public grasps what goes into these estimates, but the economics blogosphere is well aware of how these estimates are produced at this point. That's not particularly troubling for me. The general public is not aware of how we estimate how much oil is in the Gulf of Mexico right now without directly observing it - but I assume the experts are hotly debating it amongst themselves and holding each other accountable. That's the division of labor, and so far in human history it has worked out well for us.

A few links on the paper:

- Arnold Kling makes the standard macroeconometric critique but I think takes it a little too far. He goes as far as arguing that this is rejected by the profession. Considering so many professional economists are doing this right now, that seems to me to be obviously wrong. I also think its hilarious how many Austrians are chiming in on this point. If professional rejection of a modeling approach is such an important standard for them you'd think... ummmm... they wouldn't be Austrians. Kling does make one really good point: that macro models should incorporate the research on labor dynamics done by Davis, Faberman, Haltiwanger, and others. Which, of course, is exactly what I want to do in a dissertation!

- John Taylor critiques the paper. I'm loathe to even link this. Taylor's own postings on the impact of the stimulus have been completely devoid of even a discussion of a counterfactual. The idea that he would critique the way Blinder and Zandi deal with it when he doesn't even try to is a little odd. Anyway - he just offers the standard critique, which essentially only gets us to "your estimate is only as good as your model" - which is obviously no way to dissuade someone who believes the model.

- David Leonhardt talks about the paper here.

I'm sure there were many others - feel free to share them in the comment section. This paper really doesn't add anything to similar papers that have come out so far, and the critiques don't really seem to add anything to the previous critiques, so its not especially interesting to me right now.

Wednesday, July 28, 2010

Missing George Bush...

...well, not really. But fiscal policy was clearly and unequivocally more expansionary under the Bush administration than it has been under the Obama administration. Commenters seemed to think I was crazy in the other posts, but they cannot alter the state of facts and evidence. This is all readily available to the public. This isn't secret data I'm looking at. It's simply a question of thinking critically about it.

Jonathan, for one, clarified his comment on that last post, and perhaps I jumped the gun in interpreting what he was saying. The shock of what's in the data still stands, though. We've seen a $40 billion increase in real government spending in the second quarter of 2009, and a $16 billion increase in real government spending in the third quarter of 2009.
If we total the change in government spending since Obama entered office (and that we have data for) we get an increase of only 20.8 billion real dollars. Of course there are some adjustments because we're talking in real dollars, but we're only looking a year back in time so it doesn't make that much of a difference. Krugman was advocating 2 trillion dollars of stimulus.
In other words, the fiscal stimulus we've actually done is ONE PERCENT of what the Keynesians suggested ought to be done. That's a f^&*%ing rounding error, people. This is why it's so frustrating to hear people say of Keynesianism "oh we tried that already".
Jonathan's recent comment in the last post is very well taken. It's quite possible some future economist could still get some empirical estimate of the fiscal multiplier out of this mess. That will be a valuable academic endeavor, and hell - as an aspiring macroeconomist I am excited at the prospect of being a part of that scientific effort. And certainly while the government in general is not engaging in fiscal stimulus, we could theoretically say that Obama and Congress are (albeit at about a third the pace required). As a scholar I can appreciate that.
But as an American citizen with a sister entering the job market, a mother in law recently retired and relying on her investments, and a new neice and nephew coming into this society I'm infuriated. My wife and I are doing OK, but a lot of people aren't. Ignorance is no excuse for thinking that we're doing anything about it.

A bad argument against advocates of further stimulus... "we tried that, it didn't work, and now they're just telling us we needed more in the first place - you can't win if the response is always 'well if we did more it would work'."

You hear this a lot - it's either ignorant or disingenuous - and either way it's a really, really bad case against stimulus advocates.

Paul Krugman explains in detail why here. As he says here, this is not some ex post rationalization. The stimulus argument was laid out in detail before Obama took office. I don't know of any economist (there are probably some, but I'm not aware of any) not working for the government that thought the $800K stimulus was a good figure. Independent economists either said it was too small or that it should have been $0. Even some administration economists, such as Christie Romer, apparently thought it was too small as well, but was silenced by poilticos. But I am not personally aware of an independent economist that thought it was right (maybe a few economic journalists, but since when do they run the numbers?).

If you're going to take issue with fiscal stimulus, make the argument on the merits - don't dredge up some ridiculous and easily debunked argument that advocates are just rationalizing after the fact, or that we didn't see this coming.

Krugman of course makes a mistake himself in this blog post - he only mentions the federal government. It looked like we needed about $2 trillion in stimulus, but that means $2 trillion in net stimulus. If the states are working against the feds, that shrinks the actual amount of fiscal stimulus even further.

It seems to me this recession offers a case study in do-nothing or at least do-very-little policy. If you're not happy with the policy response either, I can understand that. But at least be aware enough of your opponents views to recognize why this has been such a disappointment.

It would be a good reason to turn on Obama, in fact, if I thought anyone else out there would have done a better job - but unfortunately this is probably the best we could have hoped for. Don Boudreaux often chimes in on statements like that and says "well why do you want to give power to people that are so disappointing to you". I would think the answer to that question would have been obvious - because minimal fiscal stimulus is better than no fiscal stimulus. Disappointing action on the part of policy makers doesn't imply at all that no action on the part of policy makers is better.

UPDATE: Apparently Krugman tapped into a concern that a lot of people share. Brad DeLong just reposted this too. It's really hard to emphasize enough how dumb some people sound when they attack stimulus advocates from this angle.

Indiviglio on Uncertainty

David Indiviglio, at The Atlantic, shares an interesting looking paper arguing that recessions cause uncertainty and not vice versa. What does this mean for a Keynesian? I have a few thoughts:

1. Well it could mean the Keynesian emphasis on uncertainty about the futureis wrong. I don't think it means that, and even if this one paper means that I don't think one paper overthrows an enduring theoretical framework with a lot of explanatory power, but let's start by being up front and making clear (if it was unclear to any readers) that this presents a challenge.

2. I'd have to read the paper, but this could just be a better explanation of the way declining animal spirits work. "Animal spirits" is a vague and nebulous term. I don't think there's anything wrong with saying that collapse in asset values or a real downturn or a downturn in consumer demand causes a decline in animal spirits and an increase in uncertainty which worsens a downturn. This whole "secondary depression"/"feedback loop" mechanism is very common across a lot of business cycle theories, including Keynesian ones.

3. The Keynesian understanding of uncertainty is primarily tied to liquidity preference, and the idea is that even in good times liquidity preference keeps us below our output potential. I'm not sure how any paper could pick up this "baseline" liquidity preference, which is really the primary way that it comes into the Keynesian model.

4. I wonder how macroeconomic policymaking plays into the paper. In the United States, we actually have taken macroeconomic stability more seriously as a policy objective than a lot of the rest of the world (see the Crooked Timber article I shared earlier on Keynesianism as a substitute for social democracy). If macroeconomic policy is done right and it's not taken into account in the model then I'm sure the effect of uncertainty would be weakened.

5. The paper only looked at the manufacturing sector. Not sure what the implications of this are.

Real Time Economics also picked up the paper, and had this to say:

"One conclusion from the paper is that policy makers can talk about the need to end uncertainty all they want, but jaw-boning won't make much difference. Only increased demand will make business executives feel more confident."
Indiviglio also writes on consumer confidence here.

Assault of Thoughts - 7/28/2010

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

- Arnold Kling makes a really good point I had honestly never thought of before. One of the reasons we have less to worry about when it comes to a debt crisis then, say Greece, is that we have the option of inflating away our debt. Relying too heavily on this is obviously bad news, but some moderate debt erosion isn't that much to worry about - it played an imortant role after WWII, for example. However, the CBO issue brief tthat Kling cites points out that our biggest long-term debt issue, the entitlement programs, only get bigger as inflation increases. The traditional "inflating away the debt argument" doesn't take this dynamic into account.

- Regular F&OST commenter Xenophon highly recommends the most recent EconTalk, where Russ Roberts interviews Robert Service about Trotsky. I haven't gotten a chance to listen to this yet, but Service is always excellent so I'm sure Xenophon is right. Another great Robert Service interview is this one, where he and Christopher Hitchens are both interviewed by the Hoover Institution about Trotsky. Hitchens has an interesting line at the beginning of this interview - Service and Hitchens are asked "was Leon Trotsky a good guy or a bad guy?". Hitchens answers "he was one of the few figures in the Communist movement about whom it would be worth asking that question". To bring this full circle, this is Hitchens on EconTalk talking about George Orwell, but of course also having the opportunity to mention Trotsky as well.

- Xenophon also reminds me of a recent article in National Affairs by Greg Mankiw on the challenge of knowing the impact of the stimulus. He makes a lot of the same points that I regularly do about the challenges of macroeconometrics.

- L. Randall Wray has an interesting post "reaching out" to Austrians and libertarians. It's a little harsh (harsher than my extended olive branches? I think so, but perhaps not), but an interesting review of Modern Monetary Theory (a review I am still desperately in need of, even though I'm a closer cousin to MMT than a lot of my regular readers). I found his point #4 to be especially well put:

"The problem with a monetary economy (you can call it capitalism if you like) is that from inception imposition of taxes creates unemployment (those looking for money to pay taxes). We scale this up to our modern almost fully monetized economy (you need money just to eat, watch TV, play on cell phones, etc) and we get everyone looking for money (and not just to pay taxes). It is sheer folly to then force the private sector to solve the unemployment problem created by the government’s tax. The private sector alone will never (never has) provide full employment. ELR/JG is a logical and empirical necessity to support the private sector. It is a complement not a substitute for private sector employment."
This is a great explanation (with an MMT spin) of why the business cycle is such a prominent feature of modern capitalism. It's largely about money demand.

Tuesday, July 27, 2010

There wasn't really any stimulus

David Leohnhardt makes the case.

I don't know why this is so hard for people to understand. Yet we still hear "we tried Keynesian stimulus and look - nothing happened". Explain to me precisely what "Keynesian stimulus we tried". The Feds filled a hole that the states were digging - once you net that out there was very little stimulus to speak of.

I'm making essentially the same point in an opinion piece I'm sending in to the Washington Post to coincide with the release of the second quarter GDP statistics. If it doesn't make it through, I'll post it here.

This really isn't that hard. We've done some monetary policy, although as many people point out the monetary environment was still contractionary, not expansionary. Fiscal policy was more or less a flat line. That's the policy environment, and the macroeconomic response is pretty much what I would have expected from that sort of policy environment.

Yglesias's Lynching Statistics

Yglesias had a post up yesterday on a really strange attempt by the conservative magazine American Spectator to try to discredit Shirley Sherrod by arguing that her relative, Bobby Hall, was not lynched because he was not hung (he was beaten to death). Yglesias goes through the history of lynching, and some of the reports on the incident, and demonstrates quite clearly that lynching doesn't necessarily mean "hanging", it simply means mob justice before a trial can take place. It often implies hanging, but the act is not required. Why the American Spectator would try to take a stand on this is a worthwhile question for any subscribers to that publication to ask. But I was also intrigued by the graphic that Yglesias included from the Truman administration's "To Secure These Rights" report:

One thing that caught my eye was how many of the early lynchings were of whites. For the first ten years, about half the incidents involved whites, and then very quickly the vast majority were lynchings of blacks. What happened here? One of the books I rescued from the Urban Institute's library before it closed up was the 1966 follow up report on civil rights titled "To Fulfill These Rights", but this report didn't even mention lynching (which I suppose is in and of itself a sign of some progress). I also consulted DuBois's 1915 article on lynching and he doesn't mention the phenomenon of white lynching. I have three theories for what's going on here. If anyone has any way of arbitrating between the theories or has any additional theories I'd be interested in hearing about it:

1. The end of Reconstruction marked the beginning of the Jim Crow era. The late 1870s and early 1880s were a time of institution building at the state and local level; new institutions emerged to control blacks now that the old laws and customs of chattel slavery and the protective cover of the Union Army were both gone. In 1875 or so, while the United States was not a pleasant place for blacks, it was not yet the Jim Crow world that would emerge. I know specifically of former Confederate officer William Mahone, who (at least initially) made political inclusion of blacks a priority in Virginia. But as the institutions of Jim Crow began to emerge this sort of position became untenable for whites, and men like Mahone very quickly began to relent. So - perhaps white lynchings in the 1880s, which quickly dropped off afterwards, were a form of institutional enforcement. Whites were lynched early on for the same reason that blacks were: they weren't sufficiently deferential to white privilege. Perhaps a few tried to defend blacks during lynchings and suffered the same fate. As the institution matured, whites "learned their place" as it were, and didn't make any attempts to challenge a system that, after all, provided them with privileges. It seems like a reasonable explanation.

2. Lynchings became racialized. There are a lot of things in our society that are thought of as "black things" or "white things". Crime and punishment is no different. The South has always been a violent place, and its not particularly surprising that mob justice was meted out to whites as well as blacks. But when lynching became a specific tool of Jim Crow, it became a "black punishment". Part of keeping the disparity between whites and blacks intact was to make sure that whites weren't subjected to "black punishments". Violent outbursts are racially categorized - you don't hear that much about black duels and you don't hear that much about white lynchings. You can see this trend in servitude and slavery itself in the very early South. Bound servitude was initially a fate of both whites and blacks. But very quickly chattel slavery was distinguished as an institution for blacks alone. In a sense this explanation, like the first one, is very much an "institutional emergence" explanation.

3. Bad statistics. You can't work with data of varying quality every day and not keep in mind that the statistics might just be bad. It's quite plausible that total lynchings were much higher in the 1880s than is reported here, but that white lynchings were reported and counted more often than black lynchings. As the years went on and this was recognized as a real problem, counts of black lynchings became more accurate. If this is the case, then the substantial number of early white lynchings may be a mirage - they may have formed just as small a percentage of the total as they did in later years.

Monday, July 26, 2010

Assault of Thoughts - 7/26/2010

- Two about-faces on liquidity preference and sub-optimal output. Brad DeLong shares how Niall Ferguson went from being a guy that recognized liquidity preference put us on a sub-optimal production level and that we could have both "guns and butter" for a period (oddly enough, he understood the logic a decade ago and thought it applied, but he doesn't think it applies now). Robert Samuelson, on the other hand, has an article talking about the breakdown of Okun's Law - and at the end he essentially makes a liquidity preference point. He also makes a lot of interesting institutional arguments for the breakdown of Okun's Law. Brace yourself, though. You're going to cringe when he calls the thoroughly Ricardian terms of labor and capital "Marxist vocabulary". I guess strictly speaking it's not inaccurate. It is Marxist vocabulary. But it's also pretty standard, orthodox, classical vocabulary.

- Evan has an interesting post on book buying habits, following up on his recent thoughts on Amazon.

- Mario Rizzo has a critique of Brad DeLong that I think falls a little flat. See if you agree - my comment is a little ways down. Let me give this to Rizzo - if his interpretation of DeLong is accurate, his critique is correct. The problem is, his interpretation is a little silly and he reads way too much into what DeLong said.

- The Wall Street Journal publishes a "well duuuuhhhh" article on language and culture (which I suppose is still better than a wrong article, which they've certainly had more than a few of recently). Hasn't anyone heard of Wittgenstein? Speaking of Wittegenstein, he was a friend of Keynes's. Keynes once wrote, after picking Wittgenstein up when he came in to visit "Well God has arrived; I met him on the 5:15 train". Apparently the guy made a positive impression on Keynes.

Some Defunct Economist - 7/26/2010

"Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist" - JMK

- Brad DeLong quotes extensively from David Pilling's article on Keynesianism in Asia, and the justified faith that people have in it there. The article also seems to make the cautionary point that effective stimulus was possible in Asia because of the large cash reserves. I would be careful about taking this too far. It's also plausible that growth and living standards were depressed precisely because of years of that public liquidity preference. Regardless of the wisdom of that hoarding policy, Asia is a good place to look to evaluate Keynesian performance now. Krugman also has comments on Pilling here.

- Crooked Timber has an interesting interpretation of a recent Martin Wolf article, suggesting that Keynesianism is an (inadequate) substitute for social democracy. He ties it into the recent Krugman-Cowen debate over Keynesianism and Germany.

- Firedoglake asks the question "why do conservatives hate Keynes". Part of the answer, the author argues, is that Keynes was not afraid to criticize people who hoard capital. I think this is largely on target. It's amazing how many critiques of Keynes simply revolve around things like the "euthanasia of the rentier" rather than actual analytical critiques. In a way that's unfortunate. But I also wouldn't do away with Keynes's "euthanasia of the rentier" or any of his other rhetorical flares. They keep the reader focused. Economic policy is about the public good, not the special interest, and we can't ever keep our eyes off of that. Fighting for some vague notion of the public good isn't an excuse for bad analysis, though - and Keynes is laudable not simply for his enthusiasm but also because analytically he got so much right. But I think that energy is essential.

I would caution Firedoglake against some of its language and approach here. First, they criticize those who "own and manage capital" - this isn't something that Keynes himself ever harped on. In fact, Keynes made it very clear that those who manage capital deserve substantial compensation for a very challenging job. His concern was the rentier, not the managers. The ones who earned without contributing anything to society. The critique was a social and political one as much as an economic one, but it was generally speaking not directed at managers of capital. I'd also echo Lee Kelly's comment from an earlier post that FDL and others in that crowd really need to clean up their language around savings and investment, and this post is no exception. The post makes the important point that not all savings ends up being invested. But then later in discussing sinking funds, the critique is that the money is "saved rather than spent". Well earlier they said that some but not all savings are invested, so is this sinking fund partially spent? "Savings" in the first instance seems to mean a stock of loanable funds, and in the second instance it seems to be a hoard of some sort. This is why we need to be very clear about the distinction between supplying savings to the loanable funds market and liquidity preference. Treating "savings" in one instance as the excess of income over consumption and in the next instance as a hoard, at the same time that many others talk about savings as supply in the loanable funds market is all very confusing. Better I think just to talk about liquidity preference explicitly the way Keynes did.

Sunday, July 25, 2010

Cowen on substitutes and the liquidity trap

Regular readers know that I think the liquidity trap is intriguing and certainly relevant right now, but more of a theoretical curiosity than a hugely important factor. Tyler Cowen makes much the same case in this post, which thinks through the zero lower bound argument by reviewing the importance of substitutability in other markets.

Cowen argues that adjustment can be slow for very close substitutes, but that it will happen - and many other factors are important than just the substitutability of cash and Treasuries for the adjustment process. That's all well and good, but the fact remains that the adjustment process is considerably slower for closer substitutes than it is for substitutes that are much less close. It is precisely the close substitutability of cash and Treasuries that makes all the other issues that Cowen talks about relevant right now, and that is the sense in which the liquidity trap is meaningful. Cowen uses the example of the close substitutability of grapes and pluots to talk about the liquidity trap, and he says that substitutability alone does not explain the adjustment. His appetite, for example, is also a factor. I would only add that we're only even talking about "appetite" as a factor because what is introduced is more food (pluots). If Cowen's house guest had brought, say, a bottle of wine we might think of the wine and the grapes as complements rather than substitutes. "Appetite" in the sense of how much food you feel like eating is no longer a constraint at all, because it might be very nice to have wine and grapes together. The close substitutability of grapes and pluots is disconcerting precisely because it introduces the relevance of other constraints like appetite.

That's largely how I think about the liquidity trap. It makes things problematic that wouldn't be problematic under other circumstances. Other than that, it's hard to stretch this metaphor much farther. Grapes and pluots aren't media of exchange, stores of value, or opportunities for speculation, after all - so I'm not sure how much mileage Cowen thought he was going to get out of this. I suppose it works as an explanation for portfolio adjustment, which is what he claims he's talking about. But since when is the importance of the liquidity trap derived from balancing the composition of your portfolio between cash and bonds? That's not really the major point. The point is the demand for liquidity as well as the impact (or lack of impact) of monetary expansion on the interest rate.

I guess I'd offer one more interpretation to push this metaphor a little further. If you were Cowen's house guest and you knew about his grapes/pluots dilemma, it would probably make more sense for you to bring that bottle of wine that would complement grape consumption, rather than those pluots which would be close substitutes for grapes, right?

What could possible complement liquidity preference right now - what could encourage households and firms to work through their liquidity preference - rather than exascerbate it? Probably some additional aggregate demand, right?

To extend, or not to extend

Lately I've been puzzled by this surge of interest on the part of the Democrats in letting the Bush tax cuts for the wealthy expire. I can't understand what possible benefit that could provide us right now. It only makes sense to me as an act of vengence - I see no macroeconomic benefit. Quite frankly, I'm not interested in vengence.

Don't get me wrong, I don't think the tax cuts were a good idea in the first place. They were unnecessary at the time, and they blew a big hole in the budget for no good reason. I would have prefered they never passed in the first place (or at least that a smaller cut, with a different structure was passed). It certainly should have been reconsidered when the war really started heating up. But that was then, and this is now. When the facts change, I change my mind. And my mind simply cannot come up with anything positive that could come from letting any of these tax cuts expire.

Until this morning, when I had a thought. Perhaps letting the cuts expire would make a few key votes in Congress less concerned about additional fiscal stimulus. Generally speak, spending is the key issue during a downturn, but if you can do that spending with deficits that's all the better. But really, at this point, we're going to be dealing with a bunch of second-best options. Is it better to raise taxes on the wealthy in the middle of a severe downturn and get more stimulus than it is to keep taxes low and have no stimulus? My preference would be to let the wealthy keep their tax cuts for the time being and have more stimulus, but if I can't have that which would I prefer? We might be better off with the expiration and additional stimulus.

Of course this is all just a thought experiment. There's no guarantee at all that a compensatory stimulus could come out of letting the tax cuts expire. And it would depend on a few key votes from some deficit hawks that are not ideologically opposed to fiscal stimulus (a small sub-population indeed). Republicans would see this as the worst of both worlds. It would only really be convincing for conservative Democrats who worry more about the deficit than they do about the wealthy, and it might not even work for them.

It's a dicey political game that's very unlikely - so I'm still in the "don't let it expire camp". But it was an interesting thought.

Can anyone furnish any good reason to let the tax cuts expire (right now at least)? I simply can't come up with one.

Saturday, July 24, 2010

Have I found my leftists?

Recently, Evan suggested to me that I try to actively engage leftist or radical positions in the same way that I engage libertarian and Austrian positions. With the Austrians, I find that I buy a lot of what they have to say - they have interesting insights that have a sense of being "untapped" because they are so out of the mainstream. But they have more than enough analytical, methodological, and philosophical problems that the debate I can have with them is always lively. They're also very active on the internet, which makes the interaction easy.

Evan suggested that I engage radicals in the same way. I'm not entirely opposed to the radical/socialist/leftist outlook. I've found the Trotskyite/New Left position enriching in the same way I've found the Austrians enriching - lot's of good insights but enough differences that I'd never personally align with them. Also, like the Austrians, they are very good at history of thought, which is always intriguing for me. Usually, I turn to Dewey, Hitchens, Orwell, etc. for this stuff. These are guys that don't leave any doubts about their positions on human liberty - which of course makes me more comfortable. Aside from that explicitly anti-totalitarian nexus on the left, though, it's slim pickings. Mattheus von Guttenberg gives an excellent example recently of a Marxist blogger that was so nonsensical he couldn't make heads or tails of the encounter (I would provide a link, but Mattheus and Jonathan's website is temporarily down). In the past I've shared similar concerns about Slavoj Zizek ravings about the end of capitalism. It's just hard. Even the good, sensible Marxists are speaking a whole different language from most of us - but a lot of them aren't even sensible.

Anyway, recently I've posted on the Modern Monetary Theory/post-Keynesian perspective. Whether they're really deficit owls or just deficit super-doves is up for debate. I can't help but get the sense that they're just repeating "solvency isn't a problem! solvency isn't a problem!", while the rest of us Keynesians are calmly saying "we know solvency isn't a problem - we never said it was - we're worried about real growth". If that's all going further down the rabbit hole of post-Keynesianism is going to get me, I'm not sure how fruitful it will be. But maybe they have more to say than that. I may just have to follow their blogs for a while and see. I don't want to just write a bunch of posts on solvency. We shall see. They're not radicals, but I may have found my leftists, Evan.

What do readers think? Would more post-Keynesian material, links, and well honed sniping to draw commenters in be interesting?

I still haven't quite given up on the idea of engaging more of the full-blown Marxists. Does anyone know of intelligible, engageable, interesting radical blogs/communities out there? I think New Left/Frankfurt School type stuff would be best. It would be a real learning experience for me, but I think if a reasonable person wants to engage the left, this is the left to engage.

A young Marx once wrote that philosophers have thus far only interpreted the world, but that the task is to change it. It's hard to argue with that. My problem with many leftists is that they have taken up the banner of change and left the banner of intepretation lying on the ground. That's dangerous - you have to continually re-evaluate your position and your ideas. To me, that's the major liability of the left. We shall see - let me know what you all think.

More on the owls...

In this post critiquing Davidson, Galbraith, and Skidelsky's passivity with respect to the long-term debt, I got several interesting responses from post-Keynesian commenters. A lot of it was resources on the "deficit owl" perspective. I spent a little time looking through each, and doing a cursory review of what they call "Modern Monetary Theory" and has also been called Chartalism (really not a strategically developed name, which I'm guessing has more than a little to do with the newer MMT designation!).

Most of the emphases of this school of thought are right on target. They specifically highlight the implications of sovereignty for the federal debt. A sovereign debt crisis in the U.S. is not a risk the way it is in Greece because we have the freedom to monetize our debt. Of course these guys also talk about functional finance, stabilization policy, and liquidity preference. This is all very good - it can be hard to get a New Keynesian to talk about liquidity preference sometimes! So the real sticking point seems to be the debt. We agree debt monetization removes the risk of a sovereign debt crisis - this is quite standard analysis and not anything that really distinguishes Galbraith, Davidson, and Skidelsky from Reich, Stiglitz, and Krugman. I think the Krugman point (recently, in a disagreement with Galbraith) is the important point to make - debt monetization provides budgetary flexibility (on top of the already substantial flexibility provided by our credit rating and the nature of sovereign governments), but it ultimately just kicks the can down the road. Problems emerge later in terms of inflation and interest rates, but more importantly real growth rates. Janos Kornai's famous observation that governments face "soft budget constraints" doesn't mean that they face no budget constraints. I read and buy into Keynes, Minsky, and Lerner - but I also read and buy into Reinhart and Rogoff (and, well, Keynes!) on the risks involved.

One intriguing option raised by Joe Firestone in the comment section of the last post is to stop issuing debt instruments and just start crediting bank accounts. He provides this link to that option, and L. Randall Wray discusses it further here. They essentially want to cut out the middle man of the Federal Reserve. I don't know enough about the implications of this, and I'd love to hear more discussion in the comment section, but two thoughts immediately come to mind. First, this would bring an end to independence in monetary policy, which is not a pleasant prospect for most economists. Second, as James Macdonald argues, public debt has historically been an essential element in restraining government. Hoarded treasure (aside from being macroeconomically inefficient) ensures that sovereigns are unaccountable to their citizens. Citizen creditors ensure that their government stays accountable. Cutting out this debt instrument gives a sovereign all the revenue-raising power of government bonds, without any of the risk of nervous creditors restraining policy. Perhaps a robust republic can be maintained in such an environment, but if the Macdonald point is right, the chance of abuses are very real.

OK, enough talk. Time for some links. Thanks to Joe Firestone for sharing most of these:

- New Economic Perspectives is a post-Keynesian blog I've followed for a little while now.

- Warren Mosler's blog

- This is Bill Mitchell's blog. Mitchell is at the University of Newcastle's Centre for Full Employment and Equity.

- Here is an interview of Randall Wray and Bill Mitchell, talking about MMT. This is the first one, there are several more that follow.

- Firedoglake and Corrente post regularly on Modern Monetary Theory. I've pulled the MMT tagged posts here (FDL) and here (Corrente) for your convenience.

- Recently these guys had a "fiscal sustainability teach-in" at my alma-mater, The George Washington University. The website for that event is here. I know a guy that was involved in this (Alex Lawson - big activist/advocate if any readers know of him), so I heard updates from it. It did a lot of important work I think - trying to educate people on why Social Security isn't the big risk a lot of people think it is. Of course, as my comments above suggest, I also think they down played more genuine risks.

- Joe Firestone shares this New Deal 2.0 post with me to "address some of the concerns" about the long-term debt. Of course nothing Wray writes in here is new to me or controversial to me, nor does it address the concerns I have. I'm not worried about our ability to pay back our debt. I understand why public debt is different from private debt. And regular readers can attest to the fact that I'm not shy about running up deficits. The bigger concern for me is the impact on real growth rates. And that, of course, is precisely the point that this blog post ignores. Anyway, I have two other reasons for highlighting this: (1.) New Deal 2.0 is another good site worth following, and (2.) an interesting historical point they make. The only time we've ever retired the debt was in 1835. In 1837 we had a severe depression. Does anyone know if these two events are related? I imagine at the time the federal budget was too small to make this sort of macroeconomic difference, but it's possible. Nothing says "liquidity preference" quite like a sinking fund. Anyway - just a query. Joe also provides, this, this, this, this, and this to "address my concerns".

- I'll also share once again the Levy Institute's website. This group does a lot of work with Minsky's theories, and also has strong post-Keynesian influences. This is their program on Monetary Policy, and this is an interesting recent working paper from them outlining what "fiscal responsibility" should mean. I thought this was an especially good passage. It highlights the MMT argument, and it provides an interesting philosophical justification and explanation of the role of government:

"If the government acts not as a self-interested individual, but in order to allow citizens to achieve their intended expenditure decisions, it must engage in policies that support private sector decisions in such a way that they lead to public good. It should act to coordinate and offset the incompatible combination of firms’ and households’ intentions. If households follow the rule of virtue and seek to save too much, then the government should run a fiscal deficit that is just equal to the shortfall between households’ desires to save and firms’ expectations of profits. By doing so it can allow each individual to achieve his desired objective. But, it also avoids the loss in income that would result from the mismatch. Here the government can intervene to make private vices into public virtue by encouraging prodigality when the private sector desires to be frugal. Government prodigality is the equivalent of supporting public virtue! This is the fiscal policy of a responsible government, responsible to insure that private sector decisions can be achieved rather thwarted by the law of unintended consequences."

Webb and Affirmative Action

Since we're going down the divisive race-tinged politics path, I'll also share an excellent op-ed by my Senator (who, I might add, I voted for in his race against George Allen), Jim Webb, on why we should get rid of affirmative action programs.

Webb makes two points about affirmative action that I consider to be quite self-evident:

1. It is fundamentally unfair and discriminatory, and
2. It was an absolutely defensible, if imperfect, remedy for centuries of state-sponsored discrimination

These two obviously butt up against each other, and I've fallen out on the pro-affirmative-action side of that clash, while still recognizing the truth of both points. He buys both of these arguments too, and then he makes some very good additional points in favor of dropping affirmative action:

- Affirmative action now is not helping who it is supposed to help: African Americans. Non-African American "people of color"are benefiting from this policy despite the fact that their history of discrimination doesn't even begin to approach that of African Americans.

- Race based policies that treat whites as a monolith ignore disadvantaged white sub-populations deserving of help (Webb specifically mentions poor Southern whites). At the same time, they give a leg-up to "people of color" that are advantaged by treating "people of color" as a monolith (more recent Asian immigrants, for example). This isn't some naive "we should be color-blind" point. This is a serious point that monolithic racial thinking obscures disadvantages within the categories "white" and "people of color".

I think these are both sensible observations. Am I swayed on my position on affirmative action (which I actually came to through a long, complicated, acrimonious episode on campus at William and Mary - it was not a position I came to casually)? Not by this op-ed alone, no. But I think he makes some excellent points.

I would add one of my own - one nagging problem I have had with affirmative action even through my conversion to being a supporter of the practice. Affirmative action generally improves the chances of people of color at later stages of their lives: college and employment, specifically. It seems to me, by then the problem is already entrenched. The real disadvantage faced by African Americans is not in the admissions committees of colleges, it is in the quality of primary education in their communities. It seems to me, affirmative action at these later stages does nothing to impact the root cause of these problems. It's a farce, in that sense. Perhaps it takes a few real achievers from bad schools and gives them a chance to shine as they could have shined in high school if they had a more supportive environment. Perhaps. And that's what's kept me supporting the program. But it isn't a solution for black students who have already lost out in elementary school and middle school, where I imagine the bulk of the problem lies.

On Secession

Three blog posts recently on secession:

- OK, the first is technically on nullification - the Mises Institute interviews Tom Woods on his new book on state nullification. For those of you not familiar with him, Tom Woods is an Austrian-oriented historian that I have a big problem with when it comes to the 1920-21 depression. But that's another matter. His new book is on nullification.

- David Ribar, a fairly liberal economics professor at UNC, an alum of my alma mater (William and Mary), former professor at my other alma mater (The George Washington University), and one-time co-panelist at a Southern Economic Association conference, does a round-up of recent secession-happy Republicans, and reviews one case in particular.

I actually think secession isn't as unreasonable a position as a lot of people think it is. I don't see how you can admire the founders and admire Jefferson and the Declaration of Independence in particular and not be ethically and legally fine with secession. We cannot be a nation of, by, and for the people if the people are not free to withdraw their consent to their government (an enormous irony of Lincoln's famous address).

Nullification, I think, is a different matter. It may have been a tenable position in the early antebellum period, when the institutions of governance were being worked out. But decisions were made, institutions developed, and social contracts (much as I hate that term) were forged. Nullification now is repudiation of that institutional evolution. You cannot remain in the Union and repudiate the terms of Union at the same time. To a certain extent, then, I suppose all I'm really saying is that nullification amounts to secession. I oppose the very idea of nullification as a course of action that stands independent of outright secession.

So I actually wouldn't be as critical as Ribar is, but I wouldn't be as enthusiastic as Woods is. My question for secessionists isn't so much "how could you think this is legal or ethical", as it is "how could you possibly think this is necessary or desirable"? They are treating the dumbest move on the part of the South like it was its greatest triumph. I'm not as dismissive of the Confederacy as a lot of people are, and I hold a fairly nuanced view of the Civil War. But even a "less dismissive than average" view of the Confederacy I think can still be nothing more than a qualified disapproval. Even those positively disposed towards the South as a civilization have to recognize the attending evils of the Confederacy, and not just the evils but the unforgivable blunders. And secession is among those blunders. It's not a question of "can they do that?" for me. They can. It's a question of "why would you do that?". The leaders of the secessionist movements in the antebellum South need to be regarded, even by sympathetic Southerners, with "impotent fury" (to quote Harper Lee). One might defensibly say "with Lincoln's army marching and threatening my home, I'll pick up my gun and fight". One cannot defensibly argue that secession was intelligent, or well-advised, or in the interests of the South. It's even more infuriating that so many secessionists, then and now, uphold Washington specifically as an icon; Washington! - one of the greatest examples of what it means to be a "Union man".

Anyway, I'm not lawyer but the legal niceties of secession never bothered me all that much. The right to secede seems to me to follow naturally from the right to incorporate a state in the first place. Any statute on the books that would oppose that right simply begs the question. After all - it's precisely that statue book that presumably one is seceding from! The question of why one would even consider the prospect of secession, so long as the United States remains such a paragon of republicanism, liberty, and democratic representation - that is a question that I simply can't answer.