Tuesday, November 30, 2010

Some posts on Austrians

First Brad DeLong - you've gotta appreciate this: Austrians as the "mutant descendants" of Marxism. Now that sounds pretty cool even if you're not a DeLong fan, doesn't it? I wish I was someone's mutant descendant... ya'll would probably say I'm the mutant descendant of John Law or something, I don't know.

Matt Yglesias will probably also piss a few people off.

BTW - I kinda sorta defended you guys against Brad recently here.

There are problems with prominent non-Austrian treatments of the Austrian school to be sure, and I'll try to highlight those and highlight what I like in the Austrian school (yes, there are a few things I do like). I'll muster more moral indignation when I see a higher share of Austrians being reasonable in their approach to Keynesianism.

...and IMO, people should temper their outrage at a post with goofy Grecian dialogue and mutants.

This will be an awesome event...

...and I strongly encourage readers to listen to the audio webcast or show up if you're in the D.C. area on December 10th.

The discussion will be held at the Urban Institute and is called "New Unemployment and What to Do About It: Jumpstarting the Job Market". There will be a series of interesting guests. First, Tim Bartik of the W.E. Upjohn Institute for Employment Research will be there. The Upjohn Institute does some really incredible labor economics research that I've been following for a long time. Bartik is especially good - he's long been an advocate of job creation tax credits (corporate tax cuts for newly hired employees), a policy favorite of mine. I like to think of these policies as the labor-demand equivalent of the EITC. Bartik actually has a history of debating the merits of these tax credits with some of my colleagues here at the Urban Institute in the Tax Policy Center who are more skeptical.

Next there is Robert Graboyes of the National Federation of Independent Business (NFIB). I don't know Graboyes, but I know the NFIB. They're the ones that produce the data that says loudly and clearly that we have aggregate demand issues, but for some reason always lobby against regulation and taxes as the biggest problem for business.

There will also be Cliff Johnson of the National League of Cities. I don't know him. Finally, Bob Lerman of the Urban Institute - long time advocate of community colleges and apprenticeship programs - will round out the list of panelists. Lerman is a professor of economics at American University, a celebrated labor economist, and one of my graduate school references. I'll actually be with him on a site visit investigating the operation of an apprenticeship program in Indiana for the two days prior to this event.

Margaret Simms, a really wonderful economist here at the Institute and all around nice and insightful person will be moderating the panel.

I am really going to think hard about the questions I want to ask (I always ask questions at these things). I kinda want to make sure the NFIB guy knows what his data actually say, and challenge him if he side-steps that - but I also would like to hear more about the job creation tax credits. This should be a very interesting talk.

H. Vernon Eney - Goldbug

On a few occasions I've talked about my great-grandfather, H. Vernon Eney, and his work as president of Maryland's 1967-68 Constitutional Convention. The Constitution failed, but it was an important reform effort that tried to make the state government more efficient and more responsive to the needs of modern society. I've previously called his work an example of a non-reactionary case for states rights.

Well, one thing I don't share as often (that I haven't shared at all) is that in the thirties, Eney also played a small role in pushing back against the Roosevelt administration's most important policy of monetary stimulus: the demonetization of gold. I was reminded of this recently by a Peter Klein post about the "gold clause" cases in 1935. Eney argued a less famous gold case before the Supreme Court in 1937 (I believe this was ten years after he passed the bar). To be honest, the argument on the part of Eney's client (Machen) and two other petitioners was a little contrived. All three petitioners were arguing that they deserved interest payments on their Liberty Loans from after a 1935 redemption call. The argument was that the call was made null because it was a call on the initial bonds but did not stipulate that payment would not be made in accordance with the language of the initial bonds (i.e., in gold). They argued that "the payment that it [the call for redemption] promises is not the payment owing under the letter of the bond", and so was not valid.

The court ruled that the call for redemption was simply a notice that must be construed in the context of current law, and current law had stated that gold would not be paid out by the Treasury (this was the issue at stake in the earlier, more controversial rulings). The notice wasn't nullified by the fact that it didn't explicitly note that payment would be in a manner different than what was laid out in the language of the bond and so the petitioners were unjustified in demanding interest payments after the call.

Riveting stuff, huh? Anyway - I've always thought the small part that Eney had to play in monetary policy during the Great Depression was interesting, and this post by Klein today reminded me of it. It would probably be a stretch, I suppose, to say that if he had won it would have worsened the "depression within a depression" of 1937!
Note: Justice Cardozo, who delivered the opinion of the court in this case, is pictured above. Cardozo was appointed by Hoover in 1932, and was generally considered to be a liberal justice. He has also been said to look like Conan O'Brien, but I personally don't see it.

Monday, November 29, 2010

The Practice of Macroeconomics - A Few Rules

There have been three good posts recently from Paul Krugman, Arnold Kling, and Steve Horwitz on how to do macroeconomics (or in Horwitz's case, Austrian economics in general). Krugman makes the point I often do that you can't assume that all macroeconomic episodes are created equal or that they should be responded to in the same way. It's a point that Jefferson and Keynes have both made emphatically, and one that Tom Woods and Bob Murphy would do well to digest. Arnold Kling makes several points on here about identification problems in macroeconomics. He also notes the relationship between model building and a person's macroeconomic priors. I think this is very important, and a good introduction to the way that empiricism can be used to pursue truth (and the ways in which it cannot). Steve Horwitz wrote a very thoughtful post with a lot of very thoughtful comments on what Austrian economics is - emphasizing for the most part the Peter Boettke's ten tenets of Austrian economics and Steve's own concerns about the tendancy to mesh positive and normative insights.

These all got me thinking more concretely about a few thoughts/rules of my own on the practice of economics and macroeconomics in particular that I've been thinking about for a while. I think they broadly relate to these three posts insofar as they emphasize how we have to approach macroeconomics pragmatically rather than dogmatically, and how to keep our approach objective despite the obvious judgement calls and normative concerns.

Rule # 1 - The economy is complex so you cannot successfully build it up deductively. This is not to say, of course, that deductive logic is useless. It is useful - but as a tool to be employed when necessary, and not as a totalizing method. The problem with building a macroeconomics out of strict deductionism is that there are simply too many factors to account for - we are faced with what is essentially a knowledge problem. Deduction can certainly illuminate specific processes that go on in the economy, but one cannot hope to get an adequate picture because of the very real risk that the necessary and true axioms identified are insufficient for determining the system. In other words, deductive logic should not lead you astray if you do it right and if it remains circumscribed (both of which are very big "ifs"), but it will lead you astray if you make the mistake of thinking you can rely on your deductions for a sufficient picture of the macroeconomy.

Rule # 2 - Start with theory, whether it is deduced, induced, or inherited. We need some way to conceptually organize what we empirically observe, and if we want an understanding of the macroeconomy we need some framework for understanding macroeconomic processes. So you need a story or an explanation - a theory. Where you get this theory isn't terribly important as long as you understand that what you have is a theory and not a statement of exhaustive truth. Deductive logic is very useful in theory construction, of course. But induction can be a useful approach as well. If we observe, for example, that cyclical unemployment is primarily determined by movements in hiring rates rather than separation rates, that observation can be used to think up a story about why that might be the case. It's also fine to acknowledge that you're relatively new to macroeconomics, but everything that some older, wiser scholar said has the ring of truth, and so you adopt that perspective as a theoretical starting point. The key is to understand that you are not claiming a truth - you are constructing a way of understanding the world. Pitfalls still exist for deduction (I describe these above), induction (the pitfalls of induction should be abundantly obvious), and inheritance ("arguing from authority" is never good, and hero-worship is always a risk). But these problems and fallacies are only really problems if we think of theory-building as truth-claiming. It's not. And I can't emphasize this enough. Epistemological insights are useful for science, but science is not the search for "truth". It is the search for useful approximate knowledge of the world. Theories are ways of organizing knowledge and information - they are not "truth".

Rule # 3 - History is simply past behavior of the human species and as such it is essential to the scientific study of the human species - once you have a theoretical framework your first task is to corroborate it with history. Verification of theory is extremely hard. We think it is only possible through deductive verification (which we established as futile in Rule # 1) or falsification, but falsification never provides definitive proof of truth (only definitive evidence of un-truth), and what falsification can provide us with is very hard to come by because true falsification tests are hard to arrange. However, corroboration (which is necessary, but not sufficient, for establishing truth) is comparatively easier, and therefore we should first exhaust our options for corroboration of theory with evidence. In other words, to establish the truth of a statement about the macroeconomy, we would like to uniquely map our theorization space onto our observational space (i.e. "what we theorize uniquely implies X", or "we would expect to see X given our theory") and uniquely map our observational space onto our theoretical space ("what we observe uniquely implies Y understanding of the economy"). The latter is very hard to do, but the former is somewhat easier. If you cannot corroborate your theory with what happens in the real world in every episode that comes up, you're in trouble, because you know your theoretical space cannot map onto your observational space. The fix may be relatively easy - you just recognize that you've identified one economic process among many. That's no reason to abandon your theory - that's a reason to expand your understanding of the economy. You may also have to modify the theory itself. This happened when people realized the Phillip's Curve needed to take expectations into account. This should illustrate why corroboration is very fruitful. At the very least it gives us a pragmatic theory that we can say seems to fit a lot of circumstances (and so should be a decent guide for future circumstances), but it also allows us to start the task of weeding out or fixing bad theories. It doesn't give us definitive proof, but it is a very important task. This is how I see the work I've done (and continue to do) with 1920-21. It's quite obvious how 2007-2010 or 1929-1933 corroborates the Keynesian story. 1920-21 is more of a head scratcher for some people, so it was worth some attention. It didn't take that long to realize that it actually doesn't provide an obstacle to Keynesianism at all. It's perfectly consistent with Keynesianism - a Keynesian would expect to see 1920-21 play out exactly how it did. So my theory maps uniquely onto my observation. The problem is, a couple other theories seem to be corroborated by the episode as well. ABCT and monetarism also map onto the observational space we are presented with in 1920-21. So the question is - of the theories which uniquely map onto the experience of 1920-21, which theory or combination of theories does 1920-21 uniquely map onto? That is a tougher question.

Rule # 4 - Theorization is the task of elaborating economic processes of which many could be true. From Rule #'s 1 and 2 another point starts to emerge - that our brains are inadequate to rule out additional theories deductively or inductively so any story-telling we do about the economy cannot be assumed to be exhaustive. What we are doing is theorizing economic processes and hoping to understand and integrate enough of the important ones to have a useful (not exhaustive or strictly "true") description of the way the economy works. I think this point is especially easy to grasp for someone coming from a New Keynesianish perspective. New Keynesianism as a theoretical project was largely the cobbling together of lots of different processes and market failures that could explain the idiosyncrasies of the observed economy. We had credit rationing, asymmetric information, wage rigidity, money illusion, efficiency wages, irrationality, bounded rationality, myopic discounting, frictions, etc. to explain all the funny stuff that could go on. It was an exercise in economic process identification, not economic truth proclamation.

Rule # 5 - Try to uniquely map observations onto theories, but don't hold your breath. You should always look for good opportunities to actually try to verify theories with data. This is very hard for macroeconomics because of how sparse data is. It is especially hard when we are interested in particularly rare phenomena (like depressions). Ideally we would want to have two cases that are exactly identical except one case implements the desired amount of fiscal or monetary stimulus and one doesn't. We could compare the two and get a legitimate test of various theories' implications about fiscal or monetary policy. The problem is, (1.) it's hard to establish that two historical circumstances are exactly the same, much less close enough for comparison, (2.) most of the time some intervention is tried (so there is no counter-factual), but often it's not of a magnitude that anyone is happy with, and (3.) it's hard to get sufficient statistical power even when we do have a case to look at. Macroeconomic theory testing is extremely hard for these reasons, as I mentioned recently in another post where I noted the fact that I came to macroeconomics via labor economics (which has been able to perform much more rigorous and plausible empirical analyses and has quite a high bar for satisfactory identification). I've essentially concluded that this sort of strict theory-testing empirical work is practically impossible in macroeconomics. There are a few good examples of it - like Barro's work on the multiplier. Those are always great to have. But for the most part you're grasping at straws. Empirical macroeconomics mostly has to stick to (1.) providing parameters to plug into theoretical models, and (2.) corroboration/checking for consistency with observation.

Where does this lead, in a nutshell?:

1. Less "schools of thought"
2. More openness to the operation of mutliple processes
3. More history in macroeconomics
4. Less fretting about microfoundations. They're nice and I'm not saying they're bad, but notice they don't feature very prominently in my schema.

Horwitz on Austrian Economics

Steve Horwitz has a good post on Austrian economics, what it is, and what it isn't. Maybe I'll try to comment more extensively in the future on it, but for now I would just say that you should read and digest it. I have a comment on the post too.

States Rights and the Constitution in Virginia

Virginia House Speaker Bill Howell (R-Fredericksburg) has announced that the Virginia legislature will consider an amendment to the Constitution that will allow two-thirds of the state legislatures to repeal federal legislation. Right now, I have no idea how plausible this is - I am skeptical about how far it would get, but it's fascinating for at least two reasons.

Reason 1: It's a pretty decent reform that is not what Tom Woods has been proposing
First, like the repeal of the seventeenth amendment, I think this is actually an excellent Constitutional reform. The arc of Constitutional reform for most of the 19th and 20th centuries was in the right direction: expansion of democracy, incorporation of the states into Constitutional defenses of liberty, and the solidification of the federal government as a functional institution of governance. But what we've found is that while democracy and equality have benefited from the amendments we've passed, federalism has atrophied as a meaningful pillar of American society. The question is, how do we give greater primacy to federalism? For a while we tried to do it legislatively with various devolution measures, and these provided a mixed record of success. In the end, my assessment is that these devolution measures ended up giving the states more freedom of action, but essentially putting them on a federal allowance. Repealing the seventeenth amendment, which provided for the direct election of Senators, would elevate the role of the states in a meaningful way, and make the federal government accountable to the states. This amendment that will be considered by the Virginia legislature would appear to do the same. Winning two-thirds of the state legislatures for repeal is quite a hurdle, after all. It's a relatively conservative measure, in that sense.

Of course for my libertarian readers, I'm sure this brings Tom Woods' recent push for nullification to mind. Nullification is a tough subject, and I think this is especially true for thoughtful Southerners. On the one hand, if a law is blatantly unconstitutional, I don't think anyone would really balk at local officials who stand up against it. Lots of states have marijuana laws, and have moved against the Patriot Act, etc. I would argue that when nullification is used against truly heinous federal laws as Jefferson and Madison originally intended it to be used against the Alien and Sedition Acts, you don't have a groundswell of opposition to it. We have an inherent sense of what is appropriate without assuming a right of the states to opt-out of the decisions of the Union. Woods doesn't have to make his case on these counts - he'd be preaching to the choir. What bothers me about Woods is that he's trying to push an opt-out understanding of the Constitution that allows any state to appeal to even the most defunct and demolished understandings of what is "unconstitutional" to chart its own course. This is not federalism - this is a repudiation of our constitutional republic. Moreover, this is not what Howell is proposing at all.

I'm sure Tom Woods will embrace Howell's proposal in the Virginia legislature (and I'm sure that lots of normally objective liberals are going to howl against it make vague references to the Confederacy), but it's simply not the same as Woods' nullification. This is not an opt-out for states. This is a reform of the way federal legislation is passed that does provide a greater role for the states, but still relies on very broad consensus for action. Two-thirds of the states deciding they don't like one egregious piece of legislation is very different from South Carolina deciding it doesn't want to be bound by two-thirds of federal legislation because some crack-pot Constitutional "scholar" supplied them with a handful of bad arguments telling them they don't have to. This isn't the Tom Woods nullification plan - this is the anti-Woods states rights plan.

Reason 2: It opens Pandora's Box on the Constitution
Jefferson has remarked that the tree of liberty must now and then be fertilized with the blood of patriots and tyrants, and that constitutions should be scrapped and rewritten on a regular basis. I'll humbly disagree with Jefferson on this point, and submit that he probably would have come around to the modern view himself. Jefferson's primary concern was that he didn't want previous generations binding future generations to their understanding of government. In other words, Jefferson was a progressive and a democrat that wanted flexibility in government. What I think we've learned is that (1.) war is an awful and scarring way to keep government flexible, and (2.) the Constitution was constructed with deliberately flexible language for precisely the reasons that Jefferson was concerned about: the founders wanted to leave a wide open field for their descendants to chart their own destiny, within a structure that they carefully set to balance liberty, equality, and self-governance.

What does this have to do with Howell's proposal in the Virginia legislature? Howell is proposing to pass this amendment with a constitutional convention. Two-thirds of the state legislatures would have to call for a convention, at which three fourths of the states would have to ratify the amendment. No constitutional amendment has ever been passed in this way - all have originated in Congress. One of the concerns is that if a convention is called, the whole Constitution could be scrapped or modified. This is essentially what happened with the first Constitutional Convention, after all. Needless to say, I think this probably wouldn't be an ideal move. Our Constitution is working well, but I don't hold the document sacred. I'm more concerned that I don't think anyone today could write one that would improve it, and I'm especially concerned about the hostilities and passions it could raise. Of course, if a convention were called without incident or radical change, that could be a great step forward.

Federalism is weak in this country. The Constitution has served us well, but people don't place a lot of value on it and the ones that loudly proclaim the value they place on it often distort it to fit their own ideology. This Howell amendment probably won't pass, but at its heart it offers a very good proposal and raises some interesting issues.

Sunday, November 28, 2010

Prad Krulong on Keynesian Political Economy

In the storied tradition of combining celebrity names, Arnold Kling has coined "Prad Krulong" - a combination of Brad DeLong and Paul Krugman - in a (rather unsatisfying) discussion of some recent thoughts from the two luminaries on macroeconomics. I really think that what they're getting at is much bigger than macroeconomics, though - it is Keynesian political economy: not just the economics of the current downturn, but the political economy of why the response has been so tepid:

- At Project Syndicate, Brad DeLong starts by writing about the retreat of macroeconomic policy. What he presents is really what I would call Keynesian political economy or Keynesian public choice theory - he explains why we let economic disasters happen when we should know better. This has been a theme for DeLong for a long time, and he says it quite explicitly here.

- That column got the juices going for Paul Krugman who responded with a piece on the "instability of moderation". He goes through three types of instability: "intellectual instability", whereby good ideas don't survive in the academy, "political instability", whereby political institutions can never be depended on to properly implement what we know to be true, and "financial instability" of the typical Minsky variety.

- Brad DeLong comes back with a post at Foreign Policy called The Four Horsemen of the Teapocalypse, straining to tie together Hayek, Schumpeter, Mellon, and Nietzsche (yes, Nietzsche) to explain the political revolt against Keynesianism. I wouldn't fully embrace this piece for the same reasons that I've noted in the past that I don't entirely agree with Krugman and DeLong's position on Hayek and the depression. Despite the fact that I don't entirely agree with them, I do have to press flustered Austrians on the point a little bit. Krugman and DeLong certainly overstate the peace that Hayek made with the depression. But how exactly would you characterize Hayek's reaction? Did he not think it was "necessary"? Did he not think it was "functional"? The fact is he did. Krugman and DeLong probably hurt their own argument by overstating Hayek's position, but I don't think they should back down from the fact that Hayek's was a fundamentally myopic perspective. I was tempted to add "unsympathizing", but honestly I can't know the man's heart. But there should be no arguing over the fact that he thought depressionary unemployment was functional and provided a (in my opinion, inadequate) theoretical justification for that position, while Keynes thought depressionary unemployment was dysfunctional and provided a (in my opinion, much better) theoretical justification for his position (you an argue over my parentheticals, but not the primary point).

Saturday, November 27, 2010

If you can't beat your opponents, assume they're idiots!

Arnold Kling and Bob Murphy are both getting on my nerves, and I wish I could say it surprises me. I don't know why these two have so much trouble approaching their opponents as they are rather than as they imagine them to be. Everyone slips into straw-manning every once in a while. It's practically inevitable, for example, when you know enough about someone's position to know you disagree with them, but you don't know enough to make a cogent argument. But that's not the case here - these two should know better.

I'll start with Bob Murphy because he presents a much more egregious (although for that reason, probably more innocent) case than Kling. Murphy quotes Greg Ip writing: "People and businesses spend when their incomes are growing and they’re confident about the future…If…spending outstrips the economy’s productive capacity, inflation could result. But that’s years away: The economy today is awash in idle factories and unemployed workers." Classic demand-pull inflation talk. Fairly innocent stuff (I thought). Murphy, on the other hand, assumes that these two selectively quoted sentences constitute the full extent of Ip's (and Murphy expands it to Keynesians') understanding of inflation. Murphy then takes it upon himself to lecture us that in fact inflation and unemployment can come togehter - that you can have excess capacity and inflation at the same time.

He really has to assume a shocking degree of ignorance or idiocy on the part of his opponents to interpret it the way he did. There is absolutely no suggestion in here that Ip thought demand-pull mechanisms were the only cause of inflation, and in fact Ip mentions and addresses cases like Zimbabwe and the 1970s where stagflation (or hyper-stagflation) occurs. Murphy doesn't even try to address any of that. He takes two sentences about capacity-utilization driven inflation, fails to cite everything else Ip wrote about monetary inflation, and accuses Ip and others of some of the most absurd views on inflation that you can think of. This is precisely how Murphy responded to my 1920-21 paper - he invents ridiculous views of "what Keynesians think" so that half the time in the response is spent walking him back to reality from that strawman.

Arnold Kling writes a post denouncing large computer models of the macroeconomy, specifically citing the model in use in 1970. He suggests that Prad Krulong (Paul Krugman + Brad DeLong) advocate this sort of model and that they think macroeconomics went downhill from there. I searched high and low in Krugman and DeLong's recent postings and cross-postings on the state of macroeconomics to find their advocacy of 1970-vintage models, but couldn't! What is the heart of the problem with this model for Kling? It's similar to the issue that Murphy was addressing: the determination of inflation and wages, which is allegedly done by the Phillip's curve and a price-markup process (workers see prices rise, so they demand wage increases). I have to take Kling's word for this - there's no reason why this 1970s-era model couldn't have taken expectations into account or why it couldn't have distinguished between a long-run and short-run Phillip's curve. But let's take him at his word - so far this actually isn't so bad. Krugman had a recent post combining just such an inflation and wage determination mechanisms. It was basically to illustrate why moderate inflation targets might not be adequate. Kling panned it here, but seemed to essentially understand it. Several of his commenters simply could not grasp what Krugman was trying to say (Miguel Madiera and I try to clear their confusion up in the comment section).

That's all fine - the Phillip's Curve as classically conceived isn't wrong so much as it is inadequate. It's an empirical relationship that a lot of people wrong leverage into some sort of behavioral law. What's frustrating is that without any explanation Kling ties DeLong and Krugman to 1970s-style macro using a logic I can't even fully understand. I guess because recently Krugman and DeLong have advocated going back to an old-school macro before the assumptions of the rational expectations revolution? Anyway - no explanation at all of why this economics is at the heart of the Krugman-DeLong approach, and on top of that Kling raises the specter of wage and price controls and suggests that the Krugman-DeLong approach is going to lead to that. Kling's post is simply a mess. I could at least understand Bob Murphy's argument, as poorly reasoned as it was.


I have to admit - my interactions with libertarians and Austrians have been tiring recently. Hopefully it will pass, cause I like those guys. I've been mulling over some questions of my own that I find discussions with libertarians and Austrians do nothing to help me think through - like how excess worker reallocation relates to changes in the price level (for my NSF application), or how increases in nominal expenditures are supposed to put people to work (I'm increasingly unsure of what exactly I should think of quantitative easing which increasingly seems to me to be treating the symptom [demand for money; falling nominal income] rather than the disease [reduced demand for real output]). It's not encouraging when I read two economists like Murphy and Kling and realize they don't even understand (or they do understand and are straw-manning) the perspective that I'm coming from.

Thursday, November 25, 2010

Assault of Thoughts - Thanksgiving Edition - 11/25/2010

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

First - Happy Thanksgiving!

- The New Republic has put up a series of archived articles that it has published on the Puritans here. I'll allow it because it's still interesting New England history. But it's still shaky to associate this too closely with Thanksgiving. Thanksgiving marks a harvest celebration of the Pilgrims of Plymouth Colony, who could accurately be described as "Puritans". The important thing to remember is that while it's probably safe to call all Pilgrims "Puritans", it's not safe at all to call all Puritans "Pilgrims" or associate all Puritans with Thanksgiving. The major Puritan wave came later and settled Massachusetts Bay Colony*. Here, The New Republic seems to present some articles on the Pilgrims, but some on later waves of Puritans that had nothing to do with the establishment of Thanksgiving.

- At Think Markets, Chidem Kurdas reviews past reactions to Thanksgiving. She cites Daniel Boorstin, noting that the Puritans did not celebrate Christmas, leaving Thanksgiving as a good chance to take it easy (so here Kurdas also talks about "Puritans" rather than "Pilgrims", but since she's not talking about the first Thanksgiving - but rather later celebrations of it - she seems in the clear). She also hints at some of the thinking behind Roosevelt's decision to establish Thanksgiving as the fourth Friday in November: it provided an extra shopping day and therefore served as a stimulus of sorts.

- Thanksgiving is always a great opportunity to highlight the power of market exchange to foster social progress. I'm sure everybody knows the story - when the Pilgrims landed at Plymouth they required that everyone share everything they produced. They established a communist society, essentially. It failed miserably, Governor Bradford ended it, and they all lived happily ever after. Alex Tabarrok has a longer version here from a couple of years ago, with a good long selection from Bradford on the episode. I do think it's important to emphasize that this does not rule out charity or collective action. The survival of the colony was not merely due to the emergence of a market economy. They also have the Wampanoag to thank for their survival. But the point is clear - collectives cannot run markets. State care for the poor, of course, continued in Massachusetts throughout the colonial period and up to the present day. But that's very different from expecting a collective to run a market. I think it's great that we have such a good example of market efficiency so early in our history to point to. It sets a very important precedent.

- All this talk of Massachusetts is moot, of course. Why? Because the first Thanksgiving celebrated in English speaking America occurred where all great "firsts" in English speaking America occurred: Virginia. In 1619, two years before the Pilgrims celebrated theirs and almost a year before the Pilgrims even set sail on the Mayflower the twelve year veteran colonists in Virginia celebrated their own Thanksgiving at Berkeley Hundred (which is just up the road from William and Mary).

*This includes the earliest ancestors of mine that I know of to come to America. Thomas Joy came over to Massachusetts Bay Colony in 1635 - a Puritan, but not a Pilgrim. My maternal grandmothers maiden name was Joy and we can trace it back from there. We're going to Baltimore this Thanksgiving, and I know my paternal grandmothers line has been in Baltimore (the Eney's) since at least 1850 (I've written here before about H. Vernon Eney and his work on the Maryland Constitutional Convention of 1968). So the Eney's may go back a ways too - I just don't know. If Maryland was where they first settled, it's unlikely they've been here longer than Thomas Joy. We also have French Canadians on my mother's side - the Comeau's - who conceivably could have been here before Thomas Joy. Again I just don't know, but I imagine that's unlikely. The Kuehns themselves came from Germany in the 1890s or so, so they're the late-comers. Finally, on my Dad's side, we have Davises in ante-bellum Alabama. As I understand it, much of the settlement of Alabama came from the Carolinas, which again makes it unlikely that any of these Davises pre-date Thomas Joy - I have no reason to expect it, but again I just don't know (after the Civil War, the Alabama Davises moved to North Carolina where they stayed until the early 20th century at which point they moved to Maryland, where my great-grandmother Margaret Davis met and married my great-grandfather and well established Marylander H. Vernon Eney).

Thanksgiving Proclamation, 1921


That season has come when, alike in pursuance of a devout people’s time-honored custom and in grateful recognition of favoring national fortunes, it is proper that the President should summon the nation to a day of devotion, of thanksgiving for blessings bestowed, and of prayer for guidance in modes of life that may deserve continuance of Divine favor.

Foremost among our blessings is the return of peace, and the approach to normal ways again. The year has brought us again into relations of amity with all nations, after a long period of struggle and turbulence. In thankfulness therefore, we may well unite in the hope that Providence will vouchsafe approval to the things we have done, the aims which have guided us, the aspirations which have inspired us. We shall be prospered as we shall deserve prosperity, seeking not alone for the material things but for those of the spirit as well; earnestly trying to help others; asking, before all else, the privilege of service. As we render thanks anew for the exaltation which came to us, we may fittingly petition that moderation and wisdom shall be granted to rest upon all who are in authority, in the tasks they must discharge. Their hands will be steadied, their purposes strengthened, in answer to our prayers.

Ours has been a favored nation in the bounty which God has bestowed upon it. The great trial of humanity, though indeed we bore our part as well as we were able, left us comparatively little scarred. It is for us to recognize that we have been thus favored, and when we gather at our altars to offer up thanks, we will do well to pledge, in humility and all sincerity, our purpose to prove deserving. We have been raised up and preserved in national power and consequence, as part of a plan whose wisdom we can not question. Thus believing, we can do no less than hold our nation the willing instrument of the Providence which has so wonderfully favored us. Opportunity for very great service awaits us if we shall prove equal to it. Let our prayers be raised, for direction in the right paths. Under God, our responsibility is great; to our own first, to all men afterward; to all mankind in God’s own justice.

Now, therefore, I, Warren G. Harding, President of the United States of America, hereby designate Thursday, the twenty-fourth day of November, to be observed by the people as a day of Thanksgiving, devotion and prayer; urging that at their hearthsides and their altars they will give thanks for all that has been rendered unto them, and will pray for a continuance of the Divine fortune which has been showered so generously upon this nation.

In witness whereof, I have hereunto set my hand and caused the seal of the United States to be affixed.

Done at the City of Washington this thirty-first day of October in the year of our Lord, one thousand nine hundred and twenty-one, and of the independence of the United States OF America the one hundred and forty-sixth.

Warren G. Harding

Wednesday, November 24, 2010

The Forgotten Depression or the First Great Recession?

I now regularly Google various combinations of "1920-1921 depression" to keep my finger on the pulse of the discussion of the episode, paying particular attention to discussion of it on blogs.

One thing that pops up regularly is "the 1920-21 depression was very deep but we got out of it quickly!" I'm not sure where I'm pretty sure I know where this meme got started, but it's simply not true. The 1920-21 depression lasted 18 months, which of course pales in comparison to the Great Depression.

But if you compare that to the duration of recessions in the period after the Federal Reserve began operations (in 1914), it is tied as the second longest recession on record. And which episode is it tied with? You guessed it! The current "Great Recession" - which has also been dated as lasting 18 months.*

Now, how much do these durations really mean? That, of course, is up for debate. One of the biggest reasons why we even care about economic fluctuations is the impact they have on unemployment. Unemployment can persist long after the decline in economic activity has ended, and we've certainly had periods where growth has picked up but employment hasn't. It's legitimate that people aren't so sanguine about such occurrences. How you rank recessions based on what matters to you is your business. But the point is, under no reasonable definition was 1920-21 a quickie. Even if you redefine what matters to you so that 1920-21 is no longer tied in second place, it's still among the longer downturns in recent American economic history.

UPDATE: That's a lie... I'm not sure why I said that in the second paragraph. I know exactly where this meme got started - the same place that most of the memes about the 1920-21 depression that are floating around there got started.

*The 1913-1914 recession was longer than 1920-21, but it was well under way by the time the Federal Reserve started operations, which is why I left it out of my "post-Fed" count. This recession endured 12 months after the passage of the Federal Reserve Act in December of 1913. I'm not sure when Fed operations started in 1914, so I'm not sure how long it lasted after the Reserve System itself got off the ground.

New Acquisitions...

So I was at the public library's book sale room this past weekend and at Second Story Books today and have a few new acquisitions.

1. First, for fifty cents at the library I finally got a copy of Bernard Bailyn's The Ideological Origins of the American Revolution. "Seminal" is a designation that is applied too liberally to books, but this one probably qualifies. I haven't read any of Bailyn's books before, but I also own The Ordeal of Thomas Hutchinson and The New England Merchants in the Seventeenth Century.

2. At Second Story Books I found Herbert Hoover: The Great War and Its Aftermath, 1914-1923, a conference volume from the Herbert Hoover Centennial Seminars. This was the first volume from the seminars. I recently got the second volume (without knowing there was a first) in Boston. That one is called Herbert Hoover as Secretary of Commerce: Studies in New Era Thought and Practice 1921-1928. So now I have a quite thorough coverage of Hoover's activities in the early 1920s - which is quite hard to find. Most of what is available on Hoover addresses the Depression (the other Depression, that is). And guess who authored the chapter "Hoover's 1919 Food Diplomacy in Retrospect"? None other than Murray N. Rothbard! I've read the preface to the second volume that I had acquired previously already, and it sounds like a very thoughtful, thorough book. I'm quite excited to have both of these now. As far as I can tell these are the only two volumes.

3. Also at Second Story Books, I was excited to find a first edition of Edward Ruppelt's 1956 book The Report on Unidentified Flying Objects (an online version is available here). I only know a little about Ruppelt, but I'm eager to learn more. Ruppelt was a part of the government's Project Bluebook which in 1952 was tasked with studying the UFO phenomenon. Ruppelt approached the issue seriously and tried to rigorously assess what sightings could be explained and what couldn't. He fought against the common term "flying saucer" at the time and popularized the term "unidentified flying object" to reduce the sensationalism around the phenomenon and emphasize the fact that it was fundamentally unexplained. The book looks like it will provide an account of the Blue Book years and the way that they weeded through and addressed different sightings. I haven't written an alien post for a while, but I think people have a sense of my interest in this. First, of course, UFOs could really be aliens. It doesn't get much more spectacular than that prospect. Second, UFOs always provide a fascinating exercise in epistemology and method. How do we know what we know about them? What don't we know? When is evidence credible? Can we reason through what is probable or improbable? How do we reason through these phenomena when we have no basis for assessment? Finally, the dawn of the UFO age in the late 40s and early 50s represent the beginning of an important era in human, but especially American history when we started to understand ourselves in the context of a much, much wider cosmos. I find that cultural shift interesting from a historical perspective.

For anyone in the D.C. area, I wanted to (1.) promote Second Story Books because it's a great store, and (2.) especially promote the DuPont Circle location in D.C., which was where I went. They have a ton of Liberty Fund books scattered all over the store that were not there when I was there last time. There is a lot of good seventeenth century English stuff, a lot of colonial writings, many Mises volumes, Mandeville, some Grotius, some Tullock, etc. I didn't end up getting any of it but there is a truck-load of it. Either Liberty Fund had a big sale or some local guy that had a bunch of Liberty Fund books sold his library to them - I'm not sure, but it was pretty cool that they had all that.

Prices and Production, Lecture 2, Post 1

It's been a pretty busy week or two with the NSF application, so I haven't gotten a chance to jump into Lecture 2 of Prices and Production as easily as I was able to review Lecture 1. On top of that, readers know that this lecture can be pretty confusing at points. Talking through some of these difficulties with Jonathan and EdP has helped me understand the chapter better, which is great - that's what these reading groups are for. I have a collection of thoughts I want to share, though, in at least two posts.

1. W.C. Mitchell: First, I want to reiterate a point I made earlier about Hayek's treatment of W.C. Mitchell (p. 225), which I think was a little much. Hayek writes "I cannot agree that Professor Wesley Mitchell is justified when he states that he considers it no part of his task "to determine how the fact of cyclical oscillations in economic activity can be reconciled with the general theory of equilibrium, or how that theory can be reconciled with the facts." On the contrary, it is my conviction that if we want to explain economic phenomena at all, we have no means available but to build on the foundations given by the concept of a tendency toward equilibrium.". The statement is a little vague on the part of both Hayek and Mitchell. I'm not sure exactly what Mitchell means by "how that theory can be reconciled by the facts" (I'm not very familiar with him). Is he talking about working up a new theory that better fits the facts? If that's the case, then I think that's perfectly legitimate. If he means that he has no obligation to seek out a correspondence between fact and theory, then I don't agree with that. It's also unclear what "tendency toward equilibrium" Hayek is referring to, but I'm wary of the claim that we are forced to build on the equilibrium theory we've always had. Many other economists besides Mitchell were concerned about the correspondence between what he observed and the existing equilibrium theory. The two that I know best are Joan Robinson at Cambridge and Edward Chamberlin at Harvard. Both independently developed theories of monopolistic competition in 1933 precisely because of the perceived inadequacies of the "foundations" they had received in explaining the facts. Hayek sees his project as taking a foundation and moving forward with it. That's fine, but I can certainly sympathize with people who have less reverence for former foundations.

2. The time structure of demand: When I first read Keynes's account of Bohm-Bawerk's views on roundabout production (well, when I read it for the second time I suppose, because I didn't see as much significance in it when I read it the first time), it sounded really odd to me. I had by that point learned ABCT through Garrisonesque emphasis on the structure of production. Keynes, on the other hand, talked about roundaboutness in terms of the time structure of demand (demands that are less immediate support more roundabout production). That sounded weird, although the conclusions essentially worked out the same. What's interesting is that that's largely how Hayek approaches the question, at least in his discussion on page 226: "What I have here in mind are not changes in the methods of produciton made possible by the progress of technical knowledge, but the increase in output made possible by a transition to more capitalistic method of production, or, what is the same thing, by organizing production so that, at any given moment, the available resources are employed for the satisfaction of the needs of a future more distant than before." I think a lot of modern renditions of ABCT move away from this question of the time structure of demand, although many of these still note that facet of the theory (Garrison, page 48).

3. Assumed productivity of roundaboutness: Hayek asserts but does not explain why more roundabout methods of production are more productive. He writes "It is not necessary for my present purpose to enter at length into an explanation of this increase of productivity by roundabout methods of production. It is enough to state that within practical limits we may increase the output of consumers' goods from a given quantity of original means of production indefinitely, provided we are willing to wait long enough for the product" (pg. 227). I wish he had taken the time to demonstrate the point. Abstracting away from actual improvements in technology (as Hayek does and which I agree is appropriate to do), the primary impact that time will have on productivity is through interest costs and inventory costs. Indeed, these are the determinants of the relative productivity of a given "roundaboutness" when Keynes discusses Bohm-Bawerk (and I imagine these are the relevant factors in Bohm-Bawerk too). But there is no presumption that more roundabout methods are more productive. Does anyone know what Hayek is referring to here? Clearly, we may also get into his reasons for claiming this in future lectures.

4. Income, expenditures, and capital: I want to clarify for fellow readers that the numbers in Hayeks figures represent expenditures, not income. This is an issue that took some hashing out in this post on Jonathan's blog. Figure 2 is the clearest. The level of income in the economy (i.e. - GDP) is 40 here. The level of total expenditures is 120 (80 on intermediate goods, 40 on final goods). The savings rate, as far as I can tell, is 0%. Figure 3 is more confusing. Income is 30 in this figure because 10 is saved. Total expenditure is still 120 (90 on intermediate goods, 30 on final goods). What is confusing is that Hayek is still not including capital as a factor of production. So capital investment - which we normally think of as "final output", and income from capital - which we normally think of as part of income, isn't included at all! I'm hoping in subsequent lectures these will be brought in, but right now its a little confusing. We've just removed a portion of income because it's not counted as income to an "original factor of production", and we've removed a portion of output because it's not "consumer output" (although at another point - p. 236 - he says that capital is intermediate goods... so at that point it is included in the model, but it's still not a factor of production earning income!), so an important portion of economic output and income (i.e. - capital and capital's income) just evaporates from the model. On page 231 he writes "interest is then received by the owners of the original means of production with wages and rent", but then he completely neglects this point later when he has the original means of production earn 30 instead of 30 + interest. I'm guessing when capital is explicitly introduced later (as he promises) this will all get cleared up. But it's off to a muddy start.

5. Unused resources: Hayek acknowledges that the question of why some resources lay idle is something that needs to be explained (pg. 224). This is good, but he also insists that we should not start there. He writes "it is not true that the existence of unused resources is a necessary condition for an increase of output, nor are we entitled to take such a situation as a starting point for theoretical analysis". This is kind of an odd approach in my mind, particularly with his original point that we have to start from a foundation of theoretical equilibrium. Why should we expect unused, idle resources to emerge from a system that is assumed from the outset to be stable? Aside from frictions and disturbances, we generally wouldn't. So you can see where Hayek's business cycle theory is heading from the very beginning - by virtue of how he chooses to conduct his analysis, it's going to be some external force such as government that is going to be required to disturb the system, by virtue of how he sets up the problem. Hayek says the starting point has to be the full employment of resource (p. 224). Why? He gives no reason at all and it's not clear to me why we should assume that idle resources emerges from full employment of resources and theorize it as such. Hayek suggests we theorize such that full employment is normal and then explain why idle resources can happen. The alternative, of course, is to theorize such that full employment or idle resources are natural. What's especially strange about this point is that Austrians have always critiqued Friedman for his version of positivism, which rejects the need for realistic assumptions... and yet Hayek is here engaging in what I think can fairly be called "unrealistic assumptions" (Garrison did this too and it was one of my biggest complaints about him - for details, see this post).

6. The role of the entrepreneur: On page 236, I think there's an interesting discussion of the role of the entrepreneur, "whether the structure of production remains the same depends entirely upon whether entrepreneurs find it profitable to reinvest the usual proportion of the return from the sale of the product of their respective stages of production in turning out intermediate goods of the same sort. Whether this is profitable, again, depends upon the prices obtained for the product of this particular stage of production on the one hand and on the prices paid for the original means of production and for the intermediate products taken from the preceding stage of production on the other." So again, the terminology is a little confused... profit is the difference between costs and revenue (so far so good), which means that it is a portion of the value added at successive stages of production. This would suggest that the entrepreneur is included in the "original factors of production". That's fine - it's a special type of labor, specifically it is labor that organizes the structure of production. What is still confusing, of course, is this reinvestment question. So now income from capital seems to be included in the original means of production (because it's the entrepreneur's profit). But since capital right now is still just intermediate goods (see p. 236) it's completely removed from the income figure (which, by 239, declines from 40 to 30). What you need is to bring capital and capital's income explicitly into the model. Garrison does this - Hayek may do this in the future.

7. Aggregates: I just want to note that this lecture is chock full of aggregates. One of the frustrating things to me about complaints from Austrians about using aggregates (aside from the fact that the complaint is simply misguided) is that they regularly use aggregates in their own work. Anyway, you should note the use of aggregates when you read and then maybe reevaluate how damaging aggregates really are and how sincere Hayek's later critique of Keynes on this front really was.


OK - I should have another post on the capital structure itself as I finish the lecture. So far, this has been a very confusing presentation. I think there are much better modern renditions of ABCT than this (I would say the same for Keynes, btw - he has some great insights in the General Theory, but his exposition of the mechanics of the theory itself are not as good or clear as later revisions). Obviously I'd point readers to Garrison because I'm the most familiar with him - but aside from that I think he is widely recognized as being one of the best expositors of ABCT. His approach is not without problems, but I think it's tighter than Prices and Production so far. However - we are still near the beginning!

Tuesday, November 23, 2010

Three links on education

First, Professors Robert Archibald and David Feldman discuss their new book on the economics of higher education at the New York Times website. Both are at William and Mary. I never had either of them as a professor, but I of course I saw them around the department a lot. The discussion is very good - it talks about the reasons for rising tuition costs, the problems with identifying this as an "affordability" problem, and the role that technological development plays in the price of high-skilled labor (which of course drives a lot of the college costs). All very good stuff. They do a good job contrasting how an economist thinks about problems with how a non-economist thinks about problems.

The cover of the book shows the Wren Building at William and Mary, which was built in the late 1600s. If I recall, it's the longest continually operating educational building in the Western Hemisphere. I had one class in the Wren Building on Virginia history. It's a really beautiful structure in the heart of the "old campus". Thomas Jefferson studied, lived and ate in this building along with many other early alumni. You can also find bullet holes in the outer walls from Union soldiers using it as target practice during the Civil War, when Williamsburg was occupied. Another connection I have to it is that I was married in the Wren Chapel - which is the wing on the right side of the picture on the book cover (this picture shows the back of the building).

Anyway - enough memories.

The other education link I have is a series of blog posts at The Huffington Post by a family friend, Ed Schmidt, who Evan just discovered blogs there. He seems to have just started in October, but appears to blog once a week or so. Ed comes at education from an interesting perspective - he's an architect that specializes in school design, so his discussion of education emphasizes a lot of these school facility and infrastructure concerns. He went to college with my uncle, aunt, mom, and dad at Virginia Tech, which is how we know him. He and his wife still live not too far from me here in Arlington. So it was neat to see him blogging there, and I plan on keeping up with his thoughts.

Finally, Yale has put out a Call for Papers for its eighth annual Bouchet Conference on Diversity in Graduate Education. The conference is named for Edward Bouchet, who was apparently the first self-identified African-American to earn a PhD. I plan on submitting the research I'm doing on the engineering workforce for the NBER volume. One of the interesting things we've looked into is the composition of new engineering programs that have been initiated during our study period. Do they rely disporportionately on foreign students to get started? How big are they compared to established programs? We're going to expand this to look at broader definitions of diversity in these new programs, and expand the population that we're looking at to new or growing programs (as opposed to more static or shrinking programs). Do growing engineering programs rely disproportionately on foreign students or on whites in order to grow, or do they maintain the same diversity they were able to support in previous years? Or do they increase the diversity of their program. I think it should be research that's of interest to this conference - and while "diversity in higher education" is fairly well-covered ground, I think what we're doing by highlighting new and growing programs will be somewhat new.

Logic, David Henderson, and the TSA

I used to say on here that I never liked David Henderson's posting at Econlog much - I liked Arnold Kling best, was relatively indifferent to Bryan Caplan, and liked Henderson the least. In the last couple weeks that's basically flip-flopped. Henderson has been posting some great stuff recently and Kling has been getting on my nerves. Anyway, I wanted to preface with that because I wanted to share a recent post of Henderson's on the TSA that I think misses the mark. In a post titled "Abolish the TSA" he writes:

"Art Carden has an excellent article on Forbes.com in which he advocates abolishing the TSA. I give a segment on this in my econ class when I discuss, at length, Hayek's "The Use of Knowledge in Society." How does Hayek's article apply? The clearest cut success stories we have are of other passengers using their local knowledge to thwart the shoe bomber, the underpants bomber, and the United flight #93 bombers. Of course, there's a huge difference between my first two examples and the third. In the third case, all the passengers died. But, as I said to a flight attendant when I traveled on a Boeing 777 from LAX to Boston on September 22, 2001, on a nearly empty flight that United had offered to let me out of with a full refund, "The reason we're safer now is that we passengers are never again going to think about a hijacking the same way. We're not going to sit passively as the FAA told us to."" (emphasis mine)

Now - without looking at my comment in the comment section of the post what logical probelms do you think bothered me about this paragraph and the general argument for abolishing the TSA that he provides?

TSA, A-OK? A few quick thoughts

There has been a lot of buzz on the left end and the libertarian end (it's getting harder and harder to say "left and right" as a catch-all... which is a good thing I think!) of the blogsphere about the TSA's full body scans. I'm not going to link all the reactions - I'm sure you'll have no problem finding them.

There are really two questions at hand: (1.) would I submit to this?, and (2.) should the TSA do these scans?

The first doesn't have much of anything to do with rights, political philosophy, the state, or anything else we talk about here. I, for one, have no qualms at all about getting scanned. I'm going to be flying the first week of December and I plan on walking right through the scanner, for two reasons. First, although I'm not a naturally immodest person, nudity doesn't make me squeemish either as long as it's either functional or fun. Who really cares? Not me. Second, I wouldn't want to be patted down if I could help it. So the scanners are fine with me.

The deeper question is whether the TSA should be obligating this in the first place, because that involves state coercion of people who may not have the same indifference to the scanners that I do. That's tougher. But the "persumption of liberty" here isn't quite as easy to address as I think a lot of people are trying to make it. I know I sound like a broken record sometimes on this, but there is an externality problem of sorts going on here - and it's similar to the incentives of vaccination. The costs I do incur by going through the scanner benefit my fellow passengers who are assured I don't have a bomb on me. Likewise, when a fellow passenger chooses not to be scanned, they impose a cost on me - they expose me to the risk of terrorism against my will. Moreover, the non-scanners are self-selected. Anyone interested in doing harm will obviously choose not to be scanned - it's not like scanning would be randomly assigned if people were given the choice.

To be sure, the risks involved are probably quite minor. But there seems to be a reason why they introduced the scanners and why they're working on scanners that can see beneath your skin. Jeff Goldberg of The Atlantic has been making a name for himself recently by noting the prospect of doomsday scenarios (e.g. - his article on the prospect of Israel bombing Iran), but he recently had a short piece that I think is worth looking at about the prospect of "cavity bombs" becoming more common for terrorist attacks. He writes:

"But, unfortunately, the threat comes not only from explosive devices on people, but in people. Our country has not yet experienced the terror of a cavity bomb -- a bomb inserted into the rectum or vagina of a suicide terrorist -- but this is what experts, in and out of government, fear is coming. We've already seen the technique used in the Middle East: Colleagues of an Islamist terrorist named Abdullah Asiri detonated a bomb inserted up his rectum last year by cell phone in an unsuccessful attempt to kill a top Saudi counter-terrorism official.

Three experts I spoke to this weekend -- two of whom are currently serving in government in counter-terrorism capacities -- believe it is only a matter of time before the technique is tried here. "We have nothing in our arsenal that would detect these bombs," one told me. "There is no taboo that we can see against this technique. Suicide is suicide, it doesn't matter how gross it is.""

It seems reasonable to assume that the new scanners were motivated by the assessment of precisely this sort of risk, although as Goldberg notes the current scanners cannnot operate like an x-ray to catch these things. In a way, safe x-ray scanners might be an improvement. Seeing people's skeleton's seems less invasive than seeing their skin. So the emergence of such machines might settle the issue. Either way, my point is that when initiatives like this are rolled out they usually have some sort of impetus, and this might be related. So the concern about safety is real.

OK, but what can be said from the perspective of what is appropriate for the TSA to do in light of all this? Well as I noted, to require these scanners would be an obvious involuntary imposition of costs. But to allow non-scanned passengers to ride with scanned passengers like me would also be an obvious involuntary imposition of costs (one that I don't think the left and libertarian blogs are really acknowledging). The solution, it seems to me, is to provide a choice by flight. Have "TSA approved" flights and have "non-TSA approved" flights, where passengers get whatever kind of screening the airline wants to provide itself. That way, nobody would be imposing costs on anyone else. The federal government has a legitimate role to play in national security so the involvement of the TSA in TSA approved flights is perfectly legitimate. Where would you fly if this were implemented? The short wait with less safety measures or the longer wait with safety measures? I'd probably go with the longer wait, and recent survey evidence suggests that two thirds of the American public would too. Then we would let the market decide. People opposed to the scanning in all likelihood would have less flights available to them, unless of course they wanted to pay more for the convenience. Or if the tides turn and more people go for the non-TSA approved flights, then safety conscious travelers might have to pay relatively more for the extra safety measures. The point is - this seems to take care of all the "presumptions of liberty". One thing that clearly doesn't ensure liberty is to let self-selected non-scanned passengers ride with scanned passengers that don't want to ride with them.

Monday, November 22, 2010

John Taylor on Keynesianism

John Taylor has a post up on Keynesian economics that's a little interesting and a little odd. I'll just quote in full:

"This past weekend Columbia University hosted a conference on the occasion of the 40th anniversary of the famous Phelps volume on the micro foundations of macroeconomics. In addition to the technical papers, which will eventually be published in a conference volume, important lunch and dinner talks were given by two of the most recent Nobel Prize winners in economics--Dale Mortenson and Chris Pissaredes--as well as by Fool’s Gold author Gillian Tett of the FT and Ned Phelps.

Ned spoke about what he called the “recrudescence of Keynesian economics.” He explained why, as he put it in his New York Times column of last August, “The steps being taken by government officials to help the economy are based on a faulty premise. The diagnosis is that the economy is ‘constrained’ by a deficiency of aggregate demand. The officials’ prescription is to stimulate that demand, for as long as it takes, to facilitate the recovery of an otherwise undamaged economy — as if the task were to help an uninjured skater get up after a bad fall. The prescription will fail because the diagnosis is wrong.”

The problem with these Keynesian policies is that at best they give short term boosts to the economy, but then fizzle out as we are seeing now. Sustaining growth in employment requires sustaining investment, which requires government policy that encourages investment and innovation, not short-run stimulus packages that try to boost consumption and government purchases, which crowd out investment.

Will there be an end of this recrudescence? Politics as well as economics will be an important determining factor, at least that’s what the historical analysis in the paper I presented at the conference shows. The good news then is that more people are beginning to see the problems with these stimulus packages and the political process is responding."

I find his position quite reasonable, but what's strange to me is that he's describing sort of an odd version of Keynesian economics. He's playing fast and loose with terms like "demand" and "consumption", acting like the point of stimulus is to boost the latter. The point of a Keynesian stimulus isn't (primarily) to boost consumption, and the fact that the fiscal stimuli we've seen largely do is a valid critique of the focus of the stimulus package. But it's not really a valid critique of Keynesianism, whose primary emphasis is to boost investment demand through (1.) reducing interest rates, and (2.) the enigmatic "socialization of investment". The General Theory is not really a consumption story at all. Consumption is that psychologically stable-sloped slide that a depressed economy drifts down. To use classic econ 101 phrasing - "we move down the consumption schedule in this case, the consumption schedule doesn't move". Other points, like the idea that stimulus packages crowd out private investment, are of course absurd - but if you don't think it is true then you are forced to accept some important Keynesian premises, which I don't think John Taylor wants to do.

I do think there's an extent to which what we traditionally think of as "innovation policies" can be put to good use as "stimulus policies". We categorically separate them because of how we think of innovation as a determinant of secular growth, but it's not clear why that's necessary.

Saturday, November 20, 2010

Welcome to Becket Gilead Kuehn!

Yesterday I learned I have a new nephew - Evan's second kid, Becket Gilead Kuehn, was born. Here's a picture of Becket with his older sister Sophia. I'm very excited to be seeing both of them this Christmas! Congratulations Evan and Tricia! Every time my sister-in-law has a kid we want one... a couple of years - gotta take care of a few things first. But hopefully not that long...

Friday, November 19, 2010

Assault of Thoughts - 1920s Edition - 11/19/2010

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

If you haven't picked up on it by now, I'm quite definitively hooked on the 1920s. The founding era is still very important to me. The 1930s and 1940s are fascinating as well. And the populist era is growing on me. But it's the 1920s that has really started to capture my imagination. So here it goes:

- I recently stumbled across an article by Robert Barro and Jose Ursua in the Wall Street Journal tying the Spanish Flu to the 1920-21 depression! Fascinating! I'm sure there is a paper they're basing this on, which I really need to track down. I wish I had had this when I wrote mine. Oh well. I remember looking at life tables in my demography class that captured the Spanish Flu - it was a surprisingly large spike. Interesting stuff. You would think that a negative labor supply shock like that would raise labor costs, though. I don't know - worth looking into. Barro and Ursua also seem to be looking internationally - perhaps it wasn't as big of a factor in the U.S.

- Andrew Sullivan notes that Bush's use of torture against terror suspects all but guaranteed the acquittal of Ahmed Ghailani on almost all his charges. In 1920 the New York Times took a more principled stance. On September 16th, 1920, a bomb planted by anarchists exploded on Wall Street, killing 38 people and sending shockwaves through the nation. The Times was firm, but principled. It talked about hunting down the terrorists "like wild animals", but noted that the very advantage of Americans was that we were "civilized" and that our society's "mental and spiritual resources" were "infinitely superior to anarchy". We hunt down terrorism. We fight it. But we don't descend into anarchy and terrorism ourselves in the process. Read the whole peace - it should be more widely read today.

- Finally, Hampton Stevens at The Atlantic discusses the upcoming Great Gatsby movie. He cautions that "Film versions of Fitzgerald's masterwork inevitably fail because of the kind of novel Gatsby is—frankly thin on story, but incredibly thick with introspection, thoughts unspoken, intricately woven metaphor, and long, dazzling descriptions of otherwise mundane things like sunsets, front lawns and angry wives that are only special because of how the narrator describes them."

Thursday, November 18, 2010

Austrians in The Economist

I want to quickly share this article in The Economist on the Austrian school. It's a nice, accessible overview. Probably no readers here need anything this basic, but still good to see.

It raises the question of why nobody pays attention to the Austrian school. I think there are two reasons:

1. The version of malinvestments highlighted in the article is not exclusive to the Austrian school at all. I don't know any economist that wouldn't say "credit was cheap, it was poorly invested, and when everyone realized this the market crashed". Now, the arguments for what caused the cheap credit varies... some blame the Fed, some blame the Chinese, some blame the federal government, some blame the market's inability to price credit correctly on its own. There are more Austrian and less Austrian versions of "credit was cheap", but you can get the rest of the story from any school of thought. So why go to the Austrians for the simple point that when money is sloshing around people make bad decisions?

2. Austrians do a good job explaining the boom and bust, but then sort of stop. This is my opinion at least. There's nothing about the distortions or the malinvestments that I fundamentally reject. My concern with the Austrian school has always been that it doesn't recognize the even greater damage that can be done by the demand deficiency induced by a financial crisis that wreaks havoc on balance sheets. Sometimes you get a "secondary deflation" story from Austrians, etc. But you don't get everything that Keynes gives us. I think a lot of people see Austrians engaging in fundamental fallacies when talking about aggregate demand and then are tempted to just plug their ears about the rest that Austrians have to say.

There is good reason for hope on both points! On the first point, even though you don't need the Austrian school at all to explain the dangers of cheap credit, what's unique that the Austrians do provide is insights about the capital structure. In other words, you don't need Austrianism to warn you about cheap credit - but Austrianism will tell you how the danger of cheap credit may manifest itself. That story oughta be told. On the second point, there's reason for hope because as far as I've been able to tell there is no conflict at all between Keynesian aggregate demand dynamics and Austrian business cycle theory (conceived of as the artificial elongation of the capital structure). Many Austrians challenge Keynesian aggregate demand stories but (1.) they're wrong, and (2.) nothing in that challenge is required to make the Austrian capital structure arguments.

So... good article in The Economist, and I maintain my hopes for a synthesis of sorts.

A fascinating idea...

Vote-share bonds: "How can excessive public debt be avoided? This column proposes a novel solution: “vote-share bonds”. These government bonds are tied to the share of the vote that the adoption of the underlying deficit has received in parliament. A bond with a higher vote-share is considered senior. Vote-share bonds inspire fiscal responsibility, while retaining the flexibility to stabilise negative macroeconomic shocks."

The mess of a theory that is the "social contract" causes a lot of problems for democratic legitimacy. This may be one step in the right direction: make less collective decisions more expensive. It really cuts two ways - those who can only eke out a majority are also responsible for saddling the country with greater debt. More broadly appealing legislation is cheaper. At the same time, I think those who oppose a specific piece of legislation for purely partisan reasons could also legitimately be blamed for the high costs. If they had compromised or offered a compromise the other side accepts (or if their position had simply garnered a majority), costs would be lower.

If federal and state bonds were measured on the same standard, this could also make borrowing easier for states which might help make a more robust, progressive federalism. My impression is that state houses are usually either (1.) less partisan, or (2.) more dominated by one party than Congress is, which means that holding everything else equal, state bonds would be lower cost under this plan.

What exactly do Selgin, Lastrapes, and White expect me to think about this?

George Selgin, William Lastrapes, and Larry White recently released a Cato Institute working paper looking at economic performance before and after the Fed which concludes that the Fed has been bad for the macroeconomy on all kinds of measures. The sort of people you'd expect to blog on a Cato working paper have fulfilled their duties in praising the piece: Cafe Hayek, Coordination Problem, and Econ Log. I'm not sure exactly what there is to be so impressed about. It's when I see things like this that I'm glad I came up through the labor economics/econometrics side of economics first before developing an interest in macroeconomics, because methodologically this paper has very little to offer and I'm not sure why that's not being pointed out by more people.

The paper is essentially a century and a half long pre-post test of the Federal Reserve, an approach to performance evaluation that simply wouldn't fly in, say, the labor economics literature. The question of how macroeconomic performance and volatility have changed over time may be an interesting question to answer, but simply comparing a century with the Fed to a century without the Fed isn't really a test of the impact of the Fed at all.

The problem is (as Arnold Kling does point out in his post) that things change over time that have nothing to do with the Fed, and those changes are being picked up and attributed to the Fed by Selgin, Lastrapes, and White. What's worse is that we are likely to have substantial endogeneity in this case. It's not simply that other changes that are going on may be falsely attributed to the Fed - it's that the Fed was created precisely to address these changes in the economy that were occuring! It's the same problem that you have when you regress output or employment on federal spending to get at the impact of fiscal policy - it doesn't work because you implement fiscal policy precisely when the economy is weak. The pre-Fed period was an agrarian period where the United States largely followed other technological leaders, where we still had a frontier, and when growth was extensive: applying standard production techniques to more land, more people, and more capital. The Fed was established at a time of transition, precisely because of the volatility that that transition was expected to usher in: we emerged as an industrial economy that was a technological leader, not a follower. The frontier was closed and the low hanging fruit of extensive growth was no longer available. Instead, we grew intensively - by innovating on the production processes that we had been using. This road is inherently rockier, which is precisely why you saw a growth in macroeconomic management at this time. Selgin, Lastrapes, and White see a more volatile 20th century and attribute it to the Fed - I see a more volatile 20th century and say "well isn't that why we made the Fed in the first place? Wasn't this precisely what we were expecting when we were having these discussions about another central bank between 1907 and 1913?".

I've been doing program analysis at the Urban Institute for four and a half years now, and I haven't once done a pre-post test like the one Selgin, Lastrapes, and White present here. We could never get that kind of assessment published, and if we were producing it for a client, we would probably get it sent back to us with an angry note and lots of red ink. It's not like these points should be lost on monetary or macroeconomists. It's precisely these concerns with identification problems that lead Barro and Romer to do their innovative work trying to isolate the effect of fiscal policy. Macroeconomists do know about this stuff. But sometimes I feel like they are less attuned to the problem than labor economists and econometricians. A lot of people looked at the Selgin, Lastrapes, and White paper and thought it was pretty interesting and compelling. I just thought "What the hell do they expect me to think of this? This is fluff. I can't make heads or tails of this."

Read critically, people.

UPDATE: Looking at what happens before and after a policy change can be improved by a lot of different methods. One is to compare the pre-post change to a pre-post change from a comparison group that did not experience the policy change (this is called difference-in-differences). This allows you to subtract out the change over time that wasn't associated with the policy. People also trust pre-post tests if they look at change in a very short time period as a result of a very sharp policy change where nothing else in the system has changed (this is called a natural experiment or a regression discontinuity design, depending on how it's implemented). Intuitively we can also put more weight on pre-post observations in a shorter time period (for example, in my 1920-21 paper I point out a rise in economic activity after the Fed finally cut rates and argue that this is consistent with the idea that monetary policy is stimulative - it's not a rigorous test, but the tight time frame makes it more plausible as an illustration). A dicier method that I'm usually skeptical of is called "instrumental variables", which uses an exogenous proxy to measure the impact of an endogenous policy change. These have to be very, very well justified.

UPDATE 2: So I asked Don Boudreaux to humor me and let me know what he thought of my critique. He writes: "I'll satisfy your curiosity. First, you ought to pay more attention to public choice; your 'the Fed was created with good intentions' assumption is naive. Second, given your reasons for dismissing as 'fluff' Selgin's, Lastrapes's, and White's conclusions, what evidence have you that the Fed succeeded? Third, I see no reason why the economy of the twentieth century - or the economy that those mythical wise and well-meaning technocrats of a century ago thought they foresaw - was destined to be inherently more volatile than was the economy of the 19th century. Why, for example, you presume that the closing of the geographic frontier is economically significant is beyond me. Were not, say, the economic frontiers pushed outward by electrification, by telecommunications, by inexpensive transoceanic steamships, by the Internet less important than the Wm. Jackson Turner's geographic frontier? If your criticism of Selgin-Lastrapes-White is the harshest that there is, their paper is destined to become a celebrated classic." And odd and telling reply, isn't it? The public choice point is strange - I don't deny the incentives associated with the founding of the Fed, but there's nothing in public choice theory that requires an entirely myopic perspective on public actions either. I also never said that there was evidence succeeded. In fact I said quite the opposite, didn't I? He makes a big fuss over the frontier point too, which I re-explain in the comment section
here. Notice anything missing in Don's response? Oh yeah - no mention at all of the massive methodological problems with this paper that formed the crux of my criticism. Now Don's not dumb. He understands the argument. He makes the same argument when cautioning people against being too sanguine about empirical fiscal multiplier estimates. So he understands the concept perfectly. Which is why when he fails to mention it, it's pretty transparent what it means - he knows I'm right, that he was overzealous in praising the paper, and he doesn't want to admit it.

Wednesday, November 17, 2010

On inflation, nominal expenditures, investment and QE2

David Beckworth has a great post up on QE2, where he basically takes Lee Kelly's side:

"A key objective of QE2 is to raise nominal spending. Given sticky prices and excess economic capacity, this increase in nominal spending would boost the real economy. Now the way QE2 can raise nominal spending is by raising inflation expectations. Higher inflation expectations creates the incentive for banks, firms, and households sitting on money to start spending them. In fact, the key problem facing the U.S. economy right now is an excess money demand problem. While it is true that rising inflation expectations may temporarily lower real interest rates too and thus stimulate interest sensitive spending, this effect is of second-order importance and is only temporary."

Robert Murphy recently mused on Keynesian reactions to QE2, and other people have assumed some nefarious plot at the root of the Keynesian embrace of QE2 as well (I have comments on both). Murphy, I think, is on the right track. Caplan is simply paranoid. Either way I don't think this is that hard to understand, and the Beckworth post frames it nicely.

Lee Kelly and Beckworth think that what Keynesians think is a first order effect is actually a second order effect.

I genuinely don't know how to weigh these things against each other, so I note with Keynes that investment demand is what's really ****ed up, so lowering rates to increase investment is the "first order" effect, but the inflation is nice for other reasons too.

And there's a range of Keynesians that sound more like Lee Kelly and Beckworth (DeLong seems to be on that end) or sound more like Keynes (Krugman seems to be on that end). But as long as I'm writing #1 by one effect and #2 by another effect and Lee Kelly is putting #2 by one effect and #1 by the other, of course you're not going to see that much clashing. We're in the middle of an economic depression. Academic quibbles like that are interesting, but simply not worth it.

We've got an incoming Congress that will be hamstrung, if not controlled, by a weird libertarian-populist hybrid of a Republican party and we finally have a public institution they can't touch (for now at least) willing to serve the American people with an action that leaves a lot of us shurgging our shoulders and crossing our fingers, but can nevertheless get an impressive cross-section of liberals and conservatives nodding their heads in agreement. Conservatives. Like - really live conservatives. I feel like I haven't seen one of them since 2006! Lately they've been morphing into populists or libertarians or populist-libertarian hybrids. But now Bernanke (aka "the Bernank") has managed to smoke out a few actual conservatives with a few sensible things to say that liberals and centrists can be a party to.

Who the hell cares that Lee Kelly and David Beckworth call second order what some of us might call first order? We finally have a growing chorus of people that don't descend into Don Boudreaux-style mangling of the equation of exchange or Jeffrey Tucker-style swooning at rising bond yields. It's about time.

UPDATE: I really want to emphasize that I am an almost exclusively self-taught Old Keynesian with lots of sympathy for the kinds of things Lee Kelly, Sumner, and DeLong have been saying. My graduate macro course did a lot of other stuff that has very little application to what we're going through now (waterzooi can attest to this... OLG models with that professor that late at night could be a harrowing experience sometimes). I really am not sure how to rank these effects, but I just figure it's important to point to the classic Keynesian effect of monetary policy since the blogosphere is pretty saturated with more monetarist and new monetarist understandings. They may well be right in terms of prioritization, but I think it's well worth pointing out the way the story has been told by others.