Sunday, July 31, 2011

James Buchanan, Paul Krugman, and $20 bills

In the James Buchanan lecture I presented here, one of the points he makes is that a lot of people commit a fallacy of composition when it comes to aggregate behavior. Buchanan referenced the fact that economists like to say that $20 bills on the sidewalk don't exist. They can't exist - someone would pick them up. But he points out that that describes behavior at the individual level, and in the aggregate we often do leave $20 bills on the sidewalk. Keynesians of course have their favorite fallacies of composition - but Buchanan specifically pointed to public choice and the commons of rule-making.

Paul Krugman's post this morning seems to agree with James Buchanan: we do sometimes leave $20 bills lying on the sidewalk.

"The resources of nature and men's devices are just as fertile and productive as they were"

"The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history. But now that the man in the street has become aware of what is happening, he, not knowing the why and wherefore, is as full to-day of what may prove excessive fears as, previously, when the trouble was first coming on, he was lacking in what would have been a reasonable anxiety. He begins to doubt the future. Is he now awakening from a pleasant dream to face the darkness of facts? Or dropping off into a nightmare which will pass away?

He need not be doubtful. The other was not a dream. This is a nightmare, which will pass away with the morning. For the resources of nature and men's devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life—high, I mean, compared with, say, twenty years ago—and will soon learn to afford a standard higher still. We were not previously deceived. But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time."

- John Maynard Keynes, The Great Slump of 1930 (1930)

Saturday, July 30, 2011

DeLong shares an exchange between Keynes and Acheson

Here. It's very interesting. They're discussing lend-lease agreements in 1941. It seems to me to be pretty typical of Keynes - there's always a lot of thinking going on underneath the surface that doesn't get revealed unless you push a little deeper. Keynes is hesistant here because there's no naivete on his part about what certain statesmen can do in the interest of nationalism with ostensibly liberalized policies. Acheson acknowledges this further down in the passage. You can also clearly see Keynes's thought processes on the post-war international monetary system at this early stage. He seems primarily concerns that claims about non-discrimination won't stand in the way of his bancor and trade stabilization plans.

UPDATE: And I don't want to be exclusively positive. This is always a real liability for Keynes too. There is a much deeper argument behind things like "burying banknotes" that a lot of people miss because he either says things cryptically or he just has outbursts like the one with Acheson. Sometimes the outbursts get fleshed out in more detail later... but if they don't it can really obstruct peoples' understanding of what he's saying.

Brad DeLong, if you're in the "Rubin wing" of the Democratic Party, you are essentially a centrist

I am too - and it's OK.

Brad writes: "One of the most puzzling things that those of us in the Rubin wing of the Democratic Party face is that we get no credit for any of the good things we do in the eyes of "centrist" commentators, and the Republicans get no blame for any of the bad things they do in the eyes of "centrist" commentators".

He's jumping on the Krugman point earlier about the "cult of centrism", which I criticized here. This narrative says that centrists are moral equivocators and "opinions of the shape of the Earth differ" style commentators.

It's a blatant category error on the part of Brad and Paul. Centrism as a political disposition simply says that when you look at the left and the right you often think they both have some good points to make on either policy or philosophy and you have a tough time identifying enthusiastically with either one. That's all it is. It's a political or philosophical disposition. It's not:
1. Being a lazy journalist
2. Being a gutless people-pleaser
3. Unwilling to accept evidence and objective science
4. Being a contrarian
5. Giving those whom the evidence is against a free pass

These have nothing to do with a person's policy or philosophical stance.

Likewise Brad earlier wrote that he was "moving to the left of Steny Hoyer" in proposing a few technical solutions to the debt ceiling crisis. Again, it's a category error. There's nothing inherently left-wing or right-wing about economic policy competence (which is really the quality that Brad brings to the table). Competence is competence. It so happens that it's in short supply all around and the shortage seems to become more modest as you move left. But that's just coincidence. There's nothing inherently "leftist" about (1.) following the Constitution, (2.) prudently running government, and (3.) prudent macroeconomic management. You're not proposing a massive expansion of the welfare state, after all. You're not proposing a punitive orientation towards business. You're not even touching a host of social issues. You're just pushing basic functionality in the public sector with a little Keynesian stabilization mixed in. That's fairly centrist, and you push that centrism without getting deferential to both parties in the room. I do think the sort of journalism Brad and Paul describe is a problem. A lot of journalists also just presuppose that what Washington is worried about is the actual problem, and that's bad too. Washington is worried about deficits so the presumption is deficits must be the problem. They're not - jobs are. I don't want to minimize the problem, I just don't think we should be confusing that ignorance with centrism.

One of the perks of being a centrist is precisely that you don't give a damn about strict attendance to a particular party's reputation!

Two fascinating things we learned this week

1. There is a "trojan asteroid" hanging out, in orbit with us, in one of our Lagrange points. It has a very odd, but stable, fluctuation in its orbit. There's been another world in our neighborhood and we're just finding out about it - I think that's pretty cool.

2. You know how they always taught you that the Sun's atmosphere was hotter than its surface, but no one knew why? Now we think we might know why. Well, we think we may have new evidence that makes a source of heat we knew about before 100 times stronger than we thought: Alfven waves, or magnetic waves carrying energy from the Sun's core.

Friday, July 29, 2011

Dates to know, and the logic of the debt ceiling crisis

April 15th, 2011: Department of Defense and Full-Year Continuing Appropriations Act

February 4th, 2010: Resolution to Increase the Statutory Limit on the Public Debt

Don't tell me you respect the Constitutional authority of Congress and the Constitutional limits on the presidency if you think that the president can violate a more recent act of Congress in order to fulfill an older act of Congress.

There are two other options, of course. The tax code is older than the debt ceiling and we can always default on our debts to give more room for growth in current debts.

The second option is unconstitutional as a result of the 14th amendment to the Constitution.

The first option I suppose you could make a case for. The president could take it upon himself to levy taxes without the consent of the governed. Historically, though, the American people have frowned on this. And history aside, the raising of revenue has to originate in the House. One can consider a piece of legislation trumped or rendered moot by more recent leigslation, but you can't invent new legislation - i.e. - levy new taxes.

Justice John Marshall Harlan II presciently warned that “the Constitution is not a panacea for every blot upon the public welfare,” and we do have a quandary here. Congress, in passing laws it absolutely has the authority to pass, has attempted to repeal the laws of arithmetic (which while it may or may not have the Constitutional authority to repeal it certainly doesn't have the ability to repeal). The president's job is to execute Congress's laws, but he can't execute one without violating another. So the task of execution becomes a task of reconciliation of conflicting legislation - he can't execute the laws if he doesn't make some attempt at reconciling them. And the constitutional and logical option seems to me to be (1.) not raise taxation without represenative assent - Article 1 Section 8 rules this unconstitutional, (2.) not default on public debts - Amendment 14 rules this unconstitutional, and (3.) recognize more recent legislation as the will of the Congress over older legislation which they for all intents and purposes have revised.

I personally see no Constitutional, logical, or chronological reason for violating (1.) or (2.) or for flipping (3.) around.

UPDATE: The other option is asset sales. This is good, but there are limits to it, of course. The appropriations bills include money to do things like, say, operate federal parks, lands and buildings. It's unclear to me how you're not violating those laws with a lot of asset sales. Certainly we could do some and probably should do some. I'm guessing that won't close the gap.

UPDATE 2: Brad DeLong links this post, but let me make something clear - I don't like the idea of asset sales and I don't think it's a solution - but I can see the legal/Constitutional argument that we ought not violate the laws of Congress until we exhaust that option. It's still obviously a non-starter. Once you start getting rid of too many assets, again you're running into Congressional legislation ordering you to make use of those assets (i.e. - you can't sell off park land if Congress directs you to staff and run the park you're trying to sell!). I do like Brad's idea, which is something that's been floating around: mint and sell a 10-lb., $100 billion platinum coin. The president has the unambiguous authority to do this.

UPDATE 3: It's in my author description, but this is probably a good post to emphasize that these are my own views and absolutely not those of my employer. I'm leaving in a couple weeks, but still oughta be clear about that.

Barkley Rosser on the Idiocy of the Debt Ceiling and Moody's Opposition to It

He writes:

"This actually dates back to July 18, but has somehow gotten nearly zero coverage in the MSM, somewhat like Bill Clinton's argument that the debt ceiling is unconstitutional, something that Obama's press secretary seemed to move him away from agreeing with this past Monday. In any case, one link to the declaration by Moody's that the US should abolish the debt ceiling is at That Moody's has threatened to downgrade the US credit rating has received a lot of attention, but this piece of their threat has somehow been completely ignored, and so far there are exactly zero members of Congress of either party who have even remotely suggested that we do what Moody's suggests, which is clearly what needs to be done.

I remind everyone again: no other nation in world history has ever had such a ridiculous thing as a nominal debt ceiling. Whether or not it is unconstitutional, it is utterly incoherent. It forces the president to break the law if Congress neither raises the ceiling nor prescribes which bills are to be paid on time (if at all). I find it bizarre that all sorts of people are loudly declaring how the president has no authority raise the debt ceiling but somehow has the authority to "prioritize" which bills will be paid and which will not, meaning that somehow it is his responsibility rather than Congress's to actually destroy the "full faith and credit of the United States" that is demanded by the Constitution. Again, not paying legally mandated bills is a default, not just a failure to pay interest on securities on time

The bolded point is precisely the one I made, which Brad DeLong shared here. I had written: "I personally don't see why we have to make this complicated as even a 14th amendment issue. Obama has conflicting legislation: he is told what revenue to raise, he is told what money to spend, and he is told what debt to issue. Congress can't legislate arithmetic - Obama HAS to break one of these laws. For me it's not some sneaky Constitutional measure. It's a matter of following the laws that Congress has the clearest authority to pass first: appropriation acts and revenue acts."

My one concern is that if Obama does go forward and just follows the revenue and approriations act that Congress gives him (because he has to break one law and the debt limit is on the shakiest Constitutional grounds and was passed earlier than the appropriations and revenue bills if I'm not mistaken) then the idiots who already think he's a tyrant are going to go nuts, which is something we want to avoid.

Assault of Thoughts - 7/29/2011

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

- I want to address David Friedman's comment on my earlier post on Breivik in more detail but honestly I'm not sure if I'll have time to. But you can read it here. Briefly, I think he's wrong about me - there's no presumption at all about an "optimal outcome", which I think should be clearer to people who read me more regularly. So I actually agree with him in that sense. James Buchanan made very similar points about the spontaneous order of law in the video I presented in this post.

- LK has a video of Skidelsky talking about Keynes and the crisis. His LSE debate doesn't appear to be up yet.

Thursday, July 28, 2011

This is pretty disturbing

Investment advice on which companies are "exposed" to low-income families. The author notes that low-income families are going to be taking a hit in any deficit reduction package. He offers the requisite sympathies - he's not a complete monster. But then he gets to the meat of the article: how is their suffering going to impact your portfolio!

This is depressing stuff. The debt talks are bad enoughto listen to - it's really frustrating to see the fate of the budgets of low-income families discussed as if they were exchange rate fluctuations or heavy rain on Black Friday.

Straightening out this Block/Callahan thing

Commenter I.Georgiev challenges Gene: "Gene, your quote of Block is misplaced. In this paper Block give an example where an individual is FIRST robbed by a Mafia, THEN he tries to get his stolen property back and IN THE PROCESS of doing so he harms the Mafia's agents who are trying to prevent him from doing so. Would you please be so kind to let me know where is the injustice in this example? A ) Is it the act of ROBBERY by the Mafia's agents, B) is it the act of restitution performed by the Mafia's victim (which involves the physical harm of individuals trying to prevent the JUST owner of the property to gain possession of what is rightfully his)?

Mr. Block does not (explicitly) specify the course of actions, that is, whether the victim first finds out that the Mafia keeps its loot (a part of which is his now-stolen property) in a store-house where there are "guards" who do not have guns with them, but rather are there in order to politely give back the loot to the robbed-original-property owners who find the store-house and express their wish to get their belongings back, and whether the victim knowing this information buys himself a kalashnikov goes to the store-house murders all the "guards" and takes his property; or whether the "guards" actually ARE guards, are NOT polite (i.e. do not want to cooperate) but rather hostile and prefer to try their best to stop any victim of their robberies from performing restitution. In the second case where the guards are guards and as such they respectfully DECLINE to peacefully give back what is NOT THEIRS, THEN:

"pretty much anything you do to or against them will be more than fully deserved."

what Block is NOT saying is EXACTLY WHAT YOU TRY TO INSINUATE HE IS SAYING, and that is what you paint to be as a LIBERTARIAN CALLING, something as a duty that makes one a real libertarian, and this duty is supposed to be: go ahead and murder the state and its agents

Now I don't know Walter Block's thinking on these things in any great detail so I need you guys to help me sort this out. I.Georgiev seems to me to be contradicting himself here although I find his prose somewhat confusing. Unless he's saying "Block thinks killing agents of the state is justified but not necessarily a duty" - perhaps he's saying that - but I can't understand how he's not at least saying that it's justified. If you think the government is akin to the Mafia and you think that responding to the Mafia with violence is acceptable under the non-aggression principle because you aren't the aggressor (they are), then what argument could you possibly make against the Breivik situation. It seems to me once you accept the premise that the government is a criminal enterprise that we're all victims of, you've given up any counter-argument to Breivik and you certainly can't hide behind the non-aggression principle. Block seems to understand this. Lots of other people seem to be in denial. I don't happen to agree with Block. I don't think government in general is analagous to a criminal enterprise at all (although certain governments have been criminal).

I made this point in this post too, where I made the probably too strong suggestion of saying that libertarians didn't really believe taxation is theft because they didn't respond to it the way they would respond to a thief in their house. Later I conceded the point on a lot of that. However, even if there are very good reasons why any given libertarian might (1.) think taxation is theft, but (2.) not respond, it seems to me nobody that thinks taxation is theft would begrudge someone else's response or consider them to be acting unjustly. I understand not all libertarians are going to respond this way and they might have good reason not too, but if you really think the state is criminal and taxation is theft how could you argue against someone who refuses to take that aggression lying down? It seems to me you have two options: (1.) think the state is criminal and a violent response is justified, it's just not for you, or (2.) think the state is not a criminal enterprise and thus that a violent response is unjustified.

A lot of libertarians seem to want it both ways. They want to say the state is the mafia, the state is criminal, the state is the biggest mass murderer in history, the state is the biggest thief in history - put simply, the state is the biggest aggressor in history. But then when someone says "I am going to respond to this aggressor" they try to whip out the non-aggression principle as a defense.

I don't think that works, guys.

This is getting way past the "is Breivik a libertarian" question. Let's say he's not at all, he just happens to think the state is an aggressor. I know what I'd say in response to that: "The state is not an aggressor and you, Mr. Breivik, are a murderer and you're lucky you don't live in a country where they execute murderers because if I were on your jury I know what my sentencing recommendation would be". What can libertarians say? Can they dispute that the state is an aggressor? No, I don't think so. Can they invoke the non-aggression principle if the state is an aggressor? No, I don't think so. What's the argument against Breivik if you've burrowed yourself in this ethical hole? I truly don't understand what the argument is except for a gut feeling (which isn't necessarily a bad thing - gut feelings are there for a reason). I just wish more people would compare what they feel in their gut to their more formal pronouncements about ethics, justice, and the state.

Wednesday, July 27, 2011

James Buchanan at the University of Richmond

This is a really great talk from about a month ago. He has some interesting criticisms of Hayek here. I'm not qualified to say if he's characterizing Hayek well because I haven't read much of Hayek on the law. Even if its a caricature, it's probably the sort of position many people hold so his criticism I think is still valuable and interesting. Lots of really good thoughts here about the difference between efficiency at the micro level and efficiency at the macro level, as well as understanding rules as externalities or public goods.

Watching this inspires something of an autobiographical digression, if you care at all: James Buchanan had me quite excited about George Mason University when I read some of his stuff as an undergraduate at William and Mary. I especially appreciated his work on constitutional economics. I also wrote a few papers on economic geography, which is when I first came into contact with a guy named Paul Krugman, specifically his work on and the work of people at the Santa Fe Institute on "emergent order". The summer after my junior year I attended an experimental economics workshop at George Mason, where I became even more enthusiastic after meeting Vernon Smith and reading Hayek there, and hearing him talk about these same ideas of emergent order that I had first read about in Krugman's work. I had read some Hayek before, but that was the first time I had ever heard of the Austrian school as a school of thought. It was easier to get my master's at night at George Washington University, which was a couple blocks away from work for me. So any thoughts about Mason or anywhere else (I was also always excited about the University of Maryland) was shelved for a while. In the interim I learned how political the department was and I never ended up applying this last year. That was kind of surprising to me. At George Washington the political views of only one of my professors was clear. At William and Mary two were quite clear. All three of these cases were liberal Democrats, which wasn't particularly surprising. Over all though I had no clue. College faculty are bound to be liberal, but economics faculty specifically obviously weren't spouting leftism or anything like that. I just didn't know - politics simply never came up all that much, and I still don't know. Anyway, it's an odd thing. What I like about James Buchanan is that he's always so clearly concerned with understanding how the economy works. The political affiliations didn't really blare out from him for me. Always good to listen to or read - a brilliant mind.

UPDATE: And since I mention my early interest in Krugman - I never read his columns back then. I didn't even realize he had one until after I graduated. So I didn't really realize Krugman had strong political views until I had already read a lot of his stuff and until he became the guy that first explained emergent order to me. For a lot of you it's just the opposite, I imagine - the columns and blog posts of Krugmans are the first introduction you had to him (for many of you, perhaps the only thing you've ever read of his) and it was someone like Hayek that introduced you to emergent order.

Don't Mess with Milton

People are justifiably cheering David Friedman for defending his father against Lew Rockwell (Rockwell himself is responding to the Lee/Wilkinson posts from a couple days ago about how unfortunate it is not to have Milton Friedman around at a time like this).

My favorite point from David actually came up in the comment section:

"Rothbard had a problem. He thought he was a great economist, but practically nobody within the profession agreed and most of them had never heard of him.

Rothbard had a solution. He was ignored because he held extreme pro-market views, which were ideologically unpopular in the academy.

Rothbard had a problem. Milton Friedman held extreme pro-market views--not as extreme as Rothbard's, but far enough from academic orthodoxy so that the same effect should have existed. But Milton Friedman not only wasn't ignored, he was viewed within the profession as a leading figure--despite his unpopular political views.

Rothbard had a solution--to persuade himself and his followers that Milton Friedman was really one of them instead of one of us, hence his acceptance by the profession didn't contradict Rothbard's view of the reason for Rothbard's non-acceptance.

Maintaining that claim was difficult--at one point I remember being told by a Rothbard supporter, explaining why he was not going to publish a letter of mine in his journal that contained quotes from my father inconsistent with Rothbard's account of my father's views, that if Rothbard and Friedman disagreed about what Friedman's views were, Rothbard was right

There's really not much to say here. Friedman was one of the best economists of the twentieth century. Rothbard wasn't. The idea of comparing the two is laughable. If we never had Friedman the discipline would be very different. If we never had Rothbard nobody would notice. Even the Austrians would have found someone else to play the anarcho-capitalist re-invigorator and re-stater of Mises in the last half of the century.

This isn't to say I think Rothbard is terrible (although like clockwork someone is going to accuse me of saying that). I don't honestly have any strong opinions about Rothbard. I'm sure I would strongly disagree with him on lots of stuff, but what I mean is I don't feel strongly about him as an economist nor do I spend much time thinking about him. Read him if you want - I don't particularly care. Don't tell me he eclipses Milton Friedman.

Murray Rothbard

Federalism and Republican Candidates

A while back I spoke positively about Rick Perry's stand for federalism on the Daily Show. It's always unclear what to make of Daily Show performances, though. It's not a venue that a politician wants to look bad in, so of course you're going to spin your views in a good way. A nice way of blunting social conservatism is by paying lip service to federalism. However, it sounds like Rick Perry is still going strong on the issue, which is good to see.

The other stand-out federalist is, of course, Mitt Romney. Romney has specifically talked about federalism and health reform which I think is very important. It was a major mistake of the Obama administration not to follow the Clinton welfare reform example and push reform by supporting state experimentation. I criticized Andrew Sullivan for saying that Romney "hides behind federalism" as if its not a legitimate policy position. Federalism has ensured that American government is incredibly robust and its worked well in the past at reforming social programs that get too cumbersome in the hands of the federal government and federal agencies.

There are a lot of depressing Republican candidates, and Perry especially has a lot of other problems - but the stronger adherence to federalism is a good thing to see.

Assault of Thoughts - 7/27/2011

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

- Casey Mulligan apparently now thinks Keynesians don't think supply matters or evidence of labor supply fluctuations somehow invalidates Keynesians points. Sigh... I'm going to sigh even deeper when Greg Mankiw reposts this later, which he usually does.

- Gene Callahan calls our attention to a Mercatus working paper coauthored with Steve Horwitz on the role of ideal types in ABCT. The conclusion is very much the sort of attitude I approached the issue with in my 1920-1921 paper: "the amount of illumination that the Austrian Business Cycle Theory can cast upon any particular historical happening varies directly with how nearly the specific circumstances of the time in question approach the idealized state of affairs assumed in constructing the various ideal types it incorporates. With this explanation, it then becomes clear that the Austrian Business Cycle Theory is not the only possible explanation of macroeconomic downturn but provides a possible account of specific historical episodes."

- Last night at the LSE, Robert Skidelsky and Duncan Weldon debated George Selgin and Jamie Whyte in a "Keynes vs. Hayek" debate. The podcast should be up soon - I'll post that as well as thoughts in the next couple days.

- Stickman writes about Norway here and here. In the first link I provide he compares the murder rate in Norway to the rate in South Africa (both countries with which he's intimately familiar). I'm not entirely sure this is the best way to frame the violence. Human stress and strain is always going to produce a background level of violence, and in conditions where that stress is greater we're going to see higher levels of violence. There's something different and more disconcerting about violence as a political tool, whether it's in Norway, the Middle East, or a civil war in Africa that claims millions - whether its organized or done by a loner.

- And speaking of Norway, if you haven't worked through the comments of my earlier post, some of them are worth reading - particularly a lot of good insights from Gene. Some people - on this blog and elsewhere - have taken my post as saying that Breivik is typical of libertarians and libertarians are bad. If you think I said that, you need to reread the post.

Tuesday, July 26, 2011

Krugman is wrong on centrism

He writes:

"Watching our system deal with the debt ceiling crisis — a wholly self-inflicted crisis, which may nonetheless have disastrous consequences — it’s increasingly obvious that what we’re looking at is the destructive influence of a cult that has really poisoned our political system.

And no, I don’t mean the fanaticism of the right. Well, OK, that too. But my feeling about those people is that they are what they are; you might as well denounce wolves for being carnivores. Crazy is what they do and what they are.

No, the cult that I see as reflecting a true moral failure is the cult of balance, of centrism.

Think about what’s happening right now. We have a crisis in which the right is making insane demands, while the president and Democrats in Congress are bending over backward to be accommodating — offering plans that are all spending cuts and no taxes, plans that are far to the right of public opinion.

So what do most news reports say? They portray it as a situation in which both sides are equally partisan, equally intransigent — because news reports always do that. And we have influential pundits calling out for a new centrist party, a new centrist president, to get us away from the evils of partisanship

Sorry, Paul - you're wrong and your logic here is lazy. What you rightly criticize is:

1. Moral ambiguity
2. Lack of intellectual curiosity
3. A confusion of respecting others with conceding points to others
4. The view that fair debate does not mean conceding to poorly made arguments

These things are very bad for society, and they're worth fighting. You usually do a great job fighting them. But these things have absolutely nothing to do with "centrism" which really is just a nebulous sense that conservatives have some good ideas and liberals have some good ideas and we don't have anything else to call ourselves.

I can think of myself in terms of "centrism" (usually I think of myself as "center-left" or "moderate") without conceding an inch to the absurdities of the austerity crowd. The two things have nothing to do with each other.

Some good old fashioned Keynesianism and Default

If you were on the D.C. metro last night and you saw me tracing out IS-LM curves in the air with my fingers with a puzzled look on my face, it was because I was thinking about this post. Nick Rowe asks what a simple IS-LM model would imply about the consequences of default. He says that the IS curve would shift to the right, the IS-LM equilibrium would shift to the right, and the IS-LM model would say we would be better off.

This is odd, right? In the guts of the IS curve, ignoring what's going on with the LM curve, the equilibrium shifts left and the equilibrium savings/investment level decreases. The equilibrium interest rate is higher but because of a negative shock to the supply of savings. Investment demand equilibrium decreases and there's no clear mechanism for an increase in government or consumption spending, so the ultimate salutary result is puzzling.

Most of the responses have focused on the LM curve. Brad DeLong says it should shift money demand out as well, canceling the shift in the IS curve. This isn't implausible to me. Money demand is a security blanket, so the idea that it would increase makes sense, particularly given Paul Krugman's point that the primary difference between inflation and default (which Nick considers comparable) is that default doesn't directly affect the value of cash the way inflation does.

My reaction was somewhat different. Treasuries are assets, and if those assets suddenly become worth much less it's going to impact demand. How is this any different from mortgage backed securities exploding in people's faces (oh right... it's different because this isn't inevitable - but there's nothing analytically different about it)? So my first thought wasn't Brad DeLong's thought that adjustments in the demand for money would cancel out any counter-intuitive expansion due to a higher risk premium. My thought was that within the IS curve itself decreasing demand would be at least as strong as increasing interest rates due to a supply of loanable funds curve that shifts left.

Nick says "this is like an increase in inflation", but it's really not is it? Inflation has some nice side effects for debtors. Inflation can have the consequences of spurring investment. Does default do that? Put it this way - if we can just think of inflation and default as comparable, why do so many governments seem to prefer inflation to default? If they were exactly the same wouldn't they default more often?

Does this make sense at all?

UPDATE: Hmmmm... thinking more about it and I'm not really sure it's all that different from inflation after all. Anyway - thoughts welcome.

Monday, July 25, 2011

Does anybody else do this?

Kate and I were musing on something this weekend that perhaps you all could help me out with.

One of the big events in the area was the re-enactment of the Battle of Manassas on the 150th anniversary of the event. It got us thinking - Civil War re-enactments are a big deal in the U.S., particularly in Virginia where a lot of it happened. To a lesser extent, we re-enact the Revolutionary War too (you see a lot of this down where I went to college, in Williamsburg and Yorktown).

Does anybody else do this? Do any other cultures re-enact their bloodiest wars, not in some vague ceremonial way but with a high premium placed on authenticity and detail? It's kind of strange, if you think about it, but it seems so natural that I personally have never thought about why we do it before.


More on macroeconometrics

The other day I said that macroeconometric role models should be people like Robert Barro and Christina Romer, who understand the issues surrounding identification of macroeconomic models. Of course, there's one major problem with using a lot of this work in practice, which Jonathan Parker points out in a new NBER working paper. From the abstract:

"We do not have a good measure of the effects of fiscal policy in a recession because the methods that we use to estimate the effects of fiscal policy — both those using the observed outcomes following different policies in aggregate data and those studying counterfactuals in fitted model economies -- almost entirely ignore the state of the economy and estimate 'the' government multiplier, which is presumably a weighted average of the one we care about — the multiplier in a recession — and one we care less about — the multiplier in an expansion. Notable exceptions to this general claim suggest this difference is potentially large."

His solution is a more careful look at general equilibrium effects. This is similar to my response to the Conley-Dupor paper, where I suggest that some sense of the magnitude of interstate trade would help us understand exactly what the Conley-Dupor results are telling us. This also smacks of Old Keynesian econometrics to me: identify all the micro-reaction components (marginal propensities to consume, import, etc.) and then slap it all together to get a rough estimate of a fiscal multiplier.

Andrew Bossie advocated a mixed-methods approach to multipliers, and to a certain extent I agree. We can't just embrace all clearly biased estimators and call that "mixed methods", but we can take weighted averages of multipliers like Barro's and Romer's, and compare that to cross-national studies, and studies that build a multiplier up from its constituent parts, etc. I just don't like the idea of taking an estimator we know is going to be biased - like these cross-state studies - and throwing them into the pot, just assuming that the average that we get out is going to be useful.

Parker suggests: "Microeconomic estimates of the partial-equilibrium causal effects of a policy can discipline the causal channels inherent in any DSGE model of the general equilibrium effects of policy. Microeconomic studies can also provide measures of the dependence of the effects of a policy on the states of different agents which is a key component of the dependence of the general-equilibrium effects of fiscal policy on the state of the economy." It sounds like calibrating a DSGE model instead of the traditional calibration of an Old Keynesian model.

Breivik and the Libertarians

As someone who has spent a fair amount of time alternately being dumbfounded by and then refuting claims from libertarians (yes - as my memory serves me - exclusively libertarians) that a champion of liberalism like Keynes was a Nazi sympathizer, I don't feel particularly shy looking at the case of Anders Breivik and libertarianism.

Steve Horwitz discusses this issue here, and he notes that people with nasty agendas are going to point this out and that people ought to think seriously about it and simply know the facts to get ahead of the situation. I agree with Steve here, and like Gene Callahan I want to make clear I'm not one of those people with a "nasty agenda".

Libertarianism is no antidote to the human condition

I suppose what bothers me most is the reaction that some people have that "you cannot be a libertarian and do something like that", as if any human ideology insulates us from doing terrible things. That outlook is negligent, and that's really what worries me. Nobody thinks that their own outlook on the world, properly understood, justifies this sort of thing. Many people have pointed out illiberal tendencies in libertarianism long before this episode, and the suggestion that Breivik couldn't be a libertarian seems to ignore these past observations. Libertarianism strictly curtails free people's self-governance. Libertarianism often seeks to design a polity based on logical constructions and opposes itself to states that are the result of gradual evolution and emergent order (and are therefore likely to be much more robust and consistent with human flourishing than the blueprint-societies libertarians have in mind). Libertarianism is better described as "propertarianism" because it is not so much pro-liberty as it is pro-non-interference with a given property rights regime. I and others have pointed out these tendencies in some libertarians and in some expressions of libertarianism. Nobody is saying that libertarianism is definitively illiberal or that libertarianism "leads to this sort of violence", but nobody should think that libertarianism is an ideology that is immune to illiberalism or nutjobs either.

If Breivik is not a libertarian, is he a Hoppean?

The other thing that bothers me about these claims that Breivik couldn't be a libertarian because he was anti-immigrant and nationalist is that we have such a blatantly obvious and widely celebrated cases of anti-immigrant, nationalist libertarianism: Hans Hermann Hoppe. His best known anti-immigration article is here:

Hoppe, H. 1998. "The Case for Free Trade and Restricted Immigration". Journal of Libertarian Studies 13(2), p. 221-233.

Walter Block responded to the article critically here. My case of course is not that Hoppe demonstrates that all libertarians are or must be anti-immigration. But Block himself certainly doesn't seem to think this threatens Hoppe's libertarian bona fides. There is clearly space for anti-immigrant, nationalist perspectives. In that article, Block refers to Hoppe as one immigrant who has "improved our freedom immeasurably", so clearly there's no feeling on Block's part (despite his disagreement with Hoppe) that Hoppe has at all been a detrimental influence on the advancement of libertarianism. Hoppe has another anti-immigration article here, also in the Journal of Libertarian Studies.

Another thing that people have mentioned is that Breivik's opposition was cultural and that this somehow makes a difference. Again, though, Hoppe presents a cultural case for restricted immigration. In the well-known "footnote 23" of Natural Order, the State, and the Immigration Problem he writes:

"A second motive for the open border enthusiasm among contemporary left-libertarians is their egalitarianism. They were initially drawn to libertarianism as juveniles because of its "antiauthoritarianism" (trust no authority) and seeming "tolerance," in particular toward "alternative" — non-bourgeois — lifestyles. As adults, they have been arrested in this phase of mental development. They express special "sensitivity" in every manner of discrimination and are not inhibited in using the power of the central state to impose non-discrimination or "civil rights" statutes on society. Consequently, by prohibiting other property owners from discrimination as they see fit, they are allowed to live at others' expense. They can indulge in their "alternative" lifestyle without having to pay the "normal" price for such conduct, i.e., discrimination and exclusion. To legitimize this course of action, they insist that one lifestyle is as good and acceptable as another. This leads first to multiculturalism, then to cultural relativism, and finally to "open borders.""

Hoppe makes many different sorts of cases against immigration, including an economic case and a political case. But he also clearly embraces a cultural case: culture must be grounded in a nation, multiculturalism is a bad thing, etc. So is Breivik a libertarian? I don't know but let's not pretend there hasn't been acceptance of views like Breivik's among libertarians. We can be honest about this without saying that libertarianism "leads to violence". In fact it's only through being honest about these sort of things that we're going to avoid being blind-sided.

And then there's Mises

Of course, this question is going to require refighting the case of Mises on fascism. I'll keep this brief, because this whole issue has a tendency to explode, and it's already been written about extensively elsewhere. Mises, as I read him in Liberalism, (1.) promotes a liberalism that is inconsistent with fascism, (2.) recognizes that fascism can never succeed and fundamentally misunderstands economics and human nature, but (3.) makes a clear instrumentalist case for fascist violence as a means of suppressing the greater threat of Communism. I would not call Mises a "Nazi sympathizer". He wasn't even commenting on Nazis. I would say that he takes a chillingly instrumentalist position on the inter-ideological violence of the 1920s. If you replace the Communists who threaten European civilization with the immigrants who threaten a Hoppean view of European civilization you can see the same sort of instrumentalist formulas with Breivik and potential reactions to Breivik.

I don't have a "nasty agenda"

I really don't. I've tried to cultivate an environment that is critical of but fair to libertarians, and I think in most cases I hit the mark. I'm certainly not trying to tie Breivik to all libertarians in this post. But we know how dangerous a "this can't happen here" attitude is, and that's what I'm trying to avoid here. And perhaps I am trying to push libertarians a little. Should they be more critical of Hoppe? Should these sorts of views be welcomed as uncritically as they are? As libertarian ideas continue to be on the rise in the U.S. and Europe we need to consider the reactionary potential of libertarianism just like we consider the reactionary potential of any ideology. And we should do that with specificity - not broad brushstrokes.

Sunday, July 24, 2011

Much as I like fiscal stimulus, this is not evidence of its effectiveness

Jared Bernstein calls employment in the DC area compared to the nation a "natural experiment" demonstrating the effectiveness of fiscal stimulus. He writes:

"It’s not like our area is totally insulated from recession, but the countercyclical expansion of federal spending does give the region a notable edge compared to much of the rest of the country. (Though the point of my presentation was that with the fed gov’t poised for contraction, our region needs to diversify.)

Note how the jobs line for the DC region is flat while that of the nation falls steeply. It’s a bit of a natural experiment: if you actually apply some serious Keynesian stimulus, you can minimize job losses


It was wrong when the Conley-Dupor paper did it, and I said it, and it was wrong when the Feyrer-Sacerdote paper did it, and I said it (although I did think they had a nice instrument - it just wasn't an instrument that could identify the parameter they were looking to identify).

You can't look at differences between sub-regions and get macroeconomic impacts. This should bother people for and against stimulus. First, if stimulus has a positive impact, then the fact that the states are open economies on the same currency will create spillover effects that bias the impact estimates downward. If stimulus doesn't have a positive impact and there's crowding out, then any gains in one state are going to come at the expense of other states, and inter-state differentials will be biased upwards. As one of my mentors at Urban in all things econometric likes to put it, "the estimates are mush".

Identification of impacts in macroeconomics is hard. You can't just look at raw data like John Taylor does. You can't do inter-state comparisons like these people do. You have to do hard work identifying your model. Role models in empirical macro should be economists like Robert Barro and Christian Romer.

Saturday, July 23, 2011

It's starting to seem ridiculous to call this a debt "talk"

Apparently Cantor isn't the only House Republican that can throw a hissy-fit. And it sounds like Obama is increasingly looking towards the "constitutional option". I think the 14th amendment case is weak. Certainly it's grounds for continuing to pay actual debt obligations, but I don't think that was ever in question by anyone. It doesn't really provide cover for other obligations.

But he can cite the 14th amendment if it makes him feel better - I'd just cite Article 1, section 8. Two things Congress unambiguously has the authority to do are spend money and levy taxes. The math on this isn't tough:

Outlays - revenues = deficits

Congress has specified the left hand side of the equation for the president by statute. They don't get to rewrite the laws of arithmetic by statute. The very idea of a debt limit is stupid, and the president is put in an impossible position here. He has to break some law here - a debt limit law, an appropriations law, or a tax law. It seems to me breaking the first of those three laws makes the most sense. Congress has maintained control over taxing and spending for over three hundred years. We've only had a debt limit for about 70 years, it's only really been binding for about 40 years and in those 40 years it's been increased essentially as a formality. A law has to be broken, and adhering to the debt law rather than a tax or spending law seems to me like it would be a greater affront to American democracy and liberty. It would better if we just let the laws of arithmetic alone and didn't pass these things, of course.

My one concern is that a non-trivial segment of the population already sees Obama as a tyrant. If Fox News and others starts talking about Obama directly flaunting the will of the Congress, this could get very ugly, very fast.

Assault of Thoughts - 7/23/2011

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

- Tim Lee, Will Wilkinson, and Matt Yglesias pining for Milton Friedman on inflation. Ryan Murphy cites Wilkinson approvingly for challenging "folk-Austrianism" (better known in some circles as "Rothbardianism").

- Andrew Sullivan has been profiling a strange Christian group that Rick Perry is "associated" with (granted, when journalists talk about these "associations" you never know how close it actually is). It's called the New Apostolic Reformation, and they see themselves as prophets that are preparing the church for the end of the world (which they don't believe will be kicked off by rapture, unlike most who anticipate the end-times). More discussion is provided here. One of the prophecies for 2011 should be interesting for those of you interested in IP issues: "A great release of new wealth will come from ideas given from God in the form of intellectual properties. A new creative anointing of ideas for those who will use the wealth for the advancement of God’s Kingdom" and also inflation: "We must intercede against hyperinflation that will strangle the ability of people of give to world missions".

- Gary has thoughts on the Norwegian shooting here and here. has a post here. doesn't even mention it and Gary only mentions it briefly, but this guy was essentially a libertarian. This isn't some Loughner mental health issues situation. I don't intend any more by saying this than just to be up front about this fact of the matter so we can reflect on it. I'm sure "but he was virulently anti-immigrant so he's not a real libertarian" will come up, but I'm not sure why that matters. Anti-immigrant sentiments aren't part of liberalism as well, but what would we be talking about if an otherwise liberal Democrat orchestrated an attack like this and made some claims about how Democrats ought to be harder on immigration? All this is just to say that libertarians have never been very convincing when they say "oh a libertarian could never be a threat to people". Of course you guys can. You aren't special. It's this sort of thing that worries us about things like the Tea Party. Whenever any ideology becomes rigid and second-guessing it becomes unacceptable, violence can't be precluded as a risk. That doesn't make violence inherent in libertarianism any more than violence is inherent in Islam because of Muslim terrorists, so please nobody put those sorts of words in my mouth. It's just something we need to be aware of. Intolerance is a human failing, and no ideology should be put on a pedestal with respect to intolerance. Often people have a hard time seeing faults in their own ideology.

Friday, July 22, 2011

Jonathan Catalan on the General Theory

Jonathan discusses why The General Theory was so successful here. As I understand him, he's saying that it was successful because it adequately critiqued what Jonathan calls "Marshallian" economics. Keynes was fond of Marshall, and so I think you'll be more likely to find Keynesians call it "Classical" economics. One of Jonathan's points seems to be that the Austrians never were Marshallians and this became especially clear only after Keynes successfully displaced Marshallian economics.

Towards the end he talks about what Austrians ought to do to assert their "supremacy". My position, of course, is that they have no such "supremacy", so they ought to be strategic. There are good ideas that Austrians can contribute. ABCT, I think, has a lot of potential in the mainstream as one of many macroeconomic mechanisms worthy of study. Believe it or not, I'm actually warming to Austrian views on inter-subjective utility comparisons. My position used to be that making these inter-subjective comparisons was a justifiable modeling assumption that didn't do all that much harm. After all - we're really mostly dealing with marginal utility, so Austrian hand-wringing about whether total utility comparisons can be made always seemed beside the point. Lately, though, I've been so frustrated with implicit conflations of clearing markets and "ideal" outcomes that I'm beginning to wonder whether the whole welfare economics outlook that people carry over from micro is doing more harm than good.

Regardless, the point is Austrians have good things to bring to the conversation and I support that enthusiastically. I don't agree that they have anything that would displace the Keynesian paradigm that we're in. Some day I'm sure the paradigm will shift, and I hope I'm not so old and crusty at that point that I miss it. I don't think the Austrians will bring that about.

Ultimately, Jonathan rejects this line that Keynes succeeded because he was good for politicians. That demonstrates a great deal of wisdom on his part.

Scott Sumner and "Dark Age" Macro

I just lost a massive post on this and I'm mad and not going to rewrite it.

- Scott Sumner has critiques here, here, and here.

- I think he adequately shows that Cochrane has a more nuanced view.

- I think he still can't defend Fama writing things like this in the post that kicked off this "Dark Age of Macro" stuff back in 2009: "The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another. And bailouts and stimulus plans only enhance future incomes when the activities they favor are more productive than the activities they displace."

Fama reiterates the point later. It doesn't look like a slip of the tongue. And it's telling that Sumner can dig up Cochrane offering more nuance but not Fama. This is disconcerting because we know that (1.) Fama is not alone, (2.) Fama is a celebrated Chicago professor - not some hack, and (3.) politicians think like this. Whatever the gulf between Sumner on the one hand and Krugman and DeLong on the other, it is considerably narrower than the gulf between Sumner and Fama and I don't know why Sumner feels the need to keep attacking Krugman and DeLong when there are people that hold positions like this that are considerably more egregious.

- Sumner argues that fiscal policy is just roundabout monetary policy and that Chicago-types speak a different language that essentially presupposes the Fed is doing its job. Fine. But Sumner agrees that the Fed is not doing it's job, right? He's been pounding that point for almost two years now. If that's the case, then again - why is he piling on the people supporting fiscal policy? Shouldn't he be saying "hey - I think fiscal policy is roundabout monetary policy but we need all the help we can get because the Fed appears to be uninterested in doing its job".

- I don't personally agree that fiscal policy is just roundabout monetary policy. We think the money demand schedule flattens out. So as the nominal interest rate gets lower monetary policy becomes less effective. There are two options (1.) create lots of inflation so low nominal interest rates aren't high real interest rates anymore, or (2.) if the real interest rate can't come down to meet investment demand at a full employment level, why not move investment demand up? Fiscal policy is roundabout monetary policy only if you're looking at the bond creation facet of fiscal policy. But there's also a direct demand facet to it.

Thoughts on the debt deal

Somebody asked my thoughts on it. I really don't have detailed thoughts, but I suppose it's worth highlighting a few things.

- One of the reasons why I have a hard time having any firm thoughts on it is that I haven't seen much in the way of a timeline for rolling this out. Perhaps it's because I haven't been paying close enough attention - if anyone knows of simply a chart showing revenue, outlays, and deficits and how each would change over the next decade with each plan I'd probably have a lot more to say.

- The reason is, right now I think it's absurd that anyone is talking about (1.) raising taxes, (2.) cutting spending, or (3.) cutting the deficit. Five years from now I think it would be absurd not to talk about those three things. To the extent that these debt deals are addressing entitlement spending and Iraq and Afghanistan, the cuts are likely to come on a medium to long term horizon. That's fine with me. If it's happening a ways out I'd even go in for a relatively big deal, because these opportunities don't come around all that often.

- In last night's debt talks apparently Boehner wanted to throw in adjustments to health reform. The one the Washington Post specifically mentions is ending the individual mandate. That would be great, in my opinion. While they're ending a variety of tax credits (this corporate jet thing and apparently maybe the mortgage interest deduction too) they might consider ending tax credit for employer sponsored plans (they partially ended it during health reform). That's a McCain campaign proposal, and a good one, but I'm guessing all this health reform stuff isn't going to make it in.

- This is beginning to be exclusively a debt negotiation and the debt limit itself is starting to fall out of the discussion. That's not good, because the debt limit is far more important and urgent than the debt. The debt limit needs to increase. Better yet, we just shouldn't have a debt limit. Congress passes appropriations bills and Congress passes revenue bills. If they want to tell the president what to spend and what to tax they don't get to reinvent algebra - they don't get to tell him what to borrow. That's determined by simple arithmetic, not by Congressional fiat.

- A balanced budget amendment would be a horrible idea. Recently I said we could run deficits from now until the sun burns out, so long as we run deficits at a rate such that we keep the debt level stable as a share of GDP. Upon further reflection, though, I realized that it's likely we'll be an inter-stellar species long before the Sun burns out, so that isn't really a constraint. So let me revise that - we can keep running deficits until the heat death of the universe.

Thursday, July 21, 2011

More on wages, labor surplus, and that wage distribution graph Krugman shared

So the other day Krugman shared a great graph from Barrattieri, Basu, and Gottschalk that appears to show some wage rigidity. If you define wage rigidity as "wages have a tough time falling" it not only appears to show wage rigidity - it actually does show it:

The idea is that given a typical supply and demand graph, if demand falls wages and employment should fall. Since only employment is falling, people conclude (1.) wages are rigid, and (2.) that creates a labor surplus which reduces employment by even more than it would otherwise be reduced. The solution is "let wages fall". One of the easiest ways to do that if you think workers are being intransigent is to raise the price level.

As I said, if we just define "wage rigidity" as this sort of censored wage growth distribution, then obviously we have "wage rigidity". What follows much less clearly, though, is that this creates a "labor surplus" and that that surplus is somehow coterminous with "unemployment".

But consider the possibility that spending, long-term investment, and employment decisions are made simultaneously. Take my wife and I, for example. We're five years out of college. Immediately after leaving school we lived relatively cheaply because Kate went immediately to get her master's degree. She took out student loans and I just had an entry-level salary at a non-profit research group, so we didn't buy a house, we decided not to start a family yet, and we lived fairly frugally. Two years later I had been promoted and got a big wage bump, Kate was out of school and working herself, and our consumption changed. We lived in a nicer neighborhood, ate out more, our wine rack was always full and we would go to wineries in Loudon and Charlottesville regularly. Now I'm going back to school and while I have a stipend it's a big wage cut. So we moved to cheaper neighborhood and are living more cheaply than we did just two years ago.

Right now our labor supply function is fairly elastic because our spending commitments aren't very stringent commitments. But in five or ten years this won't be the case. I expect we'll have a house, a few kids etc. Clearly there are legal (to say nothing of moral) obligations associated with the maintenance of both of those things. Now, at that time (i.e. - prime working age for workers) when I think about making labor market decisions my reservation wage is going to be much less flexible. Most labor isn't bought on a spot market, after all, and it would benefit me to wait a little to get a wage that can actually maintain my mortgage and feed my kids than immediately lowering my reservation wage to get a job. Thus far, of course, this is just standard search theory type stuff.

Now, the point is these sorts of consumption commitments (kids, houses, etc.) are also committed to with specific employment expectations in mind. So if you go through several years of decent labor markets, the labor supply curve to the left of the equilibrium point is going to get increasingly elastic. People get into certain consumption habits - particularly debt-financed consumption habits - that are hard to extract themselves from, and therefore which are going to increase people's reservation wages and increase the value of searching (should they ever lose their job). In a robust labor market, the shape of that labor supply curve to the left of equilibrium doesn't bother us all that much. But if labor demand drops we're going to see the brunt of the labor market adjustment carried in employment.

So why this censored distribution that Krugman shows? Well, different sectors are behaving differently. While they're probably growing slower than they would have otherwise, health and education are actually not doing so bad through the crisis. If you have elastic labor supply to the left of equilibrium because people tie themselves up in consumption commitments when times are good, and if you assume different sectors are experiencing different levels of labor demand, then you can get Krugman's censored wage growth distribution without any (1.) labor surplus or (2.) puzzling questions about why workers won't take lower wages:

So to recap, here's one story on that wage distribution:

1. During tight labor markets, people feel like they can make long term consumption and life plans, so they do.

2. A lot of these life plans are necessarily debt financed - mortgages, car loans, sending kids to school, etc. Those plans that aren't debt financed are still tough to get out of (it starts to get awkward to leave a kid in a basket with a note on it at a church doorstep when they're seven or eight years old).

3. These consumption commitments and life plans make maintaining a certain income level for extended periods very important - so important that it makes sense to forgo employment a little longer and maintain a higher reservation wage than take a job immediately that will provide an income that can't support your commitments. This results in a relatively elastic labor supply curve for those currently employed.

4. During a period of weak demand, when all sectors are weaker than they would be otherwise but there is still some dispersion in growth in different sectors, that will result in a censored distribution of wage growth, a la Barrettieri, Basu, and Gottschalk.

5. No labor surplus.

6. We're at an equilibrium, so no great puzzle around what workers are thinking not taking lower wage rates.

7. Inflation to lower real wages makes less sense here. Inflation to relieve debt burdens does make sense because presumably that would make labor supply less elastic, but

8. It's still not really an answer because while the more elastic labor demand is, the more of an employment boost you'll get from #7, there's still no guarantee you're solving the underlying effective demand problem. A clearing labor market is not the same thing as a labor market at full employment (hell, if it were we could have stopped all this at #6).

Clearing Labor Markets and Unemployment

Bob Murphy has been asking questions about sticky wages (here, here), and Stephen Williamson talks about sticky wages as the primary Keynesian "tweak" to the standard neoclassical growth model that everyone is taught. I personally have a tough time knowing exactly how invested to get in this. Of course wages are actually downwardly rigid, I don't second guess that. Certainly that's going to add to unemployment. But I personally have a hard time understanding how this is a major cause of unemployment.

The implicit assumption is that a clearing labor market is a labor market without unemployment. That just seems wrong to me. We care about how markets clear because we think markets have a tendency to clear under normal circumstances. So it makes sense that we would want to pay attention to (1.) the forces that bring about that clearance, (2.) perhaps the special cases that would disturb a clearing market, and (3.) some insight into where that market clears - where quantity and price settle or at least where they tend towards. If you want to understand market quantities and prices, knowing how markets clear is important.

But unemployment is different. A lot of people sort of implicitly assume that unemployment is the same as a labor surplus, so that if they can explain why firms that would hire labor at a given wage might coexist with workers who would take a job at a given wage, they are "explaining unemployment". But this concept of labor surplus has little to do with the empirical phenomenon of unemployment that ostensibly we're interested in explaining. When people talk about "the unemployment rate" in the United States they are refering to the Bureau of Labor Statistics (BLS) definition: the share of the labor force that wants to work, is ready to start work, and is actively looking for work. Some people also care about those who want to work but aren't actively looking out of frustration, so the BLS also produces other figures to include these workers too. That definition is more or less how we think about "unemployment" in our own lives, right?

Notice what's missing from that, though. The reservation wage. As an empirical phenomenon, we really don't care about the relationship between a person's reservation wage and the market clearing wage when we identify this phenomenon called "unemployment". So why does it play such an important role in how we theorize about the causes of unemployment?

And what is "unemployment" in a simple model of the labor market? The "unemployed" are actually the workers between the equilibrium quantity and the upper right point of the labor supply curve. I've illustrated this here:

So for me, explaining what causes fluctuations in the quantity of labor (i.e. - impact of liquidity preference on investment demand and multiplier effects on consumption) or explaining why people might be in the labor market looking for work but not working (i.e. - search theory) seems a lot more important than explaining how labor surpluses can crop up (i.e. - sticky wages). I don't really know why I should even care about labor surpluses in and of themselves. I'd personally rather have an economy with a relatively high labor surplus and relatively low unemployment than an economy with relatively low (or zero) labor surplus and relatively high unemployment.

So part of me just wants to concede the point on sticky wages. Let's say all this sticky wages stuff is a red herring. Now, with that out of the way and the market cleared, is it cleared at a level where everyone that wants work is working? If not, why not?

Wednesday, July 20, 2011

No answer, time for a brief answer, and no time to read just yet

- Ryan Murphy has a question about Keynesianism that I have no answer to. Do readers have any thoughts on this?

- Tyler Cowen speculates on alien economics. I do have thoughts on this but don't have time to answer in too much detail here. In brief, I have a hard time imagining that technologically advanced and intelligent aliens wouldn't develop market economies of some sort, so long as their intelligences are distinct. If there's some kind of mind-meld going on, perhaps the price mechanism would be superfluous. We're at an unusual inflection point in human history - as we get more technologically advanced, I generally disagree with Keynes that we'll somehow sit around and enjoy leisure. Ideally inter-planetary and inter-stellar investment opportunities will emerge and we'll continue to invest. If that doesn't pan out, it seems to me human leisure has a tendency to be heavy on consumption. So regardless on the route we take, I don't think we're likely to sit around and enjoy leisure (which might result in the emergence of socialism - what's the use of a market if you satiate needs?). What do you all think?

- Bob Murphy comes back from the Keynesian brink with his silly liquidity preference talk and writes this. I haven't had the time to sit down and give it my complete attention. Have you? What do you think?

Communicating the difference between public and private debt

Yesterday afternoon I was doing something I usually avoid - listening to a lot of the Congressional debate on C-Span. Both sides were depressing because both were demanding deficit reduction. The Democrats were a smidgen less depressing because they at least kept pounding the position that maybe reforming some tax credits was a better way to close the gap than cutting into student loans. But overall, it was not what you wanted to hear during what is now increasingly being called the "Little Depression".

One of the things that just about every Republican said was that "Washington needs to do what families do and not spend more than they take in". It's powerful rhetoric that is electoral gold. Getting tough on the deficit is good for politicians - analogizing it to family values is even better.

What's bothersome is that no one challenged this view, which among economists is almost universally considered to be fallacious. Even those economists who don't think deficit spending is good macroeconomic policy do not claim that government has to, on average, run a balanced budget. The people demanding austerity ultimately have a better stump speech than the people who understand public deficits and debt, and this is a problem.

So my question to readers is - what is a good, succinct way for politicians to communicate that (1.) public debt is different from private debt, (2.) it is not fiscally responsible to cut public debt during downturns, and (3.) we can run deficits from now until the Sun burns out and everything would be just fine, so long as their magnitude is manageable over long periods.

Let's put together a good stump-speech phrase and then spread it over the internet - get Paul Krugman, Matt Yglesias, Brad DeLong, Mark Thoma, Menzie Chinn, and lots of others saying it so politicians might start saying it. What should our representatives say when Republicans or others analogize government to families?

[A note on comments - I know I have a large libertarian readership, but I'm not at all interested in challenges to these three points. While (2.) is admittedly a fair topic for debate, the other two simply aren't. I'm really interested in generating a good stump-speech phrase, so comments trying to challenge the premise are just going to get deleted. I'm not interested in a debate on this particular post. Obviously this comment policy doesn't carry over to other posts].

Tuesday, July 19, 2011

Should we cut advocates of certain objective or labor theories of value some slack?

The other day a conversation on here veered towards the labor theory of value*. That made me think of a really great video that Don Boudreaux recently made about subjective value. One of the brilliant things about Don's video is that he was able to cut straight through the issue by essentially doing what econometricians do in his example: holding objective or labor value constant and looking at how value varied with subjective preferences. He had two t-shirts that he made with the same iron-on technology, the same amount of time, the same effort, etc. One had an iron-on image of Che Guevara and one with an image of Milton Friedman. He was easily able to explain from there that the costs of the Che t-shirt were the same as the Friedman t-shirt. The difference in prices (everyone - particularly market skeptics - know Che t-shirts sell well!) could clearly be attributed to subjective value in this case.

In thinking about actual objective value theorists, though, I began to wonder if we should cut them some slack. What occured to me was that the genius of Don's example was entirely derived from modern product differentiation. In the early 19th century you didn't really have iron-on t-shirts. You had much less variety and product differentiation in general than you do today, so I imagine it would be hard to do a thought-experiment holding costs constant. One of the greatest sources of poverty before the industrial revolution was precisely the lack of variety, choice, and diversity. One could say that precisely because the market responds to subjective values we have more examples to draw on today of the impact of subjective value theory than we did in less prosperous times.

One of the lessons of this, of course, is that product differentiation is in and of itself a product of the market and an important element of progress. Edward Chamberlin, the American developer of monopolistic competition theory (it was simultaneously discovered by Joan Robinson in the UK) acknowledged the importance of product differentiation for value theory in the sub-title to his book: "The Theory of Monopolistic Competition: A Reorientation of the Theory of Value".**

*There's still an open invitation to Mattheus to explain what he meant when he said that Keynes had a labor theory of value - we all were confused by that and Mattheus didn't seem interested in backing it up - I don't know if that means he's conceded or not.

**People have also made a lot of the differences between Robinson and Chamberlin on this question: Chamberlin saw product differentiation as welfare-enhancing. I agree, but I think people are often too hard on Robinson in this case. Yes, product differentiation is welfare-enhancing, and yes we would rather have differentiated products and choice rather than homogenous products, but that doesn't seem like any reason to deny the market power or excess capacity issues that also come out as results of monopolistic competition. As is often the case in intellectual history, some people have built up Robinson and Chamberlin as being deep, opposing thinkers. I think this is silly - economics is not a morality play.

Klein on Keynes

Mark Thoma shares an interesting article by Ezra Klein on Keynes in the United States today. It's not entirely satisfying - it's very much a savings-leakage sort of Keynesianism and says nothing about money and the interest rate (don't think you can lop off two thirds of Keynes's title and still come out with Keynes). I think that's more forgivable from media and policy type people. The fact is, savings-leakage/"lean against the wind" Keynesianism may just be underconsumptionism and that may not be up to snuff for people who are interested in the history of ideas, but it'll result in good policy and in a public that is at least closer to understanding what's going on than before. To a large extent I think this is why Keynes was so sympathetic to the "underworld economics" of his day. They may have missed some major theoretical points, but a bunch of underconsumptionist policymakers would still come out with better results than a bunch of pro-austerity policymakers.

One of the more interesting things about the article was the stuff he shared on various major players. Eric Cantor's understanding of Keynesianism was abysmal. He said that Keynesianism was the theory "that government can be counted on to spend more wisely than the people". This is Keynes vs. Hayek Rap talk and this is the sort of talk that makes me think that those videos did more harm than good in educating public. They roused people politically, and they spread ideas just like this.

The admission from Romer that she had no idea how hard it would be to implement additional stimulus, if necessary, was interesting too. Summers had an interesting line about "shovel-ready" projects. He doesn't sound like he was surprised about how hard shovel-ready work would be, and I think this is an important point to make. In the run up to the stimulus I heard and read a lot about how hard that would be. This wasn't really a matter of naivete or biting off more than we could chew.

The article is a good read - let me know what you think.

Monday, July 18, 2011

Classical Liberalism and Evolution

This is a good post at shared by Gary. The title actually mentions "libertarianism" and evolution, but the post itself is all about classical liberalism which - I gather - is what the Cato Unbound posts are all about (I haven't read them yet).

This is not particularly revolutionary stuff, but it's a good review of some of the defenses of liberalism using evolutionary psychology arguments (despite the controversies associated with that particular field). Human fitness is derived primarily from our ability to associate through language, etc., and our ability to think abstractly, which enables wider circles of association as well as innovation. Human social behavior and abstract thought enables us to maintain trade networks, which allow our species to both allocate and exploit resources much more efficiently than other species. Social orders that foster these traits are largely classical liberal in nature, emphasizing limited hierarchical ordering, decentralization, flexibility, etc.

The post specifically contrasts the illiberalism of Marxism to this classical liberal order. Speaking of evolution, the author quotes Peter Singer saying: "It tells the left that some of them have failed because their goals were really unrealistic. For example, if their goals were to achieve equality and to combine that with a high degree of liberty--to have the state withering away, as Marx said--it's very difficult to see how you're going to be able to achieve that. If you let the state wither away, then humans' natural tendencies to form hierarchies and rank and so on are going to assert themselves. What happened specifically with the form of communism that was attempted in the Soviet Union and Eastern Europe was that people went into it with some vague idea that they could have this sort of society. But they kept needing to strengthen the power of the state rather than allow it to wither away. In that sense, the original idea would just collapse. You simply couldn't achieve it. Human beings are not such that you could expect them to work for the common good in the way that the theory assumed. The failure to understand that human nature is not as plastic as socialists often assume is a substantial part of why some of these schemes have failed."

I've bolded a sentence there that I think gets to one of many reasons why I think a more robust political economy actually needs to be a non-libertarian classical liberalism (unless of course we're thinking in terms of a blander "small government"/Greg Mankiw libertarianism).

Thinking through comparisons on Medicare

This weekend I was listening to Kathleen Sebelius testify about Medicare. One of the things that came up in the hearing was a comparison of Medicare payments to private payments. I forgot the figure exactly, but Medicare was supposed to have compensated physicians something like 80% of the amount that private plans do. I'm no health care expert but I believe this is different from the co-pay (which I understand is also 20%) because in the discussion they were actually talking about privately insured patients cross-subsidizing Medicare patients.

I had much the same uncertainty about this discussion that I did in the post where I caution against making head-on comparisons of public and private school students. How do they make this comparison with Medicare? For one thing, you have to be comparing seniors to seniors, controlling for their conditions, etc. But that's what introduces the problem. The large majority of seniors are on Medicare in the first place. Those that use private insurance are qualitatively different sorts of patients than Medicare patients. A straight comparison of the two would seem to be biased against Medicare because the mere participation in a private plan by a senior in the United States indicates a higher willingness to pay. Another similarity between Medicare and my public school example in the link above is that without Medicare, uninsurance rates for seniors would probably be comparable to the rest of the country (if not higher). So what is the right margin of comparison? What is the right counterfactual to think about? Seniors on Medicare now compared to a self-selected group on private insurance now? I think the more reasonable comparison would be everybody now compared to everybody in the absence of Medicare. If we think of how Medicare impacts costs and physician reimbursement, that's the right comparison. If we make that comparison, these numbers are likely to look a lot different. More senior citizens would be utilizing emergency rooms and charity care and more would be uncovered.

Either way, it's not clear to me (1.) how they get the underpayment comparison with private plans without a selection bias problem, and (2.) whether that's even the right comparison to be thinking about.

A lot of the points made in the hearing about the Ryan plan made sense (and have always made sense) to me. One of the concerns about Medicare Advantage (the current "private" version of Medicare) has been that it is subsidized, so a head-on comparison with regular Medicare is hard to make. The Ryan plan doesn't do this, of course, so it avoids that problem. I would support a voucher program as an option for Medicare, at least until we know more about how it works. Again, you're going to have a different group of people selecting into such a voucher program. What I would do is give all Medicare beneficiaries the option of converting their benefit into a voucher, and then randomly assigning who actually gets the voucher from among those who choose it (i.e. - if one million Medicare beneficiaries choose the voucher route, randomly select 500,000 to actually receive it so that we can subsequently do comparisons). There are good reasons to think that vouchers would solve a lot of the problems with fee for service, which is good because nobody likes the fee for service system.

Sunday, July 17, 2011

I may be vastly overstating the case, but I think this is how Bob Murphy sees Scott Sumner

Joan Robinson on Keynes, Marshall, Marx, and Ricardo

Tyler Cowen points us to a letter from Joan Robinson to a Marxist named Ronald Meek. There's a lot at the beginning criticizing Marxists for not understanding their own theory, but I found this section at the end particularly interesting. It presents a little bit of Robinson's understanding of Keynes's place in the history of economic thought:

"Ricardo existed at a particular point when English history was going round a corner so sharply that the progressive and the reactionary positions changed places in a generation. He was just at the corner where the capitalists were about to supersede the old landed aristocracy as the effective ruling class. Ricardo was on the progressive side. His chief pre-occupation was to show that landlords were parasites on society. In doing so he was to some extent the champion of the capitalists. They were part of the productive forces as against the parasites. He was pro-capitalist as against the landlords more than he was pro-worker as against capitalists (with the Iron Law of Wages, it was just too bad for the workers, whatever happened).

Ricardo was followed by two able and well-trained pupils – Marx and Marshall. Meanwhile English history had gone right round the corner, and landlords were not any longer the question. Now it was capitalists. Marx turned Ricardo’s argument round this way: Capitalists are very much like landlords. And Marshall turned it round the other way: Landlords are very much like capitalists. Just round the corner in English history you see two bicycles of the very same make – one being ridden off to the left and the other to the right.

Marshall did something much more effective than changing the answer. He changed the question. For Ricardo the Theory of Value was a means of studying the distribution of total output between wages, rent and profit, each considered as a whole. This is a big question. Marshall turned the meaning of Value into a little question: Why does an egg cost more than a cup of tea? It may be a small question but it is a very difficult and complicated one. It takes a lot of time and algebra to work out the theory of it. So it kept all Marshall’s pupils preoccupied for fifty years. They had no time to think about the big question, or even to remember that there was a big question, because they had to keep their noses right down to the grindstone, working out the theory of the price of a cup of tea.

Keynes turned the question back again. He started thinking in Ricardo’s terms: output as a whole and why worry about a cup of tea? When you are thinking about output as a whole, relative prices come out in the wash – including the relative price of money and labour. The price level comes into the argument, but it comes in as a complication, not as the main point. If you have had some practice on Ricardo’s bicycle you do not need to stop and ask yourself what to do in a case like that, you just do it. You assume away the complication till you have got the main problem worked out. So Keynes began by getting money prices out of the way. Marshall’s cup of tea dissolved into thin air. But if you cannot use money, what unit of value do you take? A man hour of labour time. It is the most handy and sensible measure of value, so naturally you take it. You do not have to prove anything, you just do it.

Well there you are – we are back on Ricardo’s large questions, and we are using Marx’s unit of value. What is it that you are complaining about?

Do not for heaven’s sake bring Hegel into it. What business has Hegel putting his nose in between me and Ricardo?"

The bolded section was very strange to me and I had to look back to Keynes's chapter on the choice of units. He says pretty clearly that he's using two units - "labor units" and "money value". Now perhaps she just means that in applications he divides one by the other, in which case that's OK. But the way she says it (particularly what she says at the end) sounds an awful lot like she's suggesting Keynes is using a labor theory of value.