LK on Selgin, Lastrapes, and White

Here.

A couple things - first, he links to the Cato WP (as Don did earlier), but I want to make sure everyone knows this is forthcoming in the Journal of Macroeconomics. I'm not sure if any major adjustments have been made between the WP and the article.

Second, LK highlights the interesting point that in an attempt to provide an argument against the Fed, they actually note the importance of fiscal stabilization policy.

Third - again - forget all the details that LK highlights (sorry LK!) - it's simply not a valid evaluation method. Their impact estimate is not identified.

Catalan on "Property as Theft"

Kind of strange... he seems to be suggesting I'm saying precisely the opposite of what I'm saying.

I'm quoting Proudhon here because it's relevant and it's always a nice flare to quote people. I think I said pretty clearly I don't exactly agree with him. But I do think Proudhon orients us towards and important point.

This is one area where I think Gene and I are basically of the same mind. So if you think Gene is saying something sensible and I'm saying something objectionable, I might be making my point unclearly.

If you want lower long term deficits, you don't have to settle for Ron Paul

CRFB estimates that Obama and Paul are about comparable for the deficit in 2021. I've been getting email updates from CRFB for a while. It's a little more alarmist on the short-term deficit than I'd like, but it's a good group.

It's also not some kind of Democratic front group that's going to try to make Obama look good. If you don't believe me, go to their site and look at their list of directors.

Assault of thoughts - 2/29/2012

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

- Proudhon and Callahan both get it - as the former said, "property is theft". Gene discusses John Locke as a philosophical apologist for this "theft" here. Of course, just because property is "theft" does not mean that property is a bad idea. I happen to think it's a good idea. And indeed, much like "taxation is theft", the point of saying "property is theft" ought to be for insight rather than for taking literally (I take arguments that we shouldn't have taxation because "taxation is theft" about as seriously as I take arguments that we shouldn't have private property because "property is theft" - that is to say, I don't take it seriously at all). What's better to say (if we're taking things literally) is "property and taxation are both coercive", because clearly "theft" is a word we've reserved for quite different activities than simply owning property or raising tax revenue.

- Don Boudreaux links to the Selgin, Lastrapes, and White paper on the Fed. As I've noted here before, this paper is a great piece of economic history but it bothers me a great deal when it's tossed around as an evaluation of the performance of the Fed. It is nothing more than a pre-post test, and therefore entirely incapable of making such a claim. I strongly encourage any students looking for dissertation ideas to take the paper and perform a difference-in-differences or some other widely acknowledged non-experimental evaluation technique. I'd love to but I'm not sure I'd get around to it any time soon. As it stands, this is not a sufficient approach to evaluating the Fed.

- I have a short article on underemployment among engineers that's been sitting around waiting to be polished up and sent into a newspaper or magazine (hopefully this weekend). My point is that engineers have very low unemployment rates, but that can often conceal labor market troubles. Labor market problems for engineers often show up in underemployment indicators - particularly how hard it is for those with engineering skills to find a job working as an engineer. Anyway, medical students apparently have the same issue (which surprised me - I think of this as a high demand occupation). This Science Careers post indicates that more medical students are turning to prostitution to make ends meet. Say what you will about whether it's a legitimate line of work - but it's certainly an example of underemployment and low skill utilization.

- And speaking of the sale of sexual content: Playboy is thinking about the possibility of opening a club in space.

Krugman's got a book coming out!

He's been widely applauded for making the arguments for free trade digestible for the public. For some reason, when he turns to macroeconomics the applause trails off and whispers of "partisan hack" start popping up.

No matter, Krugman's new book on ending depressions is one I await eagerly. He is the indispensable economic commentator in this depression, and more broadly I'd say the indispensable public intellectual.

A capital gains tax argument I've never quite gotten...

Ira Stoll brings it up, which is the impetus for this post. But I've never quite understood the "don't tax capital gains because it's double taxation" logic.

What's so special about financial assets? I've taken my money (which is taxed when I earn it) and spent it on graduate education (not AU, that's covered - but GW). I now own some human capital. I invested in that human capital because I expected a return on it. That return that I earn comes in the form of more wages, which get taxed at income tax rates. What's so special about financial assets that returns on those assets should get taxed at a lower rate? I don't get it. Why is it that everyone pretends capital gains are not part of your return on investment? When it comes to thinking about capital gains taxes. From an accounting perspective the "double taxation" point is really strange. What income isn't from other income?

We should really have higher standards than this

I swear, if one more kid writes "complimentary good", I'm going to start taking points off.

Sullivan on Callahan

Andrew Sullivan links to Gene here. Congratulations!

If only he linked to one of your observations that libertarianism is not a non-coercive viewpoint, then maybe we'd dislodge his silly Ron Paul endorsement... until he read one of your "everyone else will bomb Iran posts", of course, in which case you'd get him back on the Paul bandwagon.

Speaking of Keynes related material

I saw Treatise on Money in the used bookstore the other day. This one is very hard to find, so I was excited to come across it...

...until I saw the $300 price tag.

Sigh...

Bretton Woods Transcript Found

Fascinating stuff. Thoughts here on the Indian delegation.

Things that have bugged me lately

1. The way changes to consumer surplus are discussed with respect to a price ceiling in intro classes. When you have a price ceiling, anyone wiling to pay at the level of the price ceiling can be in the market. You can't just assume that the people to the left of the point where the price ceiling intersects the supply curve are the ones who get the good. It's quite possible that those with lower reservation prices will get it. So the consumer surplus gains associated with price ceilings are almost certainly overstated. It's true that if you have a higher reservation price, you'll probably exert more (non-price) effort towards getting the product. But to the extent that is true, the actual cost expended to get the project will begin to approach the market price. This is basically the discussion of scalping.

2. I hate the argument by retailers that you have to make a minimum purchase with a credit card because there's a fee for each credit card transaction. The argument is bullshit. It would be trivial to spread that fee cost by raising the retail mark-up. This is no obstacle whatsoever for them. That's not the reason they have minimum credit card purchases. The reason why they have these minimums is to get the guy that doesn't have cash to frantically purchase three bucks worth of extra stuff to meet the minimum requirement. They know enough people are going to do this, rather than leave the store without a purchase. Push back on this - they can run your credit card, after all. Say "but the cashier I had the other day let me run it" or complain about how prominently they post the minimum requirement.

What?!?!

Two Don Boudreaux posts in a row that I agree completely with (here and here)? He would probably take the conclusions of the second link farther than I would, but as it stands it's good. I'm guessing Don would get into areas of fighting against a natural emergence of a social organization that free people construct for themselves that I wouldn't. But it's still quite good as written (of course it is - the Stossel segment he references was written with full knowledge that attacking certain regulations would get a better reaction than others). I liked this point especially:

"One bit of good news is that while there may be so many laws that no one knows if he’s a lawbreaker, it has never been easier to “watch the watchmen.” Tiny cameras in our iPods and cell phones allow citizens to film law enforcement and hold our government accountable."

This, of course, is the whole point of constitutional democracy - watching the watchers and holding them accountable. Unfortunately, some people are suspicious of such democratic feedback loops, and would rather short-circuit the whole democratic process, relying on constitutional restrictions more exclusively to guarantee liberty. I think that's probably unwise. You need both.

Why do so many people WANT there to be disagreement?

Isn't it a good thing when we agree?

Why do Austrians want to think people who like markets actually don't like markets?

Why does Scott Sumner want to think Keynesians are lukewarm about monetary stimulus despite the fact that, along with the market monetarists, we've been the strongest backers of monetary stimulus?

And now, why do the MMTers want to think that non-MMT Keynesians are worried about large deficits from fiscal stimulus?

All of you guys - we agree with you! Shouldn't you be glad about that? Don't we have enough drama in this world already - aren't there enough genuine disagreements we can fight about? Why do you need to act like we disagree so much on these issues?

A Toast to Bob Reischauer!

Last night, I had the honor of being asked to attend and give some brief thoughts at a celebration of Bob Reischauer's retirement from the Urban Institute. Bob served as the Institute's president for the last 12 years, and for several of those years I served as his research assistant.

When Bob got to work on policy and research issues, he mainly dealt with the budget, particularly as it related to Medicare and long-term budget problems.

- Here is a video of Bob speaking at the University of Arizona in 2008 on the politics and economics of health care.

- Ezra Klein discusses an interesting proposal by Bob to tie the employer provided health insurance tax break to cost reduction measures. I hadn't heard this before, and I've always fallen in the camp of "just end the tax advantage" that Klein describes.

- Paul Krugman discussed Bob's views on the deficit in this article.

- And here, Bob advocates additional fiscal stimulus (an issue he did not usually jump into). Bob was always deeply concerned about long-term deficits (indeed, he's been a big influence on my own long-term-deficit-hawkery). In this call for additional short-term stimulus, he advocates the Christina Romer plan to include long-term deficit reduction measures in any additional stimulus bill. I agree strongly.

I never spent too much of my time to working with Bob - it varied between 10 and 20 percent of my time for the first three years I was at the Urban Institute. But he's been a big impact on me. Bob was director of the CBO, a MedPAC member, chairman of the Harvard Corporation, and a Senior Fellow at Brookings. An impressive career. An impressive guy.

Thanks for twelve great years of leadership at the Urban Institute, Bob! Enjoy your well-earned retirement!

Jonathan Nails it on Unemployment

Unemployment is not the same thing as a labor surplus. This way of talking about it bugs me to no end, and I've laid out my position in more detail before (here, here, here, and here). Jonathan is making the same points in this post. The key line is:

"If you use a supply and demand graph to show the labor market, then this interpretation is a bad one. You have a supply of labor that exists before the fall in aggregate demand. This supply of labor does not shrink when aggregate demand falls — the number of people willing and able to provide their labor remains the same (or, may even grow, if new laborers are willing and able to enter the market). If we assume full employment at the original level of demand, then the bracket (on the above graph) showing the change in the quantity of labor employed represents the number of unemployed in a depressed market."

Being unemployed means that you are willing and able to work, but not working. In other words, you are on the supply curve, but you are not to the left of the equilibrium point. Basic supply and demand pictures make somewhat more sense if you have a search model attached (then you have some sense that those to the right of the equilibrium point are "searching" and in the process of lowering their reservation wage, so there's some context to this non-employment status), but usually people don't bother presenting it that way in casual or even some formal discussions. Instead, they talk as if unemployment is a labor surplus and so they automatically zero in on high wages as the cause of unemployment.

I also like that Jonathan gets into a discussion about the marginal productivity of labor and its relation to unemployment. He writes:

"During a depression, you have a certain number of workers who are now unemployed (see that supply and demand graph). These workers are able and willing to work, but firms are not looking to buy extra units of labor. Why? Because the costs of employing that labor are higher than the benefits.

Does this not fly in the face of the Austrian claim that in a free market everyone will find employment? Yes and no. Like I said, I think that this disproves the notion that perfect wage flexibility will end all involuntary unemployment. The derivation of the marginal product of labor is based on “everything else being equal.” Austrians are not counting on everything else being equal. Since wants are essentially limitless (as long as people are acting), then there is always opportunity for employment. But, capital and labor are complimentary, and thus for there to be a greater quantity of people employed there must be an increase in the quantity of employed capital — i.e. an increase in marginal productivity.

What this tells me is, that in the study of depressions the most important factor is not necessarily labor, but capital."

Two thoughts.

First, I want to push back on this "wants are essentially limitless" line. Let's grant that they are. Still, that doesn't quite solve the puzzle because when we are talking about demand, we are talking about both willingness and ability to pay. Wants may be limitless, but if your ability to pay is not limitless that insatiability is not going to guarantee a fully employed economy.

Second, I like that he's thinking about the marginal productivity of labor. But I would put it slightly differently. "Labor is not a commodity", after all. When a firm hires a worker, they are looking at that very similarly to the way they look at an investment. They are taking their expected stream of wage payments to the worker and comparing it to their expected stream of benefits from employing that worker. We have a tendency to treat labor as a spot market, but it's not. It's much more like a capital market. (In fact it's more complicated because workers can shirk - machines can't. Workers can break the contract and leave - machines can't. Workers can bargain - machines can't, etc. etc.). So the time dimension comes into the employment decision in the same way that it comes into the capital decision.

Now I'm going to turn Keynesian on the quesiton. Why do we think depressions happen? We think they happen because firms compare the marginal efficiency of capital to the interest rate, and the equilibrium level of capital at that interest rate is not enough to achieve full employment. I would argue (Keynes did not, to my knowledge) that firms also consider a marginal efficiency of labor and also compare that to the interest rate. Labor is unemployed for the same reason that capital is, in other words. The future stream of earnings expected from employing an additional unit of labor is not sufficient to justify employing that labor.

Why?

Keynesians say it's because of insufficient demand and uncertainty about future demand. This particular Keynesian would say that because labor is not a commodity, and because ever since Mincer we know that it acts an awful lot like capital, labor is unemployed for much the same reason that investment levels are low.

One more clarification on Hoover

Current writes in one of the previous posts on Hoover: "It seem to me that to Keynesians a government must perform a large stimulus of some sort to be Keynesian by them. A simple increase spending isn't regarded as enough."

To a certain extent, sure. Do Austrians consider Bill Clinton to be a fellow traveler because he stopped running deficits?

People are focusing on rates with Hoover, and the rate of growth was large - but from a small base. Levels matter too. My position is fairly straightforward, and I'm amazed at how much acrimony it inspires. Did he raise spending? Of course he did. The data is right in front of our faces. How might we characterize the administration's fiscal policy? Austere. Hoover's biggest spending year had a lower spending level than the 1921 federal budget. I have been told ad nauseum that 1921 was a year of fiscal austerity. If that's austerity, then so is 1932. Period.

Here's the thing - the federal government was a fiscally austere institution until WWII. That was just the nature of government at that time. People did "Keynesian" things with monetary policy before WWII. Wars and megalomaniacal leaders provided sporadic opportunities to do "Keynesian" things with fiscal policy. But for the most part, in a normal, democratic, peace-time context it was just austere by nature. And for that time, that was probably just fine. I think we can afford to do a little more now.

And I don't hold it against Hoover. Like the early Roosevelt, he was groping towards a new world order. Good for him! But if his budget looks more or less like Coolidge's budget, and Harding's budget, and peace-time Wilson's budget and the budgets before them, let's just call it what it is - it's fiscal austerity. Levels and rates both matter.

Assault of Thoughts - 2/23/2012

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

- A large portion of what bugs me about Austrian economics (and other heterodoxies) is not Austrian economics per se, but the bad arguments that they heap on mainstream economics. This constitutes a large share of what heterodoxies do on a day to day basis, of course. A case in point is the whole criticism of search theory, and talking about "surprise", etc. One of the best take-downs of the Austrian critique here is Bryan Caplan in his debate with Peter Boettke. It's on Youtube and it's a masterful performance - I encourage you all to watch it. Anyway, Boettke links to Dan Klein - who discusses Caplan's position on "surprise". I do like how Klein phrases it better than how Caplan phrases it. But that's not surprising, since Klein's whole post is based on dissecting the phrasing. I think Caplan's point still stands, though, that neoclassical economics is entirely capable of talking about this at least as well as any Austrian alternative. I have comments in Boettke's post to that effect. (and... since this is once again on Coordination Problem... perhaps I should say "if I don't say something, don't assume I think it").

- David Ribar informs us that these contraception requirements - ones that are stricter than the Obama administration's in many cases - are already common at the state level.

- The Romers have a new paper on tax policy in the interwar period - Harding's tax reductions are included in the analysis.

two links

- Callahan gets it right.

- Jonathan responds to my claim that raising taxes is an austerity policy. He has a good graph of idle resources that relates to my idea that unemployment is not the same thing as a labor surplus. Except, if I were to put a dollar figure on it, I think I'd shade the transpose of the triangle he shades (factors of production to the left of equilibrium are being used - they're not idle - and what's lost is the productive capacity extending all the way up to the full employment demand curve). This is the crux of the point:

"However, within the context of depressed aggregate demand, this is no longer the case. The entire problem is that nominal expenditure has fallen, which is caused by either a failure in financial intermediation (unused savings) or an increase in the demand for money (basically also unused savings). If we abstract from real goods for a minute, the entire issue originates from the fact that there is a portion of aggregate income which is left unused. If there is no intention of using this income, then taxing it and redistributing it does not seem contractionary. In fact, it is expansionary, since it puts to use idle income."

I may be misunderstanding the argument, but I don't think this is right. It's not that some income is unused. It's that the income is unearned. Nominal spending (i.e. - nominal income) declines. You can look at the decline, call it "unused" and figure it can be taxed away relatively costlessly. The income isn't there and that's the problem.

Now, a better way of saying this might be to talk specifically about income that is held liquid - i.e. income that IS EARNED but then isn't subsequently spent (not income to the right of the equilibrium point that is never earned). You're basically raising the cost of staying liquid. This might have merit. That's the idea of a negative IOR, after all - and Gesell's evaporating currency. I'm not sure how to do this, though, without reducing spending further.

Now, the traditional way of saying all this is that if you tax a dollar from a consumer with an MPC that is less than one and spend it by a government that has an MPC of one, you're still coming out with a modest stimulus. This is true, and it's more or less what Jonathan is getting at. However, I don't think that makes it a non-austere policy. That argument basically boils down too "when you finance spending with taxes you're only elimintinating 80% of the stimulative effect - not 100%, so it's still stimulative". In my book, any policy that gets rid of 80% of a given stimulative effect is an austerity policy. You are reducing aggregate demand relative to the counterfactual. That's austerity.

More questions on my petro work

In between grading midterms, studying for midterms, and doing homework I've spent my free time blogging trying to push my petroleum engineering chapter forward, particularly the estimation of the labor supply elasticity.

I've got a good handle on my identification strategy. There are lots of good instruments here (good instruments? does that sound like an oxymoron to anyone else?). Now I'm focusing more on the specification of the model.

First, I'm working with 10 years of the ACS, which comes out to something like 30 million observations. I expect only about 3,000 of them are petroleum engineers (I'm getting about 300 each year). So what I'd like to do is just restrict the sample to engineers.

1. - My first question is - is this OK??? Ryoo and Rosen (2004) look at demand elasticities for all engineers, and they restrict their sample to all college grads - and they seem fine calling that "the demand for engineers". It seems strange to me to exclude all other workers and still call it the "labor supply elasticity" if I'm restricting my sample like that. But perhaps its fine? Perhaps the idea is that it's a local elasticity estimate and while non-engineers may be drawn into the petroleum engineering labor market they are so far out on the labor supply function that it's fine to ignore them??? Anyway - if I've got good instruments to identify demand shifts specific to petroleum engineers, is it OK to just estimate on a sample of engineers?

2. - My second question is - I've been reading a lot of papers on the "extended Roy model" - particularly Heckman (most of which is over my head), and some operationalization of it by Blau. The whole idea is that you need to add a sector selection correction to get an unbiased elasticity, which basically means satisfying another exclusion restriction that I have no clue how I'm going to satisfy. So the question is - if I'm restricting my sample to engineers anyway, is a selection correction strictly necessary? Ryoo and Rosen don't use one. Blau does. But Blau is looking at child care workers - that seems like it could have a lot more selection problems associated with it. Will it look bad if I don't include this step?

3. - Finally, while I don't know generalized method of moments (GMM) too well myself, I really thik I need to do that in addition to 2SLS when I'm presenting my results. It looks like somebody has generated a new stata command - ivreg2, that includes GMM as an option. Is this a good way of doing GMM in stata? Has anyone done GMM and have any other suggestions?

Disability insurance and labor supply

Alex Tabarrok highlights the relationship between unemployment insurance benefit exhaustion and disability insurance applications. Essentially, disability insurance in this country is used as a way of extending other social insurance programs.

This is not a new finding. In fact, the first person I know of to point this strategic utilization of disability insurance out was my labor economics professor at GW, Donald Parsons. Parsons had two papers on the issue in 1980. His AER paper determined that going on disability was a major determinant of the decline in the labor supply of black males. His JPE paper of the same year found similar results for the decline in labor supply of older males.

Since I've been blogging a lot about Hoover lately, I'll make a very Hooveresque point on all this: if we aren't able to generate jobs for people going through hardship, they're going to go on whatever relief is available. This is a very real problem. This was not the purpose of disability insurance. One way to solve this problem is to crack down on applicants - and perhaps some resources ought to be put into this solution. But that seems to miss the forest for the trees to me. A better solution is to implement policies that will actually help the labor market generate more jobs.

Hoover in High School

Not literally in high school, because interestingly enough Hoover never attended. But how is he taught in high school?

In the last post, commenters Patch and mute lamrackian suggested they were taught that Hoover actually cut spending (along with some surprisingly leftist stuff*). This was genuinely surprising to me, for one thing because that was not my experience, and also because historians actually edit these history textbooks. Hoover's response to the New Deal is not some kind of mystery, and I don't think the editors would have let that through. So I did some googling, and so far I haven't found any evidence that this is how it's taught in public schools at least. In fact, they're even more generous than calling him a "do-nothing president":

- Education.com's AP History site explicitly says it is wrong to say that Hoover did nothing. They mention the RFC, the business conferences, the agricultural lending, and voluntarism. Like I found in many sites, they do make a point of stating that Hoover adamently refused to provide unemployment relief or welfare.

- The Cliff's Notes discussion says all the things that education.com did, but it also adds discussion of his public works spending. Again - it highlights the point that while he increased spending he refused direct relief.

- Historyteacher.net says the same thing - mentions loans to business, tax increases, public works, and business conferences and notes that he opposed direct relief.

- McGraw-Hill's website on the matter makes almost exactly the same points that Historyteacher.net did. Plus it adds detail on the funding level of the RFC.

- Totallyhistory.net... same thing. Mentions RFC and spending on construction, notes that he opposed direct relief measures.

- APstudynotes.org... same thing. Mentions spending on railroads, public works projects, RFC. Mentions he opposed direct relief.

My take-away is this:

1. The high school history picture of Hoover seems to be strikingly consistent across teacher resoruce sites, textbook sites, AP sites, and Cliff's notes. And it seems to be entirely accurate.

2. Either Patch and mute lamrackian had the unfortunate experience of being taught by a very leftist teacher with no interest in accurately communicating history, or they are remembering their experiences through their own libertarian lens.

I tried googling "Herbert Hoover cut spending", and I get two things: Krugman's writing, and a whole bunch of conservative and libertarian blogs and newspapers suggesting that Hoover did not cut spending.

This does not look good for Krugman, and this does not look good for people who claim that the average person is under the impression that Hoover cut spending.

Bob Murphy, in the prior comment section, agrees with me that they probably teach the right history in high school. He still maintains that the average NY Times reader thinks Hoover cut spending. I kind of doubt that myself. I'm guessing the average NY Times reader thinks he was a "do nothing president" too. I asked Kate last night what she thought Hoover's response to the Depression was. She said she didn't know, but I think that answer may have been strategic... sometimes I pester her into longer discussions and she probably figured better to be neutral than stake out a position that might lead to me talking history :)

* For example, apparently they were taught that Standard Oil was a bad influence on the country... the lesson I personally remember most about Rockefeller in my public school history class was not that he was a bad guy, but that story about how he switched from using 40 rivets in his oil drum to 39 rivets, and how much money that saved because Rockefeller was so intent on increasing the efficiency of the oil industry (story told in more detail here). I remember being impressed by both Rockefellers hands-on approach and how much money attention to detail could save.

Do the unwashed masses think Hoover was a "slasher"

Not everybody is well informed about economics, or history, or economic history. That's life. We build narratives, though.

I was intrigued by this comment by Bob Murphy about what we could call the "Hoover narrative": "the average NYT reader would certainly think that the Hoover years were
characterized by sharp cuts in government spending, in response to the
1929 crash."

I disagree with Bob. At least coming from my own sample of one before even studying economics, I never thought or learned about "sharp cuts in government spending".

In fact, there's a funny little adjective our national narrative has attached to the Hoover administration - he is known as "the do-nothing president". Not "the spending slasher president", but "the do-nothing president".

And - for the reasons I laid out in the last post - I think that narrative is 100% fair. Hoover at the time probably didn't think that's what he was. And I think the guy meant well. And I'm not sure what we, in 2012, could really have expected. Government was just different back then. But I think this is the stigma that has attached to Hoover - that he just kinda sat there, not that he was some kind of spending slasher.

Depression Era Austerity

The comment section of Steve Horwitz's post on the Hoover administration's austerity was surreal. I was accused by Steve, Don Boudreaux, and even Bob Murphy of endorsing Krugman's claim that Hoover "slashed spending", when I did nothing of the sort in that comment section and even dismissed Krugman's interpretation of Hoover's spending on this blog!

When I agree with Krugman, they don't like it. When I disagree with Krugman, they don't like it or just assume that I actually agree with Krugman! I'm not sure what else to do here. I'm at my wits end with this sort of thing.

LK (who agreed with me, Steve, Don, and Bob that Hoover did not slash spending) has a great response post here.

Anyway - the early thirties is still a critical time in U.S. economic history, and worth talking about, so I put together the chart below with OMB spending data (I think these are in Fiscal Years, but it's unclear - anyway you'll see that doesn't matter all that much - it's in millions of dollars). I've gone from 1920 to 1945 so we can see the full context of Hoover's budgets. Harding and Coolidge's budgets are in blue, Hoover's are in red, and Roosevelt's are in green.


In the last post I pointed out that the Hoover administration had one unambiguous austerity policy - raising taxes in the middle of the Great Depression. That's grade-A dumb.

So what about spending? Did he slash spending? No. Of course not. The data is out there for everyone to see. Spending increased under Hoover, from the low point it was at in the mid-1920s, to just under the FY1921 budget (which - I'm told - was a period of austerity that disproves Keynesianism). The increase continued through the early Roosevelt administration, so that in 1935 Roosevelt was spending about as much as Wilson was in 1920. Let me repeat that. The federal budget in 1935 was less than one percentage point higher than the federal budget fifteen years earlier under the progressive Woodrow Wilson, and this was higher than anything under Hoover.

That brings us up to the recession within a depression, and about mid-decade.

How would I characterize the early 1930s? How do I think any reasonable person should characterize the early 1930s? Since so many people seem so willing to impute views to me, let me lay this out explicitly. You can quote me on this:

The early 1930s was a period of fiscal austerity. Tax rates were raised precisely when they should have been maintained or probably lowered. It's quite true that Hoover did not slash spending - he increased it. Indeed, he increased it through programs like the Reconstruction Finance Corporation that laudably generated important institutional infrastructure, which would serve the country well during the New Deal and the second world war. But the Hoover administration and the early Roosevelt administration spent at a level that was consistent with the post-WWI spending of the Wilson administration, the Harding administration, and the Coolidge administration. That was fine for the 1920-1921 depression and the 1920s, but it was not an appropriate fiscal policy response to the early 1930s. It was far too austere. While the Hoover administration and the early Roosevelt administration both increased spending levels, there was no practical difference from a macroeconomic stabilization perspective between their spending policy and that of the Coolidge administration. Both men did a lot of bad things and both men also did some good things, but the real regime change in fiscal policy did not come until the late 1930s and early 1940s.

That's what I think. I think it's a very reasonable assertion, and I hope that graphic highlights why it's reasonable.

Of course, Krugman is wrong about Hoover's spending record. I've said this several times now in this most recent discussion, and I know I've said this in the past too. But I think Krugman's characterization of the Hoover administration is more accurate than the characterization offered by Steve Horwitz.

Note - this is not to say that I think Steve's points are a "pile of bullshit" (what he accused Krugman of offering), or "propaganda" (another accusation against Krugman). I just think he's missing some of the salient points and has some problems with his interpretation. I wish we could say that without making all these nasty comments about other bloggers and economists.

Krugman, Hoover, and all that

There's some disappointing discussion of Hoover going on - with substantial disappointments and nastiness on both sides. I don't have time to discuss my thoughts in detail now, but do have a question at the end of a brief summary of my thoughts:

1. A lot of the deficit increases under Hoover came from reduced revenue as a result of reduced incomes. That is not expansionary policy. Sorry.

2. Hoover raised taxes. That is austerity, plain and simple - there should be NO ARGUMENTS over this.

3. Hoover did increase spending, and I really wish guys like Krugman and DeLong would just come out and say this. The point is he didn't increase it nearly enough, which looks like austerity to those of us who think he didn't increase it enough.

4. Federal government ain't the only game in town. I'm not sure how state and local spending compared to federal spending (i.e. - whether declines swamped the federal increases), but it is very reasonable to note that the total government position was more austere than the federal position (just as is the case today).

My question: Does anyone have a defense of Krugman on #3? I haven't looked at this in detail, what I have seen is from people that really aren't fond of Krugman, but as far as I can tell there were modest spending increases. My response is that it clearly wasn't enough. That is clearly true - my question is whether these guys are representing the data correctly. As far as I can tell they are.

Also - my QJAE comment on the business conferences is relevant to this discussion.

A few links on monetary theory

- Washington Post on MMT here. (HT - Jared Bernstein).


- I think Scott Sumner is concerned about the wrong people when it comes to monetary policy - my comment on it is here. I think the real concern is people who (1.) peddle folk economics arguments against stimulus, (2.) love to quote Hayek as an NGDP targeting advocate but then never seem to get around to promoting expansionary policy, and (3.) people who know nominal spending seems to increase but always jump into the fiscal debate on the side that's against increased spending, just because they have a stronger preference for monetary policy.

The magnitude of the problem for society posed by these groups probably goes in the order of #3, #1, #2.

The extent to which these groups frustrate me probably goes #2, #1, #3.

Assault of Thoughts 12/19/2012

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

- Mark Thoma highlights a nice passage from an interview with Romer about the Great Depression. She talks about how we can trick ourselves into imagining the fiscal stimulus of the New Deal was bigger than it was because of the myth of FDR and the physical legacy, and also compares it to ARRA and talks about what happened with the states. This was a particularly good passage: "Even under Roosevelt the fiscal expansion was modest. When we think about the New Deal, we tend to remember things like the WPA [Works Progress Administration relief program], which built dams and bridges, and the Civilian Conservation Corps, which constructed so many buildings in our national parks. These programs left enduring legacies, and so we often think of the fiscal policy response of the New Deal as being big and aggressive. But what Chandler points out, building on a classic paper by E Cary Brown, is that the fiscal response to the Great Depression was actually quite small – not nearly as large as the American Recovery and Reinvestment Act of 2009. Even when Roosevelt increased the Federal deficit in the mid-1930s, a move to budget surpluses by state and local governments meant that the net fiscal stimulus was much smaller."

This was one of those five books interviews. Her books were: Golden Fetters (Eichengreen), A Monetary History of the United States (Friedman and Schwartz), Essays on the Great Depression (Bernanke), America's Great Depression (Chandler), and The End of One Big Deflation (Temin and Wigmore).

- Gene Callahan argues that liberalism imposes a moral viewpoint, that it is not morally neutral as many suggest, and that we should be honest about this. I strongly agree. Richard Rorty said something very similar, although he put it in terms of cultural norms rather than morals (but really - is there a difference?) he wrote: "The rhetoric we Westerners use in trying to get others to be more like us would be improved if were more frankly ethnocentric, and less professedly universalist. It would be better to say: Here is what we in the West look like as a result of ceasing to hold slaves, beginning to educate women, separating church and state, and so on. Here is what happened after we started treating certain distinctions between people as arbitrary rather than fraught with moral significance. If you would try treating them that way, you might like the results." I don't always live up to that - I talk about univesalist ideas and I talk as if liberalism is morally neutral all the time, I think. But if you pinned me down on the point, I'd agree with Gene and Rorty.

- Russ Roberts has a great post on Van Halen and their M&M contract. Contract theory is really fascinating stuff. I took a class on information and contract economics at GW - it was when I really first got introduced to this stuff, as well as two great economists (I'm calling them both economists, although they don't always get referred to as such): Avner Greif and Elinor Ostrom. Anyway, I think contract theory is important to bring to the table when we're bringing theories about marginal product equaling wage rates to the real world. I've been thinking about this a lot myself with the labor market for scientists. I'm bothered by the way journal publications are often treated as a measure of productivity and therefore as some kind of direct determinant of wages in a standard labor market model. I suspect that publications are more of a status symbol, and also one of these contract monitoring devices - but have very little direct relevance to thinking about the productivity of scientific labor.

- Ryan Murphy pokes fun at Russ Roberts being over the top about the Keynes vs. Hayek debate. I agree. He's refering to the same post that botched Keynesianism by reducing it to underconsumptionism, and thereby completely missing how much Mill and Keynes agreed about the determinants of output. Russ really should know better than to keep telling students and the public that Keynesianism is consumptionism. It's not a good thing, and ever since that post where he openly declared he said things for ideological reasons, it worries me.

- Jonathan Catalan replies to my post on re-framing the discussion of Keynes and Hayek. He writes: "Second, and more importantly, Daniel is looking to frame the discussion from his point of view." Well, yes. I'm reminded of a response Christopher Hitchens often gave to people who accused him of just offering "his opinion". "Of course", Hitchens would reply, "who else's opinion would you expect me to offer?". I think this is what Keynes thought and I think this is what most Keynesians think, and I think that Keynesians who don't think like this are in many ways wrong about Keynes and Keynesianism. Certainly some people disagree with me on that. That's almost another matter entirely because I still think the MMT/Minsky/Post-Keynesian types that disagree with me on that are still closer to my interpretation than Brian Doherty's interpretation is to my interpretation of Keynes. My point is simply this: if you want to argue with Keynes, argue with Keynes - not your preferred underconsumptionist, big-government, anti-market strawman (that's not directed at Jonathan - it's a general "your preferred"). If you want to argue with an underconsumptionist, big-government, anti-market strawman, then go find such a person to argue with. They're certainly out there. My concern with my re-framing post is that even putting it in the terms that Doherty (and many other people) do skews the argument. It's like I said about the Keynes-Hayek rap when it came out: I've always liked Hayek, but if you find me rooting for Hayek against Keynes, something seems wrong with your portrayal of Hayek, Keynes, or both of them. And the important point I was trying to make is that a lot of people who don't really know Keynes watch that video and now have a completely different impression of Keynes. That's not trivial when it comes to the economics dialogue.

- Speaking of Keynes, I found a neat new picture of him. That may not interest anyone else, but I like finding these. My favorite so far is the one of him and Lydia dancing.

Krugman, Austerity, and Growth: No, no, no, no, no...

...no, no, no, no, no.

Krugman has a post up plotting change in government spending against change in real GDP and getting a positive relationship. The only sentence I really agree with is "it's a bit striking, isn't it". Yes, it is. It's first-step towards proof that should encourage people to look at the question more.

But this is obviously very bad empirical reasoning, and the worst part is - Krugman knows that. Indeed he lists several reasons not to take this scatterplot seriously. I'll add another reason - take a look at the scattered points and ignore Poland, Latvia, and Ireland (you can even keep Greece in if you want). Do you see a clear story anymore? I don't.

And none of that is to say that I disagree with Krugman on austerity. You all know I agree. But it's this kind of low-quality latching onto whatever buttresses your point attitude that gets sophomoric libertarians yammering on about the Romer-Bernstein chart. This is exactly the wrong way to approach macroeconomic empirics.

I'm not saying you always need a fancy model when you discuss these things. Tell a compelling narrative that makes your case about a compelling counterfactual or justification. Krugman is often quite good this, and that approach is not only sound - it's well suited to a blog. Point being - identify your damn models, people. You aren't doing your viewpoint any favors by defending it with sloppy evidence.

Thoughts?

From Angry Bear: "I have a challenge. Can anyone think of a useful insight in macroeconomic theory which isn't clearly stated in "The General Theory of Employment Interest and Money"?"

The most defensible elements of ABCT are in chapter 16, btw.

One comes to mind - he seems to be much more likely to treat labor like a spot market, which is wrong. And as far as I know he ignores job search.

If you mention anything touching public choice I'm going to be forced to conclude you either (1.) haven't read the General Theory, or (2.) have read it but for some reason will only accept a public choice argument if it's clothed in the language, politics, or citations associated with the modern public choice school.

How much sense does it make to use capacity utilization to talk about the output gap?

Tyler Cowen links to this post, which argues that the output gap is smaller than advertised. One of the key indicators cited is capacity utilization, which is not particularly low.

But how much sense does this really make in an economy where investment demand is a major part of the problem? In shorter recessions, supply shocks, etc., capacity utilization seems like a fair enough indicator to look at. But if this is a recession where investment demand is the source of the problem, you're going to be depressing the numerator and the denominator of the capacity utilization figure.

In other words, the method that Cowen cites to argue that the CBO estimates are biased upwards seems itself to have an inherent downward bias.

If the nature of this depression were different, perhaps this would still work. But it seems highly suspect to rely on a capital stock related measure to talk about this sort of thing if it's precisely capital accumulation that's our problem!

A question about energy statistics

So I'm doing more work on our chapter on petroleum engineering. I'm collecting some demand-shifters to help identify a labor supply elasticity. Price of oil is an obvious one, but I've only got ten years of ACS to work with (there are just too few of these guys in the longer series of CPS data), so ideally I'd like some things that will vary within a given ACS panel too.

My first thought was proven reserves, perhaps also interacting this with oil price. New discoveries increase the demand for engineers, or old discoveries get more cost effective as prices increase.

So I'm looking at the Energy Information Administration's proven reserves data, and I'm curious about a few things... I just want to get my head around these data:

1. They jump around more than I would have expected. Why is this? Is this noise due to how the reporting is done, or is this going to represent a genuine change in the expectations of industry?

2. I'm surprised how many states have a downward trend over the last ten years. Is this really a peak oil thing? I was under the impression that we continue to make enough discoveries that concerns about peak oil can be misleading. Should I not be surprised these are declining?

EIA also has (1.) new field discoveries, and (2.) new resevoir discoveries in old fields, which I think will help to pin down what actually represents new news.

Any other ideas on demand shifters?

Framing the Economics Discussion

Shorthand can have a powerful influence because it affects the way people frame discussions.

I think it would elevate the economic policy discussion tremendously to change the shorthand version from: "Hayek thought markets coordinated dispersed information and brought prosperity, and he also was skeptical of government intervention, and in the 1930s he argude with Keynes, who advocated government intervention" to:

"Hayek thought markets coordinated dispersed information and brought prosperity, and he also was skeptical of government intervention. Keynes agreed strongly with Hayek on the importance of markets, and was also worried about poor governance, but he helped us understand important things that a government can do during recessions."

It's not hard to promote one shorthand over the other, but the difference is huge. If you choose one version over the other, you really ought to think about why. I think the second bit of shorthand accomplishes a few important things:

1. First, it helps combat anti-market bias among an often economically illiterate public by making crystal clear that all sides of the debate among economists agree about the value of markets.

2. It focuses on the real disagreement: the question of whether there are smart things government can do or not.

3. It moves away from the place where there isn't disagreement: the question of whether the market or the government is better at allocating resources and coordinating human wants.

Plus it's simply better history.

And the point is, you can still write make whatever point you want to make - side with Hayek over Keynes, etc. - if you use this sort of shorthand for the debate. There's no good reason to make people think that Keynesianism is underconsumptionism. There's no good reason to make people think that Keynesianism is a blank check for government. There's no good reason to make people think that Keynesianism is a challenge to the market. It's very easy not to say these things. There's no cost to not saying these things. Indeed, what you're doing when you say these sorts of things is skewing the debate.

Ditto for the people with a proclivity to say Hayek doesn't care about poor people.

This is what I do a lot on this blog - correct the framing of the discussion of Keynesian economics. I have other things I write about too, but that sort of monitoring of the way Keynes and Keynesianism are talked about is part of it (in fact, most bloggers seem to have some discourse or other that they take it upon themselves to monitor and police... it's a very common blogging style). The little things can do a lot for the debate. I'd much rather we argue over stabilization policy than over some kind of false government vs. markets dichotomy where Keynesians always get stuck on the side defending government.

Callahan on Doherty and what's worth paying attention to

Gene adds this point on the Doherty review: "Doherty et al are not trying to talk to Keynesians: they are convincing other libertarians that there is no need to pay any attention to Keynesians."

I think that's a good interpretation. Doherty can contest it if he likes.

But it also reminded me of a line from the Doherty review about Keynesians: "Modern Keynesians tend to sniff at the notion that their man and Hayek were equal participants in the “clash that defined modern economics.” They note that Hayek did not wield a similarly huge influence on modern macroeconomics, and they are right in the sense that the Austrian questioned the value of macroeconomics as an intellectual project in the first place."

The implication of the first sentence being, of course, that modern Keynesians are unjustified in so dismissing Hayek. I agree strongly with Doherty on this. I don't think Hayek performed particularly well in his engagement with Keynes, but I don't think he should be dismissed as some kind of lightweight.

The first clause of the second sentence - as we've discussed on here before - is true too of course.

It is with the second clause of the second sentence that we finally get around to me disagreeing with Doherty again. He's not exactly wrong about Austrians questioning the macroeconomic project. But that's not the heart of the matter. This is mostly intellectual ass-covering. The real source of the retreat from macroeconomics was exactly this outcome of Hayek's engagement with Keynes. The effort to rationalize that by some people through the dismissal of macroeconomics itself has been mostly vacuous. The only thing more pathetic than the "aggregation is a sham" crowd is probably the "it's all scientism" crowd. Neither of these lines of argument are worthy of the proud line of Austrian school economics going back to Menger, so I don't want my claims here to be confused with a screed against Austrianism. It's just a critique of bad Austrianism.

*****

There really could be a thriving infusion of Austrianism into mainstream macroeconomics: incorporate capital structure (even a simple, imperfect version) into mainstream models. Don't just dismiss everything the mainstream does. Ask yourself "if I take a framework that the mainstream already finds convincing, accept that they have good reason to find that convincing, and then just add a capital structure, what would happen?". All this effort applied to deconstructing mainstream economics is largely wasted effort.

UPDATE: Doherty is commenting on the previous post... let me remind readers of the very first sentence on my first post on this. I thought it was a good review. It was well written and I learned a lot from it. You all know one of the major purposes of this blog is presenting what I take to be an accurate reading of Keynes in a swirl of inaccurate readings of Keynes. You all also know I like Hayek a lot, and that I find Austrian macro fascinating and plausible. Nobody's out to get Doherty here. I'm just doing what I always do: putting my view of Keynes out there. I would have worded somethings differently from Doherty, but I've got nothing against Doherty.

Watching the new True Grit while doing some work...

Mattie Ross is a tremendously more interesting character in this version than in the older version.

She kinda bugged me in the older version.

The circularity of Ricardian Equivalence

We were talking about Ricardian Equivalence in macro last night. I for one think that it's actually not bad as a starting point for thinking about public debt. It's like any argument dependent on rational behavior. Rational behavior is an excellent starting point, you just have to remember that's not the end of the discussion.

Anyway - a brief thought I had was that there's a bit of circularity to the attempts to use Ricardian Equivalence to refute Keynesian claims about stimulus.

So people that do this set out to demonstrate that national income can't increase from deficit spending.

- To do this, they say "people will know they have to pay taxes in the future, so they reduce their spending, which cancels out any deficit spending"

- What they leave unsaid is "people will know they have to pay taxes in the future out of the same national income as in the counterfactual, so they reduce their spending, which cancels out any deficit spending".

- That bolded, red, unstated assumption is critical, of course!!! After all, if for some reason deficit spending increased national income relative to the counterfactual, taxpayers may not have to reduce their spending in order to prepare to pay taxes in the future, and the deficit spending wouldn't be canceled out.

So the argument - because of its unstated assumptions - is really rather circular. For Ricardian Equivalence to say what some people want it to say, you have to assume your conclusion - that the deficit spending won't increase national income.

Surprise, surprise! In a world where you assume deficit spending doesn't work, you tend to also draw the conclusion that it doesn't work.

This isn't to say, of course, that Ricardian Equivalence is useless. Use it as a framework for thinking about the public's responsiveness to public finance decisions. But don't assume it has broader macroeconomic implications unless you bring something else to the table theoretically.

More on Keynes and the Wapshott Review

Brian Doherty responds to me: "While there may be some alternative I'm not seeing, are you saying toward the end of graf one that Keynesians belief that free markets NEVER create bad outcomes for which concerted government action are required as a remedy? If you've argued this point at greater length elsewhere, I'd be interested in seeing a link. If I'm misunderstanding what contrary to that statement of mine you are arguing, I'd be interested in elaboration."

Of course Keynesians think that markets can create bad outcomes. And of course Keynesians point to government action that could be beneficial. The problem is this view (which Doherty is not alone in promoting) that once the economy runs into problems Keynesians think "only concerted government action could pull them out" [that's from the original article]. This is the point that's patently untrue. I'm not sure what else there is to say about this, because Doherty hasn't even really explained why he thinks this is the Keynesian position in the first place. All I can say, then, is that it's never been the claim. Keynesianism points out how we can have a less-than-full employment equilibrium in market economies. If investment demand recovers, of course we can see a recovery of the economy without government. Who ever said we couldn't? We might be seeing some of that right now. The stimulus certainly slowed the downturn, but it's likely that the signs of recovery we're seeing now have little to do with govenrment policy at all.

Anyway - I compare Doherty's odd point here with an earlier odd point made by Tyler Cowen. I give more details on the Cowen disagreement here.

I genuinely don't understand why some people insist on attributing bizarre arguments to the other side. How does that help. What good would it do me to say "Austrians hate poor people", and then waste my breath telling them why they shouldn't hate poor people. It would be entirely unproductive because it would entirely miss the mark. Why do people do this? I don't know.

Keynesian Sentences of the Day, from an unlikely source

HT - Russ Roberts.

Replace "productive consumption" with "investment":

"In opposition to these palpable absurdities, it was triumphantly established by political economists, that consumption never needs encouragement. All which is produced is already consumed, either for the purpose of reproduction or of enjoyment. [ <-- at first glance, this sounds like a crude version of Say's Law, and quite unacceptable. When you read on I think it's clear we can think of this as more of an accounting identity than a Panglossian macroeconomics] The person who saves his income is no less a consumer than he who spends it: he consumes it in a different way; it supplies food and clothing to be consumed, tools and materials to be used, by productive labourers. Consumption, therefore, already takes place to the greatest extent which the amount of production admits of; but, of the two kinds of consumption, reproductive and unproductive, the former alone adds to the national wealth, the latter impairs it. What is consumed for mere enjoyment, is gone; what is consumed for reproduction, leaves commodities of equal value, commonly with the addition of a profit. The usual effect of the attempts of government to encourage consumption, is merely to prevent saving; that is, to promote unproductive consumption at the expense of reproductive, and diminish the national wealth by the very means which were intended to increase it.

What a country wants to make it richer, is never consumption, but production."

- John Stuart Mill

I don't know why Russ is still peddling this idea in his own post that Keynesianism is consumptionism. He is a professor of economics. He should know much better than this. Keynesianism says the problem is investment demand. Consumption is a function of income, so it will move around too, but the cause of problems in the economy is fluctuations in investment demand due to uncertainty not just about the level of future consumption, but also the composition of future consumption.

There is no "lump of labor" or "lump of capital" or "lump of consumption". As Keynes took great pains to discuss in chapter 16, entrepreneurs don't just supply some aggregate "consumption" to the market - they supply specific products. If they supplied some kind of amorphous blob of consumption then we wouldn't have as much of a concern about the business cycle. When consumers saved entrepreneurs could confidently invest in tandem because they would know X amount of amorphous blob consumption would go on in the future, and they could invest to prepare to provide that. But in the real world, when consumer's save entrepreneurs don't know how that savings will be represented in future demand. Good entrepreneurs make good guesses, of course - they aren't at a total loss. But investment demand can be depressed if for some reason there's a great deal of uncertainty about how increased holdings of liquid assets will play themselves out in future demand.

The problem is investment, not consumption.

If you want to complain about consumptionism, go find a consumptionist. They're definitely out there, and Keynesians can slip into this like anyone else. Correct that. But let's be clear - Mill is making a point here that's very consistent with Keynesian concerns about fluctuations in investment demand.

UPDATE: In response to some discussion of this on Facebook... this is not to say, of course, that the Mills passage that Russ cites is some kind of proto-General Theory. It's only to say that if your position is that investment demand is key to understanding economic prosperity, then you are on the same broad page as Keynesians. When Keynes cited the underconsumptionists (primarily in Chapter 23) he made it very clear that they were quite wrong to focus on consumption. What Keynes liked about the underconsumptionists was their recognition that the total volume of output could move to re-equilibrate shifting supply and demand. That was an important theoretical contribution by the underconsumptionists: below-full-employment equilibria were plausible because while accounting guarantees that a balance will be struck between supply and demand, there is no guarantee that that balance will be struck at a full employment level. In some cases, the volume of output itself is what moves to rebalance the system.

Wapshott Review

Brian Doherty has a good review of Wapshott's book here. The consensus (which Doherty agrees with) seems to be that Wapshott provides an unsatisfying coverage of the Keynes-Hayek debate. Doherty further suggests that Wapshott oversimplifies and even glosses over the economics debate itself. Unfortunately, I think Doherty is guilty of the same thing. Keynes - according to Doherty - believes that full employment should be pursued "by any means available", and Doherty is even more confused about the parameters of the disagreement when he writes "Keynesian ideas posited that free markets sometimes guided economies into ditches from which only concerted government action could pull them out". It's like the Cowen "this recovery makes Keynesianism a loser and RBC a winner" nonsense all over again! How many times do we have to inform people that this is not what we think until they finally stop insisting that we own up to it or defend it?

The most striking paragraph for me is this one: "For example, Keynes believed that intelligent, well-meaning planners manipulating economic aggregates such as demand and employment can bring about a happy end to business cycles. Hayek, by contrast, insisted that individual decisions and imbalances between specific prices and demand, or interest rates and specific plans for long-term productive projects, are where the economic action is."

"By contrast"? Now that's an interesting turn of phrase, isn't it? "By contrast" implies that what Hayek is said to have believed here is not something that Keynes believed. That's nonsense, of course. Those two statements are not opposites, Keynes believed both statements, and Hayek believed only one of them.

What could have been

Romer was pushing a $1.8 trillion stimulus. I have to say, since I first became familiar with the name "Christina Romer", almost everything I've heard since then has improved my view of her. And it's not just "she wanted a huge stimulus". It's her work on economic history - the 1920-1921 depression particularly. She approached her multiplier estimate work with a labor economist's attention to identification concerns (contrary to some peoples' suspicions, my economics is evidence-based, not ideology-based). And then, of course, she's a W&M alum.

One thing I'll give Larry Summers is that he's probably right about the politics of a stimulus that size. There is a great deal of truth to the idea that none of this talk is worth a damn if we can't actually pass something. But I would not have erred on the side of political expediency on this one.

Reviving the classics

A little while back, we heard that Neil DeGrasse Tyson was going to be hosting a new Cosmos series, perviously hosted by his mentor Carl Sagan.

Now it looks like we'll be getting more of Milton Friedman too (HT - Peter Boettke)! Unfortunately, it will only be a three part series, but it will still be a great celebration of the 100 year anniversary of his birth.

I'm most suspicious of the third in the series, differentiating between "equality of opportunity" and "equality of outcomes". Of course, as I've discussed here before, the distinction between the two is complete hogwash. The world is a lot more complex than that, and some of the most important inequalities of opportunities are the product of someone else's inequality of outcomes. It's impossible to concieve of a situation where you'd actually equalize opportunity and not have to equalize a lot of outcomes too.

The idea is on the right track, if the two could be separated. But more and more I think perpetuating this mythical dichotomy creates more problems than it solves.

The first two look much better - the importance of the market, followed by the dangers of government intervention.

"If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid."

A great post by Bob pointing out that NPR really should have sought out a consultation on this one.

ABCT links/thoughts

- Great post by Gene. To be honest, I always thought that was kind of a goofy argument. Doesn't Cowen peddle this one too?

- I am having trouble squaring ABCT with this. Can ABCT be squared with it?

- Does anyone know if anyone has worked with producing ABCT-like dynamics from a growth model where consumers hyperbolically discount? I was thinking of this today. It seems like it would have much the same conclusions as liquidity preference would if applied to a temporal capital strucutre: namely, turning the standard ABCT sequence on its head. The idea is current interest rates are higher than they "should be" for time-consistent preferences - something you only discover in the future (as opposed to ABCT, where you're relying on exogenous monkeying around with the interest rate, and you discover in the future that it was previously too low). First - am I thinking about the implications of hyperbolic discounting for the capital structure correctly. Second - anyone ever worked with this?

*****

It's worth reminding everyone that I am something of an ABCT agnostic - I am NOT anti-ABCT. As presented, it makes decent sense. My concerns mainly revolve around the relative lack of empirical evidence (people like Andrew Young are changing this) and the trouble you run into when you incorporate liquidity preference theory (which - for reasons I've stated here previously - would seem to reverse some of the implications of ABCT grounded solely in the loanable funds model).

*****

Back to macro. Isn't this sad? Even when I'm doing stuff for class it makes me think of ABCT/heterodox stuff/other personal interests.

Let's reorient this dialogue

Iran is in the news again, and the way people talk about it is worrisome to me.

So I'm going to do my small part to change the dialogue:

On behalf of F&OST, I want to congratulate the nuclear scientists of Iran on taking an important step towards improving their energy infrastructure and towards the generation of nuclear power.

There don't seem to be any signs of an active weapons program, according to our own intelligence reports. If that is not the case, or if this is the case and your intentions change in the future, you need to understand the responsibilities associated with being in this particular club. Nuclear warheads themselves are morally ambiguous, inanimate objects. How you use them is the key. Dumping your theocrats would be a good place to start (in fact, that would be a good idea even if you never pursue weapons).

F&OST wishes you all the best in your pursuits, so long as they remain peaceful, and F&OST (unlike more naive pacifists) will always be careful to distinguish between "peaceful" and "non-nuclear power". We are not under the impression that to be peaceful, a nation must be disarmed and dependent on dirty energy sources.

Would we be better off with scientists and engineers as politicians?

The case is made here. Neil DeGrasse Tyson has said similar things in the past. I haven't thought much about it, but I'm somewhat skeptical if we're talking about the natural sciences. Certainly we need politicians with a deep appreciation of natural science, but I'm not sure we need natural scientists and engineers themselves. That smacks of technocracy and Thorstein Veblen's "soviet of technicians" to me.

I do think we would be much better off if the Congress were full of psychologists, sociologists, and economists (particularly the latter, of course!). Social science seems more directly relevant to a lot of what Congress does. A Congress informed by social science would know, after all, that most natural science and engineering relevant to what Congress does is the stuff of agents, not principals. Hire them, don't elect them.

But I still am somewhat leary of a Congress of social scientists. Democracy is about electing people you feel represent you, not about technocracy.

I guess what it boils down to is that I don't want a social scientist Congress... I want voters to want a social scientist Congress!

My contribution to the latest facebook craze

Assault of Thoughts - 2/15/2012

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

- A great article by Mark Thoma on income distribution. He also provides links (on his blog post about this) to Tim Taylor and Jacobson and Occhino on the declining labor share of national income. I need to really go back to the data, but what I remember from looking at this question a year ago was that labor share of compensation has been more steady, it's just that the earnings share has declined. Perhaps I'm remembering this wrong. The idea is that benefits make up an increasing portion of compensation. This still can have big implications - when I was looking at it, what I was primarily concerned about was the financing of unemployment insurance. Unemployment insurance (and Social Security and Medicare, for that matter) is financed through taxes on wages and salary. If these are making up a smaller and smaller share of total compensation, that means the tax base for these programs is shrinking. This is all something of an aside - the links above deal more directly with the distributional issues.

- Here's a very well written post on the relationship between social science and natural science. Normally I'm skeptical of crude discussions of this issue by natural scientists who don't really have much of a concept of social science, but this is very carefully worded and has some good thoughts. The issue motivating the post is how each talks about race. My interest in race is entirely consequentialist and not ontological at all (which I interpret as being just fine according to this post). I study how the human species makes resource allocation decisions (just like many biologists study resourc allocation by other species - I'm just a biologist that studies a highly evolved primate). The way humans sub-divide each other into races plays a crucial role in many of these allocation decisions, so I work with "race" as it is popularly understood a lot. It doesn't matter, from my perspective, whether there is a genetic foundation for race groups at all. I operate on the assumption that it isn't, based on my weak understanding of the biology of the question, but I'm happy to defer on this point to the biologists either way. In most cases when I work with questions of race, the genetics of it is entirely beside the point for me.

Note especially in this post how he talks about the relationship between social science and biology as analagous to the relationship between biology and chemistry. He talks about a "hierarchy of disciplines" (I cringed when I first read that), but he clarified that in this hierarchy chemistry is more "fundamental" than biology, and biology is more "fundamental" than social science. This is the critical point. This does not mean we need to build economics up from chemistry, the way some people pre-occupied with "microfoundations of macroeconomics" might suggest if their views were taken to their logical end. What it does mean is that biologists are dealing with fundamentally chemical systems, and social scientists are dealing with fundamentally biological systems. Reconciliation of theory and observation can work in both directions, of course.

- Simon Wren-Lewis talks about teaching minimum wages and immigration. As most of you know, the empirics and the theory on this are not as clear as some people would like to pretend. What's fascinating to me is that there are some people who are insistent on what a downward sloping labor demand curve means for the minimum wage, but are willing to very quickly write it off for immigration. A bigger problem is that these discussions rarely take the general equilibrium impact of the minimum wage or immigration into account.

Callahan on Romer

Gene writes: "I heard Paul Romer present yesterday at NYU. He gave a very interesting talk on his plans for charter cities. But he began his talk claiming something very strange."First of all," he said, "think about shaking hands. Shaking hands, I think we can all agree, is an obviously inefficient norm. It's a major way to transmit disease." (I quote from memory!)

Well, there certainly is that downsize to shaking hands. But it also provides social bonding, human contact, acts as a signaling device ("he had a good, firm handshake"), and probably more of which I am not thinking.

So how does Romer know that these benefits do not outweigh the costs? "

It's not the only strange thing Paul Romer says. He's also wants to subsidize the supply of new scientists and engineers. Romer is a fantastic macroeconomist - I have big reservations about his labor economics. Anyway, I anticipate that once the chapters that Hal and I are writing finally get published, he'll change his tune.

Ryan Murphy's blind rage at hipsters leads him to say goofy things sometimes

He says: "Hipsters don’t have a taste for chicken. They have a taste for inefficiently produced chicken. The more inefficiently produced it is (more land to roam around! more “natural” feed! no “chemicals”!), the higher it is valued. Farmers, supply chain specialists, and culinary experts direct their energies towards how to convince progressives that they should feel good about the pointless but expensive measures taken to produce the food, instead of making good food cheaper.

This is another way of saying the more a trendy food hurts the poor, the more highly valued it is by hipster-progressives."

Now, maybe this is restricted to hipsters and he's right, but I have a feeling "hipster" and "progressive" are significantly overlapping terms for him.

I don't go all-in on the socially-aware eating stuff, but I try to do as much of it as is reasonable. I think people really do care about the treatment of animals and bargaining with third world producers, and environmental impact when they eat.

Actually, Ryan hurts his own case elsewhere in the post when he points out the "hipster" proclivity towards vegetarianism or veganism too. Hipster vegetable-love is actually an important signal that efficiency is a hipster value. Vegetables are often embraced, not because of their health value, but precisely because they are more efficient (economically and environmentally) per calorie than meat.

One hipster dietary habit I hate is their anti-corn stance. I love corn, both when I know that it's actually corn, and when it's processed and added to food without my knowledge. It's delicious - but there's also a hipster value here. Biofuels made from corn, while good for American farmers, isn't the best thing for the environment. So I figure the more corn I eat, the more it drives up the price of ethanol, which incentivizes energy companies to invent cleaner fuels.

One thing Ryan says that I can emphatically agree with: "bacon is good".

Three strange things I noticed in the grocery store this morning

1. A bunch of wine prominently advertised as "unoaked Pinot Grigio". Isn't that redundant? Who the hell oaks Pinot Grigio in the first place? Doesn't that defeat the purpose?

2. A Vietnamese sauce, with all Vietnamese characters over the whole bottle except (1.) the name of the sauce, and (2.) a big "Made in the U.S.A." label at the bottom.

3. I think the last ten times I've been to the grocery store I've consistently spent within $3 of $30. If you're wondering how much a randomly selected hand basket of food costs at Giant, it costs $30.

Ah, Judge

Saw this on a friend's facebook page, musing on the end of the guy's TV show (errrr... I mean... valiant defense of freedom!).

I love these "Screw those politicians! Now vote for my politician, who'll be great!" types. Does the Judge feel no cognitive dissonance at all when he does pieces like this?

I like certain politicians enough to drag myself out of my house and cast a vote for them. But I hope I don't sound like this when I do it. Obama is not going to revolutionize the country, people - and he's going to disappoint you in some way no matter who you are. But he'll do alright and I think you should vote for him.

If I ever say much of anything more than that, please show me this video.

Is vs. Ought: Mises, DeLong, Callahan, and Birth Control

I wasn't quite sure what Gene was talking about when he offered this quote as evidence that Mises was an "enthusiastic" advocate of birth control. And I noted that I wasn't all that impressed with the DeLong smackdown attempt. Mises seems to be making true statements about the role of birth control in the modern world. I see nothing in this particular passage to assuage me about the other passage DeLong quotes that suggests Mises has a problematic (to say the least) take on feminism and birth control.

Apparently I'm not alone.

But what I do I know - I'm just a Paul Krugman/Brad DeLong lackey that agrees with whatever they say, right?

For all I know Mises was an enthusiastic advocate of birth control and a poster-child for feminism by the 1950s (the other passages were from decades earlier). I just know Gene's quote doesn't really prove that.

Documents on Awlaki

Discussed here. Documents here. I haven't read them yet.



And yes, for the time being I'm closing comments on all war/terrorism/military related stuff. I don't think that will put too big of a dent in the discussions, since it's not a major posting topic. I'll let you know in the post if I open them in a particular case, or if I'm stopping the practice.

Two NBER working papers of interest

Acemoglu and Autor on Goldin and Katz. I've been thinking about Goldin and Katz in the last several weeks too... and it's actually gotten me closer to accepting Cowen's Great Stagnation. Maybe more on that if I decide I'm not crazy in how I'm thinking about it.

And speaking of Goldin, my cost-benefit analysis professor from GW co-authors a paper with Goldin on the impact of student aid on tuition.

A note on Greg Ransom

...here, on this blog, since he has me blocked from his comment section because of the audacity of expecting a little more justification from him when he accuses people of being "reeking sewer rats from the bowels of Russia" (yes, that's a direct quote).

Here he shares more evidence of something I think most people who think about and discuss Austrian economics on at least an intermittent basis already know: that by the second half of the twentieth century Hayek was saying that it was a good idea to maintain nominal spending levels during a depression.

I feel like Greg tries to bring attention to this point in a variety of fora because he's under the impression people aren't aware of it. Certainly many aren't, but I think most of the people he shares this with are already well aware of this view of Hayek. We are more focused on two questions, which seem more important from the perspective of intellectual history and modern policy analysis:

1. How, in the period when Hayek was actually working on macroeconomics in the 1930s, could he have missed this? Exactly why did it take until later in the century?, and

2. Why, then, do modern Hayekians still heap so much scorn on us over active monetary policy? Clearly you all would rather have free banking. But that doesn't seem like it should keep you - in the midst of a depression where we seem stuck with a central bank - from joining us in advocating for more vigorous stimulus.

Greg, let's say most of us get that Hayek thought this in the 1970s. Your intellectual history mission is for the most part accomplished. Now can you dedicate a few blog posts to cutting IOR to zero, expanding open market operations, and announcing a nominal spending level target? John Papola, since the fall of 2011, is now telling me semi-regularly in emails that Hayek supports NGDP targeting. Great. So does that mean the next EconStories video will be advocating monetary expansion, with Ben Bernanke as the good guy? Does that mean his next Fortune column will be strongly supporting monetary stimulus until the economy is back on track?

If not, why not?

And if you guys want to stick with the intellectual history, then let's call it "case closed" on what Hayek thought in the 1970s, and turn our attention to why he didn't say this as emphatically in the 1930s. (Yes, I know about the letter to the Times where he and several other LSE economists say deflation isn't good for its own sake... but why wasn't the maintenance of nominal spending more prominent in his macroeconomics).

Science, Williamson, and Fenyman's birds

I found this comment by Robert Vienneau interesting: "Williamson writes a lot about how economics is a science and how they follow a scientific methodology. A few months back, he told us he had to look up the meaning of the word "incommensurable". So we know Williamson is basically unlettered when it comes to the literatures on the philosophy, sociology, and history of science."

Richard Feynman once said "philosophy of science is as useful to scientists as ornithology is to birds". While he probably intended this to be more dismissive than I would agree with, I do agree strongly with the plain English of the statement. Williamson may not be well versed in the philsophy of science (or the economics of science, for that matter). So? Who cares? He doesn't need to know science as a subject of study to be an excellent practitioner or example of it. We study economic agents all the time who have very little knowledge of or use for the science of economics. It doesn't mean they're failing to behave effectively in the economy.

My interest in the philosophy/history/sociology of science is fairly circumscribed, personally - I'm mostly interested in it to the extent that it informs the economics of science and particularly the labor market for scientists. I've been trying to get a handle of how science is produced, which in turn of course helps understand the derived demand for scientists, which is my personal interest*. The philosophy of science that veers into methodology holds little interest for me, for that reason. I've found Kuhn particularly enlightening, and Vienneau's reference to incommensurability raises Kuhn too. But here again, what is the use of knowing about incommensurability to the scientist himself? I don't see any real use. Certainly most paradigm shifters probably had the sense they were shifting a paradigm. But do they really need to understand Kuhn (much less have a working knowledge of the term "incommensurability") to prosecute their paradigm shift? Of course not!

So, Vienneau may very wel be right. Williamson may be largely ignorant of the philosophy, history, and sociology of science. Certainly that of all things isn't what's going to call his own credibility into question.

UPDATE: Another way of putting this is that a scientist can do his work with a ridiculously naive view of "the scientific method" and even convince himself that that's what he's doing and that's how science progresses - and still be an excellent historical example of Kuhnian science.

* - I'm personally not very entranced by the bibliometrics craze that's sweeped the economics of science, but I'm not entirely sure what an alternative would be (or what could remedy the way people currently think about bibliometrics as a way of getting at scientific production.