New Urban Institute President

I was in the office yesterday now that exams are over, and while I was there they happened to announce the new president of the Institute, who will be replace Robert Reischauer (who I worked as an RA for in my first couple years there). Sarah Wartell, from the Center for American Progress, is going to be the new president - starting next year. I've heard very good things about her. This statement from Wartell is a justification of her selection that I've been hearing a lot from people:

"The Urban Institute is a treasure trove of expertise, analytical tools, and independent research relevant to the hard choices ahead on housing, retirement, health, taxes, and other issues," Wartell said. "I am thrilled to join these talented scholars and researchers and those who enable their work. I want to help ensure that policymakers of all stripes can use these resources to improve outcomes and the public's return on investment from shrinking funds."

Center for American Progress is very good at promoting research and making it timely, and that's something that the Urban Institute could benefit from.

But WHY?

Commenter increasingmu writes on my post about Peter Boettke, Keynesianism, and public debt that: "[L]ike the 19th century, we need to be continually running surpluses when we aren't under extreme duress."

Why? You can't just say something like this, you have to have a reason. Why do people think this? If this is really something we "need" then why have so many countries been doing exactly the opposite and doing fine?

It seems to me the only thing that's obvious is that our debt burden can't grow faster than GDP on a permanent basis (if social welfare is growing even faster than GDP we actually probably could grow the debt burden faster than GDP without suffering welfare losses, but let's keep this simple). So the question is, what is required for that to happen. "Continually running surpluses when we aren't under extreme duress"? Nope. That's not required. The only thing that's required is that the growth of the debt is slower than the growth of GDP - not that it's negative (i.e. - a budget surplus).

So if your goal is a stable or even a decreasing debt burden there is exactly zero justification for the claim that this is something that "we need".

So why? Why are these claims made? I don't understand and I still don't feel like I have answers. Another commenter says that taxes may increase. It doesn't seem like they need to. Borrow money to pay the interest, and shave that amount off the top of the non-debt-burden-increasing deficit threshhold. A doctrine that we must run surpluses is just as likely to raise your tax burden as continual deficits - probably more. I like some aspects of Bowles-Simpson, but imagine if you had them running everything with the budget (that's what this demand for balanced budgets would entail). You don't think you'd get higher taxes out of that??? Come on - be serious.

Thoughts on Boettke?

Peter Boettke argues that "Keynesianism cannot work to solve our current problems because Keynesianism is responsible for our current problems", bringing Buchanan and Wagner into the discussion of Samuelson's confused op-ed yesterday.

It's true, Boettke is just pointing us to Buchanan and Wagner and while I'm very familiar with their argument I've never read the book. Perhaps I should read the book before asking questions, but I don't think I'll be particularly surprised by anything - so I don't think it's outrageous to pose a few questions to Boettke about the logic of this post first.



1. First, why is running deficits "the problem"? Boettke doesn't explain this at all and I'm not sure what his argument is. It's crucial for people who think this to actually make an argument rather than just presuming it's obvious, beause most economists don't think it's obvious (although most of the public probably thinks it is).

2. I would have said that Medicare is the only real budget problem we face in this country. The only one. Some people throw in Social Security - my understanding from people who have been on the trust fund's board is that that is a relatively small problem with an easy fix. Some people would throw in our tax policy - but that can change very quickly and easily too. It strikes me as reasonable to say that for the United States, the only problem we have associated with the public debt is Medicare. Bringing this back to Boettke, what could our Medicare problems possibly have to do with Keynesianism? I don't know because he doesn't say, and Buchanan and Wagner don't talk about Medicare at all (based on a word search of the html version of the book).

3. How exactly did Keynesianism cause our problems? Again - the argument is unclear to me. I guess it's clearer if you assume "the problem" is simply the fact that we run deficits persistently when we didn't used to. But that brings us back to #1. Why is that a problem? Everyone who thinks it's a problem seems to think it's self-evident. Everyone who doesn't think it's a problem is left scratching our heads as to what the argument is.


Alert readers may argue Keynes was not a "fiscalist", rendering Boettke's whole post moot. I'm not quite sure about this tactic. Keynes wanted to put the deficits in a capital budget, but he wasn't against "loan expenditures". I think the Keyes/Lerner split is overblown - overblown by Keynes himself no less than anyone else. Certainly Keynesians are comfortable with deficits, and that's the point.

Another Cafe Hayek post desperately in need of a comment section

Don quotes Steve Landsburg against progressive taxation: "Whenever a politician proposes to make the tax code more progressive, we hear rhetoric about how the rich have too much, the poor have too little, it’s only fair to spread the wealth more equally, and so forth. To me, the interesting thing about that rhetoric is that nobody believes it. Of this I’m certain, because in all the years I took my daughter to the playground, I never once heard another parent tell a child that if some kids have more toys than you do, that makes it okay to take some of them away…. [T]axation for the sole purpose of redistributing income is closely parallel to behavior that we admonish on the playground all the time. If we don’t accept this from our kids, I’m not sure why we should accept it from our congressmen.”

First this is obviously factually wrong. It's not true that "nobody believes it", if "it" is the logic of the progressive tax. Lots of people believe it. That's why we've had a progressive tax system that's been in place for a century.

But the example is a non-sequitor. It's true we teach our kids not to steal. But what does stealing have to do with taxes? It's the obvious question that could have been raised pointedly in a comment section, but commenters like that often get accused of being trolls or not understanding economics (some of these critics genuinely don't understand economics but that doesn't mean that they don't raise good points that are often left unanswered).

We also teach children that it's important to share their things. We also teach children that in certain human communities it's not only appropriate, but imperative to make contributions to a common fund where welfare is redistributed from those who have means to those who have needs.

I wouldn't use either of those examples to advocate the elimination of the market and the inauguration of communism because that would be inferring too much of the observation about what we teach our kids (and it's not even an outcome I'd approve of). Likewise Landsburg and Boudreaux should not be so impressed with an incomplete, overextended anecdote or try to draw any extensive conclusions from it.

What is "cronyism" and what isn't?

Ryan Murphy provides a link to these big business/U.S. government Venn diagrams.

I'm never quite sure what to make of these worries. I just try to think of what the world would be like if government officials didn't play important roles in the private sector in the fields that they deal with as policymakers. Is it possible to have a policymaker knowledgeable about the impact of his policy in the real world without inevitably having many of them rise to the upper ranks of business? Would we really rather have a situation where we deny people with this kind of experience any role in government? Cronyism to me is about a lot more than "six degrees of separation" test. I'm much more concern about whether there is actual malfeasance. That's obviously a risk - you don't need to be a public choice theorist to know that. But the risk on the other side is incompetence. When we have costs and benefits to weigh on either side, that usually means we have a trade off to make and it usually means a corner solution is not the right solution.

This is the sort of post that could use a few comments

Cafe Hayek commenters can be really bad, so part of me understands Don and Russ's recent decision.

But a post like this really deserves comment. Wow. I suppose other blogs can point out the problems with all this, but commenters are good for that too.

I'm also putting Elizabeth and Harry Johnson the list of people who seem to have nothing or value to say about Keynes and who are probably not worth reading. Between that post and this one, it seems the Johnsons are really in the dark.

The Paul Cabinet

Another thing I was thinking of yesterday when we were talking about Ron Paul was, "what would a Paul administration cabinet look like?"

Economic posts particularly. I imagine we would see some people from Auburn here. George Mason is the most convenient well of Austrian intellect, and probably the most in touch with policymaking, but I doubt he'd pull many from there. It's an interesting thought experiment indeed.

Andolfatto vs. Ron Paul

Given our discussion of him yesterday, and the increasing strength of his campaign, I think it's worth reprinting the post that David Andolfatto had up earlier this spring criticizing Ron Paul's grasp of monetary. The circumstances are worth recounting too. David Andolfatto works at the Federal Reserve as a research economist. He wrote this post criticizing the sitting chairman of the House committee that oversees the Federal Reserve, Ron Paul, and pointing out that the emperor has no clothes. I don't think I need to point out how that takes a lot of guts.

The supporters of Ron Paul, the Congressman who calls Obama authoritarian and who recently suggested that he's doing well in the polls because his opponents don't have principles, took deep offense at the fact that Andolfatto let his blood boil a little and called Ron Paul a "pinhead". Yes, the people who love the guy that throws around "authoritarian" got outraged at "pinhead". Andolfatto got so overwhelmed by the rage over the post that he took it down. Here it is:

"I can appreciate Ron Paul’s libertarian philosophy. And because this is so, it pains me all the more to say what I am about to say. The guy can be a real pinhead at times. And this is never so evident as in his persistent “attacks” against the Fed.

Now, of course, I work at the Fed, so maybe you think I’m just complaining for the sake of defending my employer. If you think that, I can understand why you do. It is because you do not know me.

There are legitimate arguments one could make against the Fed as an institution and/or about the conduct of Fed policy. And then there are the stupid arguments, for example, the one contained on pg. 25 of his book End the Fed:

"One only needs to reflect on the dramatic decline in the value of the dollar that has taken place since the Fed was established in 1913. The goods and services you could buy for $1.00 in 1913 now cost nearly $21.00. Another way to look at this is from the perspective of the purchasing power of the dollar itself. It has fallen to less than $0.05 of its 1913 value. We might say that the government and its banking cartel have together stolen $0.95 of every dollar as they have pursued a relentlessly inflationary policy."

One might indeed say that, Mr. Congressman. But if one did, one would behaving like an opportunistic politician, which I know you are not.

Now, let us examine what is wrong or misleading in the statement above.

First, with the exception of the last sentence (which he weasels around with his “one might say”), there is nothing factually incorrect. Indeed, the data source cited by Paul is (ironically enough) the Federal Reserve Bank of St. Louis. (I’m glad he trusts us enough for some things.)

So the question is not whether he has his facts straight on this matter. The question is whether these facts matter at all.

There is this old idea in monetary theory called money neutrality. Money neutrality means that larger quantities of money ultimately manifest themselves in the form of higher nominal prices (and wages), and not on real quantities. No serious economist disputes the idea of long-run money neutrality.

Yes, what cost $1 in 1913 now costs $20. But so what? Money neutrality states that if you were earning $1 per hour in 1913, you are now earning $20 per hour (and even more, if labor productivity is higher).

So there you go, the Fed is responsible for increasing your nominal wage by a factor of 20. How do all you workers out there like them apples? Ron Paul wants to rob you of these wage increases!

Here is another example of the Congressman misleading the public (perhaps unintentionally); see his recent interview here with CNBC’s Larry Kudlow: Fed Under Fire.

At the 3:50 mark, Kudlow asks Paul: “Would oil be at $102 a barrel now if we had a sound dollar policy?” Paul’s reply is that, if Bretton Woods had not been abandoned (in 1971), oil would now be trading closer to $5 a barrel.

I ask you…how embarrassing of an answer is that? I mean, maybe oil would be trading at $5 a barrel. But what he is implicitly suggesting is that your nominal wage would not be scaled back in proportion. That is, he is suggesting that by cutting the value of paper, the Fed has somehow diminished the purchasing power of your labor over the past 100 years. Can he be serious?

The Congressman evidently suffers from money illusion. It is an affliction that can be forgiven in most people. But not one who likes to think of himself as a person learned in the finer principles of monetary theory.

And, as an aside, am I the only one who chuckles whenever he berates the Fed for creating money “out of thin air?” (I reiterate, there may be many legitimate complaints one could make against the Fed, but the “out of thin air” charge…well, let’s just say it…lacks substance).

Is it not true that the Treasury also creates its debt “out of thin air?” Do you think getting rid of the Fed (which, in conducting monetary policy, is simply swapping one form of thin air for another) will prevent Congress from issuing its own thin air? Do you really believe that a gold standard would mitigate the government’s ability to tax? (Seigniorage revenue for the U.S. is peanuts as a fraction of total taxation. Moreover, keep in mind that the inflation tax is collected off of foreigners as well.)

Let me conclude by saying that I think that America is, on the whole, well-served by having a voice like Ron Paul in Congress. I’d like to invite him to the SL Fed for lunch one day. I’d ask him to tone down his rhetoric and present his (frequently very good) arguments in a more sober manner.

But maybe this is too much to ask of a politician. Even a libertarian one."

Andolfatto had a follow up post here.

It's back!

It is with great pleasure that I welcome Jonathan Catalan and Mattheus Guttenberg back to the economics blogosphere. Economic Thought is up and running again. There are three posts up:

- There's one post on Sumner and the Great Depression.
- One on the modern Austrian school.
- And one that's a little more self-reflective.

A great line from David Henderson

At a talk he gave at Occupy Monterery:

"There's a common view that when markets are free, the rich get richer and the poor get poorer. It's not a total myth: it's half true. The rich get richer, the poor get richer, and pretty much everyone else gets richer."

A clever OWS-Monterey attendant that thinks in terms of rates of growth and convergence and divergence might have realized this dodges the inequality point somewhat. But I still like the line and it is still, of course, 100% true even if it leaves more to be discussed.