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Brooks Wilson's Economics Blog: August 2010

Tuesday, August 31, 2010

Barro on Obama’s Policy Objectives

Robert Barro, a creative and influential Harvard economist, published an opinion article, “The Folly of Subsidizing Unemployment,” that makes several interesting points besides the point made in the title.  Barro faults the Obama administration with being more concerned with transforming the American economy than ending the Great Recession.  He writes
In general, the current administration has been too focused on expanding government, redistributing more from rich to poor, and stimulating aggregate demand. I have previously criticized the stimulus package as cost-ineffective. In particular, whatever tax reductions were in the package did not involve the cuts in marginal income tax rates that encourage investment, work effort and productivity growth.

Now the administration wants to kill the 2003 income-tax cuts, at least the parts that reduced marginal income tax rates for high-income earners and for all recipients of dividend income. This proposal is particularly disturbing because the 2003 law was George W. Bush's main economic achievement; unlike most of Mr. Bush's policies, this one was well-conceived and effective.
I agree with Barro’s criticism.  To the extent that a president can influence economic activities, I believe that influence should be directed toward ending the recession without compromising long-run growth, not changing America.  I also believe that economic evidence suggests that the presidency has limited means to combat recessions and that President Obama’s main objective may not be to end the recession but to change American. David Kennedy, a Stanford historian and author of Freedom from Fear, a book about the Roosevelt administration, and a guest on EconTalk, offers the opinion that Roosevelt’s main objective was not to end the Great Depression but to fundamentally alter the American economy to improve the welfare of the poor and reduce economic risk.  Kennedy said,
There’s a deeper story; I’m going to try to develop a little thesis. I think I can make a case that Roosevelt's top priority was not ending the Depression as soon as possible. His top priority was to use this moment of political, sociological, ideological disruption, malleability, to accomplish reforms that he had thought well before the Great Depression came along that were necessary to make modern American life viable.

A single word that sums up that objective that is in the title of the single most famous piece of legislation that comes down to us from that era, the Social Security Act.  Security is unmistakably the touchstone and core of everything he wanted to accomplish: take the risk out of old age, mortgage lending, securities trading--or at least reduce the risk in all these sectors; and to make American life across the board for individuals and institutions more predictable and less susceptible to these wild ups and downs that had been characteristic of the American economy since the early 19th century, since the United States had entered the early industrial revolution era.

He got a lot of that accomplished. He established the Securities and Exchange Commission, passed Unemployment Insurance, created Fannie Mae, and created the Federal Housing Authority.  Those things worked well for half a century.
Perhaps future historians will not judge the Obama presidency on the effectiveness of the programs he instituted on ending the Great Recession but on how he transformed American by extending health coverage to the poor, improving diets, expanding “green” energy while simultaneously limiting the use of fossil fuels. 
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Sunday, August 29, 2010

Equality Before the Law or Equality of Outcome?

Anatole France (1844-1924) throws a jab, or maybe a haymaker, at market based economies and the law that undergirds it in his novel, The Red Lily (Book 1, Chapter 7).

The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets, and to steal bread.

How would I respond as an economist steeped the tradition of Adam Smith?  Wealthy societies are based on equality of process including equality before the law, and not on the implied equality of outcomes.  Taking earnings from one person or group to give to another weakens incentives to produce of both.  Market based economies do produce enormous disparities of outcomes but where do the poor fair better? 

I doubt that my comment would leave Anatole France speechless.

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Friday, August 27, 2010

Defining Unintentionally Beneficial Actions

Conflict of Visions by Thomas Sowell is full of insights into how social philosophers view the nature of man, the acquisition of knowledge, and social decision making, and I will have more to write on that in a future post, but first I will reproduce a table Sowell reproduces from William Godwin’s Enquiry Concerning Political Justice

  Beneficial Harmful
Intentional Virtue Vice
Unintentional   Negligence

Godwin uses a table to categorize a person’s actions as based on outcomes.  Actions are either “Intentional” and “Unintentional,” and outcomes, “Beneficial” and “Harmful.”  Intentional actions that are beneficial circumscribe virtue and intentionally harmful actions, vice.  Unintentional harmful actions are defined as vice.  Godwin did not define actions that are unintentionally beneficial and I believe that many others would have similar difficulty but Adam Smith did not when he penned the words describing the social outcome of self-interest in a market economy in An Inquiry into the Nature and Causes of The Wealth of Nations.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. 

The poor are fed, the naked, dressed and the lame, healed by self-interest.  I am not sure at what point self-interest turns to greed; the terms are often used interchangeably.  But it is interesting that the same motivation, greed, which may damn a soul to hell, may not be so bad when constrained by market forces.

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Wednesday, August 25, 2010

Competition and Bias

During the first week of my classes, I emphasize the importance of the scientific method in improving critical thinking and limiting biases.  Drawing upon the work of others, using math to express relationships, empirically testing hypotheses, and the peer review process of publishing scientific papers all work toward this end.  In the preface of their book, Saving Capitalism from the Capitalists, Raghuram Rajan and Luigi Zingales describe their methodology and the nature of bias in scientific progress.  The emphasis added is mine. 

This book is also more than simply a survey of a literature—it weaves a broad argument.  While we will marshal historical facts, and draw on our own studies, as well as the studies of others, history gives us few natural experiments with which to test all aspects of broad argument.  Therefore, at certain junctures, we will try and persuade the reader as much by logic as by the historical authorities and evidence we cite.

The purist may not approve of this approach.  Unfortunately, any attempt at integration of different fields, and evidence across time and studies, is usually unsatisfactory to purists, partly because the weights on places on different aspects are pregnant with biases.  We would apologize for these were it not for our firm believe that bias is inevitable in all work, and it is competition between biases that generally drives thought ahead.

Competition between biases must work toward advancing science and knowledge, but it also explains why progress in social science is often painfully slow. 

I suspect that biases are defined by what Thomas Sowell describes two widely held visions, “what we sense or feel before we have constructed any systematic reasoning that could be called a theory,” of how the world operates in Conflict of Visions.  Both visions are logical constructs and have endured for centuries.  They also lead us to interpret data differently leading those lead by one vision to talk past those lead by the other.  Critical thinking and competition of ideas may be imperfect tools, but they are the tools we have. 

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Tuesday, August 24, 2010

Confirmation Bias (Repost II)

As classes begin, I urge students to avoid confirmation bias. Robert T. Carroll of the Skeptic's Dictionary describes confirmation bias as
a type of selective thinking whereby one tends to notice and to look for what confirms one's beliefs, and to ignore, not look for, or undervalue the relevance of what contradicts one's beliefs.
Expose yourself to new ideas. Students tend to think of economics in terms of the Democrat and Republican debate. Although economists are often partisans, their debates frequently turn on a different axis. For example, economists might debate the relative effectiveness of monetary policy and fiscal policy in achieving full employment. Both a Democrat and a Republican might favor stimulative fiscal policy but differ on who gets tax cuts. Many of the economists who believe that fiscal policy is effective may not like the tax cut plans of either party.

Greg Mankiw posted a letter from the "perfect" student in “A Question about Learning Economics,” or at least that's how I think the student. The student reads books by economists with very different perspectives, and respectfully engages professors in discussions. The student mentions having a professor who was a Friedman disciple and another who was New Keynesian. Mankiw's reply is sold. In part, he writes,
You are lucky that you have professors with different viewpoints. Your job, as a budding economist, is to learn from all of them. Ideally, at the end of the day, you should be able to understand and appreciate (although not necessarily agree with) each point of view. You should try to construct in your mind a debate between your Friedmanite professor and your Keynesian professor. What points would each raise, and how would the other respond?
In a valuable EconTalk, Ian Ayers suggests that listeners attempt to name things that they have learned but that they don't like. If you can't think of any, you are a biased consumer of education.
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Monday, August 23, 2010

Runners Then and Now

When I was young, I ran a 5:02 mile, 16:00 three miles, and several sub one hour ten miles.  Those are good times but they would not impress real runners.  Cameron Stracher starts his Wall Street Journal article with the in-your-face title, “Slow and Steady Loses the Race: U.S. runners are pokier than they were in 1979.”  This title gave me perverse pleasure and pride.  He begins,
This summer, more Americans than ever have laced up their running shoes and entered road races. That's the good news. The bad news is that America's runners have never been slower, fatter or more out of shape. How is this possible? How can running enjoy a new wave of popularity while the sport itself has never been in more trouble? The answer lies in the peculiarity of foot races on the road.
As I read, I began to doubt that my generation was faster than today’s.  I thought that the explanation was easy.  If there are more runners, it is very likely that the increase came from slower runners joining races.  Stracher fires his first salvo pointing out that median times for marathons have increased from 3:32:17 in 1980 to 4:13:36 in 2009.  But my explanation is insufficient to cover all his observations.  In his second salvo he points out that fewer runners are matching past marathon qualifying times and that there are fewer “sub-elite” or club runners. 

After my first doubt was shot down, but I noted that he offers no data beyond slower times to support his contention that “America’s runners have never been slower, fatter or more out of shape.”  Before I accept his claim, and acknowledge my generation as America’s fastest, I want to know if the average age of American runners has increased with the general population, or if there are a larger percentage of women runners.  In a flight of fancy, I would like more direct evidence like the average weight, height, or percent body fat or runners then and now, but doubt that such evidence exists.  Indirect evidence will have to do.   

Why are runners slower?  Stracher suggests counter intuitively that the first running boom in the 1970’s is the culprit.  Americans began to view running as a pastime and not a sport.  I am looking forward to his book on the running craze of the 1970s.  I was there.  I wonder if my data point fits his aggregate data.  I hope he elaborates on his hypotheses about American runners.

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Experts Vs. Partisans (Repost II)

I love college football; my favorite team is Southern Cal and it has been since I was ten. I love tailgating before the game, and walking into the stadium in a wave of cardinal. Then the game starts. USC defers to the second half.  Chris Galippo smacks a back for a five yard loss and the band plays Conquest. Matt Barkley hits Ronald Johnson on a slant up the middle for a thirty yard gain and the band plays Conquest. The band plays Conquest a lot. After the game, the players, the band, and the fans gather at one end of the stadium to chant traditional cheers, often led by players. I love being a fan and surrounded by other fans.>

If I had money on the game, I would not listen to my fellow fans; I wouldn’t even trust my own opinion. As a fan, I am too emotionally involved in the game. With money on the game, I would look at a computer model, or read what an expert or experts say. I would also try to get a consensus opinion of experts by looking at the Las Vegas betting line, or prediction markets. Experts and aggregations of experts somehow stay above the fray and remain objective.
There is a similar relationship between economists, politicians, and citizens; economists are the experts and politicians are the players, the media, the band, and voters, the fans. Politicians and voters are partisans, allegiance to the team comes before objectivity. Politicians enact policy through law, and economists study the impact of policy and advise politicians. Politicians need good positive economics to achieve their normative goals. But if I were a politician, I would like to know my advisors had my back, and would not hire an advisor unwilling to show allegiance.

Economists advising politicians walk a fine line between holding to their science and remaining objective, or becoming partisans. Occasionally, a good advisor might contradict the politicians they advise as did Greg Mankiw when he said,
Romney has had to distance himself from his top economics adviser after Mankiw _ a Princeton-trained economist now teaching at Harvard _ voiced his support for an immigration bill Romney strongly opposes [1].
At some point, an economist must become a partisan, or at least bite his tongue when his team supports policy that contradicts good science as Greg Mankiw did when he supported tax cuts that important Bush administration officials said would raise tax revenues. Mankiw is on the record as stating that tax cuts don’t increase tax revenue. He took incoming fire from fellow economists for his silence, but defended himself by parsing words, noting that, “Being opposed to a tax cut as a policy and being critical of an argument for tax cuts are two different things. [2]” In response to Mankiw’s relative silence and awkward position on the revenue impact of the tax cut, Brad DeLong noted,
Mankiw was indeed correct in thinking that he personally could do more good for the country and the world working inside than if he were to march up to Dick Cheney, tell him "you have to stop saying that tax cuts raise revenues," and so get fired. But the Bush administration did frequently argue that tax cuts raised revenue. And there is the much harder question: is it worth the sacrifice of the economics profession's outside credibility and the further confusion of the public that is entailed when good economists defend bad policies on the outside that they are working to change on the inside? I don't know the answer to that.
The world has need for both experts and partisans, and it is difficult to do both simultaneously. Anyone who reads my blog for any period of time will note that I do not like economists surrendering their science for partisanship. I believe that most economists share my sentiments. I hope that I can be fair.

[1] Glen Johnson, “Romney Finds Advisors Both Help And Hurt,” The Washington Post, June 19, 2007.

[2] Nathan Strauss, “Mankiw Defends Tax Cut Stance, Faces Online Flak,” The Harvard Crimson, July 13, 2007.

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Friday, August 13, 2010

Krugman: An Economist with an Unconstrained Vision of Man

Paul Krugman is something of an enigma to many academic economists.  His peer reviewed work is deserving of the Nobel Prize he won, but his column for the New York Times is often full of insults towards opponents, exaggerated claims in favor of his position or against those he views as political opponents.  For example, in "War and non-remembrance," Krugman claimed Harvard economist, Robert Barro, made a "boneheaded" argument "against the effort" of securing a Keynesian stimulus, and that he should read Keynes before criticizing him.  John Cochrane, a University of Chicago economist, described his thoughts on Krugman's rants in "How did Paul Krugman get it so Wrong?"
Many friends and colleagues have asked me what I think of Paul Krugman’s New York Times Magazine article, “How did Economists get it so wrong?”

Most of all, it’s sad. Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses. If a scientist, he might be an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all.

It gets worse. Krugman hints at dark conspiracies, claiming “dissenters are marginalized.” Most of the article is just a calumnious personal attack on an ever-growing enemies list, which now includes “new Keynesians” such as Olivier Blanchard and Greg Mankiw. Rather than source professional writing, he plays gotcha with out-of-context second-hand quotes from media interviews. He makes stuff up, boldly putting words in people’s mouths that run contrary to their written opinions. Even this isn’t enough: he adds cartoons to try to make his “enemies” look silly, and puts them in false and embarrassing situations. He accuses us of adopting ideas for pay, selling out for “sabbaticals at the Hoover institution” and fat “Wall street paychecks.” It sounds a bit paranoid.

It’s annoying to the victims, but we’re big boys and girls. It’s a disservice to New York Times readers. They depend on Krugman to read real academic literature and digest it, and they get this attack instead. And it’s ineffective. Any astute reader knows that personal attacks and innuendo mean the author has run out of ideas.
I too was perplexed until I began rereading "Conflict of Visions" by Thomas Sowell.  A vision is our sense of causation before we apply systemic reasoning or build a theory to explain a phenomenon.  Visions are important because they are the foundation of theories and why people are consistently liberal or conservative on most issues.  Sowell describes two visions, the constrained and unconstrained, and how they view the nature of man, knowledge and social processes. 

Cutting to the chase, Krugman has an unconstrained vision of man and many of his critics, a constrained vision.  Why is Krugman's writing so full of personal attacks?  Sowell writes,
Sincerity is so central to the unconstrained vision that it is not readily conceded to adversaries, who are often depicted as apologists, if not venal. It is not uncommon in this tradition to find references to their adversaries’ “real” reasons, which must be “unmasked.” Even where sincerity is conceded to adversaries, it is often accompanied by references to those adversaries’ “blindness,” “prejudice,” or narrow inability to transcend the status quo.
His constrained vision critics place emphasis on fidelity to roles, in this case as scientists, above sincerity making it easy to acknowledge opponent's sincerity.  Why the exaggerations?
Both sincerity and fidelity can be seen as aspects of honest--but as very different aspects, weighed differently in the opposing visions.  The constrained vision in particular distinguishes sincerity from fidelity to truth: “The first thing a man will do for his ideals is lie,” according to J. A. Schumpeter.
Before proceeding, it might be important to demonstrate that Krugman is not opposed to exaggeration for his ideal, the public good.  Krugman weighs-in in "Pop Internationalism.
Many people who know that "competitiveness" is a largely meaningless concept have been willing to indulge competitive rhetoric precisely because they believe they can harness it in the service of good policies. An overblown fear of the Soviet Union was used in the 1950s to justify the building of the interstate highway system and the expansion of math and science education. Cannot the unjustified fears about foreign competition similarly be turned to good, used to justify serious efforts to reduce the budget deficit, rebuild infrastructure, and so on?

A few years ago this was a reasonable hope. At this point, however, the obsession with competitiveness has reached the point where it has already begun dangerously to distort economic policies.
Economists who hold to the constrained vision believe that they are acting in the public interest by acting as scientists; good facts lead to good policy.  Krugman (and many who support his policies) holds to the unconstrained vision, that he is acting in the public interest by persuading people to support his positions; good policy produces happier citizens.  While not judging which vision is correct, I know I would rather read Krugman's critics when forming my opinions. 

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Thursday, August 12, 2010

Samuelson on Population Growth and Deficits

Throughout most of my life, many social scientists have warned of a Malthusian population bomb that threatens our planet's limited resources. Thomas Malthus (1776-1834), an influential economist, observed that population tends to grow geometrically and food production, arithmetically. But here the similarity between many of today's demographers and Malthus ends. He concluded that mankind was not starving so other economic forces must be at work to extend life and that it was the role of the economists to study these forces.

With the aging of Western countries, economists are revising theories of population growth and finding that there is much to recommend at least stable populations. Robert Samuelson explores the impact of population growth on the U.S. economy and discusses tax policies to encourage birth in "Taxes, Fertility and Economic Growth."
...a budget is not just a catalogue of programs and taxes. It reflects a society's priorities and values. Our society does not -- despite rhetoric to the contrary -- put much value on raising children. Present budget policies punish parents, who are taxed heavily to support the elderly. Meanwhile, tax breaks for children are modest. If deficit reduction aggravates these biases, more Americans may choose not to have children or to have fewer children. Down that path lies economic decline.
Societies that cannot replace their populations discourage investment and innovation. They have stagnant or shrinking markets for goods and services. With older populations, they resist change. For a country to stabilize its population -- discounting immigration -- women must have an average of about two children. That's a "fertility rate" of two. Many countries with struggling economies are well below that. Japan's fertility rate is 1.2. Italy's is 1.3, as is Spain's...

The U.S. fertility rate isn't yet close to these dismal levels. In 2007, it was at the replacement rate of 2.1 children per woman, reports the National Center for Health Statistics...

While having a child is a deeply personal decision, it's also shaped by culture, religion, economics and government policy...

We need to avoid Western Europe's mix of high taxes, low birth rates and feeble economic growth. Young Americans already face a bleak labor market that cannot instill confidence about having children. Piling on higher taxes won't help. "If higher taxes make it more expensive to raise children," says demographer Nicholas Eberstadt of the American Enterprise Institute, "people will think more about having another child." That seems common sense, despite the multiple influences on becoming parents.

How to reconcile this with deficit reduction is unclear. From 2011 to 2020, the Obama administration projects budget deficits of $8.5 trillion. Other estimates are higher. Even if spending and benefits for the elderly are cut -- as they should be -- higher taxes will still almost certainly be needed. Parents ought to be shielded from the steepest increases.

Any tax system rewards some activities and punishes others. A case in point is the mortgage interest rate deduction that rewards people for buying larger homes with more debt. We might reduce this dubious subsidy and shift some savings toward children. Stein advocates combining pro-child tax breaks (the personal exemption, the child tax credit, the child-care credit and the adoption credit) into one generous credit. Whatever the details, policies should have a pro-family bias because parenting is, as he writes, "one of the most important services any American can perform."

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Wednesday, August 11, 2010

I Will Gladly Pay Tomorrow (2014) for a Stimulus Today

Three articles about fiscal stimulus caught my attention.  The first, "We Need a New Recovery Plan" (The Daily Beast), is by Nobel Laureate Robert Solow.  He uses traditional Keynesian rhetoric to describe the current state of the economy: given the deep recession, monetary policy is ineffective and private sector growth is unlikely because of few profitable opportunities.  Solow writes, "That leaves a choice between prayer and fiscal policy."  Recognizing the country's impending debt growth due mainly to underfunded entitlements, he makes his recommendation.

The right response is stimulus now plus a credible plan to decrease the debt/GDP ratio when unemployment and idle capacity have been reduced to acceptable levels. Unfortunately the federal government doesn’t have much credibility these days. An intelligent, non-suicidal recovery plan might actually help.

The second article, "$26-billion aid package for states becomes law" (The Los Angeles Times), outlines measures in the new Act that will fund cash-strapped states' programs to save the jobs of teachers and other government employees, and preserve Medicaid programs.  Increased spending now will be paid for by cutting food stamp funding beginning in 2014 and increasing taxes now on American firms operating internationally.  The $26 billion stimulus is probably too small to satisfy Solow but otherwise meets his recommendation of spending now and paying for it later. 

The reaction to the bill by many advocacy groups has been predictable and demonstrates the difficulty any Congress and administration will have in reducing future deficits ("Democrats, Advocacy Groups Blast Cuts to Food Stamps to Fund $26B Aid Bill," FOXNews).  They oppose the spending cuts to the food stamps program even though the Act would only reduce expenditures to pre-stimulus levels.  Paul Ryan (R-Wis) claims that the bill would reward teachers unions who are political allies of the administration and irresponsible states that have been ineffective in controlling mounting debt at the expense of responsible states. 

To repeat my oft stated position, I do not have a strong opinion about the effectiveness of stimulus spending.  Empirical evidence supporting it tends to be weak and contradictory empirical studies, abundant.  The nature of financial crises and regime uncertainty as developed by Robert Higgs are more likely causes of slow growth and lingering high unemployment than a lack of deficit spending.  We should encourage private sector growth by removing regulatory uncertainty.  I agree with Ryan that we should not reward profligate states; this type of bailout is part of the problem, not the cure.  If our choice is truly between prayer and fiscal policy; it is probably as effect and it is cheaper.   

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Tuesday, August 10, 2010

Sue Your Spouse's Lover?

Fantasia Barrino, an American idol winner, is named as the "other woman" in a divorce case in North Carolina where a spouse can sue a third party for alienation of affection.  Barrino has not been sued but in North Carolina the wife does not need to prove adultery, although there is a sex video, but she does need to prove alienation of affection.  The husband will claim that there was no affection.  In "Fantasia Barrino Allegedly Has a Sextape Video with a Married Man...Could It Cost Her Millions?," Meg G. sums up her thoughts about the North Carolina law permitting spouse to sue third parties for adultery.

...maybe the world would be a better place if there were more laws such as these laws from NC. Maybe people would think twice about going behind their spouses back, and maybe people would think twice before having an affair with a married individual. As such, the nature of the human race won't likely change - but at least there would be harsher consequences.

I agree with Meg G. that maybe such laws would cause a husband, wife, or their potential lovers to think twice before having an affair.  After all, people respond to incentives.  I also agree that human nature probably won't change.  That is exactly why such contracts exist, to provide incentive for people to act in socially beneficial ways. 

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Monday, August 9, 2010

Passengers on a Small Boat

From Paul Seabright, via Peter Gordon via Greg Mankiw:

Politicians are in charge of the modern economy in much the same way as a sailor is in charge of a small boat in a storm. The consequences of their losing control completely may be catastrophic (as civil war and hyperinflation in parts of the former Soviet empire have recently reminded us), but even while they keep afloat, their influence over the course of events is tiny in comparison with that of the storm around them. We who are their passengers may focus our hopes and fears upon them, and express profound gratitude toward them if we reach harbor safely, but that is chiefly because it seems pointless to thank the storm. (p. 25)

Greg Mankiw calls this a wise passage.  I like it as well but differ with some aspects of the analogy with a few qualifications.  I have not read Seabright's book, "The Company of Strangers: A Natural History of Economic Life (Revised Edition)," from which the passage comes so I might be taking his meaning out of context.  When examined too closely, all analogies breakdown and I may be pushing this analogy further than Seabright intended; I could not come up with something better.

Politicians are not in charge of the modern economy and we are not merely passengers.  They, like the rest of us, have functions on the small boat.  Our role is to provide spontaneous order, that is order "of human action but not the execution of any human design" (Adam Ferguson), and theirs, directed order.  The passage also ignores the symbiotic relationship between the economy and both the spontaneous and directed order.  Because most of our economic actions are spontaneous and because spontaneous organizations evolve over long periods, we sometimes forget that the economy is largely the result of our spontaneous actions combined with our coordinated actions through our polity.  Economic storms can develop because of an exogenous shock (a tsunami), bad spontaneous decisions (irrational exuberance), or bad politically ordered institutions (Smoot--Hawley Tariff Act).  Once the storm is upon us, no economic agent, including the sailor in charge of the small boat, has much control of the course of events.  I agree with Seabright that we tend to "focus our hopes and fears upon" politicians but I wonder why.  It seems to be as pointless as thanking the storm. 

The passage also ignores periods of calm between the storms and the bounty the sea provides for us.  As during the storm, we seem to focus our hopes and fears upon politicians.  I again wonder why.

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Sunday, August 8, 2010

Bad Experimental Design

From the right, a newly released CBS news video feed from September 2008 showing Katie Couric lambasting  the names of Sarah Palin's children, Trig and Track ("Where the hell do they get these [names]?"), is being used by some conservative groups to demonstrate Katie Couric's bias against all things conservative ("Couric's Palin vid leaked").  What is lacking is experimental control, a film of Couric reaction to the unusual names of a liberal's kids, perhaps Calc and Econ.  Even then the number of observations would be so small to make a strong conclusion. 

From the left, James Harrington, a pastor, set up a mock fight between two black men to test the reaction of an invited speaker, a white police officer ("Police: Officer Baited In Altercation That Injured Him").  Again there is no experimental control.  How would the same cop react to a fight between two white men?

We can't always make decisions on controlled experimentation, but we should be careful about the conclusions we draw without it. 

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E-Books: A Market Innovation

E-book sales are currently 8% of the book market but are projected to rise to 20 to 25% of the market in 2012 Jeffery A. Trachtenberg writes for the Wall Street Journal in "Mass Paperback Publisher Goes All Digital."  The article relates the travails of Dorchester Publishing Inc., which publishes most romance novels.  The company's book unit has lost 25% of books sales in one year and will be making its books digital only with print on demand. 

I recently purchased my first e-reader.  I enjoyed the reading experience.  There is no hump near the binding; the entire page is flat.  I love the prospect of buying more than a thousand books that take up about the same space of a fifty page pamphlet.  I have found book marking and moving through pages somewhat awkward.  Perhaps it is my age, but I would still prefer a hard copy of any technical material.  I just haven't figured out how to make notes in the margins of my e-books. 

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Saturday, August 7, 2010

The Obama Administration's Drilling Ban

Two articles, both from the Wall Street Journal address aspects of the Obama administration's drilling ban.  The first, "No Specific Timeline for Ending Drilling Ban, Regulator Says," written by Stephan Power, quotes Interior Department official, Michael Bromwich, who said that the drilling ban which is set to expire November 30 will not be reconsidered until at least mid-September, and that the ban threatens up to 20,000 jobs and has resulted in millions of dollars of lost wages.

The second article, "The World Drills On," which appears in the Review and Outlook column notes that Norway, Australia, Canada, and the United Kingdom, all countries with governments sensitive to environmental issues that are continuing and expanding deep water drilling.  Countries less sensitive to those issues, like Brazil, are expanding production as well.

One has to question the rationality of U.S. policy that alone sees the Deepwater Horizon spill as representing a new unmanageable high risk threat to the environment rather than an unfortunate low probability, high risk event.  One also has to question the commitment to reducing carbon emission of many countries that for years have complained about our lack of commitment.  If less oil is produced, less oil will be consumed. 

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Friday, August 6, 2010

I Obscenity in Your Gas Tank!

(HT Drudge Report) In "For Whom the Bell Tolls," Hemingway creates a great many characters who use various terms for defecate as profane insults.  Rather than fill his pages with profanity, Hemingway censors these profanities with a polite, "I obscenity in your..."  British engineers may have twisted the profane insult into a benediction giving new meaning to the words, "fill it up!"  (Laura Roberts,, "Bio-Bug: Car run on human waste is launched")
The Bio-Bug has been converted by a team of British engineers to be powered by biogas, which is produced from human waste at sewage works across the country...

Excrement flushed down the lavatories of just 70 homes is enough to power the car for 10,000 miles - the equivalent of one average motoring year.

This conversion technology has been used in the past but the Bio-Bug is Britain's first car to run on methane gas without its performance being reduced.

It can power a conventional two litre VW Beetle convertible to 114mph.
I noticed that the cost of the methane gas derived from waste was not mentioned.  The economic question is can engineers convert this cool technological invention into a market innovation? Replace this text with...
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Thursday, August 5, 2010

Rogoff Compares Japanese, U.S., and European Financial Crises

Kenneth Rogoff is one of the nation's foremost scholars on financial crisis. With Carmen Reinhart, he coauthored the popular and widely cited book "This Time is Different: Eight Centuries of Financial Folly." Rogoff has the talent of engaging in politically charged economic debate without partisan rancor.  Rogoff compares the ongoing financial crises in the United States and Europe to the crisis in Japan that evolved into the "lost decade" in "An Age of Diminished Expectations?"  The article is short and well worth the time to read highlighting similarities and many differences between the economies as they entered their financial crises.  I have focused on paragraphs that describe policies that might help the United States exit the Great Recession and resume more robust growth. 
As the United States and European economies continue to struggle, there is rising concern that they face a Japanese-style “lost decade.” Unfortunately, far too much discussion has centered on what governments can do to stimulate demand through budget deficits and monetary policy. These are key issues in the short term, but, as every economist knows, long-run economic growth is determined mainly by improving productivity...
In the short term, it is important that monetary policy in the US and Europe vigilantly fight Japanese-style deflation, which would only exacerbate debt problems by lowering incomes relative to debts. In fact, as I argued at the outset of the crisis, it would be far better to have two or three years of mildly elevated inflation, deflating debts across the board, especially if the political, legal, and regulatory systems remain somewhat paralyzed in achieving the necessary write-downs.

With credit markets impaired, further quantitative easing may still be needed. As for fiscal policy, it is already in high gear and needs gradual tightening over several years, lest already troubling government-debt levels deteriorate even faster. Those who believe – often with quasi-religious conviction – that we need even more Keynesian fiscal stimulus, and should ignore government debt, seem to me to be panicking.

Last but not least, however, it is important to try to preserve dynamism in the US and European economies through productivity-enhancing measures – for example, by being vigilant about anti-trust policy, and by streamlining and simplifying tax systems.

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Wednesday, August 4, 2010

Geithner on the Economy

Treasury Secretary Timothy Geithner was interviewed about unemployment and the impending sunset of Bush era tax cuts by George Stephanopoulos on ABCs Good Morning America.  Kate McCarthy and Rich McHugh summarize the interview in "Treasury Secretary Timothy Geithner: Unemployment Could Go Up Before It Comes Down."  The headline focused on Geithner's forecast that unemployment might go up before in goes down even with an improving economy. 

This phenomenon is taught in many principles classes and is explained using a numerical example in "The Unemployment and Labor-Force Participation Rates."  To summarize the numerical example, the unemployment rate is an imperfect statistic.  To be counted as unemployed, a worker must actively seek employment.  As workers become discouraged, the unemployment rate can fall as the economy worsens.  The opposite can happen as the economy improves.  Discouraged workers, finding new hope in an improving economy, start seeking employment.  They are now counted as unemployed and the unemployment rate rises.

The sunset of the Bush tax cuts is a hot topic and Geithner explains the Obama administration's plans.

What the President believes is the best strategy for the country is to extend the tax cuts that go to more than 95 percent of Americans, more than 95 percent of small business. Keep taxes on capital income low going to moderate...
The administration is in a tough position.  They must simultaneously argue that tax increases on 95% of the Americans are bad while increases on the remaining 5%, the rich, are good.  Perhaps they will argue that the rich got theirs in form of the TARP, the Wall Street bailout, but only a small fraction of the rich, Wall Street commercial and investment bankers, directly benefited.  Extraordinarily low interest rates maintained by the fed also benefit Wall Street bankers and harm savers, and America needs to save more.  Why is trickle-down economics that extends tax cuts to all Americans including the rich bad while trickle-down policies Wall Street good?

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Tuesday, August 3, 2010

A Manifesto for Stimulus Spending

My training is primarily in microeconomics.  I know enough about macroeconomics to discuss it but not enough to lose my humility.  As I explain below, I do not support additional stimulus spending but many do including forty economists and historians including three Nobel Laureates (Stiglitz, Maskin, and McFadden) who signed a manifesto in the Daily Beast.  The manifesto reads ("Get America Back to Work"),
Fourteen million unemployed represents a gigantic waste of human capital, an irrecoverable loss of wealth and spending power, and an affront to the ideals of America. Some 6.8 million have been out of work for 27 weeks or more. Members of Congress went home to celebrate July 4 having failed to extend unemployment benefits.

We recognize the necessity of a program to cut the mid- and long-term federal deficit but the imperative requirement now, and the surest course to balance the budget over time, is to restore a full measure of economic activity. As in the 1930s, the economy is suffering a sharp decline in aggregate demand and loss of business confidence. Long experience shows that monetary policy may not be enough, particularly in deep slumps, as Keynes noted.
The urgent need is for government to replace the lost purchasing power of the unemployed and their families and to employ other tax-cut and spending programs to boost demand. Making deficit reduction the first target, without addressing the chronic underlying deficiency of demand, is exactly the error of the 1930s. It will prolong the great recession, harm the social cohesion of the country, and continue inflicting unnecessary hardship on millions of Americans.
I believe that the manifesto oversells government's ability to "fine tune" the economy in the first sentence of the second paragraph.  Nearly all economists recognize the need for deficit and debt reduction, but waiting until the mid- and long-term is probably politically not feasible.  Students of economics know that an economist's definitions of mid- and long-term is not precise, nor are the men and women who signed the manifesto clear about when deficits need to be reduced, presumably after more robust employment has been achieved.  Given that much of the future deficits will be caused by underfunded entitlement programs such as Social Security and Medicare, the reluctance of the electorate to support entitlement cuts or tax increases, and the reluctance of politicians to buck the will of the electorate, I have doubts that our collective institutions can reduce the structural deficits.

The third paragraph is a Keynesian plea for funding an extension of unemployment benefits through deficit spending.  I believe that a good humanitarian case can be made for extending the benefits but not through deficit spending.  The manifesto claims that "Making deficit reduction the first target, without addressing the chronic underlying deficiency of demand, is exactly the error of the 1930s."  There have been two global financial recessions.  We did not use stimulus spending to lift us out of the first, the Great Depression, and over two trillion in stimulus spending has failed to lift us out of the second, the Great Recession.  There is a literature that supports stimulus spending, but it is disputed because many of the models used assume that stimulus spending works and automatically produce big multipliers.  I do not support continued stimulus spending, a strategy that might work, when impending deficits and debt crises, problems that will be made marginally greater through stimulus spending, will lower economic growth and employment for decades if they are not successfully resolved. 

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Monday, August 2, 2010

Roberts on the Financial Crisis

Russell Roberts will not win the Nobel Prize in economics.  That honor is reserved to number crunching theorists who extend the frontier of economic understanding of economists.  Roberts' contribution is to extend the frontier of economic understanding of non-economists and students, and he may have no peers.  He has written textbooks and novels.  He posts for the popular blog, Cafe Hayek, and is the host of EconTalk.  He has even produced a rap video contrasting the economics of Keynes and Hayek and students love it.  His latest project, "Gambling with Other People's Money," is an explanation of the inflating of the housing bubble, the ensuing financial crisis and steps that the government can take to avoid future crises.

The problem that draws Roberts' focus is that the government, time and time again, "socialized losses" while allowing private agents to retain profits.  At several points in the paper, Roberts paraphrases Milton Friedman who wisely described capitalism as a profit a loss system.  The profits encourage risk taking and the losses, prudence.  The financial system that developed from the interplay of large financial institutions, elected and appointed public officials, and other special interest groups was decidedly not capitalist.  It encouraged risk without prudence.  Roberts calls it crony capitalism. 

Roberts skillfully uses an allegory of a poker game to describe the incentives of all the players when losses are present and then how behavior changes when the fear of losses is reduced or eliminated.  The people at the allegorical poker table represent different types of economic agents: equity holders, debt holders, Fannie and Freddie, commercial and investment bankers, and consumers.  The behavior of each changed as the government shifted risk from these economic agents to taxpayers with dire consequences for the economy as a whole. 

Although the government receives a large share of criticism, it would be unfair to characterize the paper as an apologia for capitalism.  Market participants also draw criticism.  For example, besides their role in the symbiotic dance with regulators, commercial and investment bankers draw Roberts' criticism for following the perverse incentives, establishing faulty incentive based compensation, etc.

At the end of the paper, Roberts lists reforms that the government could make that would restore risk and reduce the likelihood of a future catastrophic economic event.  He believes that these changes would lower government outlays, reduce wealth transfers to the rich and reduce the probability or severity of future financial crises.  I think that he is on to something. 

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