Why We're Here

"The body politic is formed by a voluntary association of individuals: it is a social compact, by which the whole people covenants with each citizen, and each citizen with the whole people, that all shall be governed by certain laws for the common good."

-excerpted from the Preamble to the Constitution of the Commonwealth of Massachusetts.

A Brief Note on Connecticut

I'm not going to go deeply into the tragedy today in Connecticut, but I wanted to expand upon what Ezra Klein said this afternoon, that those who reflexively call for a moratorium on so-called political issues after events like this are, in fact, politicizing the event themselves.

At some point, we as a nation are going to have to decide to take these tragedies seriously. There is no one solution to this problem, and anyone who tries to tell you that there is is lying to you, or to themselves.

We need to improve our mental health screening processes. We need to vigorously enforce our existing firearms laws. These are non-negotiables if we want to reduce gun violence, especially that of the mass, nonsensical variety that is increasingly common in this country.

But inescapable from this issue is our self-annihilating relationship with guns. We cannot stop these absurd tragedies until we decide to stop sacrificing our fellow citizens on the altar of an unfettered Second Amendment. Our freedoms are sacred to us in this country, and mostly for good reason, but the cost of this stubbornly archaic interpretation of this particular freedom is paid by the people killed in these shootings and by their families. Anyone who thinks this interpretation is defensible ought to try and defend it to them.

Richard Posner on the Electoral College

Richard Posner offers a defense of the Electoral College in Slate. While acknowledging the faults of the barbarous relic, Judge Posner makes a solid point on demographics and geography. The Electoral College discourages candidates from campaigning in 'safe' states, forcing them to win over skeptical swing-state voters. I find this idea especially persuasive given the rise of monolithic 'movement conservatism.' It's not hard to imagine a candidate such as Senator Santorum spending all of his time working his base up into a thorough lather, while never venturing north of Louisville or west of Amarillo.

I disagree with Judge Posner's assertion that swing-state voters are the best voters. Here I feel he wades into dangerous voter analysis territory. This tracks with his admitted ambivalence to serious democracy, but no one's perfect, as they say.

Post-Election Roundup

Ta-Nehisi Coates' big picture review: Hippies Wander Into the Lions' Den, Maul Lions

Who voted for Mitt Romney? Funny you should ask... (Tom Scocca)

http://www.slate.com/articles/news_and_politics/scocca/2012/11/mitt_romney_white_voters_the_gop_candidate_s_race_based_monochromatic_campaign.html

Also, Ezra Klein on the, uh, optics.

http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/11/07/the-romney-campaigns-biggest-mistake-in-the-election/

Paul Krugman, quickly

Greg Ip on the validation of macroeconomics

Ezra Klein's got a posse, and they have charts.

Randall Munroe delicately and patiently explaining in precise detail the dissonance between the 'numbers' guys and the diviners of 'momentum.'


Note: Sorry for the ugly links. Blogger will not currently allow those links to, you know, link.

Repost: Evan Soltas, An Alternate View of Markets

If the average student remembers anything from a single-term economics course over the long run, it is the basic model of supply and demand.

He or she is taught that there exist microeconomic, and macroeconomic aggregate, supply and demand functions which codetermine the combination of real output and price for any particular good or service, and across the entire economy. He or she is taught that these forces push markets to equilibrium by draining surpluses through underproduction or price cuts -- or in the face of scarcity, expanding production or hiking prices. He or she is taught to think about markets as, in a word, orderly.

But what if that's wrong? Or, more precisely, what if the orthodox view of markets as self-organizing and equilibrating systems captures but the smallest sliver of their behavior? What if the vast majority of market behavior does not fit into such a model? What if the truth is that markets are ultimately more disorderly, more behavioral, more unstable, and more path-dependent than a primarily supply-and-demand framework allows us to understand?

Brittle, fragile, and chaotic is an entirely different characterization of markets, so much so that I find these the two visions difficult to reconcile. To get there, you may have to adjust your view of human nature -- we can't be, or maybe can't all be, intemporal optimizers in such a world. By teaching the orderly former so early on and so unequivocally, and to the near-total exclusion or extreme delay of the disorderly latter, it's worth asking if the emphasis on the supply-and-demand framework blinds economists, or if it leads them to dependably misperceive the economic systems they study.

It's worth asking, in fact, if economists have it backwards, if rather than living in a neoclassical world with some non-neoclassical phenomena happening in the footnotes -- imperfect information, money illusion, noise traders, loss and risk aversion, herding instinct, etc. -- we live in the non-neoclassical world with a limited amount of neoclassical phenomena sprinkled on top.

Basic behavioral intuition would seem to reinforce the notion that we are cognitively biased to see a neoclassical economy and confine the disorder to footnotes, considering the well-documented and broad tendency of humans to perceive ordered phenomena where there is none, or their persistent overestimation of confidence in order or pattern.

In some subfields of economics -- that is, besides the direct behavioral/cognitive/neuro research -- supply-and-demand is not seen as quite so regnant. I'm thinking, in particular, of the economics of exchange rates.

Here I find a rather close analogy to the view that supply-and-demand explains relatively little: the rejection of perfect and continuous purchasing power parity (PPP) hypothesis, which said that exchange rates should always adjust such that identical goods available in different countries cost the same amount, i.e. such that there is no room for further arbitrage trade.

Kenneth Rogoff, in a 1996 paper quoted in this PPP literature review in the Journal of Economic Perspectives, wrote: "While few empirically literate economists take PPP seriously as a short-term proposition, most instinctively believe in some variant of purchasing power parity as an anchor for long-run real exchange rates." That is, perhaps, a similar destination for this alternate view of markets: supply-and-demand "as an anchor for long-run" prices and quantities, hardly operating "as a short-term proposition." This dimmer view of PPP comes from a recognition of a variety of influences which consistently push foreign-exchange markets out of PPP equilibrium: interest rate differentials, real growth differentials, risk premia, all of which influence capital flows and trade balances.

It is not challenging, as a theoretical matter, to render a supply-and-demand equilibrium unstable through the addition of other forces. Let's look at one stylized models with some interesting, but I think plausible, assumptions.

Consider the possibility that price can influence demand -- more specifically, a microeconomic demand function which is determined to a significant extent by recent changes in price. When prices are rising, the entire demand function moves out; when prices are falling, the entire demand function falls back. There is, in other words, a component of demand which responds to the direction of price changes; in a traditional supply-and-demand model, the demand function is independent of price, and it is quantity demanded which is dependent upon price. In the case of the housing market, where demand is appears strongly governed by expected appreciation or depreciation of that asset, that modification of the model strikes me as reasonable, especially in the context of risky, limited arbitrage. Under these assumptions, partial equilibria are unstable, sensitive to movements in prices, and the market as a whole looks much like our brittle-fragile-chaotic story, rather than self-ordering and equilibrating.

Without implicating him in any way, I thank Miles Kimball for helpful comments and suggestions via email in advance of this post.

Update (8/4/12): Noah Smith makes a similar point in an old post, writing that:

[t]he whole notion of thinking of each interesting feature of the economy as a "friction," and then of considering only one or two "frictions" at a time, has been very detrimental. For one thing, it makes it hard to develop a useful model of the economy, since the actual economy contains many, many "frictions" (so many that the "frictions" together are usually more important than the "frictionless" dynamics that supposedly "underlie" them). Also, the "one friction at a time" approach makes it very difficult to generate any alternatives to the classical "core theory" of Walrasian general equilibrium.

original

Voting Information

In one week's time, the 2012 iteration of our greatest national holiday, Election Day, will be upon us. As many states have instituted Early Voting, the wonders of the ritual are available to be enjoyed for as many as thirty days in advance of the day itself.

Conscience Warrior encourages all whom this post may reach to do the most patriotic act an American can do: Vote! Familiarize yourself with your choices and find your local polling place here.

Mankiw Reality-Disconnect of the Day

From an outpost on the narrow edge of the fever swamp:

Woodward seems to believe that if we had a President more like Bill Clinton, a fiscal deal could have been struck. President Obama is described as distainful of schmoozing with other pols, as mishandling the negotiation process, and as unwilling to move sufficiently toward the political center to get a deal done. One gets the sense that the Democratic President who signed the 1996 welfare reform would have more easily reached a compromise with House Republicans.
This story brought to my mind recent research by Baker, Bloom, and Davis, which suggests that policy uncertainty has impeded the economic recovery. If Baker et al. are right that uncertainty depresses the economy, and if Woodward is right that the uncertainty we now face with the upcoming "fiscal cliff" is attributable mostly to the inability of Barack Obama to work with Congress, then the implication is clear: The meagerness of this recovery is not simply a hangover from a financial crisis, but rather a reflection of a fundamental political failure. The price of politics, indeed. [link and emphasis added]

There are several obvious rebuttals to this idea; my favorite comes to us via the Heritage Foundation. Take it away, Senator:

If you didn't immediately recognize him, that was Senator McConnell of Kentucky, the Minority Leader. That these people are continually reelected is testament to the validity of Jay Gould's Law.

Relentless Decency

Paul Krugman:

Macroeconomic Morality 

A brief postscript to today’s column: contrary to what some people may think, I don’t regard anyone who disagrees with me as necessarily a mendacious idiot. Economics is hard, and people will disagree. Sometimes people will give advice with the best of intentions that turns out, in hindsight, to have been disastrous; that’s a tragedy but not a sin.

But here’s what is indeed a sin: choosing your position based on what is personally convenient.

I may make jokes along the way – I kind of need to in order to stay sane – but the stuff I write about is extremely serious; there’s a vast human tragedy taking place, and anyone who has the ear of the public has a duty to make a good-faith effort to get it as right as he can.

Yet all too many players in this game, very much including economists and public officials, very obviously haven’t been making that good faith effort. They’ve seized on dubious arguments, touted obviously weak evidence as definitive, looked for excuses either not to act themselves or for their friends not to act. And invariably the thrust of these bad arguments is to comfort the comfortable and give them license to afflict the afflicted.

I like to think that I have enough integrity to change my views when it becomes clear that they were wrong. Maybe, maybe not — although it’s probably worth pointing out that I didn’t believe in the liquidity trap and was pretty down on old-fashioned Keynesianism until 1998, when a hard look at Japan and an attempt to understand what was happening there led me to change my mind. Anyway, I try, because the ideas of economists and political philosophers matter.

And too many people aren’t trying, which is, as I said, a sin.

Dr Krugman has been hammering this point home of late. Economics really shouldn't be like this; it's almost a science, after all. But if, as Dr Krugman laments, so many are so determined to blind themselves to the facts, either out of corporate fealty or out of simple ignorance, valuable resources are diverted to debunking curious claims. It's bad enough that charlatans and shills scream for our attention; the true shame is that our best minds must occupy themselves with such nonsense.

Yann Giraud:

Yet, the same Paul Samuelson had written to his friend Alvin Hansen a couple of years before, in the midst of the Phillips curve controversy, the following sentence: "Milton F. is a bloody nuisance. In the end he is not right in his provocative stands, but it takes valuable time rebutting his arguments." He even added: "Having just returned from UCLA where (as in Virginia and Washington) the place is jumping with energetic libertarian nuts, I realize that so much of one's scientific life has to be occupied in sterile debate." [emphasis added]

What We Talk About When We Talk About Savings

Alan Greenspan, 1966:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

(Aside: Is it any wonder that this guy oversaw the regressive policies that led to the 2008 financial crisis?)


It is important, when we discuss anything related to the Income-Expenditure Model, to clearly define 'savings.' 'Saving' is a flow, that is, an amount over time, usually expressed (in the U.S.) in dollars per (time period), or as a rate, such as percentage of income. 'Savings' is a stock, that is, an accounting measure, or a lump sum.

When a household consumes less than they earn, we say that they have saved a portion of the earnings. Implicit in nearly every macroeconomic model of this action is the idea that this amount of money is then either entrusted to a financial intermediary in the form of a savings account, certificate of deposit, mutual fund, etc., or used to purchase assets such as shares of stock, government or corporate bonds, land, etc.

The household that saves, therefore, becomes one or both of two types of economic actor. Those with savings accounts, certificates of deposit, or bonds are lenders who earn a rate of return (interest) on the funds they lend. Those with assets such as land earn a rate of return (plus capital gain) on the assets they (directly or indirectly) possess. Well-chosen assets and financial instruments will earn a rate of return over and above the rate of inflation.

What the macro models don't generally assume is that 'savings' take the form of banknotes under the mattress. While this activity does fit the broad definition of 'saving,' there exist no models where widespread hoarding benefits the macroeconomy. In normal times, an increase in the demand for financial assets will lead to a decrease in consumption but also to an increase in business investment via a healthy and functioning financial sector. In a downturn, however, such demand for financial assets can be very large, as households seek a cushion against uncertainty. Such a demand can drive interest rates to a lower bound, creating a friction, as a glut of available funds cannot be loaned at any interest rate.

The savings that Mr Greenspan was worried about in the above quote is hoarded funds, or mattress money. Such is always the fear of those who ideologically oppose inflation. The missing part of the argument is why such hoarding ought to be encouraged, as it serves no observable social function. If people derive utility from sleeping on a bed of banknotes, then that is their choice. Why policymakers should bend over backward to accommodate such foolishness is unclear.

If Romney Has Any Other Godchildren, They Must Be Breathing Easier...

...or at least they no longer have to sleep with one eye open.


A man for all seasons, so to speak. To cop a line from Brad DeLong, no one has any business supporting, defending, or voting for this clown. Even entrenched power, his natural constituency, should be wary of him by now.

Astride the Train Tracks, Facing Which Way?

I wrote recently that the United States is facing a sort of 'battle for it's soul' in this upcoming presidential election. I stressed then, and continue to stress, that this is not meant to be melodramatic, rather this is a framework to explain the particular challenge of this election season. I think also that the Republican Party is facing the same challenge as it grasps for relevance in the twenty-first century.

The seeds of the modern Republican Party were sown at their 1964 presidential nominating convention. At that time, conventions still served a functional role in the selection of candidates for president. The favorite in 1964, Senator Barry Goldwater of Arizona, embodied a hard turn rightward for the Party. His top challenger, Governor George Romney of Michigan, advocated a moderate position, including support for civil rights for black Americans. At the convention, Gov Romney's positions were repudiated, and Sen Goldwater went on to lose the general election to President Lyndon Johnson. In the aftermath of 1964, the radical right wing of the Republican Party rallied behind Goldwater supporter Ronald Reagan, who was elected governor of California in 1967, and president in 1980.

The always-uneasy alliance between economic and social conservatives within the Republican Party is coming to a head in 2012. Representative Todd Akin of Missouri, who is running for Senate, dragged social issues to the top of the discussion when he articulated his peculiar views on biology. Social issues are among the last things 2012 Republican nominee for president, the former governor of Massachusetts Mitt Romney, wants to discuss, as his previous positions on these matters are, one could say, all encompassing. As this Gov Romney seeks to focus on economic issues, the attention paid to social conservatives like Rep Akin, former Senator Rick Santorum of Pennsylvania, and Representative Michelle Bachmann of Minnesota has been a millstone.

As Gov Romney seeks to self-identify as a 'true conservative,' and seeks to convince much of his party to identify him in this manner as well, he faces also an unusual challenge from his right flank. Representative Ron Paul, in addition to representing the 14th district of Texas, represents a peculiar, some might say unique, brand of conservatism. While many modern conservatives are content to adhere to William F Buckley's command to stand astride the train tracks of history yelling 'stop!', Rep Paul is so enchanted with the simpler time of the the eighteenth century that he seeks to repeal nearly everything that followed it. Chief among these are modern government and central banking. While it remains unclear if Gov Romney shares his views, the Republican Party has endorsed a return to the gold standard, a mainstay of Rep Paul's talking points, in it's 2012 platform.

If the Republicans are to remain viable in the new century, these nebulous positions must be resolved. While it is certain that, given enough time, this Gov Romney will come around to any position imaginable, it's not at all clear that the Republican Party has that much time.

Two Visions

The announcement that the Romney campaign has settled on Representative Paul Ryan of Wisconsin as its choice for Vice President confirms my evolving belief that this election is less a referendum on the current state of the macroeconomy, and more another incarnation of a very old trope of American politics: the Battle for the Soul of the Country. I don't intend this to sound melodramatic; these Battles need to be fought from time to time, perhaps more often than they've been.

The most recent example was in 1996. Following the election of President Clinton in 1992, young upstarts in the Republican Party seized power from the old guard, and mounted a very successful midterm campaign in 1994, which led many to believe that the pendulum swing away from Mr Clinton signaled a shift of the median voter back toward the staid Republicanism of the 1980s. Thus the reelection of Mr Clinton in 1996 served as a mandate for his radical centrism, at least inasmuch as it contrasted with the radically regressive economics of his opponent, Senator Dole of Kansas.

The parallels between 1996 and 2012 are striking. While Senator Obama, as he then was, didn't seek to unseat an incumbent, the strength and cohesion of the machine he challenged made his task similar. Like Mr Clinton, Mr Obama offered an alternative to insider politics and the economics of division. The bitter and thorough revulsion of the establishment led to a overwhelmingly reactionary midterm election, manifest in Mr Obama's case by the rise of the Tea Party, the faux-populist creation of Charles and David Koch and other big-business libertarians.


Where we as a nation are to go from here has become the issue in this election. Mr Romney represents a return to the prerogatives of another era, one in which what was best for the captains of industry is best for the nation and common individuals are merely factors of production, rather than full citizens. Mr Romney summed up his vision of opportunity in America concisely when he advised that enterprising young people should start businesses, and should borrow $10,000 from their parents if necessary. The America to whom Mr Romney speaks is comprised solely of those for whom this is a natural option. None other count. By his brutal calculus, those who need government assistance are by definition unworthy of it. The selection of Mr Ryan, a devotee of Ayn Rand who advocates the virtual elimination of the social safety net, is a clear affirmation that Mr Romney speaks only to established power. 'This is your country,' he whispers soothingly, 'don't let one of them take it from you.'

Like Mr Clinton, Mr Obama is a centrist whose policies have broad appeal, mitigated mostly by their association with him, but who's been painted as the 'other' in an effort to discredit him. The cynical appeal to baseless fear is an old part of the political toolkit, but its deployment against Mr Obama evokes a particularly dark and sinister chapter of our shared history. 

The story of Barack Obama is a complete horror story to the Mitt Romneys of the world, and many of those to whom he speaks. A smart, ambitious kid, born behind the socioeconomic eight-ball, leverages his talent to achieve the power to do great things. In Mr Romney's fantasy, kids such as the young Barack Obama settle for less: maybe assembling cars in Detroit, maybe even selling insurance, leaving the running of things to the children of those who previously ran things. The great hope that Mr Obama represents to the rest of us is that people who start out with less needn't be constrained by their circumstances. For all that Mr Obama has not accomplished in the last three and a half years, this hope remains alive.

This Battle is what this election is about. A vision of America in which the successful are worshipped because of their inherent superiority, and everyone else knows their place, in which our sick and our old are anchors on the great ship of prosperity, in which we are all left on our own, to fend for ourselves, or a vision in which opportunity is fairly distributed, achievement is honestly attained, and one's destination is not solely a function of one's starting position.

The selection of Mr Ryan pegs Mr Romney to a very specific agenda. The advantage to voters of this selection is clearly the contrast it will illuminate in the positions of Mr Romney and Mr Obama. 

Introducing...

I am running a guest post today by Richard Hammer. Mr Hammer is a graduate student in economics at North Carolina State University and has written extensively on limited government and related topics.

Mr Hammer's views are his own; I am merely providing a forum for discussion. His post will appear shortly.

Economics in Song I

'The Day John Henry Died,' by the Drive-By Truckers:

I watched the rain; it settled in. We disappeared for days again.
Most of us were staying in, lazy like the sky. [Labor Force Hysteresis, Classical view of unemployment?]
The letters flew across the wire filtered through a million liars.
The whole world smelled like burning tires [negative externalities] the day John Henry died.

We knew about that big machine that ran on human hope and steam. [Solow Growth Model, Cobb-Douglas Production Function]
Bets on John were far between and mostly on the side. [financial intermediation & the derivatives market]
We heard he put up quite a fight. His hands and feet turned snowy white.
That hammer rang out through the night the day John Henry died.

When John Henry was a little bitty baby nobody ever taught him how to read [Underinvestment in Human Capital]
but he knew the perfect way to hold a hammer was the way the railroad baron held the deed. [Specialization]

It didn't matter if he won, if he lived, or if he'd run. 
They changed the way his job was done. Labor costs were high. [MPL < MPK]
That new machine was cheap as hell [IRR > R] and only John would work as well, [MP(John)=MP(new machine)]
so they left him laying where he fell the day John Henry died.

John Henry was a steel-driving bastard but John Henry was a bastard just the same.
An engine never thinks about his daddy and an engine never needs to write its name.

So pack your bags, we're headed west [Labor Force Mobility, Sector Shift?] and L.A. ain't no place to rest. [U(LA) < U(USA), Labor Force Participation]
You'll need some sleep to pass the test, so get some on the flight
and say your prayers John Henry Ford 'cause we don't need your work no more. [Structural Unemployment, Creative Destruction]
You should have known the final score the day John Henry died.

Team Oligarch

This book review gives as much insight into the ruinous and caustic worldview of the alleged market-worshipper as I've ever read. I want to explore a couple of Tyler Cowen's casual observations.

Cowen wishes the book better 'distinguish[ed] the preferences of the (often ill-informed) poor across means and ends.' He argues that 'the poor' (a presumably monolithic bloc) will advocate for conflicting goals, such as tariffs to protect their jobs and 'prosperity.' Their positions are in conflict because, as Cowen would have it, they are too dumb to know otherwise. This, however, assumes that the Cowen-Poor are advocating for a universal prosperity, which may not always be the case. If most people vote to increase their own well-being (a point that Cowen admittedly does not concede), then there are no conflicting positions.

This casual belief that their opponents are ill-informed or mentally deficient is a staple of libertarian orthodoxy. Remember that Ron Paul has suggested that the fact that a relatively low proportion of African Americans subscribe to free-market fundamentalism is evidence of their genetically inferior intellect. Cowen seems to extend this odd and dangerous worldview to poor people.

Cowen's alternative hypothesis includes the assertion that 'Wealthier voters are better educated and smarter...' I think the notion that 'wealthier voters are better educated' is relatively uncontroversial. (I'll leave aside for the now the fact that this is precisely how wealthier voters want it.) 'Smarter' is just baffling, however. This idea seems to be going down John Galt Drive right on to the Joel Osteen Parkway, which is a road most sane and moral people avoid at all cost.

Cowen then tries a Socratic approach. The result may be more Freudian, however.

I would be falling prey to the fallacy of mood affiliation if I simply assumed the author wanted policy to be more responsive to the wishes of the poor and middle class. Still I can ask whether this would be a desirable end. Aren’t they less educated and less well-informed on average? Don’t they also care about politics less and derive less of their status from political processes and outcomes? Do I want them to have a greater say over social issues, including gay marriage? No.

Cowen has indeed set the bar rather low, but he's certainly crashed into it this time. While I'm sure he'd like to think that his are bold and innovative ideas, they are in fact over 120 years old.

It's not hard to imagine that those to whom the status quo has been so generous would be so uncomfortable with the meaningful suffrage of ordinary people; the staggering part is that he'd reveal it so casually.


It's also important to remember that this is not economics. There are questions Cowen raises here that are framed in terms of economics (trade-offs, optimization), but this is simply heavy-handed social engineering. It's important to remember that libertarians' fear of democracy is at the heart of their fear of government.

In the 1977 television series The Age of Uncertainty, John Kenneth Galbraith noted that the oligarchs of the Gilded Age would be unwelcome in the corridors of power and the playgrounds of the powerful in the 1970s. He felt that the standards of that time were such that the original Rockefellers, Morgans, Hearsts, and others would be seen as crude and crass.

Our twenty-first-century oligarchs may not be as uncouth as the lords of industry of yore, but it hardly matters when they've got such an accommodating and reverent stable of willing academics.

Cowen's Folly

Food critic and professional contrarian Tyler Cowen deepens his commitment to austerity-denial. I think he's on to something: We don't have 'austerity' if nothing we do can be called 'austerity.' If this principle actually worked, I'd seek to apply it to 'libertarians.'


Tyler Cowen:

A new report shows that Hollande faces a tougher budget situation than had been expected (by whom?  Not me.).  Here is one bit:

“There will be tax increases; there will be spending cuts,” said the finance minister, Pierre Moscovici, last week. “But I reject any talk of austerity. We must avoid a budget policy that hurts economic activity.”
But it is not clear how the government plans to go about that, since both spending cuts and higher taxes tend to depress already lackluster economic activity even further. Nicholas Spiro, who runs a sovereign risk consulting agency in London, said that the report by the auditors “throws the scale of the fiscal challenge facing Mr. Hollande into sharp relief.”

And this:

But thus far the Hollande government has not been specific about any spending cuts, only tax increases. It will not raise the value-added tax on consumption, but says it will repeal an increase in the tax instituted by Mr. Sarkozy. Nor has the government outlined any structural reforms to reduce unemployment, which remains at a record high in the euro zone.

At least they are trying to get people away from using the misleading word “austerity.”  But it is funny how they too are finding it necessary to engage in some form of fiscal consolidation.

[Emphasis added]

see also

Quote of the Day - Matthey

'The Old English Common Law doctrine of caveat emptor - "let the buyer beware" - was accepted in our colonies and established in the main body of American law. Up to 1933 the buyer was supposed to be able to look out for himself. The seller was permitted to tout his wares as long as he didn't blatantly misrepresent. Our heritage was one of rugged individualists who could take it as well as give it. However, not only Mr. Roosevelt but the people of this great country, shocked by the excesses of the roaring twenties, for which many groups were to blame, said "This cannot happen again." So we changed from the concept of caveat emptor to the doctrine of caveat vendor - "let the seller beware." This fundamental change in our basic thinking, in our mores, took place in but a few years.'


-Dean Matthey, Fifty Years on Wall Street, 1966.


via Michael Lewis, The Money Culture

Quote of the Day - Malkiel

'Information is disseminated too rapidly today, and it gets reflected almost immediately in market prices. By reacting so quickly, the analysts make it extremely difficult to realize a significant profit in the stock market on the basis of fundamental analysis.'


-Burton Malkiel, A Random Walk Down Wall Street, 1973.

Shame on the Atlantic

I think that Elspeth Reeve should stick to covering weddings. This tripe over at the Atlantic (?!) claims that the fact that a primary challenger to Barack Obama in Arkansas is to the left of Mr Obama is illogical. This, she sputters, is because one John Wolfe supporter claims he represents Southern Democratic values. Ms Reeve thinks this means that they think Mr Obama is 'too liberal.' Ms Reeve seems to think that everything means that Mr Obama is 'too liberal.' She'll even try to raise some segregationist Democrats from the dead if that'll do the trick.

While it's nice to see that young Ms Reeve apparently took a class in mid-20th-century American politics, it's a shame that she never got to the part where all of the Dixiecrats became Republicans. Where exactly is that space on the D-R spectrum that is to the right of Mr Obama and still marked 'D?' Any Democrat with ideological differences with Mr Obama is by definition to his political left.

I had to read this screed twice, just to make sure that I wasn't missing a weird joke. Could this be the plague that Ross Douthat hath wrought? A generation of bright, young, energetic, reactionary dunderheads?

What We Talk About When We Talk About Austerity

Tyler Cowen's Alfred-E-Newman-esque protestations notwithstanding, this is, indeed, what austerity looks like. It might be easier for the likes of Cowen to recognize this plain fact if the reality borne by ordinary people in this crisis were similarly borne by those bankrolling his sort of quasi-intellectual reactionary witchcraft. So long as the citizenry must cash the checks written by the bankers over the last thirty years, there will be unrest. So-called libertarianism's goal of maintaining the status quo at all costs will likely, in the long run, cost more than anyone can imagine.


Brad Delong:

Austerity, American Style:

Paul Krugman:
Austerity, American Style: Via Mark Thoma, Antonio Fatas has a good piece on the exceptional weakness of government spending in this recovery. I thought I might add to that observation. Let’s look at real government… purchases of goods and services — from all levels of government during three recoveries: the current expansion, the Bush Boom (such as it was), and Morning in America…. Which one is different? Now, this doesn’t include safety-net spending…. But actual government purchases have been uniquely weak, largely because of budget distress at the state and local level…

EDIT: Ezra Klein lays on more data.

Quote of the Day - Shameless Age

"The Shameless Age is over only when people on Wall Street begin to care what people off Wall Street think."

"The Street is not about to give back the emancipation it has won in the last ten years from the conventional rules of social behavior. The show goes on, muted only slightly by recent events."

-Michael Lewis, Franky's Longest Mile, 1990. 

Mankiw-Reality-Disconnect of the Day

What Greg Mankiw leaves unsaid, but seems to want his readers to believe, is that executives are not really paid as much as we think they are, and that, maybe, their pay is not actually that outsized. I think he'd rather his readers not glance casually at the y-axis of the graph. That's the axis that shows the ratio of average executive pay to that of workers. If you look closely, you'll see that it is 'only' 231. It's no wonder Mitt Romney likes this guy so much.

On a related note, Dr Mankiw has got to exercise a lot more care in choosing his sources. If he keeps looking at the EPI, he may learn some uncomfortable truths.

Fact of the Day: CEO Pay:

Source. 

The relative pay of CEOs skyrocketed during the 1990s and has since fallen by about half.

Quote of the Day - Woodhouselee*

"A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury."

*Though attributed to Alexander Fraser Tytler, Lord Woodhouselee, by one Mr Elmer T Peterson in an op-ed that appeared in the 9th December 1951 edition of the Daily Oklahoman, this quotation is likely apocryphal, as no reference to the quote appeared prior to 1951, and Lord Woodhouselee had at that point been dead for nearly 140 years. It is, of course, possible that Mr Peterson was mistaken in his attribution, but, given the obscurity of the supposed author of the quote and the fact that no one has yet stepped forward to claim it on behalf of another, it can be safely asserted that the true author is Mr Peterson, whose efforts to lend gravity to his postulation led him to associate it with an obscure scholar, confident that Lord Woodhouselee's obscurity was sufficient to mask his own subterfuge.

The sentiment of the quote itself is indeed curious. Two unspoken assumptions seem to be required by the audience. First, that the society described is more capitalistic than not. Clearly some attributes of social democracy must exist, however, for, in a laissez-faire dystopia, there is of course no largess to be voted to oneself. The other assumption is that, in Mr Peterson's example, social and economic conditions are so poor so as to incentivize the teeming masses to stage what amounts to an economic revolution by way of the ballot box. I'd offer that there is a very narrow range on the utopia-dystopia spectrum within which this particular scenario could occur. If prosperity is truly shared, this fear is absurd.

Perhaps Mr Peterson, in his haste to find a dead Scots noble to claim as his intellectual forebear, didn't think his theory all the way through. What is unsustainable is the condition of subsistence serfdom that many of the economically powerful seek to impose upon their lessers. Fortunately, in this situation, we have only to look to Stein's Law for solace.

Quote of the Day - Russell on Keynes

"Keynes's intellect was the sharpest and clearest that I have ever known. When I argued with him, I felt that I took my life in my hands, and I seldom emerged without feeling something of a fool. I was sometimes inclined to feel that so much cleverness must be incompatible with depth, but I do not think that this feeling was justified."


Bertrand Russell, in Autobiography Ch. 3 : Cambridge, p. 69

Quote of the Day - Kalecki

"We shall deal first with the reluctance of the “captains of industry” to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of “sound finance” is to make the level of employment dependent on the state of confidence."

-Michał Kalecki, 1943

The more things change...


via Paul Krugman and Robin Wells.

Quote of the Day - Anatole France

"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…"

--Anatole France, The Red Lily

Ma Ferguson and Know-Nothingism

Miriam Amanda 'Ma' Ferguson became the first female governor of the state of Texas, and the second in the nation, when she assumed office in January 1925. Her husband, 'Pa,' had been banned from public office after his own term as governor was interrupted by impeachment and conviction. She was the most efficient chief executive in state history, if efficiency is best reflected in the pardon rate. Ma Ferguson averaged over five pardons per day for her entire four years as governor.

During her first term, she vehemently opposed her state's single progressive innovation, Spanish-language kindergarten. Though the quote is widely attributed to her, there is no evidence that she asserted, 'If English was good enough for Jesus Christ, it's good enough for the children of Texas!' A variation on this know-nothingness dates to the late 19th century. The New York Times, on 23 May 1881, referred to a Rev. Dr. Pentecost, who was raising money for a new Bible translation. A farmer told the curiously-named parson, 'What's the matter with the good old King James version? That was good enough for St. Paul, and it's good enough for me.'

Quote of the Day - JF re: Ron Paul

Ron Paul advocates a position that represents the curious rebellion against a particular institution by those to whom that institution has returned the greatest benefit. And he's really uncomfortable with black people.

Quote of the Day - Sir Humphrey Appleby

Si tacuisses, philosophus mansisses.

Quote of the Day - Rumsfeld

"We know there are known knowns: there are things we know we know. We also know there are known unknowns: that is to say we know there are things we know we don't know. But there are also unknown unknowns — the ones we don't know we don't know." 

—Defense Secretary Donald Rumsfeld, Defense Department briefing, 12 Feb 2002.

What Matters (and it's not crossword puzzles)

Paul Krugman: 

What bothers me, and should bother you, about much of this debate is that it pretty clearly is not in good faith. Too many economists and commentators on economics are clearly playing for a political team; too many others are clearly playing professional reputation games. Their off-the-cuff reactions to policy issues were wrong and foolish, and I think they know in their hearts that they messed up; but instead of trying to remedy the fault, they’re trying to defend the property values of their intellectual capital.

And that really is a sin. This is not an academic game, where tempers run high because the stakes are so small. This really matters to millions of people, and refusing to think clearly because you don’t want any negative thoughts about the papers you and your friends have been writing the past few decades is unforgivable. [emphasis added]

"This is not an academic game."
"This really matters to millions of people."

The point that Dr Krugman makes here is invaluable. If only students were required to handwrite these two sentences a thousand times as a condition of their admission to an economics program, and were then required to repeat this exercise at the start of each academic year, maybe we'd all have a lot less semi-informed quasi-academic econ-speak with which to contend.

Besides the dilettantes who approach the subject with the same gravity that they'd bring to a crossword puzzle, we also mustn't forget the corporate water-carriers whose noise Dr Krugman and others so often lament.

Unfortunately, this battle is not new. Yann Giraud:

Yet, the same Paul Samuelson had written to his friend Alvin Hansen a couple of years before, in the midst of the Phillips curve controversy, the following sentence: "Milton F. is a bloody nuisance. In the end he is not right in his provocative stands, but it takes valuable time rebutting his arguments." He even added: "Having just returned from UCLA where (as in Virginia and Washington) the place is jumping with energetic libertarian nuts, I realize that so much of one's scientific life has to be occupied in sterile debate." [emphasis added]

Hidden Subsidies

A common issue in international trade is the deleterious effects of discriminatory health and safety standards. The idea is that one government can specify a standard that cannot be met by those outside the borders. The classic example is that of northeast butchers seeking to prevent the import of beef from western states made possible by the advent of refrigeration. Massachusetts, New York, and Pennsylvania, for example, required that meat sold within their borders be inspected by local authorities. The Commerce Clause of the US Constitution prevents such policies when they obstruct interstate trade. Another example is that of Thailand, which forbid the sale of American cigarettes on the grounds of health and safety, when domestically produced cigarettes, which were no safer, were permitted. 

This has Ricardian implications, it seems. The potential elements of comparative advantage are myriad, but one argument is that these elements include labor force preferences.  Specifically, that different working-condition standards provide opportunities for some nations to gain comparative advantage over other nations. 

It could be argued that a nation, by allowing poor working conditions, is providing an implicit subsidy, especially to labor-intensive industries.

The Rotten Eggs of the Ostrich

There's an old economists' joke about three people, a physicist, a chemist, and an economist, marooned on a deserted island. They've got three cans of food and have set themselves to getting them open. The physicist says that they could try to drop rocks onto the cans from a tree and hope to break open the cans. The chemist wonders if they could light a fire and burst open the cans with the heat. The economist, however, knows the true solution. 'Assume a can opener,' he says...

The can opener cited by the ostriches of libertarianism is the even distribution of power between the parties to trade. In their magical worldview, every transaction is entered into with complete knowledge by two rational parties operating on a level playing field. From this fantasy flows the article of faith that all transactions are to the equal benefit of all parties, and that all parties of interest are directly represented in the transaction. The only friction possible is the result of evil coercion or bumbling inefficiency by the dreaded government.

That this is not true is hardly the point. Frictions are everywhere. Coercion can be committed by private parties. There is indeed a commons. All of these simple truths are outside the libertarian's model. Indeed, they are sacrificed on the holy altar of property rights and individual liberty, during the libertarians' mass, immediately before the blessed incantation, 'You're on your own, pal.'

That which is tidily dressed up as liberty and freedom is, at the end of the day, simply a desperate grip on the status quo, the maintenance of which is the only firm belief of this species of ostrich. What is left to inference is that liberty and freedom, to the libertarian, are commodities like any other, the just allocation of which can be only be to the highest bidder.

There consists a slight variant on the 'level playing field' canard. Some libertarians welded to a particularly acute manifestation of the fantasy argue that those who wield mighty economic power over their fellows, and are thus able to transact in a manner which is spectacularly self-advantageous, can only do so because society, in its only true libertarian expression, the market, has deemed them to be of greater value than their fellows. Such is the moral bankruptcy endemic to this worldview.

The libertarian ostrich is a hearty beast, however. It attaches itself like a barnacle to economic power, and is staggeringly resilient in the face of such natural predators as downturns, empiricism, and moral reasoning. It's found the can opener, it's sure to tell you. If you can't see it, your head must be above the sand.

The Shallow End of the Charles

It seems the sort of people who whine about overpaid government employees are the same sort of people who claim executive compensation is driven by market forces.

A better explanation of how all of this tricky business works can be found here.

Quote of the day - Bailliol

"The quad at Balliol is the scene of the well-known limerick that parodies the immaterialist philosophy of Bishop Berkeley:

There was a young man who said, God

Must think it exceedingly odd

If he finds that this tree

Continues to be

When there's no one about in the Quad

and also of the response, by the Balliol-educated Catholic theologian and Bible translator Ronald Knox, which more accurately reflects Berkeley's own beliefs:

Dear Sir, your astonishment's odd:

I am always about in the Quad.

And that's why the tree

Will continue to be,

Since observed by, Yours faithfully, GOD.

via

[Full Disclosure Announcement]

I took part in a seminar on deficits and debt this last Friday at NC State. The seminar was made possible by a grant from the Koch Foundation. As a participant, I received a modest stipend. In accordance with previously stated policy, I am disclosing that fact.

Quote of the day - Mackay

"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

-Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds

MLK Day Every Day

Today, our nation honors its single greatest citizen, Dr Martin Luther King, Jr. Dr King seized upon the ideals of the founders and sought to bring intellectual honesty to the precept, "Justice for all." Like so many people of beneficent conscience, he sought to remake the world in the image of what it could be. Unlike so many before or since, he succeeded, at least in moving our society toward that goal, chiefly through the relentless courage of his convictions.

In the immediate aftermath of the Second World War, black Americans who'd served overseas began to agitate for the sort of equality to which they'd been exposed in Europe. They came to realize that, if they were to fight and die for the American cause, perhaps that cause ought to include their interests. From this burgeoning movement emerged Martin Luther King. A young minister with a degree in divinity, he was radicalized by the rampant culture of abuse inflicted upon American blacks, particularly in the south. His expansive philosophical interest led him to, among others, Henry Thoreau, whose views on the tyranny of the majority were the intellectual foundation of Dr King's interpretation of the problem faced by black Americans, and Mohandas Gandhi, whose philosophy of non-violence was the inspiration for Dr King's solution.

The importance of the cultural shift under way in the 1950s to the effectiveness of Dr King's message cannot be overstated. In the years after the Second World War, Americans collectively enjoyed a growth in prosperity previously unseen. As more and more white Americans escaped poverty and enjoyed President Roosevelt's "freedom from want," it became increasingly clear to non-whites that they were not to be included. The expansion of radio and the advent of television hammered home the point that economic security and middle class luxury in 1950s America were monochromatic. Radio and television also provided the viscerally powerful orator an audience wider than that enjoyed by earlier prophets.

In 1965, Dr King's focus on social improvement expanded to include the economically disadvantaged, regardless of race. The escalation of the war in Vietnam struck at the heart of Dr King's fervent belief in non-violence. He also came to see conscription, as practiced in 1960s America, as an unfair burden upon the less fortunate, and blacks in particular. His inclusion of poor whites in the pantheon of the dispossessed whose lot he sought to improve posed a particular threat to the political and economic establishment because then, as is still so sadly the case now, this establishment relies upon poor whites as their agents of oppression, forming a bulwark against the political and economic gains of poor minorities.

That Dr King was killed before his job was done is not to be mourned. It is not appropriate, either, to draw primary inspiration from his tragedy. It is a disservice to his legacy to focus our attention too greatly on any aspect of his story beyond his message. Dr King was no utopian; he lived in, and was of, our time. He did not advocate equality of result, merely equality of opportunity. Much of the last forty years has seen the rise of philosophies committed to the maintenance of the status quo, such as free-market fundamentalism. While this would surely sadden Dr King, it is important to take a long view, as Dr King acknowledged when he observed that “The arc of the moral universe is long, but it bends toward justice." To recognize that our society has come so far in furtherance of the betterment Dr King envisioned is not to blindly settle for what progress has been made, but rather to understand how much more is possible.

The holiday in honor of Dr Martin Luther King, Jr comes once a year, in January. Every day that we consider the plight of the poor and of the disadvantaged and work toward improving our shared prosperity, however, is Martin Luther King Day.


"True compassion is more than flinging a coin to a beggar; it comes to see that an edifice which produces beggars needs restructuring."

Quote of the day - Krugman on fantasy

"There are two novels that can change a bookish fourteen-year old’s life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs." 


-Paul Krugman