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.